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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K
[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 2001
[ ]         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 000-25147

                             INTERNET AMERICA, INC.
                (Name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                    TEXAS                                        86-0778979
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)

         350 N. ST. PAUL, SUITE 3000                               75201
                DALLAS, TEXAS                                    (Zip Code)
   (Address of principal executive offices)
</Table>

                                 (214) 861-2500
                        (Registrant's telephone number)

      Securities registered pursuant to Section 12(b) of the Exchange Act:
                                (NOT APPLICABLE)

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

     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 [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     Based upon the closing price of the registrant's Common Stock on September
27, 2001, the aggregate market value of the Common Stock held by non-affiliates
of the registrant is $1,855,568.*

     The number of shares of Common Stock outstanding as of September 27, 2001
was 10,005,263.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on November 20, 2001, to be filed within 120 days after
the end of our fiscal year, are incorporated by reference into Part III, Items
10-13 of this Form 10-K.
---------------

*  Solely for purposes of this calculation, all executive officers and directors
   of the registrant and all shareholders reporting beneficial ownership of more
   than 5% of the registrant's Common Stock are considered to be affiliates.

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                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                                    PAGE
                                                                                    ----
<S>        <C>        <C>                                                           <C>
PART I     Item 1.    Business....................................................    1
           Item 2.    Properties..................................................    8
           Item 3.    Legal Proceedings...........................................    8
           Item 4.    Submission of Matters to a Vote of Security Holders.........    8
PART II    Item 5.    Market for Registrant's Common Stock and Related Stockholder
                        Matters...................................................    9
           Item 6.    Selected Financial Data.....................................   10
           Item 7.    Management's Discussion and Analysis of Financial Condition
                        and Results of Operations.................................   11
           Item 7a.   Quantitative and Qualitative Disclosure About Market Risk...   17
           Item 8.    Financial Statements and Supplementary Data.................   17
           Item 9.    Changes in and Disagreements with Accountants on Accounting
                        and Financial Disclosure..................................   18
PART III   Item 10.   Directors and Executive Officers, Promoters and Control
                        Persons; Compliance with Section 16(a) of the Exchange
                        Act.......................................................   19
           Item 11.   Executive Compensation......................................   19
           Item 12.   Security Ownership of Certain Beneficial Owners and
                        Management................................................   19
           Item 13.   Certain Relationships and Related Transactions..............   19
PART IV    Item 14.   Exhibits and Reports on Form 8-K............................   19

SIGNATURES........................................................................   22
INDEX TO FINANCIAL STATEMENTS.....................................................  F-1
</Table>

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Certain statements contained in this Form 10-K constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act. These
statements, identified by words such as "anticipate," "believe," "estimate,"
"should," "expect" and similar expressions, include our expectations and
objectives regarding our future financial position, operating results and
business strategy. These statements reflect the current views of management with
respect to future events and are subject to risks, uncertainties and other
factors that may cause our actual results, performance or achievements, or
industry results, to be materially different from those described in the
forward-looking statements. Such risks and uncertainties include those set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Form 10-K. We do not intend to
update the forward-looking information to reflect actual results or changes in
the factors affecting such forward-looking information.

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Internet America is an Internet service provider ("ISP") that provides a
wide array of Internet services tailored to meet the needs of individual and
business subscribers. As of June 30, 2001, we served approximately 147,000
subscribers. Internet America was incorporated in Texas in 1995 and currently
has operations in Texas and Louisiana. Our business model is to create high user
density in each geographic area we serve, which allows us to realize substantial
marketing and operating efficiencies. Our growth strategy focuses on growth in
operating cash flow while maintaining a reasonable revenue growth. We will
maintain our focus on the high user density model.

     Elements of our growth strategy include:

     Creative Use of Advertising and Direct Marketing to Maintain the Internet
America Brand.  We use primarily outdoor billboard and print media advertising.
We are currently developing and using several direct marketing techniques. See
"-- Marketing," below.

     Attract New Subscribers and Migrate Existing Subscribers to Our Broadband
Products.  We emphasize our broadband products in marketing efforts to increase
our total subscriber base and our average revenue per subscriber.

     Cost-Effective Development of Network Infrastructure.  We deploy network
infrastructure in a disciplined manner to achieve substantial economies of scope
and scale. We have almost completed a consolidation of all of our Texas
operations and have realized substantial efficiencies from this consolidation.
With our "Virtual POP" architecture, we can provide local access services
quickly and efficiently without investing in additional physical infrastructure.
See "-- Infrastructure," below.

     Development of Value-Added Revenue Streams.  We continue to develop
value-added revenue streams such as dedicated broadband connectivity, news
access and Web hosting. In addition, we continue to evaluate other value-added
service opportunities such as Internet telephony. We believe that a user dense,
regional customer base provides an excellent platform for the introduction of
new value-added services, taking advantage of existing brand awareness and
economies of scale.

SIGNIFICANT ACQUISITIONS

     We have completed several acquisitions, the most significant of which were
PDQ.Net, Incorporated ("PDQ") and NeoSoft, Inc. ("NeoSoft"). On November 22,
1999, we acquired all of the outstanding shares of PDQ, a Houston-based ISP, in
exchange for 2,425,000 shares of Common Stock. We also issued options to
purchase 352,917 shares of Common Stock with a weighted average exercise price
of $1.62 per share in replacement of all of the outstanding stock options of
PDQ. The transaction was accounted for as a purchase. On June 30, 1999, we
acquired all the outstanding common stock of NeoSoft, an ISP in Houston, Texas
for

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$8.3 million. The transaction was accounted for as a purchase. PDQ and NeoSoft
are wholly-owned subsidiaries and constitute the majority of our Houston
operations.

SERVICES

     We offer Internet services tailored to meet the needs of both individual
and business subscribers. Our primary service offerings are broadband and
dial-up Internet access, as well as related value-added services. For our
business subscribers, we offer dedicated high speed Internet access, Web
hosting, colocation and other business related services. Our services are
offered in several different packages to provide subscribers a broad range of
choices to satisfy their Internet needs. The majority of our consumer
subscribers have month-to-month subscriptions and the majority of our business
customers are under service contracts for a term. Most consumer subscribers are
billed through automatic charges to their credit cards or bank account and our
business customers are billed by monthly invoices. We offer discounts on almost
all of our services for subscribers who prepay for a longer term.

     High Speed Connectivity; DSL Services.  We offer broadband connectivity for
business and consumers, including dedicated 56k dialup, 64k/128k Integrated
Service Digital Network (ISDN) access, Asymmetrical Digital Subscriber Lines
(ADSL) to 1.5M/768k, 144k to 1.5M Symmetrical Digital Subscriber Lines (SDSL),
fractional to full T-1, and DS-3 level connectivity. Our Shared Line DSL
products provide high-speed Internet access over existing telephone lines, and
may allow subscribers to simultaneously use a single telephone line for voice
service and for access to the Internet. DSL provides an "always on" connection
thereby removing wait times associated with dialing into a network. The DSL
products offer our residential and business subscribers a cost-effective way to
substantially increase the speed at which they access the Internet.

     Dial-Up Internet Access.  Our most popular dial-up Internet access package
includes basic Internet access and related Internet applications such as World
Wide Web browsing, e-mail, Internet relay chat (IRC), file transfer protocol
(FTP), and USENET news access. Available value-added services include multiple
e-mail mailboxes, national roaming services, personalized e-mail addresses,
personal Web sites and enhanced USENET news access.

     USENET.  Our Airnews.net product provides access to Internet America's
newsgroup services for subscribers of other Internet services and on a wholesale
basis to other businesses or ISPs. As of June 30, 2001, there were approximately
6,000 Airnews.net subscribers.

     Web Services.  We offer Web hosting through our Airweb.net service for
businesses and other organizations that wish to create their own World Wide Web
sites without maintaining their own Web servers and high-speed Internet
connections. Web hosting subscribers are responsible for building their own Web
sites and then uploading the pages to an Internet America server. This Web
hosting service features state-of-the-art servers for high speed and
reliability, a high quality connection to the Internet, specialized customer
support and advanced services features, such as secure transactions and site
usage reports.

CUSTOMER CARE

     Our goal of 100% customer satisfaction begins with providing superior
systems and network performance. We focus on scalability, reliability and speed
in the technical design and maintenance of our systems. In addition to the
provision of superior systems and network performance, we emphasize high quality
customer care and technical support. We strive to retain our subscribers by
prompt response to customer problems via telephone, email and newsgroups.

     Individuals accessing the Internet have many different operating system,
hardware and network configurations, coupled with varying levels of computer
sophistication. Consequently, our customer care department must be able to
efficiently and effectively address:

     - Problems affecting a variety of hardware systems,
     - Start-up or other basic problems of new subscribers or new Internet users

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     - Highly technical issues that sophisticated users may encounter
     - Operating system defects/workarounds.

     We had approximately 100 customer care employees at June 30, 2001. Customer
care is available to subscribers 24-hours-a-day, 7-days-a-week. The customer
care department is organized in tiers designed to respond to varying types of
support needs. In addition to diagnosing and resolving subscribers' technical
problems, our customer care department answers questions about account status,
responds to software requests and provides configuration information.

     We maintain a comprehensive description of our customer care services on
our Web site, as well as troubleshooting tips and configuration information.
Additionally, we offer our subscribers free educational classes, which are held
weekly in our Dallas office. Subscribers can also obtain recorded system and
network status reports at any time and review extensive system and network
performance on the World Wide Web.

MARKETING

     Our marketing strategy focuses on penetration of high density urban markets
in order to acquire a critical mass of subscribers to support profitable
operations. Our approach combines direct response marketing and brand building
advertising. We use primarily outdoor billboard and print media advertising and
are currently developing and using several direct marketing techniques. We
believe that the demand for high-speed connectivity will continue to grow and
our advertising will focus on high speed broadband services as well as our
narrowband products.

INFRASTRUCTURE

     Our network provides subscribers with local dial-up and broadband (DSL)
access in all major metropolitan areas of Texas, as well as dial-up access in
many smaller communities. Our systems and network infrastructure is designed to
provide reliability and speed. Reliability is achieved through redundancy in
mission critical systems that minimizes the number of single points of failure.
Speed is achieved through clustered systems, diverse network architecture,
multi-peered Internet backbone connections and aggressive load balancing.

     Physical and Virtual POPs.  Subscribers dial a local phone number and
connect to one of our points of presence (POPs), consisting of inbound telephone
lines, modems and related computer equipment. The POPs are either facilities
owned by Internet America or "Virtual POPs" owned by telecommunication
companies. Virtual POP architecture allows us to provide local access services
without deploying additional physical infrastructure. The Virtual POP
architecture enables subscribers to dial a local phone number and connect to a
modem owned and housed by a telecommunications provider. The subscriber's data
call is then routed across leased lines to our internal network. Unlike simply
leasing network capacity from a third-party provider, the Virtual POP
architecture allows us to maintain substantial control over quality of service
and capacity. The benefits of this architecture include substantially reduced
capital expenditures and reduced exposure to technological obsolescence. In
addition, when entering new markets, the Virtual POP architecture allows us to
more precisely match capacity needs to actual sales in that market.

     Internal Network Infrastructure.  Subscribers enter our network from either
the physical POP or Virtual POP. Our primary internal network is designed to
maximize sustained high-speed traffic and provide both resiliency to failure and
redundancy. Our facilities are powered by a computer controlled uninterruptible
power supply that provides battery backup, surge protection and power
conditioning. Automatic onsite diesel generators provide power for prolonged
power outages.

     We also maintain a Network Operations Control Center ("NOCC") in Dallas,
which is staffed 24 hours a day. The NOCC is responsible for monitoring the
status of all networking facilities, components, applications and equipment
deployed throughout our infrastructure. The NOCC is responsible for operational
communications among internal departments and is also responsible for
communication with external service providers. Sophisticated historical and
statistical analysis software used in the NOCC provides data about the

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quality of service most subscribers are experiencing, as well as information to
help control costs by purchasing additional bandwidth and services only when
needed.

     We maintain our applications on a variety of systems from a number of
vendors. The major applications, such as e-mail and newsgroup access services,
utilize a network of servers which are connected directly to our network
backbone through high-availability network routers. We deploy PC style hardware
in clusters for distributing the load of other applications and providing
fault-tolerance against application failure. These distributed applications are
housed on low cost, easily obtainable components with minimal interdependency.

     Management Information Systems.  Our MIS department uses a near real-time
customer database, billing and flow-through fulfillment system to handle all
customer contact and billing information for the services we provide. The system
maintains access controls for the authentication servers and various
applications. The system also creates customer invoices and automatically
processes credit card charges and automatic check handling. Our PDQ subsidiary
uses a similar system, while our NeoSoft subsidiary uses a database to manage
customer information but provisions services manually. We are transitioning to
an integrated financial and information reporting system that will include all
subsidiaries, automate many additional functions and provide financial,
marketing and management reports.

TECHNOLOGY AND DEVELOPMENT

     Although we do not focus a significant amount of resources on creating new
technologies, we continuously evaluate new technologies and applications for
possible introduction or incorporation into our services. High-speed
connectivity is essential to the commercially viable deployment of new,
value-added services such as Internet telephony, particularly VoIP, video and
audio programming distribution and other high-bandwidth, low-latency
applications. We believe that we are well positioned to efficiently market and
deploy our broadband products and other new, value-added services due to the
high density of our subscriber base.

PROPRIETARY RIGHTS

     General.  We believe that our success is more dependent upon technical,
marketing and customer service expertise than upon our proprietary rights.
However, our success and ability to compete are dependent in part upon
proprietary rights. We rely on a combination of copyright, trademark and trade
secret laws. "Internet America," the Internet America logo, "1-800-Be-A-Geek,"
"PDQ.Net," "ExpressLane DSL," "Airmail.net," "Airnews.net" and "Airweb.net" are
registered service marks of Internet America or its subsidiaries.

