UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2009





OR





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


SECURITIES
ACT OF 1934





FOR THE
TRANSITION PERIOD FROM _________ TO _____





COMMISSION
FILE NUMBER   000-25147





INTERNET
AMERICA, INC.


(Exact
name of registrant as specified in its charter)




TEXAS
                      86-0778979(State
      or other jurisdiction of
                      (I.R.S.
      Employerincorporation
      or organization)
                      Identification
      Number)10930
      W. Sam Houston Pkwy., N., Suite 200
                      77064(Address
      of principal executive offices)
                      (Zip
      Code)





(713)
968-2500


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes
      x
                    No
      o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes
      o
                      No
      x





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




Large accelerated filer o
                          
                          Accelerated
      filer oNon-accelerated filer o
                          Do
      not check if a smaller reporting company)
                          Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
      o
                        No
      x





As of May
06, 2009, registrant had 16,857,031 shares of Common Stock at $.01 par value,
outstanding.





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












PART
I - FINANCIAL INFORMATION





ITEM
1 - FINANCIAL STATEMENTS





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE
SHEETS




March
      31,
                          
                          
                          June
      30,2009
                          
                          
                          2008(unaudited)
                          
                          
                          (audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                          
                          $
                          2,841,277
                          
                          
                          $
                          3,911,680Restricted
      cash
                          
                          
                          6,432
                          
                          
                          
                          6,432Accounts
      receivable, net of allowance for uncollectible accounts of $9,180 and
      $5,863as
      of March 31, 2009 and June 30, 2008, respectively
                          
                          
                          116,760
                          
                          
                          
                          170,231Inventory
                          
                          
                          261,617
                          
                          
                          
                          285,410Prepaid
      expenses and other current assets
                          
                          
                          569,646
                          
                          
                          
                          610,865Total
      current assets
                          
                          
                          3,795,732
                          
                          
                          
                          4,984,618Property
      and equipment---net
                          
                          
                          2,187,603
                          
                          
                          
                          2,328,954Goodwill---net
                          
                          
                          3,533,127
                          
                          
                          
                          3,533,127Subscriber
      acquisition costs---net
                          
                          
                          852,689
                          
                          
                          
                          1,310,537Other
      assets---net
                          
                          
                          13,818
                          
                          
                          
                          38,087TOTAL
                          
                          $
                          10,382,969
                          
                          
                          $
                          12,195,323LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      accounts payable
                          
                          $
                          286,718
                          
                          
                          $
                          204,056Accrued
      liabilities
                          
                          
                          472,676
                          
                          
                          
                          654,187Deferred
      revenue
                          
                          
                          1,088,350
                          
                          
                          
                          1,271,901Current
      portion of long-term debt
                          
                          
                          606,570
                          
                          
                          
                          620,585Current
      portion of capital lease obligations
                          
                          
                          20,347
                          
                          
                          
                          -Total
      current liabilities
                          
                          
                          2,474,661
                          
                          
                          
                          2,750,729Long-term
      debt
                          
                          
                          817,705
                          
                          
                          
                          1,331,096Long-term
      capital lease obligations
                          
                          
                          38,347
                          
                          
                          
                          -Minority
      interest in subsidiary
                          
                          
                          5,706
                          
                          
                          
                          5,696Total
      liabilities
                          
                          
                          3,336,419
                          
                          
                          
                          4,087,521COMMITMENTS
      AND CONTINGENCIES
                          
                          
                          -
                          
                          
                          
                          -SHAREHOLDERS'
      EQUITY:Preferred
      stock 10% cumulative, $.01 par value: 5,000,000 shares authorized,
      2,889,076issued
      and outstanding as of March 31, 2009 and June 30, 2008,
      respectively
                          
                          
                          28,891
                          
                          
                          
                          28,891Common
      stock, $.01 par value: 40,000,000 shares authorized,
      16,857,031issued
      and outstanding as of March 31, 2009 and June 30, 2008
                          
                          
                          168,571
                          
                          
                          
                          168,571Additional
      paid-in capital
                          
                          
                          63,655,311
                          
                          
                          
                          63,588,884Accumulated
      deficit
                          
                          
                          (56,806,223
                          )
                          
                          
                          (55,678,544
                          )Total
      shareholders' equity
                          
                          
                          7,046,550
                          
                          
                          
                          8,107,802TOTAL
                          
                          $
                          10,382,969
                          
                          
                          $
                          12,195,323





See
accompanying notes to condensed consolidated financial statements.




2




INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended
                
                
                Nine
      Months EndedMarch
      31,
                
                
                March
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008REVENUES:Internet
      services
                
                $
                1,878,991
                
                
                $
                2,173,992
                
                
                $
                5,764,038
                
                
                $
                6,423,159Other
                
                
                44,481
                
                
                
                102,183
                
                
                
                152,204
                
                
                
                295,219Total
                
                
                1,923,472
                
                
                
                2,276,175
                
                
                
                5,916,242
                
                
                
                6,718,378OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                
                
                1,272,273
                
                
                
                1,513,966
                
                
                
                3,963,063
                
                
                
                4,360,372Sales
      and marketing
                
                
                69,948
                
                
                
                117,055
                
                
                
                212,793
                
                
                
                428,342General
      and administrative
                
                
                793,812
                
                
                
                828,618
                
                
                
                1,995,117
                
                
                
                2,675,935Provision
      for bad debt expense
                
                
                3,381
                
                
                
                (418
                )
                
                
                3,317
                
                
                
                5,383Depreciation
      and amortization
                
                
                256,929
                
                
                
                297,318
                
                
                
                830,034
                
                
                
                867,973Total
                
                
                2,396,343
                
                
                
                2,756,539
                
                
                
                7,004,324
                
                
                
                8,338,005LOSS
      FROM OPERATIONS
                
                
                (472,871
                )
                
                
                (480,364
                )
                
                
                (1,088,082
                )
                
                
                (1,619,627
                )INTEREST
      INCOME
                
                
                (5,301
                )
                
                
                (33,492
                )
                
                
                (32,826
                )
                
                
                (67,846
                )INTEREST
      EXPENSE
                
                
                23,956
                
                
                
                38,366
                
                
                
                72,412
                
                
                
                95,315Minority
      interest in loss (income) of consolidated subsidiary
                
                
                (67
                )
                
                
                393
                
                
                
                (11
                )
                
                
                788NET
      LOSS
                
                $
                (491,593
                )
                
                $
                (484,845
                )
                
                $
                (1,127,679
                )
                
                $
                (1,646,308
                )NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                
                $
                (0.03
                )
                
                $
                (0.03
                )
                
                $
                (0.07
                )
                
                $
                (0.11
                )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                
                
                16,857,031
                
                
                
                16,857,031
                
                
                
                16,857,031
                
                
                
                14,357,119








See
accompanying notes to condensed consolidated financial statements.





