UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006





OR





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


SECURITIES
      ACT OF 1934





FOR
      THE
      TRANSITION PERIOD FROM _________ TO _____





COMMISSION
      FILE NUMBER 000-25147





INTERNET
      AMERICA, INC.


(Exact
      name of registrant as specified in its charter)





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





(214)
      861-2500


(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
o  No
x





As
      of
      November 8, 2006, 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**





**September
                30,**
            
            **June
                30,****2006**
            
            **2006**(unaudited)
            
            (audited)ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            618,110
            
            $
            937,401Accounts
                receivable, net of allowance for uncollectible
              accounts
                of $7,998 and $6,996 as of September 30, 2006
              and
                June 30, 2006, respectively
            
            
            102,175
            
            
            120,208Inventory
            
            
            256,068
            
            
            280,888Prepaid
                expenses and other current assets
            
            
            433,731
            
            
            299,379Total
                current assets
            
            
            1,410,084
            
            
            1,637,876PROPERTY
                AND EQUIPMENT — Net
            
            
            1,031,267
            
            
            1,082,590OTHER
                ASSETS — Net
            
            
            4,744,682
            
            
            4,812,122TOTAL
            
            $
            7,186,033
            
            $
            7,532,588LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            207,601
            
            $
            419,766Accrued
                liabilities
            
            
            414,033
            
            
            465,836Deferred
                revenue
            
            
            1,275,045
            
            
            1,292,430Current
                portion of long-term debt
            
            
            100,220
            
            
            98,208Current
                portion of capital lease obligations
            
            
            53,577
            
            
            57,390Total
                current liabilities
            
            
            2,050,476
            
            
            2,333,630Long-term
                debt
            
            
            119,906
            
            
            169,044Capital
                lease obligations
            
            
            115,395
            
            
            127,344Other
                long-term liabilities
            
            
            28,345
            
            
            47,320Total
                liabilities
            
            
            2,314,122
            
            
            2,677,338COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Common
                stock, $.01 par value; 40,000,000 shares authorized,
              12,508,914
                issued and outstanding as of September 30, 2006
              and
                June 30, 2006
            
            
            125,089
            
            
            125,089Additional
                paid-in capital
            
            
            57,072,098
            
            
            57,061,952Accumulated
                deficit
            
            
            (52,325,276
            )
            
            (52,331,791
            )Total
                shareholders' equity
            
            
            4,871,911
            
            
            4,855,250TOTAL
            
            $
            7,186,033
            
            $
            7,532,588





See
      accompanying notes to condensed consolidated financial
      statements.


2





Financial
      Statements - Continued





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(Unaudited)**






**Three
                Months Ended****September
                30,****2006**
            
            **2005**REVENUES:Internet
                services
            
            $
            2,083,976
            
            $
            2,241,910Other
            
            
            -
            
            
            405,893Total
            
            
            2,083,976
            
            
            2,647,803OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            992,284
            
            
            1,535,177Sales
                and marketing
            
            
            41,357
            
            
            74,707General
                and administrative
            
            
            829,236
            
            
            696,518Provision
                for bad debt expense
            
            
            1,002
            
            
            11,683Depreciation
                and amortization
            
            
            206,975
            
            
            217,377Total
            
            
            2,070,854
            
            
            2,535,462INCOME
                FROM OPERATIONS
            
            
            13,122
            
            
            112,341INTEREST
                EXPENSE, NET
            
            
            (6,607
            )
            
            (3,625
            )NET
                INCOME
            
            $
            6,515
            
            $
            108,716NET
                INCOME PER COMMON SHARE:BASIC
            
            $
            0.00
            
            $
            0.01DILUTED
            
            $
            0.00
            
            $
            0.01WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            12,508,914
            
            
            12,514,812DILUTED
            
            
            12,508,914
            
            
            12,523,761








See
      accompanying notes to condensed consolidated financial statements.





