UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 2009





OR





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


SECURITIES
ACT OF 1934





FOR THE
TRANSITION PERIOD FROM _________ TO _____





COMMISSION
FILE NUMBER   000-25147





INTERNET
AMERICA, INC.


(Exact
name of registrant as specified in its charter)





TEXAS
            86-0778979(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      Number)





10930
      W. Sam Houston Pkwy., N., Suite 200
            77064(Address
      of principal executive offices)
            (Zip
      Code)





(713)
968-2500


(Registrant's
telephone number, including area code)





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





Yes x     No
 ̈





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


Yes  ̈     No
 ̈





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





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





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


Yes  ̈     No
x





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





PART
I - FINANCIAL INFORMATION





ITEM
1 - FINANCIAL STATEMENTS





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE
SHEETS


December 31,
                                      
                                      
                                      June 30,2009
                                      
                                      
                                      2009(unaudited)
                                      
                                      
                                      (audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                      
                                      $
                                      1,479,158
                                      
                                      
                                      $
                                      2,421,264Restricted
      cash
                                      
                                      
                                      6,432
                                      
                                      
                                      
                                      6,432Accounts
      receivable, net of allowance for uncollectible accounts of $5,010 and
      $6,824(as
      of December 31, 2009 and June 30, 2009, respectively)
                                      
                                      
                                      85,896
                                      
                                      
                                      
                                      122,128Inventory
                                      
                                      
                                      269,430
                                      
                                      
                                      
                                      255,534Prepaid
      expenses and other current assets
                                      
                                      
                                      470,778
                                      
                                      
                                      
                                      542,606Assets
      held for sale
                                      
                                      
                                      11,855
                                      
                                      
                                      
                                      -Total
      current assets
                                      
                                      
                                      2,323,549
                                      
                                      
                                      
                                      3,347,964Property
      and equipment—net
                                      
                                      
                                      1,968,087
                                      
                                      
                                      
                                      2,150,562Goodwill—net
                                      
                                      
                                      2,413,127
                                      
                                      
                                      
                                      2,413,127Subscriber
      acquisition costs—net
                                      
                                      
                                      494,717
                                      
                                      
                                      
                                      744,869Other
      assets—net
                                      
                                      
                                      47,311
                                      
                                      
                                      
                                      53,318TOTAL
      ASSETS
                                      
                                      $
                                      7,246,791
                                      
                                      
                                      $
                                      8,709,840LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      accounts payable
                                      
                                      $
                                      299,770
                                      
                                      
                                      $
                                      298,903Accrued
      liabilities
                                      
                                      
                                      381,892
                                      
                                      
                                      
                                      573,013Deferred
      revenue
                                      
                                      
                                      903,161
                                      
                                      
                                      
                                      1,029,773Current
      portion of long-term debt
                                      
                                      
                                      735,862
                                      
                                      
                                      
                                      613,746Current
      portion of capital lease obligations
                                      
                                      
                                      25,608
                                      
                                      
                                      
                                      22,929Total
      current liabilities
                                      
                                      
                                      2,346,293
                                      
                                      
                                      
                                      2,538,364Long-term
      debt
                                      
                                      
                                      899,105
                                      
                                      
                                      
                                      664,772Long-term
      capital lease obligations
                                      
                                      
                                      17,054
                                      
                                      
                                      
                                      30,565Total
      liabilities
                                      
                                      
                                      3,262,452
                                      
                                      
                                      
                                      3,233,701COMMITMENTS
      AND CONTINGENCIES
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -SHAREHOLDERS'
      EQUITY:Preferred
      stock $.01 par value: 5,000,000 shares authorized,
    2,889,076issued
      and outstanding as of December 31, 2009 and June 30, 2009
                                      
                                      
                                      28,891
                                      
                                      
                                      
                                      28,891Common
      stock, $.01 par value: 40,000,000 shares authorized,16,558,914
      and 16,857,031 issued and outstanding as ofDecember
      31, 2009 and June 30, 2009, respectively
                                      
                                      
                                      165,589
                                      
                                      
                                      
                                      168,571Additional
      paid-in capital
                                      
                                      
                                      62,975,684
                                      
                                      
                                      
                                      63,676,806Accumulated
      deficit
                                      
                                      
                                      (59,185,292
                                      )
                                      
                                      
                                      (58,398,129
                                      )Total
      Internet America, Inc. shareholders' equity
                                      
                                      
                                      3,984,872
                                      
                                      
                                      
                                      5,476,139Noncontrolling
      interest in subsidiary
                                      
                                      
                                      (533
                                      )
                                      
                                      
                                      -Total
      shareholders' equity
                                      
                                      
                                      3,984,339
                                      
                                      
                                      
                                      5,476,139TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                      
                                      $
                                      7,246,791
                                      
                                      
                                      $
                                      8,709,840





See
accompanying notes to condensed consolidated financial
statements.