3











INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      Months Ended March 31,2009
                                
                                
                                2008OPERATING
      ACTIVITIES:Net
      loss
                                
                                $
                                (1,127,679
                                )
                                
                                $
                                (1,646,308
                                )Adjustments
      to reconcile net income to net cashused
      in operating activities:Minority
      interest
                                
                                
                                11
                                
                                
                                
                                (788
                                )Depreciation
      and amortization
                                
                                
                                830,034
                                
                                
                                
                                867,973Loss
      on disposal of fixed assets
                                
                                
                                2,169
                                
                                
                                
                                -Provision
      for bad debt expense
                                
                                
                                3,317
                                
                                
                                
                                5,383Non-cash
      stock compensation expense
                                
                                
                                66,426
                                
                                
                                
                                92,211Changes
      in operating assets and liabilities (net of effectsof
      assets acquired, less liabilities assumed):Accounts
      receivable
                                
                                
                                50,154
                                
                                
                                
                                (32,794
                                )Inventory
                                
                                
                                23,793
                                
                                
                                
                                97,785Prepaid
      expenses and other current assets
                                
                                
                                41,219
                                
                                
                                
                                (153,863
                                )Other
      assets
                                
                                
                                24,269
                                
                                
                                
                                (33,850
                                )Accounts
      payable and accrued liabilities
                                
                                
                                (98,849
                                )
                                
                                
                                (248,828
                                )Deferred
      revenue
                                
                                
                                (183,551
                                )
                                
                                
                                77,077Net
      cash used in operating activities
                                
                                
                                (368,687
                                )
                                
                                
                                (976,002
                                )INVESTING
      ACTIVITIES:Purchases
      of property and equipment, net
                                
                                
                                (275,914
                                )
                                
                                
                                (1,067,168
                                )Change
      in restricted cash
                                
                                
                                -
                                
                                
                                
                                (6,432
                                )Proceeds
      from sale of property and equipment
                                
                                
                                10,934
                                
                                
                                
                                -Cash
      received from  acquisitions
                                
                                
                                -
                                
                                
                                
                                655,102Net
      cash used in investing activities
                                
                                
                                (264,980
                                )
                                
                                
                                (418,498
                                )FINANCING
      ACTIVITIES:Proceeds
      from issuance of common stock
                                
                                
                                -
                                
                                
                                
                                3,987,625Proceeds
      from issuance of preferred stock
                                
                                
                                -
                                
                                
                                
                                1,307,183Proceeds
      from issuance of long term debt
                                
                                
                                -
                                
                                
                                
                                71,787Principal
      payments of long-term debt
                                
                                
                                (436,736
                                )
                                
                                
                                (321,540
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                (436,736
                                )
                                
                                
                                5,045,055NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                
                                
                                (1,070,403
                                )
                                
                                
                                3,650,555CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                
                                
                                3,911,680
                                
                                
                                
                                782,887CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                
                                $
                                2,841,277
                                
                                
                                $
                                4,433,442SUPPLEMENTAL
      INFORMATION:Cash
      paid for interest
                                
                                $
                                69,826
                                
                                
                                $
                                88,155NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Stock
      issued in connection with acquisitions
                                
                                $
                                -
                                
                                
                                $
                                770,443Debt
      assumed in connection with acquisitions
                                
                                $
                                -
                                
                                
                                $
                                100,529Debt
      issued in connection with acquisitions, net
                                
                                $
                                -
                                
                                
                                $
                                863,500Debt
      extinguished for breach of acquisition contract  and
      related
                                  reduction
      in subscriber acquisition cost
                                
                                $
                                90,670
                                
                                
                                $
                                -Minority
      interest liability
                                
                                $
                                -
                                
                                
                                $
                                5,632Borrowings
      extinguished for preferred stock
                                
                                $
                                -
                                
                                
                                $
                                300,000Property
      and equipment purchased under capital lease
                                
                                $
                                58,694
                                
                                
                                $
                                -





See
accompanying notes to condensed consolidated financial statements.




4





INTERNET
AMERICA, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
            Basis
      of Presentation





Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to Article 8 of Regulation
S-X of the Securities and Exchange Commission.  The accompanying
unaudited condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair presentation of Internet
America, Inc.’s (“the Company’s”) consolidated financial position and results of
operations for the interim periods presented.  All such adjustments
are of a normal and recurring nature.  These condensed financial
statements should be read in conjunction with the consolidated financial
statements for the year ended June 30, 2008, included in the Company’s Annual
Report on Form 10-KSB (SEC Accession No. 0001144204-08-055890).





2.
            Reclassifications





Certain
reclassifications have been made to the 2008 financial statements to conform to
the 2009 presentation.  These reclassifications had no effect on 2008
net loss or shareholders’ equity.





3.
            Basic
      and Diluted Net Earnings Per Share





There are
no adjustments required to be made to net loss for the purpose of computing
basic and diluted earnings per share (“EPS”) for the three and nine months ended
March 31, 2009 and 2008.  For the three and nine months ended March
31, 2009 and 2008, diluted earnings per share is the same as basic earnings per
share due to the net loss. During the three and nine months ended March 31,
2009, options to purchase 746,639 shares of common stock were not included in
the computation of diluted EPS because the options were not “in the money” as
of  March 31, 2009. During the three and nine months ended March 31,
2008, options to purchase 572,288 shares of common stock were not included in
the computation of diluted EPS because the effect would be anti-dilutive;
412,972 of these shares were “in the money” as of  March 31,
2008.  There were no options exercised to purchase shares of common
stock during the nine months ended March 31, 2009 and 2008.





4.
            Use
      of Estimates





The
preparation of consolidated 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.




5





5.
            Goodwill,
      net and Subscriber Acquisition Costs,
net





Pursuant
to Statement of Financial Accounting Standard (“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 nine months ended March 31,
2009.





The Company allocates the purchase price for
acquisitions to acquired subscriber bases and goodwill based on fair value at
the time of acquisition.  Subscriber acquisition costs, net of
amortization, totaled approximately $853,000 and $1,311,000, as of March 31,
2009 and June 30, 2008, respectively.  The weighted average
amortization period for subscriber acquisition costs is 48 months for both
dial-up and wireless broadband Internet customers. Amortization expense for the
three and nine months ended March 31, 2009 was $118,046 and $367,178,
respectively.  As of March 31, 2009, amortization expense for the
fiscal years ended June 30, 2009, 2010, 2011 and 2012 is expected to be
approximately $475,000, $386,000, $355,000 and $4,000,
respectively.





During
the quarter ended March 31, 2009, the Company reduced subscriber acquisition
costs by $90,670 due to a final adjustment to reduce the purchase price on an
acquisition of assets by the total amount of related liability previously
recorded as a long term amount payable.  Further, the Company has
officially notified the seller of the Company’s claim for damages due to
sellers’ breach of the Asset Purchase Agreement.  The claim of
approximately $85,000 has been fully reserved due to the financial condition of
the seller.


6.
              Income
      Taxes





During
the three and nine months ended March 31, 2009, the Company generated a net loss
of $491,593 and $1,127,679, respectively.  For the three and nine
months ended March 31, 2008, the Company generated a net loss of $484,845 and
$1,646,308, respectively.  No provision for income taxes has been
recorded for the three and nine months ended March 31, 2009 and 2008, as the
Company has net operating losses generated in the current and prior
periods.  As of March 31, 2009, the Company continues to maintain a
full valuation allowance for its net deferred tax assets of approximately $13.9
million.  Given its limited history of generating net income, the
Company has concluded that it is not more likely than not that the net deferred
tax assets will be realized.





On July
1, 2007, the Company adopted Financial Account Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB
Statement No. 109” (“FIN 48”).  As a result of the implementation of
FIN 48, management assessed its various income tax positions, and this
assessment resulted in no adjustment. The preparation of various tax returns
requires the use of estimates for federal and state income tax
purposes.  Those estimates may be subject to review by respective
taxing authorities.  A revision, if any, to an estimate may result in
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.  The Company will account for
interest and penalties related to uncertain tax positions in the current period
income statement, as necessary.  The 2004, 2005, 2006 and 2007 tax
periods remain subject to examination by various federal and state tax
jurisdictions.




