UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED MARCH 31, 2007





OR





oTRANSITION
      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  incorporation or organization)
            (I.R.S.
                Employer Identification
                Number)10930
                W. Sam Houston Pkwy., N., Suite 200
            77064(Address
                of principal executive offices)
            (Zip
                Code)




(713)
      968-2500


(Registrant's
      telephone number, including area code)





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


Yes
x  No
o





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


Yes
x  No
o





As
      of May
      09, 2007, registrant had 12,508,914 shares of Common Stock at $.01 par value,
      outstanding.





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







**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1 - FINANCIAL STATEMENTS**


**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**  ****




**March
                31,2007**
            
            
            **June
                  30, 2006**ASSETS
            
            
            (unaudited)
            
            
            (audited)CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            671,159
            
            $
            937,401Accounts
                receivable, net of allowance for uncollectible
              accounts
                of $13,576 and $6,996 as of March 31, 2007
              and
                June 30, 2006 respectively
            
            
            105,090
            
            
            120,208Inventory
            
            
            242,269
            
            
            280,888Prepaid
                expenses and other current assets
            
            
            466,014
            
            
            299,379Total
                current assets
            
            
            1,484,532
            
            
            1,637,876PROPERTY
                AND EQUIPMENT — Net
            
            
            886,056
            
            
            1,082,590OTHER
                ASSETS — Net
            
            
            4,609,794
            
            
            4,812,122TOTAL
            
            $
            6,980,382
            
            $
            7,532,588LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            262,921
            
            $
            419,766Accrued
                liabilities
            
            
            332,225
            
            
            465,836Deferred
                revenue
            
            
            1,266,820
            
            
            1,292,430Current
                portion of long-term debt
            
            
            98,546
            
            
            98,208Current
                portion of capital lease obligations
            
            
            47,362
            
            
            57,390Total
                current liabilities
            
            
            2,007,874
            
            
            2,333,630Long-term
                debt
            
            
            94,765
            
            
            169,044Capital
                lease obligations
            
            
            92,423
            
            
            127,344Other
                Long-term liabilities
            
            
            –
            
            
            47,320Total
                liabilities
            
            
            2,195,062
            
            
            2,677,338COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS'
                EQUITY:Common
                stock, $.01 par value; 40,000,000 shares authorized
              12,508,914
                and 12,508,914 issued and outstanding as of
              March
                31, 2007 and June 30, 2006, respectively
            
            
            125,089
            
            
            125,089Additional
                paid-in capital
            
            
            57,092,390
            
            
            57,061,952Accumulated
                deficit
            
            
            (52,432,159
            )
            
            (52,331,791
            )Total
                shareholders' equity
            
            
            4,785,320
            
            
            4,855,250TOTAL
            
            $
            6,980,382
            
            $
            7,532,588





See
      accompanying notes to condensed consolidated financial statements.


2


**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**


Three
                  Months Ended March
                  31,
              
              
              Nine
                  Months Ended March
                  31,2007
              
              
              2006
              
              
              2007
              
              
              2006REVENUES:Internet
                  services
              
              
              
              
              $
              1,971,684
              
              $
              2,260,354
              
              $
              6,057,407
              
              $
              6,659,498Other
              
              
              
              
              
              –
              
              
              293,382
              
              
              66
              
              
              1,013,756Total
              
              
              
              
              
              1,971,684
              
              
              2,553,736
              
              
              6,057,473
              
              
              7,673,254OPERATING
                  COSTS AND EXPENSES:Connectivity
                  and operations
              
              
              
              
              
              1,038,404
              
              
              1,654,217
              
              
              3,068,017
              
              
              4,747,937Sales
                  and marketing
              
              
              
              
              
              60,918
              
              
              34,592
              
              
              155,433
              
              
              198,875General
                  and administrative
              
              
              
              
              
              728,142
              
              
              857,932
              
              
              2,301,825
              
              
              2,393,864Bad
                  debt expense
              
              
              
              
              
              2,875
              
              
              21,893
              
              
              5,579
              
              
              53,419Depreciation
                  and amortization
              
              
              
              
              
              203,917
              
              
              233,129
              
              
              617,609
              
              
              662,158Total
              
              
              
              
              
              2,034,256
              
              
              2,801,763
              
              
              6,148,463
              
              
              8,056,253LOSS
                  FROM OPERATIONS
              
              
              
              
              
              (62,572
              )
              
              (248,027
              )
              
              (90,990
              )
              
              (382,999
              )INTEREST
                    EXPENSE, NET
              
              
              
              
              
              302
              
              
              1,715
              
              
              9,377
              
              
              29,497NET
                    LOSS
              
              
              
              
              $
              (62,874
              )
              $
              (249,742
              )
              $
              (100,367
              )
              $
              (412,496
              )NET
                    LOSS PER COMMON SHARE:SHARE:BASIC
              
              
              
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.03
              )DILUTED
              
              
              
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.03
              )WEIGHTED
                  AVERAGE COMMONSHARES
                  OUTSTANDING:BASIC
              
              
              
              
              
              12,508,914
              
              
              12,495,064
              
              
              12,508,914
              
              
              12,461,925DILUTED
              
              
              
              
              
              12,508,914
              
              
              12,495,064
              
              
              12,508,914
              
              
              12,461,925
 See
        accompanying notes to condensed consolidated financial statements.  3


**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Nine
                Months Ended **March
                31,******2007**
            
            
            **2006**OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (100,367
            )
            $
            (412,496
            )Adjustments
                to reconcile net loss to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            617,609
            
            
            66,158Gain
                on disposal of property and equipment
            
            
            (89
            )
            
