10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006 or
¨	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 incorporation or	(I.R.S. Employer Identification No.)
organization)
505 Third Avenue East, Oneonta, Alabama	35121
(Address of Principal Executive Offices)	(Zip Code)

(205) 625-3574

(Registrant’s telephone number, including area code)

N/A

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

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 ýNo ¨

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 ¨ Accelerated filer ý Non-accelerated filer ¨

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

Yes ¨No ý

APPLICABLE ONLY TO CORPORATE USERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 6, 2006
Class A Common Stock ($0.01 par value per share)	9,676,733
Class B Common Stock ($0.01 par value per share)	544,671

OTELCO INC.

FORM 10-Q

For the three month period ended September 30, 2006

TABLE OF CONTENTS

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

Item 6. Exhibits

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

FORWARD-LOOKING STATEMENTS

The report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations and cause actual results to differ materially from those in the forward-looking statements.

OTELCO INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
	2005			2006
Assets				(unaudited)
Current assets
Cash and cash equivalents	$	5,569,233		$	14,691,890
Accounts receivable:
Due from subscribers, net of allowance for doubtful
accounts of $163,028 and $198,088 respectively		1,212,909			2,931,832
Unbilled receivables		1,828,104			2,302,904
Other		1,482,171			1,773,234
Materials and supplies		932,861			1,986,975
Prepaid expenses		504,256			595,477
Income tax receivables		749,591			749,591
Deferred income taxes		872,675			872,675
Total current assets		13,151,800			25,904,578
Property and equipment, net		44,555,611			62,026,887
Goodwill		119,431,993			134,226,762
Intangible assets, net		1,588,079			11,709,781
Investments		1,108,249			1,244,888
Deferred financing costs		6,971,610			7,205,426
Interest rate cap		5,318,728			4,807,755
Deferred costs		—			67,921
Total assets	$	192,126,070		$	247,193,998
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	1,106,114		$	2,105,577
Accrued expenses		1,692,841			9,517,809
Advance billings and payments		1,204,680			2,231,842
Customer deposits		213,524			217,605
Total current liabilities		4,217,159			14,072,833
Deferred income taxes		15,345,890			23,722,135
Other liabilities		192,769			185,098
Total deferred tax and other liabilities		15,538,659			23,907,233
Long-term notes payable		161,075,498			201,075,498
Derivative liability		1,830,095			1,492,399
Class B common convertible to senior subordinated notes		3,655,454			3,987,649
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			1,989,566
Retained deficit		(805,731	)		(364,761	)
Accumulated other comprehensive income		899,019			931,367
Total stockholders' equity		5,809,205			2,658,386
Total liabilities and stockholders' equity	$	192,126,070		$	247,193,998

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

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OTELCO INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2005			2006			2005			2006
Revenues
Local services	$	4,383,431		$	6,387,561		$	13,153,081		$	15,043,360
Network access		5,324,589			6,533,743			16,289,223			16,849,379
Cable television		533,812			550,914			1,545,990			1,631,985
Internet		1,417,485			2,725,156			4,140,643			5,743,860
Transport services					939,598						939,598
Total revenues		11,659,317			17,136,972			35,128,937			40,208,182
Operating expenses
Cost of services and products		3,282,787			6,139,234			9,356,381			12,501,035
Selling, general and administrative expenses		1,585,280			2,451,391			4,912,279			5,604,055
Depreciation and amortization		2,375,266			4,031,841			7,111,459			8,696,215
Total operating expenses		7,243,333			12,622,466			21,380,119			26,801,305
Income from operations		4,415,984			4,514,506			13,748,818			13,406,877
Other income (expense)
Interest expense		(4,131,073	)		(4,998,563	)		(12,166,821	)		(13,445,668	)
Change in fair value of derivative		305,016			27,234			920,494			337,696
Other income		58,662			201,419			379,353			3,197,927
Total other expense		(3,767,395	)		(4,769,910	)		(10,866,974	)		(9,910,045	)
Income (loss) before income tax and accretion expense		648,589			(255,404	)		2,881,844			3,496,832
Income tax expense		(41,601	)		1,375			(607,822	)		(1,231,235	)
Income (loss) before accretion expense		606,988			(254,029	)		2,274,022			2,265,597
Accretion of Class B common convertible to senior
subordinated notes		(110,732	)		(110,732	)		(332,194	)		(332,195	)
Net income (loss) available to common stockholders	$	496,256		$	(364,761	)	$	1,941,828		$	1,933,402
Weighted average shares outstanding:
Basic		9,676,733			9,676,733			9,676,733			9,676,733
Diluted		10,221,404			10,221,404			10,221,404			10,221,404
Net income (loss) per share
Basic	$	0.05		$	(0.04	)	$	0.20		$	0.20
Diluted	$	0.03		$	(0.03	)	$	0.13		$	0.19
Dividends declared per share	$	0.18		$	0.18		$	0.53		$	0.53

