8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): August 5, 2008

Otelco Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	1-32362	52-2126395
(State of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

505 Third Avenue East, Oneonta, AL 35121

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (205) 625-3574

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On August 5, 2008, Otelco Inc. announced its results of operations for its second quarter ended June 30, 2008.  A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

99.1 Press Release Dated August 5, 2008

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 hereunto duly authorized.

	OTELCO INC.
	(Registrant)
Date: August 5, 2008
	By:	/s/ Curtis L. Garner, Jr.
		Name: Curtis L. Garner, Jr.
		Title: Chief Financial Officer

EX-99.1

Contact: Curtis Garner

Chief Financial Officer

Otelco Inc.

205-625-3571

Curtis@otelcotel.com

Otelco Reports Second Quarter 2008 Results

ONEONTA, Alabama (Aug. 5, 2008) - Otelco Inc. (NASDAQ: OTT; TSX: OTT.un), the sole wireline telephone services provider in several rural communities in Alabama, Maine and Missouri, today announced results for its second quarter ended June 30, 2008. Key quarterly highlights for Otelco include:

· Total revenues of $17.7 million.

· Operating income of $5.0 million.

· Adjusted EBITDA (as defined below) of $8.5 million.

“Our business provided solid revenue and subscriber growth which resulted in a strong financial performance for second quarter,” stated Mike Weaver, President and Chief Executive Officer of Otelco. “Key operating highlights include continued growth in access line equivalents when compared to last quarter and last year, driven by increases in both RLEC data lines and CLEC voice and data lines. Our bundled product offerings have increased to approximately 40% of our eligible customers.

“We also delivered solid increases in revenue and operating income, which increased 3.2% and 14.1%, respectively, from the year-ago period and 3.6% and 10.8% respectively for the first half of 2008 compared to the same period in 2007. Adjusted EBITDA was $8.5 million for the quarter and $17.3 million year-to-date, a 1.6% and 1.7% increase from the comparable periods last year,” added Weaver. “Bottom line performance also improved from the year-ago period as we reported net income of $0.4 million for the quarter and $0.8 million year-to-date compared to a net loss of $0.1 million for the second quarter 2007 and a net loss of $0.2 million for the first half of 2007. We invested over $1.5 million in our infrastructure to serve both our current and future customers and delivered our fourteenth consecutive IDS distribution. That demonstrates our continued focus on generating solid operating and financial performance while also exploring strategic expansion opportunities to further grow our business.”

Distribution to IDS Holders

Each quarter, the Board considers the declaration of dividends during its normally scheduled meeting. For the second quarter of 2008, the Board is meeting on August 14, 2008. Currently, it is anticipated that the Company’s dividends will continue to be treated as a return of capital for tax purposes. The scheduled interest and any dividend declared will be paid on September 30, 2008 to holders of record as of the close of business on September 15, 2008. The interest payment will cover the period from June 30, 2008 through September 29, 2008.

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Otelco Reports Second Quarter Results

Page 2

Aug. 5, 2008

Second Quarter 2008 Financial Summary

(Dollars in thousands, except per share amounts)

	Three Months Ended June 30,						Change
	2007			2008			Amount			Percent
Revenues	$	17,118		$	17,669		$	551			3.2	%
Operating income	$	4,389		$	5,006		$	617			14.1	%
Interest expense	$	(5,412	)	$	(4,773	)	$	(639	)		(11.8	)%
Net income (loss) available to stockholders	$	(105	)	$	406		$	511			*	%
Basic net income (loss) per share	$	(0.01	)	$	0.03		$	0.4			*	%
Diluted net income (loss) per share	$	(0.03	)	$	0.02		$	0.5			*	%
Adjusted EBITDA(a)	$	8,349		$	8,479		$	130			1.6	%
Capital expenditures	$	1,501		$	1,534		$	33			2.2	%

	Six Months Ended June 30,						Change
	YTD 2007			YTD 2008			Amount			Percent
Revenues	$	34,291		$	35,528		$	1,237			3.6	%
Operating income	$	9,159		$	10,146		$	987			10.8	%
Interest expense	$	(10,789	)	$	(9,456	)	$	(1,333	)		(12.4	)%
Net income (loss) available to stockholders	$	(223	)	$	814		$	1,037			*	%
Basic net income (loss) per share	$	(0.02	)	$	0.06		$	0.8			*	%
Diluted net income (loss) per share	$	(0.07	)	$	0.05		$	0.12			*	%
Adjusted EBITDA(a)	$	17,049		$	17,333		$	284			1.7	%
Capital expenditures	$	2,876		$	3,947		$	1,071			37.2	%