            –Provision
                for bad debt expense
            
            
            5,579
            
            
            53,419Stock
                based compensation
            
            
            30,438
            
            
            –Changes
                in operating assets and liabilities, net of acquisitions:Accounts
                receivable
            
            
            9,539
            
            
            66,680Inventory
            
            
            100,945
            
            
            (248,099
            )Prepaid
                expenses and other current assets
            
            
            (166,636
            )
            
            (175,782
            )Other
                assets
            
            
            –
            
            
            (7,357
            )Accounts
                payable and accrued liabilities
            
            
            (352,782
            )
            
            (264,524
            )Other
                liabilities
            
            
            (47,320
            )
            
            –Deferred
                revenue
            
            
            (25,610
            )
            
            (108,675
            )Net
                cash provided by (used in) operating activities
            
            
            71,306
            
            
            (434,676
            )INVESTING
                ACTIVITIES:Purchases
                of property and equipment
            
            
            (219,258
            )
            
            (470,293
            )Proceeds
                from sale of property and equipment
            
            
            600
            
            
            –Cash
                paid at closing for acquisitions
            
            
            –
            
            
            (248,371
            )Net
                cash used in investing activities
            
            
            (218,658
            )
            
            (718,664
            )FINANCING
                ACTIVITIES:Proceeds
                from issuance of common stock
            
            
            –
            
            
            9,981Principal
                payments under long term debt
            
            
            (73,941
            )
            
            (187,920
            )Principal
                payments under capital lease obligations
            
            
            (44,949
            )
            
            (53,081
            )Net
                cash used in financing activities
            
            
            (118,890
            )
            
            (231,020
            )NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (266,242
            )
            
            (1,384,360
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            937,401
            
            
            2,364,287CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            671,519
            
            $
            979,927SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            17,744
            
            $
            27,408NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Transfers
                between fixed assets and inventory
            
            $
            –
            
            $
            187,417Assets
                acquired through accounts payable
            
            $
            62,326
            
            $
            93,536Stock
                issued in connection with acquisitions
            
            $
            –
            
            $
            52,500Debt
                assumed in connection with acquisitions
            
            $
            –
            
            $
            65,166Debt
                issued in connection with acquisitions
            
            $
            –
            
            $
            136,362





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 financial statements
      prepared in accordance with generally accepted accounting principles have been
      condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities
      and Exchange Commission. The accompanying unaudited condensed consolidated
      financial statements reflect, in the opinion of management, all adjustments
      necessary to achieve a fair statement of the Company's consolidated financial
      position and consolidated results of operations for the interim periods
      presented. All such adjustments are of a normal and recurring nature. These
      condensed consolidated financial statements should be read in conjunction with
      the consolidated financial statements for the year ended June 30, 2006 included
      in the Company’s Annual Report on Form 10-KSB (File No
      000-25147).





2.
            Basic
                and Diluted Net Loss Per Common
                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, 2007 and 2006. There were no options exercised to purchase shares
      of
      common stock during the nine months ended March 31, 2007 and 2006.




3.
            Employee
                Stock Option Plans




On
      March
      30, 2007, the Board of Directors adopted the 2007 Stock Option Plan (“2007
      Plan”) under which options to purchase up to 2,000,000 shares may be granted as
      incentive and nonqualified stock options to employees, executives and directors.
      The 2007 Plan will be submitted to the Shareholders for approval at the next
      annual meeting of stockholders. In
      connection with the adoption of the 2007 Plan, the Board of Directors amended
      the 2004 Non-Employee Director Plan to reduce the number of shares available
      for
      issuance upon the exercise of options under that plan from 600,000 to 131,556
      being the number of shares covered by ou tstanding
      options granted under that plan as of March 30, 2007. The Board of Directors
      also determined that the terms of the 1996 and 1997 Stock Option Plans of the
      Company, with combined reserved shares of 1,425,000, will not be
      renewed.




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





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




The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of July 1, 2006,
      the first day of the Company’s fiscal year ended June 30, 2007. The Company’s
      Consolidated Financial Statements for the prior periods have not been restated
      to reflect, and do not include, the impact of SFAS 123(R). The effect on net
      loss and loss per share of the Company before and after application of the
      fair
      value recognition provision of SFAS 123(R) to stock-based employee compensation
      for the nine months ended March 31, 2007 is as follows:


5




3.
              Employee
                  Stock Option Plans
                  (continued)


**Nine
                Months Ended March 31, 2007****Net
                Loss Before Adoption of SFAS 123(R)**
            
            
            **Effect
                of Stock-Based Compensation Expense**
            
            
            **Net
                Income (Loss) As Reported**Loss
                before income tax
            
            $
            (
                69,929
            )
            $
            (30,438
            )
            $
            (100,367
            )Provision
                for income tax
            
            
            –
            
            
            –
            
            
            –Net
                Loss
            
            $
            (
                69,929
            )
            $
            (30,438
            )
            $
            (100,367
            )Earnings
                per share:Basic
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.01
            )Diluted
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.01
            )





The
      proforma effect on net loss and loss per share as if the Company had applied
      the
      fair value recognition provision of SFAS 123(R) would be as
      follows:





**Nine
                Months Ended****March
                31, 2006**Reported
                net loss
            
            $
            (412,496
            )Less:
                SFAS No. 123(R) compensation expense
            
            
            (40,112
            )Pro
                forma net loss
            
            $
            (452,608
            )Reported
                basic loss per share
            
            $
            (0.03
            )Reported
                diluted loss per share
            
            $
            0.03
            )Less:
                SFAS No. 123(R) compensation expense
            
            $
            (0.00
            )Pro
                forma basic loss per share
            
            $
            (0.03
            )Pro
                forma diluted loss per share
            
            $
            (0.03
            )








4.
            Use
                of estimates





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires management to make
      estimates and assumptions that affect the reported amounts of assets 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.
            Other
                Assets