2





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended
                
                
                Six Months EndedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008REVENUES:Internet
      services
                
                $
                1,793,020
                
                
                $
                1,930,332
                
                
                $
                3,591,437
                
                
                $
                3,885,047Other
                
                
                42,629
                
                
                
                57,585
                
                
                
                81,035
                
                
                
                107,723TOTAL
      REVENUES
                
                
                1,835,649
                
                
                
                1,987,917
                
                
                
                3,672,472
                
                
                
                3,992,770OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                
                
                1,223,064
                
                
                
                1,339,613
                
                
                
                2,542,685
                
                
                
                2,690,791Sales
      and marketing
                
                
                69,287
                
                
                
                72,832
                
                
                
                147,746
                
                
                
                142,845General
      and administrative
                
                
                527,320
                
                
                
                613,377
                
                
                
                1,228,004
                
                
                
                1,201,306Provision
      for (recovery of) bad debt expense
                
                
                843
                
                
                
                (1,152
                )
                
                
                (1,815
                )
                
                
                (65
                )Depreciation
      and amortization
                
                
                256,679
                
                
                
                277,307
                
                
                
                504,100
                
                
                
                573,104TOTAL
      OPERATING COSTS AND EXPENSES
                
                
                2,077,193
                
                
                
                2,301,977
                
                
                
                4,420,720
                
                
                
                4,607,981LOSS
      FROM OPERATIONS
                
                
                (241,544
                )
                
                
                (314,060
                )
                
                
                (748,248
                )
                
                
                (615,211
                )INTEREST
      INCOME
                
                
                2,625
                
                
                
                11,803
                
                
                
                6,621
                
                
                
                27,525INTEREST
      EXPENSE
                
                
                (26,210
                )
                
                
                (23,052
                )
                
                
                (45,536
                )
                
                
                (48,457
                )NET
      LOSS
                
                $
                (265,129
                )
                
                $
                (325,309
                )
                
                $
                (787,163
                )
                
                $
                (636,143
                )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                
                $
                (177
                )
                
                $
                (87
                )
                
                $
                (533
                )
                
                $
                (57
                )NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                
                $
                (264,952
                )
                
                $
                (325,222
                )
                
                $
                (786,630
                )
                
                $
                (636,086
                )NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                
                $
                (0.02
                )
                
                $
                (0.02
                )
                
                $
                (0.05
                )
                
                $
                (0.04
                )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                
                
                16,558,914
                
                
                
                16,857,031
                
                
                
                16,602,659
                
                
                
                16,857,031





See
accompanying notes to condensed consolidated financial
statements.


3





INTERNET
AMERICA, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months EndedDecember 31,2009
                
                
                2008OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (786,630
                )
                
                $
                (636,086
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-controlling
      interest
                
                
                (533
                )
                
                
                (57
                )Depreciation
      and amortization
                
                
                504,100
                
                
                
                573,104Loss
      on disposal of fixed assets
                
                
                12,895
                
                
                
                2,170Recovery
      of  bad debt expense
                
                
                (1,815
                )
                
                
                (65
                )Non-cash
      stock compensation expense
                
                
                41,307
                
                
                
                44,262Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                38,047
                
                
                
                27,505Inventory
                
                
                (13,896
                )
                
                
                (15,182
                )Prepaid
      expenses and other current assets
                
                
                71,828
                
                
                
                (93,331
                )Other
      assets
                
                
                6,007
                
                
                
                24,569Accounts
      payable and accrued liabilities
                
                
                (190,254
                )
                
                
                (212,233
                )Deferred
      revenue
                
                
                (126,612
                )
                
                
                (153,125
                )Net
      cash used in operating activities
                
                
                (445,556
                )
                
                
                (438,469
                )INVESTING
      ACTIVITIES:Purchases
      of property and equipment, net
                
                
                (161,913
                )
                
                
                (152,086
                )Proceeds
      from sale of property and equipment
                
                
                5,520
                
                
                
                10,934Net
      cash used in investing activities
                
                
                (156,393
                )
                
                
                (141,152
                )FINANCING
      ACTIVITIES:Principal
      payments of long-term debt
                
                
                (329,325
                )
                
                
                (286,429
                )Principal
      payments of capital leases
                
                
                (10,832
                )
                
                
                -Net
      cash used in financing activities
                
                
                (340,157
                )
                
                
                (286,429
                )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (942,106
                )
                
                
                (866,050
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                2,421,264
                
                
                
                3,911,680CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                1,479,158
                
                
                $
                3,045,630SUPPLEMENTAL
      INFORMATION:Cash
      paid for interest
                
                $
                41,494
                
                
                $
                46,847NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Cancellation
      of common stock shares for long term debt in connection with
      acquisition
                
                $
                745,943
                
                
                $
                -Debt
      issued in connection with canceled common stock, net
                
                $
                685,773
                
                
                $
                -Non
      cash adjustment to intangible assets related to imputed interest on
      long-term debt issued for cancellation of common stock
                
                $
                60,170
                
                
                $
                -





See
accompanying notes to condensed consolidated financial
statements.


