SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**Form
      10-KSB**




**x** **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(** d **)
      OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      The Fiscal Year Ended June 30, 2007**




**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****Houston,
                Texas**
            
            **77064**(Address
                of principal executive offices)
            
            (Zip
                  Code)





Registrant’s
      telephone number: **(214)
      861-2500**





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)**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the registrant (1) filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. x





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





The
      issuer’s revenues for its most recent fiscal year were $7,984,786.





Based
      on
      the closing price of the registrant’s Common Stock on September 25, 2007, the
      aggregate market value of the Common Stock held by non-affiliates of the
      registrant is $5,970,407. 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, 2007 was
      12,508,914.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the definitive proxy statement for the Annual Meeting of Shareholders to
      be
      held in December 2007 to be filed within 120 days after the end of our fiscal
      year, are incorporated by reference into Part III, Items 9 through 12 and 14
      of
      this Form 10-KSB.


Transitional
      Small Business Disclosure Format (check one): Yes o No x










**TABLE
      OF CONTENTS**





**Page**PART
                I
            
            Item
                1.
            
            Description
                of Business
            
            3Item
                2.
            
            Description
                of Properties
            
            9Item
                3.
            
            Legal
                Proceedings
            
            9Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            9PART
                II
            
            Item
                5.
            
            Market
                for Common Equity and Related Stockholder Matters and Small Business
                Issuer Purchases of Equity Securities
            
            10Item
                6.
            
            Management’s
                Discussion and Analysis or Plan of Operation
            
            10Item
                7.
            
            Financial
                Statements
            
            17Item
                8.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            17Item
                8A.
            
            Controls
                and Procedures
            
            17Item
                8B.
            
            Other
                Information
            
            17PART
                III
            
            Item
                9.
            
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            
            18Item
                10.
            
            Executive
                Compensation
            
            18Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            18Item
                12.
            
            Certain
                Relationships and Related Transactions and Director
                Independence
            
            18Item
                13.
            
            Exhibits
            
            18Item
                14.
            
            Principal
                Accountant Fees and Services
            
            18SIGNATURES
            
            19INDEX
                TO FINANCIAL STATEMENTS
            
            F-1




2





*This
      Report on Form 10-KSB 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 or
      Plan
      of Operation" and elsewhere in this Form 10-KSB. See also Item 6, “Management’s
      Discussion and Analysis or Plan of Operation - Safe Harbor Statement.”*





**PART
      I**





**Item
      1.** ***Description
      of*** **** ***Business***





**General**





Internet
      America, Inc. (the “Company” or “Internet America”) is an Internet service
      provider ("ISP") that provides an array of Internet services to residential
      and
      business subscribers. As of June 30, 2007, we served approximately 34,200 active
      subscribers. Internet America was incorporated in Texas in 1995 and currently
      has operations only in the state of Texas.





In
      fiscal
      2007, the Company continued to adjust its focus and business away from reliance
      on dialup and wire broadband connectivity in major metropolitan markets to
      providing wireless broadband Internet connectivity to under-served, suburban
      and
      rural markets in the southwest United States, with our initial focus in Texas
      markets. Our current activities are near wireless operational centers in San
      Antonio, Stafford (an adjoining suburb of Houston), Victoria, North Dallas,
      and
      Corsicana. These operational centers provide installation, construction and
      repair services to their surrounding geographic areas. The rural and suburban
      markets that Internet America sells to are typically avoided or overlooked
      by
      Incumbent Local Exchange Carriers (“ILEC’s”) and cable television companies. The
      rural and suburban wireless ISP (“WISP”) industry is fragmented with ample
      consolidation opportunity. The Company estimates that there are up to 2,500
      potential WISP acquisition candidates in the United States, including
      approximately 150 in Texas.





Our
      wireless broadband Internet services are offered utilizing fixed
      point-to-multipoint wireless technology in unlicensed spectrum. We offer these
      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 DSL lines. As a result of these savings,
      we are able to offer broadband Internet to communities that would otherwise
      be
      ignored by terrestrial based providers.





*Existing
      wireless Broadband markets in Texas*





The
      Houston area wireless operations have been expanded in a “de-novo” fashion since
      operations commenced in September 2005 in the area west of Houston, roughly
      following Interstate Highway 10. The initial service offerings were provided
      in
      Weimar and have expanded since then to the towns of Schulenberg, Flatonia and
      Columbus. In February 2006, the Company acquired a very small WISP, PowerWeb,
      in
      the Fulshear area near Houston and has used this as a platform for expansion
      of
      services in that area as well.





The
      San
      Antonio wireless operations were initially a result of two acquisitions made
      in
      fiscal 2006: Top Gun Telecommunications, purchased in July of 2005 and 2Fast
      Communications, Inc. purchased in January of 2006. These units were
      operationally combined shortly after the 2Fast acquisition.





In
      the
      Corsicana operational center, the operations and subscriber base are largely
      a
      result of several acquisitions made in fiscal 2005. The Corsicana operations
      provide service coverage to a five county area where many residents commute
      to
      the Dallas/Fort Worth Metroplex for employment.





In
      June
      2007, we completed two acquisitions in the Victoria area. The combined
      subscriber count in Victoria is approximately 640. However, our acquired
      footprint includes underutilized network capacity. Our material reduction in
      operating costs provided by integration into our customer care and network
      monitoring systems and access to capital for adding customer premise equipment
      will allow for more aggressive expansion under our management. The introduction
      of our proven marketing programs is expected to contribute to greater
      penetration in the acquired network footprint further expanding the contribution
      of acquired WISP’s in this area to our EBITDA (earnings before interest, taxes,
      depreciation and amortization) in fiscal 2008.





In
      addition to the growth of the wireless subscriber base through acquisitions,
      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, near the operational centers
      in
      San Antonio, Houston and Corsicana. We will continue to utilize this
      micro-market strategy in identifying and constructing areas for new network
      construction.




3





We
      have
      had success in achieving attractive market penetration rates in markets where
      we
      offer broadband wireless Internet services in both de-novo markets and in
      acquired markets. We believe we can achieve customer penetration rates of 40%
      -
      50% within the first year of offering broadband wireless Internet service in
      a
      market and approximately 60% customer penetration rates by the end of the second
      year of operation in a market. The following tables depict broadband wireless
      penetration rates in selected markets:


**#
                  of**
              
              **#
                  of**
              
              **%****San
                  Antonio Area**
              
              **Homes**
              
              **Customers**
              
              **Penetration**Arrowhead
              
              
              13
              
              
              7
              
              
              53.8
              %Country
                  Hills
              
              
              60
              
              
              40
              
              
              66.7
              %Deer
                  Ridge
              
              
              48
              
              
              20
              
              
              41.7
              %Donegan
              
              
              51
              
              
              30
              
              
              58.8
              %Eagle
                  Creek
              
              
              67
              
              
              32
              
              
              47.8
              %Great
                  Oaks
              
              
              130
              
              
              89
              
              
              68.5
              %Lewis
                  Ranch
              
              
              42
              
              
              27
              
              
              64.3
              %Live
                  Oak
              
              
              63
              
              
              25
              
              
              39.7
              %Lost
                  Meadows
              
              
              20
              
              
              15
              
              
              75.0
              %Wildflower
              
              
              23
              
              
              10
              
              
              43.5
              %Ranch
                  County
              
              
              14
              
              
              9
              
              
              64.3
              %Pullman
                  Road
              
              
              73
              
              
              42
              
              
              57.5
              %*Average*
              
              
              *50*
              
              
              *29*
              
              
              *56.8*
              *%*


**#
                  of**
              
              **#
                  of**
              
              **%****Houston
                  Area**
              
              **Homes**
              
              **Customers**
              
              **Penetration**Grand
                  River
              
              
              65
              
              
              45
              
              
              69.2
              %Weston
                  Lakes
              
              
              625
              
              
              345
              
              
              55.2
              %Valley
                  Lodge
              
              
              125
              
              
              72
              
              
              57.6
              %Marian/Ustinik
              
              
              90
              
              
              52
              
              
              57.8
              %Brazos
                  Lakes
              
              
              50
              
              
              23
              
              
              46.0
              %*Average*
              
              
              *191*
              
              
              *107*
              
              
              *56.2*
              *%***N.
                  Central TX Area**Quail
                  Run
              
              
              91
              
              
              51
              
              
              56.0
              %





*Acquisition
      of TeleShare Communications Services, Inc.*





On
      July
      27, 2007, we completed the acquisition of TeleShare Communications Services,
      Inc. (“TeleShare”) for $1,850,000, subject to certain adjustments 90 days after
      closing. TeleShare, based in Crosby, Texas served approximately 1,500 wireless
      Internet service customers, had a loan commitment under a program administered
      by the Rural Utilities Service of the Department of Agriculture (“RUS”), and
      provided telex messaging services.





Under
      the
      program administered by the RUS, TeleShare (now Internet America) has 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. We intend to continue network expansion utilizing
      funds
      under the existing borrowing facility.  Under the terms of the RUS
      approval, the Company agreed to add $2 million in equity
      within 60 days of closing.  The Company is in the process of finalizing
      the documentation to close an initial equity raise to a limited number
      of accredited investors in a private placement.  Management has been in
      communication with the RUS regarding the deadline, and while management believes
      that it will be able to obtain the $2 million, that the documentation for
      such raise will be finalized within the next few weeks and that the RUS
      will approve the extension of such raise, there can be no assurance that
      the Company will be successful in doing so or that the RUS will approve the
      extension.  While it is possible that the RUS could withhold its approval,
      management's past experience with the RUS leads us to believe that they
      will cooperate with us as we complete this sale of equity, without adverse
      effect on the RUS borrowing facility.




