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, 2009




o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For
the transition period
from           to





Commission
file number 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.   ̈
  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  
o
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes o    No o
  Indicate
by check mark 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 29, 2008, the
aggregate market value of the Common Stock held by non-affiliates of the
registrant is $1,493,886 ($0.14 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 25, 2009 was
16,558,914.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 None.


TABLE
OF CONTENTS





PagePART
      I
                                                                      Item
      1.
                                                                      Description
      of Business
                                                                      3Item
      1A.
                                                                      Risk
      Factors
                                                                      10Item
      1B.
                                                                      Unresolved
      Staff Comments
                                                                      10Item
      2.
                                                                      Properties
                                                                      10Item
      3.
                                                                      Legal
      Proceedings
                                                                      11Item
      4.
                                                                      Submission
      of Matters to a Vote of Security Holders
                                                                      11PART
      II
                                                                      Item
      5.
                                                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                      12Item
      6.
                                                                      Selected
      Financial Data
                                                                      12Item
      7.
                                                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                                                                      12Item
      7A.
                                                                      Quantitative
      and Qualitative Disclosures about Market Risk
                                                                      19Item
      8.
                                                                      Financial
      Statements and Supplementary Data
                                                                      20Item
      9.
                                                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                      20Item
      9A (T).
                                                                      Controls
      and Procedures
                                                                      20Item
      9B.
                                                                      Other
      Information
                                                                      20PART
      III
                                                                      Item
      10.
                                                                      Directors,
      Executive Officers and Corporate Governance
                                                                      20Item
      11.
                                                                      Executive
      Compensation
                                                                      23Item
      12.
                                                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                      24Item
      13.
                                                                      Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                      26Item
      14.
                                                                      Principal
      Accounting Fees and Services
                                                                      27PART
      IV
                                                                      Item
      15.
                                                                      Exhibits,
      Financial Statement Schedules
                                                                      27SIGNATURES
                                                                      28INDEX
      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. Description of 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 8,000 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 27,000 total subscribers in Texas
as of June 30, 2009.  Initially providing primarily dial-up Internet
services, the Company grew rapidly to over 150,000 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 non-wireless
subscribers and revenues 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 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 that would otherwise be ignored by terrestrial based
providers. Our wireless broadband Internet services are offered utilizing fixed
point-to-multipoint wireless technology in both licensed and unlicensed
spectrum.  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 improved 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. We have
substantially improved our productivity and have as a result reduced headcount
from 93 total employees in December 2007 to 55 at the end of September
2009.





With intentions of substantially
increasing the Company’s subscriber base, 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 has 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.





Our
improved financial results and gains towards profitability have been partially
offset by the expenses related to the failed KeyOn merger during fiscal year
2009.  The Company reported EBITDA loss of $281,000, when adjusted for
the amount written off related to the failed KeyOn merger of $194,000, for
fiscal 2009.  Compared to fiscal 2008 EBITDA loss of $1,022,000,
fiscal 2009 EBITDA loss decreased by $741,000.




3


During
2009, due to efficiencies gained, the Company reported decreases in salaries and
wages of approximately $437,000 to $3,665,000 for the fiscal year compared
to $4,102,000 for fiscal year 2008.  Additional decreases in
telecommunications costs for fiscal year 2009 compared to the previous year
totaled approximately $485,000 due to more favorable agreements with
telecommunications service providers including decreased cost but generally also
including increased capacity.  We expect our ongoing commitment to
defect-free quality services to contribute to our future profitability and
productivity.





We
continue to increase the capacity and quality of our existing networks. However
we expect to increase investment in marketing our rural wireless broadband in
existing areas to increase the number of new subscribers. We anticipate no
significant negative churn in wireless broadband subscribers, which has remained
stable at approximately 8,000 subscribers during fiscal 2009, and instead expect
modest growth as a result of this planned increase in marketing
efforts.





Near the
end of October 2008, the Company entered into an agreement with an aggregator
that allows the Company to resell DSL broadband internet service over most of
the metropolitan and suburban areas of the United States where it is currently
available.  In the near term we anticipate it helping us to reduce the
attrition of dial-up customers to other broadband providers and allow us to
fulfill additional demand for this service. As part of this agreement, the
Company transitioned 1,200 DSL broadband Internet customers to the new
provider.  The one-time charges associated with the conversion totaled
approximately $40,000 during fiscal 2009.





The
Company completed its evaluation of third-party service providers to provide
Voice over Internet Protocol (“VoIP”) and Hosted VoIP PBX services to its
embedded customer base throughout Texas and to new residential and business
customers nationwide after fiscal year ended June 30,
2009.  Management selected a vendor who provides service utilizing SIP
technology (“session initiation protocol”) technology to deliver VoIP services,
enabling businesses to significantly reduce communications costs and improve
efficiency without investing in a new phone system or disrupting
business.  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 during fiscal
2010.





Under the
present economic recession, many companies are seeking to reduce travel time and
expenses. Also, the quality and availability of internet connectivity is
improving and the power of personal computers is growing.  Management
believes video conferencing presents an opportunity for growth and has
identified this as a natural addition to our products and services in existing
and potential markets. We recently 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.





In
February 2009, we began to focus time and resources on an opportunity to expand
our wireless infrastructure to additional unserved and underserved areas
provided by The American Recovery and Reinvestment Act legislation which
allocated a total of $7.2 billion in grants for programs to increase the
deployment and adoption of high speed broadband Internet.  On August
20, 2009, the Company submitted an application for a grant from the Broadband
Technology Opportunity Program to utilize fixed Point-to-Multipoint wireless
infrastructure to expand outward from areas adjacent to the Company’s existing
service areas to unserved and underserved areas of 35 counties in southeast
Texas. We estimate that in these counties there are approximately 99,500
unserved and 35,200 underserved households. In addition, the proposed area will
make service available for approximately 15,600 businesses and 600 community
anchor institutions, public safety entities, and critical community
organizations. Management believes that lack of broadband service in rural
communities hampers first responders, healthcare modernization, and education
systems and makes it more difficult to meet modern communities’
needs.  Direct expenses to complete our application incurred during
fiscal 2009 were $30,000; total expenses incurred related to the application to
date are approximately $134,000.





The
proposed project is focused on expanding our coverage in public-private
partnerships with state or local governments, utility providers, or other
entities to bring high-speed broadband Internet to more subscriber bases in
rural communities. Internet America has already created successful partnerships
with community anchor entities. In Chambers County, Texas, Internet America
delivers high-speed internet to public buildings including local libraries and
schools, and provides networks for communications among all public service
providers including local and county law enforcement and fire fighters that did
not previously have access to high speed broadband Internet. More information
about our public-private partnership in Chambers County, Texas is available at:
http://www.internetamerica.com/cccnet/  During
the project preparation, Internet America and Bluebonnet Electric Cooperative
(“Bluebonnet”) entered into a Memorandum of Understanding to
work  together to facilitate the granting of our application. If
awarded, Bluebonnet’s substations and easements will be made available to
Internet America as permitted to use existing towers and to construct new ones
for our build out of the proposed project and provide service to Bluebonnet
customers.




4


Internet
America’s focus, experience and proven ability to deliver quality high-speed
broadband Internet in rural markets places us in an excellent position to expand
our service area by utilizing grant funds.  Management is working toward
establishing public-private partnerships with state or local governments,
utility providers, or other entities to bring high-speed broadband Internet more
rapidly to rural communities.  Core competencies which management believes
exist in current operations include existing vendor and contractor relationships
which will allow us to commence construction rapidly, customer management
systems, financial systems, and support systems which are in place, running
well, and are adequate to accommodate the proposed growth detailed in our
application.





Internet America is positioned today
to drive the vision of delivering high speed broadband to every corner of rural
America. 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 an
economic slowdown and/or 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 strong position to improve earnings
by the creation of partnerships with public entities that take advantage of our
capabilities and previous experience and should lead to a more rapid rate of
growth without significant increases in shares outstanding.





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, Texas.  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.  We will continue to utilize this micro-market strategy in
identifying and constructing areas for new network construction.





Operating
center





Our
corporate headquarters are located in Houston, Texas, where all executive
functions, call center and network monitoring exist.  This
headquarters location now contains a centralized network operations center where
all operations on the network can be monitored, maintained 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





As described above, during fiscal 2009, the Company devoted substantial time and
resources to a proposed and later terminated merger with KeyOn. Direct costs
incurred by the Company for the contemplated merger totaled $194,000, 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. Our
experience the contemplated merger with KeyOn, the time and focus required
to close and integrate past acquisitions, and the significant expenses required
to be incurred in order to conform previously acquired networks to our quality
and performance standards have led us to the conclusion that acquisitions of
rural and suburban wireless ISPs (“WISPs”) are no longer considered an essential
method of enhancing our net income.





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. However, there is no guarantee
that we will make significant or numerous acquisitions.


5


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.





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. The DSL products offer our residential and business
subscribers a cost-effective way to substantially increase the speed at which
they access the Internet.  In fiscal 2009, our migration to a
private-labeled DSL wholesaler removed our necessity for costly equipment
upgrades and reduces our overhead for maintaining that network infrastructure in
the long-term.  In addition, the ability to compete in a nationwide
marketplace was quickly attainable through the wholesaler's existing
infrastructure and contract relationships.





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, TX as single-server,
half-cabinet, and full-cabinet plans. Additionally, we offer hosted services,
including professionally managed Video Conferencing, VoIP, web, and mail
hosting.





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





Our goal
of customer satisfaction begins with providing superior systems and network
performance. In addition to the provision of excellent systems and network
performance, we emphasize high quality customer care and technical support. We
strive to retain our subscribers by strong responses to customer problems via
telephone and email.





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





·
            Problems
      affecting a variety of hardware
systems;


·
            Start-up
      or other basic problems of new subscribers or new Internet
      users;


·
            Highly
      technical issues that sophisticated users may encounter;
    and


·
            Operating
      system defects/workarounds.





Our
customer care employees resolve support calls working in a two tier system which
allows for escalation of customer care based on technical difficulty. Customer
care is available to subscribers during extended business hours, typically until
10 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 management and
quality control include the following procedures:


6





·
            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 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.





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 6.8 Mbps to any individual end-user.  The network is
fully open, adheres to 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.  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.  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. 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
fully-redundant Cisco 6509 switch/routers that provide fully-redundant routing
between our 450Mbps of upstream Internet Access, across three separate Internet
Service Providers, our internal core services network, and our eight access
networks of 693Mbps total capacity.





