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, 2010


 ̈


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)





Texas
                
                86-0778979(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification No.)10930
      W. Sam Houston Pkwy., N. Suite 200
                
                77064Houston,
      Texas
                
                (Zip
      Code)(Address
      of principal executive offices)





Registrant’s
telephone number: (713)
968-2500





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 $0.01 Per Share


(Title
of Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     Yes  ̈    No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  o




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes  ̈    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.   ̈




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


Large
accelerated filer  ̈    Accelerated
filer  ̈    Non-Accelerated
Filer  ̈    Smaller
Reporting Company x


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈ No
x


Based
on the closing price of the registrant’s Common Stock on December 31, 2009, the
last business day of the registrant’s most recently completed second fiscal
quarter, the aggregate market value of the Common Stock held by non-affiliates
of the registrant is $3,734,715 ($0.35 per share).  Solely for the
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.





The
number of shares of Common Stock outstanding as of September 21, 2010 was
16,558,914.





DOCUMENTS
INCORPORATED BY REFERENCE





None.








TABLE
OF CONTENTS





PagePART
      I
                                                                Item
      1.
                                                                Business
                                                                3Item
      1A.
                                                                Risk
      Factors
                                                                9Item
      1B.
                                                                Unresolved
      Staff Comments
                                                                9Item
      2.
                                                                Properties
                                                                9Item
      3.
                                                                Legal
      Proceedings
                                                                9Item
      4.
                                                                [Removed
      and Reserved]
                                                                9PART
      II
                                                                Item
      5.
                                                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                10Item
      6.
                                                                Selected
      Financial Data
                                                                10Item
      7.
                                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                                                                10Item
      7A.
                                                                Quantitative
      and Qualitative Disclosures about Market Risk
                                                                17Item
      8.
                                                                Financial
      Statements and Supplementary Data
                                                                17Item
      9.
                                                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                18Item
      9A.
                                                                Controls
      and Procedures
                                                                18Item
      9B.
                                                                Other
      Information
                                                                18PART
      III
                                                                Item
      10.
                                                                Directors,
      Executive Officers and Corporate Governance
                                                                19Item
      11.
                                                                Executive
      Compensation
                                                                20Item
      12.
                                                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                22Item
      13.
                                                                Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                24Item
      14.
                                                                Principal
      Accounting Fees and Services
                                                                24PART
      IV
                                                                Item
      15.
                                                                Exhibits,
      Financial Statement Schedules
                                                                25SIGNATURES
                                                                26INDEX
      TO FINANCIAL STATEMENTS
                                                                F-1


2





This
Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results, performance or achievements, or industry results,
may be materially different from those described in the forward-looking
statements due to a number of risk factors. Such risks and uncertainties include
those set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations – Safe Harbor Statement" and
elsewhere in this Form 10-K.





PART
I





Item
1. Business





General





Internet
America, Inc. (the “Company” or “Internet America”) is an Internet service
provider ("ISP") that is focused on providing wireless high-speed broadband
Internet in rural markets, and presently serves 8,200 wireless broadband
Internet subscribers. Since the Company’s founding in 1995, we have a history of
providing an array of Internet services to residential and business subscribers
and serve approximately 25,900 total subscribers in Texas as of June 30, 2010.
Initially providing primarily dial-up Internet services, the Company grew
rapidly with dial-up subscribers. In recent years, Internet America has evolved
its product offering to include high-speed Broadband, and entered the rural
wireless broadband market in 2004, incorporating a core competency of managing
large numbers of internet subscribers. A subscriber represents an active, billed
service.  One customer account may represent multiple subscribers
depending on the number of active and billed services for that customer. A
decline in dial-up subscribers and the corresponding revenues associated with
these subscribers is expected and will continue primarily due to our customers
migrating to high-speed providers in metropolitan areas.





We offer
broadband services to both business and residential customers within our network
footprint, many without the use of terrestrial lines. This allows us to cover a
rural or suburban geographical area at a fraction of the cost of terrestrial
based broadband provided by cable modems or digital subscriber lines
(“DSL”).  As a result of these savings, we are able to offer broadband
Internet to communities and rural areas that would otherwise have little or no
access to the internet other than over dial up telephone lines. Our wireless
broadband Internet services are offered utilizing fixed point-to-multipoint
wireless technology in both licensed and unlicensed
spectrums.  Internet America has obtained a nationwide, non-exclusive
license for 3.65 GHz bandwidth; to date, we have utilized this license to deploy
WiMAX in non-metropolitan areas providing better quality high speed broadband
services to small and mid-size businesses.





In
January 2008, with more than three years experience in growing organically and
through acquisitions, management refocused on creating and maintaining a ‘defect
free’ philosophy by conforming acquired wireless networks to our standards,
creating simplified and more efficient processes, and rewarding zero defect
results. As a result, we improved the quality of our service and enhanced the
productivity of our personnel. Our dedication to the quality process
implementation, including investing in infrastructure upgrades and simplifying
internal systems and procedures, has continued to improve productivity and
customer satisfaction. Our success can be measured in ways such as improved
EBITDA and decreases in expenses and headcount over the last year.





Beginning in May 2008 and continuing
through February 2009, the Company devoted substantial time and resources to a
proposed merger with KeyOn Communications Holdings, Inc. (“KeyOn”). The
contemplated merger was terminated on February 19, 2009 due to KeyOn’s inability
to comply in a material respect with certain of the covenants and conditions to
closing required to be performed or satisfied by it under the Merger Agreement.
We recorded a receivable from KeyOn of approximately $394,000, which is the sum
of direct merger costs incurred by the Company of $194,000 and the termination
fee of $200,000.  The Company recorded an allowance for doubtful
accounts equal to the full amount of these receivables which had a material
negative impact on our earnings for the year ended June 30, 2009. Additional
indirect costs of management’s time negotiating and preparing to close the
merger and the related travel costs also impacted reported
losses.  Detailed information about the termination of the merger is
contained in the Company’s Current Report on Form 8-K filed on February 24,
2009.





We
continue to increase the capacity and quality of our existing networks. However,
during fiscal 2011, we expect to increase investment in marketing our rural
wireless broadband in existing areas to increase the number of new commercial
and residential subscribers. We anticipate no significant negative churn in
wireless broadband subscribers, which has remained stable at approximately 8,000
subscribers during the present recession, and instead expect modest growth as a
result of this planned increase in marketing efforts.


3





The
Company provides Voice over Internet Protocol (“VoIP”) and Hosted VoIP PBX
services to its embedded customer base throughout Texas. Management believes
that customers, especially in rural and underserved markets, have few
communications options and those they have are very fragmented and expensive.
Providing these customers with bundled broadband Internet access and
commercial-grade VoIP services will increase revenue per subscriber for existing
and potential future customers.





Management
believes video conferencing presents another opportunity for growth and has
identified this space as a natural addition to our products and services in
existing and potential markets. We entered into a reseller agreement to
provide one-on-one and multi party high-quality, resilient video conferencing
using desktop computers.  The Company offers its customers access to this
technology in the form of hosted services or direct sale of hardware and
software.  Hosted video conferencing products may be very attractive to
mid-size businesses without long-term capital costs or commitments, and Internet
America can provide them with immediate access to new, high
performance technology





Internet
America is positioned today to drive the vision of delivering high speed
broadband in the United States; however, our major focus has remained in the
Texas area to date. We believe our continued efforts to increase our subscriber
base will yield improvements in profitability and cash flow from operations.
Because of our efforts to improve the quality and efficiency of our operations
over the last few years, we believe that we are well positioned today to
withstand a continuing economic slowdown and to capitalize on growth
possibilities. We believe that we have sufficient capital resources and cash on
hand to withstand a short or prolonged economic downturn, and we are in a
position to continue to improve earnings during these challenging
times.





Company
management believes the initiatives identified above are instrumental to the
achievement of our goals, but they may be subject to competitive, regulatory,
and other events and circumstances that are beyond our control. We can provide
no assurance that we will be successful in achieving any or all of the
initiatives, that the achievement or existence of such initiatives will result
in profit improvements, or that other factors will not arise that would
adversely affect future profits.




Existing
wireless broadband markets in Texas





The
access networks which Internet America operates successfully are located in
rural areas near or surrounding the following Texas cities: Dallas, Fort Worth,
Corsicana, Baytown, Crosby, Magnolia, Stafford, Victoria, Cuero, and San
Antonio.  In addition to the growth of the wireless subscriber base
through acquisitions of smaller WISPs, the Company has organically expanded its
wireless subscriber base by focusing on providing services in specifically
targeted underserved “micro-markets”, primarily consisting of subdivisions and
other small geographic areas with favorable demographics and population
density.





Operating
center





Our
corporate headquarters are located in Houston, Texas, where all executive
functions, call center and network monitoring exist.  The headquarters
location now contains  centralized network operations center where all
operations on the network can be monitored and supported. Our core network is
located in a secure leased cage in a SAS 70 Type II compliant data
center.





Potential
growth through acquisitions





Management
considers target communications acquisitions without exclusive focus on rural
WISPs attractive as an important potential method of acquiring additional
diverse sources of recurring communications revenue in markets that enhance its
geographic and strategic plans.  Additionally, we will consider proposed
transactions to be attractive if they do not negatively impact our liquidity and
have a clear path to closing and integration and immediate positive cash flow
results. However, there is no guarantee that we will make significant or
numerous acquisitions.





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, co-location 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. We bill most consumer subscribers through automatic
charges to their credit cards or bank accounts, and we bill most of our business
customers by monthly invoices. We offer discounts on almost all of our services
for subscribers who prepay for a longer term.


4





Wireless Broadband Internet
Access.  Our wireless Internet access package includes basic
Internet access and related Internet applications such as World Wide Web
browsing, e-mail, file transfer protocol (“FTP”), and USENET news access.
Available value-added services include multiple e-mail mailboxes, national
dial-up roaming services, personalized e-mail addresses and personal web sites.
Value-added services are being developed more rapidly as broadband access
becomes more widely available.  We believe that the addition of
quality add-on services will allow us to increase our market penetration in
existing markets and could increase customer retention.  For these
reasons, we continue to evaluate potential value added services.





High Speed Connectivity; DSL
Services.  Our 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.





Commercial
Services.  Internet America offers a comprehensive line of
commercial-grade 24x7x365 monitored business services. Broadband connectivity
offerings include Metro Ethernet from 3Mbps to 100Mbps, full and fractional
T3/DS-3 and T1/DS-1 leased lines, commercial fixed wireless (licensed and
unlicensed), and commercial DSL. We also provide Tier-1 and Tier-2 Colocation
services in Stafford, Victoria, and China Grove, Texas as single-server,
half-cabinet, and full-cabinet plans.





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, 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.





Customer
Care





Individuals
accessing the Internet have many different operating systems, 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;


·


· Highly technical issues that
sophisticated users may encounter; and


· Operating system
defects/workarounds.





Our
customer care employees work out of the corporate office in Houston, Texas. They
resolve support calls of all levels of technical difficulty with a focus on
quality and one call resolution. Customer care is available to subscribers
during extended business hours, typically until 8 p.m. weekdays and on limited
hours on weekends. In addition to diagnosing and resolving subscribers'
technical problems, members of our customer care department answer questions
about account status and billing information, respond to new product requests
and provide configuration information. Our implementation of good quality
control include the following procedures:




·Regular team
meetings by all support lines to discuss problems with the view of information
sharing and drawing up potential resolutions.




·Analysis of
calls and queries using quality management tools such as call monitoring to
identify common issues.


·Appropriate
staff training with regular review of skill matrixes.


·Implementation
of issue tracking databases, improving morale, encouraging information
sharing.


·Collection of
customer feedback through online surveys; certain incentive compensation is
awarded based on surveys.





Marketing





As
discussed, our marketing efforts and expenditures are focused primarily on
expanding our wireless subscriber base in very specific geographic areas that
are represented by underserved markets whose characteristics meet our
requirements for specific demographics and population density. We primarily use
door hangars, direct mail, local events and advertising, and resellers to create
brand and service awareness in these areas.  We do not use
mass-marketing tools or tactics as a result of our focus on very specific
geographic areas.





Infrastructure





Our
network provides subscribers with local dial-up in Texas, nationwide broadband
(DSL) access in all major metropolitan areas, as well as dial-up access in many
tier 2 and tier 3 cities. Our wireless network is limited to specific areas
identified as underserved markets in which we have chosen to establish the
required network components such as towers and network access
points.


5





Available
value-added services include multiple e-mail mailboxes, national dial-up roaming
services, personalized e-mail addresses and personal web sites, VoIP, and USENET
news access. We maintain our applications for operations and value added
services utilizing a network of servers which are connected directly to our
network backbone via a fault-tolerant, high-availability network architecture.
We deploy PC style hardware in tightly coupled clusters for application
load-balancing, fault-tolerance against application failure, and reduced
latency.  These distributed applications are housed on low cost,
easily obtainable components with minimal interdependency.





Wireless Broadband Internet
Access.  Our wireless Internet access package includes basic
Internet access and related Internet applications such as World Wide Web
browsing, e-mail, and USENET news access.  The network is designed to
deliver up to 10 Mbps to any individual end-user and up to 50 Mbps to commercial
subscribers.  The network is fully open, adheres to the FCC’s Internet
Policy Statement and does not restrict access to any lawful Internet
applications or content.





Internal Network
Infrastructure. Our systems and network infrastructure are designed to
provide reliability and speed. Reliability is achieved through redundancy in
mission critical systems that minimize the number of single points of failure.
Speed is achieved through the deployment of clustered systems, aggressive
network capacity planning and upgrades, diverse network architecture, multiple
diverse Internet backbone connections, and 'most-direct-route' network
topology.  Additional available speed is being provided by greater
bandwidth sizes and installation of higher speed capacity radios and back
hauls.  Automated software tools remotely monitor the status of all
networking facilities, components, applications and equipment deployed
throughout our infrastructure on a 24 hours/365 days a year basis and transmits
alerts to both Network Operations Center (“NOC”) personnel and local field
employees. This alert system includes an automated escalation path for
notification of supervisors based on type of alert and time lapsed. Our NOC is
staffed 24 hours/365 days a year and also communicates with external service
providers when needed. Other software tools, such as statistical analysis
software, are used by the Company to provide data about the quality of service
most subscribers are experiencing, as well as information to identify the need
for additional bandwidth and services in an efficient and proactive
manner.  These centralized monitoring systems allow for scalable
monitoring and enhanced customer service.