     There can be no assurance that the steps we take will be adequate to
prevent the misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to ours.

     Licenses.  We have obtained authorization to use the products of each
software company that are bundled in our front-end software product for Windows
and Macintosh subscribers. The particular applications included in our start-up
package have been licensed when necessary. We intend to maintain or negotiate
renewals of existing software licenses and authorizations as required. We may
also want or need to license other applications in the future. Other
applications included in our start-up package are shareware that we have
obtained permission to distribute or that are from the public domain and are
freely distributable.

COMPETITION

     The Internet services market is extremely competitive. There are no
substantial barriers to entry, and we expect that competition will continue to
intensify. We believe that the primary competitive factors determining success
in this market include:

     - pricing;
     - access speed;
     - a reputation for reliability and service;
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     - effective customer support; and
     - access to capital.

     Our current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical, marketing
and other resources than we have. We currently compete or expect to compete with
the following types of Internet access providers:

     - commercial online service providers, such as America Online;
     - national ISPs, such as EarthLink and Prodigy;
     - national telecommunications providers, such as AT&T, Qwest, WorldCom and
       Sprint;
     - regional telecommunications providers, such as SBC Communications;
     - free and low cost providers, such as Juno and NetZero;
     - numerous regional and local ISPs;
     - computer hardware and software companies, and other technology companies,
       such as IBM, Microsoft, Dell and Gateway;
     - cable operators, such as Time Warner and AT&T;
     - fixed wireless communications companies; and
     - satellite companies.

     We believe that new competitors, such as large computer hardware and
software, media and telecommunications companies, will continue to enter the
Internet services market. In addition, existing competitors are likely to
further increase their emphasis on Internet access services, resulting in even
greater competition. The ability of these competitors or others to enter into
business combinations, strategic alliances or joint ventures or to bundle
services and products with Internet access could put us at a significant
competitive disadvantage.

     The market for broadband services is extremely competitive. The markets we
serve have been flooded with DSL offers from our competitors, some of which have
greater resources than we have and are able to offer DSL products at lower
prices than we offer. We have to rely on local loop providers with which we
compete to provide DSL services to our customers. These providers have begun to
exert pressure on independent ISPs, including raising prices and changing
billing relationships, all of which puts us at a competitive disadvantage. Many
local loop providers have consolidated or failed, causing fewer choices for us
to offer to our customers. Furthermore, other methods of broadband delivery
which we do not currently offer, such as cable or wireless transmission, may be
more successful than DSL.

     Most of the major long-distance companies offer Internet access services
and compete with us. Local exchange carriers, including regional Bell operating
companies and competitive local exchange carriers, have also entered the
Internet service provider market. We believe long-distance and local carriers
are moving toward horizontal integration through acquisitions of, and joint
ventures with, Internet service providers. Accordingly, we expect to experience
increased competition from the traditional telecommunications carriers for both
customers and potential acquisitions. Many of these telecommunications carriers
have greater coverage and market presence, as well as substantial financial,
technical and marketing resources. These telecommunications providers may have
the ability to bundle Internet access with basic local and long-distance voice
services. This bundling of services may make it difficult for us to compete
effectively and may cause us to lower our prices.

     We expect to face competition in the future from companies that provide
connections to consumers' homes, including national and regional
telecommunications providers, cable companies, electric utility companies and
terrestrial and satellite wireless communications companies. For example, cable
television operators offer Internet access through their cable facilities at
significantly faster rates than existing analog modem speeds. These companies
include Internet access in the basic bundle of services, or offer such access
for a nominal additional charge, and could prevent us from delivering Internet
access through wire and cable connections owned by these competitors. This could
negatively affect our business, financial condition and results of operations.

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GOVERNMENT REGULATION

     We are not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations applicable
to businesses and public companies generally. The FCC classifies Internet access
providers as "information service providers" rather than regulated
"telecommunications providers" under the 1996 Telecommunications Act. As such,
we are not subject to regulations that apply to telephone companies and similar
carriers.

     However, changes in the FCC's policies relating to the telecommunications
industry could have a material adverse effect on our business. For example,
several telecommunications carriers are seeking to have Internet communications
regulated by the FCC in the same manner as traditional telecommunications
services. In addition, local telephone carriers are seeking to impose access
fees on Internet access providers similar to those paid by long distance
telephone carriers, generally on a per-minute basis. If imposed, access fees
would increase the cost of the Internet to users, most of whom currently enjoy
unlimited, flat-fee usage. This in turn could slow the growth of the Internet
and cause an adverse effect on our business. The FCC does not currently require
ISPs to contribute to the Universal Service Fund, however, most
telecommunications providers charge these fees to their customers, including us.
Finally, any change in the FCC's policy of not regulating Internet access
providers may cause states to regulate aspects of our business as
telecommunications services.

     Our services are subject to Texas state sales taxes at a rate of 8.25% of
gross receipts. Accordingly, we are responsible for collecting and remitting the
taxes to the state. Effective October 1, 1999, the first $25 per month of the
Internet access service fee collected from each customer is exempt from Texas
sales taxes.

     We may be liable for information disseminated through our network. A number
of lawsuits have sought to impose liability on Internet service providers for
defamatory speech, fraud, privacy violations, and infringement of copyrighted
materials, as well as violations of the Communications Decency Act of 1996.
Although we do not actively monitor the content of our subscribers' Internet
transmissions, a court may determine that we have knowledge of such content
and/or are liable for such content. Although no such claims or lawsuits have
been asserted against us to date, there can be no assurance if we were
prosecuted that we would have any defenses to liability. In addition, measures
to reduce our exposure, as well as existing and proposed federal and state
legislation, may require us to expend substantial resources or discontinue some
product or service offerings.

     Due to the increasing popularity and use of the Internet, it is possible
that additional laws, regulations, or legal precedent may be adopted with
respect to the Internet, covering issues such as content, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation,
copyright infringement and other intellectual property issues. We cannot predict
the impact, if any, that any future legal or regulatory changes or developments
may have on our business, financial condition and results of operations. Changes
in the legal or regulatory environment relating to the Internet access industry,
including changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on our business,
financial condition and results of operations.

EMPLOYEES

     As of June 30, 2001, we employed approximately 200 people, almost all of
whom are full time employees. None of our current employees are represented by a
labor organization, and we consider employee relations to be good.

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EXECUTIVE OFFICERS

     The following table sets forth certain information concerning our executive
officers.

<Table>
<Caption>
NAME                                        AGE                        POSITION
----                                        ---                        --------
<S>                                         <C>   <C>
Jack T. Smith.............................  48    President, Chief Executive Officer and Director
Peter C. Gibbons..........................  37    Executive Vice President and Chief Operating
                                                  Officer
Elizabeth Palmer Daane....................  35    Vice President, General Counsel and Secretary
Bobby R. B. Manson........................  45    Vice President -- Network Operations
David B. Jennings.........................  43    Vice President -- Sales and Marketing
Jonathan L. McSweeney.....................  38    Vice President -- Quality Assurance
</Table>

     Jack T. Smith has served as our President and Chief Executive Officer since
September 5, 2000 and as one of our directors since November 1995. From March
1997 to February 1999, Mr. Smith was President and Chief Operating Officer of
Jayhawk Acceptance Corporation, a specialized financial services company. From
June 1996 to September 1997, Mr. Smith was employed as an independent business
consultant. From 1989 until its acquisition by Primedia, Inc., in June 1996, Mr.
Smith was President and Chief Operating Officer of Westcott Communications, Inc.

     Peter C. Gibbons joined us in October 2000 as Executive Vice President and
Chief Operating Officer and has served as one of our directors since February
2001. Mr. Gibbons previously was employed by Media Highway, an integrated
practice management software provider, where, as Vice President -- Engineering,
he was responsible for all information and network services, as well as the
development and implementation of that company's software products. Prior to
joining Media Highway, Mr. Gibbons was a Regional Territory Manager at ACI US,
Inc., now 4D, Inc., a provider of database software development tools. From 1990
to 1994, he was President, Chief Executive Officer and a director of Software
Engineering Professionals, Inc. Mr. Gibbons began his career as a Systems
Engineer at Texas Instruments.

     Elizabeth Palmer Daane joined us in August 1999 as Vice President, General
Counsel and Secretary. Prior to joining us, Ms. Daane was an attorney at the law
firm of Jackson Walker LLP, where she specialized in corporate and securities
law.

     Bobby R.B. Manson has served as our Vice President -- Network Operations
since January 2000. He has been with us since February 1999 as Director of
Network Engineering and from April 1995 to February 1997 as Vice President of
Network Operations. From April 1998 to February 1999, Mr. Manson was Director of
Operations of Allegiance Telecom, Inc. Prior to that, Mr. Manson was acting Vice
President of Dallas Operations of Winstar Wireless from October 1997 to April
1998 and Regional Director of Operations of Advanced Radio Telecom from February
1997 to October 1997. Prior to joining Internet America in April 1995, Mr.
Manson was a manager in the technical operations department of Metropolitan
Fiber Systems (now a part of MCI WorldCom).

     David B. Jennings joined us in October 2000 as Vice President of Sales and
Marketing. Mr. Jennings was previously employed by Voyager Expanded Learning, a
privately owned learning curricula provider, where he was Senior Vice President
of Sales. Prior to that, he served as Vice President of Sales and Marketing of
TeleService Resources, Inc., a subsidiary of AMR Corporation which provides
outsource call management solutions. Mr. Jennings also spent six years in
various positions at Westcott Communications, Inc., most recently as Director of
Sales and Marketing of all satellite network divisions.

     Jonathan L. McSweeney joined us in January 2001 as Vice President of
Quality Assurance. Mr. McSweeney was previously employed by BeautiControl
Cosmetics, where, as a Senior Packaging Engineer, he was responsible for overall
project management and specification generation for all new product launches and
ongoing product modifications. Prior to that, he was a Senior Account Manager
with Cebal America, a manufacturing company, and a Senior Package Quality
Engineer for Mary Kay Cosmetics. Mr. McSweeney has also held various positions
with Gates Energy, Inc., Tandy Electronics, Inc. and Optical Gauging Products.

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ITEM 2. PROPERTIES

     Our corporate headquarters are located in downtown Dallas, Texas at One
Dallas Center, 350 N. St. Paul, Suite 3000, where all executive functions exist.
We lease approximately 37,000 square feet in Dallas, Texas and approximately
10,600 square feet in Houston, Texas under multiple leases. All systems, sales
and technical support functions take place in our Dallas and Houston facilities.
We also lease a small equipment room facility for our other physical POP in
Louisiana. We do not own any real estate. We believe that all of our facilities
are adequately maintained and suitable for their present use.

ITEM 3. LEGAL PROCEEDINGS

     Our wholly-owned subsidiary, PDQ, and our Vice Chairman, William E. Ladin,
Jr., were named as defendants in a lawsuit filed on April 10, 2000 by Santa Fe
Capital Group, Inc. in the District Court of Santa Fe County, New Mexico. The
plaintiff alleges a finders fee was owed to plaintiff in connection with
Internet America's acquisition of PDQ. Plaintiff asserts claims for breach of
contract, restitution, fraud and unfair trade practices, and alleges damages in
the amount of $960,000. We believe this lawsuit is without merit and intend to
defend it vigorously.

     In July, 2001, a District Court of Dallas County, Texas entered a judgment
against the Company, our former Chief Executive Officer, Michael T. Maples, and
our Chairman, William O. Hunt, in the approximate amount of $3.2 million. The
plaintiff, Cindy Carradine, is a former employee who asserted claims for fraud
in connection with her sale of options to the Company in 1998. Pursuant to
indemnification agreements, the Company will indemnify Messrs. Hunt and Maples
for losses incurred by them in connection with this lawsuit. We believe there is
a basis for this judgment to be overturned on appeal and we intend to pursue
this course of action. However, there can be no assurance that our efforts will
be successful and that the judgment adverse to Internet America will be
overturned. The Company has completed financing to post an appeal bond in this
matter.

     We are involved from time to time in various disputes and litigation in the
ordinary course of business. In our opinion, none of these matters is expected
to have a material adverse effect on our financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 2001.

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                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Our common stock began trading on the Nasdaq National Market on December
10, 1998 under the symbol "GEEK." Before that date, there was no established
public trading market for our common stock. Our common stock was delisted
effective August 15, 2001 and currently trades on the OTC Bulletin Board. The
following table shows for the period indicated the high and low sales prices per
share of the common stock as reported by the Nasdaq National Market.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
Fiscal Year Ended June 30, 2001:
  First Quarter.............................................  $ 5.13   $ 1.94
  Second Quarter............................................    2.31     0.28
  Third Quarter.............................................    2.00     0.31
  Fourth Quarter............................................    0.96     0.38
Fiscal Year Ended June 30, 2000:
  First Quarter.............................................  $23.50   $11.50
  Second Quarter............................................   27.00     8.00
  Third Quarter.............................................   15.25     8.25
  Fourth Quarter............................................    8.69     3.94
</Table>

     At September 27, 2001, there were 205 holders of record of our common
stock.

     We have neither declared nor paid any cash dividends on our capital stock
and do not anticipate paying cash dividends in the foreseeable future. Our
current policy is to retain any earnings in order to finance the expansion of
our operations. Our board of directors will determine future declaration and
payment of dividends, if any, in light of the then-current conditions they deem
relevant.

     On August 6, 2001, we entered into a Stock Purchase Agreement with our
Chief Executive Officer, Jack T. Smith, to sell Mr. Smith 200,000 shares of
Common Stock at $0.42 per share. The shares were issued in reliance on the
exemption from registration under section 4(2) of the Securities Act.

