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, 2010





OR





 ̈ 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
 ̈





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  ̈               No
 ̈





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  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (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  ̈               No
x





As of May
13, 2010, registrant had 16,558,914 shares of Common Stock at $.01 par value,
outstanding.








PART
I - FINANCIAL INFORMATION





ITEM
1 - FINANCIAL STATEMENTS





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE
SHEETS





March 31,
                    
                    
                    June 30,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                    
                    $
                    1,279,364
                    
                    
                    $
                    2,421,264Restricted
      cash
                    
                    
                    6,432
                    
                    
                    
                    6,432Accounts
      receivable, net of allowance for uncollectible accounts of $5,011 and
      $6,824 as of March 31, 2010 and June 30, 2009,
respectively
                    
                    
                    78,258
                    
                    
                    
                    122,128Inventory
                    
                    
                    274,855
                    
                    
                    
                    255,534Prepaid
      expenses and other current assets
                    
                    
                    447,353
                    
                    
                    
                    542,606Total
      current assets
                    
                    
                    2,086,262
                    
                    
                    
                    3,347,964Property
      and equipment—net
                    
                    
                    1,898,018
                    
                    
                    
                    2,150,562Goodwill—net
                    
                    
                    2,413,127
                    
                    
                    
                    2,413,127Subscriber
      acquisition costs—net
                    
                    
                    409,204
                    
                    
                    
                    744,869Other
      assets—net
                    
                    
                    41,502
                    
                    
                    
                    53,318TOTAL
      ASSETS
                    
                    $
                    6,848,113
                    
                    
                    $
                    8,709,840LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      accounts payable
                    
                    $
                    261,303
                    
                    
                    $
                    298,903Accrued
      liabilities
                    
                    
                    396,743
                    
                    
                    
                    573,013Deferred
      revenue
                    
                    
                    887,206
                    
                    
                    
                    1,029,773Current
      portion of long-term debt
                    
                    
                    441,463
                    
                    
                    
                    613,746Current
      portion of capital lease obligations
                    
                    
                    27,064
                    
                    
                    
                    22,929Total
      current liabilities
                    
                    
                    2,013,779
                    
                    
                    
                    2,538,364Long-term
      debt, net of current portion
                    
                    
                    985,736
                    
                    
                    
                    664,772Long-term
      capital lease obligations, net of current portion
                    
                    
                    9,717
                    
                    
                    
                    30,565Total
      liabilities
                    
                    
                    3,009,232
                    
                    
                    
                    3,233,701COMMITMENTS
      AND CONTINGENCIES
                    
                    
                    -
                    
                    
                    
                    -SHAREHOLDERS'
      EQUITY:Preferred
      stock $.01 par value: 5,000,000 shares authorized, 2,889,076 issued and
      outstanding as of March 31, 2010 and June 30, 2009
                    
                    
                    28,891
                    
                    
                    
                    28,891Common
      stock, $.01 par value: 40,000,000 shares authorized, 16,558,914 and
      16,857,031 issued and outstanding as of March 31, 2010 and June 30, 2009,
      respectively
                    
                    
                    165,589
                    
                    
                    
                    168,571Additional
      paid-in capital
                    
                    
                    62,989,134
                    
                    
                    
                    63,676,806Accumulated
      deficit
                    
                    
                    (59,344,106
                    )
                    
                    
                    (58,398,129
                    )Total
      Internet America, Inc. shareholders' equity
                    
                    
                    3,839,508
                    
                    
                    
                    5,476,139Noncontrolling
      interest in subsidiary
                    
                    
                    (627
                    )
                    
                    
                    -Total
      shareholders' equity
                    
                    
                    3,838,881
                    
                    
                    
                    5,476,139TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                    
                    $
                    6,848,113
                    
                    
                    $
                    8,709,840





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 31,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009REVENUES:Internet
      services
                          
                          $
                          1,828,523
                          
                          
                          $
                          1,878,991
                          
                          
                          $
                          5,419,960
                          
                          
                          $
                          5,764,038Other
                          
                          
                          44,994
                          
                          
                          
                          44,481
                          
                          
                          
                          126,029
                          
                          
                          
                          152,204TOTAL
      REVENUES
                          
                          
                          1,873,517
                          
                          
                          
                          1,923,472
                          
                          
                          
                          5,545,989
                          
                          
                          
                          5,916,242OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                          
                          
                          1,233,737
                          
                          
                          
                          1,272,273
                          
                          
                          
                          3,776,422
                          
                          
                          
                          3,963,063Sales
      and marketing
                          
                          
                          73,452
                          
                          
                          
                          69,948
                          
                          
                          
                          221,198
                          
                          
                          
                          212,793General
      and administrative
                          
                          
                          510,191
                          
                          
                          
                          793,812
                          
                          
                          
                          1,738,195
                          
                          
                          
                          1,995,117Provision
      for (recovery of) bad debt expense
                          
                          
                          2
                          
                          
                          
                          3,381
                          
                          
                          
                          (1,813
                          )
                          
                          
                          3,317Depreciation
      and amortization
                          
                          
                          251,130
                          
                          
                          
                          256,929
                          
                          
                          
                          755,230
                          
                          
                          
                          830,034Gain
      from restructuring of debt
                          
                          
                          (51,613
                          )
                          
                          
                          -
                          
                          
                          
                          (51,613
                          )
                          
                          
                          -TOTAL
      OPERATING COSTS AND EXPENSES
                          
                          
                          2,016,899
                          
                          
                          
                          2,396,343
                          
                          
                          
                          6,437,619
                          
                          
                          
                          7,004,324LOSS
      FROM OPERATIONS
                          
                          
                          (143,382
                          )
                          
                          
                          (472,871
                          )
                          
