Otelco (OTEL) DEF 14A Definitive proxy

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

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Securities Exchange Act of 1934

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OTELCO INC.

(Name of Registrant as Specified in its Charter)

___________________________________________________

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 12, 2006

Dear Stockholders:

It is my pleasure to invite you to Otelco Inc.’s second Annual Meeting of Stockholders. We will hold this meeting on Thursday, May 11, 2006 at the Celebration Hotel, 700 Bloom Street, Celebration, Florida 34747. At this meeting, you will vote on the election of two Directors and ratify the appointment of BDO Seidman, LLP as our Independent Registered Public Accounting Firm.

Enclosed, you will find a notice of meeting and proxy statement that contains further information about the agenda items and the meeting, and a copy of our 2005 Annual Report and a proxy card.

Your vote is important to us and our business. I encourage you to sign and return the proxy card in order for your shares to be represented and voted at the meeting.

Sincerely,

/s/ Michael D. Weaver

Chairman of the Board

TABLE OF CONTENTS

	Page
Notice of Annual Meeting of Stockholders	1
Questions and Answers About This Proxy Material and Voting	3
Proposal 1	6
Governance of the Company	7
Report of the Audit Committee	10
Report of the Compensation Committee	11
Beneficial Ownership of Otelco Inc. Common Stock	13
Section 16(a) Beneficial Ownership Reporting Compliance	14
Stockholder Communications with the Board	14
Director and Executive Compensation and Other Information	14
Summary Compensation Table	15
Other Relationships and Transactions with Executives	16
Performance Graph	18
Proposal 2	19
Our Relationship with our Independent Registered Public Accounting Firm	19

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 11, 2006

To the holders of Otelco Inc. Class A and Class B shares:

The Annual Meeting of Stockholders of Otelco Inc. (the “Company”) will be held on May 11, 2006 at 10:00 a.m. Eastern Time at the Celebration Hotel, 700 Bloom Street, Celebration, Florida 34747. The purposes of the meeting are to:

1.

Elect two Directors to serve until the Annual Meeting of Stockholders in 2009;

2.

Ratify the appointment of BDO Seidman, LLP as our Independent Registered Public Accounting Firm; and

3.

Transact such other business as may properly come before the meeting and any postponements or adjournment thereof.

Only stockholders of record of the Company as of the close of business on March 20, 2006 are entitled to vote. You are cordially invited to attend the meeting in person. If your shares are held of record by a broker, bank or other nominee and you wish to vote in person at the meeting, you must obtain a proxy issued in your name from such broker, bank or other nominee. Whether or not you expect to attend, please complete, date, sign and return the enclosed proxy as promptly as possible in order to ensure your representation at the meeting.

IMPORTANT

Whether or not you expect to attend the meeting in person, we urge you to sign, date, mark and return the enclosed proxy at your earliest convenience. This will ensure the presence of a quorum at the meeting. An addressed envelope for which no postage is required if mailed in the United States is enclosed for that purpose. Sending in your proxy will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option.

By Order of the Board of Directors

/s/ Curtis L. Garner, Jr.

CFO and Secretary

April 12, 2006

PROXY STATEMENT FOR 2005 ANNUAL MEETING OF STOCKHOLDERS

We are providing these proxy materials in connection with the solicitation by the Board of Directors (the “Board”) of Otelco Inc. of proxies to be voted at the Company’s Annual Meeting of Stockholders, to be held on May 11, 2006, and at any meeting following postponement or adjournment of such annual meeting (the “Annual Meeting”).

Unless the context requires otherwise, references in this statement to “Otelco”, the “Company”, “we”, “us”, or “our” refer to Otelco Inc. and its consolidated subsidiaries.

You are invited to attend the meeting which will begin at 10:00 a.m. Eastern Time at the Celebration Hotel, 700 Bloom Street, Celebration, Florida 34747. If you plan to attend and your shares are held in “street name” – in an account with a bank, broker or other nominee – you must obtain a proxy issued in your name from such broker, bank or other nominee.

You can vote your shares by completing and returning the proxy card or, if you hold shares in “street name”, the voting form provided by the broker, bank or other nominee. A returned signed proxy card without an indication of how your shares should be voted will be votedFOR the election of Directors andFORthe ratification of the Independent Registered Public Accounting Firm as described on the Proxy.

Our corporate by-laws define a quorum as a majority of the voting power of the issued and outstanding voting stock present in person or by proxy. They do not allow for cumulative voting. The two nominees who receive the most votes will be elected. A simple majority of votes present, whether in person or by proxy, is required to ratify the appointment of the Independent Registered Public Accounting Firm.

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QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

Why did I receive this proxy statement?

The Board is soliciting your proxy to vote at the Annual Meeting because you were a stockholder of record at the close of business on March 20, 2006, and are entitled to vote at the meeting.

The proxy statement and our 2005 Annual Report, along with a proxy card and voting instructions, are being mailed to stockholders on or about April 12, 2006. The proxy statement summarizes the information you need to know to vote at the Annual Meeting. You do not need to attend the Annual Meeting to vote your shares.

Who can vote at the Annual Meeting?

Only stockholders of record at the close of business on March 20, 2006 will be entitled to vote at the Annual Meeting.

Stockholder of Record: Shares Registered in Your Name

If on March 20, 2006 your shares were registered directly in your name with our transfer agent, Wells Fargo Bank, National Association, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to mark, sign and date your proxy card and return the proxy card in the postage-paid envelope provided to ensure your vote is counted.

Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Nominee

If on March 20, 2006 your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy card from your broker, bank or other nominee.

What proposals will be voted on at the Annual Meeting?

·

The election of two directors:  John P. Kunz and Andrew Meyers; and

·

The ratification of the appointment of BDO Seidman, LLP as Independent Registered Public Accounting Firm for 2006.

The Board recommends a voteFOR each of the nominees to the Board andFORthe ratification of the appointment of BDO Seidman, LLP as Independent Registered Public Accounting Firm.

What different methods can I use to vote?

Stockholder of Record: Shares Registered in Your Name

If you are a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person if you have already voted by proxy.