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

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OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30,
	2005			2006
Cash flows from operating activities:
Net income	$	1,941,828		$	1,933,402
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		5,772,431			6,390,925
Amortization		1,339,027			1,890,831
Interest rate caplet		130,739			543,321
Accretion expense		332,194			332,195
Change in fair value of derivative liability		(920,494	)		(337,695	)
Provision for uncollectible revenue		—			123,979
Gain on disposition of other assets		84,197			(2,686,745	)
Changes in assets and liabilities; net of assets and liabilities acquired:
Accounts receivables		18,393			(155,522	)
Material and supplies		71,282			(20,652	)
Income tax receivable		—			287,804
Prepaid expenses and other assets		60,367			101,675
Accounts payable and accrued liabilities		(427,017	)		4,888,886
Advance billings and payments		(71,831	)		1,888
Other liabilities		11,105			(3,860	)
Net cash from operating activities		8,342,221			13,290,432
Cash flows from investing activities:
Acquisition and construction of property and equipment		(3,339,695	)		(3,662,910	)
Proceeds from retirement of investment		122,914			3,226,651
Payment for the purchase of Mid-Missouri Holding Corp, net of cash acquired		29,683			—
Payment for the purchase of Mid-Maine Communications, Inc., net of cash acquired		—			(15,905,248	)
Deferred costs		—			(67,921	)
Net cash from investing activities		(3,187,098	)		(16,409,428	)
Cash flows from financing activities:
Cash dividends paid		(5,116,572	)		(3,411,048	)
Proceeds from long-term notes payable		—			40,000,000
Repayment of long-term notes payable		—			(24,347,299	)
Loan origination costs and transaction cost		(68,406	)		—
Net cash from financing activities		(5,184,978	)		12,241,653
Net increase (decrease) in cash and cash equivalents		(29,855	)		9,122,657
Cash and cash equivalents, beginning of period		5,406,545			5,569,233
Cash and cash equivalents, end of period	$	5,376,690		$	14,691,890
Supplemental disclosures of cash flow information:
Interest paid	$	12,317,453		$	12,130,902
Income taxes received	$	(357,226	)	$	(262,632	)
Dividends declared but not paid	$	—		$	1,705,524

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Basis of Financial Reporting

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, Otelco Telephone LLC, Hopper Holding Company, Inc. (“HHC”), Brindlee Holdings LLC (“BH”), Page & Kiser Communications, Inc. (“PKC”), Mid-Missouri Holding Corporation (“MMH”), and Mid-Maine Telecommunications, Inc. (“Mid-Maine”). HHC’s wholly owned subsidiary is Hopper Telecommunications Company, Inc. BH’s owned subsidiary is Brindlee Mountain Telephone Company, Inc. PKC’s wholly owned subsidiary is Blountsville Telephone Company, Inc. MMH’s wholly owned subsidiary is Mid-Missouri Telephone Company (“MMT”). MMT is the sole stockholder of Imagination, Inc. Mid-Maine’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.

The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005. The interim consolidated financial information herein is unaudited. The information reflects all adjustments (which include only normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in the report.

2. Commitment and Contingencies

From time to time, we may be involved in various claims, legal actions and regulatory proceedings incidental to and in the ordinary course of business, including administrative hearings of the Alabama and Missouri Public Service Commissions and the Maine Public Utilities Commission related primarily to rate making. Currently, none of the legal proceedings are expected to have a material adverse effect on our business.

3. Derivative and Hedge Activities

The interest rate cap was purchased on December 21, 2004, coincident with the closing of our initial public offering and the recapitalization of our senior notes payable. The interest rate cap was purchased to mitigate the risk of rising interest rates to limit or cap the rate at 7%. It is considered an effective hedge as all critical terms of the interest rate cap are identical to the underlying 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. For the three months ended September 30, 2005 and 2006 the change in the fair value of the interest rate cap was $(1,207,369) and $(1,454,243), respectively. For the nine months ended September 30, 2005 and 2006 the change in the fair value of the interest rate cap was $456,048 and $32,349, respectively. The cost of the interest rate cap is expensed as interest over the effective life of the hedge in accordance with the quarterly value of the caplets as determined at the date of inception. For the three months ended September 30, 2005 and 2006 the cost of the interest rate cap was $80,024 and $198,376, respectively. For the nine months ended September 30, 2005 and 2006 the cost of the interest rate cap was $130,740 and $543,322, respectively.

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4. 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.