     On October 2, 2000, a nonqualified stock option to purchase 150,000 shares
of common stock at an exercise price of $2.25 per share was granted to our Chief
Operating Officer, Peter C. Gibbons.

                                        9
<PAGE>   12

ITEM 6. SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                        YEAR ENDED JUNE 30,
                                   --------------------------------------------------------------
                                      2001         2000         1999         1998         1997
                                   ----------   ----------   ----------   ----------   ----------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA
REVENUES:
  Internet Services..............  $   34,642   $   28,893   $   18,010   $   14,037   $   11,054
  Other..........................         233          452          109           41          249
                                   ----------   ----------   ----------   ----------   ----------
          Total..................      34,875       29,345       18,119       14,078       11,303
                                   ----------   ----------   ----------   ----------   ----------
OPERATING COSTS AND EXPENSES:
  Connectivity and operations....      22,013       17,154        8,801        7,418        7,316
  Sales and marketing............       3,348        5,561        6,045        1,925        2,181
  General and administrative.....       7,713        6,816        3,920        2,948        3,282
  Provision for bad debt
     expense.....................       3,283          688          324           --           --
  Depreciation and
     amortization................      15,787       11,995        1,685        1,739        1,800
  Impairment of equipment........          --           --           --           --          615
  Gain on vendor settlement......      (2,395)          --           --           --           --
  Accrued lawsuit expense........       3,200           --           --           --           --
                                   ----------   ----------   ----------   ----------   ----------
          Total..................      52,949       42,214       20,775       14,030       15,194
                                   ----------   ----------   ----------   ----------   ----------
LOSS FROM OPERATIONS.............     (18,074)     (12,869)      (2,656)          48       (3,891)
INTEREST INCOME..................          73          108          405           --           --
INTEREST EXPENSE.................         (66)         (73)        (220)        (670)        (518)
                                   ----------   ----------   ----------   ----------   ----------
NET LOSS BEFORE INCOME TAX
  BENEFIT........................     (18,067)     (12,834)      (2,471)        (622)      (4,409)
                                   ----------   ----------   ----------   ----------   ----------
INCOME TAX BENEFIT (EXPENSE).....           0            8            8          (24)          --
                                   ----------   ----------   ----------   ----------   ----------
NET LOSS.........................  $  (18,067)  $  (12,826)  $   (2,463)  $     (646)  $   (4,409)
                                   ==========   ==========   ==========   ==========   ==========
NET LOSS PER COMMON SHARE:
  BASIC..........................  $    (1.82)  $    (1.49)  $    (0.45)  $    (0.16)  $    (1.16)
                                   ==========   ==========   ==========   ==========   ==========
  DILUTED........................  $    (1.82)  $    (1.49)  $    (0.45)  $    (0.16)  $    (1.16)
                                   ==========   ==========   ==========   ==========   ==========
WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING:
  BASIC..........................   9,906,502    8,613,127    5,533,670    3,914,856    3,800,443
                                   ==========   ==========   ==========   ==========   ==========
  DILUTED........................   9,906,502    8,613,127    5,533,670    3,914,856    3,800,443
                                   ==========   ==========   ==========   ==========   ==========
BALANCE SHEET DATA:
  Cash and cash equivalents......       1,513        1,374        5,846          618           --
  Intangible assets, net.........      18,654       32,885        9,196          786          326
  Total assets...................      23,913       39,287       18,913        4,062        3,114
  Long-tern debt.................           0           54          152        1,182          308
  Total stockholders' equity.....      11,911       29,340       11,625       (6,688)      (4,681)
OTHER DATA:
  EBITDA.........................      (2,287)        (874)        (971)       1,797        2,091
  Cash flows related to:
     Operating activities........       1,091       (2,382)        (659)       2,025       (1,430)
     Investing activities........        (491)      (1,695)     (11,366)        (897)      (1,513)
     Financing activities........        (461)          57       17,253         (531)       2,864
</Table>

                                        10
<PAGE>   13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

     Internet America is an Internet service provider ("ISP") that provides a
wide array of Internet services tailored to meet the needs of individual and
business subscribers. We afford our subscribers a high quality Internet
experience with fast, reliable service and responsive customer care. As of June
30, 2001, we served approximately 147,000 subscribers in the southwestern United
States.

     The growth of the Internet has resulted in increased competition for
existing services and increased demand for new products and services. Increases
in demand and a surge in Internet users have fostered an increase in the number
of ISPs providing access to the Internet. Our competitors advertise in our
existing markets with aggressive new promotions or offers of free Internet
access. We believe we are well positioned to deal with these competitive forces
by continuing to build high user density and maintaining a rational business
plan.

     High user density is the cornerstone of our business strategy. We will
continue to pursue an ambitious growth strategy, but in a controlled manner. Our
goal is to rapidly create high user density in specific markets to achieve and
maintain positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization).

     Recent technological developments have facilitated the increased adoption
of broadband access via mechanisms such as cable, fixed/mobile wireless, and
copper pair allowing voice, video, and data to occur simultaneously over one
connection. The emergence of low-cost broadband solutions will significantly
impact the ability of many ISPs to compete. We are committed to being a leader
in offering cost effective broadband solutions to individuals and businesses.
High-speed connectivity is essential to the commercially viable deployment of
new, value-added services such as Internet telephony, particularly Voice Over
Internet Protocol (VoIP), video and audio programming distribution and other
high bandwidth applications. We believe we are well positioned to efficiently
market and deploy our broadband products due to the high density of our
subscriber base.

     Given the high level of competition in the industry for new subscribers, we
will be more selective with investing in direct response advertising. We plan to
concentrate our direct response advertising more heavily in markets where we
have established branding than in new markets.

     The execution of our acquisition strategy has increased our amortization
expense as the costs of purchasing the subscriber bases are written off. In the
coming quarters we expect to report net losses, primarily due to amortization
expense, while generating positive EBITDA. There can be no assurance we will be
able to achieve or sustain positive EBITDA or net income in the future. Recently
issued Accounting Pronouncements may impact the amortization or impairment
charges relative to the intangible assets. See Note 1 of the Notes to
Consolidated Financial Statements, Page F-9.

     We have an accumulated deficit of $43.6 million at June 30, 2001 and have
had annual operating losses since inception as a result of building network
infrastructure and rapidly increasing market share.

SIGNIFICANT ACQUISITIONS

     We have completed several acquisitions, the most significant of which were
PDQ.Net, Incorporated ("PDQ") and NeoSoft, Inc. ("NeoSoft"). On November 22,
1999, we acquired all of the outstanding shares of PDQ, a Houston-based ISP, in
exchange for 2,425,000 shares of Common Stock. We also issued options to
purchase 352,917 shares of Common Stock with a weighted average exercise price
of $1.62 per share in replacement of all of the outstanding stock options of
PDQ. The transaction was accounted for as a purchase. On June 30, 1999, we
acquired all the outstanding common stock of NeoSoft, an ISP in Houston, Texas
for $8.3 million. The transaction was accounted for as a purchase. PDQ and
NeoSoft are wholly owned subsidiaries and constitute the majority of our Houston
operations.

                                        11
<PAGE>   14

STATEMENT OF OPERATIONS

     Internet services revenue is derived from individual dial-up Internet
access, including analog and ISDN access, DSL access, dedicated connectivity,
bulk dial-up access, Web hosting services, and value-added services, such as
multiple e-mail boxes and personalized e-mail addresses.

     A brief description of each element of our operating expenses follows:

          Connectivity and operations expenses consist primarily of setup costs
     for new subscribers, telecommunication costs, and wages of network
     operations and customer support personnel. Connectivity costs include (i)
     fees paid to telephone companies for subscribers' dial-up connections to
     our network and (ii) fees paid to backbone providers for connections from
     our network to the Internet.

          Sales and marketing expenses consist primarily of creative and
     production costs, costs of media placement, management salaries and call
     center wages. Advertising costs are expensed as incurred.

          General and administrative expenses consist primarily of
     administrative salaries, professional services, rent and other general
     business expenses.

          Depreciation is computed using the straight line method over the
     estimated useful lives of the assets. Data communications equipment,
     computers, data servers and office equipment are depreciated over three
     years. We depreciate furniture, fixtures and leasehold improvements over
     five years. Purchased subscriber bases and related goodwill are amortized
     over three years. The assets and liabilities acquired in business
     combinations are recorded at estimated fair values. The excess of the cost
     of the net assets acquired over their fair value is recorded as goodwill
     and amortized over an estimated life of three years.

     Our business is not subject to any significant seasonal influences.

RESULTS OF OPERATIONS

     The following table shows financial data for the years ended June 30, 2001
and 2000. Operating results for any period are not necessarily indicative of
results for any future period. Dollar amounts are shown in thousands (except per
share data).

<Table>
<Caption>
                                                         YEAR ENDED              YEAR ENDED
                                                        JUNE 30, 2001           JUNE 30, 2000
                                                    ---------------------   ---------------------
                                                                   % OF                    % OF
                                                     (000'S)     REVENUES    (000'S)     REVENUES
                                                    ----------   --------   ----------   --------
<S>                                                 <C>          <C>        <C>          <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
  Internet services...............................  $   34,642     99.3%    $   28,893     98.5%
  Other...........................................         233      0.7%           452      1.5%
                                                    ----------    -----     ----------    -----
          Total...................................      34,875    100.0%        29,345    100.0%
                                                    ----------    -----     ----------    -----
OPERATING COSTS AND EXPENSES:
  Connectivity and operations.....................      22,013     63.1%        17,154     58.5%
  Sales and marketing.............................       3,348      9.6%         5,561     19.0%
  General and administrative......................       7,714     22.1%         6,816     23.2%
  Provision for bad debt expense..................       3,282      9.4%           688      2.3%
  Depreciation and amortization...................      15,787     45.3%        11,995     40.9%
  Gain on vendor settlement.......................      (2,395)    (6.9)%           --       --
  Accrued lawsuit expense.........................       3,200      9.2%            --       --
                                                    ----------    -----     ----------    -----
          Total...................................      52,949    151.8%        42,214    143.9%
                                                    ----------    -----     ----------    -----
OPERATING LOSS....................................     (18,074)   (51.8)%      (12,869)   (43.9)%
INTEREST INCOME, NET..............................           7      0.0%            35      0.1%
                                                    ----------    -----     ----------    -----
LOSS BEFORE INCOME TAX............................     (18,067)   (51.8)%      (12,834)   (43.7)%
INCOME TAX BENEFIT................................          --      0.0%             8      0.0%
                                                    ----------    -----     ----------    -----
</Table>

                                        12
<PAGE>   15

<Table>
<Caption>
                                                         YEAR ENDED              YEAR ENDED
                                                        JUNE 30, 2001           JUNE 30, 2000
                                                    ---------------------   ---------------------
                                                                   % OF                    % OF
                                                     (000'S)     REVENUES    (000'S)     REVENUES
                                                    ----------   --------   ----------   --------
<S>                                                 <C>          <C>        <C>          <C>
NET LOSS..........................................  $  (18,067)   (51.8)%   $  (12,826)   (43.7)%
                                                    ==========    =====     ==========    =====
NET LOSS PER COMMON SHARE:
  BASIC...........................................  $    (1.82)             $    (1.49)
                                                    ==========              ==========
  DILUTED.........................................  $    (1.82)             $    (1.49)
                                                    ==========              ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
  BASIC...........................................   9,906,502               8,613,127
  DILUTED.........................................   9,906,502               8,613,127
OTHER DATA:
  Subscribers at end of period....................     147,000                 152,000
  Number of employees at end of year..............         200                     280
  EBITDA(1).......................................  $   (2,287)             $     (874)
  EBITDA margin(2)................................        (6.6)%                  (3.0)%
CASH FLOW DATA:
  Cash flow from (used in) operations.............  $    1,091              $   (2,832)
  Cash flow used in investing activities..........  $     (491)             $   (1,695)
  Cash flow from (used in) financing activities...  $     (461)             $       56
</Table>

---------------

(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
    consists of revenue less connectivity and operating expense, sales and
    marketing expense, and general and administrative expense. EBITDA is
    provided because it is a measure commonly used by investors to analyze and
    compare companies on the basis of operating performance. EBITDA is presented
    to enhance an understanding of our operating results and is not intended to
    represent cash flows or results of operations in accordance with GAAP for
    the periods indicated. EBITDA is not a measurement under GAAP and is not
    necessarily comparable with similarly titled measures for other companies.

(2) EBITDA margin represents EBITDA as a percentage of total revenue.

YEAR ENDED JUNE 30, 2001 COMPARED TO JUNE 30, 2000

     Total revenue.  Total revenue increased by $5.5 million, or 18.8%, to $34.9
million in fiscal 2001 from $29.3 million in fiscal 2000. The majority of the
increase in total revenue is attributable to the increase in internet services
revenue of $5.7 million, or 19.9%, to $34.6 million in fiscal 2001 from $28.9
million in the prior year. The majority of the increase in internet services
revenue is attributable to the acquisition of PDQ and increased sales of our DSL
products, which we began offering during last fiscal year. Other revenue
decreased by $219,000 to $233,000 for the year ended June 30, 2001, from
$452,000 last fiscal year. The decrease in other revenue is due to a decrease in
peripheral equipment sales. We expect revenue to decrease in future periods as a
result of the transfer of some of our DSL customers to one of our DSL providers,
Covad Communications ("Covad") as part of a settlement agreement with Covad.

     Connectivity and operations.  Connectivity and operations expenses
increased by $4.9 million, or 28.3%, to $22.0 million for fiscal 2001 from $17.2
million for fiscal 2000. As a percentage of total revenue, connectivity and
operations expenses increased to 63.1% for the current year from 58.5% for the
previous year. The increase as a percentage of revenue is due primarily to the
development of our DSL products. We expect these expenses to decrease in future
periods as a result of the settlement with Covad and our consolidation of
operations.