The
      carrying value of other assets at March 31, 2007 and June 30, 2006 is as
      follows:


**March
                31, 2007**
            
            
            **June
                30, 2006**Goodwill
            
            $
            26,047,266
            
            $
            26,047,266Accumulated
                amortization-goodwill
            
            
            (21,734,139
            )
            
            (21,734,139
            )Total
                goodwill, net
            
            
            4,313,127
            
            
            4,313,127Subscriber
                acquisition costs
            
            
            1,244,102
            
            
            1,244,102Accumulated
                amortization-subscriber acquisition costs
            
            
            (977,009
            )
            
            (774,681
            )Total
                subscriber acquisition costs, net
            
            
            267,093
            
            
            469,421Deposits
            
            
            29,574
            
            
            29,574Total
                other assets, net
            
            $
            4,609,794
            
            $
            4,812,122





6


The
      amortization period for subscriber acquisition costs is 36 months. Amortization
      expense for the three and nine months ended March 31, 2007, was approximately
      $67,000 and $202,000, respectively. As of March 31, 2007, amortization expense
      for the fiscal years ending June 30, 2007, 2008 and 2009 is expected to be
      approximately $270,000, $157,000 and $43,000, respectively.


6.
              Income
                  Taxes


During
      the three and nine months ended March 31, 2007 and the three and nine months
      ended March 31, 2006, the Company generated a net loss. No provision for income
      taxes was recorded for the three and nine months ended March 31, 2006 and March
      31, 2007, as the Company continues to generate losses. As of March 31, 2007,
      the
      Company continues to maintain a full valuation allowance for its net deferred
      tax assets of approximately $12.3 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.





7.
              Long-Term
                  Debt




Long-term
      debt consists of:


**March
                31,
                2007**
            
            
            **June
                30, 2006**Note
                payable due November 15, 2007, payable in monthly installments of
                $1,825,
                bearing interest at prime plus 3%
            
            $
            15,626
            
            $
            31,200Note
                payable due September 22, 2007, payable in annual installments of
                $41,667
                with interest imputed at 8% (net of unamortized discount of
                $3,087)
            
            
            38,580
            
            
            74,303Note
                payable due May 30, 2007, payable in monthly installments of approximately
                $987, bearing interest at prime plus 2%
            
            
            4,809
            
            
            13,201Note
                payable due July 19, 2009, payable in quarterly payments of $7,751
                with
                interest imputed at 9% (net of unamortized discount of
                $29,409)
            
            
            92,174
            
            
            94,612Note
                payable due January 23, 2011, payable in bi-annual installments of
                $13,917
                with interest imputed at 8% (net of unamortized discount of
                $8,131)
            
            
            34,895
            
            
            32,980Credit
                card line of credit advance, payable on demand, bearing interest
                at prime
                plus 6.5%
            
            
            7,227
            
            
            20,956193,311
            
            
            267,252Less
                current portion
            
            
            (98,546
            )
            
            (98,208
            )Total
                long-term debt
            
            $
            94,765
            
            $
            169,044





The
      Company’s long-term debt is unsecured except for approximately $20,000 and
      $44,000 as of March 31, 2007 and June 30, 2006, respectively, which is secured
      by certain inventory and equipment. The prime rate at March 31, 2007 and June
      30, 2006 was 7.75% and 6.25%, respectively.


7





8.
              Capital
                  Lease Obligations




The
      Company leases certain phone equipment, wireless equipment and switches under
      leases with bargain purchase options. The following is a schedule by fiscal
      years of the future minimum lease payments under these capital leases together
      with the present value of the net minimum lease payments as of March 31,
      2007:





2007
            
            
            15,9772008
            
            
            54,3682009
            
            
            54,3682010
            
            
            31,713Total
                minimum lease payments
            
            
            156,426Less
                amounts representing interest
            
            
            (16,641
            )Present
                value of minimum capitalized payments
            
            
            139,785Less
                current portion
            
            
            (47,362
            )Long-term
                capitalized lease obligations
            
            $
            92,423




9.
                Related
                    Parties




The
      following table shows amounts paid to three non-employee directors for serving
      on the Company’s board of directors during the nine months ended March 31, 2007
      and 2006:


**Nine
                Months Ended March
                31,****2007**
            
            
            **2006**Troy
                LeMaile Stovall
            
            $
            12,250
            
            $
            11,500Justin
                McClure
            
            
            12,000
            
            
            11,500John
                Palmer
            
            
            11,250
            
            
            10,250Total
                director fees
            
            $
            35,500
            
            $
            33,250




10.
                  New
                      Accounting
                      Pronouncements
  In
        February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
        Assets and Financial Liabilities," ("SFAS 159") which permits the choice
        to
        measure certain financial assets and liabilities at their fair value at
        specified election dates. SFAS 159 is effective as of the beginning of an
        entity's first fiscal year that begins after November 15, 2007. The new standard
        is effective for the Company for the year ended June 30, 2008, unless early
        adoption is elected. The Company does not expect the new standard to have
        a
        material impact on its financial position or results of operation.


During
      the three and nine months ended March 31, 2007, no new other accounting
      pronouncements have been issued or adopted, except as disclosed in the Form
      10-KSB for the year ended June 30, 2006. None of these pronouncements are
      expected to have a material impact on the Company’s consolidated financial
      statements.


11.
                  Letter
                      of Intent to Acquire Teleshare Communications Services,
                      Inc.


On
      February 27, 2007, the Company entered into a non-binding letter of intent
      with
      the shareholders of Teleshare Communications Services, Inc. to acquire 100%
      ownership in their wireless Internet service business. The Company is proceeding
      with due diligence to negotiate and excute a definitive stock purchase
      agreement.