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

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2005			2006			2005			2006
Weighted average common shares-basic		9,676,733			9,676,733			9,676,733			9,676,733
Effect of dilutive securities		544,671			544,671			544,671			544,671
Weighted-average common shares and potential
common shares-diluted		10,221,404			10,221,404			10,221,404			10,221,404
Net income (loss) available to common stockholders	$	496,256		$	(364,761	)	$	1,941,828		$	1,933,402
Net income (loss) per basic share	$	0.05		$	(0.04	)	$	0.20		$	0.20
Net income (loss) available to common stockholders	$	496,256		$	(364,761	)	$	1,941,828		$	1,933,402
Plus: Accretion expense of Class B common
convertible to senior subordinated notes		110,732			110,732			332,194			332,195
Less: Change in fair value of derivative		(305,016	)		(27,234	)		(920,494	)		(337,696	)
Net income (loss) available for diluted shares	$	301,972		$	(281,263	)	$	1,353,528		$	1,927,901
Net income (loss) per diluted share	$	0.03		$	(0.03	)	$	0.13		$	0.19

5. Other Comprehensive Income

The components of other comprehensive income (loss) consist of:

	For the three months					For the nine months
	ended September 30,					ended September 30,
	2005		2006			2005		2006
Net income (loss)	$	496,256	$	(364,761	)	$	1,941,828	$	1,933,402
Hedge accounting		1,207,369		(1,454,243	)		456,048		32,349
Total comprehensive income (loss)	$	1,703,625	$	(1,819,004	)	$	2,397,876	$	1,965,751

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6. Other Income

Other income included the gain of $2,662,235 from the liquidation of the Rural Telephone Bank (RTB) stock. The RTB stock liquidation resulted from the United States Department of Agriculture closing the Rural Telephone Bank. As part of the liquidation process, the Company received on April 11, 2006, $3,098,093 for the redemption of all outstanding RTB stock owned by three of its subsidiaries. The investment had a cost of $435,858.

7. Acquisition

On July 3, 2006, the Company acquired 100% of the outstanding common stock of Mid-Maine through a merger of Mid-Maine with MM Merger Corp, with Mid-Maine as the surviving wholly-owned subsidiary. Mid-Maine owns 100% of two subsidiaries, MMTI, a regulated rural local exchange company serving areas around Bangor, Maine, and MMTP, a non-regulated competitive local exchange carrier, providing. voice, data and Internet services, to residential and business customers in portions of Maine.

The purchase price was cash of $37,750,000 in exchange for the common stock of Mid-Maine, and with further purchase price adjustments and transaction costs, the total purchase price consideration was $40,460,946. The excess of the purchase price over the market value of assets and liabilities is reflected as goodwill of $14,794,767. The goodwill related to the acquisition is not deductible for tax purposes. The aggregate consideration paid for the acquisition was as follows:

Cash paid	$	16,113,647
Notes payable assumed		24,347,299
Purchase price	$	40,460,946

The allocation of the net purchase price for the Mid-Maine acquisition is as follows:

	July 2, 2006
Cash	$	208,399
Current Assets		3,867,982
Property and equipment		20,180,158
Intangible assets		10,700,606
Goodwill		14,794,767
Other assets		2,367,842
Current liabilities		(3,282,563	)
Other liabilities		(8,376,245	)
Purchase price	$	40,460,946

The intangible assets include regulated and unregulated customer base assets fair valued at $8.8 million which have remaining lives of 25 years and a non-competition agreement fair valued at $1.8 million which has a remaining life of two years.

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.

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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 the three month LIBOR rate plus 4.0% margin at a combined 7.0%.

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 Mid-Maine 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.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005		2006			2005		2006
Revenue	$	17,037,023	$	17,309,107		$	51,585,731	$	51,737,344
Income from operations		4,674,859		4,498,433			14,780,507		12,694,334
Net income (loss)		269,963		(392,426	)		1,179,254		1,063,343
Basic net income (loss) per share	$	0.03	$	(0.05	)	$	0.15	$	0.13
Diluted net income (loss) per share	$	0.03	$	(0.05	)	$	0.14	$	0.12

8. Recent Accounting Pronouncements

On July 13, 2006, the Financial Accounting Standards Board issues Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, FIN 48. It interprets and clarifies the way companies account for uncertainty in income taxes. This pronouncement is effective for years beginning after December 15, 2006. We expect to comply with this pronouncement but do not anticipate that it will have a material impact on the Company.

On September 15, 2006, the Financial Accounting Standards Board 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 are evaluating the impact of this pronouncement on accounting for future acquisitions beginning in 2008.