4





INTERNET
AMERICA, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
            Basis
      of Presentation





Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to Article 8 of Regulation
S-X of the Securities and Exchange Commission (“SEC”).  The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments necessary to achieve a fair
presentation of Internet America, Inc.’s (“the Company’s”) consolidated
financial position and results of operations for the interim periods
presented.  All such adjustments are of a normal and recurring
nature.  These condensed financial statements should be read in
conjunction with the consolidated financial statements for the year ended June
30, 2009, included in the Company’s Annual Report on Form 10-K (SEC Accession
No. 0001144204-09-050404 ).





2.
            Liquidity




The
Company is subject to risks including the presence of recurring losses and
negative cash flow, among others. During the first quarter of fiscal 2010, the
Company devoted substantial time and resources to submitting an application to
expand its service area by utilizing funds made available by The American
Recovery and Reinvestment Act legislation. In January 2010, Internet America
received notification that it will not receive a grant award in the first round
of available funds under that act.  The Company presently plans to
apply for a grant in the second round of funding, which will be awarded by
September 30, 2011.




Internet
America is uncertain about positive cash flow and operating profits in the near
future; accordingly, the Company will be dependent on reducing certain
discretionary spending to provide financing to support its operations and for
any capital expenditures. If efforts to increase operating margins and/or
decrease capital expenditures are unsuccessful or other negative factors arise,
this would adversely affect future profits and the Company’s ability to achieve
intended business objectives or, possibly, continue as a going
concern.





3.
            Basic
      and Diluted Net Loss Per Share





There are
no adjustments required to be made to net loss for the purpose of computing
basic and diluted earnings per share (“EPS”) for the three and six months ended
December 31, 2009 and 2008.  During the three and six months ended
December 31, 2009 and 2008, options to purchase 662,778 and 585,278 shares of
common stock, respectively, were not included in the computation of diluted EPS
because the options were not “in the money” as of December 31, 2009 and 2008,
respectively.  There were no options “in the money” at December 31,
2009 and 2008.  There were no options exercised to purchase shares of
common stock during the three and six months ended December 31, 2009 or
2008.





4.
            Use
      of Estimates





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


5


5.
            Goodwill
      and Subscriber Acquisition Costs





Pursuant
to Financial Accounting Standards Board (“FASB”) guidance on goodwill and other
intangibles, the Company performs an impairment test annually during the fourth
quarter of its fiscal year or when events and circumstances indicate goodwill
might be permanently impaired. Accordingly, during the year ended June 30, 2009,
the Company recorded $1,120,000 as impairment of goodwill related to potential
reduction in future cash flows from the acquisitions of NeoSoft and PDQ.Net. The
Company concluded that no impairment of goodwill occurred during the six months
ended December 31, 2009.





The Company allocates the purchase price for
acquisitions to acquired subscriber bases and goodwill based on fair value at
the time of acquisition.  Subscriber acquisition costs, net of
amortization, totaled approximately $494,717 and $744,869, as of December 31,
2009 and June 30, 2009, respectively.  The weighted average
amortization period for subscriber acquisition costs is 48 months for both
dial-up and wireless broadband Internet customers. Amortization expense for the
three and six months ended December 31, 2009 was $93,682 and $189,979,
respectively.  As of December 31, 2009, amortization expense for the
fiscal years ended June 30, 2010, 2011 and 2012 is expected to be approximately
$357,000, $323,000 and $4,000, respectively.





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





6.
            Long-Term
      Debt





Long-term
debt consists of:


December
                    
                    
                    June
      30,2009
                    
                    
                    2009Note
      payable due July 19, 2010, payable in quarterly payments of $7,751
      with interest imputed at 9% (net of unamortized discount of
      $1,003)
                    
                    $
                    22,185
                    
                    
                    $
                    36,211Note
      payable due January 23, 2011 payable in bi-annual installments of
      $13,917 with interest imputed at 8% (net of unamortized discount of
      $1,185)
                    
                    
                    23,106
                    
                    
                    
                    23,106Note
      payable due August 08, 2010, payable in monthly installments of $1,033
      beginning October 08, 2008 with interest imputed at 5% (net of unamortized
      discount of $153)
                    
                    
                    8,114
                    
                    
                    
