Otelco (OTEL) 10-K/A 2006 FY Annual report (amended)

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. Employer
incorporation 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 registered
Income 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 oNo 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 oNo 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 xNo 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 oAccelerated filer xNon-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 oNo 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.

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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

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Consolidated Financial Statements:

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

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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

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OTELCO INC.

CONSOLIDATED BALANCE SHEETS

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

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

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OTELCO INC.

CONSOLIDATED STATEMENTS OF INCOME 

	Years Ended December 31,
	2004			2005			2006
Revenues
Local services	$	16,657,356		$	17,445,233		$	21,523,406
Network access		16,602,572			21,873,485			23,481,490
Cable television		1,817,711			2,086,854			2,191,210
Internet		2,188,703			5,566,650			8,515,899
Transport services		—			—			1,877,387
Total revenues		37,266,342			46,972,222			57,589,392
Operating expenses
Cost of services and products		8,831,951			12,611,499			18,727,806
Selling, general and administrative expenses		7,676,496			6,710,542			8,277,449
Depreciation and amortization		6,100,376			8,211,552			10,781,333
Total operating expenses		22,608,823			27,533,593			37,786,588
Income from operations		14,657,519			19,438,629			19,802,804
Other 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			3,358,860
Total other expense		(4,583,683	)		(16,192,444	)		(17,000,959	)
Income before income tax and accretion expense		10,073,836			3,246,185			2,801,845
Income tax expense		(3,946,625	)		(1,011,675	)		(1,211,269	)
Income before accretion expense		6,127,211			2,234,510			1,590,576
Accretion 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		$	1,160,997
Weighted average shares outstanding:
Basic		8,103,720			9,676,733			9,676,733
Diluted		8,607,455			10,221,404			10,221,404
Basic net income per share	$	0.75		$	0.19		$	0.12
Diluted net income per share	$	0.71		$	0.12		$	0.18
Dividends declared per share	$	—		$	0.71		$	0.71

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

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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		$	—		$	53,918,422
Comprehensive income:
Net income																				6,113,863						6,113,863
Interest rate cap																							45,135			45,135
Total 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									3,391,168
Adjust 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			—			—			6,893,738
Embedded exchange feature of Class B common stock																	(273,475	)		—			—			(273,475	)
Initial Public Offering
Issuance of IDSs					830,776			8,308			—			—			6,388,667			—			—			6,396,975
Repurchase 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			—			—			57,370
Discount on repurchase of shares																	193,553									193,553
Capitalized 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		$	9,985,834
Comprehensive income:
Net Income																				1,791,584						1,791,584
Interest rate cap																							853,884			853,884
Total comprehensive income																										2,645,468
Dividends																	(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		$	5,809,205
Comprehensive income:
Net Income																				1,160,997						1,160,997
Interest rate cap																							(20,974	)		(20,974	)
Total comprehensive income																										1,140,023
Dividends																	(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.

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OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2004			2005			2006
Cash flows from operating activities:
Net income	$	6,113,863		$	1,791,584		$	1,160,997
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		5,837,033			7,748,687			9,527,319
Amortization		263,343			462,865			1,254,014
Interest rate caplet		—			258,291			755,594
Amortization of loan costs		1,128,095			1,373,747			1,627,960
Stock based compensation expense		1,493,985			—			—
Accretion expense		13,348			442,924			429,579
Change in fair value of derivative		—			(958,621	)		277,782
Gain on disposition of other assets		—			—			(2,686,745	)
Provision for deferred income taxes		3,042,751			2,072,614			983,786
Provision for uncollectible revenue		107,224			124,367			193,561
Changes 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			3,385
Prepaid expenses and other assets		(16,716	)		33,531			(365,795	)
Income tax receivables		—			(749,591	)		1,037,395
Accounts payable and accrued liabilities		(28,271	)		(1,754,002	)		2,757,784
Advance 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			16,497,205
Cash 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			3,224,913
Cash 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			—			40,000,000
Loan origination costs and transaction costs		(8,060,735	)		(324,613	)		237,000
Repayment 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	)		10,773,129
Net increase in cash and cash equivalents		3,756,238			162,688			8,832,616
Cash and cash equivalents, beginning of period		1,650,307			5,406,545			5,569,233
Cash and cash equivalents, end of period	$	5,406,545		$	5,569,233		$	14,401,849
Supplemental disclosures of cash flow information:
Interest paid	$	3,114,381		$	16,343,237		$	14,284,165
Income taxes paid (received)	$	1,581,026		$	(651,536	)	$	(698,336	)
Dividends declared but not paid	$	—		$	—		$	1,705,524
Supplemental 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.