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

Overview

General

Since 1999, we have acquired and operate six rural local exchange carriers operating in portions of eleven counties in approximately 2,500 square miles of north central Alabama, northeastern Maine and central Missouri. We are the sole wireline telephone services provider in the rural communities we serve. We also provide competitive telecommunications services through several subsidiaries. Our services include local and long distance telephone, network access, transport, digital high-speed and dial-up Internet access, cable television and other telephone related services. We view, manage and evaluate the results of operations from the various telephony products and services as one company and therefore have identified one reporting segment as it relates to providing segment information. As of September 30, 2006, we operated approximately 62,500 total access line equivalents.

Our core businesses are local and long distance telephone services, the provision of network access to other wireline, long distance and wireless carriers for calls originated or terminated on our network and private network transport services. Our core businesses generated approximately 75% of our total revenues in the third quarter of 2006 and 79% for the first three quarters of 2006. We also provide cable television within our local service area and dial-up and digital high-speed Internet access both within and adjacent to our local service areas.

The following discussion and analysis should be read in conjunction with our financial statements and the related notes included in Item 1 of Part 1 and other financial information appearing elsewhere in this report. The following discussion and analysis addresses our financial condition and results of operations on a consolidated basis.

Revenue Sources

We derive our revenues from five sources:

· Local services. We receive revenues from providing local exchange telephone services. These revenues include monthly subscription charges for basic service, calling to adjacent communities on a per minute basis, local private line services and enhanced calling features, such as voicemail, caller identification, call waiting and call forwarding. We also receive revenues for providing long distance services to our customers. With the high level of acceptance of local service bundles including unlimited calling, these telephone services are viewed by our customers as part of their local telephone service. We also provide billing and collections services for other carriers under contract and receive revenues from directory advertising in our local communities.

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

· Cable television services. We offer basic, digital and pay per view cable television services to a portion of our telephone service territory in Alabama and Missouri.

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

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· Transport. We receive monthly recurring revenues for the rental of fiber to transport data and other telecommunications services in Maine from business and telecommunications carriers along a 188 mile fiber route.

Access Line and Customer Trends

The number of traditional access lines served is one of the fundamental factors in determining revenue stability for a telecommunications provider. Reflecting a general trend in the rural local exchange carrier industry, the number of access lines we serve has been decreasing gradually when normalized for territory acquisitions. We expect this trend to continue for the industry and our territories. The growth of competitive access lines we serve in Maine should partially offset this decline. The introduction of unlimited calling bundles may positively impact customer churn over time. The growth of our digital high-speed Internet access services will continue to reduce demand for second access lines for residential and small business customers. Our response to this trend will have an important impact on our future revenues. Our primary strategy consists of leveraging our strong incumbent market position, converting customers to digital services and bundling these services to meet customer communications needs, thereby increasing revenue per access line.

	Year Ended December 31,						June 30,		September 30,
	2003		2004		2005		2006		2006
Access line equivalents (1):
Residential access lines		22,100		25,237		24,541		24,273		29,963
Business access lines		7,355		8,414		8,036		7,961		21,682
Access lines		29,455		33,651		32,577		32,234		51,645
Digital high-speed lines		2,185		3,488		5,962		7,323		10,902
Total access line equivalents		31,640		37,139		38,539		39,557		62,547
Long distance customers		11,374		13,641		14,438		16,566		21,088
Cable television customers		3,628		3,959		4,220		4,196		4,187
Dial-up Internet customers		2,331		15,348		12,149		10,614		20,999

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

On July 3, 2006, we completed the acquisition of Mid-Maine. Subscriber results for September 30, 2006 include this acquisition. Within the third quarter, Mid-Maine added 401 access line equivalents and the balance of the Company added 176 access line equivalents. During the same period, Mid-Maine added 157 access lines while the balance of the Company lost 277 access lines and 92 business data circuits.

In March, 2006, we introduced three bundled service packages including unlimited domestic calling to our Alabama residential customers. As of September 30, 2006, 27.8% of the Alabama residential customers signed up for one of the three packages. Our digital high-speed Internet customers continue to grow from 7,323 customers at June 30, 2006, to 10,902 at September 30, 2006. The acquisition of Mid-Maine added 3,034 and the balance of the Company added 545. We expect continued revenue growth in this area of our business. This growth in digital high-speed Internet customers has a negative effect on dial-up Internet customers as some customers migrate to digital high-speed Internet access, and on our access lines as some customers will no longer have a need for second lines for purposes of dial-up Internet access.

