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, 2008**


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





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





Securities
      registered pursuant to Section 12(b) of the Exchange Act:


**(Not
      applicable)**





Securities
      registered pursuant to Section 12(g) of the Exchange Act:


**Common
      Stock, Par Value $0.01 Per Share**


**(Title
      of Class)**





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. o





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 $8,777,033.





Based
      on
      the closing price of the registrant’s Common Stock on September 26, 2008, the
      aggregate market value of the Common Stock held by non-affiliates of the
      registrant is $2,749,618. 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 29, 2008 was
      16,857,031.





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 Property
            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(T).
            Controls
                and Procedures
            18Item
                8B.
            Other
                Information
            18PART
                III
            Item
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            19Item
                10.
            Executive
                Compensation
            21Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            22Item
                12.
            Certain
                Relationships and Related Transactions and Director
                Independence
            24Item
                13.
            Exhibits
            26Item
                14.
            Principal
                Accountant Fees and Services
            26SIGNATURES
            27INDEX
                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, 2008, we served approximately 30,300 active
      subscribers. Of the Company’s 30,300 total subscribers, approximately 8,000
      customer accounts are wireless broadband Internet subscribers. The Company
      continues to experience an attrition of dial-up Internet 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 a highly competitive market 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. Internet America was incorporated
      in
      Texas in 1995 and currently has operations only in the state of Texas.





In
      fiscal
      2008, 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 Crosby,
      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.





During
      2008, the Company embarked on a program to upgrade and expand areas where our
      network has been experiencing congestion due to the bandwidth demands created
      by
      the growth of our customer base. During this upgrade process, we have restricted
      the addition of new customers to certain areas of the network until the capacity
      can be expanded to meet the demand and provide quality service to our customers.
      We have experienced a reduction in the rate of growth of the Company’s wireless
      customer count, and in some areas a slight decrease in the existing customer
      base, during the period in which the improvements are being made. Management
      anticipates that the improvements will be substantially complete by December
      2008.





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.





During
      2008, the Company invested approximately $93,000 in management college training
      for key management employees. The training focuses on how to build quality
      into
      all aspects of our operations by making employees active and enthusiastic
      partners in the enterprise, rather than creating controls and procedures that
      simply hassle employees without producing results. Management believes that
      this
      was an important investment in the organization and believes that the principals
      learned will allow employees to be more productive and produce better results
      for our customers, which will contribute to our ability to acquire and retain
      customers and expand and become profitable.





*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. On July 27, 2007, we completed the acquisition
      of
      TeleShare Communications Services, Inc. based in Crosby, Texas which served
      approximately 1,500 wireless Internet service customers in the Crosby, Dayton,
      Liberty, New Waverly and Baytown areas. TeleShare had a loan commitment under
      a
      program administered by the Rural Utilities Service of the United States
      Department of Agriculture (the “RUS”). Under the program, Internet America
      assumed a loan commitment of approximately $4 million with approximately $3
      million still available for providing financial assistance for the expansion
      of
      broadband services in rural areas.


3


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
      North Texas operational center, the operations and subscriber base are largely
      a
      result of several acquisitions made in the Corsicana area in fiscal 2005 and
      an
      acquisition in June 2007. The Company completed its acquisitions of certain
      assets and assumption of related liabilities of Blue Wireless & Data, Inc.
      ("Blue Wireless") in Dallas, Texas related to its residential internet service
      customers in June 2007. The Company entered into a service agreement with Blue
      Wireless to purchase bandwidth and certain network and monitoring services
      used
      by the Company in providing residential service. The Company acquired
      approximately 700 subscribers with this transaction. The North Texas 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. 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 2009.





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





*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 has not been aggressively marketing
      these services and has seen some degradation of the overall number of
      subscribers using these services.





*Operating
      center*





In
      March
      of 2006, the Company relocated its corporate headquarters to Houston from
      Dallas. That move was completed in March 2006. In June 2008, the Company
      expanded the Houston Corporate headquarters further consolidating operations
      of
      its Customer Service and Network Services groups. The Headquarters location
      now
      contains a centralized network operations center where all operations on the
      network can be monitored, maintained and supported.





*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.





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.


4


**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, 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, 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.





**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.





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 23 customer care employees in three different business units
      (specialized by type of service) at June 30, 2008. 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.


5


**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 in our Houston Network Operations Center 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.





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.


6


**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," "Airnews.net," and “PDQ.net”are
      registered service marks of Internet America or its subsidiaries. As we expand
      our rural footprint into contiguous communities and become more entrenched
      and
      integrated into the communities that we serve through our local staff, and
      internet connectivity, we believe that our brand and our presence may create
      some barriers to entry by others and more loyalty on the part of our rural
      customers.





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





**Competition**





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





In
      the
      dialup segment, where we have approximately 9200 subscribers, there are no
      substantial barriers to entry, and we expect that competition will continue
      to
      intensify and, more importantly, dialup subscribers in general will continue
      to
      decline as more subscribers, business and residential, convert to the various
      broadband services available to them.





The
      wired
      broadband services segment, such as DSL (where we have over 1,900 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:


7


•
      National online service providers, such as Time Warner/AOL, the Microsoft
      Network and EarthLink;


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


•
      Numerous regional and local ISPs and WISPs;


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


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


•
Fixed
      wireless communications companies;


•
      Satellite companies;


•
      Electric utility companies; and


•
      Cellular and PCS services.




**Government
      Regulation**





Internet
      America is not currently subject to direct regulation by the Federal
      Communications Commission (“FCC”) or any other agency, other than regulations
      applicable to businesses and public companies generally. The FCC classifies
      Internet access providers as "information service providers," rather than
      regulated "telecommunications providers" under the 1996 Telecommunications
      Act.
      As such, we are not subject to regulations that apply to telephone companies
      and
      similar carriers. However, as we provide Internet access delivered via 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 1,900 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.





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.


8


**Employees**





As
      of
      June 30, 2008, we employed approximately 73 people, 71 of whom were full-time
      and 2 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*** **** ***Property***





Our
      corporate headquarters are located in Houston, Texas at 10930 W. Sam Houston
      Pkwy., N., Suite 200, where all executive functions, call center and network
      monitoring exist. We only own real estate consisting of 0.13 acres located
      at
      901 N Cameron in Victoria, Texas, related to our wireless operations in
      Southwest Texas. We believe that all of our facilities are adequately maintained
      and insured and are suitable for their present use. During fiscal 2008 and
      continuing in fiscal 2009, we reduced the field office locations and utilize
      a
      more centralized warehousing program for managing field inventory. This results
      in operating savings on minimally occupied field offices. We lease office space
      in the following locations for the purposes indicated:





**Location**
            
            **Square
                footage**
            
            **Purpose**
            
            **Expiration**Houston
            
            7,900
            
            Corporate
                headquarters
            
            05/31/2013Stafford
            
            5,600
                (1)
            
            Warehouse/Field
            
            08/31/2009Dallas
            
            19,000
            
            Former
                corporate headquarters
            
            10/31/2008San
                Antonio
            
            1,700
            
            Field
                office
            
            10/01/2008





(1)
      Lease
      expired August 2008; 1,600 square feet renewed for 1 year.





**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 2008.


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, 2008:Fourth
                Quarter
            
            $
            0.67
            
            $
            0.42Third
                Quarter
            
            
            0.80
            
            
            0.62Second
                Quarter
            
            
            0.81
            
            
            0.45First
                Quarter
            
            
            0.80
            
            
            0.26Fiscal
                Year Ended June 30, 2007:Fourth
                Quarter
            
            $
            0.34
            
            $
            0.22Third
                Quarter
            
            
            0.31
            
            
            0.25Second
                Quarter
            
            
            0.36
            
            
            0.20First
                Quarter
            
            
            0.35
            
            
            0.25





At
      August
      18, 2008, there were 248 holders of record of our common stock. The last
      reported sale price of the common stock on the OTC Bulletin Board on September
      26, 2008 was $0.26 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.





***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, 2008 and 2007. 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-KSB 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 broadband Internet customers and infrastructure on attractive terms
      or successfully integrate those acquisitions into our operations, (4) financing
      will not be available to us if and as needed, (5) we will not be competitive
      with existing or new competitors, (6) we will not keep up with industry pricing
      or technological developments impacting the Internet, (7) we will be adversely
      affected by dependence on network infrastructure, telecommunications providers
      and other vendors or by regulatory changes, (8) service interruptions or
      impediments could harm our business; (9) we may be accused of infringing upon
      the intellectual property rights of third parties, which is costly to defend
      and
      could limit our ability to use certain technologies in the future, (10)
      government regulations could force us to change our business practices, (11)
      we
      may be unable to hire and retain qualified personnel, including our key
      executive officers, (12) 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 30,300 subscribers in Texas as of June
      30, 2008. 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 96.1% of total revenues with the remaining
      revenues related primarily to telex messaging services for the year ended June
      30, 2008. For the year ended June 30, 2007, Internet access services represented
      all of our revenue.





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,
      2008, we continued to expand in rural markets through the deployment of new
      infrastructure and acquisitions in non-metropolitan markets in Texas where
      competition is less intense and the demand for internet connectivity may be
      under-served or non-served. Although we will continue to consider development
      and acquisition opportunities in non-metropolitan markets in Texas, our current
      focus is on acquisition opportunities outside our current geographical region
      which offer greater opportunities for expanding our subscriber base.





Management
      continues to evaluate overall profitability. During 2008, we experienced
      increases in telecommunications cost per subscriber by increasing network
      capacity to provide higher quality service to our customers and as we increased
      our wireless broadband footprint. This is offset partially by entering into
      more
      favorable agreements with telecommunications service providers. The Company
      experienced significant shifts in headcount. Staffing was increased during
      the
      first and second quarters of the year ended June 30, 2008 , with the highest
      headcount being 93 employees in December 2007. As our productivity has increased
      due to quality initiatives, we have reduced headcount to 73 people at June
      30,
      2008 and further to 63 people at September 21, 2008. The increases in personnel
      costs in fiscal 2008 are not expected to continue in fiscal 2009.




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.




**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 2008 includes telex messaging service
      revenues.


11




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





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





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





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




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





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





Our
      business is not subject to any significant seasonal influences.