     Sales and marketing.  Sales and marketing expenses decreased by $2.2
million, or 39.8%, to $3.3 million for fiscal 2001 from $5.6 million for the
prior fiscal year. Sales and marketing expense decreased as a percentage of
revenue to 9.6% for the current year from 18.9% for the previous year. The
majority of the

                                        13
<PAGE>   16

decrease relates to a reduction of television advertising in all markets. In
addition, we received co-marketing credits of $280,000 from one of our DSL
providers in connection with successfully installed DSL services. We expect
these expenses to decrease in future periods as a result of a decreased emphasis
on direct response marketing programs.

     General and administrative.  General and administrative expenses increased
by $0.9 million, or 13.2%, to $7.7 million for fiscal 2001 from $7.5 million for
fiscal 2000. General and administrative expenses as a percentage of total
revenue decreased to 22.1% in fiscal 2001 from 25.6% in the prior year. General
and administrative expense for the year ended June 30, 2001 includes $567,500 in
non-cash compensation expense related to an officer's stock purchase agreement.

     Provision for bad debt expense.  A provision for bad debts of $3.3 million
was recorded during this fiscal year due to an evaluation of the collectibility
of accounts receivable, including consumer accounts. Delinquent accounts deemed
uncollectible were disconnected and written off, although we continue collection
efforts on such accounts.

     Depreciation and amortization.  Depreciation and amortization expense
increased by $3.8 million, or 31.7%, to $15.8 million for fiscal 2001 from $12.0
million for fiscal 1999. All of the increase relates to amortization of goodwill
and cost of acquired subscribers arising for the acquisition of PDQ. We believe
future amortization of these amounts and a possible impairment charge will be
affected by recently issued accounting pronouncements as described in Note 1 of
the Notes to Consolidated Financial Statements, Page F-9.

     Gain on vendor settlement.  The Company recognized a gain of $2.4 million
in connection with the settlement agreement with Covad.

     Accrued lawsuit expense.  A charge of $3.2 million was recorded this fiscal
year due to the adverse judgment in the Carradine litigation.

     Interest income and expense.  We realized $7,000 of interest income for
fiscal 2001 compared to $35,000 during fiscal 2000. The proceeds from our
initial public offering were primarily expended in acquisitions and marketing,
resulting in a decrease in interest income. We expect interest expense to
increase in future periods as a result of the appeal bond financing described in
"Liquidity and Capital Resources," below.

                                        14
<PAGE>   17

     The following table shows financial data for the years ended June 30, 2000
and 1999. Operating results for any period are not necessarily indicative of
results for any future period. Dollar amounts are shown in thousands (except per
share data).

<Table>
<Caption>
                                                         YEAR ENDED              YEAR ENDED
                                                        JUNE 30, 2000           JUNE 30, 1999
                                                    ---------------------   ---------------------
                                                                   % OF                    % OF
                                                     (000'S)     REVENUES    (000'S)     REVENUES
                                                    ----------   --------   ----------   --------
<S>                                                 <C>          <C>        <C>          <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
  Internet services...............................  $   28,893     98.5%    $   18,010     99.4%
  Other...........................................         452      1.5%           109      0.6%
                                                    ----------    -----     ----------    -----
          Total...................................      29,345    100.0%        18,119    100.0%
                                                    ----------    -----     ----------    -----
OPERATING COSTS AND EXPENSES:
  Connectivity and operations.....................      17,154     58.5%         8,801     48.6%
  Sales and marketing.............................       5,561     19.0%         6,045     33.4%
  General and administrative......................       6,816     23.2%         3,920     21.6%
  Provision for bad debt expense..................         688      2.3%           325      1.8%
  Depreciation and amortization...................      11,995     40.9%         1,685      9.3%
                                                    ----------    -----     ----------    -----
          Total...................................      42,214    143.9%        20,776    114.7%
                                                    ----------    -----     ----------    -----
OPERATING LOSS....................................     (12,869)   (43.9)%       (2,657)   (14.7)%
INTEREST INCOME, NET..............................          35      0.1%           185      1.0%
                                                    ----------    -----     ----------    -----
LOSS BEFORE INCOME TAX............................     (12,834)   (43.7)%       (2,472)   (13.6)%
INCOME TAX BENEFIT................................           8      0.0%             8      0.0%
                                                    ----------    -----     ----------    -----
NET LOSS..........................................  $  (12,826)   (43.7)%   $   (2,464)   (13.6)%
                                                    ==========    =====     ==========    =====
NET LOSS PER COMMON SHARE:
  BASIC...........................................  $    (1.49)             $    (0.45)
                                                    ==========              ==========
  DILUTED.........................................  $    (1.49)             $    (0.45)
                                                    ==========              ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
  BASIC...........................................   8,613,127               5,533,670
  DILUTED.........................................   8,613,127               5,533,670
OTHER DATA:
  Subscribers at end of period....................     152,000                 100,000
  Number of employees at end of year..............         280                     190
  EBITDA(1).......................................  $     (874)             $     (972)
  EBITDA margin(2)................................        (3.0)%                  (5.4)%
CASH FLOW DATA:
  Cash flow used in operations....................  $   (2,832)             $     (659)
  Cash flow used in investing activities..........  $   (1,695)             $  (11,366)
  Cash flow from financing activities.............  $       56              $   17,253
</Table>

YEAR ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999

     Total revenue.  Total revenue increased by $11.2 million, or 62.0%, to
$29.3 million in fiscal 2000 from $18.1 million in fiscal 1999. The majority of
the increase in total revenue is attributable to the increase in internet
services revenue of $10.9 million, or 60.4%, to $28.9 million in fiscal 2000
from $18.0 million in the prior year. Approximately $10.3 million of the
increase in internet services revenue is attributable to the acquisitions of PDQ
and NeoSoft, while the remainder is attributable to other growth of our customer
base. We began marketing our Expresslane DSL products to consumers and
businesses in fiscal 2000, which contributed to the increase in average revenue
per subscriber. Other revenue increased by $343,000, or

                                        15
<PAGE>   18

315.0%, to $452,000 for the current fiscal year from $109,000 for the prior
fiscal year. The increase in other revenue is primarily due to increased
peripheral equipment sales and advertising revenue generated from our web site.

     Connectivity and operations.  Connectivity and operations expenses
increased by $8.4 million, or 94.9%, to $17.2 million for fiscal 2000 from $8.8
million for fiscal 1999. As a percentage of total revenue, connectivity and
operations expenses increased to 58.5% for fiscal 2000 from 48.6% for the
previous year. The increase as a percentage of revenue is due primarily to
additional connectivity costs related to our entry into new markets and the
development of our DSL products.

     Sales and marketing.  Sales and marketing expenses decreased by $484,000,
or (8%), to $5.6 million for fiscal 2000 from $6.0 million for the prior fiscal
year. Sales and marketing expense decreased as a percentage of revenue to 19.0%
for fiscal 2000 from 33.4% for the previous year. These reductions were achieved
by restricting advertising to markets with established branding and utilizing a
market development fund provided by a DSL service provider.

     General and administrative.  General and administrative expenses increased
by $3.3 million, or 76.8%, to $7.5 million for fiscal 2000 from $4.2 million for
fiscal 1999. General and administrative expenses as a percentage of total
revenue increased to 25.6% in fiscal 2000 from 23.4% in the prior year,
primarily due to administrative support related to our growth strategy.

     Depreciation and amortization.  Depreciation and amortization expense
increased by $10.3 million, or 612.0%, to $12.0 million for fiscal 2000 from
$1.7 million for fiscal 1999. Approximately $10.1 million of the increase
relates to amortization of goodwill arising for the acquisitions of PDQ and
NeoSoft.

     Interest income.  We realized $108,000 of interest income for fiscal 2000
compared to $405,000 during fiscal 1999. The income was generated from the
investment of proceeds from our December 1998 initial public offering, a
substantial part of which was expended as part of our acquisition strategy
during fiscal 2000.

     Interest expense.  Interest expense decreased by $147,000, or 66.9%, to
$73,000 for fiscal 2000 from $220,000 for the prior year. Upon completion of our
initial public offering, we repaid substantially all outstanding indebtedness,
resulting in a continuing reduction in interest expense.

LIQUIDITY AND CAPITAL RESOURCES

     We have financed our operations to date primarily through (i) public and
private sales of equity securities, (ii) loans from shareholders and third
parties and (iii) revenue collections. We completed an initial public offering
in December 1998 and received net proceeds of approximately $19.8 million. We
used a portion of the proceeds of the offering to repay approximately $2.1
million in shareholder notes and certain other indebtedness.

     Cash provided by operations totaled $1,091,000 for fiscal 2001 compared to
cash used in operating activities of $2.8 million for fiscal 2000. Cash provided
by operating activities was impacted by a gain of $2.4 million as a result of a
settlement agreement with Covad, one of our DSL providers. Under the agreement,
we satisfied approximately $3.6 million in liabilities by transferring certain
DSL accounts to Covad and entering into a promissory note with Covad. At June
30, 2001, the balance on this note was $553,792. The note is secured by our
accounts receivable. This agreement will result in DSL services offered to those
customers no longer being made available from Internet America and will
therefore reduce revenues in future periods. Cash provided by operations was
also impacted by the $3.2 million non-cash charge related to the adverse
judgment in the Carradine litigation.

     Cash used in investing activities was $491,000 for fiscal 2001, and
consisted of routine purchases of property and equipment to expand and upgrade
our network. We anticipate additional cost savings as equipment leases acquired
during previous acquisitions expire, are bought out or are otherwise terminated.

     For fiscal 2001, cash used in financing activities totaled $461,000, which
consisted of proceeds of $71,000 from the exercise of stock options by option
holders less payments of $532,000 to service long-term debt and capital lease
obligations.
                                        16
<PAGE>   19

     On September 18, 2001, we entered into an agreement with our Chairman,
William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter
of credit in the approximate amount of $3.3 million to appeal a judgment entered
against the Company, Mr. Hunt and a former executive officer of the Company.
Internet America collateralized a portion of the appeal bond by placing $200,000
in a short term certificate of deposit required to be in place for the duration
of the appeal. There will be one time transaction costs to post this appeal
bond. Annual financing costs for this bond will be up to $369,000.

     In addition, if the letter of credit is funded in the full amount or in a
reduced amount to pay a judgment or settlement, Internet America would enter
into a convertible secured promissory note for the funded amount. Interest would
accrue at 12% per annum and be payable quarterly for the first two years after
issuance. If the note was not converted within two years of issuance, the
conversion option would terminate and all principal and unpaid accrued interest
would be payable in four quarterly payments over the third year. In connection
with the agreement, we granted Mr. Hunt a security interest in our assets other
than accounts receivable.

     We estimate that cash on hand of $1.5 million at June 30, 2001 along with
anticipated revenue collections and the appeal bond financing discussed above
will be sufficient for meeting our working capital needs for fiscal 2002 with
regard to continuing operations in existing markets. Additional financing will
be required to fund acquisitions or expansion into new markets.

     If additional capital financing arrangements, including public or private
sales of debt or equity securities, or additional borrowings from commercial
banks, are insufficient or unavailable, or if we experience shortfalls in
anticipated revenues or increases in anticipated expenses, we will modify our
operations and growth strategies to match available funding. In such case, it is
likely that our advertising expenditures would be downscaled to a level where
positive cash flows are generated from operations. We have no long term
advertising commitments, and our scheduled television commercials may be
cancelled with less than two weeks notice.

     In July 2001, the Financial Accounting Standard Board issued Statement No.
141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS No.
142), "Goodwill and Other Intangible Assets." SFAS 142 includes requirements to
test goodwill and indefinite lived intangible assets for impairment rather than
amortize them. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.

     SFAS No. 142 requires that intangible assets be periodically evaluated for
impairment based on fair market value. The Company has historically evaluated
its intangible assets for impairment based on projected future cash flows.

     The Company is currently evaluating the impact that SFAS No. 142 will have
on its financial statements, specifically the potential impact on the balance of
shareholders' equity and amortization expense. If the Company were to elect to
early adopt SFAS No. 142 during the first quarter of the fiscal year ending June
30, 2002, a significant impairment charge would likely be recorded against
intangible assets included in the Company's balance sheet at June 30, 2001. At
the latest, the Company is required to adopt SFAS No. 142 by July 1, 2002, and a
significant impairment charge may be recorded at that time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of Internet America and Subsidiaries are attached
hereto as pages F-1 through F-17 and include our Balance Sheets as of June 30,
2001 and 2000, Statements of Operations for the years ended June 30, 2001 and
2000, Statements of Shareholders' Equity for the years ended June 30, 2001 and
2000, Statements of Cash Flows for the years ended June 30, 2001 and 2000, and
the Notes to the
                                        17
<PAGE>   20

Consolidated Financial Statements, together with a report thereon of Deloitte &
Touche LLP, dated August 31, 2001, except as to the second, third and fourth
paragraphs of Note 12, which is September 18, 2001.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.

                                        18
<PAGE>   21

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Information required by this Item is incorporated by reference from the
sections entitled "Election of Directors," and "Section 16 Requirements" in the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.
Information about Executive Officers of the Company is included in Item 1 of
Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

     Information required by this Item is incorporated by reference from the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 2001 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this Item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Shareholders" in
the Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this Item is incorporated by reference from the
section entitled "Related Party Transactions" in the Company's Proxy Statement
for its 2001 Annual Meeting of Shareholders.