                    14,025Note
      payable due June 20, 2012, payable in monthly installments of $2,088 with
      interest imputed at 9% (net of unamortized discount of
    $6,733)
                    
                    
                    55,902
                    
                    
                    
                    65,656Note
      payable due July 20, 2010, payable in monthly installments of $1,818 with
      interest imputed at 6.5% (net of unamortized discount of
    $271)
                    
                    
                    12,452
                    
                    
                    
                    22,757Note
      payable due July 20, 2010, payable in monthly installments of $1,409 with
      interest imputed at 6.5% (net of unamortized discount of
    $210)
                    
                    
                    9,651
                    
                    
                    
                    17,637Note
      payable due December 23, 2010, payable in monthly payments of $26,199 with
      interest imputed at 5.5% (net of unamortized discount of
      $8,761)
                    
                    
                    305,632
                    
                    
                    
                    452,548Note
      payable due July 27, 2014, payable in quarterly payments of $37,297 with
      interest imputed at 3.25% (net of unamortized discount of
      $54,583)
                    
                    
                    654,062
                    
                    
                    
                    -Loan
      and Security Agreement with United States Department of Agriculture Rural
      Utilities Service
                    
                    
                    543,863
                    
                    
                    
                    646,5781,634,967
                    
                    
                    
                    1,278,518Less
      current portion
                    
                    
                    (735,862
                    )
                    
                    
                    (613,746
                    )Total
      long-term debt
                    
                    $
                    899,105
                    
                    
                    $
                    664,772





As of
December 31, 2009, the Company’s long-term debt which is secured by certain
inventory and equipment and certificates of deposit totaled approximately
$630,000.


6





7.
            Shareholders’
      Equity





Upon the
surrender by the prior owners of TeleShare of 298,119 shares of Company stock
held in escrow, in exchange for a promissory note issued by the Company, those
shares were canceled and the total number of outstanding shares of Company
common stock was reduced to 16,558,914.




8.
            Income
      Taxes





During
the three and six months ended December 31, 2009, the Company generated a net
loss of $264,952 and $786,630, respectively.  During the three and six
months ended December 31, 2008, the Company generated a net loss of $325,222 and
$636,086, respectively.   No provision for income taxes has been
recorded for the three and six months ended December 31, 2009 and 2008, as the
Company has net operating losses generated in the current and prior
periods.   As of December 31, 2009, the Company continues to
maintain a full valuation allowance for its net deferred tax assets of
approximately $14.8 million.  Given its limited history of generating
net income, the Company has concluded that it is not more likely than not that
the net deferred tax assets will be realized.





On July
1, 2007, the Company adopted FASB guidance on accounting for uncertainty in
income taxes.  As a result of the implementation of the guidance,
management assessed its various income tax positions, and this assessment
resulted in no adjustment. The preparation of various tax returns requires the
use of estimates for federal and state income tax purposes.  Those
estimates may be subject to review by respective taxing
authorities.  A revision, if any, to an estimate may result in
assessment of additional taxes, penalties and interest.  At this time,
a range in which our estimates may change is not quantifiable and a change, if
any, is not expected to be material.  The Company will account for
interest and penalties related to uncertain tax positions in the current period
income statement, as necessary.  The 2005, 2006, 2007 and 2008 tax
periods remain subject to examination by various federal and state tax
jurisdictions.




9.
            Related
      Parties





The
following table shows amounts paid to four non-employee directors for serving on
the Company’s board of directors and payments made to Cynthia Ocker, former
owner of TeleShare, for contract services during the six months ended December
31, 2009 and 2008:





Six Months EndedDecember 31,2009
                  
                  
                  2008Troy
      LeMaile Stovall
                  
                  $
                  7,750
                  
                  
                  $
                  8,676Justin
      McClure
                  
                  
                  7,750
                  
                  
                  
                  8,250John
      Palmer
                  
                  
                  7,750
                  
                  
                  
                  9,073Steven
      Mihaylo
                  
                  
                  8,250
                  
                  
                  
                  8,893Cindy
      Ocker
                  
                  
                  68,495
                  
                  
                  
                  76,834$
                  99,995
                  
                  
                  $
                  111,726





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


7


10.
            New
      Accounting Pronouncements





In June
2009, the FASB issued guidance on subsequent events. This guidance establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. In particular, the statement provides standards
regarding the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. In accordance with this guidance, an
entity should apply the requirements to interim or annual financial periods
ending after June 15, 2009. The Company adopted this pronouncement in the
quarter ending June 30, 2009. The Corporation evaluated subsequent events for
recognition or disclosure through February 16, 2010, the date the financial
statements were reviewed for filing, and it had an immaterial effect on the
Company’s consolidated financial statements through February 16,
2010.