12


**Results
      of Operations**





**Year
      Ended June 30, 2008 Compared to June 30, 2007**





The
      following table shows financial data for the years ended June 30, 2008 and
      2007.
      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, 2008**
            
            **June 30, 2007****(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
            
            $
            8,431
            
            
            96.1
            %
            $
            7,985
            
            
            100.0
            %Other
            
            
            346
            
            
            3.9
            %
            
            -
            
            
            0.0
            %Total
            
            
            8,777
            
            
            100.0
            %
            
            7,985
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            5,925
            
            
            67.5
            %
            
            4,995
            
            
            62.5
            %Sales
                and marketing
            
            
            504
            
            
            5.7
            %
            
            209
            
            
            2.6
            %General
                and administrative
            
            
            3,371
            
            
            38.4
            %
            
            2,323
            
            
            29.1
            %Provision
                for bad debt expense
            
            
            (1
            )
            
            0.0
            %
            
            4
            
            
            0.1
            %Depreciation
                and amortization
            
            
            1,173
            
            
            13.4
            %
            
            791
            
            
            9.9
            %Impairment
                loss
            
            
            780
            
            
            8.9
            %
            
            -
            
            
            0.0
            %Total
            
            
            11,752
            
            
            133.9
            %
            
            8,322
            
            
            104.2
            %OPERATING
                LOSS
            
            
            (2,975
            )
            
            -33.9
            %
            
            (337
            )
            
            -4.2
            %INTEREST
                INCOME
            
            
            (87
            )
            
            -1.0
            %
            
            (24
            )
            
            -0.3
            %INTEREST
                EXPENSE
            
            
            112
            
            
            1.3
            %
            
            34
            
            
            0.4
            %NET
                LOSS
            
            $
            (3,000
            )
            
            -34.2
            %
            $
            (347
            )
            
            -4.3
            %NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.20
            )
            
            
            
            $
            (0.03
            )DILUTED
            
            $
            (0.20
            )
            
            
            
            $
            (0.03
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            14,978,681
            
            
            
            
            
            12,508,914DILUTED
            
            
            14,978,681
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            30,300
            
            
            
            
            
            34,200Number
                of employees at end of period
            
            
            73
            
            
            
            
            
            66EBITDA
                (loss)(2)
            
            $
            (1,022
            )
            
            
            
            $
            454EBITDA
                margin(3)
            
            
            -11.6
            %
            
            
            
            
            5.7
            %CASH
                FLOW DATA:Cash
                flow (used in) provided by operations
            
            $
            (1,237
            )
            
            
            
            $
            284Cash
                flow used in investing activities
            
            $
            (542
            )
            
            
            
            $
            (585
            )Cash
                flow provided by financing activities
            
            $
            4,908
            
            
            
            
            $
            147Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (3,000
            )
            
            
            
            $
            (347
            )Add:Depreciation
                and amortization
            
            
            1,173
            
            
            
            
            
            791Impairment
                loss
            
            
            780
            
            
            
            
            
            -Interest
                income
            
            
            (87
            )
            
            
            
            
            (24
            )Interest
                expense
            
            
            112
            
            
            
            
            
            34EBITDA
                (loss) (2)
            
            $
            (1,022
            )
            
            
            
            $
            454




(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 increased by $792,000, or 9.9%, to $8.8 million in fiscal 2008 from
      $8.0
      million in fiscal 2007. The Company’s subscriber count decreased by 3,900, or
      11.4%, to 30,300 as of June 30, 2008 compared to 34,200 as of June 30, 2007.
      The
      Company’s broadband wireless Internet subscriber base increased 39.1% to 8,000
      as of June 30, 2008 from 5,750 for the previous year.The increase in
      wireless revenue is offset by 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 2008. Revenue from telex
      messaging services included in other income was $346,000 for fiscal 2008. We
      did
      not have telex revenues prior to the acquisition of TeleShare during fiscal
      2008. The decrease in subscriber count is primarily attributed to the loss
      of
      dial-up customers.




*Connectivity
      and operations.* Connectivity and operations expenses increased by approximately $930,000, or
      18.6% to $5.9 million for fiscal 2008 from $5.0 million for fiscal 2007. Due
      to
      the increased staffing in the first two quarters of fiscal 2008, related to
      integration of acquired subscribers and the acquisition of TeleShare, labor
      costs increased by $483,000 to $2.6 million in fiscal 2008 from $2.1 million
      in
      fiscal 2007. Tower leases and related utilities increased by approximately
      $256,000 to $369,000 in fiscal 2008, due to increase in wireless Broadband
      coverage territory as a result of acquisitions. Travel and mileage expenses
      increased by approximately $118,000, to $171,000 in fiscal 2008 from $53,000
      in
      fiscal 2007, related to the increase in wireless Broadband coverage territory
      and increased staffing. Telecommunications expenses had a net increase of
      approximately $90,000 to $1,931,000 in fiscal 2008 compared to $1,841,000 in
      fiscal 2007. This was due to increased bandwidth costs for acquired subscribers,
      which was offset by the decrease in dial up subscribers, DSL and commercial
      services. Installation costs and cost of goods sold have decreased by
      approximately $26,000 to $643,000 in 2008, due to the Company currently
      retaining ownership of customer premises equipment which was sold to the
      customer in fiscal 2007, increasing cost of goods sold. Merchant services fees
      increased by approximately $11,000 in fiscal 2008 to $195,000 from $184,000
      in
      fiscal 2007 primarily due to the increase in revenue.





As
      a
      percentage of total revenue, connectivity and operations expense increased
      to
      67.5% for fiscal 2008 compared to 62.5% for fiscal 2007, due to increases in
      costs in the wireless access provider business and additional personnel costs
      during integration of recent acquisitions.





*Sales
      and marketing.* Sales
      and marketing expenses increased by $295,000, or 140.1%, to $504,000 for fiscal
      2008 from $209,000 for the prior fiscal year. The change primarily relates
      to
      increased personnel costs of $227,000 for sales call center agents and field
      sales agents. During the third quarter of fiscal 2008, the Company discontinued
      use of field sales agents and has reduced headcount in sales personnel as a
      result. Additionally, the Company increased advertising expenses by $68,000
      primarily in direct mail advertising in fiscal 2008.





*General
      and administrative.* General
      and administrative (“G&A”) expenses increased by $1,048,000, or 45.1%, to
      $3.4 million in fiscal 2008 from $2.3 million for fiscal 2007. Due to the
      acquisitions of wireless subscribers and the subsidiary TeleShare, the Company
      incurred increases in personnel, telecommunications costs, travel, and other
      general and administrative expenses. As further discussed below, the Company
      expects these costs to be reduced over time now that the integration of these
      subscribers is complete. Additional increases in general and administrative
      costs were related to stock compensation and consulting fees paid to contract
      labor for telex messaging services.





Salaries
      and wages increased by $372,000 to $1,036,000 in fiscal 2008 from $664,000
      in
      fiscal 2007. This increase is primarily due to new positions in corporate and
      accounting during the year. As discussed above, the Company temporarily
      increased staffing in fiscal 2008 related to integration of multiple
      acquisitions. Staffing has now been returned to previous lower levels. During
      fiscal 2008, the Company invested $93,000 in management college training for
      key
      management employees which is included in G&A expenses. Professional fees
      increased by $215,000 in fiscal 2008, due to payments of $224,000 under a
      consulting contract related to telex messaging services. The Company issued
      stock options during fiscal 2008 and in the fourth quarter of fiscal 2007.
      This
      caused an increase of $34,000 in expenses to approximately $134,000 in fiscal
      2008 compared to $100,000 in fiscal 2007.





Facilities
      costs increased by $136,000 in fiscal 2008 due to additional interim office
      space in acquired subscriber areas and the expense of the abandoned corporate
      headquarters lease in Dallas. Telecommunications expense increased by $88,000
      to
      $266,000 in fiscal 2008 from $178,000 in fiscal 2007, due to increases in
      telecommunications taxes and fees associated with increased telecommunication
      expenses included in connectivity and operations and additional corporate use
      of
      bandwidth and long distance services. Franchise taxes increased by $29,000
      in
      fiscal 2008 due to tax law changes in the state of Texas. The remaining net
      increase of $81,000 was primarily a result of various increased costs related
      to
      acquisitions, including insurance and travel.





*Provision
      for bad debt expense* ***.*** **** Provision
      for bad debt expense recorded a net recovery of $1,000 in fiscal 2008 compared
      to net expense of $4,000 in fiscal 2007. Consistently lower expense relates
      primarily to changes in billing systems and tightened credit policies and
      procedures. As of June 30, 2008, we are fully reserved for all customer accounts
      that are at least 90 days old.


14


*Depreciation
      and amortization.* Depreciation and amortization expense increased by $382,000, or 48.4%, to
      $1,173,000 for fiscal 2008 from $791,000 for fiscal 2007. Fiscal 2008
      depreciation increased approximately $126,000 over fiscal 2007 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 2008 increased by approximately $256,000, primarily due to
      amortization of subscriber acquisition costs derived from acquisitions during
      the fourth quarter of fiscal 2007 and first quarter of fiscal 2008.


*Impairment
        loss.* Goodwill
        was recorded in the acquisition of NeoSoft, Inc. and PDQ.Net, Inc., whose
        dial-up subscribers have continued to decline. Accordingly, the Company recorded
        $780,000 as impairment of goodwill related to potential reduction in future
        cash
        flows from these acquisitions during the year ended June 30, 2008. The Company
        concluded that no impairment of goodwill occurred during the year ended June
        30,
        2007.


*Interest
      (expense) income, net.* Interest
      income increased by $63,000, or 254.1%, to $87,000 due primarily to the increase
      in cash balances provided by issuance of Series A Preferred and Common Stock.
      Interest expense increased by $78,000, to $112,000 related primarily to
      acquisition debt and the RUS loan outstanding.




**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 2008 cash
      used
      in operations was $1,237,000, compared to cash provided by operations of
      $284,000 in fiscal 2007. Net loss plus non-cash items used cash of $914,000
      million in fiscal 2008 and additional amounts were used primarily in reducing
      accounts payable. Net loss plus non-cash items contributed to $526,000 in cash
      in fiscal 2007 which was then used primarily for reducing accounts payable
      and
      accrued expenses and a decrease in deferred revenue. Inventory decreased in
      fiscal 2007 primarily due to the Company discontinuing the wireless equipment
      reseller business in March 2006. The decrease in inventory is related to the
      use
      of inventory acquired in recent acquisitions and the return of inventory to
      normal levels by utilizing our central warehouse system. Increases in other
      current assets and a relative increase in deferred revenue relates primarily
      to
      the deferral of customer activation costs and fees over the expected life of
      the
      customer.





Cash
      used
      in investing activities totaled $542,000 and $585,000 for the years ended June
      30, 2008 and 2007, respectively. In fiscal 2008, TeleShare became a majority
      owned subsidiary and contributed $655,000 in cash upon closing. Also during
      the
      year, the Company undertook substantial network upgrade projects and invested
      $1.2 million in property and equipment. In fiscal 2007, the Company used cash
      for property and equipment of $320,000 and paid $266,000 upon closing various
      acquisitions.





Cash
      provided by financing activities for fiscal 2008 totaled $4,908,000, including
      proceeds from issuance of both Series A Preferred Stock and Common Stock
      totaling $5.3 million, which was offset primarily by payments on long-term
      debt.
      Cash provided in fiscal 2007 of $147,000 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 $3.9 million at June 30, 2008 along with
      anticipated cash flow from operations will be sufficient for meeting our working
      capital needs for fiscal 2009 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 with these acquisitions. However,
      additional financing may be required to fund future acquisitions. Continued
      decreases in revenues and subscriber count may adversely affect the liquidity
      of
      the Company.