·

To vote in person, come to the Annual Meeting and we will give you a ballot when you arrive.

·

To vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to us before the Annual Meeting, we will vote your shares as you direct.

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Beneficial Owner: Shares Registered in the Name of Broker, Bank or Other Nominee

If you are a beneficial owner of shares registered in the name of your broker, bank or other nominee, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Oteclo. Simply mark, sign and date your proxy card and return it in the postage-paid envelope provided to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker, bank or other nominee. To vote in person at the Annual Meeting, you must obtain a valid proxy card from your broker, bank or other nominee.

Follow the instructions from your broker, bank or other nominee included with these proxy materials, or contact your broker, bank or other nominee to request a proxy card.

How can I revoke my proxy?

You can revoke your proxy prior to completion of voting at the meeting by giving written notice of your revocation to the Office of the Secretary of the Company at 505 Third Avenue East, Oneonta, AL 35121, Attention: Curtis L. Garner, Jr., Secretary; delivering a later-dated proxy; or voting in person at the meeting.

What is the difference between Class A and Class B shares?

Class A and Class B shares each receive one vote for each share held. It should be noted that, unlike Class A shares, Class B shares do not receive dividends through at least December 20, 2006, at which time they may be convertible into income deposit securities of the Company (“IDSs”), a component of which are Class A shares. As of March 20, 2006 there were 9,676,733 Class A shares and 544,671 Class B shares outstanding and entitled to vote.

Who will count the vote?

An independent representative of Corporate Communications, Inc. will tabulate the proxies and be the independent inspector of elections to certify the results.

What is the quorum requirement?

A quorum is required to hold a valid meeting. A quorum will be present if at least a majority of the shares entitled to vote are represented by stockholders present at the meeting or by proxy, or 5,100,702 shares (including both Class A shares and Class B shares).

How many votes are needed to approve each proposal?

For the election of two directors, the two directors with the most “FOR” votes among votes properly cast will be elected. Broker non-votes will have no effect.

For the ratifications of the appointment of BDO Seidman, LLP as our Independent Registered Public Accounting Firm for 2006, the majority of the shares voted in person or by proxy must vote “FOR” the proposal. Abstentions and broker non-votes will have no effect.

When are stockholder proposals due for the 2006 annual meeting of stockholders?

In order to be considered for inclusion in next year’s proxy statement, stockholder proposals must be submitted in writing to the Company’s Secretary, Curtis L. Garner, Jr., Chief Financial Officer and Secretary, Otelco Inc., 505 Third Avenue East, Oneonta, AL 35121 and received by no later than December 11, 2006. Similarly, in order for a stockholder proposal to be raised from the floor during next year’s annual meeting of stockholders, written notice must be received by the Company no later than February 11, 2007 and no earlier than January 11, 2007 and shall contain the information required by our by-laws. You may contact Curtis Garner at the above described address for a copy of the relevant provisions of our by-laws regarding the requirements for making stockholder proposals and nominating director candidates.

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How much will this proxy solicitation cost?

The Company bears all of the expenses incurred in connection with the solicitation of proxies, including costs incurred by brokers, fiduciaries and custodians in forwarding proxy materials to beneficial owners of Class A shares held in their name. We expect the total costs to be approximately $25,000.

Does the Company have a policy about directors’ attendance at annual meetings of stockholders?

The Company does not have a policy about directors’ attendance at annual meetings of stockholders. Two (2)out of the seven (7) directors attended last year’s annual meeting andwe anticipate that a majority of the directors may attend the Annual Meeting.

How can I find out the results of the voting at the Annual Meeting?

Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in our quarterly report on Form 10-Q for the second quarter of 2006.

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PROPOSAL 1

ELECTION OF DIRECTORS

Our certificate of incorporation and by-laws provide that (i) the Board be divided into three (3) classes of directors:  Class I directors serve a term expiring at the 2008 annual meeting of stockholders, Class II directors serve a term expiring at the Annual Meeting and Class III directors serve a term expiring at the 2007 annual meeting of stockholders, (ii) vacancies on the Board may be filled only by the Board and (iii) a director elected to fill a vacancy shall hold office until the next election for the class for which such director shall have been chosen and until such director’s successor is elected and qualified.

Our Board is presently composed of seven (7) members. Two directors are to be elected by stockholders at the Annual Meeting with respect to our Class II directorships. The Board has recommended as nominees for election John P. Kunz and Andrew Meyers (each currently serving as a Class II director) to serve as directors until the annual meeting of 2009. If elected at the Annual Meeting, each of the nominees would serve until the 2009 annual meeting and until his successor is elected and qualified, or until such director’s earlier death, resignation or removal.

Directors are elected by a plurality of the votes present in person or represented by proxy and entitled to vote at the meeting. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the nominees named below. If any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of a substitute nominee proposed by management. Each person nominated for election has agreed to serve if elected, and management has no reason to believe that any nominee will be unable to serve.

Information on the Nominees for Election for Three-Year Terms Expiring at the 2009 Annual Meeting of Stockholders

Set forth below is biographical information for each person nominated for election to the Board at the Annual Meeting.

John P. Kunzwas appointed a director on December 21, 2004 upon the closing of our initial public offering. Now retired, Mr. Kunz is the founder and President, since 1989, of J.P.K. Associates, an international consulting firm in the information industry. From 1978 to 1989, Mr. Kunz served in successive management positions with Dun & Bradstreet Corporation, culminating with his position as President of Dun & Bradstreet Marketing Services in 1982 and President of Dun & Bradstreet Business Information Services in 1984. From 1975 to 1978, Mr. Kunz served as Chairman of R.H. Donnelley Marketing Services, Europe.

Andrew Meyershas served as a director of the Company and its predecessor Rural LEC Acquisition LLC since October 2003. He is currently a Principal at Seaport Capital, where he has been employed since 2001. Prior to that, Mr. Meyers worked at Deutsche Bank Alex Brown in their Leveraged Finance group beginning in July 1998.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF JOHN P. KUNZ AND ANDREW MEYERS.