                                    PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

     (a) The following exhibits are either provided with this Report or are
incorporated herein by reference:

<Table>
<Caption>
        EXHIBIT                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            Agreement and Plan of Merger dated as of June 30, 1999 by
                         and among Internet America, Inc., NeoSoft, Inc. and certain
                         of the shareholders of NeoSoft, Inc.(1)
          2.4            Agreement and Plan of Merger dated as of September 12, 1999
                         by and among Internet America, Inc., GEEK Houston II, Inc.,
                         PDQ.Net, Incorporated and certain of the shareholders of
                         PDQ.Net, Incorporated(2)
          3.1            Internet America, Inc.'s Articles of Incorporation(3)
          3.2            Internet America, Inc.'s Bylaws, as amended(4)
          4.1            Specimen Common Stock certificate(5)
          4.2            Pages from the Articles and Bylaws that define the rights of
                         holders of Common Stock(6)
          4.3            Stock Purchase Agreement dated September 5, 2000 by and
                         between Internet America, Inc. and Jack T. Smith(7)
          4.4            Promissory Note dated September 5, 2000 by and between
                         Internet America, Inc. and Jack T. Smith(7)
          4.5            Pledge and Security Agreement dated September 5, 2000 by and
                         between Internet America, Inc. and Jack T. Smith(7)
          4.6            Stock Purchase Agreement dated August 6, 2001 by and between
                         Internet America, Inc. and Jack T. Smith*
</Table>

                                        19
<PAGE>   22

<Table>
<Caption>
        EXHIBIT                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          4.7            Promissory Note dated August 6, 2001 by and between Internet
                         America, Inc. and Jack T. Smith*
          4.8            Pledge and Security Agreement dated August 6, 2001 by and
                         between Internet America, Inc. and Jack T. Smith*
          4.9            Letter of Credit Security Commitment Agreement dated
                         September 18, 2001 by and between Internet America, Inc. and
                         William O. Hunt*
          4.10           Security Agreement dated September 18, 2001 by and between
                         Internet America, Inc. and William O. Hunt*
          4.11           Registration Rights Agreement dated September 18, 2001 by
                         and between Internet America, Inc. and William O. Hunt*
         10.1            Consulting Agreement dated April 20, 1999 by and between
                         Internet America, Inc. and Gary L. Corona(8)
         10.2            Financial Advisory Agreement dated April 20, 1999 by and
                         among Carl Westcott LLC and Internet America
         10.3            Letter Agreement dated September 5, 2000 by and between
                         Internet America, Inc. and Michael T. Maples(7)
         10.4            Letter Agreement dated September 5, 2000 by and between
                         Internet America, Inc. and Jack T. Smith(7)
         10.5            Stock Purchase Agreement dated September 5, 2000 by and
                         between Internet America, Inc. and Jack T. Smith(7)
         10.6            Promissory Note dated September 5, 2000 by and between
                         Internet America, Inc. and Jack T. Smith(7)
         10.7            Pledge and Security Agreement dated September 5, 2000 by and
                         between Internet America, Inc. and Jack T. Smith(7)
         10.8            Stock Purchase Agreement dated August 6, 2001 by and between
                         Internet America, Inc. and Jack T. Smith, filed herein as
                         Exhibit 4.6
         10.9            Promissory Note dated August 6, 2001 by and between Internet
                         America, Inc. and Jack T. Smith, filed herein as Exhibit 4.7
         10.10           Pledge and Security Agreement dated August 6, 2001 by and
                         between Internet America, Inc. and Jack T. Smith, filed
                         herein as Exhibit 4.8
         10.11           Letter of Credit Security Commitment Agreement dated
                         September 18, 2001 by and between Internet America, Inc. and
                         William O. Hunt, filed herein as Exhibit 4.9
         10.12           Security Agreement dated September 18, 2001 by and between
                         Internet America, Inc. and William O. Hunt, filed herein as
                         Exhibit 4.10
         10.13           Registration Rights Agreement dated September 18, 2001 by
                         and between Internet America, Inc. and William O. Hunt,
                         filed herein as Exhibit 4.11
         11.1            Statement regarding computation of per share earnings(9)
         21.1            Subsidiaries list*
         23.1            Consent of Deloitte & Touche LLP*
</Table>

---------------

 *  Filed herewith.

(1) Previously filed as an exhibit to Internet America's Current Report on Form
    8-K, as amended, filed on July 15, 1999 and incorporated herein by
    reference.

(2) Previously filed as Exhibit A to the preliminary proxy statement and
    definitive proxy statement filed on October 7, 1999 and October 19, 1999,
    respectively, and incorporated herein by reference.

                                        20
<PAGE>   23

(3) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2 as amended (file no. 333-59527) initially filed on July 21,
    1998, and incorporated herein by reference.

(4) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-59527) initially filed on July 21,
    1998, and Quarterly Report on Form 10-QSB filed on November 15, 1999, and
    incorporated herein by reference.

(5) Previously filed as an exhibit to Internet America's Current Report on Form
    8-K, as amended, filed on February 16, 1999, and incorporated herein by
    reference.

(6) Previously filed as an Exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-95179), initially filed on January
    21, 2000, and incorporated herein by reference.

(7) Previously filed as an exhibit to Internet America's Annual Report on Form
    10-KSB filed on September 26, 2000, and incorporated herein by reference.

(8) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-78615) filed on May 17, 1999, and
    incorporated herein by reference.

(9) Statement omitted because not applicable or because the required information
    is contained in the Financial Statements or Notes thereto.

     (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of fiscal 2001.

                                        21
<PAGE>   24

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of the 28th day of September, 2001.

                                            INTERNET AMERICA, INC.

                                            By:      /s/ JACK T. SMITH
                                              ----------------------------------
                                              Jack T. Smith
                                              President, Chief Executive Officer
                                                and Director

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<Table>
<Caption>
                 SIGNATURES                                  TITLE                         DATE
                 ----------                                  -----                         ----
<S>                                            <C>                                  <C>
              /s/ JACK T. SMITH                President, Chief Executive Officer   September 28, 2001
---------------------------------------------    and Director (Principal
                Jack T. Smith                    Executive Officer)

             /s/ WILLIAM O. HUNT               Chairman                             September 28, 2001
---------------------------------------------
               William O. Hunt

          /s/ WILLIAM E. LADIN, JR.            Vice Chairman                        September 28, 2001
---------------------------------------------
            William E. Ladin, Jr.

             /s/ GARY L. CORONA                Director                             September 28, 2001
---------------------------------------------
               Gary L. Corona

            /s/ PETER C. GIBBONS               Director                             September 28, 2001
---------------------------------------------
              Peter C. Gibbons
</Table>

                                        22
<PAGE>   25

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<S>                                                            <C>
Independent Auditors' Report................................   F-2
Consolidated Financial Statements:
  Consolidated Balance Sheets...............................   F-3
  Consolidated Statements of Operations.....................   F-4
  Consolidated Statements of Shareholders' Equity
     (Deficit)..............................................   F-5
  Consolidated Statements of Cash Flows.....................   F-6
  Notes to Consolidated Financial Statements................   F-7
</Table>

                                       F-1
<PAGE>   26

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Internet America, Inc. and
Subsidiaries

     We have audited the accompanying consolidated balance sheets of Internet
America, Inc. and subsidiaries (the "Company") as of June 30, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of June 30, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

August 31, 2001, except as to the
  second, third and fourth paragraphs of
  Note 12 which is September 18, 2001

                                       F-2
<PAGE>   27

                    INTERNET AMERICA, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                       JUNE 30,
                                                              ---------------------------
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS


CURRENT ASSETS:
  Cash and cash equivalents.................................  $  1,513,123   $  1,373,786
  Accounts receivable, net of allowance for uncollectible
     accounts of $1,857,790 and $322,327 in 2001 and 2000,
     respectively...........................................     1,726,551      2,162,252
  Prepaid expenses and other current assets.................       375,818        148,772
                                                              ------------   ------------
          Total current assets..............................     3,615,492      3,684,810
PROPERTY AND EQUIPMENT -- Net...............................     1,642,763      2,717,715
OTHER ASSETS -- Net.........................................    18,654,246     32,884,893
                                                              ------------   ------------
          TOTAL.............................................  $ 23,912,501   $ 39,287,418
                                                              ============   ============

                     LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)


CURRENT LIABILITIES:
  Trade accounts payable....................................  $  2,046,823   $  2,573,700
  Accrued liabilities.......................................     1,484,940      1,850,088
  Deferred revenue..........................................     4,367,516      4,839,824
  Current portion of capital lease obligations..............       178,745        247,146
  Current maturities of long-term debt......................       603,557        176,267
                                                              ------------   ------------
          Total current liabilities.........................     8,681,581      9,687,025
CAPITAL LEASE OBLIGATIONS, net of current portion...........        19,899        206,894
LONG-TERM DEBT, net of current portion......................           418         53,932
ACCRUED LAWSUIT EXPENSE.....................................     3,300,000             --
                                                              ------------   ------------
          Total liabilities.................................    12,001,898      9,947,851
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
  Common stock, $.01 par value; 40,000,000 shares
     authorized, 9,977,278 and 9,705,798 issued and
     outstanding in 2001 and 2000, respectively.............        99,773         97,059
  Additional paid-in capital................................    56,064,762     54,743,828
  Note receivable from a shareholder and officer of the
     Company................................................      (685,500)
  Accumulated deficit.......................................   (43,568,432)   (25,501,320)
                                                              ------------   ------------
          Total shareholders' equity........................    11,910,603     29,339,567
                                                              ------------   ------------
          TOTAL.............................................  $ 23,912,501   $ 39,287,418
                                                              ============   ============
</Table>

                See notes to consolidated financial statements.

                                       F-3
<PAGE>   28

                    INTERNET AMERICA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                 YEAR ENDED JUNE 30,
                                                      -----------------------------------------
                                                          2001           2000          1999
                                                      ------------   ------------   -----------
<S>                                                   <C>            <C>            <C>
REVENUES:
  Internet Services.................................  $ 34,642,131   $ 28,893,430   $18,009,618
  Other.............................................       232,722        452,044       109,412
                                                      ------------   ------------   -----------
          Total.....................................    34,874,853     29,345,474    18,119,030
                                                      ------------   ------------   -----------
OPERATING COSTS AND EXPENSES:
  Connectivity and operations.......................    22,013,190     17,154,351     8,800,924
  Sales and marketing...............................     3,347,788      5,560,909     6,044,762
  General and administrative........................     7,713,447      6,815,966     3,919,728
  Provision for bad debt expense....................     3,282,854        688,382       324,829
  Depreciation and amortization.....................    15,786,281     11,994,961     1,685,097
  Gain on vendor settlement.........................    (2,395,401)            --            --
  Accrued lawsuit expense...........................     3,200,000             --            --
                                                      ------------   ------------   -----------
          Total.....................................    52,948,159     42,214,569    20,775,340
                                                      ------------   ------------   -----------
LOSS FROM OPERATIONS................................   (18,073,306)   (12,869,095)   (2,656,310)
INTEREST INCOME.....................................        72,901        108,238       405,287
INTEREST EXPENSE....................................       (66,220)       (72,866)     (220,182)
                                                      ------------   ------------   -----------
LOSS BEFORE INCOME TAXES............................   (18,066,625)   (12,833,723)   (2,471,205)
INCOME TAX BENEFIT (EXPENSE)........................          (487)         7,888         7,787
                                                      ------------   ------------   -----------
NET LOSS............................................  $(18,067,112)  $(12,825,835)  $(2,463,418)
                                                      ============   ============   ===========
NET LOSS PER COMMON SHARE:
  BASIC.............................................  $      (1.82)  $      (1.49)  $     (0.45)
                                                      ============   ============   ===========
  DILUTED...........................................  $      (1.82)  $      (1.49)  $     (0.45)
                                                      ============   ============   ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
  BASIC.............................................     9,906,502      8,613,127     5,533,670
                                                      ============   ============   ===========
  DILUTED...........................................     9,906,502      8,613,127     5,533,670
                                                      ============   ============   ===========
</Table>

                See notes to consolidated financial statements.