The
current access networks are connected via leased lines which range in speed from
8Mbps to 100Mbps. From these local Points of Presence (“POP”s), 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 120Mbps. Access towers are
then used to distribute bandwidth to approximately 8,000 end-users using
commercially available fixed wireless technology utilizing ISM frequency bands
(2.4Ghz, 3.65Ghz, 5.2Ghz, 5.8Ghz and 900Mhz). The access networks in which
Internet America’s POP’s are located are in rural areas near or surrounding the
following Texas cities: Dallas, Fort Worth, Corsicana, Baytown, Crosby,
Magnolia, Stafford, Victoria, Cuero, and San Antonio, Texas.




7


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.





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 possible 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 (dialup,
wired broadband and wireless).





In the
dialup segment, where we have approximately 7,100 subscribers, there are no
substantial barriers to entry, and we expect that competition will continue to
intensify and, more importantly, dialup 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 1,500 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.




8


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/AOL, the Microsoft
Network and EarthLink;


•
National telecommunications providers, such as AT&T, Qwest, Verizon and
Sprint;


•
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.  State
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.
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 the
ILEC 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.




9


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 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.  Additionally,
Internet America has filed an application for a grant and/or loan of funds under
the American Recovery and Reinvestment Act of 2009 Broadband Technologies
Opportunity Program. If awarded funds, the Company will be subject to federal
regulation as prescribed in Catalog of Federal Domestic Assistance (CFDA) Number
10.787 and/or 11.557, including interconnection, nondiscrimination, internal
control over financial reporting and network management practices.





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, 2009, we employed approximately 59 people, 56 of whom were full-time
and 3 of whom were part-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. During fiscal 2008 and continuing in fiscal 2009, 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
only 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.


10


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.





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





No
matters were submitted to a vote of our security holders during the fourth
quarter of fiscal 2009.




11





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, 2009:Fourth
      Quarter
                  
                  $
                  0.24
                  
                  
                  $
                  0.10Third
      Quarter
                  
                  
                  0.20
                  
                  
                  
                  0.14Second
      Quarter
                  
                  
                  0.30
                  
                  
                  
                  0.12First
      Quarter
                  
                  
                  0.43
                  
                  
                  
                  0.25Fiscal
      Year Ended June 30, 2008:Fourth
      Quarter
                  
                  $
                  0.67
                  
                  
                  $
                  0.42Third
      Quarter
                  
                  
                  0.80
                  
                  
                  
                  0.62Second
      Quarter
                  
                  
                  0.81
                  
                  
                  
                  0.45First
      Quarter
                  
                  
                  0.80
                  
                  
                  
                  0.26





At
September 11, 2009, there were 249 holders of record of our common
stock.  The last reported sale price of the common stock on the OTC
Bulletin Board on September 25, 2009 was $0.47 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, 2009 and
2008.  This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.





Safe
Harbor Statement





Certain
statements contained in this Form 10-K constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act.  These
statements, identified by words such as "anticipate," "believe," "estimate,"
"should," "expect" and similar expressions include our expectations and
objectives regarding our future financial position, operating results and
business strategy. These statements reflect the current views of management with
respect to future events and are subject to risks, uncertainties and other
factors that may cause our actual results, performance or achievements, or
industry results, to be materially different from and worse than those described
in the forward-looking statements. Such risks and uncertainties include those
set forth in this section and elsewhere in this Form 10-K.




12


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) we will not receive
grant funding sought after in our application to the Broadband Technology
Opportunity Program  to expand our wireless infrastructure to additional
unserved and underserved areas available under The American Recovery and
Reinvestment Act, (4) we will not expand our coverage in public-private
partnerships with state or local governments, utility providers, or other
entities seeking to participate in grant programs or those partnerships may not
be successful, (5) 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,  (6) financing will not
be available to us if and as needed, (7) we will not be competitive with
existing or new competitors, (8) we will not keep up with industry pricing or
technological developments impacting the Internet, (9) we will be adversely
affected by dependence on network infrastructure, telecommunications providers
and other vendors or by regulatory changes, (10) service interruptions or
impediments could harm our business, (11) 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,
(12) government regulations could force us to change our business practices,
(13) we may be unable to hire and retain qualified personnel, including our key
executive officers, (14) 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, (15) provisions in our certificate of incorporation, bylaws and
shareholder rights plan could limit our share price and delay a change of
management, and (16) 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.





Overview





Internet
America is an ISP that is focused on providing wireless high-speed broadband
Internet in rural markets, and presently serves approximately 8,000 wireless
broadband Internet subscribers and 27,000 total subscribers in Texas as of June
30, 2009. 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
2008, we experienced increases in telecommunications cost per subscriber by
increasing network capacity to provide higher quality service to our customers
and as we increased our wireless broadband footprint. These increased costs were
offset partially by entering into more favorable agreements with
telecommunications service providers and reducing personnel costs. During 2009,
we focused on quality process implementation including investing in
infrastructure upgrades and simplifying internal systems and
procedures.  Our efforts improved productivity and customer
satisfaction, and also resulted in improved EBITDA and decreases in expenses and
headcount over the last year.   We expect our ongoing commitment to
defect-free quality services to contribute to our future profitability and
productivity.




We
believe our experience and proven ability to deliver quality high-speed
broadband Internet in rural markets places us in an excellent position to expand
our service area by utilizing funds made available for economic stimulus by The
American Recovery and Reinvestment Act legislation, whose mission is to make
high-speed broadband and other technologies available to everyone residing in
the United States.  The Company has applied for a grant from the
Broadband Technology Opportunity Program to utilize fixed Point-to-Multipoint
wireless infrastructure to expand outward from areas adjacent to its existing
service areas to unserved and underserved areas of 35 counties in southeast
Texas. We are awaiting the final decision regarding our application and remain
available to respond to requests for additional information.




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. 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 strong position to improve earnings
by the creation of partnerships with public entities that take advantage of our
capabilities and previous experience.  The success of these efforts,
however, is 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 our 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.





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 2009 includes telex messaging service revenues.


13


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.





Depreciation
expense is computed using the straight-line method 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.




14


Results
of Operations





Year
Ended June 30, 2009 Compared to June 30, 2008





The
following table shows financial data for the years ended June 30, 2009 and 2008.
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 30,2009
                      
                      
                      % of
                        Revenues
                      
                      
                      2008
                      
                      
                      % of
                        RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                      
                      $
                      7,581
                      
                      
                      
                      97.4
                      %
                      
                      $
                      8,431
                      
                      
                      
                      96.1
                      %Other
                      
                      
                      202
                      
                      
                      
                      2.6
                      %
                      
                      
                      346
                      
                      
                      
                      3.9
                      %Total
                      
                      
                      7,783
                      
                      
                      
                      100.0
                      %
                      
                      
                      8,777
                      
                      
                      
                      100.0
                      %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                      
                      
                      5,304
                      
                      
                      
                      68.1
                      %
                      
                      
                      5,960
                      
                      
                      
                      67.9
                      %Sales
      and marketing
                      
                      
                      301
                      
                      
                      
                      3.9
                      %
                      
                      
                      504
                      
                      
                      
                      5.7
                      %General
      and administrative
                      
                      
                      2,657
                      
                      
                      
                      34.1
                      %
                      
                      
                      3,336
                      
                      
                      
                      38.0
                      %Provision
      for (recoveries of) bad debt
                      
                      
                      1
                      
                      
                      
                      0.0
                      %
                      
                      
                      (1
                      )
                      
                      
                      0.0
                      %Depreciation
      and amortization
                      
                      
                      1,076
                      
                      
                      
                      13.8
                      %
                      
                      
                      1,173
                      
                      
                      
                      13.4
                      %Impairment
      Loss
                      
                      
                      1,120
                      
                      
                      
                      14.4
                      %
                      
                      
                      780
                      
                      
                      
                      8.9
                      %Total
                      
                      
                      10,459
                      
                      
                      
                      134.4
                      %
                      
                      
                      11,752
                      
                      
                      
                      133.9
                      %LOSS
      FROM OPERATIONS
                      
                      
                      (2,676
                      )
                      
                      
                      (34.4
                      )%
                      
                      
                      (2,975
                      )
                      
                      
                      (33.9
                      )%INTEREST
      INCOME
                      
                      
                      37
                      
                      
                      
                      0.5
                      %
                      
                      
                      87
                      
                      
                      
                      1.0
                      %INTEREST
      EXPENSE
                      
                      
                      (86
                      )
                      
                      
                      (1.1
                      )%
                      
                      
                      (112
                      )
                      
                      
                      (1.3
                      )%MINORITY
      INTEREST
                      
                      
                      5
                      
                      
                      
                      0.1
                      %
                      
                      
                      -
                      
                      
                      
                      0.0
                      %NET
      LOSS
                      
                      $
                      (2,720
                      )
                      
                      
                      (34.9
                      )%
                      
                      $
                      (3,000
                      )
                      
                      
                      (34.2
                      )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                      
                      $
                      (0.16
                      )
                      
                      
                      
                      
                      
                      $
                      (0.20
                      )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                      
                      
                      16,857,031
                      
                      
                      
                      
                      
                      
                      
                      14,978,681OTHER
      DATA:Subscribers
      at end of period (1)
                      
                      
                      27,000
                      
                      
                      
                      
                      
                      
                      
                      30,300Number
      of employees at end of period
                      
                      
                      59
                      
                      
                      
                      
                      
                      
                      
                      73EBITDA
      (loss)(2)
                      
                      $
                      (475
                      )
                      
                      
                      
                      
                      
                      $
                      (1,022
                      )EBITDA
      margin(3)
                      
                      
                      (6.1
                      %)
                      
                      
                      
                      
                      
                      
                      (11.6
                      %)CASH
      FLOW DATA:Cash
      flow used in operations
                      
                      
                      (490
                      )
                      
                      
                      
                      
                      
                      
                      (1,237
                      )Cash
      flow used in investing activities
                      
                      
                      (404
                      )
                      
                      
                      
                      
                      
                      
                      (542
                      )Cash
      flow provided by financing activities
                      
                      
                      (596
                      )
                      
                      
                      
                      
                      
                      
                      4,908Reconciliation
      of net loss to EBITDA:Net
      loss
                      
                      $
                      (2,720
                      )
                      
                      
                      
                      
                      
                      $
                      (3,000
                      )Add:Depreciation
      and amortization
                      
                      
                      1,076
                      
                      
                      
                      
                      
                      
                      
                      1,173Impairment
      Loss
                      
                      
                      1,120
                      
                      
                      
                      
                      
                      
                      
                      780Interest
      (income)
                      
                      
                      (37
                      )
                      
                      
                      
                      
                      
                      
                      (87
                      )Interest
      expense
                      
                      
                      86
                      
                      
                      
                      
                      
                      
                      
                      112EBITDA
      (loss)(2)
                      
                      $
                      (475
                      )
                      
                      
                      
                      
                      
                      $
                      (1,022
                      )





(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)EBITDA
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
EBITDA on a historical basis as a measurement of the Company’s current operating
cash income.


