UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2009
	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 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o

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

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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 August 7, 2009
Class A Common Stock ($0.01 par value per share)	12,676,733
Class B Common Stock ($0.01 par value per share)	544,671

OTELCO INC.

FORM 10-Q

For the three month period ended June 30, 2009

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of December 31, 2008 and June 30, 2009	2
	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2009	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2009	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 6.	Exhibits	25

Explanatory Note

On February 17, 2010, we provided notification that our interim financial statements for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 could not be relied upon due to an accounting error.  This Form 10-Q/A reflects the correction of such accounting error. Except as required to reflect the effects of the correction of such accounting error in this Form 10-Q/A, we have not modified or updated disclosures presented in the original quarterly report on Form 10-Q.  Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of our original Form 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein.  Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q.  Accordingly, this Form 10-Q/A should be read in conjunction with our periodic filings made with the Securities and Exchange Commission subsequent to the date of the original filing, including any amendments to those filings, as well as any Current Reports filed on Form 8-K subsequent to the date of the original filing. The following items have been amended as a result of the restatement:

         Part 1 - Item 1 - Financial Statements

         Part 1 - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

         Part 1 - Item 3 - Quantitative and Qualitative Disclosures about Market Risk

         Part 1 - Item 4 - Controls and Procedures

In addition, in accordance with applicable Securities and Exchange Commission rules, this amended Quarterly Report on Form 10-Q/A includes updated certifications from our Chief Executive Officer and Chief Financial Officer.

i

Unless the context otherwise requires, the words “we,” “us,” “our,” “the Company” and “Otelco” refer to Otelco Inc., a Delaware corporation, and its consolidated subsidiaries as of June 30, 2009.

FORWARD-LOOKING STATEMENTS

This 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.

1

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

OTELCO INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			June 30,
	2008			2009
				(unaudited)
Assets
Current assets
Cash and cash equivalents	$	13,542,255		$	18,852,408
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $318,446 and $363,926, respectively		5,207,731			5,134,257
Unbilled receivables		2,567,730			2,517,620
Other		4,348,044			4,234,922
Materials and supplies		2,305,755			2,066,179
Prepaid expenses		1,141,908			907,719
Income tax receivable		181,644			181,644
Deferred income taxes		827,686			827,686
Total Current Assets		30,122,753			34,722,435
Property and equipment, net		75,407,062			71,043,061
Goodwill		189,334,837			189,164,662
Intangible assets, net		44,390,644			38,971,522
Investments		2,015,583			2,002,828
Deferred financing costs		8,315,921			7,639,968
Deferred income taxes		5,897,382			5,897,382
Interest rate swaps		—			264,267
Interest rate cap		7,765			—
Deferred charges		49,540			26,345
Total Assets	$	355,541,487		$	349,732,470
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,312,920		$	1,915,090
Accrued expenses		6,632,287			6,511,552
Advance billings and payments		2,024,123			1,998,610
Customer deposits		180,582			192,103
Total Current Liabilities		11,149,912			10,617,355
Deferred income taxes		45,962,402			45,962,402
Advance billings and payments		739,736			719,044
Other liabilities		188,346			146,822
Long-term notes payable		278,799,513			278,759,595
Total Liabilities		336,839,909			336,205,218
Derivative liability		238,054			163,592
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		19,277,959			14,809,411
Retained deficit		(3,870,923	)		(5,194,256	)
Accumulated other comprehensive loss		(1,160,759	)		(468,742	)
Total stockholders’ equity		14,378,491			9,278,627
Total liabilities and stockholders’ equity	$	355,541,487		$	349,732,470

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

2

OTELCO INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2008			2009			2008			2009
Revenues
Local services	$	6,711,884		$	12,063,419		$	13,438,075		$	23,918,400
Network access services		6,105,129			8,265,063			12,542,783			16,359,196
Cable television services		566,270			612,363			1,112,432			1,219,050
Internet services		3,030,393			3,500,149			6,031,859			7,041,826
Transport services		1,255,054			1,355,677			2,403,002			2,758,376
Total revenues		17,668,730			25,796,671			35,528,151			51,296,848
Operating expenses
Cost of services		6,745,612			10,133,256			13,397,723			20,799,712
Selling, general and administrative expenses		2,527,425			3,342,855			5,221,408			6,919,529
Depreciation and amortization		3,389,765			6,604,748			6,763,013			13,396,586
Total operating expenses		12,662,802			20,080,859			25,382,144			41,115,827
Income from operations		5,005,928			5,715,812			10,146,007			10,181,021
Other income (expense)
Interest expense		(4,773,240	)		(6,446,902	)		(9,456,080	)		(13,045,855	)
Change in fair value of derivatives		166,850			1,289,832			(74,055	)		338,729
Other income		64,045			12,510			430,625			238,371
Total other expenses		(4,542,345	)		(5,144,560	)		(9,099,510	)		(12,468,755	)
Income (loss) before income tax		463,583			571,252			1,046,497			(2,287,734	)
Income tax (expense) benefit		(57,448	)		(60,552	)		(232,322	)		964,401
Net income (loss) available to common stockholders	$	406,135		$	510,700		$	814,175		$	(1,323,333	)
Weighted average shares outstanding:
Basic		12,676,733			12,676,733			12,676,733			12,676,733
Diluted		13,221,404			13,221,404			13,221,404			13,221,404
Basic net income (loss) per share	$	0.03		$	0.04		$	0.06		$	(0.10	)
Diluted net income (loss) per share	$	0.02		$	0.03		$	0.05		$	(0.11	)
Dividends declared per share	$	0.18		$	0.18		$	0.35		$	0.35

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

3

OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended June 30,
	2008			2009
Cash flows from operating activities:
Net income (loss)	$	814,175		$	(1,323,333	)
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		5,527,814			7,176,803
Amortization		1,235,199			6,219,783
Interest rate caplet		470,022			699,783
Amortization of debt premium		(35,553	)		(39,918	)
Amortization of loan costs		745,655			675,953
Change in fair value of derivatives		74,055			(338,729	)
Provision for uncollectible revenue		129,453			149,765
Changes in assets and liabilities; net of assets and liabilities acquired:
Accounts receivables		(165,066	)		86,941
Material and supplies		(284,036	)		239,576
Prepaid expenses and other assets		426,802			234,189
Income tax receivable		255,106			—
Accounts payable and accrued liabilities		(392,464	)		(518,565	)
Advance billings and payments		(108,542	)		(46,205	)
Other liabilities		(5,894	)		(30,003	)
Net cash from operating activities		8,686,726			13,186,040
Cash flows from investing activities:
Acquisition and construction of property and equipment		(3,947,447	)		(3,577,514	)
Deferred charges		(232,100	)		—
Adjustment to the purchase of the CR Companies		—			170,175
Net cash used in investing activities		(4,179,547	)		(3,407,339	)
Cash flows from financing activities:
Cash dividends paid		(4,468,548	)		(4,468,548	)
Net cash used in financing activities		(4,468,548	)		(4,468,548	)
Net increase in cash and cash equivalents		38,631			5,310,153
Cash and cash equivalents, beginning of period		12,810,497			13,542,255
Cash and cash equivalents, end of period	$	12,849,128		$	18,852,408
Supplemental disclosures of cash flow information:
Interest paid	$	8,569,514		$	12,018,858
Income taxes received	$	(146,606	)	$	(15,342	)