                                       F-4
<PAGE>   29

                  INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<Table>
<Caption>
                                CONVERTIBLE                                                NOTE                           TOTAL
                              PREFERRED STOCK        COMMON STOCK       ADDITIONAL      RECEIVABLE                    SHAREHOLDERS'
                             ------------------   -------------------     PAID-IN          FROM        ACCUMULATED        EQUITY
                              SHARES    AMOUNT     SHARES     AMOUNT      CAPITAL      SHAREHOLDER       DEFICIT        (DEFICIT)
                             --------   -------   ---------   -------   -----------   --------------   ------------   --------------
<S>                          <C>        <C>       <C>         <C>       <C>           <C>              <C>            <C>
BALANCE, JULY 1, 1998......   453,339   $ 4,533   3,914,840   $39,148   $ 3,480,288     $      --      $(10,212,067)   $ (6,688,098)
Conversion of preferred
  stock....................  (453,339)   (4,533)  1,020,013    10,200        (5,667)                             --              --
Issuance of common stock
  For initial public
    offering, net
    proceeds...............        --        --   1,700,000    17,000    19,742,714                              --      19,759,714
  Other....................        --        --     278,077     2,782     1,013,730                              --       1,016,512
Net loss...................        --        --          --        --            --                      (2,463,418)     (2,463,418)
                             --------   -------   ---------   -------   -----------     ---------      ------------    ------------
BALANCE, JUNE 30, 1999.....        --        --   6,912,930    69,130    24,231,065                     (12,675,485)     11,624,710
Issuance of common stock...        --        --   2,792,868    27,929    30,448,947                              --      30,476,876
Contribution of capital in
  exchange for note
  payable..................        --        --          --        --        63,816                              --          63,816
Net loss...................        --        --          --        --            --                     (12,825,835)    (12,825,835)
                             --------   -------   ---------   -------   -----------     ---------      ------------    ------------
BALANCE, JUNE 30, 2000.....        --        --   9,705,798    97,059    54,743,828                     (25,501,320)     29,339,567
Issuance of common stock...        --        --     271,480     2,714       753,434                              --         756,148
Note receivable from a
  shareholder and officer
  of the Company...........        --        --          --        --            --      (685,500)               --        (685,500)
Compensation expense
  related to note
  receivable from a
  shareholder and officer
  of the Company and
  related put agreement....        --        --          --        --       567,500                              --         567,500
Net loss...................        --        --          --        --            --                     (18,067,112)    (18,067,112)
                             --------   -------   ---------   -------   -----------     ---------      ------------    ------------
BALANCE, JUNE 30, 2001.....        --   $    --   9,977,278   $99,773   $56,064,762     $(685,500)     $(43,568,432)   $ 11,910,603
                             ========   =======   =========   =======   ===========     =========      ============    ============
</Table>

                 See notes to consolidated financial statements

                                       F-5
<PAGE>   30

                  INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                    YEAR ENDED JUNE 30,
                                                         -----------------------------------------
                                                             2001           2000          1999
                                                         ------------   ------------   -----------
<S>                                                      <C>            <C>            <C>
OPERATING ACTIVITIES:
  Net loss.............................................  $(18,067,112)  $(12,825,835)  $(2,463,418)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization.....................    15,786,281     11,994,961     1,685,097
     Provision for bad debt expense....................     3,282,354        688,382       324,829
     Non-cash compensation expense.....................       567,500             --            --
     Gain on vendor settlement.........................    (2,395,401)            --            --
     Changes in operating assets and liabilities:
       Accounts receivable.............................    (2,846,651)      (787,828)     (858,500)
       Prepaid expenses and other current assets.......      (227,046)       141,780      (114,905)
       Other assets....................................        10,493        (85,556)     (126,580)
       Accounts payable and accrued liabilities........     2,153,375     (1,748,407)    1,035,275
       Deferred revenue................................      (472,308)      (209,574)     (140,836)
       Accrued lawsuit expense.........................     3,300,000             --            --
                                                         ------------   ------------   -----------
          Net cash provided by (used in) operating
            activities.................................     1,091,485     (2,832,077)     (659,038)
INVESTING ACTIVITIES:
  Purchases of property and equipment, net.............      (491,176)      (886,955)   (3,395,765)
  Purchase of subscribers, net of cash acquired........            --       (808,432)   (7,970,442)
                                                         ------------   ------------   -----------
          Net cash used in investing activities........      (491,176)    (1,695,387)  (11,366,207)
FINANCING ACTIVITIES:
  Proceeds from issuance of common equity..............        70,648        657,573    21,025,726
  Principal payments of notes payable to
     shareholders......................................            --             --    (2,017,713)
  Principal payments under capital lease obligations...      (255,396)      (144,983)     (359,119)
  Principal payments of long-term debt.................      (276,224)      (456,902)   (1,171,377)
  Payments on line of credit...........................            --             --      (225,000)
                                                         ------------   ------------   -----------
          Net cash provided by (used in) financing
            activities.................................      (460,972)        55,688    17,252,517
                                                         ------------   ------------   -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...       139,337     (4,471,776)    5,227,272
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.........     1,373,786      5,845,562       618,290
                                                         ------------   ------------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...............  $  1,513,123   $  1,373,786   $ 5,845,562
                                                         ============   ============   ===========
SUPPLEMENTAL INFORMATION:
  Cash paid for interest...............................  $     66,220   $     86,289   $   156,630
  Equipment acquired under capital leases..............  $         --   $    274,051   $        --
  Purchase of subscriber assumption of service
     obligations.......................................  $         --   $    774,550   $   183,457
  Contribution of capital in exchange for note
     payable...........................................  $         --   $     63,816   $        --
  Issuance of 200,000 shares of common stock in
     exchange for note receivable from a shareholder
     and officer of the company........................  $    685,500   $         --   $        --
  Conversion of vendor payable to note payable as part
     of vendor settlement..............................  $    650,000   $         --   $        --
</Table>

                See notes to consolidated financial statements.

                                       F-6
<PAGE>   31

                    INTERNET AMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED JUNE 30, 2001 AND 2000

1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation -- Internet America, Inc. is a leading Internet
service provider ("ISP") in the southwestern United States. The Company provides
a wide array of Internet services tailored to meet the needs of individual and
business customers.

     The Company has experienced cumulative operating losses, and its operations
are subject to certain risks and uncertainties including, among others, risks
associated with technology and regulatory trends, evolving industry standards,
dependence on its network infrastructure and suppliers, growth and acquisitions,
actual and prospective competition by entities with greater financial and other
resources, the development of the Internet market and need for additional
capital or refinancing of existing obligations. There can be no assurance that
the Company will be successful in sustaining profitability and positive cash
flow in the future.

     Revenue Recognition -- Revenues derived from monthly subscribers and set-up
charges are recognized as services are provided. The Company bills its
subscribers in advance for direct access to the Internet, but defers recognition
of these revenues until the service is provided.

     Credit Risk -- The Company's accounts receivable potentially subjects the
Company to credit risk, as collateral is generally not required.

     During the year ended June 30, 2001, the Company recorded a provision for
bad debt expense totaling $3.3 million. The charge was recorded as a result of
periodic evaluations during the year of the collectibility of accounts
receivable, including consumer accounts. Delinquent accounts deemed
uncollectible were disconnected and written off, although collection efforts
continue on such accounts.

     Financial Instruments -- The carrying amounts of cash, accounts receivable,
accounts payable and accrued liabilities approximate fair value because of the
short maturity of these instruments. The fair values for debt and lease
obligations, which have fixed interest rates, do not differ materially from
their carrying values.

     Cash and Cash Equivalents -- Cash and cash equivalents consist of cash on
hand and cash deposited in money market accounts. Cash and cash equivalents are
stated at cost, which approximates fair value.

     Property and Equipment -- Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the assets, ranging from three to five years.

     Equipment Under Capital Lease -- The Company leases certain of its data
communication and other equipment under agreements accounted for as capital
leases. The assets and liabilities under capital leases are recorded at the
lesser of the present value of aggregate future minimum lease payments,
including estimated bargain purchase options, or the fair value of the assets
under lease. Assets under capital lease are depreciated over the shorter of
their estimated useful lives or the related lease term.

     Other Assets -- Other assets consist primarily of subscriber acquisition
costs and goodwill related to the acquisition of NeoSoft and PDQ. The Company
allocates the purchase price to acquired subscriber bases and goodwill based on
reasonable allocation methods at the time of acquisition. Amortization of
subscriber acquisition costs and goodwill are provided using the straight-line
method over three years commencing upon completion of the transaction.

     The carrying values of subscriber acquisition costs and goodwill are
periodically reviewed and impairments, if any, are recognized when expected
future benefit based on projected future cash flows to be derived from
individual intangible assets is less than its carrying value.

                                       F-7
<PAGE>   32
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Long-Lived Assets -- The Company periodically reviews the values assigned
to long-lived assets, such as property and equipment to determine if any
impairments have occurred. Provisions for asset impairments are based on
discounted cash flow projections in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and such assets
are written down to their estimated fair values.

     Stock-Based Compensation -- The Company continues to account for its
employee stock based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25 ("APB No. 25") and provides pro forma
disclosures in the notes to the financial statements, as if the measurement
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," had been
adopted.

     Advertising Expenses -- The Company expenses advertising production costs
in the period in which the advertisement is first aired. All other advertising
costs are expensed as incurred. Advertising expenses for the years ended June
30, 2001, 2000 and 1999 were $1,953,810, $3,663,305 and $4,751,092,
respectively.

     Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying amount
of existing assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse.

     Basic and Diluted Net Loss Per Share -- Basic earnings per share is
computed using the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share reflects the potential dilution that could occur upon
exercise or conversion of these instruments. Due to the net losses reported for
the periods presented herein, all of the Company's stock options and warrants
are antidilutive, and basic and diluted loss per share amounts are therefore the
same for all periods presented.

     Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from these
estimates.

     Comprehensive Income -- The Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," during the year
ended June 30, 1999. The Company has no components of other comprehensive income
such that comprehensive income is the same as net income for the years ended
June 30, 2001, 2000 and 1999.

     Recently Issued Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Among other provisions, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for all fiscal years after
June 15, 2000. The adoption of this Standard did not have a material effect on
the Company's financial statements.

     On March 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 provides guidance on the recognition, presentation and disclosures
of revenue in financial statements filed with the Commission and is required to
be implemented no later than the fourth quarter of fiscal 2000. The adoption of
SAB No. 101 did not have a material effect on the Company's financial
statements.

                                       F-8
<PAGE>   33
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In July 2001, the Financial Accounting Standard Board issued Statement No.
141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS No.
142), "Goodwill and Other Intangible Assets." SFAS 142 includes requirements to
test goodwill and indefinite lived intangible assets for impairment rather than
amortize them. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.

     SFAS No. 142 requires that intangible assets be periodically evaluated for
impairment based on fair market value. The Company has historically evaluated
its intangible assets for impairment based on projected future cash flows.

     The Company is currently evaluating the impact that SFAS No. 142 will have
on its financial statements, specifically the potential impact on the balance of
shareholders' equity and amortization expense. If the Company were to elect to
early adopt SFAS No. 142 during the first quarter of the fiscal year ending June
30, 2002, a significant impairment charge would likely be recorded against
intangible assets included in the Company's balance sheet at June 30, 2001. At
the latest, the Company is required to adopt SFAS No. 142 by July 1, 2002, and a
significant impairment charge may be recorded at that time.

     Reclassifications -- Certain reclassifications have been made to amounts in
the period ended June 30, 2000 and 1999 to conform to the current year
presentation.

2. ACQUISITIONS

     On January 29, 1999, the Company exchanged 16,910 shares of its common
stock, and assumed liabilities of approximately $1.4 million, for substantially
all of the net assets of CompuNet, Inc (CompuNet). On February 18, 1999, the
Company exchanged 365,725 shares of its common stock for all the members'
interest of CyberRamp, L.L.C. ("CyberRamp"). These combinations were accounted
for as poolings of interests. Accordingly, the financial statements included
herein have been restated to include CompuNet and CyberRamp as of the beginning
of the earliest period presented. There were no intercompany transactions prior
to their combination. No significant adjustments were required to adopt the same
accounting practices

     On June 30, 1999, the company acquired for cash all the issued and
outstanding securities of NeoSoft, Inc. ("NeoSoft"). As a result of the
purchase, NeoSoft became a wholly owned subsidiary of the Company, and the
Company became the indirect owner of all of the assets of NeoSoft, including its
customer base and the computer equipment used to service such customer base. The
acquisition was accounted for as a purchase.

     In July and August 1999, the Company acquired certain subscribers of INTX
Networking, L.L.C., King Dinosaur, Inc. d/b/a/ KDi Internet Solutions and Pointe
Communications Corporation, Inc. The consideration for these transactions was
cash payments totaling $774,550.

     On November 22, 1999, the company acquired all of the outstanding shares of
PDQ.Net, Incorporated ("PDQ"), a Houston-based ISP, in a stock-for-stock
transaction. Under the agreement, the company issued 2,425,000 shares of Common
Stock in exchange for all the outstanding stock of PDQ. The Company also issued
options to purchase 352,917 shares of Common Stock with a weighted average
exercise price of $1.62 per share in replacement of all of the outstanding stock
options of PDQ. The transaction was accounted for as a purchase. PDQ is a wholly
owned subsidiary of the Company and constitutes the majority of the Company's
Houston operations.

3. COVAD SETTLEMENT

     The Company entered into a Purchase and Settlement Agreement with one of
its DSL providers, Covad Communications, to resolve certain disputes and settle
outstanding claims and liabilities between the companies. Under this agreement,
the Company satisfied approximately $3.6 million in liabilities by
                                       F-9
<PAGE>   34
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transferring to Covad its Digital Subscriber Line (DSL) accounts currently
serviced by Covad, making an immediate payment to Covad of $300,000 and entering
into a promissory note in the principal amount of $650,000. These DSL customers
had the option to be migrated to Covad.net or to one of Covad's Internet service
providers. The Company continued to render services to those customers during
the transition of accounts. In addition, the two companies released all claims
in connection with their prior relationship. The total impact on the statement
of operations of this transaction of approximately $2.7 million has been
recorded against connectivity and operations expense ($0.3 million) and as a
separate line item as a gain on vendor settlement ($2.4 million).

4. PROPERTY AND EQUIPMENT

     Property and equipment consist of:

<Table>
<Caption>
                                                                     JUNE 30,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Data communications and office equipment...................  $ 4,364,512   $ 4,013,258
Leasehold improvements.....................................      632,390       753,234
Furniture and fixtures.....................................      249,585       284,935
Computer software..........................................      708,144       812,108
                                                             -----------   -----------
                                                               5,954,631     5,863,535
Less accumulated depreciation and amortization.............   (4,311,868)   (3,145,820)
                                                             -----------   -----------
                                                             $ 1,642,763   $ 2,717,715
                                                             ===========   ===========
</Table>

     Depreciation and amortization expense charged to operations was $1,567,298,
$1,821,659 and $1,685,097 for the years ended June 30, 2001, 2000 and 1999,
respectively.