Directors

The following table sets forth the names and positions of our current directors (including those up for re-election to the Board), as well as their ages as of April 11, 2006:

Name	Age	Position
William Bak	65	Director
Michael D. Weaver	53	President, Chief Executive Officer and Director
Howard Haug	55	Director
John P. Kunz	72	Director (up for re-election to the Board)
Stephen P. McCall	35	Director
Andrew Meyers	37	Director (up for re-election to the Board)
William F. Reddersen	58	Director

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Information on the Continuing Directors

Set forth below is biographical information for each person whose term of office as director will continue after the Annual Meeting.

William Bakwas appointed a director on February 24, 2005. Now retired, Mr. Bak worked for First Data Corporation from 1994 to 2002 and consulted with Western Union International for two years after retirement. He served as President of InfoSource and as Executive Vice President of Western Union International. His consulting focused on building their business in Europe and Asia. Prior to First Data, he spent 30 years with Dun & Bradstreet Corporation where his senior positions included President of Donnelley Information Publishing and Executive Vice President of D&B Credit Services. His term expires at the annual meeting in 2008.

Howard Haugwas appointed a director on December 21, 2004 upon the closing of our initial public offering. Mr. Haug is currently the Senior Vice President of Administration and Chief Financial Officer for Enterprise Florida. Before joining Enterprise Florida, he spent 13 years with BellSouth, most recently within Corporate Strategy and Planning. Prior to his career with BellSouth, he worked with PricewaterhouseCoopers and Ernst & Young and is a certified public accountant. His term expires at the annual meeting in 2007. He serves as the audit committee financial expert.

Stephen P. McCallhas served as a director of the Company and its predecessor Rural LEC Acquisition LLC since January 1999 and as Chairman of the Board of Rural LEC Acquisition LLC until the closing of our initial public offering on December 21, 2004. He is currently a Partner at Seaport Capital, where he has been employed since 1997. Previously, Mr. McCall worked at Patricof & Co. Ventures, a private equity investment firm, and Montgomery Securities in the Corporate Finance Department. Mr. McCall is a director of several private companies. His term expires at the annual meeting in 2007.

William F. Reddersenwas appointed a director on December 21, 2004 upon the closing of our initial public offering. Now retired, Mr. Reddersen spent 31 years at BellSouth and AT&T Corp. From 1998 to 2000, Mr. Reddersen was Executive Vice President of Corporate Strategy at BellSouth, and from 1991 to 1998, he was responsible for BellSouth’s broadband strategy and business market operations. Mr. Reddersen serves as a director of Harmonic Inc. and several private companies. His term expires at the annual meeting in 2007.

Michael D. Weaverhas served as our President, Chief Executive Officer and a Director of the Company and its predecessor Rural LEC Acquisition LLC since January 1999. He became Chairman of the Board on December 21, 2004 upon the closing of our initial public offering. Prior to this time, he spent 10 years with Oneonta Telephone Co., Inc., the predecessor to Otelco Telephone, serving as Chief Financial Officer from 1990 to 1998 and General Manager from January 1998 to January 1999. His term expires at the annual meeting in 2008.

Independence of Directors

The Board has determined that an outside director must not have any direct or indirect material relationship with the Company to be considered independent. Messrs. Bak, Haug, Kunz and Reddersen have no involvement with any company or individual that is either a supplier, consultant or customer of the Company; do not own any Otelco IDSs or Class B shares; and do not serve in any additional paid advisory capacity with the Company and are independent directors under the Exchange Act and the American Stock Exchange’s listing standards. Messrs. McCall and Meyers may not be considered independent directors, but continue to contribute to the Board and the Company. There are no family relationships among any of our directors or executive officers.

GOVERNANCE OF THE COMPANY

The Board has three standing committees: audit committee; compensation committee; and nominating and corporate governance committee. All three committees are comprised of independent directors. During fiscal 2005, the Board held six meetings, and the audit, compensation, and nominating and corporate governance committees held seven, two, and two meetings, respectively. The average attendance at the Board and committee meetings was 97%. All directors attended more than 75% of the Board and committee meetings on which they are members. The Board and committees held executive sessions without management present as required in the conduct of regular business. Our code of conduct, corporate governance policies, and the charters of each committee of the Board may be viewed atwww.otelco.net.

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Audit Committee–William Bak, William F. Reddersen, Howard Haug (chair)

The principal duties and responsibilities of our audit committee (the members of which are independent directors as such term is used in Item 7(d) of Schedule 14A of the Exchange Act and as defined in Section 121(A) of the American Stock Exchange’s listing standards) are to monitor our financial reporting process and internal control system; to appoint and replace our independent outside auditors from time to time, determine their compensation and other terms of engagement and oversee their work; and to oversee our compliance with legal, ethical and regulatory matters. The audit committee has the power to investigate any matter brought to its attention within the scope of its duties. It also has the authority to retain counsel and advisors to fulfill its responsibilities and duties.

Audit Committee Financial Expert:  Howard Haug serves as the audit committee’s financial expert.

Compensation Committee–William Bak, William F. Reddersen, John P. Kunz (chair)

The principal duties and responsibilities of our compensation committee (the members of which are independent directors under the American Stock Exchange’s listing standards) are to provide oversight on the development and implementation of the compensation policies, strategies, plans and programs for our key employees and outside directors and to consider appropriate disclosure relating to these matters; to administer the operation of our long term incentive plan; to review and approve the compensation of our chief executive officer and the other executive officers of the Company; and to provide oversight concerning selection of officers, management succession planning, performance of individual executives and related matters.

Nominating and Corporate Governance Committee–Howard Haug, John P. Kunz, William F. Reddersen (chair)

The principal duties and responsibilities of the nominating and corporate governance committee (the members of which are independent directors under the American Stock Exchange’s listing standards) are to establish criteria for Board and committee membership and recommend to the Board proposed nominees for election to the Board and for membership on committees of the Board; to make recommendations regarding proposals submitted by our stockholders; and to make recommendations to the Board regarding corporate governance matters and practices. The committee recommends the election of John P. Kunz and Andrew Meyers to serve on the Board through the annual meeting of stockholders in 2009 by voting FOR the Election of Directors Proposal 1.