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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.

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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.

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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”.

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Derivative Financial Instruments

Derivative financial instruments are accounted for under SFAS No. 133, Accounting for Derivative Instruments andHedging 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.

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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

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

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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 B
Conversion to Delaware Corporation		8,054,841			502,463
Acquisition of Mid-Missouri		856,234			53,413
Company 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	$	8,060,735
Costs related to selling shareholders and expensed		1,526,138
Costs related to the Company and charged to APIC		143,232
Total costs	$	9,730,105

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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 million
Purchase interest rate cap	$	4.7 million
Fees and expenses	$	8.7 million
Repurchase 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	$	16,208,439
Notes payable assumed		24,347,299
Purchase price	$	40,555,738

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

	July 3, 2006
Cash	$	208,399
Other current assets		3,867,982
Property and equipment		20,180,158
Intangible assets		10,700,606
Goodwill		14,750,314
Other assets		2,367,842
Current 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.

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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		2006
Revenues	$	69,053,427	$	69,118,553
Income from operations		20,286,654		19,090,260
Net income		769,869		290,936
Basic net income per share	$	0.08	$	0.03
Diluted 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, 2006
	Carrying Value		Accumulated Amortization			Net Value		Carrying Value		Accumulated Amortization			Net Value
Customer relationships	$	1,800,000	$	(211,916	)	$	1,588,084	$	10,553,440	$	(592,701	)	$	9,960,739
Non competition		-		-			-	$	1,840,090	$	(460,022	)	$	1,380,068
Total	$	1,800,000	$	(211,916	)	$	1,588,084	$	12,393,530	$	(1,052,723	)	$	11,340,807

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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	$	263,343
For the year ended December 31, 2005		462,865
For the year ended December 31, 2006	$	1,254,014

Expected amortization expense for the years ending December 31,

2007	$	1,475,897
2008		1,015,874
2009		555,852
2010		555,852
2011		553,268
Thereafter		7,184,064
Total	$	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.

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5. Property and Equipment

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

	Estimated		December 31,
	Life		2005			2006
Land			$	772,399		$	850,257
Building and improvements		20-40		6,961,203			8,480,551
Telephone equipment		6-20		92,122,002			133,572,157
Cable television equipment		7		5,571,788			5,706,003
Furniture and equipment		8-14		1,379,306			1,996,877
Vehicles		7-9		3,133,743			3,895,058
Computer software equipment		5-7		2,950,946			8,629,616
Internet equipment		5		2,146,725			2,584,652
Total property, plant and equipment				115,038,112			165,715,171
Accumulated 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		2006
Carrier access bills receivable	$	980,294	$	1,015,850
Receivables from Alabama Service Fund		461,729		462,338
Other miscellaneous		40,148		201,956
	$	1,482,171	$	1,680,144

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7. Investments

Investments consist of the following:

	December 31,
	2005		2006
Investment in CoBank stock	$	106,049	$	659,978
Investment in Rural Telephone Bank (Class C stock)		435,858		-
Rental property		550,700		525,191
Other 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.

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Long-term notes payable consists of the following:

	December 31,
	2005		2006
Term credit facility, General Electric Captial Corporation;
variable interest rate of 6.53% and 8.62% at Decemberer 31, 2005 and
2006, respectively. There are no principal payments. Interest
payments are due on the last day of each LIBOR period or at three
month intervals, whichever date comes first. Interest rate is the
index rate plus the applicable term loan index margin of 2.25%
or the applicable LIBOR rate plus the applicable term loan LIBOR
margin of 3.5%. The unpaid balance will be due on
July 3, 2011.	$	80,000,000	$	120,000,000
13% Senior subordinated notes, due 2019; interest payments
are due quarterly		72,575,498		72,575,498
13% Senior subordinated notes, held seperately, due 2019;
interest payments are due quarterly		8,500,000		8,500,000
Total long-term notes payable	$	161,075,498	$	201,075,498
Less: 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		120,000,000
Thereafter		81,075,498
Total	$	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.