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





In
December 2007, the FASB issued guidance on noncontrolling interests in
consolidated financial statements. The guidance establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
recorded as equity in the consolidated financial statements. This Statement also
requires that consolidated net income shall be adjusted to include the net
income attributed to the noncontrolling interest. Disclosure on the face of the
income statement of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest is required.  This guidance
became effective for the Company on July 1, 2009.


8





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





Certain
statements contained in this Form 10-Q constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934.  These statements, identified
by words such as "anticipate," "believe," "estimate," "should," "expect" and
similar expressions include our expectations and objectives regarding our future
financial position, operating results and business strategy.  These
statements reflect the current views of management with respect to future events
and are subject to risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to be
materially different from those described in the forward-looking
statements.  We do not intend to update the forward-looking
information to reflect actual results or changes in the factors affecting such
forward-looking information.  Our Annual Report on Form 10-K for the
fiscal year ended June 30, 2009 and other publicly filed reports discuss some
additional important factors that could cause our actual results to differ
materially from those in any forward-looking statements.





Overview





Internet
America, Inc. (the “Company” or “Internet America”) is an Internet service
provider ("ISP") that is focused on providing wireless high-speed broadband
Internet in rural markets, and presently serves 8,200 wireless broadband
Internet subscribers.  Since the Company’s founding in 1995, we have a
history of providing an array of Internet services to residential and business
subscribers and serve approximately 26,400 total subscribers in Texas as of
December 31, 2009.  Initially providing primarily dial-up Internet
services, the Company grew rapidly to over 150,000 subscribers. In recent years,
Internet America has evolved its product offering to include high-speed
broadband, and entered the rural wireless broadband market in 2004,
incorporating a core competency of managing large numbers of internet
subscribers. 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. A decline in non-wireless
subscribers and revenues is expected and will continue primarily due to our
customers migrating to high-speed providers in metropolitan areas.





During
fiscal 2009, we focused on quality process implementation including investing in
infrastructure upgrades, increasing network capacity and simplifying internal
systems and procedures.  Our efforts improved productivity and
customer satisfaction, and also resulted in improved EBITDA and decreases in
expenses and headcount last year.   We expect our ongoing commitment
to defect-free quality services to contribute to our future profitability and
productivity. We anticipate no significant negative churn in wireless broadband
subscribers, which has increased slightly from approximately 7,900 subscribers
at December 31, 2008 to 8,200 as of December 31, 2009. Slower growth in the
rural markets has continued, and we believe this is related to the changing
economic conditions.  We continue to expect modest growth rather than
large gains in subscribers in our existing network footprint.





We have
increased wireless annual revenue per user (ARPU) from our existing customers by
marketing an add-on service plan for equipment and service calls. The Company
plans to increase recurring subscription prices in a number of markets for our
wireless subscribers. We expect modest additional gains in ARPU providing Voice
over Internet Protocol (“VoIP”) and Hosted VoIP PBX services to its embedded
customer base throughout Texas and to new residential and business customers
nationwide. We provide customers with bundled broadband Internet access and
commercial-grade VoIP services through agreements with third-party service
providers.





Under the
present economic recession, many companies are seeking to reduce travel time and
expenses. Also, the quality and availability of internet connectivity is
improving and the power of personal computers is growing. Management believes
video meeting presents an opportunity for growth and has identified this as a
natural addition to our products and services in existing and potential markets.
Under a reseller agreement, the Company provides one-on-one and multi party
high-quality, resilient video conferencing using desktop computers. The Company
offers its customers access to this technology in the form of hosted services or
direct sale of hardware and software. Hosted video conferencing products may be
very attractive to mid-size businesses without long-term capital costs or
commitments, and Internet America can provide them with immediate access to new,
high performance technology.


9





During
calendar 2009, the Company devoted substantial time and resources to submitting
an application to expand our service area by utilizing funds made available for
economic stimulus by The American Recovery and Reinvestment Act (“ARRA”)
legislation, whose mission includes making high-speed broadband and other
technologies available to everyone residing in the United
States.  Direct expenses incurred to date totaled approximately
$169,000 for personnel, consulting and other direct costs incurred in completing
the application. These expenses have contributed to the Company’s negative cash
flow in the six months ended December 31, 2009 and the year ended June 30,
2009.





During
the week of January 25, 2010, we received notice that our American Recovery and
Reinvestment Act grant proposal was no longer being evaluated for the first
round of funding under the Broadband Technology Opportunities
Program.  Internet America’s $30.6 million project designed to bring
high-speed broadband Internet to 35 rural counties in Southeast Texas had
received formal recommendation from Texas Department of Agriculture Commissioner
Todd Staples.  On January 15, 2010, the Commerce Department announced
availability of an additional $4.8 billion in the second funding round for rural
broadband.  We are currently preparing a revised application for a
grant in this second round of funding.