With the acquisition of Mid-Maine and the acceptance of our unlimited calling service bundles, our long distance customers increased 27.3% to 21,088 on September 30, 2006 from 16,566 on June 30, 2006. Our cable television customers declined slightly to 4,187 as of September 30, 2006. While we have experienced periodic increases in our cable television programming costs, and expect this trend to continue in the future, we expect these increases will be offset by a corresponding increase in the price that we charge our cable television customers for cable television service offerings. Dial-up Internet customers increased 97.8% to 20,999 on September 30, 2006, reflecting the addition of Mid-Maine which provides dial-up services throughout the state of Maine from 10,614 on

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June 30, 2006. This also includes the subscribers we service outside of our telephone service area in Missouri and will continue to reflect the expected impact of the shift to digital high-speed Internet services.

Our Rate and Pricing Structure

Our Alabama companies have filed to be regulated under the Alabama Communications Reform Act of 2005 (“ACRA”). State regulation under the provisions of ACRA begins October 31, 2006 for new services and on February 1, 2007 for existing services. Regulation under ACRA will eliminate the APSC’s jurisdiction over retail telephone rates and service terms, with the exception of limited authority to enforce a statutory cap on certain non-bundled basic residential and business service and optional calling features. APSC retains jurisdiction over interconnection agreements, access charges and other wholesale arrangements. The APSC retains exclusive jurisdiction over residential service complaints but its authority is limited to enforcing the terms of service agreements and federal truth in billing requirements.

Categories of Operating Expenses

Our operating expenses are categorized as cost of services and products; selling, general and administrative expenses; and depreciation and amortization.

Cost of services and products. This includes expenses for salaries, wages and benefits relating to plant operation, maintenance and customer service; other plant operations, maintenance and administrative costs; network access costs; and costs of sales for long distance, cable television, Internet and directory services.

Selling, general and administrative expenses. This includes expenses for salaries, wages and benefits and contract service payments (e.g., legal fees) relating to engineering, financial, human resources and corporate operations; public company expenses; information management expenses, including billing; allowance for uncollectibles; expenses for travel, lodging and meals; internal and external communications costs; insurance premiums; stock exchange and banking fees; and postage.

Depreciation and amortization. This includes depreciation of our telecommunications, cable and Internet networks and equipment, and amortization of intangible assets.

Our Ability to Control Operating Expenses

We strive to control expenses in order to maintain our strong operating margins. As our revenue shifts to non-regulated services, operating margins decrease reflecting the lower margins associated with these more competitive services. We expect to control expenses while we continue to grow our business.

Results of Operations

The following table sets forth our results of operations as a percentage of total revenues for the periods indicated.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2006			2005			2006
Revenues
Local service		37.6	%		37.3	%		37.4	%		37.4	%
Network access		45.7			38.1			46.4			41.9
Cable television		4.6			3.2			4.4			4.1
Internet		12.1			15.9			11.8			14.3
Transport		0.0			5.5			-			2.3
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses
Cost of services and products		28.1	%		35.8	%		26.6			31.1
Selling, general and administrative expenses		13.6			14.3			14.0			14.0
Depreciation and amortization		20.4			23.6			20.3			21.6
Total operating expenses		62.1			73.7			60.9			66.7
Income from operations		37.9			26.3			39.1			33.3
Other income (expense)
Interest expense		(35.4	)		(29.2	)		(34.6	)		(33.4	)
Change in fair value of derivative		2.6			0.2			2.6			0.8
Other income		0.5			1.2			1.1			8.0
Total other expense		(32.3	)		(27.8	)		(30.9	)		(24.6	)
Income before income taxes		5.6			(1.5	)		8.2			8.7
Income tax expense		(0.4	)		0.0			(1.7	)		(3.1	)
Income before accretion expense		5.2			(1.5	)		6.5			5.6
Accretion of Class B common convertible to senior
subordinated notes		(0.9	)		(0.6	)		(1.0	)		(0.8	)
Net income available to common stockholders		4.3	%		(2.1	)%		5.5	%		4.8	%

Three months and nine months ended September 30, 2006 compared to three months and nine months ended September 30, 2005

Total Revenues. Total revenues increased 47.0% in the three months ended September 30, 2006 to $17.1 million from $11.7 million in the three months ended September 30, 2005. Total revenues increased 14.5% in the nine months ended September 30, 2006 to $40.2 million from $35.1 million in the nine months ended September 30, 2005. The primary reason for the increase is the acquisition of Mid-Maine on July 3, 2006. The tables below provide the components of our revenues for the three months and nine months ended September 30, 2006 compared to the same periods of 2005.