Network Description.  Internet America’s core network is located in a secure
leased cage at the CyrusOne data center in Houston, Texas. CyrusOne operates a
SAS 70 Type II compliant data center. It has fully redundant power and cooling,
and the building is constructed to withstand category 5 hurricane conditions.
Currently our core network Router/Switch hardware includes a pair of Cisco 6509
switch/routers that provide fully-redundant routing between our 450Mbps of
upstream Internet Access, across three separate Internet Service
Providers.





The
current access networks are connected via leased lines which range in speed from
8Mbps to 400 Mbps. From these local Points of Presence (POPs), bandwidth is
distributed out to the access network via wired and wireless connections. The
majority of the route links are connected via commercially available fixed
wireless links using point-to-point wireless Ethernet bridges in both licensed
and unlicensed bands ranging in speeds from 20Mbps to 300Mbps. Access towers are
then used to distribute bandwidth to approximately 8,200 end-users using
commercially available fixed wireless technology utilizing ISM frequency bands
(2.4Ghz, 3.65Ghz, 5.2Ghz, 5.8Ghz and 900Mhz). Internet America’s POP’s are
located in rural areas near or surrounding the following Texas cities: Dallas,
Fort Worth, Corsicana, Hillsboro, Baytown, Crosby, Magnolia, Stafford, Victoria,
Cuero and San Antonio.





Management Information
Systems.  Our MIS department uses a near real-time customer
database, billing and flow-through fulfillment system (“CMS”) to handle all
customer contact and billing information for the services we
provide.  CMS 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.  We continually enhance CMS to provide additional
functionality for improved financial, marketing and management
reporting.





Acquired Customer Integration.Our MIS and Network employees have created integration plans and related
software for customer data integration and network monitoring
integration.  These tools allow us to integrate acquired subscribers
more rapidly.  The rapid integration gives us the ability to realize
growing economies of scale with marginal increases to fixed costs.





Technology
and Development





The
wireless broadband Internet sector continues to grow due to technology
improvements and increasing customer demand.  Demand has increased due
to the increase in number of internet software applications, an increased number
of equipment vendors for wireless equipment and software developments for
license-exempt spectrum.  Our success in managing a rapidly increasing
customer base and integrating acquired subscribers is dependent on our network
management and customer contact systems.  We believe that our existing
systems provide an advantage when managing markets across disparate geographical
areas and integrating acquisitions efficiently.  We continue to focus
our technology development in this area.


6





The
Company does not focus a material amount of resources on developing other new
technologies. We do however recognize that additional revenue streams and higher
level of subscriber satisfaction (and thus increased subscriber retention) are,
in many cases, based on deploying new services and technologies as they become
commercially reliable and economically feasible. Therefore, we are continuously
evaluating new technologies and applications for introduction or incorporation
into our services.





Additionally,
we are committed to developing and maintaining strong, stable, resilient, low
latency data-communications networks in order to provide connectivity services
to our subscribers, and, as new services are introduced, we believe our
customers will quickly be able to adopt our new offerings on the infrastructure
on which our network is deployed.





Proprietary
Rights





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
primarily rely on copyright and trademark laws. "Internet America," the Internet
America logo, "1-800-Be-A-Geek”, “Airmail.net," "Airnews.net," and “PDQ.net” are
registered service marks of Internet America or its subsidiaries.  As
we expand our rural footprint into contiguous communities and become more
entrenched and integrated into the communities that we serve through our local
staff, and internet connectivity, we believe that our brand and our presence may
create some barriers to entry by others and more loyalty on the part of our
rural customers.





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 and services that are substantially
equivalent or superior to ours.





Competition





The
Internet services market is extremely competitive in every segment (dial-up,
wired broadband and wireless).





In the
dial-up segment, where we have approximately 5,500 subscribers, there are no
substantial barriers to entry, and we expect that competition will continue to
intensify and, more importantly, dial-up subscribers in general will continue to
decline as more subscribers, business and residential, convert to the various
broadband services available to them.





The wired
broadband services segment, such as DSL (where we have over 1,400 subscribers)
or cable-modem, in particular is extremely competitive. The markets we serve
have been flooded with DSL, cable and wireless offers from our competitors, some
of which have greater resources than we have and are able to offer their
products at lower prices than we offer.





We have
to rely on local loop providers with whom we compete in order to provide DSL
services to our customers. These providers have been exerting 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 transmission, may be more successful than
DSL.





In the
wireless segment, while there is still significant competition, we are utilizing
a strategy of focusing on marketing to underserved geographic areas (i.e. those
areas where there is less competition or technically inferior services
available).  We believe competition in these areas is generally from
locally owned wireless broadband operators who lack the operating scale and
monitoring systems.  These operators generally have significantly
higher prices or inefficient operations.





In all of
these competitive segments, we believe that the primary competitive factors
determining success include pricing, access speed, a reputation for reliability
and service, 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 (including the ability to offer “bundled” packages of services)
than we have.  Increased competition for users of Internet services
may result in lower subscriber growth rates or continued subscriber
loss.  Competitors may charge less than we do, causing us to reduce or
preventing us from raising our fees.  As a result, our business and
revenues may suffer.  We currently compete or expect to compete with
the following types of Internet access providers:





•
            National
      online service providers, such as Time Warner and
  MSN;


7





•
              National
      telecommunications providers, such as AT&T Mobility, Qwest
      Communications, Verizon Wireless and Sprint
  Nextel;


•
            Numerous
      regional and local ISPs and WISPs;


•
            Computer
      hardware and software companies, and other technology companies, such as
      Microsoft and Dell;


•
            Cable
      operators, such as Suddenlink Communications, Cox Communications and
      Comcast;


•
            Fixed
      wireless communications companies;


•
            Satellite
      companies;


•
            Electric
      utility companies; and


•
            Cellular
      and PCS services.





Government
Regulation





Internet
America is not currently subject to direct regulation by the Federal
Communications Commission (“FCC”) 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, as we provide
Internet access delivered via DSL or wire line broadband technology which
transmits internet service over public telephone lines, these transmissions are
governed by regulations and policies of the FCC establishing charges, terms and
conditions.  Changes in the FCC's policies relating to the
classification of telecommunications services and information services could
have a material adverse effect on our business.





Certain
wireless broadband services are subject to regulation by the FCC.  At
the federal level, the FCC has jurisdiction over wireless transmissions over the
electromagnetic spectrum, all interstate and foreign telecommunications
services, and many aspects of intrastate telecommunications.  States
and municipalities also may regulate many aspects of intrastate
telecommunications.  Broadband Internet-related regulatory policies
are continuing to develop, and it is possible that our services could be subject
to additional regulations in the future.  The extent of regulations
and their impact on our business and our ability to compete are currently
unknown.





The FCC
has determined that Internet access providers, utilizing DSL technology, are
“information services functionally integrated with a telecommunications
component”.  Current FCC regulations allow telephone companies the
flexibility to offer access to affiliated or unaffiliated ISPs on a
common-carrier basis, a non-common carrier basis, or some combination of both.
Internet America currently has approximately 1,400 DSL subscribers. We rely on
contracts to share the DSL transmission component for our existing DSL service
with our telephone service providers.  Our relationships and
agreements with these providers allow Internet America to continue to provide
cost effective DSL service to our customers; however, there is no guarantee that
we will be successful in renegotiating our contracts with these providers at
favorable prices.





Further
changes in the FCC's policies relating to the classification of
telecommunications services and information services could have more adverse
effects on our business.  If the FCC were to classify us as a provider
of telecommunications services, regulations could affect the charges we pay to
connect to the local telephone network, impede our ability to compete for
broadband customers and cause us to have to increase prices for our
services.





The FCC
regulates certain spectrum bands in which the Company and its competitors
operate and can make additional spectrum available for use or change the way
existing spectrum is used. Internet America has obtained FCC approval to
operate on 3.65 GHz band on a nationwide, non-exclusive basis and has been, and
may in the future be, required to apply for licensing to operate in other
spectrum or markets. The breach of a license or applicable law, even if
inadvertent, can result in the revocation, suspension, cancellation or reduction
in the term of a license or the imposition of fines. In order to promote
competition, licenses may also require that third parties be granted access to
the Company’s bandwidth, frequency capacity, facilities or
services.





The FCC
also does not currently regulate the use of cable infrastructure for Internet
access as a telecommunications service or cable service.  This
classification will likely protect cable modem service providers from
regulation, including regulations requiring open access to cable
infrastructure.   Although some cable operators are voluntarily
providing access to competing service providers, the FCC’s classifications
decrease our potential to provide Internet access services via the cable
television infrastructure.





Internet
America assumed a Federal loan commitment from the United States Department of
Agriculture Rural Utilities Service (“RUS”) for providing financial assistance
for the expansion of broadband services in rural areas, which requires the
Company to follow certain procedures and regulations including those outlined in
RUS Bulletin 1738-2.


8





Due to
the increasing popularity and use of the Internet and the new government
programs designed to expand the Internet market, it is possible that additional
laws, regulations, taxes or legal precedent may be adopted with respect to the
Internet, covering issues such as content, privacy, pricing, unsolicited email,
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, cable operators or others, could have a material adverse effect on
our business, financial condition and results of operations.





Employees





As of
June 30, 2010, we employed approximately 39 people, all of whom were full-time
employees.  None of our current employees are represented by a labor
organization, and we consider employee relations to be good.





Item
1A.  Risk
Factors





Not
applicable.





Item
1B.  Unresolved
Staff Comments





Not
Applicable.





Item
2. Properties





Our
corporate headquarters are located in Houston, Texas at 10930 W. Sam Houston
Pkwy., N., Suite 200, where all executive functions, call center and network
monitoring exist. This location is 7,900 square feet; the lease expires May
2013. In the past few years, we reduced the field office locations and
substantially reduced operating costs.





The
Internet America core network is located in a secure leased cage at the CyrusOne
data center in Houston, Texas. CyrusOne operates a SAS 70 Type II compliant data
center. Our lease at this facility will renew or expire in May
2012.  Additionally, we lease 1,875 feet of office space in Stafford,
Texas which is used as a Data Center facility for non-core systems and
commercial customer services.





We
own real estate consisting of 0.13 acres located at 901 N. Cameron in Victoria,
Texas, related to our wireless operations in Southwest Texas. We believe that
all of our facilities are adequately maintained and insured and are suitable for
their present use.





Item
3. Legal
Proceedings





We are
involved from time to time in routine disputes and legal proceedings occurring
in the ordinary course of business.  Management believes these
matters, individually and in the aggregate, are immaterial to our financial
condition, results of operations and cash flows.  At this time and
during the last year, we have not had any actual or threatened legal
actions.





Item
4.  [Removed and
Reserved]


9





PART
II





Item
5.  Market for
Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities





Our
common stock trades on the OTC Bulletin Board under the symbol
GEEK.OB.  The following table shows the high and low bid quotations
per share of the common stock for the periods indicated as reported on the OTC
Bulletin Board.  These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.





High
                  
                  
                  LowFiscal
      Year Ended June 30, 2010:Fourth
      Quarter
                  
                  $
                  0.50
                  
                  
                  $
                  0.25Third
      Quarter
                  
                  
                  0.40
                  
                  
                  
                  0.32Second
      Quarter
                  
                  
                  0.52
                  
                  
                  
                  0.30First
      Quarter
                  
                  
                  0.50
                  
                  
                  
                  0.15Fiscal
      Year Ended June 30, 2009:Fourth
      Quarter
                  
                  $
                  0.24
                  
                  
                  $
                  0.10Third
      Quarter
                  
                  
                  0.20
                  
                  
                  
                  0.14Second
      Quarter
                  
                  
                  0.30
                  
                  
                  
                  0.12First
      Quarter
                  
                  
                  0.43
                  
                  
                  
                  0.25





At
September 21, 2010, there were 231 holders of record of our common
stock.  The last reported sale price of the common stock on the OTC
Bulletin Board on September 21, 2010 was $0.25 per share.





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.





For
information regarding securities authorized for issuance under the Company’s
equity compensation plans, please see Item 12 of this Form 10-K.





Item
6.  Selected
Financial Data





Not
Applicable.





Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.





The
following is a discussion of the financial condition and results of operations
of Internet America, Inc. for the years ended June 30, 2010 and
2009.  This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.





Safe
Harbor Statement





The
following "Safe Harbor" Statement is made pursuant to the Private Securities
Litigation Reform Act of 1995.  Certain of the statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, we seek the
protections afforded by the Private Securities Litigation Reform Act of
1995.  These risks include, without limitation, that (1) we will not
be able to increase our rural customer base at the expected rate, (2) we will
not improve EBITDA, profitability or product margins, (3) Internet revenue in
high-speed broadband will continue to increase at a slower pace than the
decrease in other Internet services resulting in greater operating losses in
future periods,  (4) financing will not be available to us if and as
needed, (5) we will not be competitive with existing or new competitors, (6) we
will not keep up with industry pricing or technological developments impacting
the Internet, (7) we will be adversely affected by dependence on network
infrastructure, telecommunications providers and other vendors or by regulatory
changes, (8) service interruptions or impediments could harm our business, (9)
we may be accused of infringing upon the  intellectual property rights
of third parties, which is costly to defend and could limit our ability to use
certain technologies in the future, (10) government regulations could force us
to change our business practices, (11) we may be unable to hire and retain
qualified personnel, including our key executive officers, (12) future
acquisitions of wireless broadband Internet customers and infrastructure may not
be available on attractive terms and if available we may not successfully
integrate those acquisitions into our operations, (13) provisions in our
certificate of incorporation, bylaws and shareholder rights plan could limit our
share price and delay a change of management, and (14) our stock price has been
volatile historically and may continue to be volatile.   This list is
intended to identify certain of the principal factors that could cause actual
results to differ materially from those described in the forward-looking
statements included elsewhere herein.  These factors are not intended
to represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed risk factors
included in our other publicly filed reports.


10





Overview





Internet
America is an ISP that is focused on providing wireless high-speed broadband
Internet in rural markets, and presently serves approximately 8,200 wireless
broadband Internet subscribers and 25,900 total subscribers in Texas as of June
30, 2010. A subscriber represents an active, billed service.  One
customer account may represent multiple subscribers depending on the number of
active and billed services for that customer. The Company derives substantially
all revenues from Internet access services and related fees. A decline in
non-wireless subscribers and revenues is expected and will continue primarily
due to our customers migrating to high-speed providers in metropolitan
areas.





During
2010, we continued to focus on quality process implementation including
investing in infrastructure upgrades and simplifying internal systems and
procedures, and we examined all expenses for opportunities to reduce them
further. We reduced other expenses across the board by restructuring our
remaining acquisition debt and decreasing our headcount of employees. These
efforts improved productivity and customer satisfaction, and also resulted in
positive adjusted EBITDA for the last two fiscal quarters and the fiscal
year. Based on present operations, we expect the improving trend in EDITDA
to continue.