*Other
      services*





In
      addition to its focus on wireless broadband Internet access services, the
      Company continues to provide dialup and wire-line broadband Internet access
      services and other services such as co-location of servers, hosting of websites
      and broadband telecommunications to its long-existing base of subscribers.
      However, as previously reported, the Company does not aggressively market these
      services and has seen some degradation of the overall number of subscribers
      using these services.





*Operating
      center*





In
      January of 2006, the Company announced its intention to relocate its corporate
      headquarters to Houston from Dallas. That move was completed in March 2006;
      also
      in March, the Company ceased operations of its small “computer centers” which
      offered computer repair services in some local markets, after a review of them
      indicated that they were only marginally profitable and did not provide the
      tactical marketing advantages that management had originally presumed. The
      Company has relocated its primary data center operations from Dallas to Houston.
      This was completed in early fiscal 2007.





*Potential
      growth through acquisitions*





While
      there is no guarantee that we will make significant or numerous acquisitions,
      the management of the Company believes that there are many WISPS who need the
      sales, marketing, and management experience that Internet America offers and
      who
      also need access to the systems and capital that will be necessary to grow
      their
      businesses. The Company is focusing on markets that enhance its geographic
      and
      strategic plans. As we have gained experience in both opening de novo markets
      and acquiring smaller ISP’s and WISP’s, acquisitions remain attractive as an
      important method of acquiring substantial subscriber bases that we can enlarge
      and provide qualified, experienced management.




4





Our
      acquisition targets are typically capital constrained and have minimal marketing
      budgets and underutilized network capacity. Our material reduction in operating
      costs provided by integration into our customer care and network monitoring
      systems allows for expanded EBITDA margins and more aggressive expansion under
      our management. The introduction of our proven marketing programs can contribute
      to greater penetration in the acquired network footprint further expanding
      the
      contribution of acquired WISP’s to our EBITDA.





**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.





*High
      Speed Connectivity; DSL Services* .
      We
      offer broadband connectivity for business and consumers, including 64k/128k
      Integrated Service Digital Network (ISDN) access, 1.5M Asymmetrical Digital
      Subscriber Lines (ADSL), fractional to full T-1, DS-3 level connectivity and
      wireless connectivity. 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.





*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, file
      transfer protocol (FTP), and USENET news access. Available value-added services
      include multiple e-mail mailboxes, national roaming services, personalized
      e-mail addresses, personal web sites and enhanced USENET news
      access.





*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.





*Municipal
      Wireless Broadband.* To
      complement our strategy of providing broadband wireless Internet services to
      non- and underserved customers in rural and suburban markets, we are at the
      early stages of providing WiFi Internet service in select metro-markets. To
      minimize risk and capital investment requirements, we plan to resell municipal
      WiFi capacity from an existing WiFi provider in the given market rather than
      develop and maintain WiFi networks ourselves. We believe there are several
      benefits to us by offering metro WiFi Internet service: (1) it provides another
      revenue stream to sell to our existing and future customers, and helps us make
      our customers more “sticky”, which could help to maintain our low churn levels;
      (2) we can leverage our strong brand name in various Texas markets, which
      reduces execution risk; and (3) by reselling existing WiFi capacity, we do
      not
      need to invest capital nor take on the risk of building out and maintaining
      the
      WiFi networks themselves.





To
      that
      end, in May 2007, we signed a five-year contract with EarthLink whereby Internet
      America will purchase capacity on EarthLink’s WiFi networks in select markets on
      a wholesale basis and resell WiFi service under the Internet America brand
      to
      customers. We will initially market WiFi Internet service in the Corpus Christi
      market to existing rural/suburban customers and also to new customers in the
      Corpus Christi metro market.





**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, email and newsgroups.




5





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.





We
      had
      approximately 31 customer care employees in three different business units
      (specialized by type of service) at June 30, 2007. Customer
      care is available to subscribers during extended business hours, typically
      until
      9 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:





·
            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





**Marketing**





As
      discussed, our marketing efforts and expenditures are primarily focused 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 and broadband (DSL) access
      in
      all major metropolitan areas of Texas, as well as dial-up access in many tier
      2
      and tier 3 cities. Our wireless network is limited to specific areas in which
      we
      have chosen to establish the required network components such as towers and
      network access points.





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
      clustered systems, diverse network architecture, multi-peered Internet backbone
      connections and aggressive load balancing.





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





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





Our
      network is remotely monitored by using software tools that alert specific
      employees, who are responsible for specific functions of the network and various
      applications running on the network. The software tools monitor the status
      of
      all networking facilities, components, applications and equipment deployed
      throughout our infrastructure on a 24 hour/365 days a year basis and transmit
      alerts as issues appear. The employees who receive the alerts are responsible
      for operational communications among internal departments and are also
      responsible for communication with external service providers. 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 help control costs by purchasing additional bandwidth and
      services only when needed. These centralized monitoring systems allow for
      scalable monitoring and enhanced customer service for any systems and customers
      integrated through acquisition.




6





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





*Management
      Information Systems* .
      Our MIS
      department uses a near real-time customer database, billing and flow-through
      fulfillment system (“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 more rapidly integrate acquired subscribers. 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 geography 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," and "Airnews.net," “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 14,000 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.




7





The
      wired
      broadband services segment, such as DSL (where we have over 2,400 subscribers)
      or cable-modem, in particular is extremely competitive. The markets we serve
      have been flooded with DSL, cable and wireless offers from our competitors,
      some
      of which have greater resources than we have and are able to offer their
      products at lower prices than we offer. We have to rely on local loop providers
      with whom we compete in order to provide DSL services to our customers. These
      providers have been exerting pressure on independent ISPs, including raising
      prices and changing billing relationships, all of which puts us at a competitive
      disadvantage. Many local loop providers have consolidated or failed, causing
      fewer choices for us to offer to our customers. Furthermore, other methods
      of
      broadband delivery which we do not currently offer, such as cable transmission,
      may be more successful than DSL.





In
      the
      wireless segment, while there is still significant competition, we are utilizing
      a strategy of focusing on marketing to underserved geographic areas (i.e. those
      areas were 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 AOL, the Microsoft Network and
                  EarthLink;·
              National
                  telecommunications providers, such as AT&T, Qwest, MCI 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 Time Warner 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 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 digital
      subscriber line (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. The FCC has determined that Internet access providers, utilizing
      DSL
      technology, are “information services functionally integrated with a
      telecommunications component”. In the past, the FCC required that telephone
      companies and similar carriers offer the DSL transmission component separately
      from their own Internet service, as a stand-alone service on a common-carrier
      basis. In August of 2005, this regulation requiring that telephone companies
      share their telephone lines was removed effective August 2006, thereby allowing
      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.





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.





Internet
      America currently has approximately 2,400 DSL subscribers. We rely on contracts
      to share the DSL transmission component for our existing DSL service with our
      telephone service providers. Our relationships and agreements with these
      providers allow Internet America to continue to provide cost effective DSL
      service to our customers; however, there is no guarantee that we will be
      successful in renegotiating our contracts with the ILEC providers at favorable
      prices.




8





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
      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.





Due
      to
      the increasing popularity and use of the Internet, it is possible that
      additional laws, regulations or legal precedent may be adopted with respect
      to
      the Internet, covering issues such as content, privacy, pricing, 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, 2007, we employed approximately 66 people, 59 of whom were full-time
      and 7 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
      2.** ***Description
      of*** **** ***Properties***





Our
      corporate headquarters are located in Houston, Texas at 10930 W. Sam Houston
      Pkwy., N., Suite 200, where all executive functions exist. We do not own any
      real estate. We believe that all of our facilities are adequately maintained
      and
      suitable for their present use. We lease office space in the following locations
      for the purposes indicated:





**Location**
            
            **Square
                footage**
            
            **Purpose**Houston
            
            
            4,100
            
            Corporate
              headquartersDallas
            
            
            19,000
            
            Offered
              for subleaseEuless
            
            
            1,000
            
            Call
              centerStafford
            
            
            5,600
            
            Warehouse/Field
              officeCorsicana
            
            
            2,000
            
            Field
              officeSan
                Antonio
            
            
            1,700
            
            Field
              office




**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 2007.




9





**PART
      II**





**Item
      5.** ***Market
      for Common Equity and Related Stockholder Matters and Small Business 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**
            
            **Low**Fiscal
                Year Ended June 30, 2007:Fourth
                Quarter
            
            $
            0.34
            
            $
            0.22Third
                Quarter
            
            
            0.31
            
            
            0.25Second
                Quarter
            
            
            0.36
            
            
            0.20First
                Quarter
            
            
            0.35
            
            
            0.25Fiscal
                Year Ended June 30, 2006:Fourth
                Quarter
            
            $
            0.40
            
            $
            0.29Third
                Quarter
            
            
            0.55
            
            
            0.38Second
                Quarter
            
            
            0.64
            
            
            0.40First
                Quarter
            
            
            0.78
            
            
            0.46





At
      September 25, 2007, there were 255 holders of record of our common stock. The
      last reported sale price of the common stock on the OTC Bulletin Board on
      September 25, 2007 was $0.55 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 10 of this Form 10-KSB, which
      incorporates by reference a section of the Company’s definitive proxy
      statement.