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

4

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”) and its subsidiaries, all of which are wholly owned. These include: Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Hopper Holding Company, Inc. (“HHC”) and its wholly owned subsidiary, Hopper Telecommunications Company, Inc. (“HTC”); Brindlee Holdings LLC (“BH”) and its wholly owned subsidiary Brindlee Mountain Telephone Company, Inc. (“BMTC”); Page & Kiser Communications, Inc. (“PKC”) and its wholly owned subsidiary Blountsville Telephone Company, Inc. (“BTC”); Mid-Missouri Holding Corporation (“MMH”) and its wholly owned subsidiary Mid-Missouri Telephone Company (“MMT”) and its wholly owned subsidiary Imagination, Inc.; Mid-Maine Communications, Inc. (“MMeT” or “Mid-Maine”) and its wholly owned subsidiaries Mid-Maine Telecom, Inc. (“MMTI”) and Mid-Maine TelPlus (“MMTP”); Granby Holdings, Inc. (“GH”) and its wholly owned subsidiary The Granby Telephone & Telegraph Co. of Massachusetts (“GTT”); War Holdings, Inc. (“WH”) and its wholly owned subsidiary War Acquisition Corporation (“WT”); and Pine Tree Holdings, Inc. (“PTH”) and its wholly owned subsidiaries The Pine Tree Telephone and Telegraph Company (“PTT”), Saco River Telegraph and Telephone Company (“SRT”), CRC Communications of Maine, Inc. (“PTN”), and Communications Design Acquisition Corporation (“CDAC”).
	GH, WH and PTH (collectively, the “CR Companies”) were acquired on October 31, 2008 from Country Road Communications LLC (“CRC”).
	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 unaudited operating results for the three months and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
	The consolidated financial statements and notes 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, 2008. 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.
	Certain prior year amounts have been reclassified to conform with the current year presentation.
	Cash and Cash Equivalents
	Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality, short-term money market instruments and highly liquid debt instruments with an original maturity of three months or less when purchased. The cash equivalents are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
	Recently Adopted Accounting Pronouncements
	In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations, or SFAS 141R. SFAS 141R replaces SFAS No. 141 and establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 31, 2008. Accordingly, any business combinations the Company engaged in prior to January 1, 2009 are recorded and disclosed following generally accepted accounting principles as in effect on December 31, 2008. The adoption of SFAS 141R will have an impact on the consolidated financial statements but the nature and magnitude of the specific effects will depend on the nature, terms, and size of acquisitions the Company consummates after the effective date.

5

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or SFAS 157. In February 2008, the FASB issued a staff position (FSP 157-2) that delayed the effective date of SFAS 157 for all non-financial assets and liabilities except those recognized or disclosed at least annually, until periods beginning after December 15, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs. The standard describes a fair value hierarchy utilizing three levels of input. The first two levels are considered observable and the third, unobservable:
Level 1 –	Quoted prices in active markets for identical assets or liabilities.
Level 2 –	Inputs other than Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities or quoted prices in markets which are not active. The inputs are generally observable or can be corroborated in observable markets.
Level 3 –	Unobservable inputs where there is little or no market activity to support valuation.
The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, or SFAS 161. SFAS 161 expands quarterly disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on our consolidated financial statements.
Recent Accounting Prouncements
In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141(R)-1, to amend SFAS 141 (revised 2007), Business Combinations. FSP 141(R)-1 addresses the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. FSP 141(R)-1 also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or liabilities be developed depending on their nature. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141(R)-1 did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. SFAS 165 provides largely the same guidance on subsequent events which previously existed only in auditing literature. The guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

6

	In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS 168. SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, given that once in effect, the Codification will carry the same level of authority. The guidance is effective for financial statements issued for interim reporting periods ending after September 15, 2009. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.
2.	Commitments 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, Maine, Missouri, Massachusetts, New Hampshire, and West Virginia Public Service Commissions relating 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
	An 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 3% for the three month LIBOR index plus the applicable margin on $80 million in senior debt for five years. On July 5, 2007, the Company repaid $55,353,032 in debt, reducing its senior debt below the level of the rate cap. The cap was considered an effective hedge for the remaining senior debt as all critical terms of the interest rate cap are identical to the underlying debt it hedges. The balance of the cap at that time was considered as an investment and adjustments were made to accumulated other comprehensive income to reflect this change. On October 31, 2008, the Company implemented its second amended and restated credit agreement, increasing senior debt to $173.5 million in conjunction with the acquisition of the CR Companies. The full $80 million rate cap is accounted for as an effective hedge from that date forward. Changes in the fair value of the effective portion of the interest rate cap are not included in earnings but are reported as a component of accumulated other comprehensive income.
	The second amended and restated credit agreement requires that the Company acquire interest rate protection for at least half of the $173.5 million senior debt through at least October 31, 2010. In addition to the existing rate cap hedge, the Company has completed two interest rate swaps with approved counterparties. The first swap has a notional amount of $90 million with the Company paying a fixed rate of 1.85% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It is effective from February 9, 2009 through February 8, 2012. The second swap has a notional amount of $60 million with the Company paying a fixed rate of 2.0475% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It is effective from February 9, 2010 through February 8, 2012.  From an accounting perspective, the documentation for both swaps does not meet the technical requirements of SFAS 133 to allow the swaps to be considered highly effective as hedging instruments and therefore the swaps do not qualify for hedge accounting. The change in the fair value of the swaps is charged or credited to income as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in value will be zero.
	The cost of the effective portion 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. The expense related to the ineffective portion of the interest rate cap in 2008 is reflected in the change in fair value of derivative. For the three months ended June 30, 2008 and 2009, the cost of the effective portion of the interest rate cap was $239,790 and $355,701 respectively. For the six months ended June 30, 2008 and 2009, the cost of the effective portion of the interest rate cap was $470,022 and $699,783 respectively.

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4.	Income (Loss) per Common Share and Potential Common Share
	Basic income per common share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the period. Diluted income (loss) per common share reflects the potential dilution that could occur if the Class B common stock were exercised into Income Deposit Securities (“IDS”) units. Class B common stock is convertible on a one-for-one basis into IDS units, each of which includes a Class A common share.
	A reconciliation of the common shares for the Company’s basic and diluted income (loss) per common share calculation is as follows:

	Three months ended June 30,						Six months ended June 30,
	2008			2009			2008			2009
Weighted average common shares-basic		12,676,733			12,676,733			12,676,733			12,676,733
Effect of dilutive securities		544,671			544,671			544,671			544,671
Weighted-average common shares and potential common shares-diluted		13,221,404			13,221,404			13,221,404			13,221,404
Net income (loss) available to common stockholders	$	406,135		$	510,700		$	814,175		$	(1,323,333	)
Net income (loss) per basic share	$	0.03		$	0.04		$	0.06		$	(0.10	)
Net income (loss) available to common stockholders	$	406,135		$	510,700		$	814,175		$	(1,323,333	)
Less: Change in fair value of B share derivative		(80,670	)		(62,882	)		(96,238	)		(74,462	)
Net income (loss) available for diluted shares	$	325,465		$	447,818		$	717,937		$	(1,397,795	)
Net income (loss) per diluted share	$	0.02		$	0.03		$	0.05		$	(0.11	)

5.	Fair Value Measurements
	In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets and liabilities as of June 30, 2009:

	June 30, 2009
	Fair Value		Level 1(1)		Level 2(2)		Level 3(3)
Assets
Cash and cash equivalents	$	18,852,408	$	18,852,408	$	—	$	—
Interest rate swaps		264,267		—		264,267		—
Interest rate cap		—		—		—		—
Co-operative patronage shares		1,540,930		—		—		1,540,930
Total assets	$	20,657,605	$	18,852,408	$	264,267	$	1,540,930
Liabilities
Class B derivative liability	$	163,592		—		—		163,592
Total liabilities	$	163,592	$	—	$	—	$	163,592

(1)	Quoted prices in active markets for identical assets.
(2)	Significant other observable inputs.
(3)	Significant unobservable inputs.