During
the quarter ended March 31, 2010, we eliminated several Senior Management
positions, and during the quarter ended June 30, 2010 we promoted two current
experienced employees to functional Vice Presidents.




We had
hoped to expand our service area by utilizing funds made available for economic
stimulus by The American Recovery and Reinvestment Act (“ARRA”)
legislation.  The Company applied for a grant from the Broadband
Technology Opportunity Program in August, 2009; however the application was
denied in early 2010 and we did not submit an application for the second round
in May 2010.





Because
of our efforts to improve the quality and efficiency of our operations over the
last few years, we believe that we are well positioned today to withstand an
economic slowdown and/or to capitalize on growth possibilities through internal
growth and acquisitions. We believe that we have sufficient capital resources
and cash on hand to withstand either a short or prolonged economic
downturn.  While we expect to see continuing earnings improvement in
the near term, we have now turned our major focus to increasing revenues through
internal growth of wireless operations, commercial services, and possible
acquisitions, although not at the expense of continued positive adjusted
EBITDA.





Statement
of Operations





Internet
services revenue is derived from dial-up Internet access, including analog and
ISDN access, DSL access, dedicated connectivity, wireless access, bulk dial-up
access, web hosting services, and value-added services, such as multiple e-mail
boxes, personalized e-mail addresses and Fax-2-Email
services.   In addition to miscellaneous revenue, other revenue
for 2010 includes telex messaging service revenues.





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, merchant processing fees 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;
(ii) fees paid to backbone providers for connections from our network to the
Internet; and (iii) equipment and tower lease costs for our new wireless
networks.





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 office and business
expenses.





Bad debt
expense (recoveries) consists primarily of customer accounts that have been
deemed uncollectible and will potentially be written off in future periods, net
of recoveries.  Historically, the expense has been based on the aging
of customer accounts whereby all customer accounts that are 90 days or older
have been provided for as a bad debt expense.


11





Depreciation
expense is computed using the straight-line or declining balance methods over
the estimated useful lives of the assets or the capital lease term, as
appropriate.  Data communications equipment, computers, data servers
and office equipment are depreciated over five years. We depreciate furniture,
fixtures and leasehold improvements over five years or the lease
term.  Buildings are depreciated over fifteen years. Amortization
expense consists of the amortization of subscriber acquisition costs, which are
amortized over four years.





Our
business is not subject to any significant seasonal influences.


12


Results
of Operations


Year
Ended June 30, 2010 Compared to June 30, 2009





The
following table shows financial data for the years ended June 30, 2010 and 2009.
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).


Year Ended June 30,2010
                
                
                % of
                  Revenues
                
                
                2009
                
                
                % of
                  RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                
                $
                7,246
                
                
                
                97.7
                %
                
                $
                7,581
                
                
                
                97.4
                %Other
                
                
                174
                
                
                
                2.3
                %
                
                
                202
                
                
                
                2.6
                %Total
                
                
                7,420
                
                
                
                100.0
                %
                
                
                7,783
                
                
                
                100.0
                %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                
                
                4,930
                
                
                
                66.4
                %
                
                
                5,304
                
                
                
                68.1
                %Sales
      and marketing
                
                
                310
                
                
                
                4.2
                %
                
                
                301
                
                
                
                3.9
                %General
      and administrative
                
                
                2,131
                
                
                
                28.7
                %
                
                
                2,657
                
                
                
                34.1
                %Provision
      for (recovery of) bad debt
                
                
                (2
                )
                
                
                0.0
                %
                
                
                1
                
                
                
                0.0
                %Depreciation
      and amortization
                
                
                1,012
                
                
                
                13.6
                %
                
                
                1,076
                
                
                
                13.8
                %Impairment
      loss
                
                
                -
                
                
                
                
                
                
                
                1,120
                
                
                
                14.4
                %Gain
      from restructuring of debt
                
                
                (52
                )
                
                
                (0.7
                )%
                
                
                -
                
                
                
                0.0
                %Total
                
                
                8,329
                
                
                
                112.3
                %
                
                
                10,459
                
                
                
                134.4
                %OPERATING
      LOSS
                
                
                (909
                )
                
                
                (12.3
                )%
                
                
                (2,676
                )
                
                
                (34.4
                )%INTEREST
      INCOME
                
                
                10
                
                
                
                0.1
                %
                
                
                37
                
                
                
                0.5
                %INTEREST
      EXPENSE
                
                
                (82
                )
                
                
                (1.1
                )%
                
                
                (86
                )
                
                
                (1.1
                )%NET
      LOSS
                
                $
                (981
                )
                
                
                (13.2
                )%
                
                $
                (2,725
                )
                
                
                (35.0
                )%LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                
                $
                (1
                )
                
                
                0.0
                %
                
                $
                (5
                )
                
                
                (0.1
                )%NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                
                $
                (980
                )
                
                
                (13.2
                )%
                
                $
                (2,720
                )
                
                
                (34.9
                )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                
                $
                (0.06
                )
                
                
                
                
                
                $
                (0.16
                )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                
                
                16,580,966
                
                
                
                
                
                
                
                16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                
                
                25,900
                
                
                
                
                
                
                
                27,000Number
      of employees at end of period
                
                
                39
                
                
                
                
                
                
                
                59Adjusted
      EBITDA(loss)(2)
                
                $
                158
                
                
                
                
                
                
                $
                (392
                )Adjusted
      EBITDA margin(3)
                
                
                2.1
                %
                
                
                
                
                
                
                (5.0
                )%CASH
      FLOW DATA:Cash
      flow used in operations
                
                $
                (258
                )
                
                
                
                
                
                $
                (490
                )Cash
      flow used in investing activities
                
                $
                (328
                )
                
                
                
                
                
                $
                (404
                )Cash
      flow used in financing activities
                
                $
                (626
                )
                
                
                
                
                
                $
                (596
                )Reconciliation
      of net loss to Adjusted EBITDA (loss):Net
      loss
                
                $
                (981
                )
                
                
                
                
                
                $
                (2,725
                )Add:Depreciation
      and amortization
                
                
                1,012
                
                
                
                
                
                
                
                1,076Impairment
      loss
                
                
                -
                
                
                
                
                
                
                
                1,120Stock
      compensation
                
                
                55
                
                
                
                
                
                
                
                88Interest
      expense
                
                
                82
                
                
                
                
                
                
                
                86Less:
      Interest income
                
                
                (10
                )
                
                
                
                
                
                
                (37
                )Adjusted
      EBITDA (loss)(2)
                
                $
                158
                
                
                
                
                
                
                $
                (392
                )







(1) A
subscriber represents an active, billed service.  One customer account
may represent multiple subscribers depending on the number of active and billed
services for that customer.


(2)
Adjusted EBITDA (earnings before interest, taxes, and depreciation and
amortization less stock based compensation) is not a measurement of financial
performance under generally accepted accounting principles (GAAP) and should not
be considered an alternative to net income as a measure of
performance.  Management has consistently used adjusted EBITDA on a
historical basis as a measurement of the Company’s current operating cash
income.


(3)
Adjusted EBITDA margin represents adjusted EBITDA as a percentage of total
revenue.


13





Total
revenue.  Total revenue decreased by $363,000, or 4.7%, to
$7,420,000 in fiscal 2010 from $7,783,000 in fiscal 2009. The Company’s
subscriber count decreased by 1,100, or 4.1%, to 25,900 as of June 30, 2010
compared to 27,000 as of June 30, 2009. The Company’s wireless broadband
Internet subscriber count remained relatively unchanged and was approximately
8,200 as of June 30, 2010 as compared to approximately 8,000 as of June 30,
2009. Wireless broadband Internet revenue increased by $386,000 to $4,693,000 as
of June 30, 2010 compared to $4,307,000 as of June 30, 2009.  This
increase was primarily due to the stability of the subscriber base and customers
migrating to upgraded service levels and purchasing additional services for the
year ended June 30, 2010. Presently stable revenues derived from wireless
broadband Internet subscribers were offset by the decrease in other types of
Internet service revenues of $721,000. This is attributable in part to the
decline of dial-up customers who moved to other providers’ broadband service. In
connection with the acquisition of TeleShare Communications Services, Inc.
(“TeleShare”), the Company derives other revenues from providing telex messaging
services, which totaled $174,000 for the year ended June 30, 2010 as compared to
$202,000 for the year ended June 30, 2009.





Connectivity and
operations.  Connectivity and operations expenses decreased by
approximately $374,000, or 7.0%, to $4,930,000 for fiscal 2010 from $5,304,000
for fiscal 2009. Salaries, wages and related personnel costs decreased by
$212,000 to $2,265,000 as of June 30, 2010 compared to $2,477,000 as of June 30,
2009 as a result of a salary reduction plan for all employees implemented as of
January 1, 2010.  Expensed assets decreased by $153,000 to $424,000 as
of June 30, 2010 compared to $577,000 as of June 30, 2009 due to a decrease in
supplies, installation costs and repairs.  Data and telecommunications
expense decreased by $61,000 to $1,470,000 in fiscal 2010 compared to $1,531,000
in fiscal 2009.  Travel and mileage decreased by $17,000 to $108,000
in fiscal 2010 compared to $125,000 in fiscal 2009.  The remaining
decrease in expense primarily relates to a decrease in merchant fees of
$8,000.





The decreases in the previously
discussed expenses were partially offset by an increase in tower lease costs of
$45,000 for fiscal year 2010 to $469,000 compared to $424,000 for fiscal year
2009.The increase in tower lease costs relates to improvements in the Company’s
wireless broadband infrastructure and increases in tower rental
rates.  There was an increase of other expenses of $32,000 for a one
time conversion cost related to the transfer of email services to a hosted
outsource service provider.





Sales and
marketing.  Sales and marketing expenses increased by $9,000,
or 3.0%, to $310,000 for fiscal 2010 from $301,000 for the prior fiscal year.
Direct print advertising expense increased by $7,000 to $71,000 as of June 30,
2010 compared to $64,000 as of June 30, 2009.  The Company focused on
direct advertising in all improved or enhanced network areas in fiscal year
2010.  Salaries and wages increased slightly by $2,000 for fiscal year
2010.





General and
administrative.General and administrative
expenses decreased by $526,000, or 19.8%, to $2,131,000 in fiscal 2010 from
$2,657,000 for fiscal 2009.  In February 2009, the Company recorded a
write off expense for direct costs incurred in the contemplated merger with
KeyOn of $194,000.





Salaries and wages decreased $330,000
to $646,000 for fiscal 2010 compared to $976,000 for fiscal 2009. The decrease
is primarily due to a reduction in the number of employees, including
resignations of the COO, CFO and the Vice President of Marketing and Sales
during the quarter ended March 31, 2010, and a salary reduction plan implemented
on January 1, 2010.  Facilities costs decreased by $46,000 to $236,000
in fiscal 2010 compared to $282,000 in fiscal 2009 primarily due to the
renegotiation of our phone system lease contract and the closing of storage
facilities.  A net decrease in stock compensation expense for stock
options and directors fees of $32,000 to $118,000 in fiscal 2010 compared to
$150,000 in fiscal 2009 was due to the continued vesting of stock options and
termination of employment of some grantees.  Insurance costs decreased
by $30,000 to $90,000 in fiscal 2010 compared to $120,000 in fiscal 2009 due to
the renegotiation of rates and the closing of storage
facilities.   Other costs decreased by $24,000 to $252,000 in
fiscal 2010 compared to $276,000 in fiscal 2009, primarily as a result of
various cost saving measures implemented during fiscal 2010.  Travel
and mileage expenses decreased an additional $14,000 to $9,000 in fiscal 2010
compared to $23,000 in fiscal 2009 as a result of continued efforts to control
all expenses.  Professional and consulting fees decreased by $206,000
to $445,000 in fiscal 2010 compared to $651,000 in fiscal 2009 primarily due to
declining consulting fees paid to contract labor for telex messaging services,
offset by outside consulting fees paid to assist with COO duties.





The above
decreases were offset primarily by non-recurring expenses totaling $120,000 in
connection with our application for a grant under the ARRA to expand access to
broadband into areas in Southeast Texas adjacent to existing
operations.  Telecommunications expense increased by $36,000 to
$215,000 in fiscal 2010 compared to $179,000 in fiscal 2009 due primarily to the
purchase of increased bandwidth capacity.


14





Provision for bad debt
expense.Provision for bad debt
expense recorded a net recovery of $2,000 in fiscal 2010 compared to a net
expense of $1,000 in fiscal 2009.  This decrease is due primarily to
the effort by the Company to have customers pay by ACH or credit
cards.  We are fully reserved for all customer accounts that are at
least 90 days old.





Depreciation and
amortization.  Depreciation and amortization expense decreased
by $64,000, or 5.9%, to $1,012,000 for fiscal 2010 from $1,076,000 for fiscal
2009.  Depreciation increased by $54,000 due to the addition of new
depreciable assets for improvement of the Company’s wireless broadband Internet
network. The increase in depreciation was offset by a decrease in amortization
of $118,000. The decrease in amortization expense is primarily due to the
subscriber acquisition costs of wireless acquisitions during 2005 and 2006
becoming fully amortized during fiscal 2010.





Impairment
loss.  Goodwill was recorded in the acquisition of NeoSoft,
Inc. and PDQ.Net, Inc., whose dial-up subscribers have continued to decline.
During the years ended June 30, 2010 and 2009 the Company recorded impairment
losses of $0 and $1,120,000, respectively.





Gain from restructuring of
debt.Gain from restructuring of debt totaled $52,000 for
fiscal 2010.  The Company amended the notes it issued in connection
with the acquisition of TeleShare to extend the payment terms and reduce the
interest rate and carrying value slightly, resulting in a one-time
gain.





Interest (expense) income, net.  Interest income decreased by $27,000, or 73.0%, to $10,000 in
fiscal 2010 compared to $37,000 in fiscal 2009.   The decrease in
interest income is due to changes in cash on hand and declining interest
rates.  As a precautionary measure, in February 2009, the Company
transferred all funds from interest bearing accounts during this economic crisis
to ensure all funds were covered by the Temporary Guaranty Liquidity Program
initiated by the Federal Reserve Board.   Interest expense
decreased by $4,000, or 4.7%, to $82,000 in fiscal 2010 compared to $86,000 in
fiscal 2009 due to the reduction of the Company’s long term debt.