***Item
      6. Management’s Discussion and Analysis or Plan 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, 2007 and 2006. 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-KSB.





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 be able to identify and negotiate acquisitions
      of wireless Internet customers and infrastructure on attractive terms or
      successfully integrate those acquisitions into our operations, (4) needed
      financing will not be available to us if and as needed, (5) we will not be
      competitive with existing or new competitors, (6) we will not keep up with
      industry pricing or technological developments impacting the Internet, (7)
      we
      will be adversely affected by dependence on network infrastructure,
      telecommunications providers and other vendors or by regulatory changes, (8)
      service interruptions or impediments could harm our business; (9) we may be
      accused of infringing upon the intellectual property rights of third parties,
      which is costly to defend and could limit our ability to use certain
      technologies in the future, (10) government regulations could force us to change
      our business practices, (11) we may be unable to hire and retain qualified
      personnel, including our key executive officers, (12) provisions in our
      certificate of incorporation, bylaws and shareholder rights plan could limit
      our
      share price and delay a change of management; and (13) 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 cautionary statements
      included in our other publicly filed reports.




10





**Overview**





Internet
      America is an ISP serving approximately 34,200 subscribers in Texas as of June
      30, 2007. 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 services, primarily Internet access services, and related fees,
      and such revenues represented all of our revenue for the year ended June 30,
      2007. For the year ended June 30, 2006, Internet access services accounted
      for
      89.6% of total revenue with the remaining revenues related primarily to wireless
      reseller revenues.





The
      Company continues to experience an attrition of dial-up service customers.
      The
      loss of these customers is primarily attributable to their moving to broadband
      connectivity with other service providers. The largest competitors in broadband
      access are the cable companies and regional Bell operating
      companies.





We
      operate in highly competitive markets for each of our service offerings. The
      competitive environment impacts the churn rates we experience as well as the
      number of new customers we are able to add.





The
      Company has undertaken several initiatives to address the declining subscriber
      base and decrease in its total revenues and the related impact on profitability
      including:





·
            Change
                in focus to under-served markets;


·
            Acquiring
                WISPs in strategic geographic areas; and


·
            Continuing
                to identify opportunities to improve
                profitability.





As
      more
      fully described in Part I, Item 1. Description of Business, the Company’s
      strategy is to focus on providing wireless Internet connectivity to customers
      in
      under-served or non-served markets. During the fiscal year ended June 30, 2007,
      we continued to expand in the rural markets through acquisitions and the
      deployment of new infrastructure. The Company is actively pursuing development
      and acquisition opportunities in non-metropolitan markets where competition
      is
      less intense and the demand for internet connectivity may be under-served or
      non-served. To complement our strategy of providing broadband wireless Internet
      services to non- and underserved customers in rural and suburban markets, we
      are
      at the early stages of providing WiFi Internet service in select metro-markets.
      In pursuing this strategy, the Company is narrowing its focus to products and
      developments that contribute directly to its implementation.





Management
      continues to evaluate overall profitability. During 2006, we reduced
      telecommunications cost per subscriber by optimizing network capacity and
      entering into more favorable agreements with telecommunications service
      providers. The Company also reduced head count in fiscal 2006 through a
      reduction-in-force (“RIF”) carried out by management in January 2006. Although a
      certain number of staff has been added since then and we incurred some shifts
      in
      our telecommunications costs as we increased our wireless Broadband footprint,
      we have increased EBITDA by 77% from the previous year.




In
      fiscal
      2006 the Company operated as a wireless equipment reseller (“WER”) until March
      2006 when we discontinued this business. Our WER business involved purchasing
      wireless infrastructure equipment and wireless customer premise equipment in
      bulk for both internal purchases and for resell to other WISP’s. Bulk purchases
      allowed the Company to maximize its cost savings for the deployment of wireless.
      Included in other revenues during fiscal 2006 is revenue of approximately
      $963,000 related the Company’s WER revenues. The WER business was discontinued
      due to lower profit margins, and remaining inventories were sold or are being
      utilized in our wireless internet provider business.




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.




11




**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 2006 includes WER revenues which were
      discontinued in March 2006.





In
      January of 2006, the Company announced its intention to relocate its corporate
      headquarters to Houston from Dallas. That move was completed in March 2006;
      also
      in March, the Company ceased operations of its small “computer centers” which
      offered computer repair services in some local markets, after a review of them
      indicated that they were only marginally profitable and did not provide the
      tactical marketing advantages that management had originally
      presumed.





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. Amortization expense consists of the amortization
      of subscriber acquisition costs, which are amortized over four
      years.





Our
      business is not subject to any significant seasonal influences.




12


**Results
      of Operations**





**Year
      Ended June 30, 2007 Compared to June 30, 2006**





The
      following table shows financial data for the years ended June 30, 2007 and
      2006.
      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**
            
            **Year
                Ended****June
                30, 2007**
            
            **June
                30, 2006****(000’s,
                except share and per****share
                data)**
            
            **%
                of****Revenues**
            
            **(000’s,
                except share and per****share
                data)**
            
            **%
                of****Revenues**STATEMENT
                OF OPERATIONS DATA:REVENUES:Internet
                services
            
            $
            7,985
            
            
            100.0
            %
            $
            8,874
            
            
            89.6
            %Other
            
            
            -
            
            
            0.0
            %
            
            1,035
            
            
            10.4
            %Total
            
            
            7,985
            
            
            100.0
            %
            
            9,909
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            4,117
            
            
            51.6
            %
            
            6,080
            
            
            61.4
            %Sales
                and marketing
            
            
            209
            
            
            2.6
            %
            
            229
            
            
            2.3
            %General
                and administrative
            
            
            3,201
            
            
            40.0
            %
            
            3,288
            
            
            33.2
            %Provision
                for bad debt expense
            
            
            4
            
            
            0.1
            %
            
            56
            
            
            0.6
            %Depreciation
                and amortization
            
            
            791
            
            
            9.9
            %
            
            859
            
            
            8.7
            %Total
            
            
            8,322
            
            
            104.2
            %
            
            10,512
            
            
            106.1
            %OPERATING
                LOSS
            
            
            (337
            )
            
            -4.2
            %
            
            (603
            )
            
            -6.1
            %INTEREST
                EXPENSE, NET
            
            
            (10
            )
            
            -0.1
            %
            
            (33
            )
            
            -0.3
            %NET
                LOSS
            
            $
            (347
            )
            
            -4.3
            %
            $
            (636
            )
            
            -6.4
            %NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            
            
            
            $
            (0.05
            )DILUTED
            
            $
            (0.03
            )
            
            
            
            $
            (0.05
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            12,508,914
            
            
            
            
            
            12,473,635DILUTED
            
            
            12,508,914
            
            
            
            
            
            12,473,635OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            34,200
            
            
            
            
            
            37,400Number
                of employees at end of period
            
            
            66
            
            
            
            
            
            67EBITDA(2)
            
            $
            454
            
            
            
            
            $
            256EBITDA
                margin(3)
            
            
            5.7
            %
            
            
            
            
            2.6
            %CASH
                FLOW DATA:Cash
                flow (used in) provided by operations
            
            $
            284
            
            
            
            
            $
            (475
            )Cash
                flow used in investing activities
            
            $
            (585
            )
            
            
            
            $
            (685
            )Cash
                flow provided by (used in) financing activities
            
            $
            147
            
            
            
            
            $
            (267
            )Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (347
            )
            
            
            
            $
            (636
            )Add:Depreciation
                and amortization
            
            
            791
            
            
            
            
            
            859Interest
                income
            
            
            (24
            )
            
            
            
            
            (43
            )Interest
                expense
            
            
            34
            
            
            
            
            
            76EBITDA
                (2)
            
            $
            454
            
            
            
            
            $
            256




(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.





13




*Total
      revenue.* Total
      revenue decreased by $1.9 million, or 19.2%, to $8.0 million in fiscal 2007
      from
      $9.9 million in fiscal 2006. The Company’s subscriber count decreased by 3,200,
      or 8.6%, to 34,200 as of June 30, 2007 compared to 37,400 as of June 30, 2006.
      The net decrease in revenue is the direct result of the decrease in dial up
      subscribers, and to a lesser extent loss of DSL and commercial services
      customers at a faster rate than the Company added wireless subscribers in 2007.
      Revenue from WER revenue was $0 for fiscal 2007 and approximately $963,000
      for
      the year ended June 30, 2006. In March 2006, the Company discontinued its WER
      business due to low profit margins. The decrease in subscriber count is
      primarily attributed to the loss of dial-up customers.