* Not a meaningful calculation

Reconciliation of Adjusted EBITDA to Net Income (Loss)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2008			2007			2008
Adjusted EBITDA
Net Income (Loss)	$	(105	)	$	406		$	(223	)	$	814
Add:
Depreciation		3,127			2,772			6,107			5,528
Interest Expense - Net of Premium		4,774			4,179			9,525			8,276
Interest Expense - Caplet Cost		240			240			468			470
Interest Expense - Amortize Loan Cost		398			373			796			746
Interest Expense - Premium		-			(18	)		-			(35	)
Gain/Loss from Investment		-			-			-			(45	)
Income Tax Expense		(503	)		57			(491	)		232
Change in Fair Value of Derivative		(250	)		(167	)		(468	)		74
Loan Fees		19			19			38			38
Amortization - Intangibles		649			618			1,297			1,235
Adjusted EBITDA	$	8,349		$	8,479		$	17,049		$	17,333

^(a) Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain non-recurring fees, expenses or charges and other non-cash charges reducing consolidated net income. Adjusted EBITDA is not a measure calculated in accordance with generally acceptable accounting principles (GAAP). While providing useful information, Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations data prepared in accordance with GAAP. The Company believes Adjusted EBITDA is useful as a tool to analyze the Company on the basis of operating performance and leverage. The definition of Adjusted EBITDA corresponds to the definition of Adjusted EBITDA in the indenture governing the Company’s senior subordinated notes and its credit facility and certain of the covenants contained therein. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

Otelco Reports Second Quarter Results

Page 3

Aug. 5, 2008

	Year Ended December 31,				March 31,		June 30,
Key Operating Statistics	2006		2007		2008		2008
RLEC access lines:
Voice lines		37,736		36,687		36,239		35,989
Data lines		10,016		12,160		12,729		13,065
RLEC access line equivalents (1)		47,752		48,847		48,968		49,054
CLEC access lines:
Voice lines		14,267		16,973		17,457		17,740
Data lines		2,016		2,571		2,602		2,735
CLEC access line equivalents (1)		16,283		19,544		20,059		20,475
Otelco access line equivalents (1)		64,035		68,391		69,027		69,529
Cable television customers		4,188		4,169		4,175		4,109
Dial-up internet customers		19,587		15,249		14,290		13,419

(1) We define access line equivalents as voice access lines and data access lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

FINANCIAL DISCUSSION FOR SECOND QUARTER 2008:

Revenue

Total revenues grew 3.2% in the three months ended June 30, 2008 to $17.7 million from $17.1 million in the three months ended June 30, 2007. The growth in revenue reflected growth in CLEC customers in Maine and increased digital Internet lines throughout the areas we serve. Local services revenue grew 2.8% in the second quarter 2008 to $6.7 million from $6.5 million in the quarter ended June 30, 2007. Network access revenue remained constant in the second quarter at $6.1 million compared with the quarter ended June 30, 2007. Cable television revenue in the three months ended June 30, 2008 remained constant at just over $0.5 million when compared to the three months ended June 30, 2007. Internet revenue for the second quarter 2008 increased 6.0% to $3.0 million from $2.9 million in the quarter ended June 30, 2007. Transport services revenue grew 20.8% to $1.3 million in the three months ended June 30, 2008 from $1.0 million in the same period in 2007.

Operating Expenses

Operating expenses in the three months ended June 30, 2008 decreased 0.5% to slightly less than $12.7 million from just over $12.7 million in the three months ended June 30, 2007. Cost of services increased 3.2% to $6.7 million from $6.5 million in the quarter ended June 30, 2007. The cost associated with increased CLEC revenue in Maine, increased long distance and Internet bandwidth requirements to support additional market penetration, and higher cost of living expense for our employees and energy were partially offset by network and organizational efficiencies. Selling, general and administrative expenses increased 4.4% to $2.5 million in the quarter ended June 30, 2008 from $2.4 million in the quarter ended June 30, 2007. Increased property taxes and employee cost of living expense were partially offset by organizational efficiencies. Depreciation and amortization for second quarter decreased 10.2% to $3.4 million from $3.8 million.