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


15


Total
revenue.  Total revenue decreased by $994,000, or 11.3%, to
$7,783,000 million in fiscal 2009 from $8,777,000 million in fiscal 2008. The
Company’s subscriber count decreased by 3,300, or 10.9%, to 27,000 as of June
30, 2009 compared to 30,300 as of June 30, 2008. The Company’s wireless
broadband Internet subscriber count remained unchanged and was approximately
8,000 as of June 30, 2009 and 2008. Wireless broadband Internet revenue
increased by $218,000 to $4,307,000 as of June 30, 2009 compared to $4,089,000
as of June 30, 2008.  This increase was primarily due to the stability
of the subscriber base and customers migrating to upgraded service levels upon
completion of infrastructure upgrades in certain areas as well as purchasing
additional services for the year ended June 30, 2009. Presently stable revenues
derived from wireless broadband Internet subscribers were offset by the decrease
in other types of Internet service revenues of $1,068,000. This is attributed to
the expected decline of dial-up customers who may move to other providers’
broadband service. In connection with the acquisition of TeleShare, the Company
derives other revenues from providing telex messaging services, which totaled
$202,000 for the year ended June 30, 2009 as compared to $346,000 for the year
ended June 30, 2008.





Connectivity and
operations.  Connectivity and operations expenses decreased by
approximately $656,000, or 11.0%, to $5,304,000 for fiscal 2009 from $5,960,000
for fiscal 2008. Data and telecommunications expense decreased by $398,000 to
$1,531,000 in fiscal 2009 compared to $1,929,000 in fiscal 2008 due to our
renegotiating more favorable terms with telecommunications service providers.
There was a decrease in salaries and wages of approximately $251,000 to
$2,477,000 in fiscal 2009 compared to $2,728,000 in fiscal 2008 which is
attributed to efficiencies gained from quality process
initiatives.  Travel and mileage decreased by $47,000 to $125,000 in
fiscal 2009 compared to $172,000 in fiscal 2008.  The remaining
decrease in expense primarily relates to a decrease in merchant fees of
$27,000.





The
decreases in the previously discussed expenses were partially offset by an
increase in tower lease costs of $56,000 for fiscal year 2009 to $424,000
compared to $368,000 for fiscal year, 2008, and a slight increase in
installation expenses of $9,000 to $577,000 in fiscal 2009 compared to $568,000
in fiscal 2008.  This increase in installation expenses is due to
significant increases in service calls in the Greater Houston, Texas region
after the natural disaster, Hurricane Ike, and ongoing network improvement
activity.  Additionally, in an effort to reduce capital expenditures
and to make best use of resources, the Company aggressively increased its repair
and recycle program for customer premise equipment.  The costs of
refurbishing equipment are currently expensed as incurred.  Minor
increases in other expense totaled $1,000 in 2009.





Sales and
marketing.  Sales and marketing expenses decreased by $203,000,
or 40.3%, to $301,000 for fiscal 2009 from $504,000 for the prior fiscal year.
Salaries and wages decreased by $161,000 to $212,000 in fiscal 2009 compared to
$373,000 in fiscal 2008 due to the present Vice President of Marketing vacancy
and the elimination of our outside sales force. Advertising expenses were
decreased by $67,000 when we temporarily delayed all sales promotions in certain
areas in order to enhance and improve our current network. These decreases were
offset by allocation of facilities expense for the inside sales force by $25,000
for the fiscal 2009.





General and
administrative.  General and administrative expenses decreased
by $679,000, or 20.4%, to $2,657,000 in fiscal 2009 from $3,336,000 for fiscal
2008.  Facilities costs decreased by $424,000 to $282,000 in fiscal
2009 compared to $706,000 in fiscal 2008 due to the write off of the abandoned
corporate headquarters lease in Dallas in the previous year and also to the
closing of additional regional field offices. Salaries and wages decreased
$25,000 to $976,000 in fiscal 2009 compared to $1,001,000 in fiscal 2008, which
is attributed to efficiencies gained from quality process
initiatives.





Professional
and consulting fees decreased slightly by $16,000 to $651,000 in fiscal 2009
compared to $667,000 in fiscal 2008.  In addition to reductions in
outside consulting and accountant’s fees, professional and consulting fees
decreased due to certain expenses incurred only in 2008, including fees paid to
outside investor relations consultants totaling $51,000 and legal fees for
litigation against a former landlord of $38,000. Also the Company did not incur
costs during the quarter ended March 31, 2009 for an annual shareholders’
meeting.  The decrease however was offset by the Company recording a
write off expense in February 2009 for direct costs incurred in the contemplated
merger with KeyOn of $194,000.The Company also
incurred additional expenses in connection with our application for a grant
under the American Recovery and Reinvestment Act of 2009 to expand access to
broadband into areas in Southeast Texas adjacent to existing
operations.





Telecommunications
expenses decreased by $87,000 to $179,000 in fiscal 2009 compared to $266,000 in
fiscal 2008 due to our renegotiating more favorable terms with
telecommunications service providers. Travel and mileage expenses decreased an
additional $21,000 to $23,000 in fiscal 2009 compared to $44,000 in fiscal 2008
as a result of continued efforts to control all unnecessary
expenses.




A net
decrease in stock compensation expense for stock options and directors fees of
$39,000 to $150,000 in fiscal 2009 compared to $189,000 in fiscal 2008 was due
to the continued vesting of stock options and to a lesser extent due to
termination of employment of some grantees.  Insurance costs decreased
by $12,000 to $120,000 in fiscal 2009 compared to $132,000 in fiscal
2008.  Other costs decreased by $54,000 to $276,000 as of fiscal 2009
compared to $330,000 in fiscal 2008, primarily as a result of various cost
saving measures implemented during fiscal 2009.




16


Provision for bad debt
expense.Provision for bad debt
expense recorded a net expense of $1,000 in fiscal 2009 compared to net recovery
of $1,000 in fiscal 2008.  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 $96,000, or 8.2%, to $1,076,000 for fiscal 2009 from $1,173,000 for fiscal
2008.  The decrease in depreciation totaling $77,000 relates to the
increase in fully depreciated assets still in use, offset by the addition of new
depreciable assets for improvement of the Company’s wireless broadband Internet
network. The decrease in amortization expense totaling $21,000 in fiscal 2009 is
primarily due to the write off of the Company’s note payable to Blue Wireless,
which reduced the carrying value of subscriber acquisition cost intangible
asset.





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, 2009 and 2008 the Company recorded impairment
losses of $1,120,000 and $780,000, respectively, related to potential reduction
in future cash flows as subscriber decline continues.





Interest (expense) income, net.  Interest income decreased by $50,000, or 57.6%, to $37,000 in
fiscal 2009 compared to $87,000 in fiscal 2008.   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 $26,000, or 23.2%, to $86,000 in fiscal 2009 compared to $112,000
in fiscal 2008 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 2009 cash used in
operations was $490,000, compared to cash used in operations of $1,237,000 in
fiscal 2008.  Net loss plus non-cash items used cash of $392,000 in
fiscal 2009 and additional amounts were used primarily in reducing accounts
payable. Net loss plus non-cash items used $914,000 in cash in fiscal 2008 and
additional amounts were used primarily in reducing accounts
payable.  Inventory decreased in fiscal 2009 primarily because the
Company focused on reducing inventory in all field locations by shorter restock
levels and had a higher quantity of CPE recoveries.  Decreases in
other current assets and a relative decrease in deferred revenue relate
primarily to the decline in revenues and related telecommunications
costs.





Cash used
in investing activities totaled $404,000 and $542,000 for the years ended June
30, 2009 and 2008, respectively.  In fiscal 2009, the Company used
cash for property and equipment of $415,000 which was offset by an insurance
claim of $11,000 for natural disaster Hurricane Ike.  In fiscal 2008,
TeleShare became a majority owned subsidiary and contributed $655,000 in cash
upon closing.





Cash used
by financing activities for fiscal 2009 totaled $596,000 for principal payments
on debt and capital leases.  Cash provided in fiscal 2008 of
$4,908,000 included proceeds from issuance of both Series A Preferred Stock and
Common Stock totaling $5.3 million, which was offset primarily by payments on
long-term debt.





We
estimate that cash on hand of $2.4 million at June 30, 2009 along with
anticipated cash flow from operations will be sufficient for meeting our working
capital needs for fiscal 2010 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. In August
the Company submitted an application for a grant of funds from the Broadband
Technology Opportunity Program to expand its wireless infrastructure from areas
adjacent to its existing service areas to unserved and underserved areas of 35
counties in southeast Texas.  The grant program requires that a minimum of
20% of the project costs be funded from non-federal sources.  If the
application is granted, the Company will seek funding, as needed, to meet this
minimum amount.





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.





In
addition, the following are contractual cash obligations entered into by the
Company through June 30, 2009, for the next five fiscal years ending June
30:


17





Payments Due By PeriodTotal
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                ThereafterConnectivity
      contracts
                
                $
                1,141,498
                
                
                $
                757,438
                
                
                $
                264,994
                
                
                $
                119,067
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      leases
                
                
                1,629,467
                
                
                
                527,376
                
                
                
                447,737
                
                
                
                365,585
                
                
                
                218,634
                
                
                
                54,660
                
                
                
                15,475Long-term
      debt
                
                
                1,278,518
                
                
                
                613,746
                
                
                
                420,492
                
                
                
                244,280
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
      leases
                
                
                53,494
                
                
                
                22,929
                
                
                
                28,315
                
                
                
                2,250
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                4,102,978
                
                
                $
                1,921,488
                
                
                $
                1,161,538
                
                
                $
                731,182
                
                
                $
                218,634
                
                
                $
                54,660
                
                
                $
                15,475




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 are 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 services 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 an 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.