8

	The Company retains its cash and cash equivalents in short-term interest bearing instruments whose value is observable on a daily basis. Its interest rate cap is valued at the end of each quarter by market experts in that business based on similar transactions in the same financial market on the day of valuation. Patronage shares have been issued primarily by one of our lenders which operates as a co-operative. The Company does not pay for these shares but receives them as a non-cash dividend. The market for these shares is limited to the issuing organization and subject to uncertainty of future redemption for cash. These shares are valued at approximately 55% of their originally issued value. While the issuer and the Company expect these shares to be worth their issued value, the current valuation recognizes some uncertainty of their future redemption value.
	The interest rate swaps are valued at the end of the quarter by market experts in that business based on similar transactions and rates in an active financial market.
	The interest rate cap matures on December 31, 2009. The interest rate cap is valued by market experts at the end of each quarter. It had a zero value at June 30, 2009.
	The Class B derivative is valued at the end of each quarter utilizing current observable factors and a market based model developed by a company whose business includes the provision of valuation expertise. Annually, the Company evaluates the probability of its Class B shares converting to IDS units in advance of their unrestricted December 2009 conversion date. This estimate, as well as current market conditions, impacts the quarterly valuation of the B share derivative liability. This liability is extinguished once the Class B shares can be converted into IDS units. This conversion can occur without any financial test after 2009.
6.	Acquisitions
	On October 31, 2008, the Company acquired 100% of the outstanding common stock of the CR Companies from CRC. GH owns 100% of its operating subsidiary GTT. WH owns 100% of operating subsidiary WT. PTH owns 100% of its operating subsidiaries, PTT, SRT, PTN, and CDAC. These operating subsidiaries provide telecommunications solutions, including voice, data and Internet services, to residential and business customers in portions of Massachusetts, Maine and West Virginia and extend the Company’s presence in the New England market. The acquisition added over 24,000 retail access line equivalents to the Company’s presence in Maine; almost 5,000 retail access line equivalents in Massachusetts and West Virginia, and a growing wholesale business in New England.
	The acquisition agreement relating to the CR Companies provided for cash consideration of $101,329,000 subject to adjustment as provided in the acquisition agreement, plus transaction costs. The purchase price was $108,832,865, including transaction costs. The excess of the purchase price over the market value of assets and liabilities is reflected as goodwill of $54,594,227. The goodwill related to the acquisition is not deductible for tax purposes. The aggregate consideration paid for the acquisition was as follows:

Cash	$	(20,167	)
Additional senior debt notes payable		108,853,032
Purchase price	$	108,832,865

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

	October 31, 2008
Cash	$	247,285
Other current assets		4,602,298
Property and equipment		24,034,772
Intangible assets		37,800,000
Goodwill		54,594,227
Other assets		6,142,596
Current liabilities		(2,948,933	)
Deferred income tax liabilities		(15,614,962	)
Other liabilities		(24,368	)
Purchase price	$	108,832,865

Property and equipment at the time of acquisition had a fair value of $24.0 million and remaining lives of five to 40 years which is consistent with current policy. The intangible assets at the time of acquisition included regulated and unregulated customer based assets at fair value of $17 million which had remaining lives of six to nine years and a non-competition agreement fair valued at $1.2 million which had a remaining life of one year. Unregulated contract based assets had a fair value of $19.6 million at the time of acquisition and remaining lives of seven years.

9

Prior to the closing of the acquisition, the Company entered into a second amended and restated credit agreement, dated as of October 20, 2008, to amend and restate the amended and restated credit agreement, dated as of July 3, 2006, as amended on July 13, 2007, by and among the Company and the other credit parties to the agreement and General Electric Capital Corporation, as a lender and agent for the lenders, and other lenders from time to time party thereto. The credit facilities under the amended and restated credit agreement are comprised of:
●	Term loans of $173.5 million due October 31, 2013, consisting of an original term loan of $64.6 million, and an additional term loan of $108.9 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 were an index rate plus 3.00% or LIBOR plus 4.00%. In addition, there are fees associated with undrawn revolver balances and certain annual fees.
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 the CR Companies 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 June 30, 2008			Six Months Ended June 30, 2008
	(unaudited)			(unaudited)
Revenues	$	25,783,981		$	51,480,651
Income from operations		4,282,162			8,582,473
Net loss		(1,350,793	)		(2,538,410	)
Basic net loss per share	$	(0.11	)	$	(0.20	)
Diluted net loss per share	$	(0.11	)	$	(0.20	)

7.	Subsidiary Guarantees
	The Company has no independent assets or operations separate from its operating subsidiaries. The guarantees of its senior subordinated notes by 12 of its 14 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. The condensed consolidated financial information is provided for the guarantor entities.
	The following tables present condensed consolidating balance sheets as of December 31, 2008 and June 30, 2009, condensed consolidating statements of operations for the three months ended June 30, 2008 and 2009, condensed consolidating statements of operations for the six months ended June 30, 2008 and 2009 and condensed consolidating statements of cash flows for the six months ended June 30, 2008 and 2009.

10

Otelco Inc.

Condensed Consolidating Balance Sheet

December 31, 2008

	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	—	$	13,521,138		$	21,117		$	—		$	13,542,255
Accounts receivable, net		—		10,869,233			1,254,272			—			12,123,505
Materials and supplies		—		1,029,214			1,276,541			—			2,305,755
Prepaid and other current assets		66,560		994,500			80,848			—			1,141,908
Income tax receivables		181,644		—			—			—			181,644
Deferred income taxes		827,686		—			—			—			827,686
Investment in subsidiaries		99,481,692		—			—			(99,481,692	)		—
Intercompany receivable		155,535,369		—			—			(155,535,369	)		—
Total current assets		256,092,951		26,414,085			2,632,778			(255,017,061	)		30,122,753
Property and equipment, net		—		62,507,141			12,899,921			—			75,407,062
Goodwill		—		191,271,477			(1,936,640	)		—			189,334,837
Intangibles assets, net		—		41,286,088			3,104,556			—			44,390,644
Investments		1,000		1,686,908			327,675			—			2,015,583
Deferred income taxes		5,897,382		—			—			—			5,897,382
Other long-term assets		8,879,424		(506,198	)		—			—			8,373,226
Total assets	$	270,870,757	$	322,659,501		$	17,028,290		$	(255,017,061	)	$	355,541,487
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	3,316,323	$	4,543,542		$	1,085,342		$	—		$	8,945,207
Intercompany payables		—		146,585,645			8,949,724			(155,535,369	)		—
Other current liabilities		—		2,129,257			75,448			—			2,204,705
Total current liabilities		3,316,323		153,258,444			10,110,514			(155,535,369	)		11,149,912
Deferred income taxes		10,316,819		31,595,332			4,050,251			—			45,962,402
Other liabilities		—		928,082			—			—			928,082
Long-term notes payable		238,536,037		40,263,476			—			—			278,799,513
Derivative liability		238,054		—			—			—			238,054
Class B common convertible to senior subordinated notes		4,085,033		—			—			—			4,085,033
Stockholders’ equity		14,378,491		96,614,167			2,867,525			(99,481,692	)		14,378,491
Total liabilities and stockholders’ equity	$	270,870,757	$	322,659,501		$	17,028,290		$	(255,017,061	)	$	355,541,487

11

Otelco Inc.