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For the three months ended September 30, 2006 and 2005

	Three Months Ended September 30,				Change
	2005		2006		Amount		Percent
	(dollars in thousands)
Local services	$	4,383	$	6,387	$	2,004		45.7	%
Network access		5,325		6,534		1,209		22.7
Cable television		534		551		17		3.2
Internet		1,417		2,725		1,308		92.3
Transport services		—		940		940		—
Total	$	11,659	$	17,137	$	5,478		47.0

Local services. Local services (including long distance and other telephone services) revenue increased 45.7% to $6.4 million in the three months ended September 30, 2006 from $4.4 million in the three months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $2.1 million. Our Alabama and Missouri local services revenue decreased $0.1 million, reflecting a decrease in access lines partially offset by the increased feature and long distance revenue associated with bundled service offerings. Unlimited residential calling bundles in Alabama represent nearly 28% of the relevant customer base.

Network access. Network access revenue increased 22.7% to $6.5 million in the three months ended September 30, 2006 from $5.3 million in the three months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $1.1 million. The balance of the increase reflects an increase in switched access in Alabama and Missouri partially offset by a decline in customer-based federal universal service charges and universal service fund payments.

Cable television. Cable television revenue in the three months ended September 30, 2006 increased 3.2% to $0.5 million which was slightly higher than in the three months ended September 30, 2005. The increase was due to the impact of higher local advertising revenue and an increase in basic cable prices.

Internet. Internet revenue increased 92.3% to $2.7 million in the three months ended September 30, 2006 from $1.4 million in the three months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $1.2 million. The balance of the increase reflects growth of more than 2,500 new digital high-speed Internet customers in the balance of the Company which more than offset the decline in dial-up Internet customers associated with the conversion to digital high-speed Internet.

For the nine months ended September 30, 2006 and 2005

	Nine Months Ended September 30,				Change
	2005		2006		Amount		Percent
	(dollars in thousands)
Local services	$	13,153	$	15,043	$	1,890		14.4	%
Network access		16,289		16,849		560		3.4
Cable television		1,546		1,632		86		5.6
Internet		4,141		5,744		1,603		38.7
Transport services		—		940		940		—
Total	$	35,129	$	40,208	$	5,079		14.5

Local services. Local services (including long distance and other telephone services) revenue increased 14.4% to $15.0 million in the nine months ended September 30, 2006 from $13.2 million for the nine months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $2.1 million. Our Alabama and Missouri revenue decreased $0.2 million, reflecting a decrease in access lines of 712 during the period, while long distance customers increased 2,434 during the period. The introduction of unlimited residential calling bundles in Alabama moved nearly 28% of the relevant customer base into one of these plans which began in March 2006.

Network access. Network access revenue increased 3.4% to $16.8 million in the nine months ended September 30, 2006 from $16.3 million in the nine months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $1.1 million. The Alabama and Missouri decline is primarily associated with $0.1 million in higher one time settlement revenue received by our three cost companies as part of the interstate settlement process in 2005, $0.1 million from lower customer-based federal universal service charges, and $0.3 million in reduced universal service fund payments.

Cable television. Cable television revenue increased 5.6% to $1.6 million in the nine months ended September 30, 2006 from $1.5 million in the nine months ended September 30, 2005. The increase was due to the impact of higher local advertising revenue and an increase in basic cable prices.

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Internet. Internet revenue increased 38.7% to $5.7 million in the nine months ended September 30, 2006 from $4.1 million in the nine months ended September June 30, 2005. The addition of Mid-Maine accounted for an increase of $1.2 million. The balance of $0.4 million reflects the growth of 2,500 new digital high-speed Internet customers in Alabama and Missouri, partially offset by the decline in dial-up Internet customers associated with the conversion to digital high-speed Internet.

Operating expenses. Operating expenses in the three months ended September 30, 2006 increased 74.3% to $12.6 million from $7.2 million the three months ended September 30, 2005. Operating expenses in the nine months ended September 30, 2006 increased 25.4% to $26.8 million from $21.4 million inthe nine months ended September 30, 2005. The primary reason for the increase is the acquisition of Mid-Maine on July 3, 2006.

For the three months ended September 30, 2006 and 2005

	Three Months Ended September 30,				Change
	2005		2006		Amount		Percent
	(dollars in thousands)
Cost of services	$	3,283	$	6,139		2,856		87.0	%
Selling, general and administrative expenses		1,585		2,451		866		54.6
Depreciation and amortization		2,375		4,032		1,657		69.7
Total	$	7,243	$	12,622	$	5,379		74.3

Cost of services and products. Cost of service and products increased 87.0% to $6.1 million in the three months ended September 30, 2006 from $3.3 million in the three months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $3.0 million, including providing competitive local exchange services in Maine. The balance of the difference is the increased cost associated with higher digital high-speed Internet customers and bundled services usage in Alabama and Missouri which was more than offset by savings from handling our Internet help desk internally and by network and organizational efficiencies.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 54.6% to $2.5 million in the three months ended September 30, 2006 from $1.6 million in the three months ended September 30, 2005. The addition of Mid-Maine accounted for the increase of $0.9 million.