12.
                  Letter
                      of Intent to Acquire Assets of NoDial.net,
                      Inc.


On
      March
      30, 2007, the Company entered into a definitive agreement to acquire
      substantially all of the assets and assume certain liabilities of NoDial.net,
      Inc., a wireless Internet service provider near Victoria, Texas, for cash and
      long-term notes. The agreement is subject to due diligence and the
      negotiation and execution of a definitive asset
      purchase agreement.


13.
                  Subsequent
                      Events


On
      April
      20, 2007, the Company entered into a definitive agreement to acquire
      substantially all of the assets and assume certain liabilities of Shadownet,
      Inc., a wireless Internet service provider in Victoria, Texas, for cash and
      long-term notes. The agreement is subject to due diligence and the negotiation
      and execution of a definitive asset purchase agreement.


8


**ITEM
      2.**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





*Certain
      statements contained in this Form 10-QSB 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, 2006 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. See “Safe Harbor” statement below.*





**Overview**





Internet
      America, Inc. (the “Company”) is an Internet service provider (“ISP”) serving
      approximately 34,000 subscribers in Texas as of March 31, 2007. A subscriber
      represents an active, billed service. One customer account may represent
      multiple subscribers depending on the number of active and billed services
      for
      that customer. The Company derives substantially all revenues from services,
      primarily Internet access services, and related fees, and such revenues
      represented 100% of our revenue for the quarter ended March 31, 2007.  For
      the year ended June 30, 2006, Internet access services accounted for 89.5%
      of
      total revenue, with the remaining percentage attributable primarily to wireless
      reseller revenues. The Company discontinued wireless reseller sales in the
      quarter ending March 31, 2006 due to low gross profit margins. For the nine
      months ended March 31, 2006, Internet access services accounted for 85.9% of
      total revenue, with the remaining percentage attributable primarily to wireless
      equipment reseller revenues.





The
      Company continues to experience an attrition of dial-up service customers.
      The
      loss of these customers is primarily attributable to their moving to broadband
      connectivity with other service providers. The largest competitors in
      broadband access are the cable companies and regional Bell operating companies.
       We operate in a highly competitive market for each of our service
      offerings.  The competitive environment impacts the churn rates we
      experience as well as the number of new customers we are able to add.





The
      Company continues to focus on providing wireless Internet connectivity to
      customers in under-served markets of Texas through acquisitions, internal
      growth, and a gradual transition into more cost effective wireless technologies.
      During the fiscal year ended June 30, 2006, we expanded in the suburban and
      rural markets near San Antonio and Houston, Texas, through acquisitions and
      deployment of new infrastructure. We also added new infrastructure in north
      central Texas, our other major wireless market, enabling additional growth
      within all of the markets we presently serve. The Company is pursuing additional
      growth within the geographic areas we cover through new acquisition
      opportunities in non-metropolitan markets where competition is less intense
      and
      the demand for Internet connectivity may be under-served. By April of 2007,
      we
      entered into letters of intent to acquire three wireless ISPs headquartered
      in
      Crosby and Victoria, Texas. The first of these, Teleshare Communication
      Services, Inc. (“Teleshare”), is based east of Houston in Crosby and provides
      service to areas east, north, and west of Houston, some of which are adjacent
      to
      our existing coverage but not overlapping. This acquisition will expand our
      service to areas that are geographically adjacent to our current coverage areas
      but in which we have not yet actively marketed our services. The other two
      acquisitions, NoDial.net, Inc. and Shadownet, Inc., in the Victoria area will
      again expand our service adjacent to areas that we presently serve and also
      expand our coverage area. Upon completion of the Teleshare acquisition, we
      anticipate adding four Teleshare executives to the Internet America management
      team including Mark Ocker, the owner and President of Teleshare, as a senior
      executive within Internet America.





While
      we
      have not entered into any additional agreements to acquire other ISPs, we are
      in
      various stages of discussions with several and may proceed to definitive
      documentation prior to our fiscal year end on June 30, 2007. At the present
      time, all of our discussions are with ISPs within the same general geographic
      areas of Texas generally bounded by and surrounding Dallas/Ft. Worth on the
      north; Corpus Christi on the south, Houston and Galveston Bay area to the east;
      and San Antonio/Austin/Hill Country to the west.


9





In
      addition to the rural market, Internet America anticipates participating in
      the
      development and deployment of wireless broadband in the metropolitan markets
      of
      Texas by selling its products over wireless systems which are being developed
      and constructed by cooperation between city and local governments and
      corporations.  This approach will alleviate much of the capital requirement
      in major metropolitan markets while allowing Internet America to focus on its
      forte in consumer marketing.





As
      the
      Company’s business and direction becomes more focused on the consolidation and
      development of the rural markets, sales and marketing to the major metropolitan
      areas, and a gradual transition to higher performance and lower cost wireless
      technologies, management believes there is an excellent opportunity for revenue
      growth in the next several years. Internet America’s prior experience in
      marketing to metropolitan markets will be reutilized in introducing wireless
      Internet to other growth areas.





Having
      recognized the transitions taking place in the communications industry that
      affect internet connectivity, Internet America has spent the last several years
      re-inventing itself along these lines while maintaining the systems developed
      for selling, billing, and supporting hundreds of thousands of dial up internet
      customers and applying them to the support of a similar number of wireless
      customers.  These same systems and controls remain in place with a proven
      track record and are being used daily.