Despite
news regarding our Round 1 ARRA application, we believe our continued efforts to
improve the quality and efficiency of our operations over the last few years, as
well as additional growth in wireless ARPU and other service offerings such as
desktop video conferencing and VoIP may lead to growth in revenues and increased
cash flow from operations, which should contribute to our ability to achieve
profitability.





Management
is uncertain about positive cash flow and operating profits in the near future;
accordingly, the Company will be dependent on reducing certain discretionary
spending to provide financing to support its operations and for any capital
expenditures. We can provide no assurance that we will be successful in
achieving any or all of our initiatives, that the achievement or existence of
such initiatives will result in positive cash flow or profit improvements, or
that other factors will not arise that would adversely affect future profits and
our ability to achieve our intended business objectives.


10


Statement
of Operations




Internet
services revenue is derived from dial-up Internet access, including analog and
ISDN access, DSL access, dedicated connectivity, wireless access, bulk dial-up
access, web hosting services, and value-added services, such as multiple e-mail
boxes, personalized e-mail addresses and Fax-2-Email
services.   In addition to miscellaneous revenue, other revenue
includes telex messaging service revenues.




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




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




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




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




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




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




Our
business is not subject to any significant seasonal influences.


11


Results
of Operations





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





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


Three Months Ended December 31,2009
                    
                    
                    % of
                      Revenues
                    
                    
                    2008
                    
                    
                    % of
                      RevenuesSTATEMENT OF OPERATIONS DATA:REVENUES:Internet
      services
                    
                    $
                    1,793
                    
                    
                    
                    97.7
                    %
                    
                    $
                    1,931
                    
                    
                    
                    97.1
                    %Other
                    
                    
                    43
                    
                    
                    
                    2.3
                    %
                    
                    
                    58
                    
                    
                    
                    2.9
                    %TOTAL
      REVENUES
                    
                    
                    1,836
                    
                    
                    
                    100.0
                    %
                    
                    
                    1,989
                    
                    
                    
                    100.0
                    %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                    
                    
                    1,223
                    
                    
                    
                    66.6
                    %
                    
                    
                    1,340
                    
                    
                    
                    67.4
                    %Sales
      and marketing
                    
                    
                    69
                    
                    
                    
                    3.7
                    %
                    
                    
                    73
                    
                    
                    
                    3.7
                    %General
      and administrative
                    
                    
                    528
                    
                    
                    
                    28.7
                    %
                    
                    
                    614
                    
                    
                    
                    30.8
                    %Recovery  of
      (provision for) bad debt expense
                    
                    
                    1
                    
                    
                    
                    0.1
                    %
                    
                    
                    (1
                    )
                    
                    
                    (0.1
                    )%Depreciation
      and amortization
                    
                    
                    257
                    
                    
                    
                    14.0
                    %
                    
                    
                    277
                    
                    
                    
                    13.9
                    %TOTAL
      OPERATING COSTS AND EXPENSES
                    
                    
                    2,078
                    
                    
                    
                    113.1
                    %
                    
                    
                    2,303
                    
                    
                    
                    115.7
                    %OPERATING
      LOSS
                    
                    
                    (242
                    )
                    
                    
                    (13.1
                    )%
                    
                    
                    (314
                    )
                    
                    
                    (15.7
                    )%INTEREST
      INCOME
                    
                    
                    3
                    
                    
                    
                    0.1
                    %
                    
                    
                    12
                    
                    
                    
                    0.6
                    %INTEREST
      EXPENSE
                    
                    
                    (26
                    )
                    
                    
                    (1.4
                    )%
                    
                    
                    (23
                    )
                    
                    
                    (1.2
                    )%NET
      LOSS
                    
                    $
                    (265
                    )
                    
                    
                    (14.4
                    )%
                    
                    $
                    (325
                    )
                    
                    
                    (16.3
                    )%LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                    
                    $
                    (0
                    )
                    
                    
                    0.0
                    %
                    
                    $
                    (0
                    )
                    
                    
                    0.0
                    %NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                    
                    $
                    (265
                    )
                    
                    
                    (14.4
                    )%
                    
                    $
                    (325
                    )
                    
                    
                    (16.3
                    )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                    
                    $
                    (0.02
                    )
                    
                    
                    
                    
                    
                    $
                    (0.02
                    )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING:BASIC
      AND DILUTED
                    
                    
                    16,558,914
                    
                    
                    
                    
                    
                    
                    
                    16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                    
                    
                    26,400
                    
                    
                    
                    
                    
                    
                    
                    28,400EBITDA
      (loss)(2)
                    
                    $
                    15
                    
                    
                    
                    
                    
                    
                    $
                    (37
                    )EBITDA
      margin(3)
                    
                    
                    0.8
                    %
                    
                    
                    