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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-Guarantor
	Parent		Subsidiaries		Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	—	$	14,376,843	$	25,006		$	—		$	14,401,849
Accounts receivable, net		21,028		6,050,195		1,038,770			—			7,109,993
Materials and supplies		—		847,045		1,115,893			—			1,962,938
Prepaid and other current assets		3,487		1,006,316		53,144			—			1,062,947
Deferred income taxes		766,225		—		—			—			766,225
Investments in subsidiaries		75,751,926		—		—			(75,751,926	)		—
Intercompany receivables		34,232,103		—		—			(34,232,103	)		—
Total current assets		110,774,769		22,280,399		2,232,813			(109,984,029	)		25,303,952
Property and equipment, net		—		42,745,710		17,748,079			—			60,493,789
Goodwill		—		136,118,949		(1,936,640	)		—			134,182,309
Intangibles assets, net		—		7,689,851		3,650,955			—			11,340,806
Investments		1,000		914,093		325,157			—			1,240,250
Other long-term assets		10,589,917		701,264		—			—			11,291,181
Total assets	$	121,365,686	$	210,450,236	$	22,020,394		$	(109,984,029	)	$	243,852,287
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payables and accrued expenses	$	4,924,962	$	3,081,839	$	1,233,497		$	—		$	9,240,298
Intercompany payables		—		15,495,558		18,736,545			(34,232,103	)		—
Other current liabilities		—		2,238,188		79,009			—			2,317,197
Total current liabilities		4,924,962		20,815,585		20,049,051			(34,232,103	)		11,557,495
					��
Deferred income taxes		4,661,690		17,544,383		2,506,140			—			24,712,213
Other liabilities		—		187,037		—			—			187,037
Long-term notes payables		105,458,990		95,616,508		—			—			201,075,498
Derivative liability		2,107,877		—		—			—			2,107,877
Class B common convertible to senior subordinated notes		4,085,033		—		—			—			4,085,033
Stockholders' equity (deficit)		127,134		76,286,723		(534,797	)		(75,751,926	)		127,134
Total liabilities and stockholders' equity (deficit)	$	121,365,686	$	210,450,236	$	22,020,394		$	(109,984,029	)	$	243,852,287