18




The
deferred tax asset as of June 30, 2009 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




We
account for goodwill in accordance with Statement of Financial Accounting
Standard (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”.SFAS No. 142 requires,
among other things, the discontinuance of amortization for goodwill and 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 SFAS
No. 142 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 5.50% 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., whose
dial-up subscribers have continued to decline. During the years ended June 30,
2009 and 2008 the Company recorded impairment losses of $1,120,000 and $780,000,
respectively, related to potential reduction in future cash flows as subscriber
decline continues. We are required to make estimates regarding the undiscounted
cash flow projections of the Company when testing for potential
impairment.  An excess of carrying value over projected undiscounted
cash flows would result in recognition of an impairment loss. We estimate cash
flows for these purposes using internal budgets based on recent and historical
trends. We base these estimates on assumptions we believe to be reasonable, but
which are unpredictable and inherently uncertain. The impairment amounts
recorded by the Company are presented as an impairment loss line item on our
consolidated statement of operations and reduction of the goodwill line item on
our consolidated balance sheet.




We are
required to periodically review the estimated useful lives of our intangible
assets. There was no change to the estimated useful lives of our intangible
assets during fiscal 2009 as a result of our review. During fiscal 2008, our
review indicated that actual lives for subscriber acquisition costs is
consistent with the estimated useful life of subscriber acquisition costs of 48
months.  The increase in useful life from 36 months to 48 months was
effective April 1, 2007.  The effective change in estimate reduced
fiscal 2007 amortization expense by $37,000 and decreased fiscal 2007 net loss
from operations and resulting net loss by $37,000.




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.




19


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 Sheet, Consolidated
Statements of Operations, Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows for each of the two years in the period
ended June 30, 2009 and 2008, and the Notes to the Consolidated Financial
Statements.





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





None.





Item
9A (T). Controls and
Procedures





Disclosure
Controls and Procedures





An
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief 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, 2009.  Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of June 30,
2009, the design and operation of these disclosure controls and procedures were
effective in timely alerting them 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
management, including our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2008.Based on the results of
its assessment, management concluded that the Company’s internal control over
financial reporting was effective as of June 30, 2009.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




This
report shall not be deemed to be filed for purposes of Section 18 of the
Exchange Act or otherwise subject to the liabilities of that
section.




Changes
in Internal Control over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting
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.





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.


20





NAME
                            
                            AGE
                            
                            POSITION
                            
                            CURRENT
                              TERM EXPIRINGWilliam E. (Billy) Ladin,
      Jr.
                            
                            68
                            
                            Chairman
      of the Board
                            
                            2010 (Class I)Justin
      McClure
                            
                            45
                            
                            Director
                            
                            2011 (Class II)Steven
      G. Mihaylo
                            
                            65
                            
                            Director
                            
                            2009 (Class III)Ambassador John N. Palmer
                            
                            74
                            
                            Director
                            
                            2010 (Class I)Troy LeMaile-Stovall
                            
                            45
                            
                            Director
                            
                            2009 (Class III)




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 became a director in April
2004. 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 became a director in February 2005. 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 became a director in April 2004. 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.





The
following table sets forth information as to all executive officers of the
Company.





Name
            
            Age
            
            PositionWilliam
      E. (Billy) Ladin, Jr.
            
            68
            
            Chairman
      of the Board and Chief Executive OfficerRoss
      McAlpine
            
            58
            
            President
      and Chief Operating OfficerJennifer
      S. LeBlanc
            
            35
            
            Chief
      Financial and Accounting Officer and
Secretary




21


William E. (Billy) Ladin, Jr.
Please see above for biographical information for Mr. Ladin.




Ross McAlpine.  Mr.
McAlpine was elected the Company’s President and Chief Operating Officer
effective November 30, 2007.  Prior to joining the Company, Mr. McAlpine
was employed by Inter-Tel Incorporated, a communications equipment provider and
subsidiary of Mitel, Inc. From 2001 to 2007, he served as President of Inter-Tel
Network Services. From 1997 to 2001 he served as President of Inter-Tel.Net, one
of the world’s initial Internet telephony service providers utilizing VoIP and
prior to that time he held other executive positions at Intertel.





Jennifer S. LeBlanc.Ms. LeBlanc joined the Company in January 2006 as Chief Financial
and Accounting Officer and Secretary. Prior to joining the Company, Ms. LeBlanc
was engaged as an independent consultant since August 16, 2004, providing
professional services related primarily to acquisition and disposition due
diligence and systems restructuring for various companies. Prior to that, from
September 15, 2001 to August 15, 2004, she served as manager and then senior
manager providing audit and assurance services for PKF Texas, a certified public
accounting firm. During 2000 and 2001, Ms. LeBlanc was an audit manager for
PriceWaterhouseCoopers in San Jose, California, providing services to clients in
their technology divisions.




Code
of Ethics




The
Company has adopted a general code of ethics that applies to all employees,
including the Company’s Chief Executive Officer and senior financial officers.
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,
2009.





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.


22


Item
11. Executive
Compensation




Summary
Compensation Table




The
following table sets forth information regarding compensation paid to our Chief
Executive Officer and up to four other most highly compensated executive
officers who earned more than $100,000 during the 2009 fiscal year (the “Named
Executive Officers”) for the fiscal periods indicated.





Name
      and
                  Principal
      Position
                
                Year
                
                Salary
                  ($)
                
                
                Bonus
                  ($)
                
                
                Option
                  Awards
                  ($)(1)
                
                
                All
      other
                  Compensation
                  ($)
                
                
                Total
                  ($)William
      E. (Billy) Ladin, Jr.
                
                2009
                
                $
                200,000
                
                
                
                -
                
                
                
                
                
                
                -
                
                
                $
                200,000Chairman
      of the Board and
                
                2008
                
                $
                200,000
                
                
                
                -
                
                
                
                
                
                
                -
                
                
                $
                200,000Chief
      Executive Officer
                
                2007
                
                $
                200,000
                
                
                
                -
                
                
                $
                48,811
                
                
                
                -
                
                
                $
                248,811Ross
      McAlpine
                
                2009
                
                $
                175,000
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                $
                175,000President
      and Chief Operating
                
                2008
                
                $
                83,462
                
                
                
                -
                
                
                $
                155,320
                
                
                
                -
                
                
                $
                238,782Officer
      (2)
                
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -Jennifer
      S. LeBlanc
                
                2009
                
                $
                120,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                $
                120,000Chief
      Financial and Accounting
                
                2008
                
                $
                120,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                $
                120,000Officer
      and Secretary
                
                2007
                
                $
                120,000
                
                
                
                -
                
                
                $
                24,406
                
                
                
                -
                
                
                $
                144,406





(1)
Option award value is calculated using the Black Scholes pricing model with the
following assumptions: option term until exercise ranging from 4 to 5 years,
volatility ranging from 200% to 290%, risk free interest rate ranging from 1.9%
to 4.5% and an expected dividend yield of zero.


(2) Mr.
McAlpine was employed by the Company beginning November 30, 2007. Compensation
shown is for the partial year.





Outstanding
Equity Awards at Fiscal Year-End




The
following table sets forth information regarding the value of stock options
outstanding at June 30, 2009 held by each of the Named Executive Officers.
No stock options were granted to or exercised by the Named Executive Officers in
fiscal 2009.





Name
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options (#)
                          Exercisable
                        
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options (#)
                          Unexercisable
                        
                        
                        Option Exercise
                          Price ($)
                        
                        OptionExpiration DateWilliam
      E. (Billy) Ladin, Jr.
                        
                        
                        150,000
                        
                        
                        
                        50,000
                        
                        
                        $
                        0.50
                        
                        03/30/201722,500
                        
                        
                        
                        0
                        
                        
                        $
                        13.19
                        
                        01/03/2010Ross
      McAlpine
                        
                        
                        62,500
                        
                        
                        
                        187,500
                        
                        
                        $
                        1.00
                        
                        11/30/2017Jennifer
      LeBlanc
                        
                        
                        75,000
                        
                        
                        
                        25,000
                        
                        
                        $
                        0.50
                        
                        03/30/2017





23





Director
Compensation





Name
                
                Fees Earned or
                  Paid in Cash ($)
                
                
                Option Awards
                  ($)
                
                
                All other
                  Compensation
                  ($)
                
                
                Total
                  ($)William
      E. (Billy) Ladin, Jr.
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Justin
      McClure
                
                
                15,750
                
                
                
                -
                
                
                
                -
                
                
                
                15,750Steven
      G. Mihaylo
                
                
                16,000
                
                
                
                -
                
                
                
                893
                
                
                
                16,893Ambassador
      John N. Palmer
                
                
                15,000
                
                
                
                -
                
                
                
                1,323
                
                
                
                16,363Troy
      LeMaile-Stovall
                
                
                16,250
                
                
                
                -
                
                
                
                426
                
                
                
                16,676





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 of 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.





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




The
following table sets forth information as of September 25, 2009, 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
                                                                    
                                                                    
                                                                    1,052,258
                                                                    (1)
                                                                    
                                                                    
                                                                    5.9
                                                                    %Chairman
      of the Board,
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    341,297
                                                                    
                                                                    
                                                                    
                                                                    11.8
                                                                    %Chief
      Executive Officer and
                                                                    
                                                                    Total
                                                                    
                                                                    
                                                                    1,393,555
                                                                    
                                                                    
                                                                    
                                                                    6.9
                                                                    %DirectorJustin
      McClure
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    447,694
                                                                    (2)
                                                                    
                                                                    
                                                                    2.5
                                                                    %Director
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    853,242
                                                                    (2)
                                                                    
                                                                    
                                                                    29.5
                                                                    %Total
                                                                    
                                                                    
                                                                    1,300,936
                                                                    
                                                                    
                                                                    
                                                                    6.4
                                                                    %Steven
      G. Mihaylo
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    4,197,461
                                                                    (3)(4)
                                                                    
                                                                    
                                                                    23.7
                                                                    %Director
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    500,000
                                                                    (3)(4)
                                                                    
                                                                    
                                                                    17.3
                                                                    %Total
                                                                    
                                                                    
                                                                    4,697,461
                                                                    
                                                                    
                                                                    
                                                                    23.3
                                                                    %Ambassador
      John N. Palmer
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    1,159,205
                                                                    (5)
                                                                    
                                                                    
                                                                    6.6
                                                                    %Director
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    853,242
                                                                    (5)
                                                                    
                                                                    
                                                                    29.5
                                                                    %Total
                                                                    
                                                                    
                                                                    2,012,447
                                                                    
                                                                    
                                                                    
                                                                    10.0
                                                                    %Troy
      LeMaile-Stovall
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    88,994
                                                                    (6)
                                                                    