6





7.
              Long-Term
      DebtLong-term
      debt consists of:





March
                      
                      
                      June
      30,2009
                      
                      
                      2008Note
      payable due July 19, 2009, payable in quarterly payments of $7,751
      with interest imputed at 9% (net of unamortized discount of
      $3,445)
                      
                      $
                      42,998
                      
                      
                      $
                      62,452Note
      payable due January 23, 2011 payable in bi-annual installments of
      $13,917 with interest imputed at 8% (net of unamortized discount of
      $2,571)
                      
                      
                      23,106
                      
                      
                      
                      23,106Note
      payable due February 12, 2009 payable in monthly installments of
      $1,261
                      
                      
                      -
                      
                      
                      
                      10,084Note
      payable due August 08, 2010, payable in monthly installments of $1,033
      beginning October 08, 2008 with interest imputed at 5% (net of unamortized
      discount of $642)
                      
                      
                      16,926
                      
                      
                      
                      21,219Note
      payable due June 20, 2012, payable in monthly installments of $2,088 with
      interest imputed at 9% (net of unamortized discount of
      $11,054)
                      
                      
                      70,371
                      
                      
                      
                      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
      $1,297)
                      
                      
                      27,786
                      
                      
                      
                      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
      $1,005)
                      
                      
                      21,535
                      
                      
                      
                      32,855Amount
      payable estimated at June 30, 2008, prior to final adjustments to purchase
      price under Asset Purchase Agreement; the final adjustment recorded during
      the quarter ended March 31, 2009 reduced the amount payable to $0 (see
      Note 5)
                      
                      
                      -
                      
                      
                      
                      95,324Note
      payable due December 23, 2010, payable in monthly payments of $26,199 with
      interest imputed at 5.5% (net of unamortized discount of
      $25,613)
                      
                      
                      524,575
                      
                      
                      
                      735,083Loan
      and Security Agreement with United States Department of Agriculture Rural
      Utilities Service
                      
                      
                      696,978
                      
                      
                      
                      845,2661,424,275
                      
                      
                      
                      1,951,681Less
      current portion
                      
                      
                      (606,570
                      )
                      
                      
                      (620,585
                      )Total
      long-term debt
                      
                      $
                      817,705
                      
                      
                      $
                      1,331,096





The
Company’s secured long-term debt totals approximately $1,352,000 and $1,681,000
as of March 31, 2009 and June 30, 2008, respectively.   Amounts
are secured by certificates of deposit and certain inventory and
equipment.


8.
                Capital
      Lease Obligation


The
Company leases certain wireless equipment under leases with bargain purchase
options. The following is a schedule by fiscal years of the future minimum lease
payments under these capital leases together with the present value of the net
minimum lease payments as of March 31, 2009:




2009
                              
                              $
                              8,3222010
                              
                              
                              32,7152011
                              
                              
                              32,2882012
                              
                              
                              2,441Total
      minimum lease payments
                              
                              
                              75,766Less
      amounts representing interest
                              
                              
                              (17,072
                              )Present
      value of minimum capitalized payments
                              
                              
                              58,694Less
      current portion
                              
                              
                              (20,347
                              )Long-term
      capitalized lease obligations
                              
                              $
                              38,347




7


9.
                Related
      Parties





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 Communications Services, Inc., a subsidiary of the Company,
for contract services during the nine months ended March 31, 2009 and
2008:




Nine
      Months EndedMarch 31,2009
                  
                  
                  2008Troy
      LeMaile Stovall
                  
                  $
                  11,676
                  
                  
                  $
                  15,250Justin
      McClure
                  
                  
                  11,250
                  
                  
                  
                  15,250John
      Palmer
                  
                  
                  12,073
                  
                  
                  
                  20,161Steven
      Mihaylo
                  
                  
                  11,893
                  
                  
                  
                  8,656Cynthia
      Ocker
                  
                  
                  124,335
                  
                  
                  
                  155,634$
                  171,227
                  
                  
                  $
                  214,951


10.
              Terminated
      Merger Agreement with KeyOn Communications Holdings,
  Inc.


On
February 19, 2009, the Company terminated the merger contemplated by the
Agreement and Plan of Merger (the “Merger Agreement”) dated November 14, 2008
among the Company, KeyOn Communications Holdings, Inc., a Delaware corporation
(“KeyOn”), and IA Acquisition, Inc., a Delaware corporation wholly owned by
Internet America.  The Company terminated the Merger Agreement due to
KeyOn’s inability to comply in a material respect with certain of the covenants
and conditions to closing required to be performed or satisfied by it under the
Merger Agreement. Internet America has asserted its right to the termination fee
and expenses due it under the Merger Agreement.





As
reported in the Company’s Current Report on Form 8-K filed November 18, 2008,
pursuant to the Merger Agreement, KeyOn would have become a wholly-owned
subsidiary of Internet America by merger with and into IA Acquisition,
Inc.  The Merger Agreement provided for the Company to issue an
aggregate of 16,155,906 shares of Company common stock to KeyOn shareholders in
a stock-for-stock exchange for all outstanding shares of KeyOn common stock.
Upon completion of the proposed merger, KeyOn shareholders would have owned 45%,
and Internet America shareholders would have owned 55%, of the aggregate number
of shares of common and preferred stock of the Company outstanding after the
merger.





Each
party to the Merger Agreement had rights to terminate that agreement if certain
covenants of the other party were not performed or conditions to the closing
were not met. On February 18, 2009, the Company received a notice from KeyOn
purportedly terminating the Merger Agreement. On February 19, 2009, Internet
America responded that it did not consider KeyOn’s termination valid under the
terms of the Merger Agreement, and gave notice of termination to KeyOn for the
failure to comply in a material respect with certain of the covenants and
conditions to closing required to be performed or satisfied by KeyOn under the
Merger Agreement.  The Company has recorded a non-trade receivable
from KeyOn of approximately $394,000, which is the sum of merger costs incurred
by the Company of $194,000 and the termination fee of $200,000 as described in
the Merger Agreement.  The Company has recorded an allowance for
doubtful accounts of $394,000, the full balance of the non-trade receivable as
of March 31, 2009.




8


11.
                New
      Accounting
Pronouncements





In
September 2006, the Financial Accounting Standards Board (“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
non-financial assets and liabilities. Adoption of the pronouncement as it
relates to our financial assets and liabilities had no impact on our
consolidated financial position or results of operations and the Company is
currently evaluating the impact of SFAS No. 157 on our non-financial
assets and liabilities.




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.  Adoption of this pronouncement had no impact
on our consolidated financial position and results of operations.




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
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 our financial statements.




9





ITEM
2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Certain
statements contained in this Form 10-Q constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934.  These statements, identified
by words such as "anticipate," "believe," "estimate," "should," "expect" and
similar expressions include our expectations and objectives regarding our future
financial position, operating results and business strategy.  These
statements reflect the current views of management with respect to future events
and are subject to risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to be
materially different from those described in the forward-looking
statements.  We do not intend to update the forward-looking
information to reflect actual results or changes in the factors affecting such
forward-looking information.  Our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2008 and other publicly filed reports discuss some
additional important factors that could cause our actual results to differ
materially from those in any forward-looking statements.