The
      current focus of our acquisition program is to identify prospective
      opportunities that would provide us with a larger number of subscribers, larger
      revenue base and geographic expansion. Such an acquisition would allow us to
      spread the cost of our well developed systems, superior network performance,
      high quality customer care and technical support over an increased number of
      subscribers. Leveraging the efficiencies of our operations over a larger
      subscriber base would provide us with the benefits of larger economies of scale.
      Acquisition opportunities with operations outside of Texas would also allow
      us
      to become a national player in the delivery of wireless internet service,
      thereby providing geographical diversity and more stability to our subscriber
      base. Financing for such an acquisition would likely come from the public
      issuance of equity securities or the private sale of debt or equity securities.
      If such capital financing arrangements or 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 acquisition
      program to match available funding.


15





In
      addition, the following are contractual cash obligations entered into by the
      Company through June 30, 2008, for the next five fiscal years ending June
      30:





Payments
                Due By PeriodTotal
            
            2009
            
            2010
            
            2011
            
            2012
            
            2013
            
            ThereafterConnectivity
                contracts
            
            $
            1,821,000
            
            $
            791,000
            
            $
            737,000
            
            $
            270,000
            
            $
            23,000
            
            $
            -
            
            $
            -Operating
                leases
            
            
            1,718,000
            
            
            531,000
            
            
            401,000
            
            
            361,000
            
            
            281,000
            
            
            132,000
            
            
            12,000Long-term
                debt
            
            
            1,952,000
            
            
            621,000
            
            
            648,000
            
            
            438,000
            
            
            245,000
            
            
            -
            
            
            -$
            5,491,000
            
            $
            1,943,000
            
            $
            1,786,000
            
            $
            1,069,000
            
            $
            549,000
            
            $
            132,000
            
            $
            12,000




**Critical
      Accounting Policies and Estimates**




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




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




Our
      critical accounting policies are as follows:




·
            Revenue
                recognition


·
            Accounting
                for income taxes; and


·
            Intangible
                assets




*Revenue
      recognition*




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





*Accounting
      for Income Taxes*




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




The deferred tax asset as of June 30, 2008 of $13.5 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.




16




*Intangible
      Assets*




We
      account for goodwill in accordance with Statement of Financial Accounting
      Standard (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”.  SFAS
      No.
      142 requires, among other things, the discontinuance of amortization for
      goodwill and at least an annual test for impairment. An impairment review may
      be
      performed more frequently in the event circumstances indicate that the carrying
      value may not be recoverable.




The
      SFAS
      No. 142 goodwill impairment model is a two-step process. The first step is
      used
      to identify a potential impairment by comparing the fair value of a reporting
      unit with its net book value (or carrying amount), including goodwill. If the
      fair value exceeds the carrying amount, goodwill of the reporting unit is not
      considered impaired and the second step of the impairment test is unnecessary.
      If the carrying amount of the reporting unit exceeds its fair value, the second
      step of the goodwill impairment test compares the implied value of the reporting
      unit’s goodwill with the carrying amount of that goodwill. If the carrying
      amount exceeds the implied fair value, an impairment loss is recognized in
      an
      amount equal to that excess. The implied fair value of goodwill is determined
      in
      the same manner as the amount of goodwill recognized in a business combination.
      That is, the fair value of the reporting unit is allocated to all the assets
      and
      liabilities of that unit (including any previously unrecognized intangible
      assets) as if the reporting unit had been acquired in a business combination
      and
      the fair value of the reporting unit was the purchase price paid to acquire
      the
      reporting unit.





Determining
      the fair value of a reporting unit under the first step of the goodwill
      impairment test, and determining the fair value of individual assets and
      liabilities of a reporting unit (including previously unrecognized intangible
      assets) under the second test of the goodwill impairment test, is judgmental
      in
      nature and often involves significant estimates and assumptions. These estimates
      and assumptions could have a significant impact on whether an impairment charge
      is recognized and the magnitude of any such charge. Estimates of fair value
      are
      primarily determined using future net cash flows discounted at 5.50% and
      are based on management’s best estimate and general market conditions. This
      approach uses significant assumptions, including projected future earnings
      and
      a subscription growth or attrition rate.




Goodwill
      was recorded in the acquisition of NeoSoft, Inc. and PDQ.Net, Inc., whose
      dial-up subscribers have continued to decline. Accordingly, the Company recorded
      $780,000 as impairment of goodwill related to potential reduction in future
      cash
      flows from these acquisitions during the year ended June 30, 2008. The Company
      concluded that no impairment of goodwill occurred during the year ended June
      30,
      2007.     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 goodwill line item on our consolidated balance
      sheet.




We are required to periodically review the estimated useful lives of our
      intangible assets. This review during fiscal 2008 indicated that actual lives
      for subscriber acquisition costs is consistent with the estimated useful life
      of
      subscriber acquisition costs of 48 months. The increase in useful life from
      36
      months to 48 months was effective April 1, 2007. The effective change in
      estimate reduced fiscal 2007 amortization expense by $37,000 and decreased
      fiscal 2007 net loss from operations and resulting net loss by
      $37,000.




**Inflation**




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





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





The
      financial statements of Internet America and subsidiaries are attached hereto
      as
      pages F-1 through F-19 and include our Consolidated Balance Sheet as of June
      30,
      2008, Consolidated Statements of Operations for each of the two years in the
      period ended June 30, 2008 and 2007, Consolidated Statements of Shareholders'
      Equity for each of the two years in the period ended June 30, 2008 and 2007,
      Consolidated Statements of Cash Flows for each of the two years in the period
      ended June 30, 2008 and 2007, and the Notes to the Consolidated Financial
      Statements.





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





None.


17




**Item
      8A(T).** ***Controls
      and Procedures***





**Disclosure
      Controls and Procedures**




An
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)
      in
      effect as of June 30, 2008. Based upon that evaluation, the Chief Executive
      Officer and Chief Financial Officer concluded that, as of June 30, 2008, the
      design and operation of these disclosure controls and procedures were effective
      in timely alerting them to the material information relating to the Company
      required to be included in its periodic filings with the Securities and Exchange
      Commission.





**Management’s
      Annual Report on Internal Control over Financial Reporting**





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




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      assessed the effectiveness of our internal control over financial reporting
      as
      of June 30, 2008.  Based
      on
      the results of its assessment, management concluded that the Company’s internal
      control over financial reporting was effective as of June 30, 2008.





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




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




**Changes
      in Internal Control over Financial Reporting**




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





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





None.


18


**PART
      III**





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





**Directors
      and Executive Officers**




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





**NAME**
            
            **AGE**
            
            **POSITION**
            
            **CURRENT**
              **TERM EXPIRING**William E. (Billy) Ladin,
                Jr.
            
            67
            
            Chairman
                of the Board
            
            2009 (Class I)Justin
                McClure
            
            44
            
            Director
            
            2010 (Class II)Steven
                G. Mihaylo
            
            64
            
            Director
            
            2008 (Class III)Ambassador John N. Palmer
            
            73
            
            Director
            
            2009 (Class I)Troy LeMaile-Stovall
            
            44
            
            Director
            
            2008 (Class III)




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




**Justin
      McClure.** Mr. McClure
      became a director in April 2004. Mr. McClure currently serves as
      President of GulfSouth Capital, Inc., a Jackson, Mississippi based private
      investment firm which he joined in 1999. Additionally, Mr. McClure
      serves as Chairman of TelNet, Ltd., a telecommunications holding company based
      in Hamilton, Bermuda.  Prior to joining GulfSouth Capital, Inc.,
      Mr. McClure practiced telecommunications law with the Washington, DC
      firm of Lukas, Nace, Gutierrez and Sachs with an emphasis on wireless
      telecommunications. Mr. McClure is the son-in-law of Ambassador Palmer.




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





**Ambassador
      John N. Palmer.** Ambassador Palmer became a director in February 2005. Ambassador Palmer
      currently serves as Chairman of GulfSouth Capital, Inc., a Jackson, Mississippi
      based private investment firm which he founded in 1999. In October 2001,
      Ambassador Palmer was confirmed by the U.S. Senate as the Ambassador to
      Portugal. His term ended in September 2004. Prior to that, he served as Chairman
      of SkyTel from 1989 until 1999. Ambassador Palmer is Mr. McClure’s
      father-in law.





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


19





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





**Name**
            
            **Age**
            
            **Position**William
                E. (Billy) Ladin, Jr.
            
            67
            
            Chairman
                of the Board and Chief Executive OfficerRoss
                McAlpine
            
            57
            
            President
                and Chief Operating OfficerJennifer
                S. LeBlanc
            
            33
            
            Chief
                Financial and Accounting Officer and
                Secretary





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




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





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




**Code
      of Ethics**




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




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section 16(a)
      of the Exchange Act requires our officers and directors, and persons who own
      more than 10% of a registered class of our equity securities, to file initial
      reports of ownership and reports of changes in ownership with the SEC. Such
      persons are required by SEC regulation to furnish us with copies of all
      Section 16(a) forms they file. Based solely on its review of the copies of
      such forms received by it and representations from certain reporting persons
      regarding their compliance with the relevant filing requirements, the Company
      believes that all filing requirements applicable to its officers, directors
      and
      10% shareholders were complied with during the fiscal year ended June 30,
      2008, except that Mr. McAlpine filed his Form 3 one day after the deadline
      and
      Mr. McClure filed a Form 4 reporting the purchase of Company stock six days
      after the deadline.





**Audit
      Committee**





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


20


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




**Summary
      Compensation Table**




The
      following table sets forth information regarding compensation paid to our Chief
      Executive Officer and up to four other most highly compensated executive
      officers who earned more than $100,000 during the 2008 fiscal year (the “Named
      Executive Officers”) for the fiscal periods indicated.





**Name and**
              **Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Option**
              **Awards**
              **($)(1)**
            
            **All other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**William
                E. (Billy) Ladin, Jr.
              Chairman
                of the Board and
              Chief
                Executive Officer
            
            
            2008
              2007
              2006
            
            $
              $
              $
            200,000
              200,000
              200,000
            
            
            -
              -
              -
            
            $
            48,811
            
            
            -
              -
              -
            
            $
              $
              $
            200,000
              248,811
              200,000Ross
                McAlpine
              President
                and Chief Operating Officer (2)
            
            
            2008
            
            $
            83,462
            
            
            -
              -
              -
            
            $
            155,320
            
            
            -
              -
              -
            
            $
            238,782Jennifer
                S. LeBlanc
              Chief
                Financial and Acounting Officer and Secretary (3)
            
            
            2008
              2007
              2006
            
            $
              $
              $
            120,000
              120,000
              60,000
            
            
            -
              -
              -
            
            $
            24,406
            
            
            -
              -
              -
            
            $
              $
              $
            120,000
              144,406
              60,000





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


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


(3)
      Ms.
      LeBlanc was employed by the Company beginning January 9, 2006. Compensation
      shown is for the partial year.