                          
                          (891,630
                          )
                          
                          
                          (1,088,082
                          )INTEREST
      INCOME
                          
                          
                          2,120
                          
                          
                          
                          5,301
                          
                          
                          
                          8,741
                          
                          
                          
                          32,826INTEREST
      EXPENSE
                          
                          
                          (17,552
                          )
                          
                          
                          (23,956
                          )
                          
                          
                          (63,088
                          )
                          
                          
                          (72,412
                          )NET
      LOSS
                          
                          $
                          (158,814
                          )
                          
                          $
                          (491,526
                          )
                          
                          $
                          (945,977
                          )
                          
                          $
                          (1,127,668
                          )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                          
                          $
                          (94
                          )
                          
                          $
                          67
                          
                          
                          $
                          (627
                          )
                          
                          $
                          11NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                          
                          $
                          (158,720
                          )
                          
                          $
                          (491,593
                          )
                          
                          $
                          (945,350
                          )
                          
                          $
                          (1,127,679
                          )NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.06
                          )
                          
                          $
                          (0.07
                          )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                          
                          
                          16,558,914
                          
                          
                          
                          16,857,031
                          
                          
                          
                          16,558,290
                          
                          
                          
                          16,857,031





See
accompanying notes to condensed consolidated financial
statements.


3





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months EndedMarch 31,2010
                
                
                2009OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (945,977
                )
                
                $
                (1,127,668
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                755,230
                
                
                
                830,034Loss
      on disposal of fixed assets
                
                
                23,390
                
                
                
                2,169Provision
      for (Recovery) of bad debt expense
                
                
                (1,813
                )
                
                
                3,317Non-cash
      stock compensation expense
                
                
                54,663
                
                
                
                66,426Gain
      from restructuring of debt
                
                
                (51,613
                )
                
                
                -Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                45,683
                
                
                
                50,154Inventory
                
                
                (19,321
                )
                
                
                23,793Prepaid
      expenses and other current assets
                
                
                95,253
                
                
                
                41,219Other
      assets
                
                
                11,816
                
                
                
                24,269Accounts
      payable and accrued liabilities
                
                
                (213,870
                )
                
                
                (98,849
                )Deferred
      revenue
                
                
                (142,567
                )
                
                
                (183,551
                )Net
      cash used in operating activities
                
                
                (389,126
                )
                
                
                (368,687
                )INVESTING
      ACTIVITIES:Purchases
      of property and equipment, net
                
                
                (257,460
                )
                
                
                (275,914
                )Proceeds
      from sale of property and equipment
                
                
                6,880
                
                
                
                10,934Net
      cash used in investing activities
                
                
                (250,580
                )
                
                
                (264,980
                )FINANCING
      ACTIVITIES:Principal
      payments of long-term debt
                
                
                (485,481
                )
                
                
                (436,736
                )Principal
      payments of capital leases
                
                
                (16,713
                )
                
                
                -Net
      cash used in financing activities
                
                
                (502,194
                )
                
                
                (436,736
                )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (1,141,900
                )
                
                
                (1,070,403
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                2,421,264
                
                
                
                3,911,680CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                1,279,364
                
                
                $
                2,841,277SUPPLEMENTAL
      INFORMATION:Cash
      paid for interest
                
                $
                66,039
                
                
                $
                69,826NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Debt
      extinguished for breach of acquisition contract
                
                $
                -
                
                
                $
                90,670Property
      and equipment purchased under capital lease
                
                $
                -
                
                
                $
                58,694Cancellation
      of common stock shares for long term debt in connection with
      acquisition
                
                $
                745,943
                
                
                $
                -Debt
      issued in connection with canceled common stock, net
                
                $
                685,773
                
                
                $
                -Non
      cash adjustment to intangible assets related to imputed interest on long
      term debt issued for cancellation of common stock
                
                $
                60,170
                
                
                $
                -





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 (“SEC”).  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, 2009, included in the Company’s Annual Report on Form 10-K (SEC Accession
No. 0001144204-09-050404 ).





2.
              Liquidity




The
Company is subject to risks including the presence of recurring losses and
negative cash flow, among others. Accordingly, the Company will be dependent on
continuing to reverse the trend of declining revenues and/or expense reductions
to provide financing to support its operations and for any capital expenditures.
If efforts to increase operating profits do not continue to be successful or
other negative factors arise, this could adversely affect future profits and the
Company’s ability to achieve intended business objectives.





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, 2010 and 2009.  For the three and nine months ended March
31, 2010, 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, 2010, options
to purchase 569,767 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, 2010.
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.
There were no options exercised to purchase shares of common stock during the
nine months ended March 31, 2010 and 2009.





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 Financial Accounting Standards Board (“FASB”) guidance on goodwill and other
intangibles, 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, 2009,
the Company recorded $1,120,000 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, 2010.





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 $409,000 and $745,000, as of March 31, 2010 and June 30,
2009, 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 approximately $86,000 and $275,000,
respectively.  As of March 31, 2010, amortization expense for the
fiscal years ended June 30, 2010, 2011 and 2012 is expected to be approximately
$357,000, $323,000 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.





During
the quarter ended September 30, 2009, the former owners of TeleShare
Communications Services, Inc. (“TeleShare”) tendered the 298,117 shares of
common stock issued to them as part of the acquisition cost and held in escrow,
in exchange for a non-interest bearing promissory note for
$745,943.   The Company reduced subscriber acquisition costs to
record imputed interest of $60,170 in connection with the issuance of the
promissory note.