The
      Company’s customer count for wireless Internet services has increased to
      approximately 4,200 subscribers as of March 31, 2007 from 3,900 subscribers
      at
      December 31, 2006. Upon the completion of the three acquisitions that were
      announced in April, 2007, wireless subscriber count would be between 6,000
      and
      6,500. Management believes that we are poised for additional growth as we have
      targeted areas where competition is less intense and demand for Internet
      connectivity may be under-served. Growth of customer count for wireless Internet
      services should continue to come from organic growth and acquisitions.
      Additional acquisitions will allow the Company to more rapidly expand in areas
      that are pre-determined to be underserved and consistent with our development
      plans. The internal growth and the additional acquisitions will help to replace
      declining revenues due to attrition of dial-up customers, and management
      believes this will allow the Company to begin to regain revenue and profits.
      More rapid growth through acquisitions will provide economies of scale cost
      savings to the acquired operations, and management believes this will allow
      for
      a more rapid return to profits and greater value to our subscriber based
      business.





Company
      management believes the initiatives identified above are instrumental to the
      achievement of our goals, but they may be subject to competitive, regulatory
      and
      other events and that sufficient capital may not be available and other
      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 wireless equipment reseller
      revenues, which was discontinued in March 2006.





Prior
      to
      fiscal 2005 the Company operated primarily out of its corporate headquarters
      in
      Dallas, Texas. In fiscal 2005, in addition to the corporate office, the Company
      began operating out of local offices including computer centers in Corsicana,
      Hillsboro, and Stafford, Texas. In March 2006, the corporate headquarters were
      moved to Houston, Texas. Operating expenses for the Company includes operating
      expenses for both the corporate office and the local computer
      centers.


10





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 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 three years. We depreciate furniture, fixtures and leasehold
      improvements over five years. Amortization expense consists of the amortization
      of subscriber acquisition costs.





Our
      business is not subject to any significant seasonal influences.


11


**Results
      of Operations**





*Three
      Months Ended March 31, 2007 Compared to Three Months Ended March 31,
      2006*





The
      following table sets forth certain unaudited financial data for the three months
      ended March 31, 2007 and 2006. Operating results for any period are not
      indicative of results for any future period. Dollar amounts are shown in
      thousands (except per share data and subscriber counts).




**Three
                Months Ended March
                31, 2007**
            
            
            **Three
                Months Ended **March
                31, 2006******%
                of**
            
            
            
            
            
            **%
                of****(000's)**
            
            
            **Revenues**
            
            
            **(000's**)****
            
            
            **Revenues**STATEMENT
                OF OPERATIONS DATA:REVENUES:Internet
                services
            
            $
            1,972
            
            
            100.0
            %
            $
            2,260
            
            
            88.5
            %Other
            
            
            -
            
            
            -
            %
            
            294
            
            
            11.5
            %Total
            
            
            1,972
            
            
            100.0
            %
            
            2,554
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,039
            
            
            52.7
            %
            
            1,654
            
            
            64.8
            %Sales
                and marketing
            
            
            61
            
            
            3.1
            %
            
            35
            
            
            1.4
            %General
                and administrative
            
            
            728
            
            
            36.9
            %
            
            858
            
            
            33.6
            %Bad
                debt expense
            
            
            3
            
            
            0.2
            %
            
            22
            
            
            0.9
            %Depreciation
                and amortization
            
            
            204
            
            
            10.3
            %
            
            233
            
            
            9.1
            %Total
            
            
            2,035
            
            
            103.2
            %
            
            2,802
            
            
            109.8
            %OPERATING
                LOSS
            
            
            (63
            )
            
            (3.2
            )%
            
            (248
            )
            
            (9.7
            )%INTEREST
                EXPENSE, NET
            
            
            -
            
            
            -
            %
            
            2
            
            
            0.1
            %NET
                LOSS
            
            $
            (63
            )
            
            (3.2
            )%
            $
            (250
            )
            
            (9.8
            )%NET
                LOSS PER COMMON SHARE:BASIC
                AND DILUTED
            
            $
            (0.01
            )
            
            
            
            $
            (0.02
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
                AND DILUTED
            
            
            12,509
            
            
            
            
            
            12,495OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            34,000
            
            
            
            
            
            46,000EBITDA(2)
            
            $
            141
            
            
            
            
            $
            (15
            )EBITDA
                margin(3)
            
            
            7.0
            %
            
            
            
            
            (1.0
            )%Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (63
            )
            
            
            
            $
            (250
            )Add:Depreciation
                and amortization
            
            
            204
            
            
            
            
            
            233Interest
                expense (income), net
            
            
            -
            
            
            
            
            
            2EBITDA(2)
            
            $
            141
            
            
            
            
            $
            (15
            )




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





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





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




12





*Total
      revenue.* Total
      revenue decreased by $582,000, or 22.8%, to $1,972,000 for the three months
      ended March 31, 2007, from $2,554,000 for the three months ended March 31,
      2006.
      The Company’s subscriber count decreased by 12,000, or 26.1%, to 34,000 as of
      March 31, 2007 compared to 46,000 as of March 31, 2006. The decrease in
      subscriber counts is attributed to the loss of dial-up customers moving to
      other
      providers’ broadband services. The decrease in revenue is primarily attributable
      to the loss of dial-up customers partially offset by an increase in wireless
      subscribers. Wireless equipment reseller revenue for the three months ended
      March 31, 2006 was $281,000. The wireless equipment reseller sales were
      discontinued in the quarter ended March 31, 2006 due to low profit margins
      and
      increased bad debts, and there were no revenues related to these sales for
      the
      three months ended March 31, 2007.