Overview





Internet
America, Inc. (the “Company” or “Internet America”) is an Internet service
provider ("ISP") that is focused on providing wireless high-speed broadband
Internet in rural markets, and presently serves 8,000 wireless broadband
Internet subscribers.   Since the Company’s founding in 1995, we
have a history of providing an array of Internet services to residential and
business subscribers and serve approximately 27,500 total subscribers in Texas
as of March 31, 2009. A subscriber represents an active, billed
service.  One customer account may represent multiple subscribers
depending on the number of active and billed services for that customer. The
decline in non-wireless subscribers and revenues is expected and will continue
primarily due to our customers migrating to high-speed providers in metropolitan
areas.







Internet
America’s focus, experience and proven ability to deliver quality high-speed
broadband Internet in rural markets places us in an excellent position to expand
our service area by utilizing funds made available for economic stimulus by The
American Recovery and Reinvestment Act legislation, whose mission is to make
high-speed broadband and other technologies available to everyone residing in
the United States.  Management is working toward establishing
public-private partnerships with state or local governments, utility providers,
or other entities to bring high-speed broadband Internet more rapidly to rural
communities.  Management believes we are better positioned than others
in our industry to succeed in public-private partnerships because we have
existing public-private partnerships operating successfully, we offer a high
quality product and because our history and present operations already focus on
that very mission.






In early
fiscal 2007 we recognized the warning signs of a difficult capital market and
signs of a slowing economy and responded in two ways. First, we raised excess
capital to meet our needs in the future and second, we completed acquisitions to
increase our wireless customer base by 4,100 to 7,500 as of September 30, 2007,
compared to 3,400 as of September 30, 2006.  In January 2008, with
more than 3 years experience in growing organically and through acquisitions,
management refocused on creating and maintaining a ‘defect free’ philosophy by
conforming acquired wireless networks to our standards, creating simplified and
more efficient processes, and rewarding zero defect results. As a result, we
improved the quality of our service and enhanced the productivity of our
personnel.







Beginning in May 2008 and continuing
through February 2009, the Company devoted substantial time and resources to a
proposed merger with KeyOn Communications Holdings, Inc. (“KeyOn”). On February
19, 2009, the Company terminated the definitive agreement to merge with
KeyOn.  The contemplated merger, announced in November 2008, was a
stock-for-stock transaction, with Internet America shareholders maintaining 55%
of the merged companies.  The termination was due to KeyOn’s inability
to comply in a material respect with certain of the covenants and conditions to
closing required to be performed or satisfied by it under the Merger Agreement.
We have asserted our right to collect the termination fee and incurred expenses
defined in the Merger Agreement. We recorded a receivable from KeyOn of
approximately $394,000, which is the sum of direct merger costs incurred by the
Company of $194,000 and the termination fee of $200,000.  The Company
has recorded an allowance for doubtful accounts equal to the full amount of
these receivables which had a material negative impact on our earnings for the
three and nine months ended March 31, 2009. Additional indirect costs of
management’s time negotiating and preparing to close the merger and the related
travel costs also impacted reported losses.  Detailed information
about the termination of the merger is contained in the Company’s Current Report
on Form 8-K filed on February 24, 2009.




10




Acquisitions
of rural and suburban wireless ISPs (“WISPs”) are no longer considered an
essential method of increasing our subscriber base or enhancing our net income.
The experiences that led us to this conclusion include the failure of the merger
with KeyOn, time and focus required to close and integrate past acquisitions,
and the significant expenses required to be incurred in order to conform
acquired networks to our quality and performance standards.  In the
future, we will consider proposed transactions to be attractive if they do not
negatively impact our liquidity and have a clear path to closing and
integration.  Given those stringent requirements, we are less likely
to consummate acquisitions in the near term.





Our
dedication and focus over the last 16 months to the quality process
implementation including investing in infrastructure upgrades and simplifying
internal systems and procedures has improved productivity and customer
satisfaction.  Our success can be measured in ways such as improved
EBITDA and decreases in expenses and headcount over the last
year.  For the nine months ended March 31, 2009, reported EBITDA loss,
adjusted for the amount written off related to the failed KeyOn merger of
$194,000, was $64,000 compared to EBITDA loss of $751,000 for the nine months
ended March 31, 2008, an improvement of $687,000 for this
year-to-date.  During 2009, due to efficiencies gained, the Company
reported decreases in salaries and wages of approximately $307,000 to $2,748,000
for the nine months ended March 31, 2009 compared to $3,055,000 for the nine
months ended March 31, 2008.  Additional decreases in
telecommunications costs for the nine months ended March 31, 2009 compared to
the same period in the previous year totaled approximately $391,000 due to more
favorable agreements with telecommunications service providers.  We
expect our ongoing commitment to defect-free quality services to contribute to
our future profitability and productivity.




Internet
America is a leaner and more efficient company with good systems and
processes.  Now, instead of expanding through acquisition that would
likely increase our outstanding shares, the Company is focused on expanding our
coverage in public-private partnerships with state or local governments, utility
providers, or other entities to bring high-speed broadband Internet to more
subscriber bases in rural communities without anticipated dilution to our
existing shareholders.  The American Recovery and Reinvestment Act
legislation has allocated a total of $7.2 billion in grants for programs to
increase the deployment and adoption of high speed broadband
Internet.  Management believes the Company is well positioned to
assist public entities seeking to participate in grant programs by forming
public-private partnerships for three main reasons.




First, we
have already created a successful partnership with non-profit entities which has
a substantial impact on their entire community.  In Chambers County,
Texas, Internet America delivers high-speed internet to public buildings
including local libraries and schools, and provides networks for communications
among all public service providers including local and county law enforcement
and fire fighters.  In partnership with a non-profit group, Chambers
County Community Network, which is supported by a grant from the State of Texas
Infrastructure Fund, Internet America provides Internet services to rural
communities that did not previously have access to high speed
broadband.





Additionally,
management has implemented a process for increasing quality which has
substantially improved our productivity.  This can be measured in ways
such as headcount reduction from 93 total employees in December 2007 to 58 at
the end of March 2009, a staffing level at which we have been operating
successfully for the last 6 months.  We believe our proven ability to
deliver quality service with greater efficiency will make Internet America a
more attractive partner for public entities.  Our current systems have
proven to have flexibility and the ability to expand.





Finally,
our current mission is to deliver internet to rural markets.  We
believe rural America needs convenient and affordable access to better
education, more efficient delivery of public services, and technology that
enables consumers to control their energy consumption. That access can be
achieved through the provision of high speed broadband Internet access and the
technologies associated with it.  The Company can provide qualified,
experienced management who have an ongoing history of going where other
providers will not and giving broadband Internet access to those residing
outside of metropolitan areas.





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 non-wireless service offerings.  The competitive environment impacts
the churn rates we experience. Although the decrease remains substantial, we are
seeing a reduction in the churn rate which indicates a potentially slower rate
of decline.





Near the
end of October 2008, the Company entered into an agreement with an aggregator
that allows the Company to resell DSL broadband internet service over most of
the metropolitan and suburban areas of the United States where it is currently
available.  In the near term we anticipate it helping us to reduce the
attrition of dial-up customers to other broadband providers and allow us to
fulfill additional demand for this service. As part of this agreement, the
Company transitioned 1,200 DSL broadband Internet customers to the new
provider.  The one-time charges associated with the conversion totaled
approximately $40,000 during the quarter ended March 31, 2009.