Liquidity
and Capital Resources





We have
financed our operations to date primarily through (i) cash flows from
operations, (ii) public and private sales of equity securities and (iii) loans
from shareholders and third parties.





Cash used
in operating activities is net loss adjusted for certain non-cash items and
changes in assets and liabilities.  For fiscal 2010 cash used in
operations was $258,000, compared to cash used in operations of $490,000 in
fiscal 2009.  Net loss plus non-cash items provided cash of $65,000 in
fiscal 2010 compared to used cash of $392,000 in fiscal 2009. Cash was used to
reduce accounts payable and accrued liabilities, reduce deferred revenue and
increase inventory. Cash was provided by decreases in accounts receivable,
prepaid expenses and other assets.





Cash used
in investing activities totaled $328,000 and $404,000 for the years ended June
30, 2010 and 2009, respectively.  In fiscal 2010, the Company used
cash for property and equipment purchases of $335,000 which was offset by
proceeds from the sale of equipment of $7,000. In fiscal 2009, the Company used
cash for property and equipment purchases of $415,000 which was offset by
proceeds from the sale of equipment of $11,000.





Cash used by financing activities for
fiscal 2010 totaled $626,000 for principal payments on debt and capital
leases.  Cash used by financing activities for fiscal 2009 totaled
$596,000 and consisted of principal payments on debt.





We estimate that cash on hand of $1.2
million at June 30, 2010 along with anticipated cash flow from operations will
be sufficient to meet our working capital needs for fiscal 2011 for continuing
operations as well as the addition of value-added services to both new and
existing subscribers.  Management believes that the Company will be
able to meet the service obligations related to the deferral of revenue and that
cash generated from recently acquired operations will be adequate to meet its
payment obligations under debt issued and assumed in connection with these
acquisitions.  However, additional financing may be required to fund
future acquisitions.  Continued decreases in revenues and subscriber
count may adversely affect the liquidity of the Company.




If additional capital financing
arrangements, including public or private sales of debt or equity securities, or
additional borrowings from commercial banks, shareholders and third parties, 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.


15





The
following are contractual cash obligations entered into by the Company through
June 30, 2010, for the next five fiscal years ending June 30:





Payments Due By PeriodTotal
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                2015
                
                
                ThereafterConnectivity
      contracts
                
                $
                960,520
                
                
                $
                630,444
                
                
                $
                330,076
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      leases
                
                
                1,246,344
                
                
                
                473,923
                
                
                
                371,146
                
                
                
                268,061
                
                
                
                95,213
                
                
                
                29,201
                
                
                
                8,800Long-term
      debt
                
                
                1,310,023
                
                
                
                425,971
                
                
                
                410,693
                
                
                
                172,222
                
                
                
                178,515
                
                
                
                122,622
                
                
                
                -Capital
      leases
                
                
                30,565
                
                
                
                28,315
                
                
                
                2,250
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                3,547,452
                
                
                $
                1,558,653
                
                
                $
                1,114,165
                
                
                $
                440,283
                
                
                $
                273,728
                
                
                $
                151,823
                
                
                $
                8,800




Critical Accounting Policies and
Estimates




In
preparing our consolidated financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our operating income and net
income, as well as on the value of certain assets and liabilities on our
consolidated balance sheet. The application of our critical accounting policies
requires an evaluation of a number of complex criteria and significant
accounting judgments by us. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Senior management
has discussed the development, selection and disclosure of these estimates with
the audit committee of our board of directors. Actual results may differ, and
could be material, from these estimates under different assumptions or
conditions.




An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the consolidated financial
statements. Management believes the following critical accounting policies
reflect our more significant estimates and assumptions used in the preparation
of the consolidated financial statements. We have not materially changed our
methodology for calculating the estimates below in the past four
years.




Our
critical accounting policies are as follows:




·
            Revenue
      recognition


·
            Accounting
      for income taxes; and


·
            Intangible
      assets




Revenue
recognition




Income
from providing internet related services is recognized when
earned.  We charge a recurring subscription fee to our subscribers and
recognize revenues when they are earned, which generally occurs as the service
is provided.  The service subscriptions are generally for billed
periods of monthly, quarterly, semiannually or annually, in
advance.  Payments received in advance for subscriptions are deferred
and recognized as the services are provided.  Installation and setup
fees are billed at the time of installation and deferred over the estimated
expected life of the customer.





Accounting
for Income Taxes




As part
of the process of preparing our consolidated financial statements we are
required to estimate our income taxes.  This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets, which are included within our consolidated balance sheet. We must
then assess and make significant estimates regarding the likelihood that our
deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations. Estimates related to income taxes affect the
deferred tax asset and liability line items and accrued liabilities in our
consolidated balance sheet and our income tax (benefit) expense line item in our
statement of operations.


16




The
deferred tax asset as of June 30, 2010 of approximately $15 million is fully
reserved due to continued tax losses since inception of the
Company.  Additionally, due to continued customer losses, it is
unclear whether the Company will be able to generate taxable income in the
future.  The valuation allowance is based on our historical and
estimates of taxable income and the period over which our deferred tax assets
will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may need to record
a deferred tax benefit which could materially impact our financial position and
results of operations.




Intangible
Assets




In
accordance with Financial Accounting Standards Board (“FASB”) guidance on
goodwill and other intangibles,amortization for goodwill
is no longer required but is subject to at least an annual test for impairment.
An impairment review may be performed more frequently in the event circumstances
indicate that the carrying value may not be recoverable.




The
goodwill impairment model is a two-step process.  The first step is
used to identify a potential impairment by comparing the fair value of a
reporting unit with its net book value (or carrying amount), including
goodwill.  If the fair value exceeds the carrying amount, goodwill of
the reporting unit is not considered impaired and the second step of the
impairment test is unnecessary.  If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill
impairment test compares the implied value of the reporting unit’s goodwill with
the carrying amount of that goodwill.  If the carrying amount exceeds
the implied fair value, an impairment loss is recognized in an amount equal to
that excess.  The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all the assets and
liabilities of that unit (including any previously unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit.





Determining
the fair value of a reporting unit under the first step of the goodwill
impairment test, and determining the fair value of individual assets and
liabilities of a reporting unit (including previously unrecognized intangible
assets) under the second test of the goodwill impairment test, is judgmental in
nature and often involves significant estimates and assumptions. These estimates
and assumptions could have a significant impact on whether an impairment charge
is recognized and the magnitude of any such charge. Estimates of fair value are
primarily determined using future net cash flows discounted at 5.85% and
are based on management’s best estimate and general market conditions. This
approach uses significant assumptions, including projected future earnings and
a subscription growth or attrition rate.




Goodwill
was recorded in the acquisition of NeoSoft, Inc. and PDQ.Net, Inc. As of June
30, 2010, Management believes that the churn rates experienced in the past three
months reflect a neutral or slightly increased value in the residual cash value
for the remaining life of the intangible assets associated with these
acquisitions.  Management believes that applying the churn rates on a
go forward basis, the businesses are reasonably sustainable beyond the 48 months
from June 30, 2010, and therefore no impairment losses were recorded for fiscal
year 2010.




We are
required periodically to review the estimated useful lives of our intangible
assets. There was no change to the estimated useful lives of our intangible
assets during fiscal 2010 or 2009 as a result of our review.




Inflation




We do not
believe that inflation has had a significant impact on our consolidated
operations.





Item
7A.  Quantitative
and Qualitative Disclosures 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-20 and include our Consolidated Balance Sheets, Consolidated
Statements of Operations, Consolidated Statements of Shareholders' Equity and
Consolidated Statements of Cash Flows for each of the two years in the periods
ended June 30, 2010 and 2009, and the Notes to the Consolidated Financial
Statements.


17




Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item
9A. Controls and
Procedures





Disclosure
Controls and Procedures





An
evaluation was carried out under the supervision and with the participation of
our Chief Executive Officer, also performing the functions of the principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) in effect as of June 30, 2010.  Based upon that
evaluation, the Chief Executive Officer concluded that, as of June 30, 2010, the
design and operation of these disclosure controls and procedures were effective
in timely alerting management to the material information relating to the
Company required to be included in its periodic filings with the Securities and
Exchange Commission.




Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles. It should be noted, however, that
because of inherent limitations, any system of internal controls, however
well-designed and operated, can provide only reasonable, but not absolute,
assurance that financial reporting objectives will be met. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate.





Our Chief
Executive Officer, also performing the functions of the principal financial
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting as of June 30, 2010 based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission (the COSO criteria). Based on that evaluation under the COSO
criteria, our management concluded that the Company maintained effective
internal control over financial reporting as of June 30, 2010.





Attestation
Report of the Registered Public Accounting Firm





This
Annual Report on Form 10-K does not include an attestation report of the
Company’s independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to an exemption for smaller reporting companies under Section 989G of
the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The
Dodd-Frank Act provides an exemption from the independent auditor attestation
requirement under Section 404(b) of the Sarbanes-Oxley Act for small
issuers that are neither a large accelerated filer nor an accelerated filer. The
Company qualifies for this exemption.





Changes
in Internal Control over Financial Reporting





There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation referred to above during its most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





Item
9B. Other
Information





None.


18


PART
III





Item
10. Directors, Executive
Officers and Corporate Governance





Directors
and Executive Officers





The
following table sets forth information about each of our directors.





NAME
                    
                    AGE
                    
                    POSITION
                    
                    DIRECTOR SINCE/
                      CLASS OF DIRECTOR(1)William E. (Billy) Ladin,
      Jr.
                    
                    69
                    
                    Chairman
      of the Board
                    
                    January
      2000 / (Class I)Justin
      McClure
                    
                    46
                    
                    Director
                    
                    April
      2004 / (Class II)Steven
      G. Mihaylo
                    
                    66
                    
                    Director
                    
                    December
      2007 / (Class III)Ambassador John N. Palmer
                    
                    75
                    
                    Director
                    
                    February
      2005 / (Class I)Troy LeMaile-Stovall
                    
                    46
                    
                    Director
                    
                    April
      2004 /
(Class III)


(1) Each
director is elected for a term expiring at the Annual Meeting of Shareholders
held in the third year after his election, or upon the election and
qualification of his successor.  In the absence of an Annual Meeting
of Shareholders, the terms of the directors whose terms were to expire in those
years are extended for another year. At the next Annual Meeting of Shareholders,
Class III directors will be elected.





William E. (Billy) Ladin, Jr.
Mr. Ladin became CEO and Chairman of the Board of Directors in September 2003
after serving as Vice Chairman and as a director of the Company since January
2000. He joined the Company in connection with its acquisition of PDQ.Net, a
Houston-based Internet service provider that Mr. Ladin formed in 1997. Mr. Ladin
served as Chief Executive Officer of PDQ.Net until its acquisition by the
Company.





Justin McClure.Mr. McClure
currently serves as President of GulfSouth Capital, Inc., a Jackson, Mississippi
based private investment firm which he joined in 1999. Additionally, Mr. McClure
serves as Chairman of TelNet, Ltd., a telecommunications holding company based
in Hamilton, Bermuda. Prior to joining GulfSouth Capital, Inc., Mr. McClure
practiced telecommunications law with the Washington, DC firm of Lukas, Nace,
Gutierrez and Sachs with an emphasis on wireless telecommunications. Mr. McClure
is the son-in-law of Ambassador Palmer.





Steven G. Mihaylo was elected
a director effective December 10, 2007, filling a vacancy on the Board. Mr.
Mihaylo founded Inter-Tel (Delaware), Incorporated and served as its Chief
Executive Officer from July 1969 to February 2006. He served as Chairman of the
Inter-Tel Board of Directors from July 1969 to October 1982 and from September
1983 to July 2005. He served as a member of the Inter-Tel Board of Directors
from July 1969 until March 2006 and from May 2006 to August 2007.





Ambassador John N. Palmer.
Ambassador Palmer currently serves as Chairman of GulfSouth Capital, Inc., a
Jackson, Mississippi based private investment firm which he founded in 1999. In
October 2001, Ambassador Palmer was confirmed by the U.S. Senate as the
Ambassador to Portugal. His term ended in September 2004. Prior to that, he
served as Chairman of SkyTel from 1989 until 1999. Ambassador Palmer is Mr.
McClure’s father-in law.





Troy LeMaile-Stovall. Mr.
Stovall has served as Senior Vice President, Finance & Operations for
Jackson State University (JSU) in Jackson, Mississippi since July 2004. In
addition, Mr. Stovall serves as Treasurer of the JSU Development Foundation.
Prior to joining JSU, Mr. Stovall founded LeMaile Stovall LLC, a management
consulting/advisory/interim senior management firm in 2001. Prior to 2001 Mr.
Stovall was Chief Executive Officer of GulfSouth Capital, Inc., a Jackson,
Mississippi based private investment firm.





In
connection with our acquisition of PDQ.Net in November 1999, the Company agreed
to use its reasonable best efforts to elect Mr. Ladin to the Board of Directors
for so long as Mr. Ladin and Ambassador Palmer collectively own more than 5% of
the Company’s outstanding Common Stock.




19




Mr.
Ladin, who serves as the sole executive officer of the Company, holds the
positions of Chairman of the Board, Chief Executive Officer and Acting Chief
Financial Officer.





Code
of Ethics





The
Company has adopted a general code of ethics that applies to all employees,
including the Company’s Chief Executive Officer. The text of the code of ethics
is posted on the Company’s website at
http://www.internetamerica.com.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Exchange Act requires our officers and directors, and persons who own
more than 10% of a registered class of our equity securities, to file initial
reports of ownership and reports of changes in ownership with the SEC. Such
persons are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of
such forms received by it and representations from certain reporting persons
regarding their compliance with the relevant filing requirements, the Company
believes that all filing requirements applicable to its officers, directors and
10% shareholders were complied with during the fiscal year ended June 30,
2010 except that the Form 4s required to be filed on September 16, 2009
reporting the receipt of Warrants by Mr. Mihaylo and Ambassador Palmer, and the
Form 4s required to be filed on October 27, 2009 reporting the receipt of stock
options by each of the directors, were not filed until September 21,
2010.





Audit
Committee





The Audit
Committee of the Board of Directors is composed of Messrs. McClure, Stovall, and
Mihaylo each of whom is independent, as defined by Rule 4200(a) (15) of the
NASD’s listing standards. Mr. Stovall serves as a financial expert as defined in
Item 401(h) (2) of Regulation S-K under the Exchange Act.





Item
11. Executive
Compensation





Summary
Compensation Table





The
following table sets forth information regarding compensation paid to our Chief
Executive Officer and the other most highly compensated executive officers who
earned more than $100,000 during the 2010 fiscal year (the “Named Executive
Officers”) for the fiscal periods indicated.