6.
            Long-Term
      Debt





Long-term
debt consists of:


March
                                        
                                        
                                        June 30,2010
                                        
                                        
                                        2009Note
      payable due July 19, 2010, payable in quarterly payments of $7,751
      with interest imputed at 9% (net of unamortized discount of
      $500)
                                        
                                        $
                                        14,937
                                        
                                        
                                        $
                                        36,211Note
      payable due January 23, 2011 payable in bi-annual installments of
      $13,917 with interest imputed at 8% (net of unamortized discount of
      $859)
                                        
                                        
                                        12,886
                                        
                                        
                                        
                                        23,106Note
      payable due August 08, 2010, payable in monthly installments of $1,033
      beginning October 08, 2008 with interest imputed at 5% (net of unamortized
      discount of $64)
                                        
                                        
                                        5,103
                                        
                                        
                                        
                                        14,025Note
      payable due June 20, 2012, payable in monthly installments of $2,088 with
      interest imputed at 9% (net of unamortized discount of
    $5,513)
                                        
                                        
                                        50,859
                                        
                                        
                                        
                                        65,656Note
      payable due July 20, 2010, payable in monthly installments of $1,818 with
      interest imputed at 6.5% (net of unamortized discount of
    $97)
                                        
                                        
                                        7,173
                                        
                                        
                                        
                                        22,757Note
      payable due July 20, 2010, payable in monthly installments of $1,409 with
      interest imputed at 6.5% (net of unamortized discount of
    $76)
                                        
                                        
                                        5,559
                                        
                                        
                                        
                                        17,637Note
      payable due  February 15, 2015, payable in monthly payments of
      $4,346 with fixed interest at 4.5%
                                        
                                        
                                        229,656
                                        
                                        
                                        
                                        452,548Note
      payable due  February 15, 2015, payable in monthly payments of
      $11,189 with interest imputed at 3.25 % (net of unamortized discount of
      $50,804)
                                        
                                        
                                        609,355
                                        
                                        
                                        
                                        -Loan
      and Security Agreement with United States Department of Agriculture Rural
      Utilities Service
                                        
                                        
                                        491,671
                                        
                                        
                                        
                                        646,5781,427,199
                                        
                                        
                                        
                                        1,278,518Less
      current portion
                                        
                                        
                                        (441,463
                                        )
                                        
                                        
                                        (613,746
                                        )Total
      long-term debt, net of current portion
                                        
                                        $
                                        985,736
                                        
                                        
                                        $
                                        664,772





As
of March 31, 2010, the Company’s long-term debt which is secured by certain
inventory and equipment and certificates of deposit totaled approximately
$563,000.


6





In March
2010, the Company entered into an agreement with Mark and Cynthia Ocker, former
owners of TeleShare (“Owners”) to modify the terms of payment. As a result of
this transaction, the Company recorded a gain from restructuring of debt in the
amount of $51,613.





7.
            Shareholders’
      Equity





Upon the
surrender by the TeleShare Owners of 298,117 shares of Company stock held in
escrow, in exchange for a promissory note issued by the Company, those shares
were canceled and the total number of outstanding shares of Company common stock
was reduced to 16,558,914.




In March
2010, the Company modified the terms of promissory notes issued to the TeleShare
Owners.  The Company granted the Owners an option to surrender their
noncontrolling interest in exchange for certain assets and customer lists owned
by TeleShare as consideration for the modification.





8.
            Income
      Taxes





During
the three and nine months ended March 31, 2010, the Company generated a net loss
of $159,000 and $946,000, respectively.  During the three and nine
months ended March 31, 2009, the Company generated a net loss of $492,000 and
$1,128,000, respectively.   No provision for income taxes has
been recorded for the three and nine months ended March 31, 2010 and 2009, as
the Company has net operating losses generated in the current and prior
periods.   As of March 31, 2010, the Company continues to
maintain a full valuation allowance for its net deferred tax assets of
approximately $14.8 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 FASB guidance on accounting for uncertainty in
income taxes.  As a result of the implementation of the guidance,
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 2006, 2007, 2008 and 2009 tax
periods remain subject to examination by various federal and state tax
jurisdictions.




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, an Owner of
TeleShare, for contract services during the nine months ended March 31, 2010 and
2009:





Nine Months EndedMarch 31,2010
                                      
                                      
                                      2009Troy
      LeMaile Stovall
                                      
                                      $
                                      12,250
                                      
                                      
                                      $
                                      11,676Justin
      McClure
                                      
                                      
                                      12,250
                                      
                                      
                                      
                                      11,250John
      Palmer
                                      
                                      
                                      11,750
                                      
                                      
                                      
                                      12,073Steven
      Mihaylo
                                      
                                      
                                      11,750
                                      
                                      
                                      
                                      11,893Cynthia
      Ocker
                                      
                                      
                                      110,576
                                      
                                      
                                      
                                      124,335$
                                      158,576
                                      
                                      
                                      $
                                      171,227





On
September 14, 2009, Internet America issued a Warrant to purchase 197,461 shares
of Common Stock to each of Steve Mihaylo and Ambassador John Palmer, both
directors of Company. These warrants were issued as consideration for
documentation provided by these two directors regarding the Company’s ability to
obtain the minimum outside capital funding in connection withan application by the Company for a
grant from the Broadband Technology Opportunity Program. The grant
program required a minimum of 20% of the project costs to be funded from
non-federal sources. The Warrants are exercisable at $0.38 per share for 5
years.


7





10.
            New
      Accounting Pronouncements





In June
2009, the FASB issued the FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (the “Codification”). The
Codification is the source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of this statement, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. The Codification is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. This
statement became effective for the Company on July 1, 2009. This statement did
not have a material effect on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued guidance on noncontrolling interests in
consolidated financial statements. The guidance 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.  This guidance
became effective for the Company on July 1, 2009.


8





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-K for the
fiscal year ended June 30, 2009 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 approximately 8,400 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 26,200 total
subscribers in Texas as of March 31, 2010, which represents active billed
services.  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.