Process for Evaluating and Selecting Potential Director Candidates

The nominating and corporate governance committee is responsible for, among other things, annually identifying and recommending to the Board nominees to be selected by the Board for each annual meeting of stockholders. The nominating and corporate governance committee is also responsible for periodically assessing, developing and communicating with the full Board concerning the appropriate criteria to be utilized in evaluating potential director nominees.

Minimum Qualifications for Director Nominees

The nominating and corporate governance committee has established the following minimum criteria for evaluating prospective director candidates:

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Reputation for integrity, strong moral character and adherence to high ethical standards.

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Demonstrated business acumen and experience and ability to exercise sound business judgments and common sense in matters that relate to the current and long-term objectives of the Company.

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Ability to read and understand basic financial statements and other financial information pertaining to the Company.

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Commitment to understand the Company and its business, industry and strategic objectives.

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Commitment and ability to regularly attend and participate in meetings of the Board, Board committees, the number of other company boards on which the candidate serves and the ability to generally fulfill all responsibilities as a director of the Company.

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·

Willingness to represent and act in the interests of all stockholders of the Company rather than the interests of a particular group.

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Good health and ability to serve.

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For prospective non-employee directors, independence under SEC and applicable stock exchange rules, and the absence of any conflict of interest (whether due to a business or personal relationship) or legal impediment to, or restriction on, the nominee serving as a director.

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Willingness to accept the nomination to serve as a director of the Company.

Other Factors for Potential Consideration

The nominating and corporate governance committee will also consider the following factors in connection with its evaluation of each prospective nominee:

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Whether the prospective nominee will foster a diversity of skills and experiences.

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For potential audit committee members, whether the nominee possesses the requisite education, training and experience to qualify as “financially literate” or as an audit committee “financial expert” under applicable Securities and Exchange Commission and stock exchange rules.

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For incumbent directors standing for re-election, the incumbent director’s performance during his or her term, including the number of meetings attended, level of participation, and overall contribution to the Company.

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Composition of Board and whether the prospective nominee will add to or complement the Board’s existing strengths.

Process for Identifying, Evaluating and Recommending Nominees

The nominating and corporate governance committee initiates the process by preparing a slate of potential candidates who, based on their biographical information and other information available to the committee, appear to meet the criteria specified above and/or who have specific qualities, skills or experience being sought (based on input from the full Board).

·

Outside Advisors. Thenominating and corporate governance committee may engage a third-party search firm or other advisors to assist in identifying prospective nominees.

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Stockholder Suggestions for Potential Nominees.The nominating and corporate governance committee will consider suggestions of nominees from stockholders. Stockholders may recommend individuals for consideration by submitting the materials set forth below to the Company addressed to the Chairman of the nominating and corporate governance committee at Otelco Inc., 505 Third Avenue East, Oneonta, AL 35121, Attn: Chairman of Nominating and Corporate Governance Committee. To be timely, the written materials must be submitted within the time permitted in the Company’s bylaws for submission of a stockholder proposal for inclusion in the Company’s proxy statement for the subject annual meeting.

·

The written materials must include: (1) all information relating to the individual recommended that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (2) the name(s) and address(es) of the stockholders making the nomination and the amount of the Company’s securities which are owned beneficially and of record by such stockholder(s); (3) a representation that the stockholder of record is a holder of record of stock of the Company entitled to vote on the date of submission of such written materials and intends to appear in person or by proxy at the meeting to propose such nomination; (4) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of prox y to holders of at least the percentage of the Company’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (y) otherwise to solicit proxies from stockholders in support of such proposal or nomination; and (5) any

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other information that the Company may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Company.

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The nominating and corporate governance committee will evaluate a prospective nominee suggested by any stockholder in the same manner and against the same criteria as any other prospective nominee identified by the nominating and corporate governance committee from any other source.

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Nomination of Incumbent Directors.There-nomination of existing directors should not be viewed as automatic, but should be based on continuing qualification under the criteria set forth above.

·

For incumbent directors standing for re-election, the nominating and corporate governance committee will assess the incumbent director’s performance during his or her term, including the number of meetings attended, level of participation and overall contribution to the Company; the number of other company Boards on which the individual serves, the composition of the Board at that time and any changed circumstances affecting the individual director which may bear on his or her ability to continue to serve on the Board.

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Management Directors. Thenumber of officers or employees of the Company serving at any time on the Board should be limited such that, at all times, a majority of the directors is “independent” under applicable Securities and Exchange Commission and stock exchange rules.

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After reviewing appropriate biographical information and qualifications, first-time candidates will be interviewed by at least one member of the nominating and corporate governance committee and by the Chief Executive Officer.

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Upon completion of the above procedures, the nominating and corporate governance committee shall determine the list of potential candidates to be recommended to the full Board for nomination at the annual meeting.

·

The Board will select the slate of nominees only from candidates identified, screened and approved by the nominating and corporate governance committee.

REPORT OF THE AUDIT COMMITTEE

The audit committee reviews the Company’s financial reporting process on behalf of the Board. Management is responsible for our internal controls, the financial reporting process and the preparation of our consolidated financial statements. The Independent Registered Public Accounting Firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and issuing a report on the financial statements.

In this context, the audit committee has met and held discussions with management and BDO Seidman, LLP, the Company’s Independent Registered Public Accounting Firm, on at least a quarterly basis. Management represented to the audit committee that the Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the audit committee has reviewed and discussed the consolidated financial statements with management and the Independent Registered Public Accounting Firm. The audit committee meets with management and the Independent Registered Public Accounting Firm together and individually, as required, at each meeting. The audit committee discussed with the Independent Registered Public Accounting Firm matters required to be discussed by Statement on Auditing Standards No. 61 (Communication With Audit Committees), as modified or supplemented.

During 2005, the audit committee reviewed management’s progress in establishing, documenting and maintaining adequate internal controls over financial reporting to meet its compliance requirements under Section 404 of the Sarbanes-Oxley Act of 2002. The Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework. Based upon its assessment, management concluded that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based upon these criteria. Management’s assessment has been audited by BDO Seidman, LLP, in accordance with the standards of the Public Company Accounting Oversight Board (United States), who expressed an unqualified opinion thereon.