Name and
                                    Principal Position
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Bonus
                                    ($)
                                  
                                  
                                  Option
                                    Awards
                                    ($)
                                  
                                  
                                  All other
                                    Compensation
                                    ($)
                                  
                                  
                                  Total
                                    ($)William
      E. (Billy) Ladin, Jr.
                                  
                                  2010
                                  
                                  $
                                  178,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  178,000Chairman
      of the Board,
                                  
                                  2009
                                  
                                  $
                                  200,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  200,000Chief
      Executive Officer and Acting Chief Financial OfficerRoss
      McAlpine
                                  
                                  2010
                                  
                                  $
                                  107,500
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  107,500Former
      President and Chief Operating Officer (1)
                                  
                                  2009
                                  
                                  $
                                  175,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  175,000





(1)
Mr. McAlpine resigned from the Company effective January 29,
2010.


20


Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth information regarding the value of stock options
outstanding at June 30, 2010 held by the Named Executive Officers. Stock
options for 50,000 shares were granted to Mr. Ladin in fiscal 2010 as director
compensation. No options were exercised by any of the Named Executive Officers
in fiscal 2010.





Name
                    
                    Number of
                      Securities
                      Underlying
                      Unexercised
                      Options (#)
                      Exercisable
                    
                    
                    Number of
                      Securities
                      Underlying
                      Unexercised
                      Options (#)
                      Unexercisable
                    
                    
                    Option Exercise
                      Price ($)
                    
                    Option
                      Expiration DateWilliam
      E. (Billy) Ladin, Jr.
                    
                    
                    200,000
                    
                    
                    
                    0
                    
                    
                    $
                    0.50
                    
                    03/30/201725,000
                    
                    
                    
                    25,000
                    
                    
                    $
                    0.50
                    
                    10/23/2019





Director
Compensation





Name
                
                Fees Earned or
                  Paid in Cash ($)
                
                
                Option Awards
                  ($) (1)
                
                
                All other
                  Compensation ($)
                
                
                Total($)William
      E. (Billy) Ladin, Jr.
                
                $
                -
                
                
                $
                2,500
                
                
                $
                -
                
                
                $
                2,500Justin
      McClure
                
                
                15,500
                
                
                
                4,000
                
                
                
                -
                
                
                
                19,500Steven
      G. Mihaylo
                
                
                15,500
                
                
                
                2,500
                
                
                
                -
                
                
                
                18,000Ambassador
      John N. Palmer
                
                
                15,000
                
                
                
                2,500
                
                
                
                -
                
                
                
                17,500Troy
      LeMaile-Stovall
                
                
                16,000
                
                
                
                4,000
                
                
                
                -
                
                
                
                20,000




(1)Option award value is
calculated using the Black Scholes pricing model with the following assumptions:
option term until exercise of 4 years, volatility of 358%, risk-free interest
rates of 2.46% and 2.41%, forfeiture rate of 8% and an expected dividend yield
of zero.


(2) At
June 30, 2010, the following directors owned options to purchase the number of
shares of Company common stock indicated: Ladin – 250,000, McClure – 124,026,
Mihaylo – 50,000, Palmer – 130,392, and LeMaile-Stovall – 124,026.





Directors
are paid fees of $12,000 per annum for their service as members of the Board of
Directors and additional fees of $250 per hour for their attendance at
video meetings, or $1,000 for their attendance at an in-person meeting of the
Board of Directors.  In addition members of the Audit Committee are paid
$500 per attendance at meetings of the Audit Committee.





Employment
Contracts





There are
no employment contracts with any of the Named Executive
Officers.


21


Item
12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters





The
following table sets forth information as of September 21, 2010 regarding the
beneficial ownership of each class of voting securities of the Company held by
(1) each person or group known by us to own beneficially 5% or more of a
class of voting securities, (2) each director and Named Executive Officer
and (3) all executive officers and directors as a group. Unless otherwise
noted, the persons named below have sole voting and investment power with
respect to the shares shown as beneficially owned by them and the address for
each is the corporate offices of the Company.




Name of
                                                                Beneficial Owner/Positions
                                                              
                                                              Title of Class
                                                              
                                                              Amount and Nature of
                                                                Beneficial Ownership
                                                              
                                                              
                                                              Percent
                                                                OwnershipWilliam
      E. (Billy) Ladin, Jr.
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              1,104,758
                                                              (1)
                                                              
                                                              
                                                              6.6
                                                              %Chairman
      of the Board,
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              341,297
                                                              
                                                              
                                                              
                                                              11.8
                                                              %Chief
      Executive Officer, Acting Chief Financial Officer and
    Director
                                                              
                                                              Total
                                                              
                                                              
                                                              1,446,055
                                                              
                                                              
                                                              
                                                              7.4
                                                              %Justin
      McClure
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              732,726
                                                              (2)
                                                              
                                                              
                                                              4.4
                                                              %Director
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              853,242
                                                              (2)
                                                              
                                                              
                                                              29.5
                                                              %Total
                                                              
                                                              
                                                              1,585,968
                                                              
                                                              
                                                              
                                                              8.1
                                                              %Steven
      G. Mihaylo
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              4,222,461
                                                              (3)(4)
                                                              
                                                              
                                                              25.2
                                                              %Director
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              500,000
                                                              (3)(4)
                                                              
                                                              
                                                              17.3
                                                              %Total
                                                              
                                                              
                                                              4,722,461
                                                              
                                                              
                                                              
                                                              24.0
                                                              %Ambassador
      John N. Palmer
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              1,156,187
                                                              (5)
                                                              
                                                              
                                                              6.9
                                                              %Director
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              853,242
                                                              (5)
                                                              
                                                              
                                                              29.5
                                                              %Total
                                                              
                                                              
                                                              2,009,429
                                                              
                                                              
                                                              
                                                              10.2
                                                              %Troy
      LeMaile-Stovall
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              84,026
                                                              (6)
                                                              
                                                              
                                                              
                                                              *DirectorGulf
      South Capital, Inc.
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              76,667
                                                              (2)(5)
                                                              
                                                              
                                                              
                                                              *Series
      A Preferred Stock
                                                              
                                                              
                                                              853,242
                                                              (2)(5)
                                                              
                                                              
                                                              29.5
                                                              %Total
                                                              
                                                              
                                                              929,909
                                                              
                                                              
                                                              
                                                              4.8
                                                              %Arnold
      Schumsky
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              170,648
                                                              
                                                              
                                                              
                                                              5.9
                                                              %Stuart
      Sternberg
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              511,945
                                                              
                                                              
                                                              
                                                              17.7
                                                              %George
      Sturgis
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              30,000
                                                              
                                                              
                                                              
                                                              
                                                              *Series
      A Preferred Stock
                                                              
                                                              
                                                              170,648
                                                              
                                                              
                                                              
                                                              5.9
                                                              %Total
                                                              
                                                              
                                                              200,648
                                                              
                                                              
                                                              
                                                              1.0
                                                              %Yvette
      Sturgis
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              170,648
                                                              
                                                              
                                                              
                                                              5.9
                                                              %2003
      Sanders Children’s Trust
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              170,648
                                                              
                                                              
                                                              
                                                              5.9
                                                              %Summit
      Growth Management, LLC
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              500,000
                                                              (4)
                                                              
                                                              
                                                              17.3
                                                              %All
      directors and executive
                                                              
                                                              Common
      Stock
                                                              
                                                              
                                                              6,340,258
                                                              
                                                              
                                                              
                                                              36.3
                                                              %officers
      as a group (five persons)
                                                              
                                                              Series
      A Preferred Stock
                                                              
                                                              
                                                              1,694,539
                                                              
                                                              
                                                              
                                                              58.7
                                                              %Total
                                                              
                                                              
                                                              8,034,797
                                                              (7)
                                                              
                                                              
                                                              39.5
                                                              %


* Less than one
percent.





(1)
            Includes
      options to purchase 225,000 shares of Common Stock granted to Mr. Ladin
      which are exercisable at $.50 per
share.


22


(2)
            Includes
      options to purchase 84,026 shares of Common Stock granted to Mr. McClure
      which are exercisable at $.50 per share, 155,333 shares representing the
      proportionate interest in shares held by J.N. Palmer Family Partnership,
      in which Mr. McClure’s spouse has a 20% limited partner interest,
      261,900 shares owned by Mr. McClure’s children and 76,667 shares of
      Common Stock and 853,242 shares of Series A Preferred Stock owned by
      GulfSouth Capital, Inc. (“GulfSouth”), a private investment firm in which
      Mr. McClure serves as an officer. Mr. McClure disclaims
      beneficial ownership of the shares owned by his spouse, his children and
      GulfSouth.





(3)
            Includes
      warrants to purchase 197,461 shares of Common Stock issued to Mr. Mihaylo
      which are redeemable at $0.38 per share and options to purchase 25,000
      shares of Common Stock granted to Mr. Mihaylo which are exercisable at
      $.50 per share.





(4)
            The
      Steven G. Mihaylo Trust, of which Mr. Mihaylo is the Trustee, owns all the
      shares of Common Stock, and Summit Growth Management, LLC, of which Mr.
      Mihaylo is the Managing Member, owns all the shares of Series A Preferred
      Stock of the Company.





(5)
            Includes
      options to purchase 105,392 shares of Common Stock granted to Ambassador
      Palmer which are exercisable at $0.50 per share. Includes warrants to
      purchase 197,461 shares of Common Stock issued to Ambassador Palmer which
      are redeemable at $0.38 per share.  Includes 776,667 shares held
      by J.N. Palmer Family Partnership, a limited partnership in which
      Ambassador Palmer owns a 40% limited partnership interest, and 76,667
      shares of Common Stock and 853,242 shares of Series A Preferred Stock
      owned by GulfSouth, in which Ambassador Palmer serves as Chairman.
      Ambassador Palmer disclaims beneficial ownership of 466,000 of the shares
      owned by the J.N. Palmer Family Partnership and all of the shares owned by
      GulfSouth.





(6)
            Includes
      options to purchase 84,026 shares of Common Stock granted to Mr.
      LeMaile-Stovall which are exercisable at $.50 per
  share.





(7)
            Includes
      (i) options to purchase 523,444 shares of Common Stock that are
      currently exercisable, (ii) 776,667 shares held by J.N. Palmer Family
      Partnership, of which Ambassador Palmer disclaims beneficial ownership of
      466,000 shares and Mr. McClure disclaims beneficial ownership of
      155,333 shares, (iii) 76,667 shares of Common Stock and 853,242
      shares of Series A Preferred Stock owned by GulfSouth, of which each
      of Mr. McClure and Ambassador Palmer disclaims beneficial ownership,
      (iv) 261,900 shares owned by Mr. McClure’s children and of which
      Mr. McClure disclaims ownership, (v) 4,000,000 shares of Common Stock
      owned by The Steven G. Mihaylo Trust, and 500,000 shares of Series A
      Preferred Stock by owned by Summit Growth Management, LLC., (vi) warrants
      to purchase 197,461 shares of Common Stock issued to Mr. Mihaylo and (vii)
      warrants to purchase 197,461 shares of Common Stock issued to Ambassador
      Palmer.





Equity
Compensation Plan Information





The
following table sets forth information as of June 30, 2010 concerning
shares of Common Stock that are authorized for issuance under our equity
compensation plans.





Plan Category
                
                Number of securities
                  to be issued
                  upon exercise of
                  outstanding options,
                  warrants and rights
                
                
                Weighted-average
                  exercise price of
                  outstanding options,
                  warrants and rights
                
                
                Number of securities
                  remaining available for
                  future issuance under
                  equity compensation plansEquity
      compensation plans approved by security holders (1)
                
                
                838,444
                
                
                $
                0.51
                
                
                
                1,322,612Equity
      compensation plans not approved by security holders (2)
                
                
                394,922
                
                
                
                0.38
                
                
                
                -Total
                
                
                1,233,366
                
                
                
                
                
                
                
                1,322,612







(1)
            Consists
      of the Internet America 2007 Stock Option Plan. Options related to the
      1998 Nonqualified Stock Option Plan and the 2004 Non-Employee Director
      Plan expired during fiscal 2010.


(2)
            Consists
      of Warrants to purchase shares of common stock issued to two
      directors.  See Item
13.


23


Item
13. Certain Relationships and
Related Transactions, and Director Independence





In the
Company’s application for a grant from the Broadband Technology Opportunity
Program under the ARRA filed in August 2009, the Company was required to
identify a source of funding of a minimum of 20% of the project costs from
non-federal sources. In order to meet that requirement, the Company asked Mr.
Mihaylo and Ambassador Palmer, both directors of the Company, to furnish in the
application documentation regarding the Company’s ability to obtain the minimum
outside capital funding committed to the project through them. On September 14,
2009, the Company issued a Warrant to purchase 197,461 shares of Common Stock to
each of Mr. Mihaylo and Ambassador Palmer in consideration for their furnishing
that documentation. The Warrants vested immediately and are exercisable for a
period of five years at $0.38 per share, which was comparable to the market
value on the date of the issuance of the warrants. The fair value of the
warrants was estimated on their grant date using the Black-Scholes pricing
model.





There
have been no other transactions since the beginning of the Company’s last fiscal
year, nor is there any currently proposed transaction, in which the Company was
or is to be a participant and in which any related person had or will have a
direct or indirect material interest.





We have a
policy providing that all transactions between us and related parties are
subject to approval by a majority of all disinterested directors and must be on
terms no less favorable than those that could otherwise be obtained from
unrelated third parties. Messrs. McClure, Mihaylo, Palmer and Stovall are
independent directors, as defined by Rule 4200(a) (15) of the NASD’s listing
standards. Mr. Ladin is not independent because he is currently employed by
the Company as its Chief Executive Officer and Acting Chief Financial
Officer.





Item
14. Principal Accounting Fees
and Services





Audit
Fees





The firm of Pannell Kerr Forster of
Texas, P.C. (“PKF”), our independent principal auditors, has billed us aggregate
fees of approximately $97,000 for professional services rendered for the audit
of our financial statements for the year ended June 30, 2010, for the reviews of
our financial statements included in our Forms 10-Q for that year and for the
audit of subsidiary statements for the years ended December 31, 2009 and
2008.  PKF billed us $153,000 for professional services rendered for
the audit of our financial statements for the year ended June 30, 2009 and
for the reviews of our financial statements included in our Forms 10-Q for that
year. We incurred no other fees to PKF for audit or other services in fiscal
years 2010 and 2009.