3


Financial
      Statements - Continued





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Three
                Months Ended****September
                30,****2006**
            
            **2005**OPERATING
                ACTIVITIES:Net
                income
            
            $
            6,515
            
            $
            108,716Adjustments
                to reconcile net income to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            206,975
            
            
            217,377Provision
                for bad debt expense
            
            
            1,002
            
            
            11,683Stock
                based compensation
            
            
            10,146
            
            
            -Changes
                in operating assets and liabilities, net of effect of
                acquisitions:Accounts
                receivable
            
            
            17,031
            
            
            (46,952
            )Prepaid
                expenses and other current assets
            
            
            (134,352
            )
            
            (12,163
            )Inventory
            
            
            93,564
            
            
            (140,117
            )Other
                assets
            
            
            -
            
            
            904Accounts
                payable and accrued liabilities
            
            
            (332,712
            )
            
            (160,708
            )Other
                long-term liabilities
            
            
            (18,975
            )
            
            -Deferred
                revenue
            
            
            (17,385
            )
            
            (63,509
            )Net
                cash used in operating activities
            
            
            (168,191
            )
            
            (84,769
            )INVESTING
                ACTIVITIES:Purchases
                of property and equipment
            
            
            (88,212
            )
            
            (103,165
            )Cash
                paid at closing for acquisitions
            
            
            -
            
            
            (50,000
            )Net
                cash used in investing activities
            
            
            (88,212
            )
            
            (153,165
            )FINANCING
                ACTIVITIES:Proceeds
                from issuance of common stock
            
            
            -
            
            
            6,127Principal
                payments under note payable
            
            
            (47,126
            )
            
            (97,139
            )Principal
                payments under capital lease obligations
            
            
            (15,762
            )
            
            (16,539
            )Net
                cash used in financing activities
            
            
            (62,888
            )
            
            (107,551
            )NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (319,291
            )
            
            (345,485
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            937,401
            
            
            2,364,287CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            618,110
            
            $
            2,018,802SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            16,184
            
            $
            10,674NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Transfers
                between fixed assets and inventory
            
            $
            —
            
            $
            36,746Assets
                acquired through accounts payable
            
            $
            68,744
            
            $
            29,720Stock
                issued in connection with acquisitions
            
            $
            —
            
            $
            32,500Debt
                issued in connection with acquisitions
            
            $
            —
            
            $
            94,612





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 accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      Article 310(b) of Regulation S-B 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 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, 2006, included in the Company’s Annual
      Report on Form 10-KSB (File No 001-32273).





2.
            Basic
                and Diluted Net Income Per Share





There
      are
      no adjustments required to be made to net income for the purpose of computing
      basic and diluted earnings per share (“EPS”) for the three months ended
      September 30, 2006 and 2005. For the three months ended September 30, 2006
      and
      2005, options to purchase 0 and 94,500 shares of common stock were included
      in
      the computation of diluted EPS because the options were “in the money” as of
      September 30, 2006 and 2005, respectively, and it resulted in 0 and 8,949 common
      stock equivalents to be added to the weighted average shares for the three
      months ended September 30, 2006 and 2005, respectively. During the three months
      ended September 30, 2006 and 2005, respectively, options to purchase 263,302
      and
      408,289 shares of common stock were not included in the computation of diluted
      EPS because the options were not “in the money” as of September 30, 2006 and
      2005, respectively. There were no options exercised to purchase shares of common
      stock during the three months ended September 30, 2006 and 2005.





3.
            Employee
                Stock Option Plans





On
      July
      1, 2006, the Company adopted Statement of Financial Accounting Standards
      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 2007. The Company’s
      Consolidated Financial Statements as of and for the three months ended
      September 30, 2006 reflect the impact of SFAS 123(R). In accordance with
      the modified prospective transition method, the Company’s Consolidated Financial
      Statements for prior periods have not been restated to reflect, and do not
      include, the impact of SFAS 123(R).  The effect on net income and earnings
      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 three months ended September 30, 2006 is as follows:





5


3.
            Employee
                Stock Option Plans (continued)




**Three
                  Months Ended September 30, 2006****Net
                  Income**
                **Before**
                **Application
                  of**
                **FAS
                  123 R**
              
              **Effect
                  of Stock-**
                **Based**
                **Compensation**
                **Expense**
              
              **Net
                  Income**
                **As**
                **Reported**Income
                  before income tax
              
              $
              16,661
              
              $
              (10,146
              )
              $
              6,515Provision
                  for income tax
              
              
              -
              
              
              -
              
              
              -Net
                  Income
              
              $
              16,661
              
              $
              (10,146
              )
              $
              6,515Earnings
                  per share:Basic
              
              $
              0.00
              
              $
              (0.00
              )
              $
              0.00Diluted
              
              $
              0.00
              
              $
              (0.00
              )
              $
              0.00





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





**Three
                Months**
              **Ended**
              **September
                30, 2005**Reported
                net income
            
            $
            108,716Less:
                Total stock based employee compensation expense
              determined
                under fair value based method for all
              awards,
                net of related tax effects
            
            
            (22,663
            )Pro
                forma net income
            
            $
            86,053Reported
                basic income per share
            
            $
            0.01Reported
                diluted income per share
            
            $
            0.01Pro
                forma basic income per share
            
            $
            0.01Pro
                forma diluted income per share
            
            $
            0.01





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.