                    
                    
                    
                    (1.9
                    )%Reconciliation
      of net loss to EBITDA (loss):Net
      loss
                    
                    $
                    (265
                    )
                    
                    
                    
                    
                    
                    $
                    (325
                    )Add:Depreciation
      and amortization
                    
                    
                    257
                    
                    
                    
                    
                    
                    
                    
                    277Interest
      income
                    
                    
                    3
                    
                    
                    
                    
                    
                    
                    
                    12Interest
      expense
                    
                    
                    (26
                    )
                    
                    
                    
                    
                    
                    
                    (23
                    )EBITDA
      (loss)(2)
                    
                    $
                    15
                    
                    
                    
                    
                    
                    
                    $
                    (37
                    )





(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 December 31, 2009 Compared to Three Months Ended December 31, 2008
(Continued)





Total
revenue.Total revenue decreased by $153,000, or 7.7%, to
$1,836,000 for the three months ended December 31, 2009, from $1,989,000 for the
three months ended December 31, 2008.  The Company’s total subscriber
count decreased by 2,000, or 7.0%, to 26,400 as of December 31, 2009 compared to
28,400 as of December 31, 2008.  The Company’s wireless broadband
Internet subscriber count increased slightly to 8,200 as of December 31, 2009,
compared to 7,900 as of December 31, 2008. Wireless broadband Internet revenue
increased by $104,000 to $1,165,000 as of December 31, 2009 compared to
$1,061,000 as of December 31, 2008.  The slight increase in wireless
broadband Internet revenues was offset by the decrease in dial-up Internet
subscriber counts and related revenue of $242,000, which is attributed to the
loss of dial-up customers moving to other providers’ broadband service. In
connection with the acquisition of TeleShare, the Company derives other revenues
from providing telex messaging services since July 27,
2007.  Messaging revenues for the three months ended December 31, 2009
totaled $43,000 and varies based on customer demand.




Connectivity and operations.Connectivity and operations expense decreased by $117,000, or 8.7%, to
$1,223,000 for the three months ended December 31, 2009, from $1,340,000 for the
three months ended December 31, 2008. Expensed assets decreased by $67,000 to
$93,000 as of December 31, 2009 compared to $160,000 as of December 31, 2008 due
to a decrease in supplies and installation and repair
expense.   Salaries, wages and related personnel  costs
decreased by $50,000  to $577,000 as of December 31, 2009 compared to
$627,000 as of December 31, 2008 which is attributed to efficiencies gained from
quality process initiatives. The remaining decrease in expense relates primarily
to a $10,000 decrease in travel, a $3,000 decrease in expense related to a
reduction in merchant fees and $1,000 in other expenses.




The
decreases in the previously discussed expenses were offset by an increase in
rents/utilities and tower lease by $12,000 due to improvements in the Company's
wireless broadband infrastructure and increases in tower rental rates and a
slight increase of $2,000 for telecommunication expenses.




Sales and marketing.Sales
and marketing expense decreased by $4,000, or 5.3%, to $69,000 for the three
months ended December 31, 2009, compared to $73,000 for the three months ended
December 31, 2008 primarily due to a decline in the Company’s print
advertising.




General and
administrative.General and administrative expense (G&A)
decreased by $86,000, or 14.1%, to $528,000 for the three months ended December
31, 2009, from $614,000 for the three months ended December 31,
2008.  Professional and consulting fees decreased by approximately
$39,000, to $96,000 as of December 31, 2009 compared to $135,000 as of December
31, 2008 which was mainly related to expenses incurred in the failed merger with
KeyOn in the prior year. Salaries and wages decreased $35,000 to $209,000 as of
December 31, 2009 compared to $244,000 as of December 31, 2008 due to ongoing
efforts to enhance efficiency and reduce headcount.  Insurance
expenses decreased by $12,000 primarily due to the renegotiation of insurance
contracts and the closing of facilities.The expense
related to the issuance of stock options and directors’ fees decreased by $5,000
to $36,000 as of December 31, 2009 compared to $41,000 as of December 31, 2008
due to the termination of employment of some grantees.  An additional
$3,000 decrease in facilities and tower lease expenses relates primarily to
changes in utility rates and there was a slight decrease of $3,000 in travel and
mileage. These decreases were offset by an $8,000 increase in telecommunication
expenses  due to purchasing increased bandwidth capacity and a slight
increase of $3,000 in other  expenses.




Provision for bad debt expense
(recovery).Provision for bad debt expense increased by $2,000
to $1,000 expense for the three months ended December 31, 2009, from $1,000
recovery for the three months ended December 31, 2008. As of December 31, 2009,
we are fully reserved for all customer accounts that are at least 90 days
old.