Condensed Consolidating Balance Sheet

June 30, 2009

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	—		$	18,813,369		$	39,039		$	—		$	18,852,408
Accounts receivable, net		—			10,696,620			1,190,179			—			11,886,799
Materials and supplies		—			965,381			1,100,798			—			2,066,179
Prepaid and other current assets		82,031			775,381			50,307			—			907,719
Income tax receivables		181,644			—			—			—			181,644
Deferred income taxes		827,686			—			—			—			827,686
Investment in subsidiaries		109,279,001			—			—			(109,279,001	)		—
Intercompany receivable		138,988,554			—			—			(138,988,554	)		—
Total current assets		249,358,916			31,250,751			2,380,323			(248,267,555	)		34,722,435
Property and equipment, net		—			59,158,662			11,884,399			—			71,043,061
Goodwill		—			191,101,302			(1,936,640	)		—			189,164,662
Intangibles assets, net		—			35,991,148			2,980,374			—			38,971,522
Investments		1,000			1,674,153			327,675			—			2,002,828
Deferred Income taxes		5,897,382			—			—			—			5,897,382
Other long-term assets		8,195,706			(265,126	)		—			—			7,930,580
Total assets	$	263,453,004		$	318,910,890		$	15,636,131		$	(248,267,555	)	$	349,732,470
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	1,377,081		$	5,751,870		$	1,297,691		$	—		$	8,426,642
Intercompany payables		—			133,265,189			5,723,365			(138,988,554	)		—
Other current liabilities		—			2,112,977			77,736			—			2,190,713
Total current liabilities		1,377,081			141,130,036			7,098,792			(138,988,554	)		10,617,355
Deferred income taxes		10,316,819			31,595,332			4,050,251			—			45,962,402
Other liabilities		(264,267	)		1,130,133			—			—			865,866
Long-term notes payable		238,496,119			40,263,476			—			—			278,759,595
Derivative liability		163,592			—			—			—			163,592
Class B common convertible to senior subordinated notes		4,085,033			—			—			—			4,085,033
Stockholders’ equity		9,278,627			104,791,913			4,487,088			(109,279,001	)		9,278,627
Total liabilities and stockholders’ equity	$	263,453,004		$	318,910,890		$	15,636,131		$	(248,267,555	)	$	349,732,470

Otelco Inc.

Condensed Consolidated Statement of Operations

For the Three Months Ended June 30, 2008

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	650,579		$	16,203,007		$	2,968,216		$	(2,153,072	)	$	17,668,730
Operating expenses		(650,579	)		(11,640,351	)		(2,524,944	)		2,153,072			(12,662,802	)
Income from operations		—			4,562,656			443,272			—			5,005,928
Other income (expense)		(4,417,403	)		(125,100	)		158			—			(4,542,345	)
Earnings from subsidiaries		4,880,986			—			—			(4,880,986	)		—
Income before income tax		463,583			4,437,556			443,430			(4,880,986	)		463,583
Income tax expense		(57,448	)		—			—			—			(57,448	)
Net income (loss) to common stockholders	$	406,135		$	4,437,556		$	443,430		$	(4,880,986	)	$	406,135

12

Otelco Inc.

Condensed Consolidated Statement of Operations

For the Three Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	700,138		$	24,908,849		$	2,897,581		$	(2,709,897	)	$	25,796,671
Operating expenses		(700,138	)		(20,055,598	)		(2,035,020	)		2,709,897			(20,080,859	)
Income from operations		—			4,853,251			862,561			—			5,715,812
Other income (expense)		(5,052,138	)		(92,411	)		(11	)		—			(5,144,560	)
Earnings from subsidiaries		5,623,390			—			—			(5,623,390	)		—
Income (loss) before income tax		571,252			4,760,840			862,550			(5,623,390	)		571,252
Income tax expense		(60,552	)		—			—			—			(60,552	)
Net income (loss) to common stockholders	$	510,700		$	4,760,840		$	862,550		$	(5,623,390	)	$	510,700

Otelco Inc.

Condensed Consolidated Statement of Operations

For the Six Months Ended June 30, 2008

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	1,459,768		$	32,390,939		$	6,126,420		$	(4,448,976	)	$	35,528,151
Operating expenses		(1,459,768	)		(23,409,655	)		(4,961,697	)		4,448,976			(25,382,144	)
Income from operations		—			8,981,284			1,164,723			—			10,146,007
Other income (expense)		(8,864,889	)		(234,703	)		82			—			(9,099,510	)
Earnings from subsidiaries		9,911,386			—			—			(9,911,386	)		—
Income before income tax		1,046,497			8,746,581			1,164,805			(9,911,386	)		1,046,497
Income tax expense		(232,322	)		—			—			—			(232,322	)
Net income (loss) to common stockholders	$	814,175		$	8,746,581		$	1,164,805		$	(9,911,386	)	$	814,175

Otelco Inc.

Condensed Consolidated Statement of Operations

For the Six Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	1,534,430		$	49,426,210		$	5,842,340		$	(5,506,132	)	$	51,296,848
Operating expenses		(1,534,430	)		(40,863,271	)		(4,224,258	)		5,506,132			(41,115,827	)
Income from operations		—			8,562,939			1,618,082			—			10,181,021
Other income (expense)		(12,255,217	)		(215,019	)		1,481			—			(12,468,755	)
Earnings from subsidiaries		9,967,483			—			—			(9,967,483	)		—
Income (loss) before income tax		(2,287,734	)		8,347,920			1,619,563			(9,967,483	)		(2,287,734	)
Income tax (expense) benefit		964,401			—			—			—			964,401
Net income (loss) to common stockholders	$	(1,323,333	)	$	8,347,920		$	1,619,563		$	(9,967,483	)	$	(1,323,333	)

13

Otelco Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2008

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	814,175		$	8,746,581		$	1,164,805		$	(9,911,386	)	$	814,175
Adjustment to reconcile net income (loss) to cash flows from operating activities		1,254,179			4,853,928			2,038,538			—			8,146,645
Changes in assets and liabilities, net of assets and liabilities acquired		12,487,674			(9,839,317	)		(2,922,451	)		—			(274,094	)
Net cash provided by operating activities		14,556,028			3,761,192			280,892			(9,911,386	)		8,686,726
Cash flows from investing activities		(176,093	)		(3,676,540	)		(326,914	)		—			(4,179,547	)
Cash flows from financing activities		(14,379,935	)		1			—			9,911,386			(4,468,548	)
Net increase (decrease) in cash and cash equivalents		—			84,653			(46,022	)		—			38,631
Cash and cash equivalents, beginning of period		—			12,707,674			102,823			—			12,810,497
Cash and cash equivalents, end of period	$	—		$	12,792,327		$	56,801		$	—		$	12,849,128

Otelco Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(1,323,333	)	$	8,347,920		$	1,619,563		$	(9,967,483	)	$	(1,323,333	)
Adjustment to reconcile net income (loss) to cash flows from operating activities		997,089			11,895,013			1,651,338			—			14,543,440
Changes in assets and liabilities, net of assets and liabilities acquired		14,762,275			(12,017,282	)		(2,779,060	)		—			(34,067	)
Net cash provided by operating activities		14,436,031			8,225,651			491,841			(9,967,483	)		13,186,040
Cash flows from investing activities		—			(2,933,420	)		(473,919	)		—			(3,407,339	)
Cash flows from financing activities		(14,436,031	)		—			—			9,967,483			(4,468,548	)
Net increase in cash and cash equivalents		—			5,292,231			17,922			—			5,310,153
Cash and cash equivalents, beginning of period		—			13,521,138			21,117			—			13,542,255
Cash and cash equivalents, end of period	$	—		$	18,813,369		$	39,039		$	—		$	18,852,408

8.	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 the National Exchange Carrier Association in the form of monthly settlements. Such revenues amounted to 13.6% and 10.3% of the Company’s total revenues from continuing operations for the six months ended June 30, 2008 and 2009, respectively.
	The Company acquired a multi-year contract with a large multiple system operator for the provision of wholesale network connections to its customers in Maine and New Hampshire. Associated with closing the acquisition of the CR Companies, various terms of the agreement were amended, including extending the contract through 2012. The customer represented approximately 12.0% of the consolidated revenue for the six months ended June 30, 2009.
9.	Subsequent Events
	Management performed an evaluation of the Company activity through August 7, 2009, and has concluded that there are no significant subsequent events requiring disclosure through the date these financial statements were issued.