Audit
Related Fees





Included
in “Audit Fees” above for the year ended December 31, 2009 is $7,500 billed for
audit-related services in connection with the registration statement for the
terminated merger with KeyOn. There were no other fees billed for audit-related
services not disclosed in “Audit Fees” above.





Tax
Fees





No tax
fees were billed for services by the Company’s independent registered public
accounting firm in fiscal years 2010 and 2009.





All
Other Fees





No other
fees were billed for services rendered by the Company’s independent registered
public accounting firm for fiscal years 2010 and 2009.





Compatibility
of Certain Fees with Independent Registered Public Accounting Firm’s
Independence





The Audit
Committee has adopted pre-approval policies and procedures pursuant to which the
engagement of any independent registered public accounting firm is approved.
Such procedures govern the ways in which the Audit Committee will pre-approve
audit and various categories of non-audit services that the auditor provides to
the Company. In accordance with this policy, the Audit Committee has given its
approval for the provision of audit services by PKF for the fiscal year ending
June 30, 2010. Services which have not received pre-approval must receive
specific approval of the Audit Committee. The Audit Committee is informed of
each such engagement in a timely manner, and such procedures do not include
delegation of the Audit Committee’s responsibilities to management. All of the
audit services which were performed by PKF in fiscal 2010 and 2009 were
pre-approved by the Audit Committee.


24


PART
IV





Item
15.  Exhibits,
Financial Statement Schedules.





(a)
            Financial
      Statements





See Index
to Consolidated Financial Statements on page F-1 for a list of each of the
financial statements included in this report.





(b)
            Exhibits





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





Exhibit
              
              Description3.1
              
              Articles
      of Incorporation (1)3.2
              
              Statement
      of Resolution of Series A Preferred Stock(2)3.3
              
              Statement
      of Resolution of Series A Preferred Stock(2)3.4
              
              Statement
      of Resolution of Series B Preferred Stock(2)3.2
              
              Bylaws,
      as amended (3)4.1
              
              Rights
      Agreement dated as of August 9, 2004, between Registrant and American
      Stock Transfer & Trust Company, as Rights Agent (4)4.2
              
              Amendment
      No. 1 to Rights Agreement dated as of December 10, 2007
  (5)4.3
              
              Registration
      Rights Agreement dated as of October 17, 2007 (2)4.4
              
              Registration
      Rights Agreement between Internet America, Inc. and the Investor named
      therein dated as of December 10, 2007 (5)4.5
              
              Form
      of Warrant dated September 14, 2009. *10.1
              
              Internet
      America, Inc. 2007 Stock Option Plan (6)21.1
              
              List
      of subsidiaries (7)31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.*31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.*32
              
              Section
      1350 Certification of William E. Ladin,
Jr.*








*Filed
herewith





(1)
            Incorporated
      by reference to exhibits 3.1 and 3.2 to Registration Statement on Form
      SB-2 as amended (file no. 333-59527) initially filed on July 21,
      1998.


(2)
            Incorporated
      by reference to exhibits 4.2 through 4.5 to Form 8-K filed on October 23,
      2007 (file no.
0001144204-07-055892)


(3)
            Incorporated
      by reference to exhibits 3.3 and 3.4 to Registration Statement on Form
      SB-2, as amended (file no. 333-59527) initially filed on July 21, 1998,
      and to exhibit 3.3 to Form 10-QSB filed on November 15,
    1999.


(4)
            Incorporated
      by reference to exhibit 1 to Registration Statement on Form 8-A (file no.
      001-32273) filed on August 11,
2004.


(5)
            Incorporated
      by reference to exhibits 4.2 and 4.3 to Form 8-K filed on December 11,
      2007 (file no.
0001144204-07-066863)


(6)
            Incorporated
      by reference to exhibit 10.2 to Form 8-K (file no. 0001144204-07-017487)
      filed on April 5, 2007.


(7)
            Incorporated
      by reference to exhibit 21.1 to Form 10-KSB (file no.
      0001144204-07-051533) filed September 28,
2007.


25


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 23rd day of September, 2010.





INTERNET
      AMERICA, INC./s/William E. Ladin, Jr.William
      E. (Billy) Ladin, Jr.Chief
      Executive Officer





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.





Signatures
                    
                    Title
                    
                    Date/s/ William E. Ladin, Jr.
                    
                    Chairman
      of the Board,William
      E. (Billy) Ladin, Jr.
                    
                    Chief
      Executive Officer,
                      Acting
      Chief Financial
                      Officer
      and Acting Principal
                      Accounting
      Officer
                    
                    September
      23, 2010/s/ Troy LeMaile-StovallTroy
      LeMaile-Stovall
                    
                    Director
                    
                    September
      23, 2010/s/ Justin McClureJustin
      McClure
                    
                    Director
                    
                    September
      23, 2010/s/ John PalmerJohn
      Palmer
                    
                    Director
                    
                    September
      23, 2010/s/ Steven G. MihayloSteven
      G. Mihaylo
                    
                    Director
                    
                    September
      23,
2010


26





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                  F-3Consolidated
      Statements of Operations
                  F-4Consolidated
      Statements of Shareholders' Equity
                  F-5Consolidated
      Statements of Cash Flows
                  F-6Notes
      to Consolidated Financial Statements
                  F-8


F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Internet
America, Inc.


Houston,
Texas




We have
audited the accompanying consolidated balance sheets of Internet America, Inc.
and subsidiaries (the “Company”) as of June 30, 2010 and 2009, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the years ended June 30, 2010 and 2009.  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 standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.




In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2010 and 2009,
and the results of its operations and cash flows for the years ended June 30,
2010 and 2009, in conformity with U. S. generally accepted accounting
principles.




Pannell
Kerr Forster of Texas, P. C.





Houston,
Texas


September
23, 2010


F-2


INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


June 30,
                
                
                June 30,2010
                
                
                2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                1,209,915
                
                
                $
                2,421,264Restricted
      cash
                
                
                6,432
                
                
                
                6,432Accounts
      receivable, net of allowance for uncollectible accounts of $4,438 and
      $6,824 as of June 30, 2010 and June 30, 2009, respectively
                
                
                113,936
                
                
                
                122,128Inventory
                
                
                274,954
                
                
                
                255,534Prepaid
      expenses and other current assets
                
                
                411,510
                
                
                
                542,606Total
      current assets
                
                
                2,016,747
                
                
                
                3,347,964Property
      and equipment—net
                
                
                1,791,459
                
                
                
                2,150,562Goodwill—net
                
                
                2,413,127
                
                
                
                2,413,127Subscriber
      acquisition costs—net
                
                
                327,435
                
                
                
                744,869Other
      assets—net
                
                
                37,879
                
                
                
                53,318TOTAL
      ASSETS
                
                $
                6,586,647
                
                
                $
                8,709,840LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      accounts payable
                
                $
                175,505
                
                
                $
                298,903Accrued
      liabilities
                
                
                409,911
                
                
                
                573,013Deferred
      revenue
                
                
                855,675
                
                
                
                1,029,773Current
      portion of long-term debt
                
                
                425,971
                
                
                
                613,746Current
      portion of capital lease obligations
                
                
                28,315
                
                
                
                22,929Total
      current liabilities
                
                
                1,895,377
                
                
                
                2,538,364Long-term
      debt, net of current portion
                
                
                884,052
                
                
                
                664,772Long-term
      capital lease obligations, net of current portion
                
                
                2,250
                
                
                
                30,565Total
      liabilities
                
                
                2,781,679
                
                
                
                3,233,701COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS'
      EQUITY:Preferred
      stock $.01 par value: 5,000,000 shares authorized, 2,889,076 issued and
      outstanding as of June 30, 2010 and June 30, 2009
                
                
                28,891
                
                
                
                28,891Common
      stock, $.01 par value: 40,000,000 shares authorized, 16,558,914 and
      16,857,031 issued and outstanding as of June 30, 2010 and June 30, 2009,
      respectively
                
                
                165,590
                
                
                
                168,571Additional
      paid-in capital
                
                
                62,989,094
                
                
                
                63,676,806Accumulated
      deficit
                
                
                (59,377,806
                )
                
                
                (58,398,129
                )Total
      Internet America, Inc. shareholders' equity
                
                
                3,805,769
                
                
                
                5,476,139Noncontrolling
      interest in subsidiary
                
                
                (801
                )
                
                
                -Total
      shareholders' equity
                
                
                3,804,968
                
                
                
                5,476,139TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                
                $
                6,586,647
                
                
                $
                8,709,840





See notes
to consolidated financial statements.


F-3


INTERNET
AMERICA, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended June 30,2010
                  
                  
                  2009REVENUES:Internet
      services
                  
                  $
                  7,246,074
                  
                  
                  $
                  7,580,901Other
                  
                  
                  173,711
                  
                  
                  
                  202,081TOTAL
      REVENUES
                  
                  
                  7,419,785
                  
                  
                  
                  7,782,982OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                  
                  
                  4,930,240
                  
                  
                  
                  5,303,779Sales
      and marketing
                  
                  
                  309,743
                  
                  
                  
                  300,821General
      and administrative
                  
                  
                  2,130,800
                  
                  
                  
                  2,656,954Provision
      for (recovery of) bad debt expense
                  
                  
                  (2,386
                  )
                  
                  
                  961Depreciation
      and amortization
                  
                  
                  1,012,421
                  
                  
                  
                  1,076,634Impairment
      loss
                  
                  
                  -
                  
                  
                  
                  1,120,000Gain
      from restructuring of debt
                  
                  
                  (51,613
                  )TOTAL
      OPERATING COSTS AND EXPENSES
                  
                  
                  8,329,205
                  
                  
                  
                  10,459,149LOSS
      FROM OPERATIONS
                  
                  
                  (909,420
                  )
                  
                  
                  (2,676,167
                  )INTEREST
      INCOME
                  
                  
                  10,495
                  
                  
                  
                  36,851INTEREST
      EXPENSE
                  
                  
                  (81,553
                  )
                  
                  
                  (85,965
                  )NET
      LOSS
                  
                  $
                  (980,478
                  )
                  
                  $
                  (2,725,281
                  )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                  
                  
                  (801
                  )
                  
                  
                  (5,696
                  )NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                  
                  $
                  (979,677
                  )
                  
                  $
                  (2,719,585
                  )NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.16
                  )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                  
                  
                  16,580,966
                  
                  
                  
                  16,857,031





See notes
to consolidated financial statements.


F-4





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


Preferred Stock
                          
                          
                          Common Stock
                          
                          
                          Additional
                            Paid-in
                          
                          
                          Accumulated
                          
                          
                          Non-
                            controlling
                            Interest in
                          
                          
                          Shareholders'Shares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          Subsidiary
                          
                          
                          EquityBALANCE,
      JUNE 30, 2008
                          
                          
                          2,889,076
                          
                          
                          $
                          28,891
                          
                          
                          
                          16,857,031
                          
                          
                          
                          168,571
                          
                          
                          $
                          63,588,884
                          
                          
                          $
                          (55,678,544
                          )
                          
                          $
                          5,696
                          
                          
                          $
                          8,113,498Stock
      compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          87,922
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          87,922Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,719,585
                          )
                          
                          
                          (5,696
                          )
                          
                          
                          (2,725,281
                          )BALANCE,
      JUNE 30, 2009
                          
                          
                          2,889,076
                          
                          
                          $
                          28,891
                          
                          
                          
                          16,857,031
                          
                          
                          $
                          168,571
                          
                          
                          $
                          63,676,806
                          
                          
                          $
                          (58,398,129
                          )
                          
                          $
                          -
                          
                          
                          $
                          5,476,139Tendered
      shares in exchange for note
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (298,117
                          )
                          
                          
                          (2,981
                          )
                          
                          
                          (742,962
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (745,943
                          )Stock
      compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          55,250
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          55,250Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (979,677
                          )
                          
                          
                          (801
                          )
                          
                          
                          (980,478
                          )BALANCE,
      JUNE 30, 2010
                          
                          
                          2,889,076
                          
                          
                          $
                          28,891
                          
                          
                          
                          16,558,914
                          
                          
                          $
                          165,590
                          
                          
                          $
                          62,989,094
                          
                          
                          $
                          (59,377,806
                          )
                          
                          $
                          (801
                          )
                          
                          $
                          3,804,968





See notes
to consolidated financial statements.


F-5


INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Year Ended June 30,2010
                
                
                2009OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (980,478
                )
                
                $
                (2,725,281
                )Adjustments
      to reconcile net los to net cash used in operating
    activities:Depreciation
      and amortization
                
                
                1,012,421
                
                
                
                1,076,634Impairment
      loss
                
                
                -
                
                
                
                1,120,000Loss
      on disposal of fixed assets
                
                
                31,768
                
                
                
                47,939Provision
      for (recovery of) bad debt expense
                
                
                (2,386
                )
                
                
                961Non-cash
      stock compensation expense
                
                
                55,250
                
                
                
                87,922Gain
      from restructuring of debt
                
                
                (51,613
                )
                
                
                -Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                10,578
                
                
                
                47,142Inventory
                
                
                (19,420
                )
                
                
                29,876Prepaid
      expenses and other current assets
                
                
                131,096
                
                
                
                68,259Other
      assets
                
                
                15,439
                
                
                
                (15,231
                )Accounts
      payable and accrued liabilities
                
                
                (286,500
                )
                
                
                13,673Deferred
      revenue
                
                
                (174,098
                )
                
                
                (242,128
                )Net
      cash used in operating activities
                
                
                (257,943
                )
                
                
                (490,234
                )INVESTING
      ACTIVITIES:Purchases
      of property and equipment, net
                
                
                (334,701
                )
                
                
                (414,909
                )Proceeds
      from sale of property and equipment
                
                
                6,880
                
                
                
                10,934Net
      cash used in investing activities
                
                
                (327,821
                )
                
                
                (403,975
                )FINANCING
      ACTIVITIES:Principal
      payments of long-term debt
                
                
                (602,656
                )
                
                
                (596,207
                )Principal
      payments of capital leases
                
                
                (22,929
                )
                
                
                -Net
      cash used in financing activities
                
                
                (625,585
                )
                
                
                (596,207
                )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (1,211,349
                )
                
                
                (1,490,416
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                2,421,264
                
                
                
                3,911,680CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                1,209,915
                
                
                $
                2,421,264





See notes
to consolidated financial statements.