5. OTHER ASSETS

     Other assets consist of:

<Table>
<Caption>
                                                                    JUNE 30,
                                                           ---------------------------
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Goodwill.................................................  $ 26,023,407   $ 26,023,407
Acquired subscribers.....................................    16,814,981     17,277,402
Other....................................................         6,533          9,508
Accumulated amortization.................................   (24,395,398)   (10,637,664)
                                                           ------------   ------------
Total intangible assets, net.............................    18,449,523     32,672,653
Deposits.................................................       204,723        212,240
                                                           ------------   ------------
          Total other assets, net........................  $ 18,654,246   $ 32,884,893
                                                           ============   ============
</Table>

     In June 1999, the Company acquired approximately 9,500 subscribers of
NeoSoft for approximately $8.3 million, including acquisition costs. In November
1999, the Company acquired approximately 41,400 subscribers of PDQ for
approximately $30.9 million, including acquisition costs. The purchase price was
allocated to subscriber acquisition costs and goodwill based on the fair value
of customers acquired.

                                       F-10
<PAGE>   35
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT

     Long-term debt consists of:

<Table>
<Caption>
                                                                    JUNE 30,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
Note payable in connection with equipment acquisitions, due
  at varying dates from July 2000 to November 2001, bearing
  interest at 7% and 8%, with principal and interest due
  monthly...................................................  $  17,884   $ 143,123
Note payable from settlement agreement with former vendor
  due January 2002 bearing interest at 7%...................    553,792          --
Other notes payable due from March 2000 through July 2002,
  with interest ranging from the prime rate to 16%..........     32,299      87,076
                                                              ---------   ---------
                                                                603,975     230,199
Less current portion........................................   (603,557)   (176,267)
                                                              ---------   ---------
                                                              $     418   $  53,932
                                                              =========   =========
</Table>

7. COMMITMENTS AND CONTINGENCIES

     The Company leases certain of its facilities under operating leases. Rental
expense under these leases was approximately $1,113,830 and $1,160,101 for the
years ended June 30, 2001 and 2000, respectively. At June 30, 2001, future
minimum lease payments on capital and operating leases were approximately as
follows:

<Table>
<Caption>
                                                               CAPITAL    OPERATING
                                                               LEASES       LEASES
                                                              ---------   ----------
<S>                                                           <C>         <C>
2002........................................................  $ 193,492   $  646,235
2003........................................................     20,761      247,817
2004........................................................         --      156,536
2005........................................................         --      160,704
2006........................................................         --      160,704
Thereafter..................................................         --       13,392
                                                              ---------   ----------
Total minimum lease payments................................    214,253   $1,385,388
                                                                          ==========
Less amounts representing interest..........................    (15,609)
                                                              ---------
Present value of minimum capitalized lease payments.........    198,644
Less current portion........................................   (178,745)
                                                              ---------
Long-term capitalized lease obligations.....................  $  19,899
                                                              =========
</Table>

     In the normal course of business, the Company enters into telephone and
internet backbone connectivity contracts with various vendors. The Company
currently has minimum annual obligations as follows: $3,327,350 for the fiscal
year ended 2002, $1,256,000 for the fiscal year ended 2003, $626,100 for the
fiscal year ended 2004, and $208,700 for the fiscal year ended 2005.

     In July, 2001, a District Court of Dallas County, Texas entered a judgment
against the Company, its former Chief Executive Officer, Michael T. Maples, and
its Chairman, William O. Hunt in the approximate amount of $3.2 million. The
plaintiff, Cindy Carradine, is a former employee who asserted claims for fraud
in connection with her sale of options to the Company in 1998. Pursuant to
indemnification agreements, the Company will indemnify Messrs. Hunt and Maples
for losses incurred by them in connection with this lawsuit. Management believes
there is a basis for this judgment to be overturned on appeal and they intend to
pursue this course of action. However, there can be no assurance that such
efforts will be successful and that the

                                       F-11
<PAGE>   36
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

judgment adverse to Internet America will be overturned. The Company accrued
$3.3 million (including $100,000 of prepaid post-judgment interest) during
fiscal 2001 in the event the judgment is not overturned. The Company has
recorded the judgment and charged operations in the fiscal year ended June 30,
2001. The Company has completed financing to enable it to post an appeal bond in
this matter. See Note 12.

     The Company's wholly-owned subsidiary, PDQ, and its Vice Chairman, William
E. Ladin, Jr., were named as defendants in a lawsuit filed on April 10, 2000 by
Santa Fe Capital Group, Inc. in the District Court of Santa Fe County, New
Mexico. The plaintiff alleges a finders fee was owed to plaintiff in connection
with Internet America's acquisition of PDQ. Plaintiff asserts claims for breach
of contract, restitution, fraud and unfair trade practices, and alleges damages
in the amount of $960,000. Management believes this lawsuit is without merit and
intends to defend it vigorously.

     The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations and cash flows.

8. SHAREHOLDERS' EQUITY

     Earnings Per Share -- Potentially dilutive securities have been excluded
from the computation of earnings per share for the years ended June 30, 2001,
2000 and 1999 as their effect is antidilutive. Had the Company been in a net
income position, diluted earnings per share would have included an additional
704,075 shares related to outstanding options and warrants, (determined using
the treasury stock method at the estimated average fair value) and for
convertible preferred stock not included above for the year ended June 30, 2001.

     Common Stock -- The Company has authorized 40,000,000 shares of $0.01 par
value common stock.

     Note Receivable from a shareholder and officer for common stock -- Pursuant
to a Stock Purchase Agreement entered into during September 2000, the Company
issued 200,000 shares of its common stock to an officer in exchange for cash of
$2,000 and a note receivable, bearing interest at 6.33%, for $685,500. The note
provides for payment of interest on a quarterly basis beginning October 1, 2000
with principal due August 29, 2007. The purchase price of the common stock under
the Stock Purchase Agreement was based on the closing price of the common stock
on the date the Company's board of directors approved the transaction.

     Under the terms of the Stock Purchase Agreement, the officer has the option
to put the shares of common stock to the Company during the term (which expires
September 5, 2007) of the Stock Purchase Agreement for $3.4375 per share. In
connection with the put option, the Company has recognized a non-cash
compensation expense of $567,500 during the year ended June 30, 2001, which was
a result of the decrease in the price of the Company's common stock between the
date of the Stock Purchase Agreement and June 30, 2001.

     Employee Stock Purchase Plan -- Effective April 30, 1999, the Company's
Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase
Plan"), which provides for the issuance of a maximum of 200,000 shares of Common
Stock. Eligible employees can have up to 15% of their earnings withheld, up to
certain maximums, to be used to purchase shares of the Company's Common Stock on
every July 1, October 1, January 1 and April 1. The price of the Common Stock
purchased under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the Common Stock on the commencement date of each three-month
offering period or the specified purchase date. During the year ended 2001,
61,931 shares were purchased ranging in price from $.43 to $4.31 per share. At
June 30, 2001, 127,987 shares were available under the Purchase Plan for future
issuance. The Purchase Plan was approved by the Company's shareholders on
November 4, 1999.

                                       F-12
<PAGE>   37
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Stock Option Plans -- The Company's 1996 Nonqualified Stock Option Plan
(the "1996 Option Plan") was adopted by the Board of Directors and the Company's
shareholders in December 1996. Pursuant to the 1996 Option Plan, the Company may
grant incentive and nonqualified stock options to key employees of the Company.
A total of 225,000 shares of common stock have been reserved for issuance under
the 1996 Option Plan.

     The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. The exercise price of incentive stock options
must be equal or greater than the fair market value of common stock on the date
of grant. The exercise price of incentive stock options granted to any person
who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant, and the term of these options
cannot exceed five years. The Company currently has 11,028 options outstanding
to its employees under the 1996 Option Plan. These options are exercisable at
$1.67 per share of common stock.

     The Company's 1998 Nonqualified Stock Option Plan (the "1998 Option Plan")
was adopted by the Board of Directors and the Company's shareholders in July
1998. A total of 1,200,000 shares of common stock have been reserved for
issuance under the 1998 Option Plan.

     The maximum term of options granted under the 1998 Option Plan is ten
years. Options granted under the 1998 Option Plan are in most cases
nontransferable and generally expire within 30 days after the termination of the
optionee's services, except in cases when the optionee is terminated "for cause"
(as such term is defined therein). In such cases, the option typically expires
automatically on the date of termination. In general, if an optionee is disabled
or dies, such option may be exercised up to 12 months following such disability
or death, unless the Compensation Committee determines to allow a longer period
for exercise. In general, if an optionee retires from his or her service to us,
such option may be exercised up to three months following such retirement,
unless the Compensation Committee determines to allow a longer period for
exercise. The Company currently has 421,087 options outstanding to its employees
under the 1998 Option Plan. These options are exercisable at prices ranging at
$1.12 to $13.75 per share of common stock.

     During October 2000, 215,000 options to purchase shares of common stock
were granted to certain officers and employees of the Company under the 1998
Option Plan at an exercise price ranging from $2.25 to $1.50 which is the fair
market values on the dates of grant.

     The Company's Employee and Consultant Stock Option Plan (the "Employee and
Consultant Option Plan") was approved by the Board of Directors in September
1999 in connection with the acquisition of PDQ. The plan was subsequently
approved by our shareholders at a special meeting of shareholders in November
1999. This plan was created in connection with the acquisition of PDQ so that
each outstanding PDQ incentive stock option could be exchanged for an incentive
stock option to purchase Internet America Common Stock. Pursuant to the Employee
and Consultant Stock Option Plan, the company may grant incentive and
nonqualified stock options to our employees, consultants, directors and
advisors. A total of 260,063 shares of Common Stock have been reserved for
issuance under the Employee and Consultant Option Plan and 58,223 were still
outstanding at June 30, 2001.

     The Company applies APB No. 25 and related Interpretations in accounting
for its employee plans. The estimated fair value of each option grant was
determined by reference to quoted market price or recent private, arm's length
sales of common and preferred stock prior to the company's initial public
offering. In cases where there were no arm's length transactions on or around
the date of an option grant, the Board of Directors determined the value. No
compensation expense has been charged against operations for the years ended
June 30, 2001, 2000 and 1999 related to stock option plans.

                                       F-13
<PAGE>   38
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Had compensation cost for the Company's stock options been determined based
on the fair value at the grant dates for awards consistent with the method of
SFAS No. 123, the Company's net loss and loss per share would have been as
indicated below:

<Table>
<Caption>
                                                   2001           2000          1999
                                               ------------   ------------   -----------
<S>                              <C>           <C>            <C>            <C>
Net loss.......................  As reported   $(18,067,112)  $(12,825,835)  $(2,463,418)
                                   Pro Forma    (18,881,982)   (13,455,964)   (2,713,242)
Basic and Diluted loss per
  share........................  As reported   $      (1.82)  $      (1.49)  $     (0.45)
                                   Pro Forma          (1.91)         (1.56)        (0.49)
</Table>

     A summary of the status of the Company's stock options as of June 30, 2001,
2000, and 1999, and changes during the years ended on those dates is presented
below:

<Table>
<Caption>
                                  2001                         2000                         1999
                       --------------------------   --------------------------   --------------------------
                                      WEIGHTED                     WEIGHTED                     WEIGHTED
                                      AVERAGE                      AVERAGE                      AVERAGE
                        SHARES     EXERCISE PRICE    SHARES     EXERCISE PRICE    SHARES     EXERCISE PRICE
                       ---------   --------------   ---------   --------------   ---------   --------------
<S>                    <C>         <C>              <C>         <C>              <C>         <C>
Outstanding at
  beginning of
  period.............  1,247,663       $3.77        1,042,616       $4.32        1,218,693       $ 1.56
Granted..............    215,000        2.02          672,138        6.21          184,000        15.87
Exercised............     (8,920)       1.68         (358,415)       1.43         (244,338)        1.57
Forfeited............   (350,741)       8.10         (108,676)       9.93         (115,739)        1.67
Outstanding at end of
  period.............  1,103,002        4.17        1,247,663        5.63        1,042,616         4.32
                       =========                    =========                    =========
Options exercisable
  at year end........    704,075        3.80          720,332        3.77          572,420         3.10
                       =========                    =========                    =========
</Table>

     The following table summarizes information about stock options outstanding
at June 30, 2001:

<Table>
<Caption>
                                                             OPTIONS
                           OPTIONS EXERCISABLE             OUTSTANDING
                 ---------------------------------------   -----------
                   NUMBER          WEIGHTED-AVERAGE          NUMBER
   RANGE OF      OUTSTANDING     REMAINING CONTRACTUAL     EXERCISABLE
EXERCISE PRICES  AT 6/30/01    LIFE AS OF 6/30/01(YEARS)   AT 6/30/01
---------------  -----------   -------------------------   -----------
<S>              <C>           <C>                         <C>
    $0.09            18,000               4.2                 18,000
     1.12            60,588               5.8                 60,588
     1.23            49,388               7.0                 49,388
     1.48             6,353               7.3                  6,353
     1.50            65,000               9.3                     --
     1.67           455,692               5.2                407,879
     2.25           150,000               9.3                     --
     2.69             6,231               8.0                  3,117
     8.00            22,500               7.0                 22,500
     9.25            63,250               8.5                 16,750
    10.00            75,000               8.4                 18,750
    13.00            69,500               7.4                 68,500
    13.19            22,500               8.5                 22,500
    13.75            39,000               8.1                  9,750
                  ---------                                  -------
                  1,103,002                                  704,075
                  =========                                  =======
</Table>

     The Black-Scholes value of each option granted is estimated using the
Black-Scholes pricing model with the following assumptions: option term until
exercise ranging from 2 to 10 years, volatility ranging from 80% to

                                       F-14
<PAGE>   39
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

120%, risk-free interest rate of 5.4% for the Employee and Consultant Stock Plan
and 5.8% to 6.2% for Nonqualified Stock Option Plans, and an expected dividend
yield of zero. The weighted average grant date fair value of options granted was
$1.94 and $6.24 for the years ended June 30, 2001 and 2000, respectively.

9. INCOME TAXES

     No provision for federal income taxes has been recognized for the years
ended June 30, 2001, 2000 and 1999, as the Company has incurred net operating
losses for income tax purposes and has no carryback potential.