*Connectivity
      and operations.* Connectivity
      and operations expense decreased by $615,000, or 37.2%, to $1,039,000 for the
      three months ended March 31, 2007 from $1,654,000 for the three months ended
      March 31, 2006. Wages decreased by approximately $252,000 due to the reduction
      in force (“RIF”) during January 2006, offset by severance costs of approximately
      $50,000 incurred in connection with a RIF. Approximately $220,000 of the
      decrease is related to the discontinuance of the wireless equipment reseller
      business prior to fiscal 2007, which resulted in $0 cost of goods sold for
      the
      quarter ended March 31, 2007 compared to $220,000 for the quarter ended March
      31, 2006. An additional decrease of approximately $274,000 relates primarily
      to
      the consolidation of internet and telephone connections and circuits to more
      closely align with demand, as well as the renegotiation of contracts with
      several of our major telecom vendors. An increase of $81,000 in wireless
      installation costs, tower rents and wireless CPE (customer premises equipment)
      for the three months ended March 31, 2007, was due to expansion of our wireless
      Internet service provider business and related amortization of deferred
      installation and set up fees. As a percentage of total revenue, connectivity
      and
      operations expense decreased to 52.7% for the three months ended March 31,
      2007,
      from 64.8% for the three months ended March 31, 2006, due to lower margins
      on
      the wireless equipment reseller revenue in 2006 offset by the decrease in
      revenues.





*Sales
      and marketing.* Sales
      and
      marketing expense increased by $26,000, or 74.3%, to $61,000 for the three
      months ended March 31, 2007, compared to $35,000 for the three months ended
      March 31, 2006. The increase relates primarily to increases in wages and
      payments to sales call center staffing of approximately $34,000, offset by
      a
      decrease in billboard and mass marketing costs during the three months ended
      March 31, 2007.





*General
      and administrative.* General
      and administrative expense decreased by $130,000, or 15.2%, to $728,000 for
      the
      three months ended March 31, 2007, from $858,000 for the three months ended
      March 31, 2006. The decrease is primarily a result of decreased operating costs
      of regional offices which were former headquarters for acquired entities.
      General and administrative expense for the three months ended March 31, 2006
      also includes severance costs, as a result of the RIF, of approximately $21,000.
      Also, the Company incurred additional travel expenses for Houston personnel
      to
      Dallas during the transition of the corporate office from Dallas during the
      three months ended March 31, 2006.





*Provision
      for bad debt expense.* Provision
      for bad debt expense decreased by $19,000, or 86.4%, for the three months ended
      March 31, 2007, from $22,000 for the three months ended March 31, 2006. The
      additional expense in 2006 related to the reserve for doubtful wireless
      equipment reseller receivables, which has since been discontinued.





*Depreciation
      and amortization.* Depreciation and amortization decreased by $29,000, or 12.4%, to $204,000 for
      the three months ended March 31, 2007, from $233,000 for the three months ended
      March 31, 2006. Increases related to additions in fixed assets through both
      acquisitions and new product development including the deployment of new
      wireless technology, were offset by discontinued depreciation of fully
      depreciated assets still in use related to the office space and network
      infrastructure.





*Interest
      expense (income), net.* ****** **** For
      the
      three months ended March 31, 2007, the Company recorded approximately $6,000
      in
      interest expense and approximately $6,000 in interest income. For the three
      months ended March 31, 2006, the Company recorded approximately $14,000 in
      interest expense and approximately $12,000 in interest income. The interest
      expense recorded relates to interest charges on newly issued and assumed debt
      related to acquisitions. Interest income represents interest earned on the
      Company’s money market accounts.


13


*Nine
      Months Ended March 31, 2007 Compared to Nine Months Ended March 31,
      2006*





The
      following table sets forth certain unaudited financial data for the nine months
      ended March 31, 2007 and 2006. Operating results for any period are not
      indicative of results for any future period. Dollar amounts are shown in
      thousands (except per share data and subscriber counts).




**Nine
                Months Ended March
                31, 2007**
            
            
            **Nine
                Months Ended March
                31, 2006****(000's)**
            
            
            **%
of
Revenues**
            
            
            **(000's)**
            
            
            **%
of
Revenues**STATEMENT
                OF OPERATIONS DATA:
              REVENUES:Internet
                services
            
            $
            6,057
            
            
            100.0
            %
            $
            6,659
            
            
            86.8
            %Other
            
            
            –
            
            
            –
            %
            
            1,014
            
            
            13.2
            %Total
            
            
            6,057
            
            
            100.0
            %
            
            7,673
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            3,068
            
            
            50.7
            %
            
            4,748
            
            
            61.9
            %Sales
                and marketing
            
            
            155
            
            
            2.6
            %
            
            199
            
            
            2.6
            %General
                and administrative
            
            
            2,302
            
            
            38.0
            %
            
            2,394
            
            
            31.2
            %Bad
                debt (recoveries) expense
            
            
            6
            
            
            0.1
            %
            
            53
            
            
            0.7
            %Depreciation
                and amortization
            
            
            617
            
            
            10.2
            %
            
            662
            
            
            8.6
            %Total
            
            
            6,148
            
            
            101.6
            %
            
            8,056
            
            
            105.0
            %OPERATING
                LOSS
            
            
            (91
            )
            
            (1.6
            )%
            
            (383
            )
            
            (5.0
            )%INTEREST
                EXPENSE, NET
            
            
            9
            
            
            0.1
            %
            
            29
            
            
            0.4
            %NET
                LOSS
            
            $
            (100
            )
            
            (1.7)%
            
            $
            (412
            )
            
            (5.4)%NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.01
            )
            
            
            
            $
            (0.03
            )DILUTED
            
            $
            (0.01
            )
            
            
            
            $
            (0.03
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            12,509
            
            
            
            
            
            12,462DILUTED
            
            
            12,509
            
            
            
            
            
            12,462CASH
                FLOW DATA:Cash
                flow provided by (used in) operations
            
            $
            71
            
            
            
            
            $
            (435
            )Cash
                flow used in investing activities
            
            $
            (218
            )
            
            
            