F-6


INTERNET
AMERICA, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)





Year Ended June 30,2010
                
                
                2009SUPPLEMENTAL
      INFORMATION:Cash
      paid for interest
                
                $
                83,573
                
                
                $
                91,149NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Debt
      extinguished for breach of acquisition contract
                
                $
                -
                
                
                $
                90,670Property
      and equipment purchased under capital lease
                
                $
                -
                
                
                $
                67,207Cancellation
      of common stock shares for long term debt in connection with
      acquisition
                
                $
                745,943
                
                
                $
                -





See notes
to consolidated financial statements.


F-7





INTERNET
AMERICA, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended June 30, 2010 and 2009





1.
General Information and
Summary of Significant Accounting Policies





Basis of Presentation —
Internet America, Inc. is an 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 experienced an operating loss for the fiscal year ended June 30, 2010
and has experienced continued declines in subscribers since fiscal
2002.  The Company’s operations are subject to certain risks and
uncertainties, including that the rural customer base will not increase at the
expected rate; the difficulty of identifying and acquiring wireless Internet
customers and infrastructure on attractive terms and of integrating those
acquisitions into its operations; the availability of needed financing;
competition with existing or new competitors; changes in industry pricing or
technological developments impacting the Internet; dependence on network
infrastructure, telecommunications providers and other vendors; service
interruptions or impediments; and the inability to hire and retain qualified
personnel. The stock price has been volatile historically and may continue to be
volatile.  There can be no assurance that the Company will be
successful in achieving profitability and positive cash flow in the
future.





Basis of Consolidation — The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All intercompany balances and transactions
have been eliminated on consolidation.





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 — Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash equivalents and accounts receivable, as
collateral is generally not required.





During
the year ended June 30, 2010, the Company recorded net bad debt recoveries
totaling approximately $2,000.  For the year end June 30, 2009 the
Company recorded net bad debt expenses of approximately $1,000. The charges were
recorded as a result of monthly evaluations during the year of the
collectability of accounts receivable and as accounts became 90 days or older
from the date of billing, including consumer accounts. Delinquent accounts
deemed uncollectible were disconnected, and collection efforts were continued 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, occasionally in excess of federally insured limits. Cash and
cash equivalents are stated at cost, which approximates fair value.





Restricted Cash— Restricted
cash consists of cash deposited in a bank account by United States Department of
Agriculture Rural Utilities Service (“RUS”) for advances on the Company’s loan.
Money in the account is to be used solely for the purposes for which each
advance is made. Restricted cash is stated at cost, which approximates fair
value.





Inventory — The Company
values inventory at the lower of cost or market using the first-in, first-out
(“FIFO”) method.  Inventory consists primarily of wireless internet
access equipment and routers.





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


F-8


Goodwill — Goodwill is the
excess acquisition costs of a business over the fair value of the identifiable
net assets acquired.  In accordance with the Financial Accounting
Standards Board (“FASB”) guidance on goodwill and other intangibles, goodwill is
no longer amortized but is subject to annual impairment tests. Other
identifiable assets with definite lives continue to be amortized over their
useful lives. Accordingly, the Company reviews goodwill for impairment annually
and/or if events or changes in circumstances indicate the carrying value of
goodwill may have been impaired.  The Company reviews intangible
assets with definite lives for impairment whenever conditions arise that
indicate the carrying value may not be recoverable, such as economic downturn in
a market or a change in the assessment of future operations.
  The
goodwill impairment model is a two-step process.  The first step is
used to identify a potential impairment by comparing the fair value of a
reporting unit with its net book value (or carrying amount), including
goodwill.  If the fair value exceeds the carrying amount, goodwill of
the reporting unit is not considered impaired and the second step of the
impairment test is unnecessary.  If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill
impairment test compares the implied value of the reporting unit’s goodwill with
the carrying amount of that goodwill.  If the carrying amount exceeds
the implied fair value, an impairment loss is recognized in an amount equal to
that excess.  The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all the assets and
liabilities of that unit (including any previously unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit.
 
 Determining
the fair value of a reporting unit under the first step of the goodwill
impairment test, and determining the fair value of individual assets and
liabilities of a reporting unit (including previously unrecognized intangible
assets) under the second test of the goodwill impairment test, is judgmental in
nature and often involves significant estimates and assumptions. These estimates
and assumptions could have a significant impact on whether an impairment charge
is recognized and the magnitude of any such charge. Estimates of fair value are
primarily determined using future net cash flows discounted at 5.85% and
are based on management’s best estimate and general market conditions. This
approach uses significant assumptions, including projected future earnings and
a subscription growth rate.
 
 Goodwill
was recorded in the acquisition of NeoSoft, Inc. and PDQ.Net, Inc., whose
dial-up subscribers have continued to decline. During the years ended June 30,
2010 and 2009, the Company recorded impairment losses of $0 and $1,120,000,
respectively, related to potential reduction in future cash flows as subscriber
decline continues.
 
 Subscriber Acquisition Costs
— Subscriber acquisition costs primarily relate to acquisitions completed during
the years ended June 30, 2006, 2007 and 2008.  The Company allocates
the purchase price to acquired subscriber bases and goodwill based on fair value
at the time of acquisition. Subscriber acquisition costs are amortized over the
average life of a customer which is estimated at 48 months.
 
 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 in
accordance with the FASB guidance on impairment or disposal of long-lived
assets.
 
 The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  If the undiscounted future cash flows of an asset to be
held and used in operations are less than the carrying value, the Company would
recognize a loss equal to the difference between the carrying value and fair
market value.   The Company has concluded that no impairment
occurred in the years ended June 30, 2010 or 2009.
 
 Stock-Based Compensation —
The Company accounts for stock-based compensation in accordance with FASB
guidance, which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including
employee stock options based on estimated fair values.
 
 The fair
value of each option granted during the year ended June 30, 2010 is estimated
using the Black-Scholes pricing model with the following assumptions: option
term until exercise of 4 years, volatility of 358%, risk-free interest rates of
2.46% and 2.41%, forfeiture rate of 8% and an expected dividend yield of
zero.  The expected term of options represents the period of time that
options granted are expected to be outstanding.   Expected
volatility assumptions utilized in the model were based on historical volatility
of the Company’s stock price over the expected term.  The risk-free
rate is derived from the U.S. Treasury yield.  After applying
discounts based on the average stock price, the trading volume, and recent
volatility, the Company valued the options granted during 2010 at $0.05 per
share.
  F-9
  The fair
value of each option granted during the year ended June 30, 2009 is estimated to
be approximately $0.20 using the Black-Scholes pricing model with the following
assumptions: option term until exercise of 2.5 years, volatility of 353%,
risk-free interest rate of 2.87%, and an expected dividend yield of
zero.  The expected term of options represents the period of time that
options granted are expected to be outstanding.   Expected
volatility assumptions utilized in the model were based on historical volatility
of the Company’s stock price over the expected term.  The risk-free
rate is derived from the U. S. Treasury yield.
 
 As of
June 30, 2010, the total compensation costs related to non-vested awards not yet
recognized is approximately $3,000.  The period over which this cost
will be recognized is approximately 2 years.
 
 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, 2010 and
2009 were approximately $71,000 and $65,000, respectively.  The
Company focuses primarily on a direct mail form of advertising.
 
 Income Taxes — Deferred tax
assets and liabilities are determined using the asset and liability method in
accordance with the FASB guidance on income taxes. Under this method, deferred
tax assets and liabilities are established for future tax consequences of
temporary differences between the financial statement carrying amounts of assets
and liabilities and their tax basis.  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.
 
 On July
1, 2007, the Company adopted the FASB guidance on accounting for uncertainty in
income taxes, and as a result management assessed its various income tax
positions, and this assessment resulted in no adjustment to the tax asset or
liability. The preparation of our various tax returns requires the use of
estimates for federal and state income tax purposes. These estimates may be
subjected to review by the respective taxing authorities. A revision, if any, to
an estimate may result in an assessment of additional taxes, penalties and
interest. At this time, a range in which our estimates may change is not
quantifiable and a change, if any, is not expected to be material. We will
account for interest and penalties relating to uncertain tax positions in the
current period income statement, as necessary. The 2006, 2007, 2008 and 2009 tax
years remain subject to examination by various federal and state tax
jurisdictions.
 
 Basic and Diluted Net Income Per
Share — Basic earnings per share is computed using the weighted average
number of common shares outstanding and excludes any anti-dilutive effects of
options, warrants and convertible securities. Diluted earnings per share reflect
the potential dilution that could occur upon exercise or conversion of these
instruments.
 
 During
the years ended June 30, 2010 and 2009, no options were included in the
computation of diluted earnings per share because the options were not “in the
money” based on the average market price for the years then ended.
 
 Use of Estimates — The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from these
estimates.
 
 Reclassifications — No
reclassifications have been made to the 2010 or 2009 financial
statements.
 
 Comprehensive Income — 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, 2010 and
2009.
 
 New accounting standards
—
 
 In June
2009, the FASB established the Accounting Standards Codification as the single
source of authoritative U.S. Generally Accepted Accounting Principles (“GAAP”)
to be applied by nongovernmental entities. This guidance is effective for
financial statements issued for interim and annual periods ended after September
15, 2009. The adoption of this guidance, while it impacts the way the Company
refers to accounting pronouncements in its disclosures, does not have an effect
on its consolidated financial statements.
 
 In
September 2006, the FASB issued new accounting guidance related to fair value
measurements and related disclosures. This new guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The Company adopted this new guidance on July 1, 2008,
as required for its financial assets and financial liabilities. However, the
FASB deferred the effective date of this new guidance for one year as it relates
to fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring
basis. The Company adopted these remaining provisions on July 1, 2009. The
adoption of this accounting guidance did not have a material impact on the
Company’s consolidated financial statements.
  F-10
 
 In
December 2007, the FASB issued new accounting guidance related to the accounting
for non-controlling interests in consolidated financial statements. This
guidance establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be recorded as equity in the
consolidated financial statements. This Statement also requires that
consolidated net income shall be adjusted to include the net income attributed
to the non-controlling interest.  Disclosure on the face of the income
statement of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest is required.  This guidance is
effective for fiscal years beginning after December 15, 2008. The Company
adopted this guidance on July 1, 2009, and except for the revised financial
statement presentation of non-controlling interests, it had no material impact
on the Company’s consolidated financial statements.
 
 2.
TeleShare Communications
Services, Inc.
 
 On July
27, 2007, Internet America acquired substantially all of the outstanding shares
of TeleShare Communications Services, Inc. (“TeleShare”) from Mark Ocker and
Cynthia Ocker for $1,850,000, payable in shares of Company common stock and a
note, and subject to certain adjustments 90 days after closing. TeleShare, based
in Crosby, Texas, serves approximately 1,500 wireless broadband Internet service
customers and provides telex messaging services. On October 25, 2007, the final
adjustments to the TeleShare acquisition were determined, and the Company issued
a note for approximately $864,000 and 298,117 shares of common stock to the
former owners of TeleShare. On July 27, 2009, pursuant to the terms of the
agreement, the former owners of TeleShare elected to tender the 298,117 shares
of common stock in exchange for a promissory note in the amount of $745,943.
During the quarter ended March 31, 2010 amendments to the promissory note
resulted in the Company recognizing a gain from restructuring debt of
$51,613.
  TeleShare
had a loan commitment under a program administered by the RUS under which
Internet America assumed a loan commitment of approximately $4 million with
approximately $3 million still available for providing financial assistance for
the expansion of broadband services in rural areas.
 
 3.
Property and
Equipment
 As of
June 30, 2010 and 2009 property and equipment consist of:
  June 30,2010
                    
                    
                    2009Land
                    
                    $
                    30,000
                    
                    
                    $
                    30,000Infrastructure
      in progress
                    
                    $
                    13,520
                    
                    
                    $
                    96,610Depreciable
      assets:Data
      communications and office equipment
                    
                    $
                    3,084,978
                    
                    
                    $
                    2,726,464Computer
      software
                    
                    
                    790,995
                    
                    
                    
                    781,230Furniture
      and fixtures
                    
                    
                    58,370
                    
                    
                    
                    58,007Leasehold
      improvements
                    
                    
                    28,312
                    
                    
                    
                    27,512Building
                    
                    
                    20,450
                    
                    
                    
                    20,4503,983,105
                    
                    
                    
                    3,613,663Less
      accumulated depreciation and amortization
                    
                    
                    (2,235,166
                    )
                    
                    
                    (1,589,711
                    )$
                    1,747,939
                    
                    
                    $
                    2,023,952Total
      property and equipment, net
                    
                    $
                    1,791,459
                    
                    
                    $
                    2,150,562
 
 The
Company owns land in Victoria, Texas; this property includes an office for
Southwest Texas operations and a tower used in our wireless
network.  Infrastructure in progress relates to wireless equipment
which was purchased by the Company for near future improvement and upgrades to
its existing wireless networks.  The equipment will be included in
data communications equipment and depreciated when placed in
service.  Included in property and equipment at June 30, 2010 and 2009
is approximately $35,000 and $67,000, respectively, of property and equipment
held under capital lease.
  F-11
 
 Depreciation
expense charged to operations was approximately $655,000 and $602,000 for the
years ended June 30, 2010 and 2009, respectively.
 
 4. 
Goodwill, Subscriber
Acquisition Costs and Other Assets
 
 As
described in Note 1, the Company performs an impairment test annually during the
fourth quarter of its fiscal year or when events and circumstances indicate
goodwill might be permanently impaired. Accordingly, during the years ended June
30, 2010 and 2009, the Company recorded impairment losses of $0 and $1,120,000,
respectively. The 2009 impairment losses related to potential reduction in
future cash flows as subscriber decline continued during 2009 from the
acquisitions of NeoSoft and PDQ.Net
 
 The
Company allocates the purchase price for acquisitions to acquired subscriber
bases and goodwill based on fair value at the time of acquisition. The Company
did not record increases in goodwill during the years ended June 30, 2010 or
2009.
 
 The
weighted average amortization period for subscriber acquisition costs is 48
months for both dial-up and wireless customers.  Total subscriber
acquisition costs, net of accumulated amortization, were approximately $327,000
and $745,000 for the years ended June 30, 2010 and 2009, respectively.
Amortization expense for the years ended June 30, 2010 and 2009 was
approximately $357,000 and $475,000, respectively.  Subscriber
acquisition costs related to the NeoSoft and PDQ acquisitions were fully
amortized as of June 30, 2002. As of June 30, 2010, expected amortization
expense for the fiscal years ended is as follows:
 
 2011
                      
                      $
                      323,0002012
                      
                      
                      4,000Total
      expected amortization expense
                      
                      $
                      327,000
 
 Other
assets consist of deposits on leaseholds and services.
 