6


5.
            Other
                Assets





Other
      assets consist of the following:





**September
                30, 2006**
            
            **June
                30,**
              **2006**Goodwill
            
            $
            26,047,266
            
            $
            26,047,266Accum.
                amortization-goodwill
            
            
            (21,734,139
            )
            
            (21,734,139
            )Total
                goodwill, net
            
            
            4,313,127
            
            
            4,313,127Subscriber
                acquisition costs
            
            
            1,244,102
            
            
            1,244,102Accum.
                amortization-subscriber acquisition costs
            
            
            (842,121
            )
            
            (774,681
            )Total
                subscriber acquisition costs, net
            
            
            401,981
            
            
            469,421Deposits
            
            
            29,574
            
            
            29,574Total
                other assets, net
            
            $
            4,744,682
            
            $
            4,812,122





The
      amortization period for subscriber acquisition costs is 36 months. Prior to
      April 1, 2006, these costs were amortized over 24 months. Amortization expense
      for the three months ended September 30, 2006 and 2005, respectively, were
      $67,440 and $125,000. As of September 30, 2006, amortization expense for the
      fiscal years ended June 30, 2007, 2008 and 2009 is expected to be $269,770,
      $157,011 and $42,640, respectively.




6.
            Income
                Taxes





During
      the three months ended September 30, 2006 and 2005, the Company generated net
      income. No provision for income taxes has been recorded as the Company has
      net
      operating losses generated in prior periods well in excess of the net income
      for
      the three months ended September 30, 2006 and 2005. As of September 30, 2006,
      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





7.
            Long-Term
                Debt





Long-term
      debt consists of:




**September
                30, 2006**
            
            **June
                30,**
              **2006**Note
                payable due November 15, 2007, payable in monthly installments of
                $1,825,
                bearing interest at prime plus 3%
            
            $
            26,279
            
            $
            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%
            
            
            10,580
            
            
            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)
            
            
            94,612
            
            
            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)
            
            
            33,619
            
            
            32,980Credit
                card line of credit advance, payable on demand, bearing interest
                at prime
                plus 6.5%
            
            
            16,456
            
            
            20,956220,126
            
            
            267,252Less
                current portion
            
            
            (100,220
            )
            
            (98,208
            )Total
                long-term debt
            
            $
            119,906
            
            $
            169,044





The
      Company’s long-term debt is unsecured except for approximately $16,500 and
      $21,000 as of September 30, 2006 and June 30, 2006, respectively, which is
      secured by certain inventory and equipment. The prime rate at September 30,
      2006
      and June 30, 2006, was 8.25%.








8.
            Capital
                Lease Obligations





The
      Company leases certain wireless equipment under leases with bargain purchase
      options. The following is a schedule by fiscal years of the future minimum
      lease
      payments under these capital leases together with the present value of the
      net
      minimum lease payments as of September 30, 2006:








2007
            
            $
            51,3332008
            
            
            54,3682009
            
            
            54,3682010
            
            
            31,7142011
            
            
            -------Total
                minimum lease payments
            
            
            191,783Less
                amounts representing interest
            
            
            (22,811
            )Present
                value of minimum capitalized payments
            
            
            168,972Less
                current portion
            
            
            (53,577
            )Long-term
                capitalized lease obligations
            
            $
            115,395





8


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 three months ended September 30,
      2006 and 2005:





**Three
                Months Ended September 30,****2006**
            
            **2005**Troy
                LeMaile Stovall
            
            $
            4,000
            
            $
            6,750Justin
                McClure
            
            
            3,750
            
            
            6,750John
                Palmer
            
            
            3,750
            
            
            3,750Total
                director fees
            
            $
            11,500
            
            $
            17,250





9.  New
      Accounting Pronouncements





During
      the quarter ended September 30, 2006, no new accounting pronouncements have
      been
      issued or adopted, except as disclosed within the


10-KSB for
      the year ended June 30, 2006. None of these pronouncements are expected to
      have a material impact on the Company’s financial statements.