**Outstanding
      Equity Awards at Fiscal Year-End**




The
      following table sets forth information regarding the value of stock options
      outstanding at June 30, 2008 held by each of the Named Executive Officers.
      No stock options were exercised by the Named Executive Officers in fiscal 2008.





**Name**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised Options (#)**
              **Exercisable**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options (#)**
              **Unexercisable**
            
            **Option Exercise**
              **Price ($)**
            
            **Option**
              **Expiration Date**William
                E. (Billy) Ladin, Jr.
            
            
            100,000
              22,500
            
            
            100,000
              0
            
            $
              $
            0.50
              13.19
            
            
            03/30/2017
              01/03/2010Ross
                McAlpine
            
            
            0
            
            
            250,000
            
            $
            1.00
            
            
            11/30/2017Jennifer
                LeBlanc
            
            
            50,000
            
            
            50,000
            
            $
            0.50
            
            
            03/30/2017




21





**Director
      Compensation**





**Name**
            
            **Fees Earned or**
              **Paid in Cash ($)**
            
            **Option Awards**
              **($)**
            
            **All other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**William
                E. (Billy) Ladin, Jr.
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Justin
                McClure
            
            
            16,000
            
            
            -
            
            
            -
            
            
            16,000Steven
                G. Mihaylo
            
            
            10,140
            
            
            -
            
            
            -
            
            
            10,140Ambassador
                John N. Palmer
            
            
            14,750
            
            
            -
            
            
            -
            
            
            14,750Troy
                LeMaile-Stovall
            
            
            16,000
            
            
            -
            
            
            -
            
            
            16,000





Directors
      are paid fees of $12,000 per annum for their service as members of the Board
      of
      Directors and additional meeting fees of $250 per meeting for their attendance
      at meetings of the Board of Directors or attendance at meetings of the Audit
      Committee. Mr. Mihaylo received compensation for his service as a director
      and
      member of the Audit Committee for a partial year beginning with his election
      on
      December 10, 2007.





**Employment
      Contracts**




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





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




The
      following table sets forth information as of September 1, 2008, regarding the
      beneficial ownership of each class of voting securities of the Company held
      by
      (1) each person or group known by us to own beneficially 5% or more of a
      class of voting securities, (2) each director, and Named Executive Officer
      and (3) all executive officers and directors as a group. Unless otherwise
      noted, the persons named below have sole voting and investment power with
      respect to the shares shown as beneficially owned by them, and the address
      for
      each is the corporate offices of the Company.





**Name of**
              **Beneficial Owner/Positions**
            
            **Title of Class**
            
            **Amount and Nature of Beneficial Ownership**
            
            **Percent**
              **Ownership**William
                E. (Billy) Ladin, Jr.
              Chairman
                of the Board,
              Chief
                Executive Officer and Director
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            1,002,258
              341,297
              1,343,555
            (1)
            
            5.8
              11.8
              6.6
            %
              %
              %Justin
                McClure
              Director
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            436,687
              853,242
              1,289,929
            (2)
              (2)
            
            2.5
              29.5
              6.3
            %
              %
              %Steven
                G. Mihaylo
              Director
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            4,000,000
              500,000
              4,500,000
            (3)
              (3)
            
            23.0
              17.3
              22.2
            %
              %
              %Ambassador
                John N. Palmer
              Director
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            941,646
              853,242
              1,794,888
            (4)
              (4)
            
            5.4
              29.5
              8.8
            %
              %
              %Troy
                LeMaile-Stovall
              Director
            
            
            Common
                Stock
            
            
            82,987
            (5)
            
            *Ross
                McAlpine
              President
                and Chief Operating Officer
            
            
            Common
                Stock
            
            
            0
            
            
            *Jennifer
                S. LeBlanc
              Chief
                Financial and Accounting Officer and Secretary
            
            
            Common
                Stock
            
            
            50,000
            (6)
            
            *GulfSouth
                Capital, Inc.
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            76,667
              853,242
              929,909
            (2)(4)
              (2)(4)
            
            *
              29.5
              4.6
            %
              %Arnold
                Schumsky
            
            
            Series
                A Preferred Stock
            
            
            170,648
            
            
            5.9
            %Stuart
                Sternberg
            
            
            Series
                A Preferred Stock
            
            
            511,945
            
            
            17.7
            %George
                Sturgis
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            60,000
              170,648
              230,648
            
            
            *
              5.9
              1.1
            %
              %Yvette
                Sturgis
            
            
            Series
                A Preferred Stock
            
            
            170,648
            
            
            5.9
            %2003
                Sanders Children’s Trust
            
            
            Series
                A Preferred Stock
            
            
            170,648
            
            
            5.9
            %Summit
                Growth Management, LLC
            
            
            Series
                A Preferred Stock
            
            
            500,000
            (3)
            
            17.3
            %All
                directors and executive officers as a group (seven
                persons)
            
            
            Common
                Stock
              Series
                A Preferred Stock
              Total
            
            
            6,281,578
              1,194,539
              7,476,117
            (7)
            
            36.0
              41.3
              36.8
            %
              %
              %


22





*
            Less
                than one percent.




(1)
            Includes
                options to purchase 22,500 shares of Common Stock granted to Mr.
                Ladin
                which are exercisable at $13.19 per share, and options to purchase
                100,000
                shares of Common Stock granted to Mr. Ladin which are exercisable
                at $.50
                per share.(2)
            Includes
                options to purchase 30,000 shares of Common Stock granted to Mr.
                McClure
                which are exercisable at $1.07, options to purchase 25,974 which
                are
                exercisable at $.77 and options to purchase 22,013 which are exercisable
                at $.50, 155,333 shares representing the proportionate interest in
                shares
                held by J.N. Palmer Family Partnership, in which Mr. McClure’s spouse
                has a 20% limited partner interest, 44,400 shares owned by
                Mr. McClure’s children and 76,667 shares of Common Stock and 853,242
                shares of Series A Preferred Stock owned by GulfSouth, in which
                Mr. McClure serves as an officer. Mr. McClure disclaims
                beneficial ownership of the shares owned by his spouse, his children
                and
                GulfSouth.(3)
            The
                Steven G. Mihaylo Trust, of which Mr. Mihaylo is the Trustee, owns
                all the
                shares of Common Stock, and Summit Growth Management, LLC, of which
                Mr.
                Mihaylo is the Managing Member, owns all the shares of Series A Preferred
                Stock of the Company.(4)
            Includes
                options to purchase 19,608 shares of Common Stock granted to Ambassador
                Palmer which are exercisable at $1.02, and options to purchase 40,196
                shares of Common Stock granted to Ambassador Palmer which are exercisable
                at $.50. Includes 776,667 shares held by J.N. Palmer Family Partnership,
                a
                limited partnership in which Ambassador Palmer owns a 40% limited
                partnership interest, and 76,667 shares of Common Stock and 853,242
                shares
                of Series A Preferred Stock owned by GulfSouth Capital, Inc.
                (“GulfSouth”), a private investment firm in which Ambassador Palmer serves
                as Chairman. Ambassador Palmer disclaims beneficial ownership of
                466,000
                of the shares owned by the J.N. Palmer Family Partnership and all
                of the
                shares owned by GulfSouth.(5)
            Includes
                options to purchase 30,000 shares of Common Stock which are exercisable
                at
                $1.07, options to purchase 25,974 which are exercisable at $.77 and
                options to purchase 22,013 which are exercisable at $.50 granted
                to Mr.
                LeMaile-Stovall.


23





(6)
            Includes
                options to purchase 50,000 shares of Common Stock, which are exercisable
                at $.50 granted to Ms. LeBlanc.(7)
            Includes
                (i) options to purchase 388,278 shares of Common Stock that are
                currently exercisable, (ii) 776,667 shares held by J.N. Palmer Family
                Partnership, of which Ambassador Palmer disclaims beneficial ownership
                of
                466,000 shares and Mr. McClure disclaims beneficial ownership of
                155,333 shares, (iii) 76,667 shares of Common Stock and 853,242
                shares of Series A Preferred Stock owned by GulfSouth, of which Mr.
                McClure disclaims beneficial ownership, (iv) 44,400 shares owned by
                Mr. McClure’s children and of which Mr. McClure disclaims
                ownership and (v) 4,000,000 shares of Common Stock owned by The Steven
                G.
                Mihaylo Trust, and 500,000 shares of Series A Preferred Stock by
                owned by
                Summit Growth Management, LLC..





**Equity
      Compensation Plan Information**





The
      following table sets forth information as of June 30, 2008 concerning
      shares of Common Stock that are authorized for issuance under our equity
      compensation plans.





**Plan Category**
            
            **Number of securities**
              **to be issued**
              **upon exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **Weighted-average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **Number of securities**
              **remaining available for**
              **future issuance under**
              **equity compensation plans**Equity
                compensation plans approved by security holders(1)
            
            
            1,259,500
            
            $
            0.92
            
            
            901,556Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            1,259,500
            
            $
            0.92
            
            
            901,556





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




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




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





On
      October 17, 2007, the Company sold 2,889,076 shares of Series A Preferred Stock
      for a per share purchase price of $0.586 and an aggregate purchase price of
      $1,693,000, in a privately-negotiated transaction. Mr. Ladin and Ambassador
      Palmer participated in the sale as purchasers and the consideration paid by
      them
      included, in addition to cash, the cancellation of the Notes. GulfSouth, a
      private investment firm owned by Ambassador Palmer and of which Justin McClure,
      a director of the Company, is the president, also participated in the sale
      as a
      purchaser. More details of this transaction are contained in the Current Report
      of the Company on Form 8-K filed with the SEC on October 23, 2007.





On
      December 10, 2007, the Company sold 4,000,000 shares of Common Stock for a
      per
      share purchase price of $1.00 and an aggregate purchase price of $4,000,000
      in a
      privately-negotiated transaction which is fully described in Note 8 of the
      Notes
      to Consolidated Financial Statements of the Company. All shares were purchased
      by The Steven G. Mihaylo Trust. Mr. Mihaylo is the sole trustee of that trust
      and is a director of the Company. More details of this transaction are contained
      in the Current Report of the Company on Form 8-K filed with the SEC on December
      11, 2007.





We
      have a
      policy providing that all transactions between us and related parties are
      subject to approval by a majority of all disinterested directors and must be
      on
      terms no less favorable than those that could otherwise be obtained from
      unrelated third parties. The transactions referred to above were approved by
      a
      majority of all disinterested directors.





24




Messrs.
      McClure, Mihaylo, Palmer and Stovall are independent directors, as defined
      by
      Rule 4200(a)(15) of the NASD’s listing standards. Mr. Ladin is not
      independent because he is currently employed by the Company as its Chief
      Executive Officer.