*Connectivity
      and operations.* Connectivity and operations expenses decreased by approximately $1.96 million,
      or 32.2% to $4.12 million for fiscal 2007 from $6.08 million for fiscal 2006.
      Due to the RIF carried out in fiscal 2006, labor costs decreased by
      approximately $531,000 to $1,310,000 in fiscal 2007 compared to $1,841,000
      in
      fiscal 2006. Telecommunications expenses had a net decrease of approximately
      $452,000 to $1,848,000 in fiscal 2007 compared to $2,300,000 in fiscal 2006.
      This was primarily due to the decrease in dial up subscribers, DSL and
      commercial services. Installation costs and cost of goods sold have decreased
      by
      approximately $909,000 to $769,000 in 2007 compared to $1,678,000 in fiscal
      2006. This was primarily due to the discontinuance of the WER segment. Use
      taxes
      decreased by $41,000 to $6,000 in fiscal 2007 from $47,000 in fiscal 2006.
      This
      decrease in expense was due to the change in capitalization policy of customer
      premise equipment. Merchant services fees decreased by approximately $30,000
      in
      fiscal 2007 to $184,000 from $214,000 in fiscal 2006 primarily due to the
      decrease in revenue.





As
      a
      percentage of total revenue, connectivity and operations expense decreased
      to
      51.6% for fiscal 2007 compared to 61.4% for fiscal 2006, due to increases in
      costs in the wireless access provider business offsetting significant cost
      reduction measures.





*Sales
      and marketing.* Sales
      and marketing expenses decreased by $20,000, or 8.7%, to $209,000 for fiscal
      2007 from $229,000 for the prior fiscal year. The change primarily relates
      to
      decreased advertising expenses.





*General
      and administrative.* General
      and administrative (“G&A”) expenses decreased by $87,000, or 2.6%, to $3.2
      million in fiscal 2007 from $3.3 million for fiscal 2006. In fiscal 2007, moving
      and travel expenses decreased by approximately $73,000 to $89,000 in fiscal
      2007
      from $162,000 in 2006 primarily due to the increased expenses in fiscal 2006
      related to moving the corporate offices from Dallas to Houston. The Company
      issued stock options in the fourth quarter of fiscal 2007. This caused an
      increase in expenses of approximately $100,000 in fiscal 2007 compared to $0
      expense in fiscal 2006. Maintenance and repairs decreased by approximately
      $53,000 to $21,000 in fiscal 2007 from $74,000 primarily due to the termination
      of a generator maintenance contract in early fiscal 2006 and extensive repairs
      on acquired wireless equipment in early fiscal 2006. Wireless consulting fees
      decreased in fiscal 2007 by $31,000 to $43,000 in fiscal 2007 from $74,000
      in
      fiscal 2006 due to the termination of a consulting agreement in December 2006
      with the former owner of a previously acquired company. Gain or loss on
      disposal/sale of assets decreased by $71,000. Gain on disposal of assets was
      recognized in fiscal 2007 of $22,000 upon retirement of phone system which
      was
      replaced by new system under an operating lease, compared to losses on retired
      property equipment of $49,000 in fiscal 2006. Telecommunications expense
      increased by $66,000 to $178,000 in fiscal 2007 from $112,000 in fiscal 2006.
      This was due to reclassifying telecommunications taxes and fees from
      connectivity and operations and restructuring our network communications.
      Salaries and wages decreased by $17,000 to $1,488,000 in fiscal 2007 from
      $1,505,000 in fiscal 2006. This decrease is primarily due to the RIF in 2006
      offset by new positions in corporate and accounting. The remaining net decrease
      of $8,000 was primarily a result of various cost saving measures implemented
      during fiscal 2007 and 2006.





*Provision
      for bad debt expense* ***.*** **** Provision
      for bad debt expense decreased by $52,000, or 92.9%, to $4,000 for fiscal 2007
      from $56,000 for fiscal 2006. The decrease relates primarily to changes in
      billing systems and tightened credit policies and procedures. As of June 30,
      2007, we are fully reserved for all customer accounts that are at least 90
      days
      old.





*Depreciation
      and amortization.* Depreciation and amortization expense decreased by $68,000, or 7.9%, to $791,000
      for fiscal 2007 from $859,000 for fiscal 2006. Fiscal 2007 depreciation
      increased approximately $159,000 over fiscal 2006 related primarily to
      depreciation of fixed assets acquired through acquisitions as well as capital
      purchases made for the build out of our wireless infrastructure. Amortization
      expense in fiscal 2007 decreased by approximately $228,000 primarily due to
      the
      absence of acquisitions during fiscal 2007 until June 2007 and the revision
      of
      estimated useful life for unamortized subscriber acquisition costs from 36
      months to 48 months.





*Interest
      (expense) income, net.* Net
      interest expense decreased by $23,000, or 69.7%, to a net expense of $10,000
      for
      fiscal 2007 compared to $33,000 for fiscal 2006. Net interest in fiscal 2007
      includes interest expense of approximately $34 **,** 000
      compared to $76,000 in fiscal 2006 and related primarily to acquisition debt.
      In
      fiscal 2007, interest income of approximately $24,000 compared to $43,000 in
      fiscal 2006 related primarily to interest earned on the Company’s cash balances.




14




**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) provided by operating activities is net loss adjusted for certain
      non-cash items and changes in assets and liabilities. For fiscal 2007 cash
      provided by operations was $284,000, compared to cash used in operations of
      $475,000 in fiscal 2006. Net loss plus non-cash items contributed to $526,000
      in
      fiscal 2007 and $328,000 in fiscal 2006 in cash which was then used primarily
      for paying off of accounts payable and accrued expenses and a decrease in
      deferred revenue. Inventory decreased in fiscal 2007 primarily due to the
      Company discontinuing the WER business in March 2006. The decrease in deferred
      revenue from year to year is a result of the decease in our subscriber count
      and
      the related decrease in revenue.





Cash
      used
      in investing activities totaled $585,000 and $685,000 for the years ended June
      30, 2007 and 2006, respectively. The decrease in cash used for investing
      activities for fiscal 2007 relates primarily to the deployment of new wireless
      infrastructure in fiscal 2006 and less additions to the wireless infrastructure
      during fiscal 2007.





Cash
      provided by financing activities for fiscal 2007 of $147,000 compared to cash
      used in fiscal 2006 of $267,000 relates to debt incurred for acquisitions in
      fiscal 2007 offset by principal payments on debt and capital leases.





We
      estimate that cash on hand of $783,000 at June 30, 2007 along with anticipated
      cash flow from operations will be sufficient for meeting our working capital
      needs for fiscal 2008 for continuing operations in both existing and new markets
      as well as the planned deployment of additional wireless infrastructure.
 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 these acquisitions. However,
      additional financing may be required to fund future acquisitions. Continued
      decreases in revenues and subscriber count may adversely affect the liquidity
      of
      the Company.





If
      additional capital financing arrangements, including public or private sales
      of
      debt or equity securities, or additional borrowings from commercial banks,
      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, 2007, for the next five fiscal years ending June
      30:





Payments
                Due By PeriodTotal
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            ThereafterConnectivity
                contracts
            
            $
            1,306,785
            
            $
            500,984
            
            $
            414,977
            
            $
            365,790
            
            $
            25,034
            
            $
            -
            
            $
            -Operating
                leases
            
            
            1,340,376
            
            
            605,561
            
            
            296,917
            
            
            174,537
            
            
            163,976
            
            
            99,385
            
            
            -Long-term
                debt
            
            
            920,937
            
            
            468,480
            
            
            161,199
            
            
            183,070
            
            
            84,314
            
            
            23,874
            
            
            -$
            3,568,098
            
            $
            1,575,025
            
            $
            873,093
            
            $
            723,397
            
            $
            273,324
            
            $
            123,259
            
            $
            -




**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 three years.




15




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 income.
      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.




The deferred tax asset as of June 30, 2007 of $12.0 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
      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.




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. If an impairment were present, these estimates would
      affect an impairment line item on our consolidated statement of operations
      and
      would affect the other assets line item on our consolidated balance sheet.




Based
      on
      our current impairment test, there would have to be a significant change in
      our
      cash flow projections used in such calculation in order for an impairment to
      occur as of June 30, 2007.




We
      are
      required to periodically review the estimated useful lives of our intangible
      assets. This review during fiscal 2007 indicated that actual lives for
      subscriber acquisition costs generally were longer than the useful life used
      for
      amortization purposes in the Company’s financial statements. As a result, the
      Company revised the estimated useful life of subscriber acquisition costs from
      36 months to 48 months, 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.




16




**Item
      7.** ***Financial
      Statements***





The
      financial statements of Internet America and subsidiaries are attached hereto
      as
      pages F-1 through F-19 and include our Balance Sheet as of June 30, 2007,
      Statements of Operations for each of the two years in the period ended June
      30,
      2007 and 2006, Statements of Shareholders' Equity for each of the two years
      in
      the period ended June 30, 2007 and 2006, Statements of Cash Flows for each
      of
      the two years in the period ended June 30, 2007 and 2006, and the Notes to
      the
      Consolidated Financial Statements.





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


**Item
      8A.** ***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, 2007. Based upon that evaluation, the Chief Executive
      Officer and Chief Accounting Officer concluded that, as of June 30, 2007, 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. There were no changes in our internal control over financial
      reporting during the year ended June 30, 2007 that materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.




**Item
      8B. *Other Information***





None.





17


**PART
      III**





**Item
      9.** ***Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act***





Information
      required by this Item is incorporated by reference from the sections entitled
      "Election of Directors," and "Section 16(a) Beneficial Ownership Reporting
      Compliance" in the Company's Proxy Statement for its 2007 Annual Meeting of
      Shareholders.