11




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




Internet
America is positioned today to drive the vision of delivering high speed
broadband to every corner of rural America. We believe our continued efforts to
increase our subscriber base will yield improvements in profitability and cash
flow from operations. Because of our efforts to improve the quality and
efficiency of our operations over the last few years, we believe that we are
well positioned today to withstand an economic slowdown and/or to capitalize on
growth possibilities. We believe that we have sufficient capital resources and
cash on hand to withstand a short or prolonged economic downturn, and we are in
a strong position to improve earnings by the creation of partnerships with
public entities that take advantage of our capabilities and previous experience
and should lead to a more rapid rate of growth without significant increases in
shares outstanding.




Our
present high-speed wireless broadband revenues are derived from subscribers on
our own independently owned and maintained network.  In future
public-private partnerships, Internet America may create competitive access to
deployed infrastructure, bandwidth and other services.  Management
believes this method will allow for a more rapid expansion of high-speed
broadband Internet at a price which is competitive with that of metropolitan
subscribers.





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 fiscal year 2009 and 2008 includes telex messaging service
revenues.





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





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





Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





The following table sets forth certain
unaudited financial data for the three months ended March 31, 2009 and
2008.  Operating results for any period are not indicative of results
for any future period.  Dollar amounts are shown in thousands (except
per share data, shares and subscriber counts).





Three
      Months Ended March 31,2009
                  
                  
                  % of Revenues
                  
                  
                  2008
                  
                  
                  % of RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                  
                  $
                  1,879
                  
                  
                  
                  97.7
                  %
                  
                  $
                  2,174
                  
                  
                  
                  95.5
                  %Other
                  
                  
                  44
                  
                  
                  
                  2.3
                  %
                  
                  
                  102
                  
                  
                  
                  4.5
                  %Total
                  
                  
                  1,923
                  
                  
                  
                  100.0
                  %
                  
                  
                  2,276
                  
                  
                  
                  100.0
                  %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                  
                  
                  1,272
                  
                  
                  
                  66.1
                  %
                  
                  
                  1,514
                  
                  
                  
                  66.5
                  %Sales
      and marketing
                  
                  
                  70
                  
                  
                  
                  3.6
                  %
                  
                  
                  117
                  
                  
                  
                  5.1
                  %General
      and administrative
                  
                  
                  793
                  
                  
                  
                  41.2
                  %
                  
                  
                  829
                  
                  
                  
                  36.5
                  %Provision
      for (recoveries of) bad debt
                  
                  
                  3
                  
                  
                  
                  0.2
                  %
                  
                  
                  (1
                  )
                  
                  
                  (0.0
                  )%Depreciation
      and amortization
                  
                  
                  257
                  
                  
                  
                  13.4
                  %
                  
                  
                  297
                  
                  
                  
                  13.0
                  %Total
                  
                  
                  2,395
                  
                  
                  
                  124.5
                  %
                  
                  
                  2,756
                  
                  
                  
                  121.1
                  %OPERATING
      LOSS
                  
                  
                  (472
                  )
                  
                  
                  (24.5
                  )%
                  
                  
                  (480
                  )
                  
                  
                  (21.1
                  )%INTEREST
      INCOME
                  
                  
                  5
                  
                  
                  
                  0.3
                  %
                  
                  
                  33
                  
                  
                  
                  1.5
                  %INTEREST
      EXPENSE
                  
                  
                  (25
                  )
                  
                  
                  (1.3
                  )%
                  
                  
                  (38
                  )
                  
                  
                  (1.7
                  )%Minority
      interest in loss of consolidated subsidiary
                  
                  
                  0
                  
                  
                  
                  0.0
                  %
                  
                  
                  (0
                  )
                  
                  
                  (0.0
                  )%NET
      LOSS
                  
                  $
                  (492
                  )
                  
                  
                  (25.5
                  )%
                  
                  $
                  (485
                  )
                  
                  
                  (21.3
                  )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                  
                  $
                  (0.03
                  )
                  
                  
                  
                  
                  
                  $
                  (0.03
                  )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                  
                  
                  16,857,031
                  
                  
                  
                  
                  
                  
                  
                  16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                  
                  
                  27,500
                  
                  
                  
                  
                  
                  
                  
                  31,800EBITDA(loss)(2)
                  
                  $
                  (215
                  )
                  
                  
                  
                  
                  
                  $
                  (183
                  )EBITDA
      margin(3)
                  
                  
                  (11.2
                  %)
                  
                  
                  
                  
                  
                  
                  (8.0
                  %)Reconciliation
      of net loss to EBITDA (loss):Net
      loss
                  
                  $
                  (492
                  )
                  
                  
                  
                  
                  
                  $
                  (485
                  )Add:Depreciation
      and amortization
                  
                  
                  257
                  
                  
                  
                  
                  
                  
                  
                  297Interest
      income
                  
                  
                  (5
                  )
                  
                  
                  
                  
                  
                  
                  (33
                  )Interest
      expense
                  
                  
                  25
                  
                  
                  
                  
                  
                  
                  
                  38EBITDA
      (loss)(2)
                  
                  $
                  (215
                  )
                  
                  
                  
                  
                  
                  $
                  (183
                  )





(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
      (earnings before interest, taxes, depreciation and amortization) is not a
      measurement of financial performance under generally accepted accounting
      principles (GAAP) and should not be considered an alternative to net
      income as a measure of performance.  Management has consistently
      used EBITDA on a historical basis as a measurement of the Company’s
      current operating cash income.(3)
              EBITDA
      margin represents EBITDA as a percentage of total
  revenue.




13




Total
revenue.Total revenue decreased by $353,000, or 15.5%, to
$1,923,000 for the three months ended March 31, 2009, from $2,276,000 for the
three months ended March 31, 2008.  The Company’s total subscriber
count decreased by 4,300, or 13.5%, to 27,500 as of March 31, 2009 compared to
31,800 as of March 31, 2008.  The Company’s wireless broadband
Internet subscriber count of 8,000 as of March 31, 2009, was virtually unchanged
from the subscriber count of 8,100 as of March 31, 2008. Wireless broadband
Internet revenue decreased slightly by $20,000 to $1,097,000 as of March 31,
2009 compared to $1,117,000 as of March 31, 2008.  During the
Company’s upgrade process in calendar 2008, we restricted the addition of new
customers while improvements were made.  Presently stable revenues
derived from wireless broadband Internet subscribers were offset by the decrease
in other types of Internet service revenues of $275,000. This is attributed to
the expected decline of dial-up customers who may move to other providers’
broadband service. In connection with the acquisition of TeleShare, the Company
derives other revenues from providing telex messaging
services.  Messaging revenues decreased by $58,000, or 56.9%, to
$44,000 as of March 31, 2009, compared to $102,000 as of March 31,
2008.





Connectivity and operations.Connectivity and operations expense decreased by $242,000, or 16.0%, to
$1,272,000 for the three months ended March 31, 2009, from $1,514,000 for the
three months ended March 31, 2008.  Data and telecommunications
expense decreased by $83,000 to $374,000 as of March 31, 2009 compared to
$457,000 as of March 31, 2008.  The decrease in data and
telecommunications expense is due to our renegotiating more favorable terms with
telecommunications service providers. Consumable supplies and installation and
repair expense decreased by $81,000 to $131,000 as of March 31, 2009 compared to
$212,000 as of March 31, 2008, including costs of refurbishing equipment from
our repair and recycle program which are currently expensed as incurred. We
believe this decrease is an important measure of quality process program
success. Salaries, wages and related personnel costs also were reduced by
quality process initiatives and decreased by approximately $66,000 to $592,000
as of March 31, 2009 compared to $658,000 as of March 31,
2008.   Merchant fees also decreased by $7,000, to $42,000 as of
March 31, 2009 due to declining revenues.  Tower lease expense
increased slightly by $5,000 due to increases in tower rental rates but is
otherwise stable and relates to the consistency of the Company’s wireless
broadband Internet subscriber operations.