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In addition, the audit committee has discussed with the Independent Registered Public Accounting Firm the accountants’ independence from the Company and its management, and has received the written disclosures and letter required by the Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees).

In reliance on the reviews and discussions referred to above, the audit committee recommended to the Board, and the Board approved, that the 2005 audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, for filing with the Securities and Exchange Commission.

The audit committee also reviewed and approved four engagement proposals from BDO Seidman, LLP and Warren, Averett, Kimbrough & Marino, LLC for audit and review, earnings and profits, tax, and tax consulting services.

THE AUDIT COMMITTEE

William Bak

Howard Haug

William Reddersen

REPORT OF THE COMPENSATION COMMITTEE

Our executive compensation program is designed to provide incentives to our executive officers and, thereby, to promote achievement of our business goals and stockholder returns. Executive compensation consists of a combination of base salary, bonuses and employee benefits.

Compensation Philosophy

The objectives of the executive compensation program are to align compensation with business objectives and individual performance, and to enable the Company to attract, retain and motivate executive officers who are expected to contribute to our long-term success. Our executive compensation philosophy is based on the principles of competitive and fair compensation for sustained performance.

Competitive and Fair Compensation

We are committed to providing an executive compensation program that helps attract and retain highly qualified executives officers. To ensure that compensation is competitive, the compensation committee compares our compensation practices with those of other companies in our industry and sets our compensation guidelines based on this review. The compensation committee believes compensation for our executive officers is within the range of compensation paid to executives with comparable qualifications, experience and responsibilities who are with companies that are in the same or similar business and of comparable size and success as the Company. The compensation committee also strives to achieve equitable relationships both among the compensation of individual officers and between the compensation of officers and other employees throughout the Company.

Sustained Performance

Executive officers are rewarded based upon corporate performance and individual performance. Corporate performance is evaluated by reviewing the extent to which strategic, business goals are met, including such factors as the introduction of new technology and services for customers, growth through acquisitions, excellent customer satisfaction, efficient utilization of capital and meeting stated financial objectives. Individual performance is evaluated by reviewing attainment of specified individual objectives and the degree to which teamwork and the Company’s values are fostered.

Elements of Annual Compensation

Annual compensation for our executive officers generally consists of three elements:  base salary, bonuses and employee benefits.

The salary for executive officers is generally set by reviewing compensation for competitive positions in the market and the historical compensation levels of the executive officers. Increases in annual salaries are based on

11

actual corporate and individual performance against targeted performance, changes in scope of responsibilities, and various subjective performance criteria. Targeted performance criteria vary for each executive officer based on his area of responsibility. Subjective performance criteria include an executive officer’s ability to recruit and retain qualified employees, manage his or her area of responsibility effectively and efficiently, and collaborate with other executive officers to enhance our growth and success.

The compensation committee does not use a specific formula based on these targeted performance and subjective criteria, but instead makes an evaluation of each executive officer’s contributions in light of all such criteria.

The level of performance bonuses for the Company’s Chief Executive Officer and Chief Financial Officer are governed by their employment agreements and the performance of the Company. The other members of the executive management may receive a performance bonus of up to from 15% to 25% of their base salary based on a combination of corporate and individual performance characteristics as determined by the Company’s Chief Executive Officer and confirmed by the compensation committee.

The compensation committee developed a Long-Term Incentive Plan for executive management. The plan became effective with the 2005 fiscal year and tied executive management’s performance to stockholder value. Based on the parameters of the plan, no awards were earned for 2005.

Compensation of Chief Executive Officer

The compensation committee believes that Mr. Weaver’s annual compensation has been set at a level competitive with other companies in the industry. In determining Mr. Weaver’s 2006 compensation, the compensation committee considered Mr. Weaver’s overall compensation package as compared with other chief executive officers in our industry, as well as the effectiveness of Mr. Weaver’s leadership of the Company and the resulting success of the Company in the attainment of its goals.

Federal Tax Considerations

Section 162(m) of the Internal Revenue Code limits the Company to a deduction for federal income tax purposes of no more than $1 million of compensation paid to our named executive officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of Section 162(m).

The compensation committee believes that, at the present time, it is quite unlikely that the compensation paid that may be subject to the deduction limit will exceed $1 million in a taxable year for any such executive. Therefore, the compensation committee has not established as a priority designing executive compensation packages specifically intended to avoid the Section 162(m) limitations. The compensation committee intends to continue to evaluate the effects of the statute and any applicable Treasury regulations and to grant compensation awards in the future in a manner consistent with Otelco’s best interests.

COMPENSATION COMMITTEE

William Bak

John P. Kunz

William Reddersen

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BENEFICIAL OWNERSHIP OF OTELCO INC. COMMON STOCK

The following table sets forth information regarding the beneficial ownership of Class A shares (represented by IDSs) and Class B shares by:

·

each person who is known by us to own beneficially more than 5% of either class of our capital stock;

·

each member of our Board;

·

each of our named executive officers; and

·

all members of our Board and our executive officers, as a group.

The amounts and percentage of shares beneficially owned are reported as of April 3, 2006 on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which that person has no economic interest.

Except as indicated in the footnotes to this table, each person has sole voting and investment power with respect to all shares attributable to such person.

	Class A Shares			Class B Shares(6)
	Shares Beneficially Owned			Shares Beneficially Owned
Name	Number	%(7)		Number	%(7)
Seaport Capital(1)	—	—		121,013	22.2	%
CEA Capital(2)	—	—		259,726	47.7	%
BancBoston Ventures, Inc.(3)	—	—		133,618	24.5	%
Mid-Missouri Parent LLC(4)	—	—		52,871	9.7	%
Michael D. Weaver	74,287	0.8	%	891	*
Stephen P. McCall(5)	—	—		380,739	69.9	%
Andrew Meyers(5)	—	—		380,739	69.9	%
Howard Haug	—	—		—	—
William Bak	—	—		—	—
John P. Kunz	—	—		—	—
William F. Reddersen	—	—		—	—
Dennis Andrews	1,784	*		—	—
Jerry Boles	360	*		—	—
Curtis L. Garner, Jr.	—	—		—	—
All directors and executive officers as a group	80,366	0.8	%	381,630	70.1	%

——————

*

Less than 1%.