14

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

Overview

          General

          Since 1999, we have acquired and operate ten rural local exchange carriers (“RLEC”) serving subscribers in north central Alabama, central Maine, western Massachusetts, central Missouri and southern West Virginia. We are the sole wireline telephone services provider for many of the rural communities we serve. We also operate competitive local exchange carriers (“CLEC”) serving subscribers throughout the state of Maine. In addition, we have authority to provide services in New Hampshire. Our services include local and long distance telephone services, network access, other telephone related services, cable television (in some markets) and Internet access. We view, manage and evaluate the results of operations from the various telecommunications services as one company and therefore have identified one reporting segment as it relates to providing segment information. As of June 30, 2009, we operated approximately 100,082 access line equivalents and supply an additional 122,471 wholesale network connections.

          Our core businesses are local and long distance telecommunications services, wholesale access to the local and long distance network, and the provision of network access to other wireline, long distance and wireless carriers for calls originated or terminated on our network. Our core businesses generated approximately 78.7% of our total revenues in the second quarter of 2009. We also provide cable television service in some markets and digital high-speed and dial-up Internet access in all of our markets.

          The following discussion and analysis should be read in conjunction with our financial statements and the related notes included in Item 1 of Part I 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, including the acquisition of Pine Tree Holdings, Inc., Granby Holdings, Inc. and War Holdings, Inc. (collectively, the “CR Companies”) from Country Road Communications LLC as of October 31, 2008.

          Revenue Sources

          We derive our revenues from five sources:

● Local services. We receive revenues from providing local exchange telecommunications services in our ten rural territories, from the wholesale network services in New England, and on a competitive basis throughout Maine. These revenues include monthly subscription charges for basic service, calling beyond the local territory on a fixed price and 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 provide billing and collections services for other carriers under contract and receive revenues from directory advertising. A growing portion of our rural subscribers take bundled service plans which include multiple services, including unlimited domestic calling, for a flat monthly fee.

● 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, Massachusetts, Maine, Missouri and West Virginia are based on rates approved by the Alabama Public Service Commission, the Massachusetts Department of Telecommunications and Cable, the Maine Public Utilities Commission (“MPUC”), the Missouri Public Service Commission and the West Virginia Public Service Commission, respectively, where appropriate. 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, high-definition, digital video recording and pay per view cable television services to a portion of our telephone service territory in both Alabama and Missouri, including Internet Protocol television (“IPTV”) in Alabama.

● Internet services. We receive revenues from monthly recurring charges for dial-up and digital high-speed Internet access.

● Transport services. We receive monthly recurring revenues for the rental of fiber to transport data and other telecommunications services in Maine.

15

          Voice and Data Access Line Trends

          The number of access lines served is a fundamental factor in determining revenue stability for a telecommunications provider. Reflecting a general trend in the RLEC industry, the number of rural voice access lines we serve has been decreasing gradually when normalized for territory acquisitions. We expect that this trend will continue, and may be potentially impacted by the effect of the economy on our customers. These trends will be offset by the growth of data access lines, also called digital high-speed Internet access service. Our competitive carrier voice and data access lines have grown as we continue to further penetrate our chosen markets. Our ability to continue this growth and our response to the rural trends will have an important impact on our future revenues. Our primary strategy consists of leveraging our strong incumbent market position, selling additional services to our rural customer base and providing better service and support levels than the incumbent carrier to our competitive customer base.

	Year Ended December 31,				March 31, 2009(2)		June 30, 2009(2)
Key Operating Statistics	2007		2008(2)
RLEC access lines:
Voice lines		36,687		51,530		50,807		50,078
Data lines		12,160		18,709		19,365		19,596
RLEC access line equivalents(1)		48,847		70,239		70,172		69,674
CLEC access lines:
Voice lines		16,973		26,558		26,744		27,110
Data lines		2,571		3,246		3,228		3,298
CLEC access line equivalents(1)		19,544		29,804		29,972		30,408
Otelco access line equivalents(1)		68,391		100,043		100,144		100,082
Wholesale network connections		—		98,187		113,855		122,471
Cable television customers		4,169		4,082		4,132		4,114
Dial-up Internet customers		15,249		11,864		10,885		10,165

(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).
(2)	We acquired the CR Companies effective October 31, 2008.

          In our RLEC territories, access line equivalents decreased by 498 during second quarter 2009, or 0.7%, compared to March 31, 2009. Voice access lines declined 1.4% while data access lines increased 1.2% during the period. We offer location specific bundled service packages, many including unlimited domestic calling, tailored to the telecommunications requirements of our customers.

          In our Maine CLEC operations, access line equivalents increased by 436 during second quarter 2009, or 1.5%, compared to March 31, 2009. Voice access lines increased 1.4% and data access lines increased 2.2% during the period. Virtually all of our competitive customers are businesses, with service bundles tailored to their specific business requirements. The Company has been negatively impacted by a delay in processing orders by FairPoint Communications, which provides the last mile connectivity for a large portion of our CLEC customers in Maine.

          Competitive pricing and bundling of services have led Otelco’s long distance service to be the choice of the majority of the long distance customers in the rural markets we serve. Over 90% of our Maine CLEC customers have selected us as their long distance carrier. Our cable television customers decreased 0.4% from March 31, 2009 to 4,114 as of June 30, 2009. Included in this number are 74 customers who have upgraded to our digital high-definition offer and 25 new IPTV customers during second quarter 2009. Dial-up Internet customers decreased 6.6% to 10,165 on June 30, 2009 compared to March 31, 2009. This also includes the subscribers we service outside of our telephone service area throughout Missouri and Maine, reflecting the shift to digital high-speed Internet services. In Missouri, we are expanding our data access lines for digital high-speed Internet in selected areas outside of our telephone service territory.

          Our Rate and Pricing Structure

          Our CLEC pricing is based on market requirements. We combine varying services to meet individual customer requirements, including technical support and provide multi-year contracts which are both market sensitive for the customer and profitable for us. The MPUC and the New Hampshire Public Utilities Commission impose certain requirements on all CLECs operating in their markets for reporting and for interactions with the various incumbent local exchange and interexchange carriers. These requirements provide wide latitude in pricing services.

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          Our RLECs operate in five states and are regulated in varying degrees by the respective state regulatory authorities. The impact on pricing flexibility varies by state. In Maine, our Saco River Telegraph and Telephone Company and Pine Tree Telephone and Telegraph Company subsidiaries have obtained authority to implement pricing flexibility while remaining under rate-of-return regulation. Our rates for other services we provide, including cable, long-distance, and dial-up and high-speed Internet access, are not price regulated. The market for competitive services, such as wireless, also impacts the ability to adjust prices. With the increase of bundled services offerings, including unlimited long distance, pricing for individual services takes on reduced importance to revenue stability. We expect this trend to continue into the immediate future.

           Categories of Operating Expenses

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

          Cost of services. This includes expenses for salaries, wages and benefits relating to plant operation, maintenance, sales and customer service; other plant operations, maintenance and administrative costs; network access costs; and costs of services 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; information management expenses, including billing; allowance for uncollectible revenue; 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. Certain of these amortization expenses continue to be deductible for tax purposes.

           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 and CLEC customers, operating margins decrease reflecting the lower margins associated with these 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.