9





**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-KSB 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.*





**Overview**





Internet
      America, Inc. (the “Company”) is an Internet service provider (“ISP”) serving
      approximately 38,500 subscribers in Texas, as of September 30, 2006. 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. During the quarter ended September 30, 2006, the
      Company began billing customers for certain services which were previously
      complimentary, which caused an increase of approximately 4,000 subscribers.
      This
      increase was offset by attrition in our dial up services. 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 September 30, 2006.  For the year ended June 30, 2006,
      Internet access services accounted for 89.5% of total revenue, with the
      remaining revenues related primarily to wireless reseller revenues. During
      fiscal 2005 the Company became a wireless equipment reseller which changed
      the
      revenue mix. For the three months ended September 30, 2005, Internet access
      services accounted for 84.7% of total revenue with the remaining revenues
      related primarily to wireless equipment reseller revenues. The Company
      discontinued wireless reseller sales in fiscal 2006 due to low gross profit
      margins.





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’s strategy is to focus on providing wireless Internet connectivity to
      customers in under-served markets.  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 in all three of our major wireless
      markets we deployed new infrastructure to enable additional growth within
      markets we presently serve. The Company is pursuing additional growth within
      markets we presently serve and acquisition opportunities in non-metropolitan
      markets where competition is less intense and the demand for Internet
      connectivity may be under-served. In pursuing this strategy, the Company is
      narrowing its focus to products and developments that contribute directly to
      its
      implementation.





The
      Company’s customer count for wireless Internet services has increased to
      approximately 3,400 subscribers as of September 30, 2006 and has continued
      to
      grow to approximately 3,600 subscribers as of October 31, 2006. 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. This growth will help to replace declining revenues due to
      attrition and management believes this will allow the Company to stabilize
      and
      then begin to regain revenue and profits.


10





Management
      continues to evaluate overall profitability. During 2006, we reduced
      telecommunications cost per subscriber by optimizing network capacity and
      entering into more favorable agreements with telecommunications service
      providers. The Company also reduced head count in fiscal 2006 through a
      reduction-in-force (“RIF”) carried out by management in January 2006. Although a
      certain number of staff has been added since then and we incurred severance
      costs related to the RIF, the Company still experienced an approximate 13%
      decrease in total salaries and wages, excluding severance costs of approximately
      $83,000 in 2006 and $132,000 in 2005. Overall, connectivity and operations
      costs
      for the quarter ended September 30, 2006 decreased by 55% from $1,535,000 for
      the quarter ended September 30, 2005 to $992,000.





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 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.





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 September 30, 2006 Compared to Three Months Ended September 30,
      2005*





The
      following table sets forth certain unaudited financial data for the three months
      ended September 30, 2006 and 2005. Operating results for any period are not
      indicative of results for any future period. Amounts are shown in thousands
      (except per share data and subscriber counts).







**Three
                Months Ended**
              **September
                30, 2006**
            
            **Three
                Months Ended**
              **September
                30, 2005****(000's)**
            
            **%
                of**
              **Revenues**
            
            **(000's)**
            
            **%
                of**
              **Revenues**STATEMENT
                OF INCOME DATA:
              REVENUES:Internet
                services
            
            $
            2,084
            
            
            100.0
            %
            $
            2,242
            
            
            84.7
            %Other
            
            
            -
            
            
            0.0
            %
            
            406
            
            
            15.3
            %Total
            
            
            2,084
            
            
            100.0
            %
            
            2,648
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            992
            
            
            47.6
            %
            
            1,535
            
            
            58.0
            %Sales
                and marketing
            
            
            41
            
            
            2.0
            %
            
            75
            
            
            2.8
            %General
                and administrative
            
            
            830
            
            
            39.8
            %
            
            696
            
            
            26.3
            %Provision
                for bad debt expense
            
            
            1
            
            
            0.0
            %
            
            12
            
            
            0.4
            %Depreciation
                and amortization
            
            
            207
            
            
            9.9
            %
            
            217
            
            
            8.2
            %Total
            
            
            2,071
            
            
            99.4
            %
            
            2,535
            
            
            95.8
            %OPERATING
                INCOME
            
            
            13
            
            
            0.6
            %
            
            113
            
            
            4.2
            %INTEREST
                (EXPENSE) INCOME, NET
            
            
            (6
            )
            
            (0.3)%
            
            
            (4
            )
            
            (0.1)%NET
                INCOME
            
            $
            7
            
            
            0.3
            %
            $
            109
            
            
            4.1
            %NET
                INCOME PER COMMON SHARE:BASIC
            
            $
            0.00
            
            
            