Sales and marketing.Sales
and marketing expense decreased by $47,000, or 40.2%, to $70,000 for the three
months ended March 31, 2009 compared to $117,000 for the three months ended
March 31, 2008.  This change is almost entirely related to a decrease
in salaries and wages of $52,000 to $52,000 as of March 31, 2009 compared to
$104,000 as of March 31, 2008 due to the present Vice President of Marketing
vacancy.  Print advertising and facilities allocations for inside
sales force offsets this decrease for the quarter ended March 31,
2009.





General and
administrative.General and administrative expense (G&A)
decreased by $36,000, or 4.3%, to $793,000 for the three months ended March 31,
2009, from $829,000 for the three months ended March 31, 2008.  In
February 2009 the Company recorded a write off expense for direct costs incurred
in the contemplated merger with KeyOn of $194,000. G&A expense adjusted for
the amount written off related to the failed KeyOn merger decreased to $599,000
for the three months ended March 31, 2009, a reduction of $230,000 or
27.7%.





Salaries and wages decreased $83,000 to
$235,000 as of March 31, 2009 compared to $318,000 as of March 31, 2008 due to
ongoing efforts to enhance efficiency and reduce headcount. Professional and
consulting fees decreased by approximately $67,000, to $111,000 as of March 31,
2009 compared to $178,000 as of March 31, 2008 due to reductions in outside
consulting and accountant’s fees; additionally the Company did not incur costs
during the quarter ended March 31, 2009 for an annual shareholders’ meeting
which were incurred during the same period in 2008.





Telecommunications
expense decreased by $15,000 to $45,000 as of March 31, 2009 compared to $60,000
as of March 31, 2008 due to our renegotiating more favorable terms with
telecommunications service providers.  Rent and utilities expenses
decreased by $10,000 to $66,000 as of March 31, 2009 compared to $76,000 as of
March 31, 2008.  The expense related to the issuance of employee and
director stock options decreased by $15,000 to $33,000 as of March 31, 2009
compared to $48,000 as of March 31, 2008 due to the continued vesting of stock
options. Travel expenses decreased by $8,000 to $4,000 as of March 31, 2009
compared to $12,000 as of March 31, 2008.  Insurance expenses of
$30,000 remained consistent for the comparable quarters.  Other
G&A expenses decreased $31,000 to $75,000 from $106,000.





Provision for bad debt expense
(recovery).Provision for bad debt expense increased by $4,000
to $3,000 expense for the three months ended March 31, 2009, from $1,000
recovery for the three months ended March 31, 2008. As of March 31, 2009, we are
fully reserved for all customer accounts that are at least 90 days
old.





Depreciation and
amortization.  Depreciation and amortization decreased by
$40,000, or 13.5%, to $257,000 for the three months ended March 31, 2009, from
$297,000 for the three months ended March 31, 2008.  The decrease in
depreciation totaling $28,000 relates to the increase in fully depreciated
assets still in use, offset by the improvement of the Company’s wireless
broadband Internet network. The decrease in amortization expense totaling
$12,000 for acquired subscriber costs is the result of early wireless
acquisitions in fiscal 2005 becoming fully amortized.




Interest expense/income.For
the three months ended March 31, 2009 and 2008, the Company recorded interest
expense of $24,000 and $38,000, respectively.  The $14,000 decrease in
interest expense is due to the reduction of the Company’s long-term
debt.  For the three months ended March 31, 2009 and 2008, the Company
recorded interest income of $5,000 and $33,000, respectively. The $28,000
decrease in interest income is due to changes in cash on hand, declining
interest rates, and closing of our interest bearing accounts. As a precautionary
measure, in February 2009, the Company transferred all funds from interest
bearing accounts during this economic crisis to ensure all funds were covered by
the Temporary Guaranty Liquidity Program initiated by the Federal Reserve
Board.




14





Nine
Months Ended March 31, 2009 Compared to Nine Months Ended March 31,
2008





The following table sets forth certain
unaudited financial data for the nine months ended March 31, 2009 and
2008.  Operating results for any period are not indicative of results
for any future period.  Dollar amounts are shown in thousands (except
per share data, shares and subscriber counts).




Nine
      Months Ended March 31,2009
                  
                  
                  % of Revenues
                  
                  
                  2008
                  
                  
                  % of RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                  
                  $
                  5,764
                  
                  
                  
                  97.4
                  %
                  
                  $
                  6,423
                  
                  
                  
                  95.6
                  %Other
                  
                  
                  152
                  
                  
                  
                  2.6
                  %
                  
                  
                  295
                  
                  
                  
                  4.4
                  %Total
                  
                  
                  5,916
                  
                  
                  
                  100.0
                  %
                  
                  
                  6,718
                  
                  
                  
                  100.0
                  %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                  
                  
                  3,963
                  
                  
                  
                  67.0
                  %
                  
                  
                  4,360
                  
                  
                  
                  64.9
                  %Sales
      and marketing
                  
                  
                  213
                  
                  
                  
                  3.6
                  %
                  
                  
                  429
                  
                  
                  
                  6.4
                  %General
      and administrative
                  
                  
                  1,995
                  
                  
                  
                  33.7
                  %
                  
                  
                  2,676
                  
                  
                  
                  39.8
                  %Provision
      for bad debt
                  
                  
                  3
                  
                  
                  
                  0.1
                  %
                  
                  
                  5
                  
                  
                  
                  0.1
                  %Depreciation
      and amortization
                  
                  
                  830
                  
                  
                  
                  13.9
                  %
                  
                  
                  868
                  
                  
                  
                  12.9
                  %Total
                  
                  
                  7,004
                  
                  
                  
                  118.3
                  %
                  
                  
                  8,338
                  
                  
                  
                  124.1
                  %OPERATING
      LOSS
                  
                  
                  (1,088
                  )
                  
                  
                  (18.3
                  )%
                  
                  
                  (1,620
                  )
                  
                  
                  (24.1
                  )%INTEREST
      INCOME
                  
                  
                  32
                  
                  
                  
                  0.5
                  %
                  
                  
                  68
                  
                  
                  
                  1.0
                  %INTEREST
      EXPENSE
                  
                  
                  (72
                  )
                  
                  
                  (1.2
                  )%
                  
                  
                  (95
                  )
                  
                  
                  (1.4
                  )%Minority
      interest in loss of consolidated subsidiary
                  
                  
                  0
                  
                  
                  
                  0.0
                  %
                  
                  
                  1
                  
                  
                  
                  0.0
                  %NET
      LOSS
                  
                  $
                  (1,128
                  )
                  
                  
                  (19.0
                  )%
                  
                  $
                  (1,646
                  )
                  
                  
                  (24.5
                  )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILLUTED
                  
                  $
                  (0.07
                  )
                  
                  
                  
                  
                  
                  $
                  (0.11
                  )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILLUTED
                  
                  
                  16,857,031
                  
                  
                  
                  
                  
                  
                  
                  14,357,119OTHER
      DATA:Subscribers
      at end of period (1)
                  
                  
                  27,500
                  
                  
                  
                  
                  
                  
                  
                  31,800EBITDA
      (loss)(2)
                  
                  $
                  (258
                  )
                  
                  
                  
                  
                  
                  $
                  (751
                  )EBITDA
      margin(3)
                  