Our
dedication and focus over the past several months has primarily been to improve
cash flow and adjusted EBITDA by reduction of expenses, simplification of
systems and improvements to processes and procedures.  During January
2010, we engaged outside consultants to evaluate our key personnel and
plans.  With their assistance, we were able to reduce our headcount
and realign the Company to a flatter, more efficient organization.





Our
success can be measured in improved adjusted EBITDA and decreases in headcount.
 For the three months ended March 31, 2010, reported adjusted EBITDA income
was $121,000 compared to a reported adjusted EBITDA loss of $194,000 for the
three months ended March 31, 2009, an improvement of $315,000.  While
we were able to reduce expenses across the board during the third fiscal
quarter, including restructuring our remaining acquisition debt, some of the
realized savings will not be evident until the fourth quarter of this fiscal
year ending June 30, 2010.





With the
reduced headcount and fewer customer issues, we determined we no longer needed
as heavy a Senior Management structure, and through streamlined systems coupled
with the outsourcing of some functions, during the quarter ended March 31, 2010,
the Company was able to eliminate some Senior Management positions including the
Chief Operating Officer, the Vice President of Sales and Marketing and the Chief
Financial Officer.  During the fourth quarter of fiscal 2010, the
Company anticipates elevating several current experienced employees to
functional vice presidents to fulfill many of the duties previously performed by
Senior Management.





During
the third quarter of fiscal 2010, we also made across the board salary
reductions and, in addition to the reduction of Senior Management positions
previously discussed, the Company has reduced the total employees from 93 in
December 2007 when the Company began its focus on the “Quality Process” to 51 as
of May 13, 2010.  These staffing economies along with other expense
reductions and quality processes allowed for a decrease in total operating
expenses of $378,000 for the quarter ended March 31, 2010 as compared to the
quarter ended March 31, 2009.  While we reduced our headcount of
employees, through implementing process improvements and outsourcing of
functions, management believes the Company is operating as well or better today
than at any point in the past.





During
the quarter ended March 31, 2010, the Company received notification that its
application for stimulus money offered through The American Recovery and
Reinvestment Act legislation was not accepted.  The Company has
decided not to apply for the second round of stimulus money based on its belief
that the expense involved and work required to complete the application, in
light of the historical record of acceptances, does not justify submitting a
second application. The Company believes that it can pursue its rights under the
present RUS loan commitment at a much lower cost and with less
complexity.


9





As a
result of the progress during the past several months, management believes there
is real opportunity to further improve both cash flow and adjusted EBITDA in the
next few quarters and plans to focus on improving revenues from the internal
growth of wireless operations, commercial services including video meetings
(conferencing) and possible acquisitions of other wireless
ISP's.  There is no guarantee that the Company will complete any
acquisitions as it is committed to making only acquisitions that are immediately
accretive with positive EBITDA.





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
includes telex messaging service revenues.





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





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





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





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





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





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.


10





Results
of Operations





Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009





The following table sets forth certain
unaudited financial data for the three months ended March 31, 2010 and
2009.  Operating results for any period are not indicative of results
for any future period.  Dollar amounts are shown in thousands (except
share, per share and subscriber count data).





Three Months Ended March 31, ($ in thousands)2010
                    
                    
                    % of
                      Revenues
                    
                    
                    2009
                    
                    
                    % of
                      RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                    
                    $
                    1,829
                    
                    
                    
                    97.6
                    %
                    
                    $
                    1,879
                    
                    
                    
                    97.7
                    %Other
                    
                    
                    45
                    
                    
                    
                    2.4
                    %
                    
                    
                    44
                    
                    
                    
                    2.3
                    %TOTAL
      REVENUES
                    
                    
                    1,874
                    
                    
                    
                    100.0
                    %
                    
                    
                    1,923
                    
                    
                    
                    100.0
                    %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                    
                    
                    1,234
                    
                    
                    
                    65.9
                    %
                    
                    
                    1,272
                    
                    
                    
                    66.1
                    %Sales
      and marketing
                    
                    
                    74
                    
                    
                    
                    3.9
                    %
                    
                    
                    70
                    
                    
                    
                    3.6
                    %General
      and administrative
                    
                    
                    510
                    
                    
                    
                    27.2
                    %
                    
                    
                    793
                    
                    
                    
                    41.2
                    %Provision
      for bad debt expense
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    3
                    
                    
                    
                    0.2
                    %Depreciation
      and amortization
                    
                    
                    251
                    
                    
                    
                    13.4
                    %
                    
                    
                    257
                    
                    
                    
                    13.4
                    %Gain
      from restructuring of debt
                    
                    
                    (52
                    )
                    
                    
                    (2.8
                    )%
                    
                    
                    -
                    
                    
                    
                    0.0
                    %TOTAL
      OPERATING COSTS AND EXPENSES
                    
                    
                    2,017
                    
                    
                    
                    107.6
                    %
                    
                    
                    2,395
                    
                    
                    
                    124.5
                    %OPERATING
      LOSS
                    
                    
                    (143
                    )
                    
                    
                    (7.6
                    )%
                    
                    
                    (472
                    )
                    
                    
                    (24.5
                    )%INTEREST
      INCOME
                    
                    
                    2
                    
                    
                    
                    (0.1
                    )%
                    
                    
                    5
                    
                    
                    
                    0.3
                    %INTEREST
      EXPENSE
                    
                    
                    (18
                    )
                    
                    
                    (1.0
                    )%
                    
                    
                    (25
                    )
                    
                    
                    (1.3
                    )%NET
      LOSS
                    
                    $
                    (159
                    )
                    
                    
                    (8.5
                    )%
                    
                    $
                    (492
                    )
                    