(1)

Includes shares owned by each of Seaport Capital Partners II, L.P. and Seaport Investments, LLC, each of which is an affiliate of Seaport Capital. Each entity has an address c/o Seaport Capital, 199 Water Street, 20th Floor, New York, NY 10038. The general partner of Seaport Capital Partners II, L.P. is CEA Investment Partners II, LLC. CEA Investment Partners II, LLC is controlled by Seaport Associates, LLC. Seaport Associates, LLC is controlled by William K. Luby and James J. Collis. Seaport Investments, LLC is controlled by William K. Luby and James J. Collis.

(2)

Includes shares owned by each of CEA Capital Partners USA, L.P. and CEA Capital Partners USA CI, L.P., each of which is an affiliate of Seaport Capital. Each entity has an address c/o Seaport Capital, 199 Water Street, 20th Floor, New York, NY 10038. Also includes shares issued to Mid-Missouri Parent, LLC in connection with the acquisition of Mid-Missouri Holding. CEA Capital Partners USA, L.P. and CEA Capital Partners USA CI, L.P. collectively own 87.6% of the equity interests of Mid-Missouri Parent, LLC. The general partner of CEA Capital Partners USA, L.P. is CEA Investment Partners, L.P. The general partner of CAE

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Capital Partners USA CI, L.P. is CEA Equity Offshore, Ltd. The general partner of CEA Equity Offshore, Ltd. is CEA Investment Partners, L.P. The general partner of CEA Investment Partners, L.P. is CEA Capital Corp. CEA Capital Corp. is wholly owned by Atlantic American Holdings, Inc., which is wholly owned by the J. Patrick Michaels, Jr. Family Trust.

(3)

BancBoston Ventures Inc. has an address at 100 Federal Street, Mailstop MAS 100-10-01, Boston, MA 02110.

(4)

A portion of these shares are included in shares of CEA Capital above. Mid-Missouri Parent LLC has an address c/o Seaport Capital, 199 Water Street, 20th Floor, New York, NY 10038.

(5)

Each of Messrs. McCall and Meyers may be deemed the beneficial owner of the shares of common stock owned by affiliates of Seaport Capital and CEA Capital set forth in notes (1) and (2) above due to their status as a partner and principal, respectively, of Seaport Capital. Each such person disclaims beneficial ownership of any such shares.

(6)

Each holder of Class B shares has entered into the Investor Rights Agreement described herein.

(7)

For each person or group, the percentage of class ownership was determined by dividing the number of shares shown in the table by 9,676,733 and 544,671, the total number of outstanding Class A shares and Class B shares, respectively.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of the Company’s common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. The Company believes that, during the fiscal year 2005, its directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements. In making this statement, the Company has relied upon examination of the copies of Forms 3, 4, and 5, and amendments thereto, provided to the Company and the written representations of its directors, executive officers and 10% stockholders.

STOCKHOLDER COMMUNICATIONS WITH THE BOARD

The Company has a process for stockholders to communicate with the directors. For more information, please see the investor relations section of our website at www.otelco.net. Other information contained on our website does not constitute a part of this proxy statement.

DIRECTOR AND EXECUTIVE COMPENSATION AND OTHER INFORMATION

Compensation of Directors

The non-employee members of the Board received annual cash compensation of $30,000 paid in four quarterly installments as a retainer for their services and participation in quarterly Board and committee meetings. In addition, they are paid $1,000 for any additional called Board or committee meetings and $500 for any Board or committee conference calls. The non-employee members of the Board are reimbursed for travel, lodging and other reasonable expenses as incurred.

Executive Compensation

The following table sets forth all compensation awarded to, earned by or paid to our Chief Executive Officer and our three other most highly paid executive officers during the three years ended December 31, 2005. Except as set forth in the table, none of our executive officers exceeded $100,000 in salary and bonus in 2005. The Company does not currently have any stock option plan for its executive officers. We did not award any options during 2004 under our former stock option plan. At the time of the our initial public offering, all options under the former stock option plan were vested and exchanged in a cashless transaction. The financial impact of this vesting and exchange are shown in the LTIP Payouts column of the table. Matching amounts and end-of-year discretionary payments paid by the Company to the 401(k) Plan for each employee are included in All Other Compensation. The Board approved a Long-Term Incentive Plan for executive managem ent that became effective for 2005. No awards were made under this plan for 2005.

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SUMMARY COMPENSATION TABLE

						Long-Term Compensation
Name and Principal Position	Annual Compensation					Securities Underlying Options(1)	LTIP Payouts(2)		All Other Compensation(3)
	Year	Salary		Bonus
Michael D. Weaver	2005	$	233,419	$	—	—	$	—	$	14,000
Chairman of the Board and	2004		211,978		63,100	—		2,444,391		17,639
Chief Executive Officer	2003		188,646		63,100	10,000		—		19,513
Curtis L. Garner, Jr.	2005		149,743		—	—		—		6,757
Chief Financial Officer(4)	2004		126,568		41,250	—		—		—
	2003		—		—	—		—		—
Dennis K. Andrews	2005		110,783		—	—		—		6,487
Senior Vice President and	2004		99,437		16,000	—		45,204		8,700
General Manager, Brindlee	2003		95,076		16,000	750		—		8,689
Jerry C. Boles	2005		105,585		—	—		—		6,287
Vice President and	2004		102,410		17,500	—		100,331		9,164
Controller	2003		103,530		17,500	1,000		—		10,133

——————

(1)

Rural LEC Acquisition LLC converted from a Delaware limited liability company into a Delaware corporation and changed its name to Otelco Inc. as part of our initial public offering. Options were awarded to executive management in 2003 as part of an option plan created in 1999. No options were awarded in 2004 and the plan was terminated coincident with the initial public offering. The Company does not currently have any form of option plan.

(2)

In connection with our initial public offering all options vested and were exchanged on a cashless basis on December 21, 2004. The amounts in this column represent the value of employee options at exchange. IDSs and Class B shares were bought back from the employees by the Company only to the extent required to pay taxes on the payout.