- 22 -

Otelco Inc.
Notes to Consoldiated Financial Statements
Condensed Consolidated Statement of Operations
For the Year End December 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenue	$	2,614,748		$	52,518,931		$	9,245,580		$	(6,789,867	)	$	57,589,392
Operating 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			—			19,802,804
Other 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	)		2,801,845
Income tax expense		6,073,066			(6,198,285	)		(1,086,050	)		—			(1,211,269	)
Accretion of class B common convertible
to 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-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	1,160,997		$	8,084,629		$	1,426,214		$	(9,510,843	)	$	1,160,997
Adjustment to reconcile net income (loss)
to cash flows from operating activities		3,491,185			6,401,396			2,470,269			—			12,362,850
Changes in assets and liabilities, net of
assets and liabilities acquired		10,331,192			(13,389,268	)		6,031,434			—			2,973,358
Cash 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			—			—			10,773,129
Net increase (decrease) in cash and cash equivalents		8,955,105			8,864,904			(32,288	)		(8,955,105	)		8,832,616
Cash and cash equivalents, beginning of period		—			5,511,939			57,294			—			5,569,233
Cash 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-Guarantor
	Parent		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	—	$	5,511,939		$	57,294		$	—		$	5,569,233
Accounts receivable, net		13,506		4,062,305			447,373			—			4,523,184
Materials and supplies		—		908,556			24,305			—			932,861
Prepaid and other current assets		799,499		424,587			29,761			—			1,253,847
Deferred income taxes		872,675		—			—			—			872,675
Investment 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	)		13,151,800
Property and equipment, net		—		33,023,888			11,531,723			—			44,555,611
Goodwill		—		116,355,199			3,076,794			—			119,431,993
Intangibles assets, net		—		(5	)		1,588,084			—			1,588,079
Investments		1,000		1,090,719			16,530			—			1,108,249
Other long-term assets		12,290,338		—			—			—			12,290,338
Total assets	$	120,944,862	$	161,377,188		$	16,771,864		$	(106,967,844	)	$	192,126,070
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payables and accrued expenses	$	171,396	$	2,556,960		$	70,599		$	—		$	2,798,955
Intercompany payables		—		24,776,573			16,505,925			(41,282,498	)		—
Other current liabilities		—		1,414,547			3,657			—			1,418,204
Total current liabilities		171,396		28,748,080			16,580,181			(41,282,498	)		4,217,159
Deferred income taxes		4,019,721		9,173,477			2,152,692			—			15,345,890
Other liabilities		—		192,768			—			—			192,768
Long-term notes payables		105,458,990		55,616,508			—			—			161,075,498
Derivative liability		1,830,095		—			—			—			1,830,095
Class B common convertible to senior subordinated notes		3,655,454		—			—			—			3,655,454
Stockholders' equity (deficit)		5,809,206		67,646,355			(1,961,009	)		(65,685,346	)		5,809,206
Total 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-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenue	$	2,563,989		$	43,270,099		$	6,884,179		$	(5,746,045	)	$	46,972,222
Operating 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			—			19,438,629
Other 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	)		3,246,185
Income tax expense		4,810,285			(4,694,211	)		(1,127,749	)		—			(1,011,675	)
Accretion of class B common convertible
to 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-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	1,791,584		$	8,641,136		$	1,749,890		$	(10,391,026	)	$	1,791,584
Adjustment to reconcile net income (loss)
to cash flows from operating activities		3,049,429			7,158,418			1,317,027			—			11,524,874
Changes in assets and liabilities, net of
assets 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	)		162,688
Cash and cash equivalents, beginning of period		—			5,178,105			228,440			—			5,406,545
Cash 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 ended
	2004		2005			2006
Federal income
Current	$	777,594	$	(940,443	)	$	134,177
Deferred		2,657,080		1,789,674			819,045
Total federal tax expense		3,434,674		849,231			953,222
State income
Current		126,280		27,085			13,559
Deferred		385,671		135,359			244,488
Total state tax expense		511,951		162,444			258,047
Total 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 December
	2004			2005			2006
Federal income tax at statutory rate		34	%		34	%		34	%
Federal income tax (provision) at statutory rate	$	3,425,104		$	1,103,704		$	952,626
New deductible IPO cost		518,887			-			-
Change in fair value of derivative		-			(325,931	)		97,900
State income tax (provision), net of
federal income tax effects		337,888			79,568			170,311
Other		(335,254	)		154,334			(9,568	)
Provision for income taxes	$	3,946,625		$	1,011,675		$	1,211,269
Effective 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			2006
Deferred 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		$	228,348
Amortized intangibles		353,249			-
State net operating loss carryforwards		92,093			97,274
Advance payments		199,133			260,514
Other		67,476			180,089
Total deferred tax assets	$	872,675		$	766,225
Net 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 December
	2004		2005			2006
Weighted average common shares at conversion		8,103,720		9,676,733			9,676,733
Effect of dilutive securities		503,735		544,671			544,671
Weighted-average common shares
and potential common shares-diluted		8,607,455		10,221,404			10,221,404
Net income available to common
shareholders	$	6,113,863	$	1,791,584		$	1,160,997
Net income per basic share	$	0.75	$	0.19		$	0.12
Net income available to common
stockholders	$	6,113,863	$	1,791,584		$	1,160,997
Accretion expense of Class B common
convertible to senior subordinated notes		13,348		442,926			429,579
Change in fair value of derivative		-		(958,621	)		277,782
Net income available for diluted shares	$	6,127,211	$	1,275,889		$	1,868,358
Net 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		$	11,843,287
Operating income		5,122,128		4,871,447		4,747,123			4,697,931
Net 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		$	17,381,212
Operating income		4,699,029		4,880,216		5,139,472			5,084,087
Net 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.

- 30 -

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

- 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.

- 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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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 Officer
31.2	Certificate pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer
32.1	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer

* Management contract or compensatory plan or arrangement

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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. WEAVER
	Michael D. Weaver President and Chief Executive Officer

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