            $
            (719
            )Cash
                flow used in financing activities
            
            $
            (119
            )
            
            
            
            $
            (231
            )OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            34,000
            
            
            
            
            
            46,000EBITDA(2)
            
            $
            526
            
            
            
            
            $
            279Reconciliation
                of net loss to EBITDA:Net
                Loss
            
            $
            (100
            )
            
            
            
            $
            (412
            )Add:Depreciation
                and amortization
            
            
            617
            
            
            
            
            
            662Interest
                expense (income), net
            
            
            9
            
            
            
            
            
            29EBITDA(2)
            
            $
            526
            
            
            
            
            $
            279





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





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




14




*Total
      revenue.* Total
      revenue decreased by $1.6 million, or 21.1%, to $6.1 million for the nine months
      ended March 31, 2007, from $7.7 million for the nine months ended March 31,
      2006. The Company’s subscriber count decreased by 12,000, or 26.1%, to 34,000 as
      of March 31, 2007 compared to 46,000 as of March 31, 2006. The decrease in
      subscriber counts is attributed to the loss of dial-up customers moving to
      other
      providers’ broadband services. The decrease in revenue is primarily attributable
      to the loss of dial-up customers partially offset by an increase in wireless
      subscribers. Wireless equipment reseller revenue for the nine months ended
      March
      31, 2006 was $938,000, or 58.0%, of the decrease of $1.6 million in total
      revenue. The wireless equipment reseller sales were discontinued in the quarter
      ended March 31, 2006 due to low profit margins and increased bad debts, and
      there were no revenues related to these sales for the three months ended March
      31, 2007.





*Connectivity
      and operations.* Connectivity
      and operations expense decreased by $1,680,000, or 35.4%, to $3,068,000 for
      the
      nine months ended March 31, 2007 from $4,748,000 for the nine months ended
      March
      31, 2006. The decrease in expense relates primarily to wireless reseller cost
      of
      sales of $818,000 for the nine months ended March 31, 2006 which were
      discontinued for the nine months ended March 31, 2007. Additional decreases
      were
      in wage expense and connectivity costs offset by increases in installation
      costs
      and wireless CPE costs of sales. Wage expense decreased by approximately
      $510,000 in the nine months ended March 31, 2007, compared to the same period
      of
      2006 primarily, as a result of the staff reductions carried out by the Company
      in January 2006. Wage expense includes severance costs of approximately $50,000
      for the nine months ended March 31, 2006. Connectivity costs decreased by
      approximately $471,000 in the nine months ended March 31, 2007, compared to
      the
      same period of 2006, primarily as a result of the consolidation of internet
      and
      telephone connections and circuits to more closely align with
      demand.





Decreases
      in wages and connectivity from 2007 to 2006 were offset primarily by an increase
      of $146,000 in cost of sales related to the ramp up of wireless installations
      and related increases in tower rents, installation costs and wireless CPE costs
      of sales for the nine months ended March 31, 2007.





To
      a
      lesser extent, decreases in wages and connectivity were affected by a decrease
      of $22,000 in merchant processing fees due to the related decrease in revenue.
      Additionally, during the nine months ended March 31, 2006, the Company incurred
      additional sales tax expense of approximately $45,000 related to a sales tax
      audit.





*Sales
      and marketing.* Sales
      and
      marketing expense decreased by $44,000, or 22.1%, to $155,000 for the nine
      months ended March 31, 2007, compared to $199,000 for the nine months ended
      March 31, 2006. The Company has increased staffing in its wireless sales call
      center, causing an increase of approximately $80,000 for the nine months ended
      March 31, 2007. This is offset by termination of the wireless equipment reseller
      staff upon discontinuing sales in 2006, resulting in a decrease of $98,000.
      Additional decreases were related to reduction in advertising costs incurred
      in
      the nine months ended March 31, 2007 compared to the nine months ended March
      31,
      2006.





*General
      and administrative.* General
      and administrative expense decreased slightly by $92,000, or 3.8%, to $2.3
      million for the nine months ended March 31, 2007, from $2.4 million for the
      nine
      months ended March 31, 2006. The decrease is primarily a result of expenses
      incurred during the nine months ended March 31, 2006 in connection with the
      additional travel for Houston personnel to Dallas during the transition of
      the
      corporate office from Dallas, as well as moving expense for relocating the
      corporate office. General and administrative expense for the nine months ended
      March 31, 2006 also includes severance costs, as a result of the RIF, of
      approximately $21,000.





*Provision
      for bad debt expense.* Provision
      for bad debt expense decreased by $47,000 for the nine months ended March 31,
      2007, compared to $6,000 for the nine months ended March 31, 2006, mainly
      related to wireless equipment reseller receivables in 2006. As of March 31,
      2007, the Company continues to be fully reserved for all customer accounts
      that
      are at least 90 days old.





*Depreciation
      and amortization.* Depreciation and amortization decreased by $45,000, or 6.8%, to $617,000 for
      the
      nine months ended March 31, 2007, from $662,000 for the nine months ended March
      31, 2006. Increases related to additions in fixed assets through both
      acquisitions and new product development, including the deployment of new
      wireless technology, were offset by discontinued depreciation of fully
      depreciated assets still in use related to the office space and network
      infrastructure.




*Interest
      expense (income), net.* For
      the
      nine months ended March 31, 2007, the Company recorded approximately $28,000
      in
      interest expense and approximately $19,000 in interest income. For the nine
      months ended March 31, 2006, the Company recorded approximately $63,000 in
      interest expense and approximately $34,000 in interest income. The interest
      expense recorded in these periods relates to interest charges on newly issued
      and assumed debt related to acquisitions. Interest income represents interest
      earned on the Company’s money market accounts.