**Item
      10.** ***Executive
      Compensation***





Information
      required by this Item is incorporated by reference from the section entitled
      "Executive Compensation" in the Company's Proxy Statement for its 2007 Annual
      Meeting of Shareholders.





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





Information
      required by this Item is incorporated by reference from the section entitled
      "Security Ownership of Management and Certain Shareholders" in the Company's
      Proxy Statement for its 2007 Annual Meeting of Shareholders.





**Item
      12.** ***Certain
      Relationships and Related Transactions, and Director
      Independence***





Information
      required by this Item is incorporated by reference from the section entitled
      "Certain Relationships and Related Transactions and Director Independence"
      in
      the Company's Proxy Statement for its 2007 Annual Meeting of
      Shareholders.





**Item
      13.** ***Exhibits***





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




**Exhibit**
            
            **Description**3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws,
                as amended (2)4.1
            
            Rights
                Agreement dated as of August 9, 2004, between Registrant and American
                Stock Transfer & Trust Company, as Rights Agent (3)10.1
            
            Stock
                Purchase Agreement between Registrant and TeleShare Communications
                Services, Inc. dated July 27, 2007 (4)10.2
            
            Internet
                America, Inc. 2007 Stock Option Plan (5)21.1
            
            Subsidiaries
                list*23.1
            
            Consent
                of UHY, LLP*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 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.


(3)
            Incorporated
                by reference to exhibit 1 to Registration Statement on Form 8-A (file
                no.
                001-32273) filed on August 11, 2004.


(4)
            Incorporated
                by reference to exhibit 99.1 to Form 8-K (file no. 0001144204-07-039539)
                filed August 1, 2007.


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





**Item
      14.** ***Principal
      Accountant Fees and Services***





Information
      required by this Item is incorporated by reference from the section entitled
      “Principal Accountant Fees and Services” in the Company’s Proxy Statement for
      its 2007 Annual Meeting of Shareholders.




18





**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 27th day of September, 2007.


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


/s/
                Jennifer S. LeBlancJennifer
                S. LeBlanc
              *Chief
                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 and
            
            September
                27, 2007William
              E. (Billy) Ladin, Jr.
            
            Chief Executive
              Officer/s/
                Troy LeMaile-Stovall
            
            Director
            
            September
                27, 2007Troy
              LeMaile-Stovall/s/
                Justin McClure
            
            Director
            
            September
                27, 2007Justin
              McClure/s/
                John Palmer
            
            Director
            
            September
                27, 2007John
              Palmer





19




INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Reports
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Financial Statements:Consolidated
                Balance Sheet
            
            
            F-4Consolidated
                Statements of Operations
            
            
            F-5Consolidated
                Statements of Shareholders' Equity
            
            
            F-6Consolidated
                Statements of Cash Flows
            
            
            F-7Notes
                to Consolidated Financial Statements
            
            
            F-9






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 sheet of Internet America, Inc.
      and subsidiaries (the “Company”) as of June 30, 2007, and the related
      consolidated statements of operations, shareholders’ equity, and cash flows for
      the year ended June 30, 2007. 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 audit.




We
      conducted our audit 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 audit 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 audit provides 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, 2007, and the
      results of its operations and its cash flows for the year ended June 30, 2007,
      in conformity with U. S. generally accepted accounting principles.




**Pannell
      Kerr Forster of Texas, P. C.**





Houston,
      Texas


September
      27, 2007




F-2




**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, 2006, and the related
      consolidated statements of income, shareholders’ equity, and cash flows for the
      period ended June 30, 2006. 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, 2006, and the
      results of its operations and its cash flows for the period ended June 30,
      2006,
      in conformity with accounting principles generally accepted in the United States
      of America.







**UHY,
      LLP**





Houston,
      Texas


October
      6, 2006




F-3




**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEET**








June
                30,2007ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            782,887Accounts
                receivable, net of allowance for uncollectibleaccounts
                of $6,391
            
            
            117,056Inventory
            
            
            282,886Prepaid
                expenses and other current assets
            
            
            485,074Total
                current assets
            
            
            1,667,903PROPERTY
                AND EQUIPMENT---Net
            
            
            854,580OTHER
                ASSETS---Net
            
            
            5,223,352TOTAL
            
            $
            7,745,835LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            534,253Accrued
                liabilities
            
            
            447,939Deferred
                revenue
            
            
            1,234,558Current
                portion of long-term debt
            
            
            468,480Total
                current liabilities
            
            
            2,685,230Long-term
                debt
            
            
            452,457Total
                liabilities
            
            
            3,137,687COMMITMENTS
                AND CONTINGENCIES
            
            
            -SHAREHOLDERS'
                EQUITY:Common
                stock, $.01 par value: 40,000,000 shares authorized,12,508,914
                issued and 12,508,914 outstanding
            
            
            125,089Additional
                paid-in capital
            
            
            57,161,980Accumulated
                deficit
            
            
            (52,678,921
            )Total
                shareholders' equity
            
            
            4,608,148TOTAL
            
            $
            7,745,835





See
      notes
      to consolidated financial statements.




F-4




**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**********Year Ended June 30,************2007**
            
            **2006**REVENUES:Internet
                services
            
            $
            7,984,786
            
            $
            8,873,795Other
            
            
            -
            
            
            1,035,590Total
            
            
            7,984,786
            
            
            9,909,385OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            4,117,631
            
            
            6,080,457Sales
                and marketing
            
            
            209,427
            
            
            229,220General
                and administrative
            
            
            3,200,824
            
            
            3,288,205Provision
                for bad debt expense
            
            
            3,993
            
            
            55,742Depreciation
                and amortization
            
            
            790,518
            
            
            858,769Total
            
            
            8,322,393
            
            
            10,512,393LOSS
                FROM OPERATIONS
            
            
            (337,607
            )
            
            (603,008
            )INTEREST
                INCOME
            
            
            24,641
            
            
            42,853INTEREST
                EXPENSE
            
            
            (34,164
            )
            
            (76,009
            )LOSS
                BEFORE INCOME TAXES
            
            
            (347,130
            )
            
            (636,164
            )INCOME
                TAX EXPENSE
            
            
            -
            
            
            -NET
                LOSS
            
            $
            (347,130
            )
            $
            (636,164
            )NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            $
            (0.05
            )DILUTED
            
            $
            (0.03
            )
            $
            (0.05
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            12,508,914
            
            
            12,473,635DILUTED
            
            
            12,508,914
            
            
            12,473,635





See
      notes
      to consolidated financial statements.




F-5




**INTERNET
      AMERICA, INC. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**





**Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Treasury**
            
            **Accumulated**
            
            **Shareholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Stock**
            
            **Deficit**
            
            **Equity**BALANCE,
                JUNE 30, 2005
            
            
            12,597,035
            
            $
            125,971
            
            $
            57,158,477
            
            $
            (160,000
            )
            $
            (51,695,627
            )
            $
            5,428,821Retirement
                of treasury stock
            
            
            (200,000
            )
            
            (2,000
            )
            
            (158,000
            )
            
            160,000
            
            
            -
            
            
            -Issuance
                of common stock
            
            
            111,879
            
            
            1,118
            
            
            57,033
            
            
            -
            
            
            -
            
            
            58,151Adjustment
                of issuance of common stock pursuant to private placement
            
            
            -
            
            
            -
            
            
            4,442
            
            
            -
            
            
            -
            
            
            4,442Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (636,164
            )
            
            (636,164
            )BALANCE,
                JUNE 30, 2006
            
            
            12,508,914
            
            
            125,089
            
            
            57,061,952
            
            
            -
            
            
            (52,331,791
            )
            
            4,855,250Stock
                compensation expense
            
            
            -
            
            
            -
            
            
            100,028
            
            
            -
            
            
            -
            
            
            100,028Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (347,130
            )
            
            (347,130
            )BALANCE,
                JUNE 30, 2007
            
            
            12,508,914
            
            $
            125,089
            
            $
            57,161,980
            
            $
            -
            
            $
            (52,678,921
            )
            $
            4,608,148





See
      notes
      to consolidated financial statements




F-6




**INTERNET
      AMERICA, INC. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended June 30,****2007**
            
            **2006**OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (347,130
            )
            $
            (636,164
            )Adjustments
                to reconcile net income to net cash provided by(used
                in) operating activities:Depreciation
                and amortization
            
            
            790,518
            
            
            858,769(Gain)
                loss on disposal of property
            
            
            (21,637
            )
            
            49,605Provision
                for bad debt expense
            
            
            3,993
            
            
            55,742Non-cash
                stock compensation expense
            
            
            100,028
            
            
            -Changes
                in operating assets and liabilities (net of effectsof
                assets acquired, less liabilities assumed):Accounts
                receivable
            
            
            (841
            )
            
            7,003Inventory
            
            
            22,575
            
            
            (346,768
            )Prepaid
                expenses and other current assets
            
            
            (185,695
            )
            
            (215,635
            )Other
                assets
            
            
            2,289
            
            
            38,241Other
                long-term liabilities
            
            
            (47,320
            )
            
            47,320Accounts
                payable and accrued liabilities
            
            
            54,739
            
            
            (195,079
            )Deferred
                revenue
            
            
            (87,898
            )
            
            (137,541
            )Net
                cash provided by (used in) operating activities
            
            
            283,621
            
            
            (474,507
            )INVESTING
                ACTIVITIES:Purchases
                of property and equipment, net
            
            
            (319,707
            )
            
            (460,399
            )Proceeds
                from sale of property and equipment
            
            
            -
            
            
            23,768Cash
                paid for acquisitions
            
            
            (265,785
            )
            
            (248,371
            )Net
                cash used in investing activities
            
            
            (585,492
            )
            
            (685,002
            )FINANCING
                ACTIVITIES:Proceeds
                from issuance of common stock
            
            
            -
            
            
            10,093Proceeds
                from issuance of long term debt
            
            
            302,553
            
            
            -Principal
                payments under capital lease obligations
            
            
            (58,227
            )
            
            (71,714
            )Principal
                payments of long-term debt
            
            
            (96,969
            )
            
            (205,756
            )Net
                cash provided by (used in) financing activities
            
            
            147,357
            
            
            (267,377
            )NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (154,514
            )
            
            (1,426,886
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            937,401
            
            
            2,364,287CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            782,887
            
            $
            937,401SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            23,602
            
            $
            26,651





See
      notes
      to consolidated financial statements.