                    
                    (25.5
                    )%LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                    
                    $
                    (0
                    )
                    
                    
                    0.0
                    %
                    
                    $
                    0
                    
                    
                    
                    0.0
                    %NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                    
                    $
                    (159
                    )
                    
                    
                    (8.5
                    )%
                    
                    $
                    (492
                    )
                    
                    
                    (25.5
                    )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                    
                    $
                    (0.01
                    )
                    
                    
                    
                    
                    
                    $
                    (0.03
                    )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                    
                    
                    16,558,914
                    
                    
                    
                    
                    
                    
                    
                    16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                    
                    
                    26,200
                    
                    
                    
                    
                    
                    
                    
                    27,500Adjusted
      EBITDA(loss)(2)
                    
                    $
                    121
                    
                    
                    
                    
                    
                    
                    $
                    (194
                    )Adjusted
      EBITDA margin(3)
                    
                    
                    6.5
                    %
                    
                    
                    
                    
                    
                    
                    (10.1
                    )%Reconciliation
      of net loss to Adjusted EBITDA (loss):Net
      loss
                    
                    $
                    (159
                    )
                    
                    
                    
                    
                    
                    $
                    (492
                    )Add:Depreciation
      and amortization
                    
                    
                    251
                    
                    
                    
                    
                    
                    
                    
                    257Stock
      compensation
                    
                    
                    13
                    
                    
                    
                    
                    
                    
                    
                    21Interest
      expense
                    
                    
                    18
                    
                    
                    
                    
                    
                    
                    
                    25Less:
      Interest income
                    
                    
                    (2
                    )
                    
                    
                    
                    
                    
                    
                    (5
                    )Adjusted
      EBITDA (loss)(2)
                    
                    $
                    121
                    
                    
                    
                    
                    
                    
                    $
                    (194
                    )





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





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





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




11





Total
revenue.Total revenue decreased by $49,000, or 2.5%, to
$1,874,000 for the three months ended March 31, 2010, from $1,923,000 for the
three months ended March 31, 2009.  The Company’s total subscriber
count decreased by 1,300, or 4.7%, to 26,200 as of March 31, 2010 compared to
27,500 as of March 31, 2009.  The Company’s wireless broadband
Internet subscriber count increased by 400, or 5.0%, to approximately 8,400 as
of March 31, 2010, from 8,000 as of March 31, 2009. As a result of the increase
in subscribers, wireless broadband Internet revenue increased by $91,000 to
$1,188,000 as of March 31, 2010 compared to $1,097,000 as of March 31,
2009.  The increase in wireless broadband Internet revenues was offset
by the decrease in dial-up Internet subscriber counts and related revenue of
$141,000, which is attributed to the loss of dial-up customers moving to other
high-speed providers’ broadband service. The Company derives other revenues
primarily by providing telex messaging services, which increased slightly by
$1,000, to $45,000 for the three months ended March 31, 2010 compared to $44,000
in 2009 and varies based on customer demand but is expected to decline as
customers migrate to other technologies.





Connectivity and operations.Connectivity and operations expense decreased by $38,000, or 3.0%, to
$1,234,000 for the three months ended March 31, 2010, from $1,272,000 for the
three months ended March 31, 2009. This decrease is primarily attributable to
decreases in expensed assets, salary and personnel costs, and data and
telecommunications expenses.  Expensed assets decreased by $27,000 to
$104,000 as of March 31, 2010 compared to $131,000 as of March 31, 2009 due to a
decrease in supplies, installation costs and repairs.  Salaries, wages
and related personnel costs decreased by $19,000 to $573,000 as of March 31,
2010 compared to $592,000 as of March 31, 2009 as a result of the salary
reduction plan for all employees implemented as of January 1,
2010.  Data and telecommunications expense decreased slightly by
$3,000 to $371,000 as of March 31, 2010 compared to $374,000 as of March 31,
2009.





The remaining decrease in expense
relates primarily to a $2,000 decrease in travel costs and a $1,000 decrease in
merchant fees.  The decreases in the previously discussed expenses
were offset by an increase in rents/utilities and tower lease of $14,000 due to
improvements in the Company's wireless broadband infrastructure and increases in
tower rental rates.





Sales and marketing.The
Company increased print advertising slightly, causing sales and marketing
expense to increase by $4,000, or 5.7%, to $74,000 for the three months ended
March 31, 2010 compared to $70,000 for the three months ended March 31,
2009.





General and
administrative.General and administrative expense (G&A)
decreased by $283,000, or 35.7%, to $510,000 for the three months ended March
31, 2010, from $793,000 for the three months ended March 31, 2009.  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 $89,000, or
14.9%.





Salaries and wages decreased $108,000 to
$127,000 as of March 31, 2010 compared to $235,000 as of March 31, 2009 due to
the salary reduction plan implemented on January 1, 2010. These decreases were
offset by a $40,000 increase in professional and consulting fees to $151,000 as
of March 31, 2010 compared to $111,000 as of March 31, 2009 primarily due to the
hiring of an outside consultant to assist with COO duties.  In
addition the President/Chief Operating Officer (COO), the Chief Financial
Officer (CFO) and the Vice President of Marketing and Sales resigned from the
Company during the current quarter.  Rent and utilities expenses
decreased by $15,000 to $51,000 as of March 31, 2010 compared to $66,000 as of
March 31, 2009 primarily due to the renegotiation of our phone system lease
contract and the consolidation of field storage facilities. The expense related
to the issuance of stock options and directors’ fees decreased by $3,000 to
$30,000 as of March 31, 2010 compared to $33,000 as of March 31, 2009 due to the
termination of employment of some grantees. Travel expenses decreased by $3,000
to $1,000 as of March 31, 2010 compared to $4,000 as of March 31,
2009.  Insurance expenses decreased slightly by $3,000 to $27,000 as
of March 31, 2010 from $30,000 as of March 31, 2009. Other G&A expenses
decreased $5,000 to $70,000 as of March 31, 2010 from $75,000 as of March 31,
2009.  Telecommunications expense increased by $8,000 due to the
purchase of increased bandwidth capacity.