                  
                  (4.4
                  %)
                  
                  
                  
                  
                  
                  
                  (11.2
                  %)CASH
      FLOW DATA:Cash
      flow used in operations
                  
                  $
                  (369
                  )
                  
                  
                  
                  
                  
                  $
                  (976
                  )Cash
      flow used in investing activities
                  
                  $
                  (265
                  )
                  
                  
                  
                  
                  
                  $
                  (418
                  )Cash
      flow provided by (used in) financing activities
                  
                  $
                  (437
                  )
                  
                  
                  
                  
                  
                  $
                  5,045Reconciliation
      of net loss to EBITDA:Net
      loss
                  
                  $
                  (1,128
                  )
                  
                  
                  
                  
                  
                  $
                  (1,646
                  )Add:Depreciation
      and amortization
                  
                  
                  830
                  
                  
                  
                  
                  
                  
                  
                  868Interest
      (income)
                  
                  
                  (32
                  )
                  
                  
                  
                  
                  
                  
                  (68
                  )Interest
      expense
                  
                  
                  72
                  
                  
                  
                  
                  
                  
                  
                  95EBITDA
      (loss)(2)
                  
                  $
                  (258
                  )
                  
                  
                  
                  
                  
                  $
                  (751
                  )





(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
      (earnings before interest, taxes, depreciation and amortization) is not a
      measurement of financial performance under generally accepted accounting
      principles (GAAP) and should not be considered an alternative to net
      income as a measure of performance.  Management has consistently
      used EBITDA on a historical basis as a measurement of the Company’s
      current operating cash income.(3)
              EBITDA
      margin represents EBITDA as a percentage of total
  revenue.





15





Total
revenue.Total revenue decreased by $802,000, or 11.9%, to
$5,916,000 for the nine months ended March 31, 2009, from $6,718,000 for the
nine months ended March 31, 2008.  The Company’s total subscriber
count decreased by 4,300, or 13.5%, to 27,500 as of March 31, 2009 compared to
31,800 as of March 31, 2008.  The Company’s wireless broadband
Internet subscriber count of 8,000 as of March 31, 2009 was virtually unchanged
from the subscriber count of 8,100 as of March 31, 2008. Wireless broadband
Internet revenue increased by $160,000 to $3,198,000 as of March 31, 2009
compared to $3,038,000 as of March 31, 2008.  This increase was
primarily due to the stability of the subscriber base and customers migrating to
upgraded service levels upon completion of infrastructure upgrades in certain
areas as well as purchasing additional services for the nine months ended March
31, 2009.  Presently stable revenues derived from wireless broadband
Internet subscribers were offset by the decrease in other types of Internet
service revenues of $820,000. This is attributed to the expected decline of
dial-up customers who may move to other providers’ broadband service. In
connection with the acquisition of TeleShare, the Company derives other revenues
from providing telex messaging services, which totaled $152,000 for the nine
months ended March 31, 2009 as compared to $295,000 for the nine months ended
March 31, 2008.





Connectivity and operations.Connectivity and operations expense decreased by $397,000, or 9.1%, to
$3,963,000 for the nine months ended March 31, 2009, from $4,360,000 for the
nine months ended March 31, 2008.  There was a decrease in salaries
and wages of approximately $94,000 to $1,870,000 as of March 31, 2009 compared
to $1,964,000 as of March 31, 2008 which is attributed to efficiencies gained
from quality process initiatives.  Data and telecommunications expense
decreased by $313,000 to $1,141,000 as of March 31, 2009 compared to $1,454,000
as of March 31, 2008 due to our renegotiating more favorable terms with
telecommunications service providers. Travel and mileage decreased by $34,000 to
$93,000 as of March 31, 2009 compared to $127,000 as of March 31,
2008.  The remaining decrease in expense primarily relates to a
decrease in merchant fees of $21,000.





The
decreases in the previously discussed expenses were partially offset by an
increase in facilities and tower lease costs of $40,000 for the nine months
ended in March 31, 2009 to $305,000 compared to $265,000 as of March 31, 2008,
and an increase in installation expenses of $24,000 to $425,000 as of March 31,
2009 compared to $401,000 as of March 31, 2008. This increase in installation
expenses is due to significant increases in service calls in the Greater
Houston, Texas region after the natural disaster, Hurricane Ike, and ongoing
network improvement activity.  Additionally, in an effort to reduce
capital expenditures and to make best use of resources, the Company aggressively
increased its repair and recycle program for customer premise
equipment.  The costs of refurbishing equipment are currently expensed
as incurred.  Minor increases in other expense totaled $1,000 in
2009.





Sales and marketing.Sales
and marketing expense decreased by $216,000, or 50.3%, to $213,000 for the nine
months ended March 31, 2009 compared to $429,000 for the nine months ended March
31, 2008.  Salaries and wages decreased by $137,000 to $163,000 as of
March 31, 2009 compared to $300,000 as of March 31, 2008 due  to the
present Vice President of Marketing vacancy and the elimination of our outside
sales force. Advertising expenses were decreased by $97,000 when we temporarily
delayed all sales promotions in certain areas in order to enhance and improve
our current network. These decreases were offset by allocation of facilities
expense for the inside sales force by $18,000 for the nine months ended March
31, 2009.





General and
administrative.G&A decreased by $681,000, or 25.4%, to
$1,995,000 for the nine months ended March 31, 2009, from $2,676,000 for the
nine months ended March 31, 2008.  In February 2009, the Company
recorded a write off expense for direct costs incurred in the contemplated
merger with KeyOn of $194,000. G&A expense adjusted for the amount written
off related to the failed KeyOn merger decreased to $1,801,000 for the three
months ended March 31, 2009, a reduction of $875,000 or 32.7%.





Facilities costs decreased by $420,000
to $213,000 as of March 31, 2009 compared to $633,000 as of March 31, 2008 due
to the write off of the abandoned corporate headquarters lease in Dallas in the
previous year and also to the closing of additional regional field offices.
Salaries and wages decreased $76,000 to $715,000 as of March 31, 2009 compared
to $791,000 as of March 31, 2008 which is attributed to efficiencies gained from
quality process initiatives.





Professional and consulting fees
decreased by $224,000 to $349,000 as of March 31, 2009 compared to $573,000 as
of March 31, 2008.  In addition to reductions in outside consulting
and accountant’s fees, professional and consulting fees decreased due to certain
expenses incurred only in 2008, including fees paid to outside investor
relations consultants totaling $51,000 and legal fees for litigation against a
former landlord of $38,000. Also the Company did not incur costs during the
quarter ended March 31, 2009 for an annual shareholders’ meeting.




16




Telecommunications expenses decreased
by $78,000 to $127,000 as of March 31, 2009 compared to $205,000 as of March 31,
2008 due to our renegotiating more favorable terms with telecommunications
service providers. Travel and mileage expenses decreased an additional $6,000 to
$19,000 as of March 31, 2009 compared to $25,000 as of March 31, 2008 as a
result of continued efforts to control all unnecessary expenses.




A net
decrease in stock compensation expense for stock options and directors fees of
$23,000 to $110,000 as of March 31, 2009 compared to $133,000 as of March 31,
2008 was due to the continued vesting of stock options.  Insurance
costs decreased by $14,000 to $91,000 as of March 31, 2009 compared to $105,000
as of March 31, 2008.  Other costs decreased by $34,000 to $177,000 as
of March 31, 2009 compared to $211,000 as of March 31, 2008, primarily as a
result of various cost saving measures implemented during fiscal
2009.