(3)

Reflects the value of the Company’s matching contribution to our 401(k) plan and the additional discretionary contribution made by the Company at the end of 2003 and 2004.

(4)

Mr. Garner was not employed by the Company in 2003.

AGGREGATED OPTION/SAR EXERCISE TABLE

Name and Principal Position	Shares Received Upon Exercise(1)		Value Realized(2)
Michael D. Weaver	151,373	IDSs	$	2,444,391
Chairman of the Board and Chief Executive Officer	9,442	Class B Shares
Jerry C. Boles	6,212	IDSs		100,331
Vice President and Controller	388	Class B Shares
Curtis L. Garner, Jr.	—			—
Chief Financial Officer
Dennis K. Andrews	2,799	IDSs		45,204
Senior Vice President and General Manager – Brindlee	175	Class B Shares

——————

(1)

In connection with our initial public offering, all options vested and were exchanged for IDSs and Class B Shares on a cashless basis on December 21, 2004.

(2)

The amounts in this column represent the value of IDSs and Class B Shares listed in the “Shares Received Upon Exercise” column as of our initial public offering.

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Management Employment and Severance Agreements

Agreement with Michael D. Weaver.We entered into an employment agreement with Michael D. Weaver on June 21, 2004 that became effective on December 21, 2004, will remain in effect through December 21, 2007 and provides for automatic one-year extensions of the employment term unless either party provides written notice of its intention not to extend the agreement within 60 days of the end of the then-current term. Pursuant to the employment agreement, Mr. Weaver receives an annual base salary of $230,610 in 2006, an annual incentive bonus and medical and other benefits. Mr. Weaver’s bonus is targeted to be 33% of his base salary for the appropriate year.

If we terminate Mr. Weaver’s employment without cause or due to death or disability, he will be entitled to receive severance benefits consisting of his annual base salary, and continued medical and other benefits for one year following the date of his termination plus the pro rata portion of the annual bonus he would have received had he been employed by us through the end of the full fiscal year in which the termination occurred. Mr. Weaver’s employment agreement provides that he will be restricted from engaging in competitive activities for one year after the termination of his employment.

Agreement with Curtis L. Garner, Jr.We entered into an employment agreement with Curtis L. Garner, Jr. on June 9, 2004 that will remain in effect until termination by us or Mr. Garner for any reason or by death or disability. Pursuant to the employment agreement, Mr. Garner receives an annual base salary of $153,754 in 2006, an annual incentive bonus and medical and other benefits. Mr. Garner’s annual bonus is targeted to be 30% of his base salary for the appropriate year.

If we terminate Mr. Garner’s employment without cause, he will be entitled to receive severance benefits consisting of his annual base salary for six months following the date of his termination plus the pro rata portion of the annual bonus he would have received had he been employed by us through the end of the full fiscal year in which the termination occurred. Mr. Garner’s employment agreement provides that he will be restricted from engaging in competitive activities for six months after the termination of his employment.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is an officer or employee of the Company. None of our executive officers serves as a member of the Board or compensation committee of any entity that has one or more executive officers serving on our compensation committee.

OTHER RELATIONSHIPS AND TRANSACTIONS WITH EXECUTIVES

Investor Rights Agreement

We entered into an investor rights agreement with holders of our Class B shares, pursuant to which we provide each holder of such shares with the option to require us, subject to the conditions set forth below, to exchange such holder’s Class B shares for IDSs beginning on December 21, 2006 or at such later time when the conditions described below are met. Each Class B share will be exchanged for one IDS, subject to adjustment for stock splits, dividends, combinations or reclassifications. If all such Class B shares were exchanged for IDSs, the holders of our Class B shares would receive an aggregate of 544,671 IDSs that currently represent 544,671 shares of our Class A shares and $4.1 million aggregate principal amount of senior subordinated notes. If the IDSs have automatically separated or are otherwise not outstanding at the time of the exchange of Class B shares for IDSs, each Class B share will be exchanged for one Class A share, su bject to adjustment for stock splits, dividends, combinations or reclassifications, and a senior subordinated note having a principal amount equal to each senior subordinated note which was represented by an IDS. However, if the senior subordinated notes are not outstanding at the time of such exchange, each Class B share will be exchanged for 1.9740 Class A share, subject to adjustment for stock splits, dividends, combinations or reclassifications.

The first condition to the exchange of the Class B shares for IDSs is that we must have satisfied a financial test relating to our Adjusted EBITDA (as such term is defined in the indenture governing our notes). This financial condition will be tested quarterly starting on December 21, 2006. All of the Class B shares held by each holder thereof will be subject to exchange if and when we have generated Adjusted EBITDA of at least $30,150,000 over the most recent four consecutive fiscal quarters immediately prior to such exchange, subject to certain adjustments, including acquisitions. Following December 21, 2009, this test will no longer apply and the Class B shares will be

16

automatically exchanged subject only to the satisfaction of the other conditions. Even if our financial performance satisfied this condition and all of our Class B shares are exchanged for IDSs, the Board has full discretion to determine whether dividends shall continue to be paid on Class A shares at any particular level or at all.

In addition, the investor rights agreement contains the following registration rights:

·

holders of our Class B shares collectively have demand registration rights, exercisable at any time after December 30, 2006, relating to the IDSs they hold, the IDSs into which such Class B shares may be exchanged and the Class A shares and senior subordinated notes constituting the IDSs, subject to the requirement that the securities covered by each demand registration have an aggregate public offering price of at least $4.0 million; provided that such holders may exercise a demand right for less than an aggregate public offering price of $4.0 million if such proposed offering is for all the registrable securities held by such holders; and

·

holders of our Class B shares have the right to include in our future public offerings of IDSs or common stock their IDSs, Class A shares or senior subordinated notes.

If holders of our Class B shares exercise their demand registration rights, we will file a registration statement or prospectus and undertake an offering in the United States and Canada, as requested by such holders. The registration rights are transferable under certain circumstances.

We have agreed to pay all costs and expenses in connection with each such registration, except underwriting discounts and commissions applicable to the securities sold, and to indemnify the holders that include securities in such offering against certain liabilities, including liabilities under the Securities Act.