            
            $
            0.01DILUTED
            
            $
            0.00
            
            
            
            
            $
            0.01WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            12,509
            
            
            
            
            
            12,515DILUTED
            
            
            12,509
            
            
            
            
            
            12,524CASH
                FLOW DATA:Cash
                flow used in operations
            
            $
            (168
            )
            
            
            
            $
            (85
            )Cash
                flow used in investing activities
            
            $
            (88
            )
            
            
            
            $
            (153
            )Cash
                flow used in financing activities
            
            $
            (63
            )
            
            
            
            $
            (108
            )OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            38,500
            
            
            
            
            
            51,000EBITDA(2)
            
            $
            220
            
            
            
            
            $
            330EBITDA
                margin(3)
            
            
            10.6
            %
            
            
            
            
            12.5
            %Reconciliation
                of net income to EBITDA:Net
                income
            
            $
            7
            
            
            
            
            $
            109Add:Depreciation
                and amortization
            
            
            207
            
            
            
            
            
            217Interest
                expense (income), net
            
            
            6
            
            
            
            
            
            4EBITDA(2)
            
            $
            220
            
            
            
            
            $
            330


__________


(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


*Three
      Months Ended September 30, 2006 Compared to Three Months Ended September 30,
      2005 (Continued)*





*Total
      revenue.* Total
      revenue decreased by $550,000, or 20.8%, to $2.1 million for the three months
      ended September 30, 2006, from $2.6 million for the three months ended September
      30, 2005. The Company’s subscriber count decreased by 12,500, or 25%, to 38,500
      as of September 30, 2006 compared to 51,000 as of September 30, 2005. The
      decrease in subscriber counts and related revenue is attributed to the loss
      of
      dial-up customers moving to other providers’ broadband service. Approximately
      $406,000 of the decrease is related to discontinuance of the wireless equipment
      reseller business prior to fiscal 2007.





*Connectivity
      and operations.* Connectivity
      and operations expense decreased by $543,000, or 35.4%, to $992,000 for the
      three months ended September 30, 2006, from $1.5 million for the three months
      ended September 30, 2005. Approximately $347,000 of the decrease is related
      to
      discontinuance of the wireless equipment reseller business prior to fiscal
      2007,
      which resulted in $0 cost of goods sold for the quarter ended September 30,
      2006
      compared to $347,000 for the quarter ended September 30, 2005. Due to
      reductions-in-force carried out in fiscal 2005 and fiscal 2006, labor costs
      decreased by $103,000 for the period. A decrease of approximately $119,000
      in
      connectivity costs was due 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. These
      decreases are offset to a lesser extent by an increase in operating costs
      related to the operation of new field offices.





*Sales
      and marketing.* Sales
      and
      marketing expense decreased by $34,000, or 45.3%, to $41,000 for the three
      months ended September 30, 2006, compared to $75,000 for the three months ended
      September 30, 2005. The decrease relates primarily to reductions in head
      count.





*General
      and administrative.* General
      and administrative expense (G&A) increased by $134,000, or 19.3%, to
      $830,000 for the three months ended September 30, 2006, from $696,000 for the
      three months ended September 30, 2005. The increase relates primarily to
      increases in personnel costs, offset by decreases in G&A related to lower
      professional fees. G&A salaries and wages and related taxes increased by
      $172,000, to $365,000 for the quarter ended September 30, 2006, primarily as
      a
      result of the addition of managers for newly established or acquired field
      offices as well as the addition of Chief Operating Officer, Glen Blackmon and
      Chief Financial Officer, Jennifer LeBlanc, offset by the Company’s staff
      reductions. Professional fees increased by approximately $15,000, from $103,000
      for the quarter ended September 30, 2006, compared to $88,000 for the quarter
      ended September 30, 2005. **





*Provision
      for bad debt expense.* Provision
      for bad debt expense decreased to $1,000 for the three months ended September
      30, 2006, from $12,000 for the three months ended September 30, 2005. The
      decrease is due primarily to reserve for bad debts for the wireless equipment
      reseller business incurred in the quarter ended September 30, 2005. As of
      September 30, 2006, we are fully reserved for all customer accounts that are
      at
      least 90 days old.





*Depreciation
      and amortization.* Depreciation and amortization decreased slightly by $10,000, or 4.6%, to
      $207,000 for the three months ended September 30, 2006, from $217,000 for the
      three months ended September 30, 2005. The decrease relates to increases in
      fully depreciated assets still in use. This is offset by an increase in
      depreciation for fixed asset purchases related to new wireless infrastructure
      as
      well as amortization of subscriber acquisition costs.