25




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





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




**Exhibit**
            
            **Description**3.1
              3.2
              3.3
              3.4
            
            Articles
                of Incorporation (1)
              Statement
                of Resolution of Series A Preferred Stock(2)
              Statement
                of Resolution of Series A Preferred Stock(2)
              Statement
                of Resolution of Series B Preferred Stock(2)3.2
            
            Bylaws,
                as amended (3)4.1
            
            Rights
                Agreement dated as of August 9, 2004, between Registrant and American
                Stock Transfer & Trust Company, as Rights Agent (4)4.2
              4.3
              4.4
            
            Amendment
                No. 1 to Rights Agreement dated as of December 10, 2007 (5)
              Purchase
                Agreement dated as of October 17, 2007 (2)
              Registration
                Rights Agreement dated as of October 17, 2007 (2)4.5
            
            Securities
                Purchase Agreement between Internet America, Inc. and the Investor
                named
                therein dated as of December 10, 2007 (5)4.6
            
            Registration
                Rights Agreement between Internet America, Inc. and the Investor
                named
                therein dated as of December 10, 2007 (5)10.1
            
            Stock
                Purchase Agreement between Registrant and TeleShare Communications
                Services, Inc. dated July 27, 2007 (6)10.2
            
            Internet
                America, Inc. 2007 Stock Option Plan (7)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of William E. Ladin,
                Jr.*31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Jennifer S.
                LeBlanc*32.1
            
            Section
                1350 Certification of William E. Ladin, Jr.*32.2
            
            Section
                1350 Certification of Jennifer S.
                LeBlanc*





*Filed herewith





(1)
            Incorporated
                by reference to exhibits 3.1 and 3.2 to Registration Statement on
                Form
                SB-2 as amended (file no. 333-59527) initially filed on July 21,
                1998.(2)
            Incorporated
                by reference to exhibits 4.1 through 4.5 to Form 8-K filed on October
                23,
                2007 (file no. 0001144204-07-055892)(3)
            Incorporated
                by reference to exhibits 3.3 and 3.4 to Registration Statement on
                Form
                SB-2, as amended (file no. 333-59527) initially filed on July 21,
                1998,
                and to exhibit 3.3 to Form 10-QSB filed on November 15,
                1999.(4)
            Incorporated
                by reference to exhibit 1 to Registration Statement on Form 8-A (file
                no.
                001-32273) filed on August 11, 2004.(5)
            Incorporated
                by reference to exhibits 4.1 through 4.3 to Form 8-K filed on December
                11,
                2007 (file no. 0001144204-07-066863)(6)
            Incorporated
                by reference to exhibit 99.1 to Form 8-K (file no. 0001144204-07-039539)
                filed August 1, 2007.(7)
            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***




**Audit
      Fees**





The
      firm
      of Pannell Kerr Forster of Texas, P.C. (“PKF”), our independent principal
      auditors, has billed us aggregate fees of approximately $131,000 for
      professional services rendered for the audit of our financial statements for
      the
      year ended June 30, 2008 and for the reviews of our financial statements
      included in our Forms 10-QSB for that year. PKF billed us $105,000 for
      professional services rendered for the audit of our financial statements for
      the
      year ended June 30, 2007 and for the reviews of our financial statements
      included in our Forms 10-QSB for that year. We incurred no other fees to PKF
      for
      audit or other services in fiscal years 2007 and 2008.





**Audit
      Related Fees**





There
      were no fees billed for audit-related services not disclosed in “Audit Fees”
above.


26


**Tax
      Fees**




No
      tax
      fees were billed for services by the Company’s independent registered public
      accounting firm in fiscal years 2007 and 2008.




**All
      Other Fees**




No
      other
      fees were billed for services rendered by the Company’s independent registered
      public accounting firm for fiscal years 2007 and 2008.




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




The
      Audit
      Committee has adopted pre-approval policies and procedures pursuant to which
      the
      engagement of any independent registered public accounting firm is approved.
      Such procedures govern the ways in which the Audit Committee will pre-approve
      audit and various categories of non-audit services that the auditor provides
      to
      the Company. In accordance with this policy, the Audit Committee has given
      its
      approval for the provision of audit services by PKF for the fiscal year ending
      June 30, 2008. Services which have not received pre-approval must receive
      specific approval of the Audit Committee. The Audit Committee is informed of
      each such engagement in a timely manner, and such procedures do not include
      delegation of the Audit Committee’s responsibilities to management. All of the
      audit services which were performed by PKF in fiscal 2008 and 2007 were
      pre-approved by the audit committee.





**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 2nd day of October, 2008.





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 ChiefWilliam
                E. (Billy) Ladin, Jr.
            
            Executive
                Officer
            
            October
                02, 2008/s/
                Troy LeMaile-StovallTroy
                LeMaile-Stovall
            
            Director
            
            October
                02, 2008/s/
                Justin McClureJustin
                McClure
            
            Director
            
            October
                02, 2008/s/
                John PalmerJohn
                Palmer
            
            Director
            
            October
                02, 2008/s/
                Steven G. MihayloSteven
                G. Mihaylo
            
            Director
            
            October
                02, 2008




27





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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


F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Shareholders of


Internet
      America, Inc.


Houston,
      Texas




We
      have
      audited the accompanying consolidated balance sheet of Internet America, Inc.
      and subsidiaries (the “Company”) as of June 30, 2008, and the related
      consolidated statements of operations, shareholders’ equity, and cash flows for
      the years ended June 30, 2008 and 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 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, 2008 and 2007,
      and the results of its operations and cash flows for the years ended June 30,
      2008 and 2007, in conformity with U. S. generally accepted accounting
      principles.





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





Houston,
      Texas


October
      2, 2008


F-2





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEET**





June
                30,2008ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            3,911,680Restricted
                cash
            
            
            6,432Accounts
                receivable, net of allowance for uncollectible accounts of
                $5,863
            
            
            170,231Inventory
            
            
            285,410Prepaid
                expenses and other current assets
            
            
            610,865Total
                current assets
            
            
            4,984,618Property
                and equipment, net
            
            
            2,328,954Goodwill
            
            
            3,533,127Subscriber
                acquisition costs, net
            
            
            1,310,537Other
                assets, net
            
            
            38,087TOTAL
            
            $
            12,195,323LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            204,056Accrued
                liabilities
            
            
            654,187Deferred
                revenue
            
            
            1,271,901Current
                portion of long-term debt
            
            
            620,585Total
                current liabilities
            
            
            2,750,729Long-term
                debt, net of current portion
            
            
            1,331,096Minority
                interest in subsidiary
            
            
            5,696Total
                liabilities
            
            
            4,087,521COMMITMENTS
                AND CONTINGENCIES
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock $.01 par value: 5,000,000 shares authorized, 2,889,076 issued
                and
                outstanding, aggregate liquidation preference of
                $1,693,000
            
            
            28,891Common
                stock, $.01 par value: 40,000,000 shares authorized, 16,857,031 issued
                and
                outstanding
            
            
            168,571Additional
                paid-in capital
            
            
            63,588,884Accumulated
                deficit
            
            
            (55,678,544
            )Total
                shareholders' equity
            
            
            8,107,802TOTAL
            
            $
            12,195,323





See
      notes
      to consolidated financial statements.


F-3





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Year
                Ended June 30,2008
            
            2007REVENUES:Internet
                services
            
            $
            8,430,931
            
            $
            7,984,786Other
            
            
            346,102
            
            
            -Total
            
            
            8,777,033
            
            
            7,984,786OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            5,924,638
            
            
            4,995,030Sales
                and marketing
            
            
            504,261
            
            
            209,427General
                and administrative
            
            
            3,371,005
            
            
            2,323,425Provision
                for bad debt (recoveries) expense
            
            
            (679
            )
            
            3,993Depreciation
                and amortization
            
            
            1,172,974
            
            
            790,518Impairment
                loss
            
            
            780,000
            
            
            -Total
            
            
            11,752,199
            
            
            8,322,393LOSS
                FROM OPERATIONS
            
            
            (2,975,166
            )
            
            (337,607
            )INTEREST
                INCOME
            
            
            87,251
            
            
            24,641INTEREST
                EXPENSE
            
            
            (112,432
            )
            
            (34,164
            )Minority
                interest in loss of consolidated subsidiary
            
            
            724
            
            
            -NET
                LOSS, BEFORE INCOME TAXES
            
            
            (2,999,623
            )
            
            (347,130
            )INCOME
                TAX EXPENSE
            
            
            -
            
            
            -NET
                LOSS
            
            $
            (2,999,623
            )
            $
            (347,130
            )NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.20
            )
            $
            (0.03
            )DILUTED
            
            $
            (0.20
            )
            $
            (0.03
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            14,978,681
            
            
            12,508,914DILUTED
            
            
            14,978,681
            
            
            12,508,914





See
      notes
      to consolidated financial statements.


F-4





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**





**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Accumulated**
            
            **Shareholders'****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Equity**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
            )
            
            4,608,148Issuance
                of preferred stock
            
            
            2,889,076
            
            
            28,891
            
            
            -
            
            
            -
            
            
            1,578,292
            
            
            -
            
            
            1,607,183Issuance
                of common stock
            
            
            -
            
            
            -
            
            
            4,348,117
            
            
            43,482
            
            
            4,714,586
            
            
            -
            
            
            4,758,068Stock
                compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            134,026
            
            
            -
            
            
            134,026Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,999,623
            )
            
            (2,999,623
            )BALANCE,
                JUNE 30, 2008
            
            
            2,889,076
            
            $
            28,891
            
            
            16,857,031
            
            $
            168,571
            
            $
            63,588,884
            
            $
            (55,678,544
            )
            $
            8,107,802





See
      notes
      to consolidated financial statements.




F-5





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Year
                ended June 30,2008
            
            2007OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (2,999,623
            )
            $
            (347,130
            )Adjustments
                to reconcile net income to net cash (used in) provided by operating
                activities:Minority
                interest
            
            
            (724
            )
            
            -Depreciation
                and amortization
            
            
            1,172,974
            
            
            790,518Impairment
                loss
            
            
            780,000
            
            
            -Gain
                on disposal of fixed assets
            
            
            -
            
            
            (21,637
            )Provision
                for bad debt (recoveries) expense
            
            
            (679
            )
            
            3,993Non-cash
                stock compensation expense
            
            
            134,026
            
            
            100,028Changes
                in operating assets and liabilities (net of effects of assets acquired,
                less liabilities assumed):Accounts
                receivable
            
            
            16,722
            
            
            (841
            )Inventory
            
            
            140,503
            
            
            22,575Prepaid
                expenses and other current assets
            
            
            (110,106
            )
            
            (185,695
            )Other
                assets
            
            
            (37,003
            )
            
            2,289Other
                long-term liabilities
            
            
            -
            
            
            (47,320
            )Accounts
                payable and accrued liabilities
            
            
            (337,689
            )
            
            54,739Deferred
                revenue
            
            
            4,363
            
            
            (87,898
            )Net
                cash (used in) provided by operating activities
            
            
            (1,237,236
            )
            
            283,621INVESTING
                ACTIVITIES:Purchases
                of property and equipment, net
            
            
            (1,190,290
            )
            
            (319,707
            )Change
                in restricted cash
            
            
            (6,432
            )
            
            -Cash
                received from (paid for) acquisitions
            
            
            655,102
            
            
            (265,785
            )Net
                cash used in investing activities
            
            
            (541,620
            )
            
            (585,492
            )FINANCING
                ACTIVITIES:Net
                proceeds from issuance of common stock
            
            
            3,987,625
            
            
            -Net
                proceeds from issuance of preferred stock
            
            
            1,307,183
            
            
            -Proceeds
                from issuance of long term debt
            
            
            71,787
            
            
            302,553Principal
                payments under capital lease obligations
            
            
            -
            
            
            (58,227
            )Principal
                payments of long-term debt
            
            
            (458,946
            )
            
            (96,969
            )Net
                cash provided by financing activities
            
            
            4,907,649
            
            
            147,357NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            3,128,793
            
            
            (154,514
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            782,887
            
            
            937,401CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            3,911,680
            
            $
            782,887SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            109,966
            
            $
            23,602





See
      notes
      to consolidated financial statements.