F-7




**INTERNET
      AMERICA, INC. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**





**Year
                Ended June 30,****2007**
            
            **2006**NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Transfers
                between property and equipment and inventory
            
            $
            -
            
            $
            233,161Stock
                issued in connection with acquisitions
            
            $
            -
            
            $
            52,500Debt
                assumed in connection with acquisitions
            
            $
            100,529
            
            $
            65,166Debt
                issued in connection with acquisitions, net
            
            $
            347,572
            
            $
            126,528Non
                cash change in lease classification
            
            $
            126,507
            
            $
            -






F-8




**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Years
      Ended June 30, 2007 and 2006**





**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, 2007
      and has experienced continued declines in revenue 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 years ended June 30, 2007 and 2006, the Company recorded a provision for
      bad
      debt expense totaling approximately $4,000 and $56,000, respectively. The
      charges were recorded as a result of monthly evaluations during the year of
      the
      collectibility 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.





*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 five years.





*Other
      Assets* —
Other
      assets consist primarily of goodwill related to the acquisition of NeoSoft,
      Inc.
      and PDQ.Net, Incorporated and subscriber acquisition costs related to
      acquisitions completed during the years ended June 30, 2006 and June 30, 2007.
      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. From April 1, 2006 to March 31, 2007, subscriber acquisition costs
      were
      amortized over 36 months. Prior to April 1, 2006, subscriber acquisition costs
      were amortized over 24 months. 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. The Company does not amortize
      goodwill; however goodwill is tested annually for impairment, or sooner if
      circumstances require, in accordance with Statement of Financial Accounting
      Standard (“SFAS”) No. 142 (“SFAS 142”), "Goodwill and Other Intangible Assets."
      The Company has concluded that no impairment of goodwill occurred during the
      year ended June 30, 2007.




F-9




*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 year ended June
      30,
      2007.




*Stock-Based
      Compensation* —
On
      July
      1, 2006, the Company adopted Statement of Financial Accounting Standard (“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
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of July 1, 2006,
      the first day of the Company’s fiscal year ended June 30, 2007. The Company’s
      Consolidated Financial Statements for the prior periods have not been restated
      to reflect, and do not include, the impact of SFAS 123(R). The effect on net
      loss and loss per share of the Company before and after application of the
      fair
      value recognition provision of SFAS 123(R) to stock-based employee compensation
      for the year ended June 30, 2007 is as follows:





**Year
                Ended June 30, 2007****Net
                Loss Before Adoption of SFAS 123(R)**
            
            **Effect
                of Stock-Based Compensation Expense**
            
            **Net
                Loss As Reported**Loss
                before income tax
            
            $
            (
                247,102
            )
            $
            (100,028
            )
            $
            (347,130
            )Provision
                for income tax
            
            
            -
            
            
            -
            
            
            -Net
                Loss
            
            $
            (
                247,102
            )
            $
            (100,028
            )
            $
            (347,130
            )Earnings
                per share:Basic
            
            $
            (0.02
            )
            $
            (0.01
            )
            $
            (0.03
            )Diluted
            
            $
            (0.02
            )
            $
            (0.01
            )
            $
            (0.03
            )





Prior
      to
      July 1, 2006, the Company accounted for stock-based compensation in accordance
      with the provisions Accounting Principles Board Opinion No.25 (“APB 25”) and
      provided pro forma disclosures in the notes to the financial statements, as
      if
      the measurement provisions of Statement 123(R) had been adopted. The pro forma
      effect on net loss and loss per share as if the Company had applied the fair
      value recognition provision of SFAS 123(R) would be as follows:





**2006**Net
                loss
            
            
            As
                reported
            
            $
            (636,164
            )Net
                loss
            
            
            Pro
                Forma
            
            
            (684,131
            )Basic
                (loss) income per share
            
            
            As
                reported
            
            $
            (0.05
            )Diluted
                (loss)income per share
            
            
            As
                reported
            
            $
            (0.05
            )Basic
                (loss) income per share
            
            
            Pro
                Forma
            
            $
            (0.05
            )Diluted
                (loss) income per share
            
            
            Pro
                Forma
            
            $
            (0.05
            )




F-10




The
      fair
      value of each option granted during the year ended June 30, 2007 is estimated
      to
      be $0.24 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. 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, 2007, the total compensation costs related to non-vested awards not
      yet
      recognized is approximately $177,000. The period over which this cost will
      be
      recognized is approximately 4 years.





The
      adoption of SFAS 123(R) had no effect on cash flow from operations and cash
      flow
      from financing activities for the years ended June 30, 2007 and
      2006.





*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, 2007 and 2006 were
      approximately $26,000 and $65,000, respectively. In fiscal 2007, the Company
      focused 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.





*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 reflects the potential
      dilution that could occur upon exercise or conversion of these instruments.





During
      the years ended June 30, 2007 and 2006, options to purchase 326,141 and 175,597
      shares of common stock, respectively, were not 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 ended June 30, 2007 and 2006,
      respectively.





*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.





*New
      accounting standards* —
In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      clarifies the accounting for uncertainty in come taxes recognized in a company’s
      financial statements in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 is effective for the Company’s
      fiscal year beginning July 1, 2007. The Company is currently reviewing this
      new
      standard to determine its effects, if any, on results of operations or financial
      position.





In
      September 2006, the FASB issued Statement No. 157, “ *Fair
      Value Measurements* ”
(“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value and expands fair value measurement disclosures. SFAS No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007. The Company is currently evaluating whether the
      adoption of SFAS No. 157 will have an impact on the financial
      statements.




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
(“SAB
      108”). SAB 108 addresses the diversity in practice in quantifying financial
      statement misstatements and establishes an approach that requires quantification
      of financial statement misstatements based on the effects of misstatements
      on
      each of the Company’s financial statements and the related disclosures. SAB 108
      is effective for fiscal years ending after November 15, 2006. The application
      of
      SAB 108 did not have any impact on the Company’s balance sheet, statement of
      operations, or statements of cash flows for fiscal 2007.




F-11




In
      February 2007, the FASB issued Statement No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ”
(“SFAS
      No. 159”). SFAS No. 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value. Most of the provisions of
      SFAS No. 159 apply only to entities that elect the fair value option. The
      Company does not believe the adoption of this standard will have a material
      impact on the financial statements. This standard will become effective for
      the
      Company in the first quarter of fiscal 2009.





*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, 2007 and
      2006.




**2.** *****Acquisitions*****


During
      the year ended June 30, 2007, the Company completed the acquisition of assets
      of
      three internet service providers. The combined aggregate purchase price was
      approximately $266,000 in cash. The remaining consideration included the
      issuance of approximately $348,000 in debt, net of approximately $8,000 in
      imputed interest, the assumption of approximately $100,000 in long-term debt
      and
      $72,000 in liabilities. Fixed assets and inventory acquired were valued at
      approximately $134,000. Subscriber acquisition costs recorded in connection
      with
      the acquisitions totaled approximately $652,000. These acquisitions were
      accounted for as purchases and, accordingly, the operations of the companies
      from which the assets were acquired were included in the financial statements
      from the date of acquisition. Pro forma information for the acquisitions is
      not
      presented as the impact is not material.





**3.** ***Property
      and Equipment***





Property
      and equipment consist of:





**June
                30,****2007**Data
                communications and office equipment
            
            $
            6,271,719Leasehold
                improvements
            
            
            612,964Furniture
                and fixtures
            
            
            234,131Computer
                software
            
            
            778,1417,896,955Less
                accumulated depreciation and amortization
            
            
            (7,042,375
            )$
            854,580





Depreciation
      expense charged to operations was approximately $552,000 and $393,000 for the
      years ended June 30, 2007 and 2006, respectively.