Management Agreements

In 2004, affiliates of Seaport Capital provided business advisory services to each of Blountsville Telephone Company, Inc. and Hopper Telecommunications Company, Inc. (each an indirect wholly-owned subsidiary of the Company) and Mid-Missouri Telephone Company (which we acquired as an indirect wholly-owned subsidiary concurrently with the closing of our initial public offering), pursuant to management agreements. Annual aggregate fees paid by these three companies in connection with the management agreements was $1.5 million. These management agreements and the related managements fees were terminated coincident with the closing of our initial public offering on December 21, 2004.

Indemnification and Insurance

For a description of our limitation on liability and indemnification of, and provision of insurance covering, our directors and executive officers, see “Management — Limitation of Directors’ Liability and Indemnification.”

17

PERFORMANCE GRAPH

The following graph compares the cumulative total stockholder return (stock price appreciation plus reinvested dividends) for our Class A shares (represented by IDSs) with the cumulative total return (including reinvested dividends) of the Russell 2000 Index (“R2000”) and the Standard & Poor’s-Telecommunications Services Index (“S&P-TS”), assuming a $100 investment on December 16, 2004 (the date our IDSs began trading on the American Stock Exchange) through December 31, 2005.

	Cumulative Total Return
	12/16/04	12/31/04	12/31/05
Otelco Inc.	100.00	104.20	115.23
Russell 2000	100.00	102.96	107.65
S & P Telecommunications Services	100.00	102.57	96.79

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PROPOSAL 2

RATIFICATION OF APPOINTMENT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

OUR RELATIONSHIP WITH OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The audit committee has selected BDO Seidman, LLP as our Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2006 subject to ratification of the appointment by the stockholders. BDO Seidman, LLP also provided audit services for both the three year period 2001 through 2003 and the interim periods of 2004 included in our initial public offering and audit services in 2004 and 2005 as a public company. They are knowledgeable of the Company and its financial statements. A representative of BDO Seidman, LLP is expected to be present at the Annual Meeting, will have the opportunity to make a statement if he desires to do so and is expected to be available to respond to appropriate questions.

	2004		2005
Audit Fees	$	687,500	$	327,473
Audit-Related Fees		0		0
Tax Fees		48,000		114,898
All Other Fees		0		0
Total Fees	$	735,500	$	442,371

Audit fees for 2004 include work related to our registration statement associated with our initial public offering as well as the audits of our financial statements for 2001 through 2003 that became effective on December 16, 2004. Audit fees for 2005 include work related to our internal control over financial reporting required by the Sarbanes-Oxley Act of 2002.

Tax fees include federal and state tax filing and consulting services during 2004 and 2005. The fees in 2004 also included tax consulting services associated with the initial public offering.

Because our initial public offering commenced on December 21, 2004, our audit committee was not required to, and did not pre-approve, all of the fees described above in 2004. The audit committee has reviewed and approved BDO Seidman, LLP’s fees for 2005.

The audit committee has determined the rendering of non-audit services by BDO Seidman, LLP is compatible with maintaining their independence. The audit committee has contracted separately for these services.

Pre-Approval Policies and Procedures

The audit committee’s policy is to pre-approve all audit and permissible non-audit services rendered by BDO Seidman, LLP. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the audit committee’s approval of the scope of the engagement of BDO Seidman, LLP or on an individual case-by-case basis before BDO Seidman, LLP is engaged to provide each service. The pre-approval of services may be delegated to one or more of the audit committee’s members, but the decision must be reported to the full audit committee at its next scheduled meeting.

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of BDO Seidman, LLP as our Independent Registered Public Accounting Firm.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF BDO SEIDMAN, LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

19

OTELCO INC.

505 Third Avenue Fast

Oneonta, AL  35121

ANNUAL MEETING OF STOCKHOLDERS – MAY 11, 2006

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned Stockholder of Otelco Inc. (the “Company”) hereby appoints Michael D. Weaver and Curtis L. Garner, Jr. and each of them, as true and lawful proxies with full power of substitution for the undersigned and in the undersigned’s name, place and stead, to represent and vote, as designated below, all of the stock of the Company held of record by the undersigned on March 20, 2006, at the Annual Meeting of Stockholders to be held at the Celebration Hotel, 700 Bloom Street, Celebration, Florida 34747, at 10:00 a.m. on May 11, 2006 or any adjournment or postponement thereof, upon all matters that may properly come before the meeting, including all matters described in the Company’s Notice of Annual Meeting of Stockholders and Proxy Statement dated April 12, 2006, subject to any directions noted on the reverse side of this card. If any nominee for director should be unavailable for election as a result of an unexpected occurrence, the foregoing proxyholders will vote for election of a substitute nominee proposed by management.

This proxy, when properly executed, will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, the proxy will be votedFOR Proposals 1 and 2. Should any other matter requiring a vote of the stockholders arise, the proxies named above are authorized to vote in accordance with their best judgment in the interest of the Company. The tabulator cannot vote your shares unless you sign and return this card.

(IMPORTANT: Please sign and date on reverse)

OTELCO INC.

PLEASE MARK THE APPROPRIATE BOX USING DARK INK ONLY.ý

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES.

1. Election of Directors:
John P. Kunz:	For  ¨	Withheld  ¨
Andrew Meyers:	For  ¨	Withheld  ¨

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE INDEPENDENT ACCOUNTANTS.

2. Ratification of the Appointment of BDO Seidman, LLP as our Independent Registered Public Accounts for the Company:
	For  ¨	Against  ¨	Abstain  ¨

3.

In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Annual Meeting of Stockholders.

Date: _____________________________________________

Signature(s) _______________________________________

 _________________________________________________

Please sign exactly as your name appears on your stock certificate. Joint owners should each sign personally. A corporation should sign the full corporate name by duly authorized officer and affix corporate seal. A partnership should sign the full partnership name by a duly authorized person. When signing as an attorney, executor, administrator or guardian, please give full title as such.

YOUR VOTE IS IMPORTANT!

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY

USING THE ENCLOSED ENVELOPE.