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2009			2008			2009
Revenues
Local services		38.0	%		46.8	%		37.8	%		46.6	%
Network access		34.5			31.9			35.3			31.9
Cable television		3.2			2.4			3.1			2.4
Internet		17.2			13.6			17.0			13.7
Transport services		7.1			5.3			6.8			5.4
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%

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Operating expenses
Cost of services and products	38.2	%	39.3	%	37.7	%	40.6	%
Selling, general and administrative expenses	14.3		13.0		14.7		13.5
Depreciation and amortization	19.2		25.6		19.0		26.1
Total operating expenses	71.7		77.9		71.4		80.2
Income from operations	28.3		22.1		28.6		19.8
Other income (expense)
Interest expense	(27.0	)	(25.0	)	(26.6	)	(25.4	)
Change in fair value of derivatives	0.9		5.0		(0.2	)	0.6
Other income	0.4		0.1		1.2		0.5
Total other expense	(25.7	)	(19.9	)	(25.6	)	(24.3	)
Income before income taxes	2.6		2.2		3.0		(4.5	)
Income tax benefit (expense)	(0.3	)	(0.2	)	(0.7	)	1.9
Net income (loss) available to common stockholders	2.3	%	2.0	%	2.3	%	(2.6	)%

           Three Months and Six Months Ended June 30, 2009 Compared to Three Months and Six Months Ended June 30, 2008

          Total revenues. Total revenues increased 46.0% in the three months ended June 30, 2009 to $25.8 million from $17.7 million in the three months ended June 30, 2008. Total revenues increased 44.4% in the six months ended June 30, 2009 to $51.3 million from $35.5 million in the six months ended June 30, 2008. The primary reason for the increase is the acquisition of the CR Companies. The tables below provide the components of our revenues for the three months and six months ended June 30, 2009 compared to the same periods of 2008.

For the three months ended June 30, 2009 and 2008

	Three Months Ended June 30,				Change
	2008		2009		Amount		Percent
	(dollars in thousands)
Local services	$	6,712	$	12,064	$	5,352		79.7	%
Network access services		6,105		8,265		2,160		35.4
Cable television services		566		612		46		8.1
Internet services		3,031		3,500		469		15.5
Transport services		1,255		1,356		101		8.0
Total	$	17,669	$	25,797	$	8,128		46.0

          Local services. Local services revenue increased 79.7% to $12.1 million in the three months ended June 30, 2009 from $6.7 million in the three months ended June 30, 2008. The acquisition of the CR Companies and growth in CLEC revenue accounted for an increase of $5.7 million. RLEC revenue, including bundled services such as long distance, decreased $0.2 million reflecting the decline in RLEC access lines. Billing and collecting services and directory advertising decreased $0.1 million.

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Network access services. Network access revenue increased 35.4% to $8.3 million in the three months ended June 30, 2009 from $6.1 million in the three months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $2.5 million. RLEC switched access and customer related charges decreased $0.3 million.

Cable television services. Cable television revenue increased 8.1% to just over $0.6 million in the three months ended June 30, 2009 from just under $0.6 million in the three months ended June 30, 2008. Growth in high-definition television and IPTV fees in Alabama and satellite television services in Missouri accounted for the increase.

Internet services. Internet revenue increased 15.5% to $3.5 million in the three months ended June 30, 2009 from $3.0 million in the three months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $0.6 million. For the balance of the Company, the growth in new digital data access lines, including related equipment rental, offset all but $0.1 million of the decline of dial-up Internet customers associated with the conversion to digital data access lines, including those customers in Maine and Missouri that are outside of our local service areas.

Transport services. Transport services revenue increased 8.0% to $1.4 million in the three months ended June 30, 2009 from $1.3 million in the three months ended June 30, 2008. The continued growth in Wide Area Network revenue from CLEC customers in Maine drove this increase.

For the six months ended June 30, 2009 and 2008

	Six Months Ended June 30,				Change
	2008		2009		Amount		Percent
	(dollars in thousands)
Local services	$	13,438	$	23,919	$	10,481		78.0	%
Network access services		12,543		16,359		3,816		30.4
Cable television services		1,112		1,219		107		9.6
Internet services		6,032		7,042		1,010		16.7
Transport services		2,403		2,758		355		14.8
Total	$	35,528	$	51,297	$	15,769		44.4

Local services. Local services revenue increased 78.0% to $23.9 million in the six months ended June 30, 2009 from $13.4 million in the six months ended June 30, 2008. The acquisition of the CR Companies and growth in CLEC revenue accounted for an increase of $11.2 million. RLEC revenue, including bundled services such as long distance, decreased $0.3 million reflecting the decline in RLEC access lines. Billing and collecting services decreased $0.2 million and directory advertising decreased $0.1 million.

Network access services. Network access revenue increased 30.4% to $16.4 million in the six months ended June 30, 2009 from $12.5 million in the six months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $4.7 million. RLEC switched access decreased by $0.8 million and customer related charges decreased $0.1 million.

Cable television services. Cable television revenue increased 9.6% to $1.2 million in the six months ended June 30, 2009 from $1.1 million in the six months ended June 30, 2008. Growth in high-definition television, pay per view and IPTV fees in Alabama and satellite television services in Missouri accounted for the increase.

Internet services. Internet revenue increased 16.7% to $7.0 million in the six months ended June 30, 2009 from $6.0 million in the six months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $1.1 million. For the balance of the Company, the growth in new digital data access lines, including related equipment rental, offset all but $0.1 million of the decline of dial-up Internet customers associated with the conversion to digital data access lines, including those customers in Maine and Missouri that are outside of our local service areas.

Transport services. Transport services revenue increased 14.8% to $2.8 million in the six months ended June 30, 2009 from $2.4 million in the six months ended June 30, 2008. The continued growth in Wide Area Network and wholesale revenue from CLEC customers in Maine drove this increase.

Operating expenses. Operating expenses in the three months ended June 30, 2009 increased 58.6% to $20.1 million from $12.7 million in the three months ended June 30, 2008. Operating expenses in the six months ended June 30, 2009 increased 62.0% to $41.1 million from $25.4 million in the six months ended June 30, 2008. The primary reason for the increase is the acquisition of the CR Companies. The tables below provide the components of our operating expenses for the three months and six months ended June 30, 2009 compared to the same periods of 2008.

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For the three months ended June 30, 2009 and 2008

	Three Months Ended June 30,				Change
	2008		2009		Amount		Percent
	(dollars in thousands)
Cost of services	$	6,746	$	10,133	$	3,387		50.2	%
Selling, general and administrative expenses		2,527		3,343		816		32.3
Depreciation and amortization		3,390		6,605		3,215		94.8
Total	$	12,663	$	20,081	$	7,418		58.6

Cost of services. Cost of services increased 50.2% to $10.1 million in the three months ended June 30, 2009 from $6.7 million in the three months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $3.7 million. The combination of increased data access lines; higher digital television programming costs; and increased pole attachment expense were more than offset by reduced directory costs; network synergies in Maine; and other outside plant operational efficiencies for a decrease in costs by $0.3 million.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 32.3% to $3.3 million in the three months ended June 30, 2009 from $2.5 million in the three months ended June 30, 2008. The acquisition of the CR Companies accounted for the increase of $0.8 million. Increases in employee costs and legal expenses of $0.2 million were offset by lower operating taxes and rent; organizational synergies; and external relations costs of $0.2 million.

Depreciation and amortization. Depreciation and amortization increased 94.8% to $6.6 million in the three months ended June 30, 2009 from $3.4 million in the three months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $3.6 million, including $2.5 million in amortization of intangible assets such as non-competition agreements and the value of customer lists and contracts. The legacy business had a decrease of $0.4 million, reflecting lower depreciation expense and lower amortization expense for a non-competition agreement.