Provision for bad debt
expense.Provision for bad debt expense decreased by $2,000,
or 40.0%, to $3,000 for the nine months ended March 31, 2009, from $5,000 for
the nine months ended March 31, 2008.  This decrease is due primarily
to the effort by the Company to have customers pay by ACH or credit
cards.  As of March 31, 2009, we are fully reserved for all customer
accounts that are at least 90 days old.





Depreciation and
amortization.  Depreciation and amortization decreased by
$38,000, or 4.4%, to $830,000 for the nine months ended March 31, 2009, from
$868,000 for the nine months ended March 31, 2008.  The decrease in
depreciation totaling $41,000 relates to the increase in fully depreciated
assets still in use, offset by the addition of new depreciable assets for
improvement of the Company’s wireless broadband Internet network. This decrease
is slightly offset by an increase in amortization expense totaling $3,000 in
fiscal 2009.





Interest income and expense.For the nine months ended March 31, 2009 and 2008, the Company recorded
interest expense of $72,000 and $95,000, respectively.  The $23,000
decrease in interest expense is due to the reduction of the Company’s long-term
debt.  For the nine months ended March 31, 2009 and 2008, the Company
recorded interest income of $33,000 and $68,000, respectively. The $35,000
decrease in interest income is due to changes in cash on hand and declining
interest rates.  As a precautionary measure, in February 2009, the
Company transferred all funds from interest bearing accounts during this
economic crisis to ensure all funds were covered by the Temporary Guaranty
Liquidity Program initiated by the Federal Reserve Board.





Liquidity
and Capital Resources





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





Cash used
in operating activities is net income or loss adjusted for certain non-cash
items and changes in assets and liabilities.  For the nine months
ended March 31, 2009, cash used in operations was $369,000 compared to cash used
in operations of $976,000 for the nine months ended March 31, 2008. For the nine
months ended March 31, 2008, net loss plus non-cash items used cash of $226,000
compared to $682,000 for the same period last year.  Additional
decreases in accounts receivable, purchases of inventory, and decrease in
deferred revenue were offset by decreases of other assets, and increases of
accounts payable.





Cash used
in investing activities totaled $265,000 for the nine months ended March 31,
2009 which relates primarily to the deployment of new wireless broadband
Internet infrastructure. Cash used in investing activities totaled $418,000 for
the nine months ended March 31, 2008, which relates primarily to approximately
$655,000 in cash provided by the acquisition of TeleShare, offset primarily by
the deployment of new wireless broadband Internet infrastructure of
approximately $1,067,000.





Cash used
in financing activities, which totaled $437,000 for the nine months ended March
31, 2009, consisted primarily of principal payments on debt and capital
leases.   Cash provided by financing activities, which totaled
$5,045,000 for the nine months ended March 31, 2008, consists of the issuance of
common and preferred stock which resulted in net proceeds of $5,295,000, offset
by principal payments on long term-debt and borrowings on the RUS
loan.





We
estimate that cash on hand of $2,841,000 at March 31, 2009 along with
anticipated cash flow from operations will be sufficient for meeting our working
capital needs for the next twelve months with regard to continuing operations in
existing markets. Additional financing may be required to fund further network
improvements or expansion into new markets.  Continued decreases in
our legacy dial-up and metropolitan market Internet services revenues and
subscriber count may adversely affect the liquidity of the Company.





If
additional capital financing arrangements, including public or private sales of
debt or equity securities, or additional borrowings from commercial banks,
shareholders and third parties, are insufficient or unavailable, or if we
experience shortfalls in anticipated revenues or increases in anticipated
expenses, we will modify our operations and growth strategies to match available
funding.





17





Off
Balance Sheet Arrangements





None.




“Safe
Harbor” Statement




The
following "Safe Harbor" Statement is made pursuant to the Private Securities
Litigation Reform Act of 1995.  Certain of the statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, we seek the
protections afforded by the Private Securities Litigation Reform Act of
1995.  These risks include, without limitation, that (1) we will not
be able to increase our rural customer base at the expected rate, (2) we will
not improve EBITDA, profitability or product margins, (3) we will not form
additional partnerships with public entities seeking to participate in grant
programs or those partnerships may not be successful, (4) we will not expand our
coverage in public-private partnerships with state or local governments, utility
providers, or other entities, (5) Internet revenue in high-speed broadband will
continue to increase at a slower pace than the decrease in other Internet
services resulting in greater operating losses in future periods,  (6)
financing will not be available to us if and as needed, (7) we will not be
competitive with existing or new competitors, (8) we will not keep up with
industry pricing or technological developments impacting the Internet, (9) we
will be adversely affected by dependence on network infrastructure,
telecommunications providers and other vendors or by regulatory changes, (10)
service interruptions or impediments could harm our business, (11) we may be
accused of infringing upon the  intellectual property rights of third
parties, which is costly to defend and could limit our ability to use certain
technologies in the future, (12) government regulations could force us to change
our business practices, (13) we may be unable to hire and retain qualified
personnel, including our key executive officers, (14) future acquisitions of
wireless broadband Internet customers and infrastructure may not be available on
attractive terms and if available we may not successfully integrate those
acquisitions into our operations, (15) provisions in our certificate of
incorporation, bylaws and shareholder rights plan could limit our share price
and delay a change of management, and (16) our stock price has been volatile
historically and may continue to be volatile.   This list is intended
to identify certain of the principal factors that could cause actual results to
differ materially from those described in the forward-looking statements
included elsewhere herein.  These factors are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed risk factors
included in our Form S-4/A Registration Statement (SEC Accession No.
0001144204-09-002049).




18




ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable




ITEM 4T.
            CONTROLS
      AND PROCEDURES





Our Chief
Executive Officer and Chief Financial Officer performed an evaluation of our
disclosure controls and procedures, which have been designed to provide
reasonable assurance that the information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.  They concluded that the controls and procedures
were effective as of March 31, 2009 to provide reasonable assurance that the
information required to be disclosed by the Company in reports it files under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC.  While our
disclosure controls and procedures provide reasonable assurance that the
appropriate information will be available on a timely basis, this assurance is
subject to limitations inherent in any control system, no matter how well it may
be designed or administered. There were no changes in our internal control over
financial reporting during the nine months ended March 31, 2009 that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





19




PART II - OTHER INFORMATION




ITEM 6.
            EXHIBITS




Exhibit
                    
                    Description31.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of Jennifer S.
LeBlanc32.1
                    
                    Section
      1350 Certification of William E. Ladin, Jr.32.2
                    
                    Section
      1350 Certification of Jennifer S.
LeBlanc







20




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.











INTERNET
AMERICA, INC.


(Registrant)





Date: 
05/08/09


By: 
/s/ William E. Ladin, Jr.


William
E. Ladin, Jr.


Chairman
and Chief Executive Officer




Date: 
05/08/09


By: 
/s/ Jennifer S. LeBlanc


Jennifer
S. LeBlanc


Chief
Financial and Accounting Officer




21




INDEX
TO EXHIBITS




Exhibit
                                  
                                  Description31.1
                                  
                                  Rule
      13a-14(a)/15d-14(a) Certification of William E. Ladin,
  Jr.31.2
                                  
                                  Rule
      13a-14(a)/15d-14(a) Certification of Jennifer S.
LeBlanc32.1
                                  
                                  Section
      1350 Certification of William E. Ladin, Jr.32.2
                                  
                                  Section
      1350 Certification of Jennifer S.
LeBlanc
 22