                                                                    
                                                                    *DirectorRoss
      McAlpine
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    62,500
                                                                    (7)
                                                                    
                                                                    
                                                                    *President
      and ChiefOperating
      OfficerJennifer
      S. LeBlanc
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    75,000
                                                                    (8)
                                                                    
                                                                    
                                                                    *Chief
      Financial andAccounting
      Officer andSecretaryGulf
      South Capital, Inc.
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    76,667
                                                                    (2)(5)
                                                                    
                                                                    
                                                                    *Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    853,242
                                                                    (2)(5)
                                                                    
                                                                    
                                                                    29.5
                                                                    %Total
                                                                    
                                                                    
                                                                    929,909
                                                                    
                                                                    
                                                                    
                                                                    4.6
                                                                    %Arnold
      Schumsky
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    170,648
                                                                    
                                                                    
                                                                    
                                                                    5.9
                                                                    %Stuart
      Sternberg
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    511,945
                                                                    
                                                                    
                                                                    
                                                                    17.7
                                                                    %George
      Sturgis
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    60,000
                                                                    
                                                                    
                                                                    
                                                                    *Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    170,648
                                                                    
                                                                    
                                                                    
                                                                    5.9
                                                                    %Total
                                                                    
                                                                    
                                                                    230,648
                                                                    
                                                                    
                                                                    
                                                                    1.1
                                                                    %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
                                                                    
                                                                    
                                                                    6,851,112
                                                                    
                                                                    
                                                                    
                                                                    38.7
                                                                    %officers
      as a group (seven
                                                                    
                                                                    Series
      A Preferred Stock
                                                                    
                                                                    
                                                                    1,194,539
                                                                    
                                                                    
                                                                    
                                                                    41.3
                                                                    %persons)
                                                                    
                                                                    Total
                                                                    
                                                                    
                                                                    8,045,651
                                                                    (9)
                                                                    
                                                                    
                                                                    39.85
                                                                    %




24





*
            Less
      than one percent.





(1)
            Includes
      options to purchase 22,500 shares of Common Stock granted to Mr. Ladin
      which are exercisable at $13.19 per share, and options to purchase 150,000
      shares of Common Stock granted to Mr. Ladin which are exercisable at $0.50
      per share.(2)
            Includes
      options to purchase 30,000 shares of Common Stock granted to Mr. McClure
      which are exercisable at $1.07, options to purchase 25,974 which are
      exercisable at $0.77 and options to purchase 33,020 which are exercisable
      at $0.50, 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, 44,400 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, 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.(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 19,608 shares of Common Stock granted to Ambassador
      Palmer which are exercisable at $1.02, and options to purchase 60,294
      shares of Common Stock granted to Ambassador Palmer which are exercisable
      at $0.50. Includes warrants to purchase 197,461 shares of Common Stock
      issued to Ambassador Palmer which are redeemable at
      $0.38.  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 Capital,
      Inc. (“GulfSouth”), a private investment firm 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.




25





(6)
            Includes
      options to purchase 30,000 shares of Common Stock which are exercisable at
      $1.07, options to purchase 25,974 which are exercisable at $.77 and
      options to purchase 33,020 which are exercisable at $.50 granted to Mr.
      LeMaile-Stovall.(7)
            Includes
      options to purchase 62,500 shares of Common Stock, which are exercisable
      at $.50 granted to Mr. McAlpine.(8)
            Includes
      options to purchase 75,000 shares of Common Stock, which are exercisable
      at $.50 granted to Ms. LeBlanc.(9)
            Includes
      (i) options to purchase 567,890 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 Mr.
      McClure disclaims beneficial ownership, (iv) 44,400 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, 2009 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)
                  
                  
                  1,637,000
                  
                  
                  $
                  0.98
                  
                  
                  
                  524,056Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  1,637,000
                  
                  
                  $
                  0.98
                  
                  
                  
                  524,056





(1)
            Consists
      of the Internet America 1998 Nonqualified Stock Option Plan, the 2004
      Non-Employee Director Plan and the 2007 Stock Option
  Plan.




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




There
have been no 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.


26





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 $153,000 for professional services rendered for the audit
of our financial statements for the year ended June 30, 2009, 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, 2008 and
2007.  PKF billed us $131,000 for professional services rendered for
the audit of our financial statements for the year ended June 30, 2008 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 2009 and 2008.





Audit
Related Fees





There were no 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 2009 and 2008.




All
Other Fees




No other
fees were billed for services rendered by the Company’s independent registered
public accounting firm for fiscal years 2009 and 2008.




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, 2009. 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 2009 and 2008 were
pre-approved by the audit committee.





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)





27





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
                
                Purchase
      Agreement dated as of October 17, 2007 (2)4.4
                
                Registration
      Rights Agreement dated as of October 17, 2007 (2)4.5
                
                Securities
      Purchase Agreement between Internet America, Inc. and the Investor named
      therein dated as of December 10, 2007 (5)4.6
                
                Registration
      Rights Agreement between Internet America, Inc. and the Investor named
      therein dated as of December 10, 2007 (5)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 Jennifer S.
  LeBlanc*32.1
                
                Section
      1350 Certification of William E. Ladin, Jr.*32.2
                
                Section
      1350 Certification of Jennifer S.
LeBlanc*







*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 4.1 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 4.1 through 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.





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of the 28th day of
September, 2009.





INTERNET
      AMERICA, INC./s/William E. Ladin, Jr.William
      E. (Billy) Ladin, Jr.Chief
      Executive Officer and Director/s/ Jennifer S. LeBlancJennifer
      S. LeBlancChief
      Financial Officer and Chief Accounting
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 andWilliam
      E. (Billy) Ladin, Jr.
                      
                      Chief
      Executive Officer
                      
                      September
      28, 2009/s/ Troy LeMaile-StovallTroy
      LeMaile-Stovall
                      
                      Director
                      
                      September
      28, 2009/s/ Justin McClureJustin
      McClure
                      
                      Director
                      
                      September
      28, 2009/s/ John PalmerJohn
      Palmer
                      
                      Director
                      
                      September
      28, 2009/s/ Steven G. MihayloSteven
      G. Mihaylo
                      
                      Director
                      
                      September
      28,
2009




28





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, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the years ended June 30, 2009 and 2008.  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, 2009 and 2008,
and the results of its operations and cash flows for the years ended June 30,
2009 and 2008, in conformity with U. S. generally accepted accounting
principles.




Pannell
Kerr Forster of Texas, P. C.





Houston,
Texas


September
28, 2009





F-2





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


June 30,
                
                
                June 30,2009
                
                
                2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                2,421,264
                
                
                $
                3,911,680Restricted
      cash
                
                
                6,432
                
                
                
                6,432Accounts
      receivable, net of allowance for uncollectible accounts of $6,824 and
      $5,863 as of June 30, 2009 and June 30, 2008, respectively
                
                
                122,128
                
                
                
                170,231Inventory
                
                
                255,534
                
                
                
                285,410Prepaid
      expenses and other current assets
                
                
                542,606
                
                
                
                610,865Total
      current assets
                
                
                3,347,964
                
                
                
                4,984,618Property
      and equipment—net
                
                
                2,150,562
                
                
                
                2,328,954Goodwill—net
                
                
                2,413,127
                
                
                
                3,533,127Subscriber
      acquisition costs—net
                
                
                744,869
                
                
                
                1,310,537Other
      assets—net
                
                
                53,318
                
                
                
                38,087TOTAL
      ASSETS
                
                $
                8,709,840
                
                
                $
                12,195,323LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      accounts payable
                
                $
                298,903
                
                
                $
                204,056Accrued
      liabilities
                
                
                573,013
                
                
                
                654,187Deferred
      revenue
                
                
                1,029,773
                
                
                
                1,271,901Current
      portion of long-term debt
                
                
                613,746
                
                
                
                620,585Current
      portion of capital lease obligations
                
                
                22,929
                
                
                
                -Total
      current liabilities
                
                
                2,538,364
                
                
                
                2,750,729Long-term
      debt, less current maturities
                
                
                664,772
                
                
                
                1,331,096Long-term
      capital lease obligations, less current maturities
                
                
                30,565
                
                
                
                -Minority
      interest in subsidiary
                
                
                -
                
                
                
                5,696TOTAL
      LIABILITIES
                
                
                3,233,701
                
                
                
                4,087,521COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS'
      EQUITY:Preferred
      stock 10% cumulative, $.01 par value: 5,000,000 shares authorized,
      2,889,076 issued and outstanding, aggregate liquidation preference of
      $1,693,000
                
                
                28,891
                
                
                
                28,891Common
      stock, $.01 par value: 40,000,000 shares authorized,
      16,857,031  issued and outstanding as of June 30, 2009 and June
      30, 2008, respectively
                
                
                168,571
                
                
                
                168,571Additional
      paid-in capital
                
                
                63,676,806
                
                
                
                63,588,884Accumulated
      deficit
                
                
                (58,398,129
                )
                
                
                (55,678,544
                )TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                5,476,139
                
                
                
                8,107,802TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                
                $
                8,709,840
                
                
                $
                12,195,323





See notes
to consolidated financial statements.