For the six months ended June 30, 2009 and 2008

	Six Months Ended June 30,				Change
	2008		2009		Amount		Percent
	(dollars in thousands)
Cost of services	$	13,398	$	20,800	$	7,402		55.2	%
Selling, general and administrative expenses		5,221		6,919		1,698		32.5
Depreciation and amortization		6,763		13,397		6,634		98.1
Total	$	25,382	$	41,116	$	15,734		62.0

Cost of services. Cost of services increased 55.2% to $20.8 million in the six months ended June 30, 2009 from $13.4 million in the six months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $7.9 million. The combination of increased data access lines; higher digital television programming costs; and increased pole attachment expense were more than offset by reduced directory costs; lower long distance cost per minute; network synergies in Maine; and other outside plant operational efficiencies for a decrease in costs by $0.5 million.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 32.5% to $6.9 million in the six months ended June 30, 2009 from $5.2 million in the six months ended June 30, 2008. The acquisition of the CR Companies accounted for the increase of $1.7 million. Increases in employee costs and legal expenses of $0.3 million were offset by lower operating taxes and rent; organizational synergies; and external relations costs of $0.3 million.

Depreciation and amortization. Depreciation and amortization increased 98.1% to $13.4 million in the six months ended June 30, 2009 from $6.8 million in the six months ended June 30, 2008. The acquisition of the CR Companies accounted for an increase of $7.3 million, including $5.0 million in amortization of intangible assets such as non-competition agreements and the value of customer lists and contracts. The legacy business had a decrease of $0.7 million, reflecting lower depreciation expense of $0.2 million and lower amortization expense for a non-competition agreement of $0.5 million.

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For the three months ended June 30, 2009 and 2008

	Three Months Ended June 30,						Change
	2008			2009			Amount			Percent
	(dollars in thousands)
Interest expense	$	(4,773	)	$	(6,447	)	$	1,674			35.1	%
Change in fair value of derivatives		167			1,290			1,123			NM
Other income		64			12			(52	)		(81.3	)
Income tax expense		(57	)		(60	)		3			5.3

Interest expense. Interest expense increased 35.1% to $6.4 million in the three months ended June 30, 2009 from $4.8 million in the three months ended June 30, 2008. Our senior credit facility was increased by $108.9 million in October 2008 to $173.5 million associated with the acquisition of the CR Companies. The increased borrowing under the amended credit facility accounted for $1.8 million of the increase. The balance of $0.1 million reflects the increased amortization expenses associated with the interest rate cap purchased in 2004.

Change in fair value of derivatives. The derivative value associated with the conversion option for our Class B common stock must be fair valued each quarter until such conversion no longer requires a financial test (December 21, 2009). The change in value of the Class B derivative liability was essentially the same for the three months ended June 30, 2009 and 2008.

The repayment of senior indebtedness in July 2007 reduced senior debt below the $80 million level of our 3% three month LIBOR interest rate cap. The acquisition of the CR Companies increased senior debt above that $80 million level. Therefore, there was a $15.4 million balance of the rate cap that was not an effective hedge to interest costs in first quarter 2008 and was considered an investment. The full $80 million cap was effective in second quarter 2009. The change in fair value of the ineffective portion of the rate cap decreased by slightly less than $0.1 million during second quarter 2008, compared to no ineffective portion in the same period of 2009.

We have two interest rate swap agreements to hedge our exposure to changes in interest rate costs associated with our senior credit facility. Form an accounting perspective, the documentation for both swaps does not meet the technical requirements to allow the swaps to be considered highly effective hedging instruments and therefore the swaps do not qualify for hedge accounting. These swap agreements must be considered investments and the increase in value of $1.2 million for the three months ended June 30, 2009 is reflected as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in value will be zero. See — Liquidity and Capital Resources below for additional explanation.

Other income. Other income was less than $0.1 million in the three months ended June 30, 2009 and 2008, reflecting low interest rates on overnight investments in both periods.

Income taxes. Provision for income taxes was less than $0.1 million in the three months ended June 30, 2009 and 2008.

Net income. As a result of the foregoing, there was net income of $0.5 million in the three months ended June 30, 2009 and net income of $0.4 million in the three months ended June 30, 2008.

For the six months ended June 30, 2009 and 2008

	Six Months Ended June 30,						Change
	2008			2009			Amount			Percent
	(dollars in thousands)
Interest expense	$	(9,456	)	$	(13,046	)	$	3,590			38.0	%
Change in fair value of derivatives		(74	)		339			413			NM
Other income		430			238			(192	)		(44.7	)
Income tax (expense) benefit		(232	)		964			1,196			515.5

Interest expense. Interest expense increased 38.0% to $13.0 million in the six months ended June 30, 2009 from $9.5 million in the six months ended June 30, 2008. Our senior credit facility was increased by $108.9 million in October 2008 to $173.5 million associated with the acquisition of the CR Companies. The increased borrowing under the amended credit facility accounted for $3.4 million of the increase. The balance of $0.2 million reflects the increased amortization expenses associated with the interest rate cap purchased in 2004.

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          Change in fair value of derivatives. The derivative value associated with the conversion option for our Class B common stock must be fair valued each quarter until such conversion no longer requires a financial test (December 21, 2009). The change in value of the Class B derivative liability was essentially the same for the six months ended June 30, 2009 and 2008.

          The repayment of senior indebtedness in July 2007 reduced senior debt below the $80 million level of our 3% three month LIBOR interest rate cap. The acquisition of the CR Companies increased senior debt above that $80 million level. Therefore, there was a $15.4 million balance of the rate cap that was not an effective hedge to interest costs in first quarter 2008 and was considered an investment. The full $80 million cap was effective in the six months ended June 30, 2009. The change in fair value of the ineffective portion of the rate cap decreased by slightly less than $0.2 million during the six months ended June 30, 2009, compared to no ineffective portion in the same period of 2009.

          We have two interest rate swap agreements to hedge our exposure to changes in interest rate costs associated with our senior credit facility. From an accounting perspective, the documentation for both swaps does not meet the technical requirements to allow the swaps to be considered highly effective hedging instruments and therefore the swaps do not qualify for hedge accounting. These swap agreements must be considered investments and the increase in value of $0.2 million for the six months ended June 30, 2009 is reflected as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in value will be zero. See — Liquidity and Capital Resources below for additional explanation.

          Other income. Other income decreased 44.7% to $0.2 million in the six months ended June 30, 2009 from $0.4 million in the six months ended June 30, 2008. The decrease was the result of $0.2 million in lower interest associated with short term investing of our cash balances and two one time 2008 items – an additional distribution associated with the Rural Telephone Bank dissolution and gain associated with the ineffective portion of the rate cap. These impacts were partially offset by a gain of less than $0.1 million associated with increased CoBank dividends.

          Income taxes. Provision for income taxes was a benefit of $1.0 million in the six months ended June 30, 2009 compared to an expense of $0.2 million in the six months ended June 30, 2008.

          Net income. As a result of the foregoing, there was net loss of $1.3 million in the six months ended June 30, 2009 and net income of $0.8 million in the six months ended June 30, 2008.

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.

          Historically, we satisfy our operating cash requirements from the cash generated by our business and utilize borrowings under our credit facility to facilitate acquisitions. For the six months ended June 30, 2009, we generated cash from our business to invest in additional property and equipment, pay interest on our senior debt, pay interest associated with the subordinated debt inherent in our IDS units, and fund dividends on our Class A common stock (as declared by our board of directors) that are inherent in our IDS units. After meeting all of these needs of our business, cash grew from $13.5 million at December 31, 2008 to $18.9 million at June 30, 2009. The Company has as its current policy to return a high percentage of its available cash to its IDS unit holders. We may also, from time to time, make payments on our outstanding indebtedness.