**4.** ***Other
      Assets***





Other
      assets consist of the following:





**June
                30,****2007**Goodwill
            
            $
            26,047,266Accumulated
                amortization-goodwill
            
            
            (21,734,139
            )Total
                goodwill, net
            
            
            4,313,127Subscriber
                acquisition costs
            
            
            1,895,893Accumulated
                amortization-subscriber acquisition costs
            
            
            (1,012,953
            )Total
                subscriber acquisition costs, net
            
            
            882,940Deposits
            
            
            27,285Total
                other assets, net
            
            $
            5,223,352








Other
      assets consist primarily of goodwill related to the acquisition of NeoSoft,
      Inc.
      (“NeoSoft”) and PDQ.Net Incorporated (“PDQ”) and subscriber acquisition costs
      related the acquisitions completed during the year ended June 30, 2007, as
      more
      fully described in footnote 2 above. The Company allocates the purchase price
      to
      acquired subscriber bases and goodwill based on fair value at the time of
      acquisition.




F-12




The
      weighted average amortization period for subscriber acquisition costs is 48
      months for both dial-up and wireless customers. From April 1, 2006 to March
      31,
      2007, these costs were amortized over 36 months. Prior to April 1, 2006, these
      costs were amortized over 24 months. 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. Amortization expense for
      the
      year ended June 30, 2007 and 2006 was approximately $238,000 and $466,000,
      respectively. Subscriber acquisition costs related to the NeoSoft and PDQ
      acquisitions were fully amortized as of June 30, 2002. As of June 30, 2007,
      expected amortization expense for the fiscal years ended is as
      follows:





2008
            
            $
            286,0002009
            
            
            249,0002010
            
            
            191,0002011
            
            
            157,0002012
                and thereafter
            
            
            -Total
                principal payments
            
            $
            883,000




In
      connection with the requirements of SFAS 142, goodwill as of June 30, 2007
      was
      evaluated for impairment. As part of the evaluation, the Company compares the
      carrying value of the goodwill of its reporting unit with the fair value to
      determine whether an impairment exists. The Company discounts the reporting
      unit’s estimated cash flow projections to determine if the goodwill can be
      recovered. As of June 30, 2007, no impairment loss was recorded based on the
      evaluation. Goodwill will be evaluated and tested for impairment on an annual
      basis on June 30, or when events and circumstances indicate that an impairment
      has occurred.





**5** ***.
      Accrued Liabilities***





Accrued
      liabilities consist of:


**June
                30,****2007**Property,
                franchise and sales tax expenses
            
            $
            91,672Employee
                wages and benefits
            
            
            171,929Professional
                fees
            
            
            130,000Investor
                relations and communication fees
            
            
            15,000Interest
            
            
            5,643Deferred
                rent
            
            
            14,695Other
            
            
            19,000$
            447,939




F-13




**6** ***.
      Long-Term Debt***





As
      of
      June 30, 2007 long-term debt consists of:




**June
                30,****2007**Note
                payable due November 15, 2007, payable in monthly installments of
                $1,825, bearing interest at prime plus 3%
            
            $
            10,415Note
                payable due September 22, 2007, payable in annual installments of
                $41,667 with interest imputed at 8% (net of unamortized discount
                of
                $3,086)
            
            
            38,580Note
                payable due July 19, 2009, payable in quarterly payments of $7,751
                with interest imputed at 9% (net of unamortized discount of
                $16,240)
            
            
            86,468Note
                payable due January 23, 2011 payable in bi-annual installments of
                $13,917 with interest imputed at 8% (net of unamortized discount
                of
                $6,217)
            
            
            35,534Credit
                card line of credit advance, payable on demand, bearing interest
                at prime
                plus 6.5%
            
            
            1,839Note
                payable due June 30, 2008 payable in an annual installment of $150,000
                with interest at 11.25%
            
            
            150,000Note
                payable due June 30, 2008 payable in an annual installment of $150,000
                with interest at 11.25%
            
            
            150,000Note
                payable due August 28, 2010, payable in monthly installments of $1,612
                with interest imputed at 9% (net of unamortized discount of
                $8,214)
            
            
            49,813Note
                payable due June 20, 2012, payable in monthly installments of $2,088
                with
                interest imputed at 9% (net of unamortized discount of
                $24,742)
            
            
            100,529Note
                payable due July 20, 2010, payable in monthly installments of $1,818
                with
                interest imputed at 6.5% (net of unamortized discount of
                $6,575)
            
            
            58,860Note
                payable due July 20, 2010, payable in monthly installments of $1,409
                with
                interest imputed at 6.5% (net of unamortized discount of
                $5,096)
            
            
            45,618Note
                payable due October 11, 2010, payable in quarterly payments of $17,907
                with interest imputed at 5.5% (net of unamortized discount of
                $21,608)
            
            
            193,281920,937Less
                current portion
            
            
            (468,480
            )Total
                long-term debt
            
            $
            452,457







The
      Company’s long-term debt is unsecured except for approximately $277,229 as of
      June 30, 2007, which is secured by certain inventory and equipment. The prime
      rate at June 30, 2007 was 8.25%.




The
      following is a schedule by fiscal years of the principal payments under these
      agreements as of June 30, 2007.




2008
            
            $
            468,4802009
            
            
            161,1992010
            
            
            183,0702011
            
            
            84,3142012
            
            
            23,874Total
                principal payments
            
            $
            920,937




F-14




**7.** ***Commitments
      and Contingencies***





The
      Company leases certain phone equipment under an operating lease. Total future
      payments under this operating lease are as follows:





2008
            
            $
            91,2002009
            
            
            91,2002010
            
            
            91,2002011
            
            
            91,2002012
            
            
            91,200Thereafter
            
            
            -Total
                principal payments
            
            $
            456,000





The
      Company leases certain of its facilities including tower space under operating
      leases. Rental expense under these leases was approximately $547,000, and
      $503,000 for the years ended June 30, 2007 and 2006, respectively. At June
      30,
      2007, future minimum lease payments on facilities operating leases are
      approximately as follows:





2008
            
            $
            514,3612009
            
            
            205,7172010
            
            
            83,3372011
            
            
            72,7762012
            
            
            8,185Thereafter
            
            
            -Total
                principal payments
            
            $
            884,376








In
      the
      normal course of business, the Company enters into telephone and internet
      backbone connectivity contracts with various vendors. At June 30, 2007, the
      Company has minimum annual obligations as follows:





2008
            
            $
            500,9842009
            
            
            414,9772010
            
            
            365,7902011
            
            
            25,0342012
                and thereafter
            
            
            -Total
                principal payments
            
            $
            1,306,785




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




**8.** ***Shareholders'
      Equity***





*Earnings
      Per Share* —
There
      were no “in the money” options as of June 30, 2007 and June 30,
      2006.





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





*Employee
      Stock Purchase Plan* —
      Effective April 30, 1999, the Company's Board of Directors adopted the Employee
      Stock Purchase Plan (the "Purchase Plan"), which initially provided for the
      issuance of a maximum of 200,000 shares of Common Stock and was initially
      approved by the Company’s shareholders on November 4, 1999. In fiscal 2002, the
      Board of Directors approved an amendment including the reservation of an
      additional 500,000 shares for issuance under the Purchase Plan, which amendment
      was approved by the shareholders on November 11, 2002. Eligible employees can
      have up to 15% of their earnings withheld, up to certain maximums, to be used
      to
      purchase shares of the Company's Common Stock on every July 1, October 1,
      January 1 and April 1. The price of the Common Stock purchased under the
      Purchase Plan will be equal to 85% of the lower of the fair market value of
      the
      Common Stock on the commencement date of each three-month offering period or
      the
      specified purchase date. During April 2006, the Company temporarily suspended
      future purchases in the Purchase Plan due to lack of employee participation.
      There were no shares purchased by employees under this plan during the year
      ended June 30, 2007. At June 30, 2007, 155,959 shares were available under
      the
      Purchase Plan for future issuance.





*Stock
      Option Plans* —
The
      Company's 1996 Nonqualified Stock Option Plan (the "1996 Option Plan") was
      adopted by the Board of Directors and the Company's shareholders in December
      1996. Pursuant to the 1996 Option Plan, the Company may grant incentive and
      nonqualified stock options to key employees of the Company. A total of 225,000
      shares of common stock were been reserved for issuance under the 1996 Option
      Plan. This plan expired during the year ended June 30, 2007 and the remaining
      4,831 options outstanding under the 1996 Option Plan at June 30, 2006 were
      forfeited during the year.





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.





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.





In
      September 2004, the Company issued 200,000 options to employees under the 1998
      Option Plan that contingently vested based upon the Company having 5,000
      wireless subscribers as of September 30, 2005 and approximately $3.5 million
      in
      EBITDA (earnings before interest, taxes and depreciation) for the twelve months
      ended September 30, 2005. The vesting contingency was not met and these options
      were forfeited. The Company has 29,500 options outstanding to its employees
      under the 1998 Option Plan at June 30, 2007. 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, 2007 or 2006.





The
      Company also has granted nonqualified stock options to employees that are not
      included under any of the stock option plans noted above. The Company currently
      has 15,576 options outstanding to its employees that are not related to any
      plan
      at June 30, 2007. These options are exercisable at $1.67 per share of common
      stock. The strike price of these options was equal to the fair market value
      of
      the stock on the date of grant. These options, which vested on the date of
      grant, expire on the tenth anniversary of the date of grant.