*Interest
      (expense) income, net.* For
      the
      three months ended September 30, 2006 and 2005, the Company recorded net
      interest expense of $6,000 and $4,000, respectively. For the three months ended
      September 30, 2006, the interest income earned was more than offset by the
      interest paid on long-term debt and capital leases.





**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.


13








Cash
      used
      in operating activities is net income adjusted for certain non-cash items and
      changes in assets and liabilities. For the three months ended September 30,
      2006, cash used in operations was $168,000 compared to cash used in operations
      of $85,000 for the three months ended September 30, 2005. For the three months
      ended September 30, 2006, net income plus non-cash items contributed $225,000
      in
      cash which was then used primarily for purchases of inventory, payments of
      accounts payable and accrued expenses and a decrease in deferred revenue.
      Inventory, which primarily includes modems and wireless access radios, decreased
      in the three months ended September 30, 2006 by approximately $94,000 due to
      the
      Company discontinuing its wireless equipment reseller business. For the three
      months ended September 30, 2005, net income plus non-cash items contributed
      $338,000 in cash which was then used primarily for the payment of accounts
      payable and accrued expenses and a decrease in deferred revenue. Payables were
      significantly reduced due to more timely payment of all open payables. Days
      payables was reduced to 12 days at September 30, 2006 from 29 days at June
      30,
      2006. The decrease in deferred revenue from year to year is a result of the
      decrease in our subscriber count and the related decrease in
      revenue.





Cash
      used
      in investing activities totaled $88,000 and $153,000 for the three months ended
      September 30, 2006 and 2005, respectively, which relates primarily to the
      deployment of new wireless infrastructure.





Cash
      used
      in financing activities, which totaled $63,000 and $108,000 for the three months
      ended September 30, 2006 and 2005, respectively, consisted primarily of
      principal payments on debt and capital leases.





We
      estimate that cash on hand of $618,000 at September 30, 2006 along with
      anticipated cash flow from operations will be sufficient for meeting our working
      capital needs for the next twelve months with regard to continuing operations
      in
      existing markets. Additional financing may be required to fund 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.





**Off
      Balance Sheet Arrangements**





None.








**“Safe
      Harbor” Statement**





The
      following "Safe Harbor" Statement is made pursuant to the Private Securities
      Litigation Reform Act of 1995. Certain of the statements contained in the body
      of this Report are forward-looking statements (rather than historical facts)
      that are subject to risks and uncertainties that could cause actual results
      to
      differ materially from those described in the forward-looking statements. With
      respect to such forward-looking statements, we seek the protections afforded
      by
      the Private Securities Litigation Reform Act of 1995. These risks include,
      without limitation, that (1) we will not be able to increase our rural customer
      base at a rate that exceeds the loss of metropolitan area customers, (2) we
      will
      not improve EBITDA, profitability or product margins, (3) we will not continue
      to achieve operating efficiencies, (4) we will not be competitive with existing
      or new competitors, (5) we will not keep up with industry pricing or
      technological developments impacting the Internet, (6) needed financing will
      not
      be available to us if and as needed, (7) 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;
      (8) service interruptions or impediments could harm our business; (9) we may
      not
      be able to protect our proprietary technologies or successfully defend
      infringement claims and may be required to enter licensing arrangements on
      unfavorable terms; (10) 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; (11) government regulations
      could force us to change our business practices; (12) we may be unable to
      continually develop effective business systems, processes and personnel to
      support our business; (13) we may be unable to hire and retain qualified
      personnel, including our key executive officers; (14) provisions in our
      certificate of incorporation, bylaws and shareholder rights plan could limit
      our
      share price and delay a change of management; (15) our stock price has been
      volatile historically and may continue to be volatile; and (16) 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.





14





**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 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 September 30, 2006. Based upon that
      evaluation, the Chief Executive Officer and Chief Accounting Officer concluded
      that, as of September 30, 2006, 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 three months ended
      September 30, 2006 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





15


**PART
      II - OTHER INFORMATION**








**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







16





**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:
                11/09/06
            By:
            /s/
                William E. Ladin, Jr.William
                E. Ladin, Jr.Chairman
                and Chief Executive OfficerDate:
                11/09/06
            By:
            /s/
                Jennifer S. LeBlancJennifer
                S. LeBlancChief
                Financial and Accounting Officer








17





**INDEX
      TO 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