F-6





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





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





Year
                ended June 30,2008
            
            2007NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Stock
                issued in connection with acquisitions
            
            $
            770,443
            
            $
            -Debt
                assumed in connection with acquisitions
            
            $
            -
            
            $
            100,529Debt
                issued in connection with acquisitions, net
            
            $
            863,500
            
            $
            347,572Non-cash
                adjustments for final purchase accounting in connection with
                acquisitions
            
            $
            137,175
            
            $
            -Non
                cash change in lease classification
            
            $
            -
            
            $
            126,507Minority
                interest liability
            
            $
            5,696
            
            $
            -Borrowings
                extinguished for preferred stock
            
            $
            300,000
            
            $
            -





See
      notes
      to consolidated financial statements.


F-7





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Years
      Ended June 30, 2008 and 2007**





**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, 2008
      and has experienced continued declines in subscribers since fiscal 2002. The
      Company’s operations are subject to certain risks and uncertainties, including
      that the rural customer base will not increase at the expected rate; the
      difficulty of identifying and acquiring wireless Internet customers and
      infrastructure on attractive terms and of integrating those acquisitions into
      its operations; the availability of needed financing; competition with existing
      or new competitors; changes in industry pricing or technological developments
      impacting the Internet; dependence on network infrastructure, telecommunications
      providers and other vendors; service interruptions or impediments; and the
      inability to hire and retain qualified personnel. The stock price has been
      volatile historically and may continue to be volatile. There can be no assurance
      that the Company will be successful in achieving profitability and positive
      cash
      flow in the future.





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





*Reclassifications* —
Certain
      reclassifications have been made to the 2007 financial statements to conform
      to
      the 2008 presentation. These classifications had no effect on 2007 net loss
      or
      shareholders’ equity.





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





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





During
      the year ended June 30, 2008, the Company recorded bad debt recoveries of
      approximately $1,000. For the year ended June 30, 2007, the Company recorded
      a
      provision for bad debt expense totaling approximately $4,000. 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.





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





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





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


F-8





*Goodwill* — Goodwill
      is the excess acquisition costs of a business over the fair value of the
      identifiable net assets acquired. Under Statement of Financial Accounting
      Standards (“SFAS”) No. 142, “ *Goodwill
      and Other Intangible Assets,* ”
      goodwill is no longer amortized but is subject to annual impairment tests.
      Other
      identifiable assets with definite lives continue to be amortized over their
      useful lives. Accordingly,
      the Company reviews goodwill for impairment annually and/or if events or changes
      in circumstances indicate the carrying value of goodwill may have been impaired.
      The Company reviews intangible assets with definite lives for impairment
      whenever conditions arise that indicate the carrying value may not be
      recoverable, such as economic downturn in a market or a change in the assessment
      of future operations.




The
      SFAS
      No. 142 goodwill impairment model is a two-step process. The first step is
      used
      to identify a potential impairment by comparing the fair value of a reporting
      unit with its net book value (or carrying amount), including goodwill. If the
      fair value exceeds the carrying amount, goodwill of the reporting unit is not
      considered impaired and the second step of the impairment test is unnecessary.
      If the carrying amount of the reporting unit exceeds its fair value, the second
      step of the goodwill impairment test compares the implied value of the reporting
      unit’s goodwill with the carrying amount of that goodwill. If the carrying
      amount exceeds the implied fair value, an impairment loss is recognized in
      an
      amount equal to that excess. The implied fair value of goodwill is determined
      in
      the same manner as the amount of goodwill recognized in a business combination.
      That is, the fair value of the reporting unit is allocated to all the assets
      and
      liabilities of that unit (including any previously unrecognized intangible
      assets) as if the reporting unit had been acquired in a business combination
      and
      the fair value of the reporting unit was the purchase price paid to acquire
      the
      reporting unit.





Determining
      the fair value of a reporting unit under the first step of the goodwill
      impairment test, and determining the fair value of individual assets and
      liabilities of a reporting unit (including previously unrecognized intangible
      assets) under the second test of the goodwill impairment test, is judgmental
      in
      nature and often involves significant estimates and assumptions. These estimates
      and assumptions could have a significant impact on whether an impairment charge
      is recognized and the magnitude of any such charge. Estimates of fair value
      are
      primarily determined using future net cash flows discounted at 5.50% and
      are based on management’s best estimate and general market conditions. This
      approach uses significant assumptions, including projected future earnings
      and
      a subscription growth rate.




Goodwill
      was recorded in the acquisition of NeoSoft, Inc. and PDQ.Net, Inc., whose
      dial-up subscribers have continued to decline. Accordingly, the Company recorded
      $780,000 as impairment of goodwill related to potential reduction in future
      cash
      flows from these acquisitions during the year ended June 30, 2008. The Company
      concluded that no impairment of goodwill occurred during the year ended June
      30,
      2007.




*Subscriber
      Acquisition Costs* —
      Subscriber acquisition costs primarily relate to acquisitions completed during
      the years ended June 30, 2006, 2007 and 2008. The Company allocates the purchase
      price to acquired subscriber bases and goodwill based on fair value at the
      time
      of acquisition. Subscriber acquisition costs are amortized over the average
      life
      of a customer which is estimated at 48 months. 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.





*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,
      2008.




*Stock-Based
      Compensation* —
On
      July
      1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
      Payment,”(“SFAS 123(R)”) which requires the measurement and recognition of
      compensation expense for all share-based payment awards made to employees and
      directors including employee stock options based on estimated fair values.
      SFAS
      123(R) supersedes the Company’s previous accounting under Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for
      periods beginning in fiscal 2006. In March 2005, the Securities and Exchange
      Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
      123(R). The Company has applied the provisions of SAB 107 in its adoption of
      SFAS 123(R).


F-9





The
      fair
      value of each option granted during the year ended June 30, 2008 is estimated
      to
      range from $0.26 to $0.72 using the Black-Scholes pricing model with the
      following assumptions: option term until exercise of 4 years, volatility ranging
      from 243% to 253%, risk-free interest rate ranging from 2.8% to 4.6%, 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, 2008, the total compensation costs related to non-vested awards not
      yet
      recognized is approximately $230,000. 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, 2008 and
      2007.





*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, 2008 and 2007 were
      approximately $132,000 and $65,000, respectively. The Company focuses primarily
      on a direct mail form of advertising.





*Income
      Taxes* —
      Deferred tax assets and liabilities are determined using the asset and liability
      method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under
      this method, deferred tax assets and liabilities are established for future
      tax
      consequences of temporary differences between the financial statement carrying
      amounts of assets and liabilities and their tax basis. Deferred tax assets
      and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to
      reverse.




On July
      1, 2007, the Company adopted Financial
      Accounting Standard Board (“FASB”) Interpretation No. 48 “Accounting for
      Uncertainty in Income Taxes”, and as a result management assessed its various
      income tax positions, and this assessment resulted in no adjustment to the
      tax
      asset or liability. The preparation of our various tax returns requires the
      use
      of estimates for federal and state income tax purposes. These estimates may
      be
      subjected to review by the respective taxing authorities. A revision, if any,
      to
      an estimate may result in an assessment of additional taxes, penalties and
      interest. At this time, a range in which our estimates may change is not
      quantifiable and a change, if any, is not expected to be material. We will
      account for interest and penalties relating to uncertain tax positions in the
      current period income statement, as necessary. The 2004, 2005 and 2006 tax
      years
      remain subject to examination by various federal and state tax
      jurisdictions.




*Basic
      and Diluted Net Income Per Share* —
Basic
      earnings per share is computed using the weighted average number of common
      shares outstanding and excludes any anti-dilutive effects of options, warrants
      and convertible securities. Diluted earnings per share reflects the potential
      dilution that could occur upon exercise or conversion of these instruments.





During
      the year ended June 30, 2008, no options were included in the computation of
      diluted earnings per share because the options were not “in the money” based on
      the average market price for the year then ended. For the year ended June 30,
      2007 options to purchase 326,141 shares of common stock 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 year then ended.





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





*New
      accounting standards* — In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities," which provides companies with
      an
      option to report selected financial assets and liabilities at fair value. SFAS
      No. 159 also establishes presentation and disclosure requirements designed
      to facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. SFAS No. 159 is
      effective as of the beginning of an entity's first fiscal year beginning after
      November 15, 2007. The Company is currently assessing the impact of the
      adoption of this standard on its financial statements.




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


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





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


F-10




*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, 2008 and
      2007.





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





On
      July
      27, 2007, Internet America acquired substantially all of the outstanding shares
      of TeleShare Communications Services, Inc. (“TeleShare”) from Mark Ocker and
      Cynthia Ocker for $1,850,000, payable in shares of Company common stock and
      a
      note, and subject to certain adjustments 90 days after closing. TeleShare,
      based
      in Crosby, Texas, serves approximately 1,500 wireless broadband Internet service
      customers and provides telex messaging services. On October 25, 2007, the final
      adjustments to the TeleShare acquisition were determined, and the Company issued
      a note payable for approximately $864,000 and 298,117 shares of Common Stock
      to
      the former owners of TeleShare.




TeleShare
      had a loan commitment under a program administered by the Rural Utilities
      Service of the United States Department of Agriculture (the “RUS”). Under the
      program administered by the RUS, Internet America assumed a loan commitment
      of
      approximately $4 million with approximately $3 million still available for
      providing financial assistance for the expansion of broadband services in rural
      areas.