On
      October 26, 2004, the Board of Directors adopted the 2004 Non-Employee Director
      Plan (the “2004 Option Plan”). Pursuant to the 2004 Option Plan, non-employee
      directors are granted stock options on the next business day following their
      election to the Board of Directors (“Initial Award Date”) and the next business
      day following their anniversary as a board member (“Annual Award Date”). On both
      the Initial Award Date and the Annual Award Date such director will receive
      an
      option to purchase a number of shares of Common Stock equal to the lesser of
      (i)
      $20,000 divided by the per share fair market value of the Common Stock on the
      award date or (ii) 30,000 shares of Common Stock. Additionally, at the
      discretion of the Board of Directors, directors receive (i) an option to
      purchase up to 50,000 shares of Common Stock and (ii) a 30-day option to
      purchase a matching number of shares of Common Stock of the initial and/or
      annual option grant. In the case of an individual who is also appointed or
      elected as the Chairman of the Board for the first time, such Chairman of the
      Board will automatically receive a one-time grant of (A) an option to purchase
      a
      number of shares of Common Stock equal to the lesser of (i) $50,000 divided
      by
      the per share fair market value of such Common Stock on the Initial Award Date,
      or (ii) 70,000 shares of Common Stock.




F-16




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 have been reserved for issuance under the 2004
      Option Plan. The Company currently has 131,556 options outstanding to its
      non-employee directors under the 2004 Option Plan at June 30, 2007. 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.
      The 2007 Plan will be submitted to the stockholders for approval at the next
      annual meeting of stockholders. In
      connection with the adoption of the 2007 Plan, 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 ou tstanding
      options granted under that plan as of March 30, 2007. The Board of Directors
      also determined that the terms of the 1996 and 1998 Stock Option Plans of the
      Company, with combined reserved shares of 1,425,000, will not be
      renewed.




On
      March
      30, 2007, the Board of Directors approved the granting of stock options under
      the 2007 Plan, in order to retain and incentivize employees, executives and
      directors. All options were granted at an exercise price of $0.50 per share,
      which was higher than the current market price of the Company’s stock. Options
      to purchase the following number of shares were granted to the category of
      persons indicated: an aggregate of 168,444 shares to directors, 300,000 shares
      to executive officers and 335,000 shares to non-executive employees. The options
      vest 25% at March 30, 2007 and 25% at each anniversary thereafter, except that
      options granted to employees or directors with less than 1 year of service
      vest
      25% at each anniversary of March 31,2007.





A
      summary
      of the status of the Company's stock options as of June 30, 2007 and 2006 and
      changes during the years ended on those dates is presented below:





June
                30, 2007
            
            June
                30, 2006Weighted
                Average Exercise
            
            
            
            Weighted
                Average ExerciseShares
            
            Price
            
            Shares
            
            PriceOutstanding
                at beginning of period
            
            
            263,301
            
            
            2.37
            
            
            507,593
            
            
            1.89Granted
            
            
            803,444
            
            
            0.50
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (86,669
            )
            
            1.29
            
            
            (244,292
            )
            
            1.38Outstanding
                at end of period
            
            
            980,076
            
            
            0.93
            
            
            263,301
            
            
            2.37Options
                exercisable at year end
            
            
            326,141
            
            
            1.74
            
            
            175,597
            
            
            3.08








F-17




The
      following table summarizes information about stock options outstanding at June
      30, 2007:





Number
            
            Weighted-Average
              Remaining
                Contractual
            
            NumberExercise
                Price
            
            Outstanding
              at
                6/30/07
            
            Life
                as of 6/30/07
              (Years)
            
            Exercisable
              at6/30/070.50
            
            
            803,444
            
            
            9.76
            
            
            193,3610.77
            
            
            51,948
            
            
            2.82
            
            
            34,6321.02
            
            
            19,608
            
            
            2.62
            
            
            13,0721.07
            
            
            60,000
            
            
            2.33
            
            
            40,0001.67
            
            
            15,576
            
            
            0.73
            
            
            15,5769.25
            
            
            7,000
            
            
            2.46
            
            
            7,00013.19
            
            
            22,500
            
            
            2.52
            
            
            22,500980,076
            
            
            
            
            
            326,141





A
      summary
      of the Company’s non-vested options as of June 30, 2007 and changes during
      fiscal 2007 is presented as follows:




Nonvested
            
            Weighted-Average
                Grant Dateoptions
            
            at
                Fair ValueNonvested
                at June 30, 2006
            
            
            87,704
            
            $
            1.05Granted
            
            
            803,444
            
            
            0.24Vested
            
            
            (237,213
            )
            
            0.39Forfeited
            
            
            -
            
            
            -Nonrested
              at June 30, 2007
            
            
            653,935




**9** ***.*** **** ***Income
      Taxes***





No
      provision for federal income taxes has been recognized for the years ended
      June
      30, 2007 and 2006 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, 2007 and 2006, consist
      of:




**June
                30,****2007**
            
            **2006**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            9,852,000
            
            $
            9,803,000Intangible
                assets
            
            
            2,169,000
            
            
            2,383,000Allowance
                for doubtful accounts
            
            
            2,000
            
            
            2,000Other
            
            
            179,000
            
            
            97,000Total
                deferred tax assets
            
            
            12,202,000
            
            
            12,285,000Deferred
                tax liabilities:Other
            
            
            -
            
            
            (18,000
            )Total
                deferred tax liability
            
            
            -
            
            
            (18,000
            )Total
                net deferred tax
            
            
            12,202,000
            
            
            12,267,000Valuation
                allowance
            
            
            (12,202,000
            )
            
            (12,267,000
            )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, 2007, the valuation allowance decreased by approximately
      $65,000.





At
      June
      30, 2007, the Company has net operating loss carryforwards of approximately
      $29
      million for federal income tax purposes. These net operating loss carryforwards
      may be carried forward in varying amounts until 2027 and may be limited in
      their
      use due to significant changes in the Company's ownership.




F-18




A
      reconciliation of the income tax provision computed at statutory tax rates
      to
      the income tax provision for the years ended June 30, 2007 and 2006 is as
      follows:





**June
                30,****2007**
            
            **2006**Federal
                income tax expense (benefit) at statutory rate
            
            
            (34
            )%
            
            (34
            )%Change
                in valuation allowance
            
            
            34
            %
            
            34
            %Total
                income tax provision
            
            
            0
            %
            
            0
            %





**10.** ***Employee
      Benefit Plan***





The
      Company has established a 401(k) plan for the benefit of its employees.
      Employees may contribute to the plan up to 15% of their salary, pursuant to
      a
      salary reduction agreement, upon meeting age requirements. The Company made
      no
      discretionary contributions to the Plan through June 30, 2007.





**11.** ***Related
      Party Transactions***





The
      following table shows amounts paid to four non-employee directors for serving
      on
      the Company’s board of directors during the fiscal years ended June 30, 2007 and
      2006:




**June
                30,****2007**
            
            **2006**Troy
                LeMaile Stovall
            
            $
            16,750
            
            $
            17,500Justin
                McClure
            
            
            16,500
            
            
            17,500John
                Palmer
            
            
            15,500
            
            
            16,000Total
                director fees
            
            $
            48,750
            
            $
            51,000





**12.** ***Subsequent
      Events***





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 internet service customers
      and provides telex messaging services. A copy of the Stock Purchase Agreement
      was included as Exhibit 99.1 to the Company’s Current Report on
      Form 8-K filed August 1, 2007.





The
      terms
      of the transaction with TeleShare were approved by the Rural Utilities Service
      of the Department of Agriculture (“RUS”) on July 13, 2007. Under the program
      administered by the RUS, TeleShare (now Internet America) has 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. We intend to continue network expansion utilizing funds under the
      existing borrowing facility.  Under the terms of the RUS approval, the
      Company agreed to add $2 million in equity within 60 days of
      closing.  The Company is in the process of finalizing
      the documentation to close an initial equity raise to a limited number
      of accredited investors in a private placement.  Management has been in
      communication with the RUS regarding the deadline, and while management believes
      that it will be able to obtain the $2 million, that the documentation for
      such raise will be finalized within the next few weeks and that the RUS
      will approve the extension of such raise, there can be no assurance that
      the Company will be successful in doing so or that the RUS will approve the
      extension.  While it is possible that the RUS could withhold its
      approval, management's past experience with the RUS leads it to believe
      that they will cooperate with us as we complete the sale of equity, without
      adverse effect on the RUS borrowing facility.




F-19





EXHIBIT
      INDEX




**Exhibit**
            
            **Description**3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws,
                as amended (2)4.1
            
            Rights
                Agreement dated as of August 9, 2004, between Registrant and American
                Stock Transfer & Trust Company, as Rights Agent (3)10.1
            
            Stock
                Purchase Agreement between Registrant and TeleShare Communications
                Services, Inc. dated July 27, 2007 (4)10.2
            
            Internet
                America, Inc. 2007 Stock Option Plan (5)21.1
            
            Subsidiaries
                list*23.1
            
            Consent
                of UHY, LLP*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 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.


(3)
            Incorporated
                by reference to exhibit 1 to Registration Statement on Form 8-A (file
                no.
                001-32273) filed on August 11,
                2004.


(4)
            Incorporated
                by reference to exhibit 99.1 to Form 8-K (file no. 0001144204-07-039539)
                filed August 1, 2007.


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




20