F-3





INTERNET
AMERICA, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended June 30,2009
                                
                                
                                2008REVENUES:Internet
      services
                                
                                $
                                7,580,901
                                
                                
                                $
                                8,430,931Other
                                
                                
                                202,081
                                
                                
                                
                                346,102Total
                                
                                
                                7,782,982
                                
                                
                                
                                8,777,033OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                                
                                
                                5,303,779
                                
                                
                                
                                5,960,007Sales
      and marketing
                                
                                
                                300,821
                                
                                
                                
                                504,261General
      and administrative
                                
                                
                                2,656,954
                                
                                
                                
                                3,335,636Provision
      for bad debt expense (recoveries)
                                
                                
                                961
                                
                                
                                
                                (679
                                )Depreciation
      and amortization
                                
                                
                                1,076,634
                                
                                
                                
                                1,172,974Impairment
      loss
                                
                                
                                1,120,000
                                
                                
                                
                                780,000Total
                                
                                
                                10,459,149
                                
                                
                                
                                11,752,199LOSS
      FROM OPERATIONS
                                
                                
                                (2,676,167
                                )
                                
                                
                                (2,975,166
                                )INTEREST
      INCOME
                                
                                
                                36,851
                                
                                
                                
                                87,251INTEREST
      EXPENSE
                                
                                
                                (85,965
                                )
                                
                                
                                (112,432
                                )Minority
      interest in loss of consolidated subsidiary
                                
                                
                                5,696
                                
                                
                                
                                724NET
      LOSS
                                
                                $
                                (2,719,585
                                )
                                
                                $
                                (2,999,623
                                )NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                                
                                $
                                (0.16
                                )
                                
                                $
                                (0.20
                                )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                                
                                
                                16,857,031
                                
                                
                                
                                14,978,681





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
                  
                  
                  Shareholders'Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  EquityBALANCE,
      JUNE 30, 2007
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  12,508,914
                  
                  
                  $
                  125,089
                  
                  
                  $
                  57,161,980
                  
                  
                  $
                  (52,678,921
                  )
                  
                  $
                  4,608,148Issuance
      of preferred stock
                  
                  
                  2,889,076
                  
                  
                  
                  28,891
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,578,292
                  
                  
                  
                  -
                  
                  
                  
                  1,607,183Issuance
      of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,348,117
                  
                  
                  
                  43,482
                  
                  
                  
                  4,714,586
                  
                  
                  
                  -
                  
                  
                  
                  4,758,068Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  134,026
                  
                  
                  
                  -
                  
                  
                  
                  134,026Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,999,623
                  )
                  
                  
                  (2,999,623
                  )BALANCE,
      JUNE 30, 2008
                  
                  
                  2,889,076
                  
                  
                  
                  28,891
                  
                  
                  
                  16,857,031
                  
                  
                  
                  168,571
                  
                  
                  
                  63,588,884
                  
                  
                  
                  (55,678,544
                  )
                  
                  
                  8,107,802Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,922
                  
                  
                  
                  -
                  
                  
                  
                  87,922Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,719,585
                  )
                  
                  
                  (2,719,585
                  )BALANCE,
      JUNE 30, 2009
                  
                  
                  2,889,076
                  
                  
                  $
                  28,891
                  
                  
                  
                  16,857,031
                  
                  
                  $
                  168,571
                  
                  
                  $
                  63,676,806
                  
                  
                  $
                  (58,398,129
                  )
                  
                  $
                  5,476,139





See notes
to consolidated financial statements.





F-5





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Year
      ended June 30,2009
                
                
                2008OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (2,719,585
                )
                
                $
                (2,999,623
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Minority
      interest
                
                
                (5,696
                )
                
                
                (724
                )Depreciation
      and amortization
                
                
                1,076,634
                
                
                
                1,172,974Impairment
      loss
                
                
                1,120,000
                
                
                
                780,000Loss
      on disposal of fixed assets
                
                
                47,939
                
                
                
                -Provision
      for bad debt expense (recoveries)
                
                
                961
                
                
                
                (679
                )Non-cash
      stock compensation expense
                
                
                87,922
                
                
                
                134,026Changes
      in operating assets and liabilities (net of effects of assets acquired,
      less liabilities assumed):Accounts
      receivable
                
                
                47,142
                
                
                
                16,722Inventory
                
                
                29,876
                
                
                
                140,503Prepaid
      expenses and other current assets
                
                
                68,259
                
                
                
                (110,106
                )Other
      assets
                
                
                (15,231
                )
                
                
                (37,003
                )Accounts
      payable and accrued liabilities
                
                
                13,673
                
                
                
                (337,689
                )Deferred
      revenue
                
                
                (242,128
                )
                
                
                4,363Net
      cash used in operating activities
                
                
                (490,234
                )
                
                
                (1,237,236
                )INVESTING
      ACTIVITIES:Purchases
      of property and equipment, net
                
                
                (414,909
                )
                
                
                (1,190,290
                )Change
      in restricted cash
                
                
                -
                
                
                
                (6,432
                )Proceeds
      from sale of property and equipment
                
                
                10,934
                
                
                
                -Cash
      paid for acquisitions
                
                
                -
                
                
                
                655,102Net
      cash used in investing activities
                
                
                (403,975
                )
                
                
                (541,620
                )FINANCING
      ACTIVITIES:Proceeds
      from issuance of common stock
                
                
                -
                
                
                
                3,987,625Proceeds
      from issuance of preferred stock
                
                
                -
                
                
                
                1,307,183Proceeds
      from issuance of long term debt
                
                
                -
                
                
                
                71,787Principal
      payments of long-term debt
                
                
                (596,207
                )
                
                
                (458,946
                )Net
      cash provided by (used in) financing activities
                
                
                (596,207
                )
                
                
                4,907,649NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (1,490,416
                )
                
                
                3,128,793CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                3,911,680
                
                
                
                782,887CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                2,421,264
                
                
                $
                3,911,680





See notes
to consolidated financial statements.





F-6




INTERNET
AMERICA, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)





Year endedJune 30,2009
                
                
                2008SUPPLEMENTAL
      INFORMATION:Cash
      paid for interest
                
                $
                91,149
                
                
                $
                109,966NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Stock
      issued in connection with acquisitions
                
                $
                -
                
                
                $
                770,443Debt
      issued in connection with acquisitions, net
                
                $
                -
                
                
                $
                863,500Debt
      extinguished for breach of acquisition contract
                
                $
                90,670
                
                
                $
                —Non-cash
      adjustments for final purchase accounting in connection with
      acquisitions
                
                $
                -
                
                
                $
                137,175Minority
      interest liability
                
                $
                -
                
                
                $
                5,696Borrowings
      extinguished for preferred stock
                
                $
                -
                
                
                $
                300,000Property
      & equipment purchased under capital lease
                
                $
                67,207
                
                
                $
                —





See notes
to consolidated financial statements.





F-7





INTERNET
AMERICA, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended June 30, 2009 and 2008





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, 2009
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, 2009, the Company recorded a provision for bad debt
expense totaling approximately $1,000.  For the year end June 30, 2008
the Company recorded bad debt recoveries 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 method over the estimated useful lives of the
assets, ranging from two to fifteen years.





Goodwill — Goodwill is the
excess acquisition costs of a business over the fair value of the identifiable
net assets acquired.  Under Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets,” 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.





F-8





The SFAS
No. 142 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,
2009 and 2008 the Company recorded impairment losses of $1,120,000 and $780,000,
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 SFAS No. 144, “Accounting for the 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, 2009 or 2008.





Stock-Based Compensation — On
July 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment,”(“SFAS 123(R)”) 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.  SFAS 123(R) supersedes the Company’s previous accounting
under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”) for periods beginning in fiscal 2006.  In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R).  The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).





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, 2009, the total compensation costs related to non-vested awards not yet
recognized is approximately $136,000.  The period over which this cost
will be recognized is approximately 3 years.





F-9





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, 2009 and
2008 were approximately $65,000 and $132,000, 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 SFAS No. 109, “Accounting for 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 Financial Accounting Standard Board (“FASB”)
Interpretation No. 48 “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 2005, 2006, 2007 and 2008 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, 2009 and 2008, 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 — Certain
reclassifications have been made to the 2008 financial statements to conform to
the 2009 presentation.  These reclassifications had no effect on 2008
net loss or shareholders’ equity.





New accounting standards
—




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which provides companies with an
option to report selected financial assets and liabilities at fair value. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year beginning after
November 15, 2007. The adoption of this standard did not have a material
impact on the Company’s financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which amends SFAS No. 141, and provides revised guidance for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed,
and any noncontrolling interest in the acquiree. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008 and is to be
applied prospectively. The Company is currently evaluating the potential impact
of adopting SFAS No. 141(R) on its consolidated financial position and
results of operations.




In
September 2006, the FASB issued SFAS No. 157,  “Fair Value
Measurements,” which provides guidance for using fair value to measure assets
and liabilities. SFAS No. 157 establishes a definition of fair value,
provides a framework for measuring fair value and expands the disclosure
requirements about fair value measurements. SFAS No. 157 as issued is
effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted. On February 12, 2008, FASB Staff Position
No. FAS 157-2 was issued which delays the effective date to fiscal years
beginning after November 15, 2008 for certain nonfinancial assets and
liabilities. The Company is currently evaluating the impact of
SFAS No. 157 on its financial statements.





F-10




In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests
in Consolidated Financial Statements — an Amendment of ARB No. 51.”
SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling 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 noncontrolling interest. Disclosure on the face of the income statement
of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest is required. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. Earlier adoption is not
permitted. The Company is currently evaluating the impact of SFAS No. 160
on its financial statements.




In June
2009, the FASB issued SFAS No. 165 “Subsequent Events,” which establishes
general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
the statement provides standards regarding the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; and the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. In accordance
with this Statement, an entity should apply the requirements to interim or
annual financial periods ending after June 15, 2009. The Company adopted this
pronouncement in the quarter ending June 30, 2009. The Corporation evaluated
subsequent events for recognition or disclosure through September 28, 2009, the
date the financial statements were reviewed for filing and it had an immaterial
effect on the Company’s consolidated financial statements through September 28,
2009.




In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles — a replacement of
SFAS Statement No. 162.” This statement will become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this Statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. This Statement is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. This Statement is effective for the Company on July 1, 2009. This
statement is not expected to have a material effect on the Company’s
consolidated 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, 2009 and
2008.





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.  See Note 13.




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, 2009 and 2008 property and equipment consist of:





F-11





June
      302009
                  
                  
                  2008Land
                  
                  $
                  30,000
                  
                  
                  $
                  30,000Infrastructure
      in progress
                  
                  $
                  96,610
                  
                  
                  $
                  145,824Depreciable
      assets:Data
      communications and office equipment
                  
                  $
                  2,726,464
                  
                  
                  $
                  8,178,965Computer
      software
                  
                  
                  781,230
                  
                  
                  
                  782,441Furniture
      and fixtures
                  
                  
                  58,007
                  
                  
                  
                  260,886Leasehold
      improvements
                  
                  
                  27,512
                  
                  
                  
                  21,777Building
                  
                  
                  20,450
                  
                  
                  
                  20,4503,613,663
                  
                  
                  
                  9,264,519Less
      accumulated depreciation and amortization
                  
                  
                  (1,589,711
                  )
                  
                  
                  (7,111,389
                  )$
                  2,023,952
                  
                  
                  $
                  2,153,130Total
      property and equipment, net
                  
                  $
                  2,150,562
                  
                  
                  $
                  2,328,954





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, 2009 and
2008, is approximately $67,000 and $0, respectively of property and equipment
held under capital lease.





Depreciation
expense charged to operations was approximately $602,000 and $678,000 for the
years ended June 30, 2009 and 2008, respectively.