During
      the year ended June 30, 2007, the Company completed the acquisition of assets
      of
      three wireless broadband Internet service providers. During the year ended
      June
      30, 2008, in accordance with these asset purchase agreements, the Company
      adjusted the purchase price to reflect certain adjustments to the total
      consideration. The approximate adjusted amounts are summarized
      below:





June
                30,2008
            
            2007Purchase
                price:Cash
            
            $
            266,000
            
            $
            266,000Assumed
                liabilities
            
            
            65,000
            
            
            72,000Notes
                (net of imputed interest of $8,000)
            
            
            218,000
            
            
            348,000Assumption
                of long term debt
            
            
            100,000
            
            
            100,000Total
            
            $
            649,000
            
            $
            786,000Allocation
                of purchase price:Fixed
                assets and inventory
            
            $
            120,000
            
            $
            134,000Subscriber
                acquisition cost
            
            
            529,000
            
            
            652,000Total
            
            $
            649,000
            
            $
            786,000




F-11


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





Property
      and equipment consist of:





June
                30,2008Land
            
            $
            30,000Infrastructure
                in progress
            
            $
            145,824Depreciable
                assets:Data
                communications and office equipment
            
            $
            8,178,965Computer
                software
            
            
            782,441Furniture
                and fixtures
            
            
            260,886Leasehold
                improvements
            
            
            21,777Building
            
            
            20,4509,264,519Less
                accumulated depreciation and amortization
            
            
            (7,111,389
            )$
            2,153,130$
            2,328,954





The
      Company owns land in Victoria, Texas; this property includes an office for
      Southwest Texas operations and a tower used in our wireless network.
      Infrastructure in progress relates to wireless equipment which was purchased
      by
      the Company for near future improvement and upgrades to its existing wireless
      networks. The equipment will be included in data communications equipment and
      depreciated when placed in service.





Depreciation
      expense charged to operations was approximately $678,000 and $552,000 for the
      years ended June 30, 2008 and 2007, respectively.


F-12





**4.** ***Goodwill,
      Subscriber Acquisition Costs and Other Assets***





Pursuant
      to SFAS No. 142, the Company performs an impairment test annually during
      the fourth quarter of its fiscal year or when events and circumstances indicate
      goodwill might be permanently impaired. Accordingly, during the year ended
      June
      30, 2008, the Company recorded $780,000 as impairment of goodwill related to
      potential reduction in future cash flows from the acquisitions of NeoSoft and
      PDQ.Net. The Company concluded that no impairment of goodwill occurred during
      the year ended June 30, 2007.




The
      Company allocates the purchase price for acquisitions to acquired subscriber
      bases and goodwill based on fair value at the time of acquisition. The Company
      did not record increases in goodwill during the years ended June 30, 2008 or
      2007. Subscriber acquisition costs increased by approximately $1,036,000, during
      the year ended June 30, 2008 due to the acquisition of TeleShare. Subscriber
      acquisition costs were adjusted by a decrease of approximately $123,000, due
      to
      purchase price adjustments on acquisitions completed during the year ended
      June
      30, 2007, as described more fully in Note 2.





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. Total subscriber acquisition
      costs were approximately $2,818,000 and $1,896,000 for the year ended June
      30,
      2008 and 2007, respectively. Amortization expense for the year ended June 30,
      2008 and 2007 was approximately $495,000 and $238,000, respectively. Subscriber
      acquisition costs related to the NeoSoft and PDQ acquisitions were fully
      amortized as of June 30, 2002. As of June 30, 2008, expected amortization
      expense for the fiscal years ended is as follows:





2009
            
            $
            485,0002010
            
            
            427,0002011
            
            
            394,0002012
            
            
            4,0002013
                and thereafter
            
            
            -Total
                expected amortization expense
            
            $
            1,310,000





Other
      assets consist of deposits on leaseholds and services.




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





Accrued
      liabilities consist of:





June
                30,2008Property,
                franchise and sales tax expenses
            
            $
            191,772Employee
                wages and benefits
            
            
            209,698Professional
                fees
            
            
            119,451Accrued
                payable on abandoned lease
            
            
            87,765Investor
                relations and communication fees
            
            
            22,078Deferred
                rent
            
            
            10,314Interest
            
            
            9,109Other
            
            
            4,000$
            654,187




F-13





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





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





Note
                payable due July 19, 2009, payable in quarterly payments of $7,751
                with interest imputed at 9% (net of unamortized discount of
                $7,307)
            
            $
            62,452Note
                payable due January 23, 2011 payable in bi-annual installments of
                $13,917 with interest imputed at 8% (net of unamortized discount
                of
                $4,728)
            
            
            23,106Note
                payable due August 8, 2010, payable in monthly installments of $1,033
                beginning October 8, 2008 with interest imputed at 5% (net of unamortized
                discount of $2,540)
            
            
            21,219Note
                payable due June 20, 2012, payable in monthly installments of $2,088
                with
                interest imputed at 9% (net of unamortized discount of
                $16,324)
            
            
            83,900Note
                payable due July 20, 2010, payable in monthly installments of $1,818
                with
                interest imputed at 6.5% (net of unamortized discount of
                $3,058)
            
            
            42,392Note
                payable due July 20, 2010, payable in monthly installments of $1,409
                with
                interest imputed at 6.5% (net of unamortized discount of
                $2,370)
            
            
            32,855Amount
                payable due in equal quarterly installments beginning 120 days from
                issuance of note with interest payable at a rate to be determined
                by the
                12-month LIBOR rate at date of note issuance
            
            
            95,324Note
                payable due December 23, 2010, payable in monthly payments of $26,199
                with
                interest imputed at 5.5% (net of unamortized discount of
                $50,887)
            
            
            735,083Loan
                and Security Agreement with United States Department of Agriculture
                Rural
                Utilities Service, due in equal monthly installments over 84 months
                payable in monthly installments of $19,536 including interest at
                4.9%
            
            
            845,266Note
                payable due February 12, 2009 payable in monthly installments of
                $1,261
            
            
            10,0841,951,681Less
                current portion
            
            
            (620,585
            )Long-term
                debt, net of current portion
            
            $
            1,331,096







As
      of
      June 30, 2008, the Company’s long-term debt which is secured by certain
      inventory and equipment and certificates of deposit totaled approximately
      $1,681,000. The prime rate at June 30, 2008 was 5%. The direct cost of money
      rate applied to the RUS loan on the date of borrowing is equal to the cost
      of
      borrowing of the Department of Treasury for 7 year obligations. At June 30,
      2008, the direct cost of money rate on borrowings to date averaged 4.9%
      .




The
      following is a schedule by fiscal years of the principal payments under these
      agreements as of June 30, 2008.




2009
            
            $
            620,5852010
            
            
            647,6462011
            
            
            438,1112012
            
            
            245,339Thereafter
            
            
            -Total
                principal payments
            
            $
            1,951,681




F-14





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





In
      the
      normal course of business, the Company enters into telephone and internet
      backbone connectivity contracts with various vendors. The Company’s minimum
      annual obligations under these contracts are listed below.





The
      Company leases certain of its facilities including tower space under operating
      leases. Rental expense under these leases was approximately $953,000, and
      $547,000 for the years ended June 30, 2008 and 2007, respectively. Future
      minimum lease payments on facilities operating leases and telecommunications
      contracts at June 30, 2008, are listed below.





2009
            
            2010
            
            2011
            
            2012
            
            2013
            
            Thereafter
            
            TotalConnectivity
                contracts
            
            $
            791,000
            
            $
            737,000
            
            $
            270,000
            
            $
            23,000
            
            $
            -
            
            $
            -
            
            $
            1,821,000Operating
                leases
            
            
            531,000
            
            
            401,000
            
            
            361,000
            
            
            281,000
            
            
            132,000
            
            
            12,000
            
            
            1,718,000$
            1,322,000
            
            $
            1,138,000
            
            $
            631,000
            
            $
            304,000
            
            $
            132,000
            
            $
            12,000
            
            $
            3,539,000





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





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





*Earnings
      Per Share* —
There
      were no “in the money” options as of June 30, 2008 or June 30,
      2007.





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





On
      October 17, 2007, the Company entered into a Purchase Agreement (the “October
      Agreement”) with certain purchasers (the “Purchasers”), pursuant to which the
      Company sold 2,889,076 shares of a newly designated Series A Preferred Stock,
      for a per share purchase price of $0.586 and an aggregate purchase price of
      $1,693,000, in a privately-negotiated transaction. Mr. Ladin, the Chairman
      of
      the Board and Chief Executive Officer of the Company, and Ambassador Palmer,
      a
      director of the Company, participated in the sale as Purchasers, as described
      in
      Note 11.





Each
      share of Series A Preferred Stock is convertible at any time, at the option
      of
      the holder, into one share of Company common stock. The Series A Preferred
      Stock
      is subject to mandatory conversion, at the option of the Company, in the event
      that the per share trading price of the Company’s common stock is equal to or
      greater than $3.00 per share for 90 consecutive trading days. The Series A
      Preferred Stock has a liquidation preference of $0.586 per share, plus all
      accrued but unpaid dividends thereon, whether or not earnings are available
      in
      respect of such dividends and whether or not such dividends have been declared.
      The holders of Series A Preferred Stock shall be entitled to receive out of
      the
      assets of the Company, when and if declared by the Board out of funds legally
      available for that purpose, cumulative cash dividends at a rate of 10% per
      annum
      for each share of Series A Preferred Stock. Such dividends are cumulative from
      the date the Series A Preferred Stock is issued and payable in arrears, when
      and
      as declared by the Board, quarterly. Cumulative dividends in arrears were
      approximately $121,044 at June 30, 2008. The holders of the Series A Preferred
      Stock are entitled to vote on an as-converted basis with the Common Stock,
      and
      separately with respect to specified corporate acts that would adversely affect
      the Series A Preferred Stock. In connection with the October Agreement, the
      Company and the Purchasers entered into a Registration Rights Agreement,
      pursuant to which the Company agreed to grant “piggyback” registration rights to
      the Purchasers.


F-15


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





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





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




*Employee
      Stock Purchase Plan* —
      Effective April 30, 1999, the Company's Board of Directors adopted the Employee
      Stock Purchase Plan (the "Purchase Plan"), which initially provided for the
      issuance of a maximum of 200,000 shares of Common Stock and was initially
      approved by the Company’s shareholders on November 4, 1999. In fiscal 2002, the
      Board of Directors approved an amendment including the reservation of an
      additional 500,000 shares for issuance under the Purchase Plan, which amendment
      was approved by the shareholders on November 11, 2002. Eligible employees can
      have up to 15% of their earnings withheld, up to certain maximums, to be used
      to
      purchase shares of the Company's Common Stock on every July 1, October 1,
      January 1 and April 1. The price of the Common Stock purchased under the
      Purchase Plan will be equal to 85% of the lower of the fair market value of
      the
      Common Stock on the commencement date of each three-month offering period or
      the
      specified purchase date. During April 2006, the Company temporarily suspended
      future purchases in the Purchase Plan due to lack of employee participation.
      There were no shares purchased by employees under this plan during the years
      ended June 30, 2008 and 2007. At June 30, 2008, 155,959 shares were available
      under the Purchase Plan for future issuance.





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





The
      maximum term of options granted under the 1998 Option Plan is ten years. Options
      granted under the 1998 Option Plan are in most cases nontransferable and
      generally expire within 30 days after the termination of the optionee's
      services, except in cases when the optionee is terminated "for cause" (as such
      term is defined therein). In such cases, the option typically expires
      automatically on the date of termination. In general, if an optionee is disabled
      or dies, such option may be exercised up to 12 months following such disability
      or death. In general, if an optionee retires from his or her service to us,
      such
      option may be exercised up to three months following such retirement, unless
      the
      Compensation Committee determines to allow a longer period for exercise. The
      Company has 29,500 options outstanding to its employees under the 1998 Option
      Plan at June 30, 2008. 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, 2008 or 2007.