Interest Expense

Interest expense decreased 11.8% to $4.8 million in the quarter ended June 30, 2008 from $5.4 million in the same period a year ago, reflecting the reduction in senior and total debt after the sale of 3,000,000 Income Deposit Securities units in July 2007 and a lower margin on senior debt.

Otelco Reports Second Quarter Results

Page 4

Aug. 5, 2008

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2008 was $8.5 million, up 1.6% over the same period in 2007. See financial tables for a reconciliation of Adjusted EBITDA to net income.

Balance Sheet

As of June 30, 2008, the Company had cash and cash equivalents of $12.8 million and total long-term debt of $170.0 million. The second quarter distribution of $5.3 million in interest and dividends to our share owners and $0.3 million to our bond holders occurred on June 30, 2008. This was the Company’s fourteenth consecutive distribution since going public in 2004.

Capital Expenditures

Capital expenditures were $1.5 million for the quarter. The Company added enhanced network capability to serve competitive customers in Maine; continued to upgrade its rural facilities in all three states, including additional data line capacity; and other upgrades to its network and switching facilities.

Second Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Wednesday, August 6, 2008, at 11:00 a.m. ET. To participate in the call, dial (913) 981-5573 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the Internet by visiting the Company's Web site at www.OtelcoInc.com or www.earnings.com. To listen to the live call online, please visit the Web site at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live Web cast, a replay of the Web cast will be available on the Company's website at www.OtelcoInc.com or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the passcode 5357214.

ABOUT OTELCO

Otelco Inc., headquartered in Oneonta, Alabama, provides wireline telephone services in Alabama, Maine and Missouri. The Company’s services include local and long distance telephone, network access, transport, digital high-speed data and dial-up Internet access, cable television and other telephone related services. With more than 69,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 40 largest local exchange carriers in the United States based on number of access lines. Otelco operates six incumbent telephone companies serving rural markets, or rural local exchange carriers, each of which can trace its history as a local telecommunications provider as far back as the early 1900s. It also provides competitive telecommunications services through several subsidiaries. For more information, visit the Company’s web site at www.OtelcoInc.com.

FORWARD LOOKING STATEMENTS

Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms “believes”, “belief,” “expects,” ‘intends,” “anticipates,” “plans,” or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s filings with the Securities and Exchange Commission.

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Otelco Reports Second Quarter Results

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Aug. 5, 2008

OTELCO INC.

Consolidated Balance Sheets

	As of			As of
	December 31, 2007			June 30, 2008
				(unaudited)
Assets
Current Assets
Cash and cash equivalents	$	12,810,497		$	12,849,128
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $257,862 and $160,136, respectively		2,753,451			2,709,891
Unbilled receivables		2,616,867			2,617,230
Other		1,760,207			1,839,017
Materials and supplies		1,991,724			2,275,760
Prepaid expenses		1,149,180			722,378
Income tax receivable		469,546			214,440
Deferred income taxes		1,486,439			1,486,439
Total current assets		25,037,911			24,714,283
Property and equipment, net		54,610,355			52,684,279
Goodwill		134,570,435			134,570,435
Intangible assets, net		9,514,772			8,660,111
Investments		1,207,183			1,194,428
Deferred financing costs		5,878,943			5,133,288
Interest rate cap		1,510,951			624,008
Deferred charges		155,573			365,598
Total assets	$	232,486,123		$	227,946,430
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,058,989		$	1,602,585
Accrued expenses		3,716,880			3,780,820
Advanced billings and payments		2,077,713			2,009,690
Customer deposits		185,147			193,163
Total current liabilities		8,038,729			7,586,258
Deferred income taxes		25,223,656			25,223,656
Advance billings and payments		797,498			756,979
Other liabilities		183,756			169,846
Long-term notes payable		170,019,705			169,984,152
Total liabilities		204,263,344			203,720,891
Derivative liability		814,005			717,767
Class B common convertible to senior subordinated notes		4,085,033			4,085,033
Stockholders’ equity
Class A Common stock, $.01 par value-authorized 20,000,000 shares; issued and outstanding 12,676,733 shares		126,767			126,767
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		28,215,056			23,746,507
Retained deficit		(4,084,797	)		(3,270,622	)
Accumulated other comprehensive loss		(938,732	)		(1,185,360	)
Total stockholders’ equity		23,323,741			19,422,739
Total liabilities and stockholders’ equity	$	232,486,123		$	227,946,430

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Otelco Reports Second Quarter Results

Page 6

Aug. 5, 2008

OTELCO INC.

Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2008			2007			2008
Revenues
Local services	$	6,530,615		$	6,711,884		$	12,879,111		$	13,438,075
Network access		6,140,830			6,105,129			12,578,418			12,542,783
Cable television		548,414			566,270			1,095,941			1,112,432
Internet		2,859,407			3,030,393			5,679,704			6,031,859
Transport services		1,038,936			1,255,054			2,057,419			2,403,002
Total revenues		17,118,202			17,668,730			34,290,593			35,528,151
Operating expenses
Cost of services and products		6,534,399			6,745,612			12,805,456			13,397,723
Selling, general and administrative expenses		2,419,527			2,527,425			4,921,328			5,221,408
Depreciation and amortization		3,775,623			3,389,765			7,404,714			6,763,013
Total operating expenses		12,729,549			12,662,802			25,131,498			25,382,144
Income from operations		4,388,653			5,005,928			9,159,095			10,146,007
Other income (expense)
Interest expense		(5,412,345	)		(4,773,240	)		(10,788,609	)		(9,456,080	)
Change in fair value of derivative		250,549			166,850			468,417			(74,055	)
Other income		165,581			64,045			447,033			430,625
Total other expense		(4,996,215	)		(4,542,345	)		(9,873,159	)		(9,099,510	)
Income (loss) before income tax expense		(607,562	)		463,583			(714,064	)		1,046,497
Income tax (expense) benefit		502,981			(57,448	)		491,276			(232,322	)
Net income (loss) available to common stockholders	$	(104,581	)	$	406,135		$	(222,788	)	$	814,175
Weighted average shares outstanding:
Basic		9,676,733			12,676,733			9,676,733			12,676,733
Diluted		10,221,404			13,221,404			10,221,404			13,221,404
Net income (loss) per share:
Basic	$	(0.01	)	$	0.03		$	(0.02	)	$	0.06
Diluted	$	(0.03	)	$	0.02		$	(0.07	)	$	0.05
Dividends declared per share	$	0.18		$	0.18		$	0.35		$	0.35

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Otelco Reports Second Quarter Results

Page 7

Aug. 5, 2008

OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended
	June 30,
	2007			2008
Cash flows from operating activities:
Net income (loss)	$	(222,788	)	$	814,175
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		6,107,336			5,527,814
Amortization		1,297,378			1,235,199
Interest rate caplet		467,793			470,022
Amortization of debt premium		-			(35,553	)
Amortization of loan costs		796,245			745,655
Change in fair value of derivative liability		(468,417	)		74,055
Provision for uncollectible revenue		78,231			129,453
Changes in assets and liabilities; net of assets andliabilities acquired:
Accounts receivables		(224,145	)		(165,066	)
Material and supplies		59,352			(284,036	)
Prepaid expenses and other assets		288,417			426,802
Income tax receivable		-			255,106
Accounts payable and accrued liabilities		(10,888	)		(392,464	)
Advance billings and payments		(836	)		(108,542	)
Other liabilities		(6,816	)		(5,894	)
Net cash from operating activities		8,160,862			8,686,726
Cash flows from investing activities:
Acquisition and construction of property and equipment		(2,875,642	)		(3,947,447	)
Proceeds from retirement of investment		7,871			-
Deferred charges		(166,921	)		(232,100	)
Net cash used in investing activities		(3,034,692	)		(4,179,547	)
Cash flows from financing activities:
Cash dividends paid		(3,411,048	)		(4,468,548	)
Net cash used in financing activities		(3,411,048	)		(4,468,548	)
Net increase in cash and cash equivalents		1,715,122			38,631
Cash and cash equivalents, beginning of period		14,401,849			12,810,497
Cash and cash equivalents, end of period	$	16,116,971		$	12,849,128
Supplemental disclosures of cash flow information:
Interest paid	$	9,547,279		$	8,569,514
Income taxes received	$	(173,718	)	$	(146,606	)
Dividends declared but not paid	$	1,705,524			-

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