4.
Goodwill, Subscriber
Acquisition Costs and Other Assets





Pursuant
to SFAS No. 142, 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, 2009 and 2008, the Company recorded impairment losses of $1,120,000 and
$780,000, respectively, related to potential reduction in future cash flows as
subscriber decline continues 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, 2009 or
2008.  Subscriber acquisition costs increased by approximately
$1,036,000, during the year ended June 30, 2008 due to the acquisition of
TeleShare.  During the year ended June 30, 2009, the Company reduced
subscriber acquisition costs by $90,670 due to a final adjustment to reduce the
purchase price on an acquisition of assets by the total amount of related
liability previously recorded as a long term amount payable.  Further,
the Company has officially notified the seller of the Company’s claim for
damages due to seller’s breach of the Asset Purchase Agreement.  The
claim of approximately $85,000 has been fully reserved due to the financial
condition of the seller.





The
weighted average amortization period for subscriber acquisition costs is 48
months for both dial-up and wireless customers.  Total subscriber
acquisition costs were approximately $2,727,000 and $2,818,000 for the year
ended June 30, 2009 and 2008, respectively. Amortization expense for the year
ended June 30, 2009 and 2008 was approximately $475,000 and $495,000,
respectively.  Subscriber acquisition costs related to the NeoSoft and
PDQ acquisitions were fully amortized as of June 30, 2002. As of June 30, 2009,
expected amortization expense for the fiscal years ended is as
follows:





2010
                  
                  $
                  386,0002011
                  
                  
                  355,0002012
                  
                  
                  4,0002013
      and thereafter
                  
                  
                  -Total
      expected amortization expense
                  
                  $
                  745,000




F-12





Other
assets consist of long term public-private partnership receivable and deposits
on leaseholds and services.





5. Accrued
Liabilities





As of
June 30, 2009 and 2008 accrued liabilities consists of:





June
      30,2009
                  
                  
                  2008Property,
      franchise and sales tax expenses
                  
                  $
                  192,191
                  
                  
                  $
                  191,772Employee
      wages and benefits
                  
                  
                  205,004
                  
                  
                  
                  209,698Professional
      fees
                  
                  
                  95,965
                  
                  
                  
                  119,451Accrued
      payable on abandoned lease
                  
                  
                  1,353
                  
                  
                  
                  87,765Investor
      relations and communication fees
                  
                  
                  64,642
                  
                  
                  
                  22,078Deferred
      rent
                  
                  
                  5,933
                  
                  
                  
                  10,314Interest
                  
                  
                  3,925
                  
                  
                  
                  9,109Other
                  
                  
                  4,000
                  
                  
                  
                  4,000$
                  573,013
                  
                  
                  $
                  654,187




F-13





6. Long-Term Debt





As of
June 30, 2009 and 2008 long-term debt consists of:





June 30,
                
                
                June 30,2009
                
                
                2008Note
      payable due July 19, 2009, payable in quarterly payments of $7,751
      with interest imputed at 9% (net of unamortized discount of
      $2,480)
                
                $
                36,211
                
                
                $
                62,452Note
      payable due January 23, 2011 payable in bi-annual installments of
      $13,917 with interest imputed at 8% (net of unamortized discount of
      $2,109)
                
                
                23,106
                
                
                
                23,106Note
      payable due February 12, 2009 payable in monthly installments of
      $1,261
                
                
                -
                
                
                
                10,084Note
      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 $442)
                
                
                14,025
                
                
                
                21,219Note
      payable due June 20, 2012, payable in monthly installments of $2,088 with
      interest imputed at 9% (net of unamortized discount of
    $9,506)
                
                
                65,656
                
                
                
                83,900Note
      payable due July 20, 2010, payable in monthly installments of $1,818 with
      interest imputed at 6.5% (net of unamortized discount of
    $872)
                
                
                22,757
                
                
                
                42,392Note
      payable due July 20, 2010, payable in monthly installments of $1,409 with
      interest imputed at 6.5% (net of unamortized discount of
    $676)
                
                
                17,637
                
                
                
                32,855Amount
      payable estimated at June 30, 2008, prior to final adjustments to purchase
      price under Asset Purchase Agreement; the final adjustment recorded during
      the quarter ended March 31, 2009 reduced the amount payable to $0 (see
      Note 5)
                
                
                -
                
                
                
                95,324Note
      payable due December 23, 2010, payable in monthly payments of $26,199 with
      interest imputed at 5.5% (net of unamortized discount of
      $19,042)
                
                
                452,548
                
                
                
                735,083Loan
      and Security Agreement with RUS
                
                
                646,578
                
                
                
                845,2661,278,518
                
                
                
                1,951,681Less
      current portion
                
                
                (613,746
                )
                
                
                (620,585
                )Total
      long-term debt, net of current portion
                
                $
                664,772
                
                
                $
                1,331,096




As of
June 30, 2009, the Company’s long-term debt which is secured by certain
inventory and equipment and certificates of deposit totaled approximately
$1,215,000. The prime rate at June 30, 2009 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, 2009, the direct cost of money rate on borrowings to date averaged
4.9%.




The
following is a schedule by fiscal years of the principal payments under these
agreements as of June 30, 2009.





2010
                  
                  $
                  613,7462011
                  
                  
                  420,4922012
                  
                  
                  244,2802013,
      and thereafter
                  
                  
                  -Total
      principal payments
                  
                  $
                  1,278,518





F-14





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, 2009:





2010
                                  
                                  $
                                  32,4302011
                                  
                                  
                                  32,4312012
                                  
                                  
                                  2,584Total
      minimum lease payments
                                  
                                  
                                  67,445Less
      amounts representing interest
                                  
                                  
                                  (13,951
                                  )Present
      value of minimum capitalized payments
                                  
                                  
                                  53,494Less
      current portion
                                  
                                  
                                  (22,929
                                  )Long-term
      capitalized lease obligations
                                  
                                  $
                                  30,565





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 $619,000 and $953,000 for
the years ended June 30, 2009 and 2008, respectively. Future minimum lease
payments on facilities operating leases and telecommunications contracts at June
30, 2009 are listed below.





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  Thereafter
                  
                  
                  TotalConnectivity
      contracts
                  
                  $
                  757,000
                  
                  
                  $
                  265,000
                  
                  
                  $
                  119,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,141,000Operating
      leases
                  
                  
                  527,000
                  
                  
                  
                  448,000
                  
                  
                  
                  366,000
                  
                  
                  
                  219,000
                  
                  
                  
                  54,000
                  
                  
                  
                  15,000
                  
                  
                  
                  1,629,000$
                  1,284,000
                  
                  
                  $
                  713,000
                  
                  
                  $
                  485,000
                  
                  
                  $
                  219,000
                  
                  
                  $
                  54,000
                  
                  
                  $
                  15,000
                  
                  
                  $
                  2,770,000





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.





F-15





9.
Shareholders'
Equity





Earnings Per Share — There
were no “in the money” options as of June 30, 2009 or June 30,
2008.





Series A Preferred Stock—
The Company has authorized 5,000,000 shares of $0.01 par value Series A
Preferred Stock.





On
October 17, 2007, the Company entered into a Purchase Agreement (the “October
Agreement”) with certain purchasers (the “Purchasers”), pursuant to which the
Company sold 2,889,076 shares of a newly designated Series A Preferred Stock,
for a per share purchase price of $0.586 and an aggregate purchase price of
$1,693,000, in a privately-negotiated transaction.  Mr. Ladin, the
Chairman of the Board and Chief Executive Officer of the Company, and Ambassador
Palmer, a director of the Company, participated in the sale as Purchasers, as
described in Note 12.





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 $307,000 at June 30, 2009. 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.





On
December 10, 2007 the Company entered into a Purchase Agreement (the “December
Agreement”) with The Steven G. Mihaylo Trust (the “Trust”), pursuant to which
the Company sold 4,000,000 shares of common stock, for a per share purchase
price of $1.00 and an aggregate purchase price of $4,000,000, in a
privately-negotiated transaction.  The December Agreement contains
customary representations, warranties and indemnification
provisions.





Additionally,
in connection with the December Agreement, the Company amended its Rights
Agreement between the Company and American Stock Transfer & Trust Company
dated August 9, 2004. Prior to adoption of the amendment, the acquisition by a
beneficial owner in excess of 15% of the outstanding shares of common stock was
an event that triggered the issuance of Common Shares to holders of rights under
the Rights Agreement.  The Board of Directors determined that it was
in the best interest of the Company to exempt the Trust from the provisions of
the Rights Agreement, with the result that no Common Shares would be issuable to
the holders of the Rights upon the sale of common stock under the December
Agreement.  Further the Board approved the acquisition by the Trust of
up to 25% of the outstanding Common Shares, so long as such acquisition is not
made in connection with a tender or exchange offer.





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, 2009 and
2008.  At June 30, 2009, 155,959 shares were available under the
Purchase Plan for future issuance.





F-16





Stock Option Plans —The
Company's 1998 Nonqualified Stock Option Plan (the "1998 Option Plan") was
adopted by the Board of Directors and the Company's shareholders in July 1998. A
total of 1,200,000 shares of common stock were reserved for issuance under the
1998 Option Plan. In connection with the adoption of the 2007 Stock Option Plan,
as further described below, the Board of Directors determined that the terms of
the 1998 Stock Option Plan of the Company will not be renewed.





The
maximum term of options granted under the 1998 Option Plan is ten years. Options
granted under the 1998 Option Plan are in most cases nontransferable and
generally expire within 30 days after the termination of the optionee's
services, except in cases when the optionee is terminated "for cause" (as such
term is defined therein). In such cases, the option typically expires
automatically on the date of termination. In general, if an optionee is disabled
or dies, such option may be exercised up to 12 months following such disability
or death. In general, if an optionee retires from his or her service to us, such
option may be exercised up to three months following such retirement, unless the
Compensation Committee determines to allow a longer period for exercise. The
Company has 29,500 options outstanding to its employees under the 1998 Option
Plan at June 30, 2009. These options are exercisable at prices ranging from
$9.25 to $13.19 per share of common stock.





The
Company's Employee and Consultant Stock Option Plan (the "Employee and
Consultant Option Plan") was approved by the Board of Directors in September
1999 in connection with the acquisition of PDQ. The plan was subsequently
approved by the shareholders at a special meeting of shareholders in November
1999. This plan was created in connection with the acquisition of PDQ so that
each outstanding PDQ incentive stock option could be exchanged for an incentive
stock option to purchase Internet America common stock. Pursuant to the Employee
and Consultant Stock Option Plan, the Company may grant incentive and
nonqualified stock options to our employees, consultants, directors and
advisors.  A total of 260,063 shares of common stock have been
reserved for issuance under the Employee and Consultant Option
Plan.  There were no options outstanding under this plan at June 30,
2009 or 2008.