Depreciation and amortization. Depreciation and amortization increased 69.7% to $4.0 million in the three months ended September 30, 2006 from $2.4 million in the three months ended September 30, 2005. The increase is associated with the acquisition of Mid-Maine, including the amortization of loan costs; intangibles of $8.8 million for customer based assets with a remaining life of 25 years and $1.8 million for a non-competition agreement with a remaining life of two years; and a telephone plant adjustment associated with the purchase price allocation.

For the nine months ended September 30, 2006 and 2005

	Nine Months Ended September 30,				Change
	2005		2006		Amount		Percent
	(dollars in thousands)
Cost of services	$	9,356	$	12,501	$	3,145		33.6	%
Selling, general and administrative expenses		4,912		5,604		692		14.1
Depreciation and amortization		7,112		8,696		1,584		22.3
Total	$	21,380	$	26,801	$	5,421		25.4

Cost of services and products. Cost of services and products increased 33.6% to $12.5 million in the nine months ended September 30, 2006 from $9.4 million in the nine months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $3.0 million, including providing competitive local exchange services in Maine. In Alabama and Missouri, cost increased $0.1 million associated with higher

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digital high-speed Internet customers and bundled services usage partially offset by savings from handling our Internet help desk internally and by network and organizational efficiencies.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 14.1% to $5.6 million in the nine months ended September 30, 2006 from $4.9 million in the nine months ended September 30, 2005. The addition of Mid-Maine accounted for an increase of $0.9 million. Alabama and Missouri expenses decreased by $0.2 million, primarily from lower legal fees and insurance expenses.

Depreciation and amortization. Depreciation and amortization increased 22.3% to $8.7 million in the nine months ended September 30, 2006 from $7.1 million in the nine months ended September 30, 2005. The increase is associated with the acquisition of Mid-Maine, including the amortization of loan costs; intangibles of $8.8 million for customer based assets with a remaining life of 25 years and $1.8 million for a non-competition agreement with a remaining life of two years; and a telephone plant adjustment associated with the purchase price allocation.

For the three months and nine months ended September 30, 2006 and 2005

Interest expense. Interest expense increased 21.0% to $5.0 million in the three months ended September 30, 2006 from $4.1 million in the three months ended September 30, 2005. Interest expense increased 10.5% to $13.4 million in the nine months ended September 30, 2006 from $12.2 million in the nine months ended September 30, 2005. The senior credit facility was amended to add $40 million for the purchase of Mid-Maine. Interest on this additional debt was the primary reason for the increase, which was partially offset by a reduction from 4.0% to 3.25% in the margin charged on LIBOR rates for the full $120 million facility. Increased amortization of costs associated with the five year, $80 million, 7% interest rate cap and the fact that interest was below the 7% rate early in 2005 accounted for the balance of the increase.

Change in fair value of derivative associated with Class B common convertible to Class A common. The derivative value associated with the conversion option for our Class B common stock must be fair valued each quarter until conversion occurs, not later than December 21, 2009. The reduction in maximum time to conversion, the change in price of IDSs and the underlying Class A common stock and the expected time for conversion impact the fair value of the derivative. The combination of these factors changed the value of the derivative by less than $0.1 million in the three months ended September 30, 2006 compared to $0.3 million for the three months ended September 30, 2005 and by $0.3 million in the nine months ended September 30, 2006 compared to $0.9 million for the nine months ended September 30, 2005.

Other income. Other income was $0.2 million in the three months ended September 30, 2006, up from $0.1 million in the three months ended September 30, 2005, primarily related to higher interest income on higher cash balances. Other income was $3.2 million for the nine months ended September 30, 2006, up from $0.4 million in the nine months ended September 30, 2005. The change was attributable to the gain of $2.7 million associated with the redemption of Rural Telephone Bank (RTB) stock owned by three of our companies in April 2006. The United States Department of Agriculture closed RTB and redeemed all outstanding stock. Higher cash balances and higher interest rates on those balances in 2006 also contributed to the increase.

Income taxes. Provision for income taxes was less than $0.1 million in the three months ended September 30, 2006 and in the three months ended September 30, 2005. Provision for income taxes in the nine months ended September 30, 2006 increased to $1.2 million from $0.6 million in the nine months ended September 30, 2005. The Company estimates its effective tax rate for all of 2006 will approximate 35.2%. The effective tax rate for 2005 was 31.1%. The increase in income tax expense is driven by the increase in net income.