          Cash flows from operating activities for the first six months of 2009 amounted to $13.2 million compared to $8.7 million for the first six months of 2008, an increase of $4.5 million.

          Cash flows used in investing activities in the first six months of 2009 were $3.4 million compared to $4.2 million in the first six months of 2008. The lower rate of capital expenditures for property and equipment accounted for $0.4 million of the difference. The remaining difference relate to one time items in each period.

          Cash flows used in financing activities for the first six months of 2009 and 2008 were $4.5 in each period, reflecting payment of dividends to stockholders in both periods. The dividend was $0.17625 per share per quarter in both periods. We have paid eighteen consecutive dividends at this rate since the Company went public in December 2004. The dividends paid in 2008 were treated as a return of capital for tax purposes; it is anticipated that dividends paid in 2009 will also be treated as a return of capital for tax purposes.

          We do not invest in financial instruments as part of our business strategy. At June 30, 2009, the Company had an $80 million interest rate cap at 3% LIBOR through December 2009. The rate cap is considered an effective hedge and qualifies for hedge accounting. In addition, it had a $90 million notional amount interest rate swap with the Company paying 1.85% and the counterparty paying a variable rate based upon the 3 month LIBOR for three years beginning February 9, 2009 and a $60 million notional amount interest rate swap with the Company paying 2.0475% and the counterparty paying a variable rate based upon the 3 month LIBOR for two years beginning February 9, 2010. From an accounting perspective, the documentation for both swaps does not meet the technical requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, or SFAS 133, to allow the swaps to be considered highly effective as hedging instruments and therefore the swaps do not qualify for hedge accounting.

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          We also have received patronage shares, primarily from one of our lenders, over a period of years for which there is a limited market to determine value until the shares are redeemed by the issuing institution. Historically, these shares have been redeemed at a value similar to their issued value. Due to the uncertainty of this future value, these shares are carried at approximately 55% of their issued value. The Class B derivative is valued based on an expert model developed specifically for the valuation of this derivative which uses current market factors to assess the B share derivative value at the end of each quarter. This liability will be extinguished upon the conversion of the Class B shares into IDS units. The specific value of these instruments is included in the notes to the March 31, 2009 financial statements.

          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.

Recently Adopted Accounting Pronouncements

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations, or SFAS 141R. SFAS 141R replaces SFAS No. 141 and establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 31, 2008. Accordingly, any business combinations the Company engaged in prior to January 1, 2009 are recorded and disclosed following generally accepted accounting principles as in effect on December 31, 2008. The adoption of SFAS 141R will have an impact on the consolidated financial statements but the nature and magnitude of the specific effects will depend on the nature, terms, and size of acquisitions the Company consummates after the effective date.

          Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or SFAS 157. In February 2008, the FASB issued a staff position (FSP 157-2) that delayed the effective date of SFAS 157 for all non-financial assets and liabilities except those recognized or disclosed at least annually, until periods beginning after December 15, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs. The standard describes a fair value hierarchy utilizing three levels of input. The first two levels are considered observable and the third, unobservable:

Level 1 –	Quoted prices in active markets for identical assets or liabilities.
Level 2 –	Inputs other than Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities or quoted prices in markets which are not active. The inputs are generally observable or can be corroborated in observable markets.
Level 3 –	Unobservable inputs where there is little or no market activity to support valuation.

          The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.

          In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, or SFAS 161. SFAS 161 expands quarterly disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on our consolidated financial statements.

          Recent Accounting Prouncements

          In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.

          In April 2009, the FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on our consolidated financial statements.

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          In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on our consolidated financial statements.

          In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141(R)-1, to amend SFAS 141 (revised 2007), Business Combinations. FSP 141(R)-1 addresses the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. FSP 141(R)-1 also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or liabilities be developed depending on their nature. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141(R)-1 did not have a material impact on our consolidated financial statements.

          In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. SFAS 165 provides largely the same guidance on subsequent events which previously existed only in auditing literature. The guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

          In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS 168. SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, given that once in effect, the Codification will carry the same level of authority. The guidance is effective for financial statements issued for interim reporting periods ending after September 15, 2009. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

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 derivative or commodity type instruments, although when a portion of our interest rate cap was ineffective, it was considered an investment. Since October 31, 2008, there has not been an ineffective portion of our interest rate cap. Also, our two interest rate swap agreements are technically not effective hedges and therefore do not qualify for hedge accounting. The change in the fair value of the swaps is charged or credited to income as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in value will be zero.  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 would be exposed to interest rate risk, primarily from a change in LIBOR or a base rate should the facility be used. Currently, we have no loans drawn under this facility.

Item 4. Controls and Procedures

          Disclosure controls and procedures are defined by the Securities and Exchange Commission as those controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of June 30, 2009, and, based on the material weakness in our internal control over financial reporting described below, have determined that such disclosure controls and procedures were ineffective.  In response to this material weakness, management performed additional analysis and other procedures to ensure that our consolidated financial statements included in this Form 10-Q/A were prepared in accordance with generally accepted accounting principles.  Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements included in this Form 10-Q/A fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

          Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  Our 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.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect material 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 policies and procedures may deteriorate.

          A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  As of the end of the period covered by this Form 10-Q/A, management determined that its financial statements contained an error with respect to one rule within SFAS 133 and that this error arose from a material weakness in the Company’s internal control over financial reporting.  Specifically, the Company acquired two interest rate swap contracts to hedge against changes in the interest rate associated with its senior credit facility.  These agreements were marked to market value on June 30, 2009 and placed on the consolidated balance sheets of the Company.  Using SFAS 133, the swaps were initially determined to be effective hedges using the short-cut methodology and changes in their value were recorded as other comprehensive income in stockholders’ equity on the consolidated balance sheets.  Subsequent review determined that, because the swaps had future start dates when they were acquired, their value would not have been zero at the effective date and therefore, the short-cut methodology could not be employed.  SFAS 133 further requires that all documentation to determine the effectiveness of hedging instruments be completed prior to their effective date, precluding the subsequent use of another methodology available within the accounting guidance to assess effectiveness.  Therefore, the swaps may not be considered effective for the period.  The hedges must be considered investments and changes in their fair value would flow through the statement of operations as change in fair value of derivatives and net income would vary with the changes.  Over the two and three year lives of the two swaps, the cumulative value of these changes will be zero.  Therefore, the Company determined that it did not maintain effective controls to ensure the proper application of SFAS 133.  To remediate this material weakness, should any future interest rate hedging contracts be used by the Company, an external hedge accounting expert will be employed to validate that the Company has properly interpreted the guidance in accounting for the contracts.

           While the documentation did not support the original decision to account for changes in the swaps as effective hedges, it did not impact operations of the business; operations of the interest rate swaps; revenue and operating costs; or cash.  There was also no impact on any debt covenants.

          Other than the changes referred to above, there has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

          Otelco Inc. held its Annual Meeting of Stockholders on May 12, 2009. At that meeting, stockholders elected John P. Kunz and Andrew Meyers as Directors of the Company for a term to expire at the 2012 Annual Meeting of Stockholders. The results of the voting are as follows:

	Votes For		Votes Withheld
John P. Kunz		11,853,887		35,987
Andrew Meyers		11,841,629		48,245

          The following Directors also have terms in office that continue after the Annual Meeting of Stockholders: William Bak, Howard J. Haug, Stephen P. McCall, William F. Reddersen and Michael D. Weaver.

          In addition, stockholders ratified the appointment of BDO Seidman, LLP as our Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2009. The result of the voting is as follows:

	Votes For	Votes Against	Abstain	Broker Non-Vote
Ratification of appointment of independent registered public accounting firm	12,048,555	63,086	47,151	0

Item 6. Exhibits

Exhibits

See Exhibit Index.

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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: March 8, 2010	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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