     Deferred tax assets and liabilities as of June 30, 2001 and 2000, consist
of:

<Table>
<Caption>
                                                                     JUNE 30,
                                                            --------------------------
                                                                2001          2000
                                                            ------------   -----------
<S>                                                         <C>            <C>
Deferred tax assets:
  Net operating loss carryforwards........................  $  9,745,000   $ 7,779,000
  Intangible assets.......................................     3,204,000     1,042,000
  Deferred revenue........................................        28,000       200,000
  Allowance for doubtful accounts.........................       282,000       110,000
  Property and equipment..................................        62,000       329,000
  Other...................................................        80,000        68,000
                                                            ------------   -----------
Total deferred tax assets.................................    13,401,000     9,528,000
Valuation allowance.......................................   (13,401,000)   (9,528,000)
                                                            ------------   -----------
          Net deferred tax assets.........................  $         --   $        --
                                                            ============   ===========
</Table>

     The Company has provided a valuation allowance for net deferred tax assets,
as it is more likely than not that these assets will not be realized.

     At June 30, 2001, the Company has net operating loss carryforwards of
approximately $28.6 million for federal income tax purposes. These net operating
loss carryforwards may be carried forward in varying amounts until 2020 and may
be limited in their use due to significant changes in the Company's ownership.

     A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended June 30, 2001, 2000, and
1999 is as follows:

<Table>
<Caption>
                                                              YEARS ENDED JUNE 30,
                                                              ----------------------
                                                              2001     2000     1999
                                                              ----     ----     ----
<S>                                                           <C>      <C>      <C>
Federal income tax benefit at statutory rate................  (34)%    (34)%    (34)%
State tax benefit, net of federal benefit...................   --       (3)      (3)
Valuation allowance.........................................    8       19       37
Alternative minimum tax.....................................   26       18       --
                                                              ---      ---      ---
          Total income tax provision........................    0%       0%       0%
                                                              ===      ===      ===
</Table>

10. EMPLOYEE BENEFIT PLAN

     The Company has established a 401(k) plan for the benefit of its employees.
Employees may contribute to the plan up to 15% of their salary, pursuant to a
salary reduction agreement, upon meeting age requirements. The Company made no
discretionary contributions to the Plan through June 30, 2001.

                                       F-15
<PAGE>   40
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

<Table>
<Caption>
                                                                         2001
                                                         -------------------------------------
                                                          FIRST    SECOND     THIRD    FOURTH
                                                         QUARTER   QUARTER   QUARTER   QUARTER
                                                         -------   -------   -------   -------
<S>                                                      <C>       <C>       <C>       <C>
Revenues...............................................  $ 8,967   $ 8,742   $ 8,758   $ 8,408
Total Expenses.........................................   14,001    14,884    12,226    11,838(1)
Income (loss) from operations..........................   (5,034)   (6,142)   (3,468)   (3,430)
Net Loss...............................................   (5,038)   (6,139)   (3,461)   (3,428)
NET LOSS PER COMMON SHARE:
  BASIC................................................  $ (0.52)  $ (0.62)  $ (0.35)  $ (0.34)
                                                         =======   =======   =======   =======
  DILUTED..............................................  $ (0.52)  $ (0.62)  $ (0.35)  $ (0.34)
                                                         =======   =======   =======   =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
  BASIC................................................    9,773     9,927     9,951     9,977
                                                         =======   =======   =======   =======
  DILUTED..............................................    9,773     9,927     9,951     9,977
                                                         =======   =======   =======   =======
Revenues...............................................  $ 5,592   $ 6,712   $ 8,845   $ 8,197
Total Expenses.........................................    7,452     9,749    12,839    12,175
Income (loss) from operations..........................   (1,860)   (3,037)   (3,994)   (3,978)
Net Loss...............................................   (1,823)   (3,024)   (3,999)   (3,980)
NET LOSS PER COMMON SHARE:
  BASIC................................................  $ (0.26)  $ (0.37)  $ (0.41)  $ (0.41)
                                                         =======   =======   =======   =======
  DILUTED..............................................  $ (0.26)  $ (0.37)  $ (0.41)  $ (0.41)
                                                         =======   =======   =======   =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
  BASIC................................................    7,009     8,129     9,642     9,695
                                                         =======   =======   =======   =======
  DILUTED..............................................    7,009     8,129     9,642     9,695
                                                         =======   =======   =======   =======
</Table>

---------------

(1) Included in expenses for the fourth quarter of 2001 are the $2.4 million
    gain recognized in connection with the Covad settlement discussed in Note 3
    and the $3.2 million charge recorded related to the lawsuit judgment
    discussed in Note 7.

12. SUBSEQUENT EVENTS

     Pursuant to a Stock Purchase Agreement entered into during September 2000,
the Company issued 200,000 shares of its common stock to an officer in exchange
for cash of $2,000 and a note receivable, bearing interest at 6.33%, for
$685,500. The purchase price of the common stock under the Stock Purchase
Agreement was based on the closing price of the common stock on the date the
Company's board of directors approved the transaction. Under the terms of the
Stock Purchase Agreement, the officer has the option to put the shares of common
stock to the Company during the term of the Stock Purchase Agreement for $3.4375
per share. The officer exercised the put agreement on August 6, 2001. On that
day another stock purchase agreement was entered into between the officer and
the Company. The company issued 200,000 shares of common stock to the officer in
exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%,
for $82,000. Under the terms of the new Stock Purchase Agreement, the officer
has the option to put the shares of common stock to the Company during the term
of the Stock Purchase Agreement for $.42 per share.

                                       F-16
<PAGE>   41
                    INTERNET AMERICA, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On September 18, 2001, the company entered into a Letter of Credit Security
Commitment Agreement with the Company's Chairman, William O. Hunt, to finance an
appeal bond in the approximate amount of $3.3 million in connection with a
judgment entered against the company. Under this agreement, Mr. Hunt will
collateralize a letter of credit in the amount of $3.3 million and the Company
will pay Mr. Hunt a commitment fee of 8% per annum, paid quarterly. If the
Company reduces the collateral amount by substituting an alternative collateral
for the letter of credit, then Mr. Hunt would have a ninety day option to
purchase shares of common stock of the Company equal in value to all or a
portion of the amount of the reduction, based on when it occurs. The purchase
price per share would be equal to 85% of the average closing price of the common
stock for the ten trading days after the agreement was signed (September 18,
2001), subject to upper and lower limits of $0.65 and $0.35. If a reduction
occurs within the six months following the agreement, Mr. Hunt could purchase
shares of common stock of the Company equal in value to one-half of the amount
of the reduction, and if a reduction occurs after this six month period, Mr.
Hunt could purchase shares of common stock of the Company equal in value to the
full amount of the reduction.

     Should the letter of credit be funded in the full amount or in a reduced
amount to pay a settlement or judgment, the Company will enter into a secured
convertible promissory note for the funded amount. Interest on the note would
accrue at 12% per annum and be payable quarterly during the first two years
after issuance. The note could be converted into common stock within two years
of issuance at the purchase price discussed above. If the note was not converted
within two years of issuance, the conversion option would terminate and all
principal and unpaid accrued interest would be payable in four quarterly
payments over the third year. If the amount of the note is less than the full
amount of the letter of credit, the balance would be treated as a reduction and
Mr. Hunt would also have the purchase rights discussed above. If the Company
pays the note prior to its maturity, Mr. Hunt would have a thirty day option to
purchase shares of common stock of the Company equal in value to the amount of
the prepayment at the purchase price discussed above. If Mr. Hunt does not
exercise this thirty day option, he would be issued a warrant to purchase, at
the purchase price discussed above, one-half of the number of shares that were
subject to the option. The warrant would terminate, if unexercised, on the
second anniversary of the note issuance date.

     The obligations to Mr. Hunt are secured by the Company's assets other than
accounts receivable. Under a registration agreement, Mr. Hunt has demand and
piggyback registration rights with respect to any shares issued under the Letter
of Credit Security Commitment Agreement. The demand registration right is
subject to a 120 day deferral if the Board of Directors determines that such
registration would be seriously detrimental to the Company or its shareholders.

                                       F-17
<PAGE>   42

                               INDEX TO EXHIBITS

<Table>
<Caption>
        EXHIBIT                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Agreement and Plan of Merger dated as of June 30, 1999 by
                            and among Internet America, Inc., NeoSoft, Inc. and
                            certain of the shareholders of NeoSoft, Inc.(1)
          2.4            -- Agreement and Plan of Merger dated as of September 12,
                            1999 by and among Internet America, Inc., GEEK Houston
                            II, Inc., PDQ.Net, Incorporated and certain of the
                            shareholders of PDQ.Net, Incorporated(2)
          3.1            -- Internet America, Inc.'s Articles of Incorporation(3)
          3.2            -- Internet America, Inc.'s Bylaws, as amended(4)
          4.1            -- Specimen Common Stock certificate(5)
          4.2            -- Pages from the Articles and Bylaws that define the rights
                            of holders of Common Stock(6)
          4.3            -- Stock Purchase Agreement dated September 5, 2000 by and
                            between Internet America, Inc. and Jack T. Smith(7)
          4.4            -- Promissory Note dated September 5, 2000 by and between
                            Internet America, Inc. and Jack T. Smith(7)
          4.5            -- Pledge and Security Agreement dated September 5, 2000 by
                            and between Internet America, Inc. and Jack T. Smith(7)
          4.6            -- Stock Purchase Agreement dated August 6, 2001 by and
                            between Internet America, Inc. and Jack T. Smith*
          4.7            -- Promissory Note dated August 6, 2001 by and between
                            Internet America, Inc. and Jack T. Smith*
          4.8            -- Pledge and Security Agreement dated August 6, 2001 by and
                            between Internet America, Inc. and Jack T. Smith*
          4.9            -- Letter of Credit Security Commitment Agreement dated
                            September 17, 2001 by and between Internet America, Inc.
                            and William O. Hunt*
          4.10           -- Security Agreement dated September 17, 2001 by and
                            between Internet America, Inc. and William O. Hunt*
          4.11           -- Registration Rights Agreement dated September 17, 2001 by
                            and between Internet America, Inc. and William O. Hunt*
         10.1            -- Consulting Agreement dated April 20, 1999 by and between
                            Internet America, Inc. and Gary L. Corona(8)
         10.2            -- Financial Advisory Agreement dated April 20, 1999 by and
                            among Carl Westcott LLC and Internet America
         10.3            -- Letter Agreement dated September 5, 2000 by and between
                            Internet America, Inc. and Michael T. Maples(7)
         10.4            -- Letter Agreement dated September 5, 2000 by and between
                            Internet America, Inc. and Jack T. Smith(7)
         10.5            -- Stock Purchase Agreement dated September 5, 2000 by and
                            between Internet America, Inc. and Jack T. Smith(7)
         10.6            -- Promissory Note dated September 5, 2000 by and between
                            Internet America, Inc. and Jack T. Smith(7)
         10.7            -- Pledge and Security Agreement dated September 5, 2000 by
                            and between Internet America, Inc. and Jack T. Smith(7)
         10.8            -- Stock Purchase Agreement dated August 6, 2001 by and
                            between Internet America, Inc. and Jack T. Smith, filed
                            herein as Exhibit 4.6
         10.9            -- Promissory Note dated August 6, 2001 by and between
                            Internet America, Inc. and Jack T. Smith, filed herein as
                            Exhibit 4.7
</Table>
<PAGE>   43

<Table>
<Caption>
        EXHIBIT                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.10           -- Pledge and Security Agreement dated August 6, 2001 by and
                            between Internet America, Inc. and Jack T. Smith, filed
                            herein as Exhibit 4.8
         10.11           -- Letter of Credit Security Commitment Agreement dated
                            September 17, 2001 by and between Internet America, Inc.
                            and William O. Hunt, filed herein as Exhibit 4.9
         10.12           -- Security Agreement dated September 17, 2001 by and
                            between Internet America, Inc. and William O. Hunt, filed
                            herein as Exhibit 4.10
         10.13           -- Registration Rights Agreement dated September 17, 2001 by
                            and between Internet America, Inc. and William O. Hunt,
                            filed herein as Exhibit 4.11
         11.1            -- Statement regarding computation of per share earnings(9)
         21.1            -- Subsidiaries list*
         23.1            -- Consent of Deloitte & Touche LLP*
</Table>

---------------

 *  Filed herewith.

(1) Previously filed as an exhibit to Internet America's Current Report on Form
    8-K, as amended, filed on July 15, 1999 and incorporated herein by
    reference.

(2) Previously filed as Exhibit A to the preliminary proxy statement and
    definitive proxy statement filed on October 7, 1999 and October 19, 1999,
    respectively, and incorporated herein by reference.

(3) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2 as amended (file no. 333-59527) initially filed on July 21,
    1998, and incorporated herein by reference.

(4) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-59527) initially filed on July 21,
    1998, and Quarterly Report on Form 10-QSB filed on November 15, 1999, and
    incorporated herein by reference.

(5) Previously filed as an exhibit to Internet America's Current Report on Form
    8-K, as amended, filed on February 16, 1999, and incorporated herein by
    reference.

(6) Previously filed as an Exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-95179), initially filed on January
    21, 2000, and incorporated herein by reference.

(7) Previously filed as an exhibit to Internet America's Annual Report on Form
    10-KSB filed on September 26, 2000, and incorporated herein by reference.

(8) Previously filed as an exhibit to Internet America's Registration Statement
    on Form SB-2, as amended (file no. 333-78615) filed on May 17, 1999, and
    incorporated herein by reference.

(9) Statement omitted because not applicable or because the required information
    is contained in the Financial Statements or Notes thereto.