F-16





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





On
      October 26, 2004, the Board of Directors adopted the 2004 Non-Employee Director
      Plan (the “2004 Option Plan”) specifically to grant stock to non-employee
      directors. The maximum term of options granted under the 2004 Option Plan is
      ten
      years. Options granted under the 2004 Option Plan are nontransferable and expire
      upon the termination of the director’s service on the Board of Directors. A
      total of 600,000 shares of common stock were reserved for issuance under the
      2004 Option Plan. In connection with the adoption of the 2007 Stock Option
      Plan,
      described below, the Board of Directors amended the 2004 Non-Employee Director
      Plan to reduce the number of shares available for issuance upon the exercise
      of
      options under that plan from 600,000 to 131,556, being the number of shares
      covered by outstanding options granted under that plan as of March 30, 2007.
      The
      Company currently has 131,556 options outstanding to its non-employee directors
      under the 2004 Option Plan at June 30, 2008. These options are exercisable
      at
      prices ranging from $0.77 to $1.07 per share of common stock.





On
      March
      30, 2007, the Board of Directors adopted the 2007 Stock Option Plan (“2007
      Plan”) under which options to purchase up to 2,000,000 shares may be granted as
      incentive and nonqualified stock options to employees, executives and directors.
      Options to purchase the following number of shares are outstanding to the
      category of persons indicated as of June 30, 2008: an aggregate of 168,444
      shares to directors, 550,000 shares to executive officers and 380,000 shares
      to
      non-executive employees. These options are exercisable at prices ranging from
      $0.50 to $1.00 per share of common stock.





A
      summary
      of the status of the Company's stock options as of June 30, 2008 and 2007 and
      changes during the years ended on those dates is presented below:





June
                30, 2008
            
            June
                30, 2007Weighted
              Average
              Exercise
            
            
            
            Weighted
              Average
              ExerciseShares
            
            Price
            
            Shares
            
            PriceOutstanding
                at beginning of period
            
            
            980,076
            
            $
            0.93
            
            
            263,301
            
            $
            2.37Granted
            
            
            475,000
            
            
            0.77
            
            
            803,444
            
            
            0.50Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (195,576
            )
            
            0.59
            
            
            (86,669
            )
            
            1.29Outstanding
                at end of period
            
            
            1,259,500
            
            
            0.92
            
            
            980,076
            
            
            0.93Options
                exercisable at year end
            
            
            567,778
            
            
            1.21
            
            
            326,141
            
            
            1.74





The
      following table summarizes information about stock options outstanding at June
      30, 2008:





Number Outstanding
            
            Weighted-Average
              RemainingContractual
            
            Number ExercisableExercise Price
            
            at 6/30/08
            
            Life as of 6/30/08 (Years)
            
            at 6/30/08$ 0.50
            
            
            838,444
            
            
            8.80
            
            
            406,722$
                0.77
            
            
            51,948
            
            
            1.81
            
            
            51,948$
                1.00
            
            
            260,000
            
            
            8.79
            
            
            -$
                1.02
            
            
            19,608
            
            
            1.62
            
            
            19,608$
                1.07
            
            
            60,000
            
            
            1.33
            
            
            60,000$
                9.25
            
            
            7,000
            
            
            1.46
            
            
            7,000$
                13.19
            
            
            22,500
            
            
            1.51
            
            
            22,5001,259,500
            
            
            
            
            
            567,778




F-17





A
      summary
      of the Company’s non-vested options as of June 30, 2008 and changes during
      fiscal 2008 is presented as follows:





Weighted-Average
              Fair ValueNon-vestedoptions
            
            at
                Grant DateNon-vested
                at June 30, 2007
            
            
            653,935
            
            $
            0.29Granted
            
            
            475,000
            
            
            0.48Vested
            
            
            (264,713
            )
            
            0.39Forfeited
            
            
            (172,500
            )
            
            0.27Non-vested
                at June 30, 2008
            
            
            691,722
            
            $
            0.40




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





No
      provision for federal income taxes has been recognized for the years ended
      June
      30, 2008 and 2007 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, 2008 and 2007, consist
      of:





**June
                30,****2008**
            
            **2007**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            10,967,000
            
            $
            9,852,000Intangible
                assets
            
            
            2,245,000
            
            
            2,169,000Allowance
                for doubtful accounts
            
            
            2,000
            
            
            2,000Stock
                compensation
            
            
            80,000
            
            
            -Other
            
            
            177,000
            
            
            179,000Total
                deferred tax assets
            
            
            13,471,000
            
            
            12,202,000Deferred
                tax liabilities:Other
            
            
            -
            
            
            -Total
                deferred tax liability
            
            
            -
            
            
            -Total
                net deferred tax
            
            
            13,471,000
            
            
            12,202,000Valuation
                allowance
            
            
            (13,471,000
            )
            
            (12,202,000
            )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, 2008, the valuation allowance increased by approximately
      $1,269,000.





At
      June
      30, 2008, the Company has net operating loss carryforwards of approximately
      $32
      million for federal income tax purposes. These net operating loss carryforwards
      may be carried forward in varying amounts until 2028 and may be limited in
      their
      use due to significant changes in the Company's ownership.





A
      reconciliation of the income tax provision computed at statutory tax rates
      to
      the income tax provision for the years ended June 30, 2008 and 2007 is as
      follows:





**June
                30,****2008**
            
            **2007**Federal
                income tax expense (benefit) at statutory rate
            
            
            (34
            )%
            
            (34
            )%Change
                in valuation allowance
            
            
            34
            %
            
            34
            %Total
                income tax provision
            
            
            0
            %
            
            0
            %




F-18


**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, 2008.





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





The
      following table shows amounts paid to four non-employee directors for serving
      on
      the Company’s board of directors and payments made to Cynthia Ocker, former
      owner of TeleShare, for contract services during the years ended June 30, 2008
      and 2007:





June
                30,2008
            
            2007Troy
                LeMaile Stovall
            
            $
            16,000
            
            $
            16,750Justin
                McClure
            
            
            16,000
            
            
            16,500John
                Palmer
            
            
            20,412
            
            
            15,500Steven
                Mihaylo
            
            
            10,140
            
            
            -Cynthia
                Ocker
            
            
            223,663
            
            
            -$
            286,215
            
            $
            48,750





On
      June
      15, 2007 the Company issued an unsecured Promissory Note to each of Mr. Ladin,
      the Chairman of the Board and Chief Executive Officer of the Company, and
      Ambassador Palmer, a director of the Company, for $150,000 (the “Notes”). The
      Notes bore interest at 11.25% per annum payable monthly. The principal was
      due
      in full on the earlier to occur of July 1, 2008 or the sale of the Series A
      Preferred Stock by the Company (see Note 8), subject to acceleration in certain
      events. The Notes were paid in full on October 17, 2007 upon the receipt by
      the
      Company of the proceeds from the sale of the shares of Series A Preferred Stock.





On
      October 17, 2007, the Company sold 2,889,076 shares of Series A Preferred Stock
      for a per share purchase price of $0.586 and an aggregate purchase price of
      $1,693,000, in a privately-negotiated transaction, which is fully described
      in
      Note 8. Mr. Ladin and Ambassador Palmer participated in the sale as Purchasers,
      and the consideration paid by them included, in addition to cash, the
      cancellation of the Notes. GulfSouth, a private investment firm owned by
      Ambassador Palmer and of which Justin McClure, a director of the Company, is
      the
      president, also participated in the sale as a Purchaser.





On
      December 10, 2007, the Company sold 4,000,000 shares of Common Stock for a
      per
      share purchase price of $1.00 and an aggregate purchase price of $4,000,000
      in a
      privately-negotiated transaction which is fully described in Note 8. All shares
      were purchased by The Steven G. Mihaylo Trust. Mr. Mihaylo is the sole trustee
      of that trust and is a director of the Company.


F-19


EXHIBIT
      INDEX





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





**Exhibit**
            
            **Description**3.1
              3.2
              3.3
              3.4
            
            Articles
                of Incorporation (1)
              Statement
                of Resolution of Series A Preferred Stock(2)
              Statement
                of Resolution of Series A Preferred Stock(2)
              Statement
                of Resolution of Series B Preferred Stock(2)3.2
            
            Bylaws,
                as amended (3)4.1
            
            Rights
                Agreement dated as of August 9, 2004, between Registrant and American
                Stock Transfer & Trust Company, as Rights Agent (4)4.2
              4.3
              4.4
            
            Amendment
                  No. 1 to Rights Agreement dated as of December 10, 2007
                  (5)
              Purchase
                Agreement dated as of Registration Rights October 17, 2007
                (2)
              Agreement
                dated as of October 17, 2007 (2)4.5
            
            Securities
              Purchase
              Agreement between Internet America, Inc. and the Investor named therein
              dated as of December 10, 2007 (5)4.6
            
            Registration
                Rights Agreement between Internet America, Inc. and the Investor
                named
                therein dated as of December 10, 2007 (5)10.1
            
            Stock
                Purchase Agreement between Registrant and TeleShareCommunications
                Services, Inc. dated July 27, 2007 (6)10.2
            
            Internet
                America, Inc. 2007 Stock Option Plan (7)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of William E. Ladin,
                Jr.*31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Jennifer S.
                LeBlanc*32.1
            
            Section
                1350 Certification of William E. Ladin, Jr.*32.2
            
            Section
                1350 Certification of Jennifer S.
                LeBlanc*





*Filed herewith


(1)
              Incorporated
                  by reference to exhibits 3.1 and 3.2 to Registration Statement
                  on Form
                  SB-2 as amended (file no. 333-59527) initially filed on July 21,
                  1998.(2)
              Incorporated
                  by reference to exhibits 4.1 through 4.5 to Form 8-K filed on October
                  23,
                  2007 (file no. 0001144204-07-055892)(3)
              Incorporated
                  by reference to exhibits 3.3 and 3.4 to Registration Statement
                  on Form
                  SB-2, as amended (file no. 333-59527) initially filed on July 21,
                  1998,
                  and to exhibit 3.3 to Form 10-QSB filed on November 15,
                  1999.(4)
              Incorporated
                  by reference to exhibit 1 to Registration Statement on Form 8-A
                  (file no.
                  001-32273) filed on August 11, 2004.(5)
              Incorporated
                  by reference to exhibits 4.1 through 4.3 to Form 8-K filed on December
                  11,
                  2007 (file no. 0001144204-07-066863)(6)
              Incorporated
                  by reference to exhibit 99.1 to Form 8-K (file no. 0001144204-07-039539)
                  filed August 1, 2007.(7)
              Incorporated
                  by reference to exhibit 10.2 to Form 8-K (file no. 0001144204-07-017487)
                  filed on April 5, 2007.