The
Company also has granted nonqualified stock options to employees that are not
included under any of the stock option plans noted above.  The
remaining 15,576 options outstanding to its employees that are not related to
any plan were forfeited during the year ended June 30, 2008.





On
October 26, 2004, the Board of Directors adopted the 2004 Non-Employee Director
Plan (the “2004 Option Plan”) specifically to grant stock to non-employee
directors.  The maximum term of options granted under the 2004 Option
Plan is ten years. Options granted under the 2004 Option Plan are
nontransferable and expire upon the termination of the director’s service on the
Board of Directors. A total of 600,000 shares of common stock were reserved for
issuance under the 2004 Option Plan.  In connection with the adoption
of the 2007 Stock Option Plan, described below, the Board of Directors amended
the 2004 Non-Employee Director Plan to reduce the number of shares available for
issuance upon the exercise of options under that plan from 600,000 to 131,556,
being the number of shares covered by outstanding options granted under that
plan as of March 30, 2007.  The Company currently has 131,556 options
outstanding to its non-employee directors under the 2004 Option Plan at June 30,
2009. These options are exercisable at prices ranging from $0.77 to $1.07 per
share of common stock.





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.  Options to purchase the following number of shares are
outstanding to the category of persons indicated as of June 30, 2008: an
aggregate of 168,444 shares to directors, 550,000 shares to executive officers
and 757,500 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, 2009 and 2008 and
changes during the years ended on those dates is presented below:





June 30, 2009
                  
                  
                  June 30, 2008Weighted
                    Average
                    Exercise
                  
                  
                  
                  
                  
                  Weighted
                    Average
                    ExerciseShares
                  
                  
                  Price
                  
                  
                  Shares
                  
                  
                  PriceOutstanding
      at beginning of period
                  
                  
                  1,259,500
                  
                  
                  
                  0.92
                  
                  
                  
                  980,076
                  
                  
                  
                  0.93Granted
                  
                  
                  500,000
                  
                  
                  
                  1.00
                  
                  
                  
                  475,000
                  
                  
                  
                  0.77Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (122,500
                  )
                  
                  
                  0.50
                  
                  
                  
                  (195,576
                  )
                  
                  
                  0.59Outstanding
      at end of period
                  
                  
                  1,637,000
                  
                  
                  
                  0.98
                  
                  
                  
                  1,259,500
                  
                  
                  
                  0.92Options
      exercisable at year end
                  
                  
                  753,639
                  
                  
                  
                  1.08
                  
                  
                  
                  567,778
                  
                  
                  
                  1.21




F-17





The
following table summarizes information about stock options outstanding at June
30, 2009:





Number Outstanding
                          
                          
                          Weighted-Average
                            Remaining Contractual
                          
                          
                          Number ExercisableExercise Price
                          
                          
                          at 6/30/09
                          
                          
                          Life as of 6/30/09 (Years)
                          
                          
                          at 6/30/09$
                          0.50
                          
                          
                          
                          715,944
                          
                          
                          
                          7.79
                          
                          
                          
                          527,5830.77
                          
                          
                          
                          51,948
                          
                          
                          
                          0.81
                          
                          
                          
                          51,9481.00
                          
                          
                          
                          760,000
                          
                          
                          
                          5.26
                          
                          
                          
                          65,0001.02
                          
                          
                          
                          19,608
                          
                          
                          
                          0.62
                          
                          
                          
                          19,6081.07
                          
                          
                          
                          60,000
                          
                          
                          
                          0.33
                          
                          
                          
                          60,0009.25
                          
                          
                          
                          7,000
                          
                          
                          
                          0.46
                          
                          
                          
                          7,00013.19
                          
                          
                          
                          22,500
                          
                          
                          
                          0.51
                          
                          
                          
                          22,5001,637,000
                          
                          
                          
                          
                          
                          
                          
                          753,639





A summary
of the Company’s non-vested options as of June 30, 2009 and changes during
fiscal 2009 is presented as follows:




Weighted-Average Grant DateNonvested options
                      
                      
                      at Fair ValueNonvested
      at June 30, 2008
                      
                      
                      691,722
                      
                      
                      $
                      0.40Granted
                      
                      
                      500,000
                      
                      
                      
                      0.20Vested
                      
                      
                      (243,987
                      )
                      
                      
                      0.35Forfeited
                      
                      
                      (64,375
                      )
                      
                      
                      0.26Nonvested
      at June 30, 2009
                      
                      
                      883,360
                      
                      
                      $
                      0.31





10.Income Taxes





No
provision for federal income taxes has been recognized for the years ended June
30, 2009 and 2008 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, 2009 and 2008, consist
of:





June 30,2009
                      
                      
                      2008Deferred
      tax assets:Net
      operating loss carryforwards
                      
                      $
                      11,810,000
                      
                      
                      $
                      10,967,000Intangible
      assets
                      
                      
                      2,419,000
                      
                      
                      
                      2,245,000Allowance
      for doubtful accounts
                      
                      
                      2,000
                      
                      
                      
                      2,000Impairment
      loss
                      
                      
                      109,000
                      
                      
                      
                      80,000Other
                      
                      
                      179,000
                      
                      
                      
                      177,000Total
      deferred tax assets
                      
                      
                      14,519,000
                      
                      
                      
                      13,471,000Deferred
      tax liabilities:Other
                      
                      
                      -
                      
                      
                      
                      -Total
      deferred tax liability
                      
                      
                      -
                      
                      
                      
                      -Total
      net deferred tax
                      
                      
                      14,519,000
                      
                      
                      
                      13,471,000Valuation
      allowance
                      
                      
                      (14,519,000
                      )
                      
                      
                      (13,471,000
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -





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, 2009, the valuation allowance increased by approximately
$1,048,000.





F-18





At June
30, 2009, the Company has net operating loss carryforwards of approximately $35
million for federal income tax purposes. These net operating loss carryforwards
may be carried forward in varying amounts until 2030 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, 2009 and 2008 is as
follows:





June 30,2009
                      
                      
                      2008Federal
      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, 2009.





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,
2009 and 2008:


June 30,2009
                  
                  
                  2008Troy
      LeMaile Stovall
                  
                  $
                  16,676
                  
                  
                  $
                  16,000Justin
      McClure
                  
                  
                  15,750
                  
                  
                  
                  16,000John
      Palmer
                  
                  
                  16,323
                  
                  
                  
                  20,412Steven
      Mihaylo
                  
                  
                  16,893
                  
                  
                  
                  10,140Cindy
      Ocker
                  
                  
                  165,298
                  
                  
                  
                  223,663$
                  230,940
                  
                  
                  $
                  286,215





On June
15, 2007 the Company issued an unsecured Promissory Note to each of Mr. Ladin,
the Chairman of the Board and Chief Executive Officer of the Company, and
Ambassador Palmer, a director of the Company, for $150,000 (the
“Notes”).  The Notes bore interest at 11.25% per annum payable
monthly. The principal was due in full on the earlier to occur of July 1, 2008
or the sale of the Series A Preferred Stock by the Company (see Note 9), subject
to acceleration in certain events. The Notes were paid in full on October 17,
2007 upon the receipt by the Company of the proceeds from the sale of the shares
of Series A Preferred Stock.





On
October 17, 2007, the Company sold 2,889,076 shares of Series A Preferred Stock
for a per share purchase price of $0.586 and an aggregate purchase price of
$1,693,000, in a privately-negotiated transaction, which is fully described in
Note 9. Mr. Ladin and Ambassador Palmer participated in the sale as Purchasers,
and the consideration paid by them included, in addition to cash, the
cancellation of the Notes. Gulf South, a private investment firm owned by
Ambassador Palmer and of which Justin McClure, a director of the Company, is the
president, also participated in the sale as a Purchaser.





On
December 10, 2007, the Company sold 4,000,000 shares of common stock for a per
share purchase price of $1.00 and an aggregate purchase price of $4,000,000 in a
privately-negotiated transaction which is fully described in Note
9.  All shares were purchased by The Steven G. Mihaylo
Trust.  Mr. Mihaylo is the sole trustee of that trust and is a
director of the Company.





As more
fully described below, on September 14, 2009, Internet America issued a Warrant
to purchase 197,461 shares of Common Stock to each of Steve Mihaylo and
Ambassador John Palmer, both directors of Company. The Warrants are exercisable
at $0.38 per share for 5 years.





F-19





13.
Subsequent
Events





On July
27, 2007, Internet America acquired substantially all of the outstanding shares
of TeleShare from Mark and Cynthia Ocker for $1,850,000, payable in shares of
Company common stock and a note.  In accordance with the terms of the
purchase agreement, 298,117 shares of common stock were placed in escrow until
the second anniversary of the closing date, at which time the former owners of
TeleShare could elect to receive the shares out of escrow or a note for the
value of the shares at $2.50 per share.  On July 15, 2009, the former
owners of TeleShare notified the Company of their election to tender the 298,117
shares of common stock, and effective July 27, 2009 the Company issued a
promissory note for $745,943. The non interest bearing note will be paid in 20
equal quarterly installments beginning on October 27, 2009.  Also effective
July 27, 2009, the total number of outstanding shares of Company common stock
was reduced to 16,558,914 as a result of the cancellation of those
shares.




On August
20, 2009, the Company submitted an application for a grant from the Broadband
Technology Opportunity Program to utilize fixed Point-to-Multipoint wireless
infrastructure to expand outward from areas adjacent to the Company’s existing
service areas to unserved and underserved areas of 35 counties in southeast
Texas.  The grant program required a minimum of 20% of the project
costs to be funded from non-federal sources. As part of the application, the
Company was required to identify its sources of outside funding committed to the
project. On September 14, 2009, the Company issued a Warrant to purchase 197,461
shares of Common Stock to each of Steve Mihaylo and Ambassador John Palmer, both
directors of Company.  These warrants were issued as consideration for
documentation provided by these two directors regarding the Company’s ability to
obtain the minimum outside capital funding. The Warrants are exercisable at
$0.38 per share for 5 years.




F-20


EXHIBIT
INDEX
 
 Exhibit
                  
                  Description31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.*31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Jennifer S.
  LeBlanc*32.1
                  
                  Section
      1350 Certification of William E. Ladin, Jr.*32.2
                  
                  Section
      1350 Certification of Jennifer S.
LeBlanc*
 
 *Filed
herewith