 5.  Accrued
Liabilities
 
 As of
June 30, 2010 and 2009, accrued liabilities consists of:
 
 June 30,2010
                    
                    
                    2009Property,
      franchise and sales tax expenses
                    
                    $
                    140,647
                    
                    
                    $
                    192,191Employee
      wages and benefits
                    
                    
                    144,558
                    
                    
                    
                    205,004Professional
      fees
                    
                    
                    84,895
                    
                    
                    
                    95,965Investor
      relations and communication fees
                    
                    
                    31,000
                    
                    
                    
                    64,642Other
                    
                    
                    8,811
                    
                    
                    
                    15,211$
                    409,911
                    
                    
                    $
                    573,013
  F-12
  6. Long-Term Debt
  As of
June 30, 2010 and 2009, long-term debt consists of:
  June 30,
                    
                    
                    June 30,2010
                    
                    
                    2009Note
      payable due July 19, 2010, payable in quarterly payments of $7,751
      with interest imputed at 9% (net of unamortized discount of
      $234)
                    
                    $
                    7,517
                    
                    
                    $
                    36,211Note
      payable due January 23, 2011 payable in bi-annual installments of
      $13,917 with interest imputed at 8% (net of unamortized discount of
      $601)
                    
                    
                    12,886
                    
                    
                    
                    23,106Note
      payable due August 08, 2010, payable in monthly installments of $1,033
      beginning October 08, 2008 with interest imputed at 5% (net of unamortized
      discount of $13)
                    
                    
                    2,054
                    
                    
                    
                    14,025Note
      payable due June 20, 2012, payable in monthly installments of $2,088 with
      interest imputed at 9% (net of unamortized discount of
    $4,407)
                    
                    
                    45,701
                    
                    
                    
                    65,656Note
      payable due July 20, 2010, payable in monthly installments of $1,818 with
      interest imputed at 6.5% (net of unamortized discount of
    $10)
                    
                    
                    1,808
                    
                    
                    
                    22,757Note
      payable due July 20, 2010, payable in monthly installments of $1,409 with
      interest imputed at 6.5% (net of unamortized discount of
    $8)
                    
                    
                    1,401
                    
                    
                    
                    17,637Note
      payable due February 15, 2015, payable in monthly payments of $4,346 with
      fixed interest at 4.5%
                    
                    
                    219,162
                    
                    
                    
                    452,548Note
      payable due February 15, 2015, payable in monthly payments of $11,189 with
      interest imputed at 3.25% (net of unamortized discount of
      $45,931)
                    
                    
                    580,661
                    
                    
                    
                    -Loan
      and Security Agreement with U.S. Department of Agriculture Rural Utilities
      Service
                    
                    
                    438,833
                    
                    
                    
                    646,5781,310,023
                    
                    
                    
                    1,278,518Less
      current portion
                    
                    
                    (425,971
                    )
                    
                    
                    (613,746
                    )Total
      long-term debt, net of current portion
                    
                    $
                    884,052
                    
                    
                    $
                    664,772
 
 As of
June 30, 2010, the Company’s long-term debt which is secured by certain
inventory and equipment and certificates of deposit totaled approximately
$494,000. The prime rate at June 30, 2010 was 3.25%. The direct cost of money
rate applied to the RUS loan on the date of borrowing is equal to the cost of
borrowing of the Department of Treasury for 7 year obligations.  At
June 30, 2010, the direct cost of money rate on borrowings year to date averaged
4.4%.
  The
following is a schedule by fiscal years of the principal payments under these
agreements as of June 30, 2010.
  2011
                        
                        $
                        425,9712012
                        
                        
                        410,6932013
                        
                        
                        172,2222014
                        
                        
                        178,5152015
                        
                        
                        122,622Total
      principal payments
                        
                        $
                        1,310,023
  7.  
 Capital Lease Obligations
 
 The Company leases certain wireless
equipment under leases with bargain purchase options. The following is a
schedule by fiscal years of the future minimum lease payments under these
capital leases together with the present value of the net minimum lease payments
at year ended June 30, 2010:
 
 2011
                            
                            $
                            32,1442012
                            
                            
                            2,584Total
      minimum lease payments
                            
                            
                            34,728Less
      amounts representing interest
                            
                            
                            (4,163
                            )Present
      value of minimum capitalized payments
                            
                            
                            30,565Less
      current portion
                            
                            
                            (28,315
                            )Long-term
      capitalized lease obligations
                            
                            $
                            2,250
  F-13
 
 8. 
Commitments and
Contingencies
 
 In the
normal course of business, the Company enters into telephone and internet
backbone connectivity contracts with various vendors.  The Company’s
minimum annual obligations under these contracts are listed below.
 
 The
Company leases certain facilities including tower space under operating leases.
Rental expense under these leases was approximately $629,000 and $619,000 for
the years ended June 30, 2010 and 2009, respectively. Future minimum lease
payments on facilities operating leases and telecommunications contracts at June
30, 2010 are listed below.
 
 2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014
                      
                      
                      2015
                      
                      
                      Thereafter
                      
                      
                      TotalConnectivity
      contracts
                      
                      $
                      630,000
                      
                      
                      $
                      330,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      960,000Operating
      leases
                      
                      
                      474,000
                      
                      
                      
                      371,000
                      
                      
                      
                      268,000
                      
                      
                      
                      95,000
                      
                      
                      
                      29,000
                      
                      
                      
                      9,000
                      
                      
                      
                      1,246,000$
                      1,104,000
                      
                      
                      $
                      701,000
                      
                      
                      $
                      268,000
                      
                      
                      $
                      95,000
                      
                      
                      $
                      29,000
                      
                      
                      $
                      9,000
                      
                      
                      $
                      2,206,000
 
 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 consolidated financial position, results of operations and cash
flows.
 
 9.
Shareholders'
Equity
 
 Earnings Per Share — There
were no “in the money” options as of June 30, 2010 or June 30,
2009.
 
 Series A Preferred Stock—
The Company has authorized 5,000,000 shares of $0.01 par value Series A
Preferred Stock.
 
 Each
share of Series A Preferred Stock is convertible at any time, at the option of
the holder, into one share of Company common
stock.  The  Series A Preferred  Stock is subject
to mandatory conversion, at the option of the Company, in the event that the per
share trading price of the Company’s common stock is equal to or greater than
$3.00 per share for 90 consecutive trading days. The Series A Preferred Stock
has a liquidation preference of $0.586 per share, plus all accrued but unpaid
dividends thereon, whether or not earnings are available in respect of such
dividends and whether or not such dividends have been declared.  The
holders of Series A Preferred Stock are entitled to receive out of the assets of
the Company, when and if declared by the Board out of funds legally available
for that purpose, cumulative cash dividends at a rate of 10% per annum for each
share of Series A Preferred Stock.  Such dividends are cumulative from
the date the Series A Preferred Stock was issued and payable in arrears, when
and as declared by the Board, quarterly. Cumulative dividends in arrears were
approximately $515,000 at June 30, 2010. The holders of the Series A Preferred
Stock are entitled to vote on an as-converted basis with the Common Stock, and
separately with respect to specified corporate acts that would adversely affect
the Series A Preferred Stock. In connection with the October Agreement, the
Company and the Purchasers entered into a Registration Rights Agreement,
pursuant to which the Company agreed to grant “piggyback” registration rights to
the Purchasers.
 
 Common Stock — The Company
has authorized 40,000,000 shares of $0.01 par value common stock.
 
 Employee Stock Purchase Plan
— Effective April 30, 1999, the Company's Board of Directors adopted the
Employee Stock Purchase Plan (the "Purchase Plan"), which initially provided for
the issuance of a maximum of 200,000 shares of common stock and was initially
approved by the Company’s shareholders on November 4, 1999.  In fiscal
2002, the Board of Directors approved an amendment including the reservation of
an additional 500,000 shares for issuance under the Purchase Plan, which
amendment was approved by the shareholders on November 11,
2002.  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
April 2006, the Company temporarily suspended future purchases in the Purchase
Plan due to lack of employee participation.  There were no shares
purchased by employees under this plan during the years ended June 30, 2010 and
2009.  At June 30, 2010, 155,959 shares were available under the
Purchase Plan for future issuance.
  F-14
  Stock Option Plans — On
March 30, 2007, the Board of Directors adopted the 2007 Stock Option Plan (“2007
Plan”) under which options to purchase up to 2,000,000 shares may be granted as
incentive and nonqualified stock options to employees, executives and
directors.  As of June 30, 2010, there are no options outstanding or
available to be issued under any of the Company’s previous stock plans. Options
to purchase the following number of shares are outstanding to the category of
persons indicated as of June 30, 2010: an aggregate of 428,444 shares to
non-officer directors, 250,000 shares to executive officers and 160,000 shares
to non-executive employees.  These options are exercisable at prices
ranging from $0.50 to $1.00 per share of common stock.
 
 A summary
of the status of the Company's stock options as of June 30, 2010 and 2009 and
changes during the years ended on those dates is presented below:
 
 June 30, 2010
                        
                        
                        June 30, 2009Weighted
                          Average
                          Exercise
                        
                        
                        
                        
                        
                        Weighted
                          Average
                          ExerciseShares
                        
                        
                        Price
                        
                        
                        Shares
                        
                        
                        PriceOutstanding
      at beginning of period
                        
                        
                        1,637,000
                        
                        
                        
                        0.98
                        
                        
                        
                        1,259,500
                        
                        
                        
                        0.92Granted
                        
                        
                        335,000
                        
                        
                        
                        0.50
                        
                        
                        
                        500,000
                        
                        
                        
                        1.00Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (1,133,556
                        )
                        
                        
                        1.19
                        
                        
                        
                        (122,500
                        )
                        
                        
                        0.50Outstanding
      at end of period
                        
                        
                        838,444
                        
                        
                        
                        0.51
                        
                        
                        
                        1,637,000
                        
                        
                        
                        0.98Options
      exercisable at year end
                        
                        
                        600,319
                        
                        
                        
                        0.50
                        
                        
                        
                        753,639
                        
                        
                        
                        1.08
 
 The
following table summarizes information about stock options outstanding at June
30, 2010:
 
 Number Outstanding
                        
                        
                        Weighted-Average
                          Remaining Contractual
                        
                        
                        Number ExercisableExercise Price
                        
                        
                        at 6/30/10
                        
                        
                        Life as of 6/30/10 (Years)
                        
                        
                        at 6/30/10$
                        0.50
                        
                        
                        
                        828,444
                        
                        
                        
                        7.71
                        
                        
                        
                        595,3191.00
                        
                        
                        
                        10,000
                        
                        
                        
                        7.64
                        
                        
                        
                        5,000838,444
                        
                        
                        
                        
                        
                        
                        
                        600,319
 
 Warrants — As of June 30,
2010, the Company has 394,922 warrants issued and outstanding. See Note
12.
 
 10.Income Taxes
 
 No
provision for federal income taxes has been recognized for the years ended June
30, 2010 and 2009 as the Company incurred a net operating loss for income tax
purposes in each year and has no carryback potential.
 
 Deferred
tax assets and liabilities as of June 30, 2010 and 2009 consist of:
 
 June 30,2010
                              
                              
                              2009Deferred
      tax assets:Net
      operating loss carryforwards
                              
                              $
                              12,261,000
                              
                              
                              $
                              11,810,000Intangible
      assets
                              
                              
                              2,169,000
                              
                              
                              
                              2,419,000Allowance
      for doubtful accounts
                              
                              
                              2,000
                              
                              
                              
                              2,000Impairment
      loss
                              
                              
                              128,000
                              
                              
                              
                              109,000Other
                              
                              
                              172,000
                              
                              
                              
                              179,000Total
      deferred tax assets
                              
                              
                              14,732,000
                              
                              
                              
                              14,519,000Deferred
      tax liabilities:Other
                              
                              
                              -
                              
                              
                              
                              -Total
      deferred tax liability
                              
                              
                              -
                              
                              
                              
                              -Total
      net deferred tax
                              
                              
                              14,732,000
                              
                              
                              
                              14,519,000Valuation
      allowance
                              
                              
                              (14,732,000
                              )
                              
                              
                              (14,519,000
                              )Net
      deferred tax assets
                              
                              $
                              -
                              
                              
                              $
                              -
  F-15
 
 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.  During
the year ended June 30, 2010, the valuation allowance increased by approximately
$213,000.
 
 At June
30, 2010, the Company has net operating loss carryforwards of approximately $36
million for federal income tax purposes. These net operating loss carryforwards
may be carried forward in varying amounts until 2031 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, 2010 and 2009 is as
follows:
 
 June 30,2010
                                  
                                  
                                  2009Federal
      income tax expense (benefit) at statutory rate
                                  
                                  
                                  (34
                                  )%
                                  
                                  
                                  (34
                                  )%Change
      in valuation allowance
                                  
                                  
                                  34
                                  %
                                  
                                  
                                  34
                                  %Total
      income tax provision
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  0
                                  %
 
 11. 
 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, 2010.
 
 12.  
Related Party
Transactions
 
 The
following table shows amounts paid to the four non-employee directors for
serving on the Company’s board of directors and payments made to Cynthia Ocker,
former owner of TeleShare, for contract services during the years ended June 30,
2010 and 2009:
  June 30,2010
                        
                        
                        2009Troy
      LeMaile Stovall
                        
                        $
                        16,000
                        
                        
                        $
                        16,676Justin
      McClure
                        
                        
                        15,500
                        
                        
                        
                        15,750John
      Palmer
                        
                        
                        15,000
                        
                        
                        
                        16,323Steven
      Mihaylo
                        
                        
                        15,500
                        
                        
                        
                        16,893Cynthia
      Ocker
                        
                        
                        132,855
                        
                        
                        
                        165,298$
                        194,855
                        
                        
                        $
                        230,940
 
 On
September 14, 2009, Internet America issued a Warrant to purchase 197,461 shares
of Common Stock to each of Mr. Mihaylo and Ambassador Palmer, both directors of
the Company. The Warrants vested immediately and are exercisable at $0.38
per share for 5 years. The fair value of the warrants was estimated on their
grant date using the Black-Scholes pricing model.
  On
October 23, 2009 Internet America issued options to purchase 50,000 shares of
Internet America stock exercisable at $.50 per share to each of the directors.
On October 27, 2009, Internet America issued options to purchase 30,000 shares
of Internet America common stock exercisable at $.50 per share to Messrs.
LeMaile-Stovall and McClure, both directors of the Company.
  F-16
  EXHIBIT
INDEX
 
 Exhibit
                    
                    Description4.5
                    
                    Form
      of Warrant dated September 14, 200931.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr32
                    
                    Section
      1350 Certification of William E. Ladin,
Jr.
 27