Accretion of Class B common convertible to senior subordinated notes. Our Class B common stock was issued to the existing equity holders coincident with our initial public offering on December 21, 2004. These shares represent their retained interest in the Company. They do not receive any dividends and will convert into IDSs not later than December 21, 2009. For the first two years after their issuance, the present value discount on the portion of the shares related to the conversion to senior subordinated notes is being accreted as a non-cash expense to the Company. For the three months ended September 30, 2006 and 2005, this accretion expense was $0.1 million. For the nine months ended September 30, 2006 and 2005, this accretion expense was $0.3 million.

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Net income. As a result of the foregoing, there was a net loss of $0.4 million available to common stockholders in the three months ended September 30, 2006 compared to net income of $0.5 million in the three months ended September 30, 2005. Net income was $1.9 million in the nine months ended September 30, 2006 and the nine months ended September 30, 2005.

Liquidity and Capital Resources

Our liquidity needs arise primarily from: (i) interest payments related to our credit facility and our senior subordinated notes; (ii) capital expenditures; (iii) working capital requirements; (iv) dividend payments on our Class A common stock; and (v) potential acquisitions.

Concurrent with the acquisition of Mid-Maine, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) dated as of July 3, 2006 to amend and restate the credit agreement dated as of December 21, 2004, details of which were filed on Form 8-K on July 5, 2006 and are included herein by reference. As part of this Amended and Restated Credit Agreement, an additional term loan of $40 million was utilized for the acquisition of Mid-Maine. The original $80 million term loan and the $15 million undrawn revolver loan commitment were reset to a new five year term at the same time. The applicable margin under the LIBOR option was reduced from 4% to 3.25% beginning July 3, 2006.

Cash flows from operating activities for the first nine months of 2006 amounted to $13.3 million compared to $8.3 million for the first nine months of 2005. The primary difference relates to the impact of acquiring Mid-Maine, the payment of the $4.3 million third quarter distribution to IDS holders occurring on October 2, 2006 rather than September 30, 2006 (which is a Saturday); the $2.7 million gain on redemption of the Rural Telephone Bank stock; the $1.6 million in depreciation and amortization of loan costs and fair valued intangible assets of Mid-Maine; and the other liabilities associated with acquiring Mid-Maine.

Cash flows from investing activities in the first nine months of 2006 were $16.4 million compared to $3.2 million in the first nine months of 2005. The payment for Mid-Maine accounted for $15.9 million. The acquisition and construction of property and equipment utilized $0.3 million more in the first nine months of 2006 than in the same period of 2005 while the sale of RTB stock generated $3.1 million in 2006.

Cash flows from financing activities for the first nine months of 2006 generated $12.2 million and for the first nine months of 2005 utilized $5.2 million. In 2006, the net of notes payable associated with the purchase of Mid-Maine amounted to $15.7 million. The balance of the difference is impacted by the fact that third quarter 2006 declared dividends were paid in October 2006 and are not reflected in cash flows from financing activities.

We anticipate that operating cash flow, together with borrowings under our credit facility, will be adequate to meet our currently anticipated operating and capital expenditure requirements for at least the next 12 months.

Recent Accounting Pronouncements

On July 13, 2006, the Financial Accounting Standards Board issues Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, FIN 48. It interprets and clarifies the way companies account for uncertainty in income taxes. This pronouncement is effective for years beginning after December 15, 2006. We expect to comply with this pronouncement but do not anticipate that it will have a material impact on the Company.

On September 15, 2006, the Financial Accounting Standards Board 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 are evaluating the impact of this pronouncement on accounting for future acquisitions beginning in 2008.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our short-term excess cash balance is invested in short-term commercial paper. We do not invest in any speculative derivative or commodity type instruments. Accordingly, we are subject to minimal market risk on our investments.

We have the ability to borrow up to $15.0 million under a revolving loan facility. The interest rate is variable and, accordingly, we are exposed to interest rate risk, primarily from the change in LIBOR or a base rate. Currently, we have no loans drawn under this facility.

Item 4. Controls and Procedures

With the participation of the Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2006.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item. 6. Exhibits

Exhibits

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Signatures

Pursuant to the requirements 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.

Date: November 6, 2006

OTELCO INC.

By:  /s/ Curtis L. Garner, Jr.

Curtis L. Garner, Jr.

Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certificate pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer
31.2	Certificate pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer
32.1	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer

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EX-31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Michael D. Weaver, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Otelco Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 13d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2006

/s/ Michael D. Weaver

Michael D. Weaver

President & Chief Executive Officer

EX-31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Curtis L. Garner, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Otelco Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 13d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2006

/s/ Curtis L. Garner, Jr.

Curtis L. Garner, Jr.

Chief Financial Officer

EX-32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael D. Weaver, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael D. Weaver

Michael D. Weaver

Chief Executive Officer

November 6, 2006

EX-32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Garner, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Curtis L. Garner, Jr.

Curtis L. Garner, Jr.

Chief Financial Officer

November 6, 2006