Provision for bad debt expense
(recovery).Provision for bad debt expense decreased by $3,000
for the three months ended March 31, 2010.  As of March 31, 2010, we
are fully reserved for all customer accounts that are at least 90 days
old.





Depreciation and
amortization.  Depreciation and amortization decreased by
$6,000, or 2.3%, to $251,000 for the three months ended March 31, 2010, from
$257,000 for the three months ended March 31, 2009. The decrease in amortization
expense of $33,000 was offset by the increase in depreciation of $27,000. The
increase in depreciation relates to the decrease in fully depreciated assets
still in use, offset by the improvement of the Company’s wireless broadband
Internet network.  The decrease in amortization expense of acquired
subscriber costs is the result of early wireless acquisitions in fiscal 2005 and
2006 becoming fully amortized.


12





Gain from restructuring of
debt.Gain from restructuring of debt totaled $52,000 for the
three months ended March 31, 2010. During the quarter ended March 31, 2010, Mark
and Cynthia Ocker along with the Company entered into amendments to the notes
payable originally issued to them in connection with the acquisition of
TeleShare. These amendments extend the payment terms and also reduce the
interest rate and carrying value slightly resulting in a one-time
gain.





Interest expense/income.For
the three months ended March 31, 2010 and 2009, the Company recorded interest
expense of $18,000 and $25,000, respectively.  The $7,000 decrease in
interest expense is the result of the reduction in the Company’s long-term
debt.  For the three months ended March 31, 2010 and 2009, the Company
recorded interest income of $2,000 and $5,000, respectively; the decrease
is due primarily to a decline in cash on hand.


13





Nine
Months Ended March 31, 2010 Compared to Nine Months Ended March 31,
2009





The following table sets forth certain
unaudited financial data for the nine months ended March 31, 2010 and
2009.  Operating results for any period are not indicative of results
for any future period.  Dollar amounts are shown in thousands (except
share, per share and subscriber count data).





Nine Months Ended March 31, ($ in thousands)2010
                    
                    
                    % of
                      Revenues
                    
                    
                    2009
                    
                    
                    % of
                      RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                    
                    $
                    5,420
                    
                    
                    
                    97.7
                    %
                    
                    $
                    5,764
                    
                    
                    
                    97.4
                    %Other
                    
                    
                    126
                    
                    
                    
                    2.3
                    %
                    
                    
                    152
                    
                    
                    
                    2.6
                    %Total
                    
                    
                    5,546
                    
                    
                    
                    100.0
                    %
                    
                    
                    5,916
                    
                    
                    
                    100.0
                    %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                    
                    
                    3,777
                    
                    
                    
                    68.1
                    %
                    
                    
                    3,963
                    
                    
                    
                    67.0
                    %Sales
      and marketing
                    
                    
                    221
                    
                    
                    
                    4.0
                    %
                    
                    
                    213
                    
                    
                    
                    3.6
                    %General
      and administrative
                    
                    
                    1,739
                    
                    
                    
                    31.3
                    %
                    
                    
                    1,995
                    
                    
                    
                    33.7
                    %(Provision
      for) Recoveries of bad debt
                    
                    
                    (2
                    )
                    
                    
                    0.0
                    %
                    
                    
                    3
                    
                    
                    
                    0.1
                    %Depreciation
      and amortization
                    
                    
                    755
                    
                    
                    
                    13.6
                    %
                    
                    
                    830
                    
                    
                    
                    13.9
                    %Gain
      from restructuring of debt
                    
                    
                    (52
                    )
                    
                    
                    (0.9
                    )%
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Total
                    
                    
                    6,438
                    
                    
                    
                    116.1
                    %
                    
                    
                    7,004
                    
                    
                    
                    118.3
                    %OPERATING
      LOSS
                    
                    
                    (892
                    )
                    
                    
                    (16.1
                    )%
                    
                    
                    (1,088
                    )
                    
                    
                    (18.3
                    )%INTEREST
      INCOME
                    
                    
                    9
                    
                    
                    
                    0.2
                    %
                    
                    
                    32
                    
                    
                    
                    0.5
                    %INTEREST
      EXPENSE
                    
                    
                    (63
                    )
                    
                    
                    (1.1
                    )%
                    
                    
                    (72
                    )
                    
                    
                    (1.2
                    )%NET
      LOSS
                    
                    $
                    (946
                    )
                    
                    
                    (17.0
                    )%
                    
                    $
                    (1,128
                    )
                    
                    
                    (19.0
                    )%LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                    
                    $
                    (1
                    )
                    
                    
                    0.0
                    %
                    
                    $
                    0
                    
                    
                    
                    0.0
                    %NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                    
                    $
                    (945
                    )
                    
                    
                    (17.0
                    )%
                    
                    $
                    (1,128
                    )
                    
                    
                    (19.0
                    )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                    
                    $
                    (0.06
                    )
                    
                    
                    
                    
                    
                    $
                    (0.07
                    )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                    
                    
                    16,558,290
                    
                    
                    
                    
                    
                    
                    
                    16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                    
                    
                    26,200
                    
                    
                    
                    
                    
                    
                    
                    27,500Adjusted
      EBITDA(loss)(2)
                    
                    $
                    (82
                    )
                    
                    
                    
                    
                    
                    $
                    (192
                    )Adjusted
      EBITDA margin(3)
                    