15




Li **quidity
      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
      provided by operating activities is net income adjusted for certain non-cash
      items and changes in assets and liabilities. For the nine months ended March
      31,
      2007, cash provided by operations was $71,000 compared to cash used in
      operations of $435,000 for the nine months ended March 31, 2006. For the nine
      months ended March 31, 2007, net loss plus non-cash items totaled $553,000
      in income which was used primarily to decrease accounts payable and accrued
      liabilities to offset the decrease in deferred revenue. These decreases were
      offset by increases in inventory. For the nine months ended March 31, 2006,
      net
      loss plus non-cash items totaled $293,000, which was used primarily for
      purchases of inventory and increases in prepaids and to decrease accounts
      payable and deferred revenue. Inventory, which primarily includes modems and
      wireless access radios, increased in the nine months ended March 31, 2006 due
      to
      the expansion of the wireless business. The decrease in deferred revenue from
      year to year is a result of the decrease in our subscriber count. The decrease
      in accounts payable and accrued liabilities is a result of the Company paying
      vendors on a timelier basis and the resolution of billing disputes with
      telecommunication vendors.





Cash
      used
      in investing activities totaled $219,000 for the nine months ended March 31,
      2007 and consisted of fixed asset purchases related to the deployment of new
      wireless infrastructure. Cash used in investing activities totaled $719,000
      for
      the nine months ended March 31, 2006 and consisted of cash paid for acquisitions
      and fixed asset purchases related to the deployment of new wireless
      infrastructure.





Cash
      used
      in financing activities totaled $119,000 and $231,000 for the nine months ended
      March 31, 2007 and 2006, respectively, and consisted primarily of principal
      payments on debt and capital leases.





We
      estimate that cash on hand of $671,000 at March 31, 2007, along with anticipated
      cash flow from operations, will be sufficient to meet our working capital needs
      for the next twelve months with regard to continuing operations in existing
      markets. Additional financing will be required to fund acquisitions or expansion
      into new markets. Continued decreases in revenues and subscriber count may
      ultimately adversely affect the liquidity of the Company.





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





**“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 a rate that exceeds the loss of metropolitan area customers; (2) we
      will
      not improve EBITDA, profitability or product margins; (3) we will not be able
      to
      identify and negotiate acquisitions of wireless Internet customers and
      infrastructure on attractive terms; (4) we may not be able to integrate
      acquisitions of wireless Internet customers and infrastructure into existing
      operations to achieve operating efficiencies; (5) needed financing will not
      be
      available to us if and as needed; (6) we will not continue to achieve operating
      efficiencies in existing operations; (7) we will not be competitive with
      existing or new competitors; (8) we will not keep up with industry pricing
      or
      technological developments impacting the Internet; (9) we will be adversely
      affected by dependence on network infrastructure, telecommunications providers
      and other vendors, by regulatory changes and by general economic and business
      conditions; (10) service interruptions or impediments could harm our business;
      (11) we may not be able to protect our proprietary technologies or successfully
      defend infringement claims and may be required to enter into licensing
      arrangements on unfavorable terms; (12) 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; (13)
      government regulations could force us to change our business practices; (14)
      we
      may be unable to continually develop effective business systems, processes
      and
      personnel to support our business; (15) we may be unable to hire and retain
      qualified personnel, including our key executive officers; (16) provisions
      in
      our certificate of incorporation, bylaws and shareholder rights plan could
      limit
      our share price and delay a change of management; (17) our stock price has
      been
      volatile historically and may continue to be volatile; and (18) some other
      unforeseen difficulties may occur. This list is intended to identify certain
      of
      the principal factors that could cause actual results to differ materially
      from
      those described in the forward-looking statements included elsewhere herein.
      These factors are not intended to represent a complete list of all risks and
      uncertainties inherent in our business, and should be read in conjunction with
      the more detailed cautionary statements included in our other publicly filed
      reports and documents.


16


**ITEM
      3. CONTROLS AND PROCEDURES**





An
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial and
      Accounting Officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures (as defined in Rule 13a-15(e) under the
      Securities Exchange Act of 1934) in effect as of March 31, 2007. Based upon
      that
      evaluation, the Chief Executive Officer and Chief Financial and Accounting
      Officer concluded that, as of March 31, 2007, the design and operation of these
      disclosure controls and procedures were effective in timely alerting them to
      the
      material information relating to the Company required to be included in its
      periodic filings with the Securities and Exchange Commission. There were no
      changes in our internal control over financial reporting during the nine months
      ended March 31, 2007 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial
      reporting.


17


**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





We
      are
      involved from time to time in routine disputes and legal proceedings occurring
      in the ordinary course of business. Management believes these matters,
      individually and in the aggregate, are immaterial to our financial condition,
      results of operations and cash flows.





**ITEM
      6. EXHIBITS**





**Exhibit**
            **Description**31.1
            Rule
                13a-14(a)/15d-14(a) Certification of William E. Ladin,
                Jr.31.2
            Rule
                13a-14(a)/15d-14(a) Certification of Jennifer S.
                LeBlanc32.1
            Section
                1350 Certification of William E. Ladin, Jr.32.2
            Section
                1350 Certification of Jennifer S.
                LeBlanc




18




**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: May 11, 2007
            
            By: /s/ William E. Ladin,
              Jr.William E. LadinPresident and Chief Executive
              OfficerDate: May 11, 2007
            
            By: /s/ Jennifer S.
              LeBlancJennifer S. LeBlancChief Financial Officer and Chief Accounting
              Officer(Principal Accounting
              Officer)





19





**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
              Jennifer S. LeBlanc32.1
            
            Section 1350 Certification of William
              E.
              Ladin, Jr.32.2
            
            Section 1350 Certification of Jennifer
              S.
              LeBlanc







20