                    
                    (1.5
                    )%
                    
                    
                    
                    
                    
                    
                    (3.2
                    )%CASH
      FLOW DATA:Cash
      flow used in operations
                    
                    $
                    (389
                    )
                    
                    
                    
                    
                    
                    $
                    (369
                    )Cash
      flow used in investing activities
                    
                    $
                    (251
                    )
                    
                    
                    
                    
                    
                    $
                    (265
                    )Cash
      flow used in financing activities
                    
                    $
                    (502
                    )
                    
                    
                    
                    
                    
                    $
                    (437
                    )Reconciliation
      of net loss to Adjusted EBITDA (loss):Net
      loss
                    
                    $
                    (946
                    )
                    
                    
                    
                    
                    
                    $
                    (1,128
                    )Add:Depreciation
      and amortization
                    
                    
                    755
                    
                    
                    
                    
                    
                    
                    
                    830Stock
      compensation
                    
                    
                    55
                    
                    
                    
                    
                    
                    
                    
                    66Interest
      expense
                    
                    
                    63
                    
                    
                    
                    
                    
                    
                    
                    72Less:
      Interest income
                    
                    
                    (9
                    )
                    
                    
                    
                    
                    
                    
                    (32
                    )Adjusted
      EBITDA (loss)(2)
                    
                    $
                    (82
                    )
                    
                    
                    
                    
                    
                    $
                    (192
                    )





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





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





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


14





Total
revenue.Total revenue decreased by $370,000, or 6.3%, to
$5,546,000 for the nine months ended March 31, 2010, from $5,916,000 for the
nine months ended March 31, 2009.  The Company’s total subscriber
count decreased by 1,300, or 4.7%, to 26,200 as of March 31, 2010 compared to
27,500 as of March 31, 2009.  The Company’s wireless broadband
Internet subscriber count increased by 400, or 5.0%, to approximately 8,400 as
of March 31, 2010 from 8,000 as of March 31, 2009. As a result of the increase
in subscribers, wireless broadband Internet revenue increased by $271,000 to
$3,469,000 as of March 31, 2010 compared to $3,198,000 as of March 31, 2009. The
increase in wireless broadband Internet revenues was offset by the decrease in
dial-up Internet subscriber counts and related revenue of $615,000, which is
attributed to the loss of dial-up customers moving to other high-speed
providers’ broadband service. The Company derives other revenues primarily by
providing telex messaging services, which decreased to $126,000 for the nine
months ended March 31, 2010 compared to $152,000 in 2009. Due to availability of
alternative technology, telex revenue is expected to continue to
decline.





Connectivity and operations.Connectivity and operations expense decreased by $186,000, or 4.7%, to
$3,777,000 for the nine months ended March 31, 2010, from $3,963,000 for the
nine months ended March 31, 2009.  There was a decrease in salaries
and wages of approximately $137,000 to $1,733,000 as of March 31, 2010 compared
to $1,870,000 as of March 31, 2009. This was attributed to efficiencies gained
from quality process initiatives and the salary reduction plan implemented on
January 1, 2010.  Installation expenses decreased by $80,000 to
$345,000 as of March 31, 2010 compared to $425,000 as of March 31, 2009 due to
decreases in supplies, installation costs and repairs.  Data and
telecommunications expense decreased by $25,000 to $1,116,000 as of March 31,
2010 compared to $1,141,000 as of March 31, 2009 due to our renegotiating more
favorable terms with telecommunications service providers. Travel and mileage
costs decreased by $14,000 to $79,000 as of March 31, 2010 compared to $93,000
as of March 31, 2009.  The remaining decrease in expense primarily
related to a decrease in merchant fees of $7,000, which is a result of the
decrease in revenues.





The decreases in the previously
discussed expenses were partially offset by an increase of $45,000 to $350,000
in facilities and tower lease costs for the nine months ended March 31, 2010,
compared to $305,000 as of March 31, 2009.  The increase in tower
leases relates to improvements in the Company’s wireless broadband
infrastructure and increases in tower rental rates.  There was an
increase of other expenses of $32,000 for a one time conversion cost related to
transfer email services to a hosted outsource service provider.





Sales and marketing.Sales
and marketing expense increased by $8,000, or 3.8%, to $221,000 for the nine
months ended March 31, 2010 compared to $213,000 for the nine months ended March
31, 2009.  Direct print advertising expense increased by $9,000 to
$42,000 as of March 31, 2010 compared to $33,000 as of March 31,
2009.  These increases were offset by a slight decrease in salaries of
$1,000.  The Company is focusing on direct advertising in all improved
or enhanced network areas in fiscal year 2010.





General and
administrative.G&A decreased by $256,000, or 12.8%, to
$1,739,000 for the nine months ended March 31, 2010, from $1,995,000 for the
nine months ended March 31, 2009.  In February 2009, the Company
recorded a write off expense for direct costs incurred in the contemplated
merger with KeyOn of $194,000.





Salaries and wages decreased $151,000
to $564,000 as of March 31, 2010 compared to $715,000 as of March 31, 2009. The
decrease is primarily due to a reduction in the number of employees, including
resignations of the COO, CFO and the Vice President of Marketing and Sales
during the quarter ended March 31, 2010, and the salary reduction plan
implemented on January 1, 2010. Certain staffing decreases were offset by
consulting fees paid to an outside consultant hired at the end of January, 2010
to assist with COO duties.  Facilities costs decreased by $33,000 to
$180,000 as of March 31, 2010 compared to $213,000 as of March 31, 2009
primarily due to the renegotiation of our phone system lease contract and the
closing of storage facilities.  Insurance costs decreased by $24,000
to $67,000 as of March 31, 2010 compared to $91,000 as of March 31, 2009 due to
the renegotiation of insurance contracts.  Professional and consulting
fees decreased by $15,000 to $334,000 as of March 31, 2010 compared to $349,000
as of March 31, 2009 primarily due to declining consulting fees paid to contract
labor for telex messaging services, offset by outside consulting fees paid to
assist with COO duties.  Travel and mileage expenses decreased an
additional $11,000 to $8,000 as of March 31, 2010 compared to $19,000 as of
March 31, 2009 as a result of continued efforts to reduce expenses using
efficiencies. The expense related to the issuance of stock options and
directors’ fees decreased by $7,000 to $103,000 as of March 31, 2010 compared to
$110,000 as of March 31, 2009 due to the expiration of options after termination
of employment of certain employees.


15





The above decreases were offset
primarily by non-recurring expenses totaling $120,000 in connection with our application for
a grant under theAmerican
Recovery and Reinvestment Act (ARRA)to expand access to broadband into
areas in Southeast Texas adjacent to existing
operations.Telecommunications expense
increased by $33,000 to $160,000 as of March 31, 2010 compared to $127,000 as of
March 31, 2009 due primarily to the purchase of increased bandwidth
capacity.   Other costs increased by $26,000 to $203,000 as of
March 31, 2010 compared to $177,000 as of March 31, 2009.





Provision for bad debt expense
(recovery).Provision for bad debt expense decreased by
$5,000, or 166.7%, to a net recovery of $2,000 for the nine months ended March
31, 2010, from a $3,000 provision for the nine months ended March 31,
2009.  As of March 31, 2010, the Company is fully reserved for all
customer accounts that are at least 90 days old.





Depreciation and
amortization.  Depreciation and amortization decreased by
$75,000, or 9.0%, to $755,000 for the nine months ended March 31, 2010, from
$830,000 for the nine months ended March 31, 2009. The decrease of $92,000 in
amortization expense is offset by the increase in depreciation expense of
$17,000. The increase in depreciation relates to the decrease in fully
depreciated assets still in use, offset by the improvement of the Company’s
wireless broadband Internet network.  The decrease in amortization
expense of acquired subscriber costs is the result of early wireless
acquisitions in fiscal 2005 and 2006 becoming fully amortized.





Gain from restructuring of
debt.Gain from restructuring of debt totaled $52,000 for the
nine months ended March 31, 2010. During the quarter ended March 31, 2010, Mark
and Cynthia Ocker along with the Company entered into amendments to the notes
payable originally issued to them in connection with the acquisition of
Teleshare. These amendments extend the payment terms and also reduce the
interest rate and carrying value slightly resulting in a one-time
gain.





Interest income and expense.For the nine months ended March 31, 2010 and 2009, the Company recorded
interest expense of $63,000 and $72,000, respectively.  The $9,000
decrease in interest expense is the result of the reduction in the Company’s
long-term debt offset. For the nine months ended March 31, 2010 and 2009, the
Company recorded interest income of $9,000 and $32,000,
respectively.





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, 2010, cash used in operations was $389,000 compared to cash used
in operations of $369,000 for the nine months ended March 31, 2009. For the nine
months ended March 31, 2010, net loss plus non-cash items used was $166,000
compared to $225,000 for the same period last year.  Additional
decreases in accounts receivable, prepaid expenses, other assets, accounts
payable, accrued liabilities and deferred revenue were offset by increases in
inventory.





Cash used
in investing activities totaled $251,000 for the nine months ended March 31,
2010 which relates primarily to the deployment of new wireless broadband
Internet infrastructure. Cash used in investing activities totaled $265,000 for
the nine months ended March 31, 2009, which also relates primarily to new
infrastructure.





Cash
used in financing activities, which totaled $502,000 for the nine months ended
March 31, 2010, consisted of principal payments on debt and capital
leases.  Cash provided by financing activities, which totaled $437,000
for the nine months ended March 31, 2009, consisted of principal payments on
debt.





Cash
on hand declined by $1,142,000 during the nine months ended March 31,
2010.  At March 31, 2010, cash on hand was $1,279,000 compared to
$2,421,000 at June 30, 2009.    We believe our continued
efforts to improve the quality and efficiency of our operations over the past
few months along with additional value-added services such as desktop video
conferencing and VoIP may lead to a more rapid rate of growth and an increase
average revenue per user and result in improved cash flow from
operations.





Management believes that the Company
will be able to meet the service obligations related to the deferral of revenue.
Continued decreases in revenues and subscriber count may adversely affect the
liquidity of the Company.  We can provide no assurance that we will be
successful in achieving any or all of our initiatives, or that the achievement
or existence of such initiatives will result in positive cash
flow.  Additional capital financing arrangements, including public or
private sales of debt or equity securities, or additional borrowings from
commercial banks, shareholders and third parties, may be insufficient or
unavailable.


16





Off
Balance Sheet Arrangements





None.




“Safe
Harbor” Statement





“Safe Harbor”
Statement





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


17








ITEM 3.
              QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK




Not
applicable




ITEM
      4T.
              CONTROLS
      AND PROCEDURES




Our Chief
Executive Officer, acting also in the capacity as the 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, to
allow timely decisions regarding required disclosure.  He concluded
that the controls and procedures were effective as of March 31, 2010 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, 2010 that materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


18


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 William E. Ladin,
  Jr.32
                      
                      Section
      1350 Certification of William E. Ladin,
Jr.









19





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:  05/13/10By:  /s/
      William E. Ladin, Jr.William
      E. Ladin, Jr.Chairman, Chief Executive Officer and Chief Financial Officer


20





INDEX
TO EXHIBITS




Exhibit No.
                    
                    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 William E. Ladin,
  Jr.32
                    
                    Section
      1350 Certification of William E. Ladin,
Jr.


21