13




Depreciation and
amortization.  Depreciation and amortization decreased by
$20,000, or 7.3%, to $257,000 for the three months ended December 31, 2009, from
$277,000 for the three months ended December 31, 2008.  The increase
in depreciation totaling $6,000 relates to the decrease in fully depreciated
assets still in use, offset by the improvement of the Company’s wireless
broadband Internet network. The decrease in amortization expense totaling
$26,000 for acquired subscriber costs is the result of early wireless
acquisitions in fiscal 2005 and 2006 becoming fully amortized.





Interest (expense) income, net.Interest expense increased by $3,000, or 13.0%, to $26,000 from $23,000
for the three months ended December 31, 2009 and 2008, which is primarily
related to the issuance of the promissory note for the acquisition cost of
TeleShare in exchange for shares of common stock held in
escrow.  Interest income decreased by $9,000, or 77.8%, to $3,000 due
to changes in cash on hand, declining interest rates, and closing of our
interest bearing accounts. As a precautionary measure, in February 2009, the
Company transferred all funds from interest bearing accounts during this
economic crisis to ensure all funds were covered by the Temporary Guaranty
Liquidity Program initiated by the Federal Reserve Board.




14




Six
Months Ended December 31, 2009 Compared to Six Months Ended December 31,
2008





The following table sets forth
certain unaudited financial data for the six months ended December 31, 2009 and
2008.  Operating results for any period are not indicative of results
for any future period.  Amounts are shown in thousands (except share,
per share and subscriber count data).





Six Months Ended December 31,2009
                            
                            
                            % of
                              Revenues
                            
                            
                            2008
                            
                            
                            % of
                              RevenuesSTATEMENT
      OF OPERATIONS DATA:REVENUES:Internet
      services
                            
                            $
                            3,591
                            
                            
                            
                            97.8
                            %
                            
                            $
                            3,885
                            
                            
                            
                            97.3
                            %Other
                            
                            
                            81
                            
                            
                            
                            2.2
                            %
                            
                            
                            108
                            
                            
                            
                            2.7
                            %TOTAL
      REVENUES
                            
                            
                            3,672
                            
                            
                            
                            100.0
                            %
                            
                            
                            3,993
                            
                            
                            
                            100.0
                            %OPERATING
      COSTS AND EXPENSES:Connectivity
      and operations
                            
                            
                            2,543
                            
                            
                            
                            69.3
                            %
                            
                            
                            2,691
                            
                            
                            
                            67.4
                            %Sales
      and marketing
                            
                            
                            148
                            
                            
                            
                            4.0
                            %
                            
                            
                            143
                            
                            
                            
                            3.6
                            %General
      and administrative
                            
                            
                            1,228
                            
                            
                            
                            33.4
                            %
                            
                            
                            1,202
                            
                            
                            
                            30.0
                            %Recovery  of  (provision
      for) bad debt expense
                            
                            
                            (2
                            )
                            
                            
                            0.0
                            %
                            
                            
                            (0
                            )
                            
                            
                            0.0
                            %Depreciation
      and amortization
                            
                            
                            504
                            
                            
                            
                            13.7
                            %
                            
                            
                            573
                            
                            
                            
                            14.4
                            %TOTAL
      OPERATING COSTS AND EXPENSES
                            
                            
                            4,421
                            
                            
                            
                            120.4
                            %
                            
                            
                            4,609
                            
                            
                            
                            115.3
                            %OPERATING
      LOSS
                            
                            
                            (749
                            )
                            
                            
                            (20.4
                            )%
                            
                            
                            (616
                            )
                            
                            
                            (15.3
                            )%INTEREST
      INCOME
                            
                            
                            7
                            
                            
                            
                            0.2
                            %
                            
                            
                            28
                            
                            
                            
                            1.3
                            %INTEREST
      EXPENSE
                            
                            
                            (46
                            )
                            
                            
                            (1.2
                            )%
                            
                            
                            (48
                            )
                            
                            
                            (1.2
                            )%NET
      LOSS
                            
                            $
                            (788
                            )
                            
                            
                            (21.4
                            )%
                            
                            $
                            (636
                            )
                            
                            
                            (16.3
                            )%LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                            
                            $
                            (1
                            )
                            
                            
                            0.0
                            %
                            
                            $
                            (0
                            )
                            
                            
                            0.0
                            %NET
      LOSS ATTRIBUTABLE TO INTERNET AMERICA, INC.
                            
                            $
                            (787
                            )
                            
                            
                            (21.4
                            )%
                            
                            $
                            (636
                            )
                            
                            
                            (16.3
                            )%NET
      LOSS PER COMMON SHARE:BASIC
      AND DILUTED
                            
                            $
                            (0.05
                            )
                            
                            
                            
                            
                            
                            $
                            (0.04
                            )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING:BASIC
      AND DILUTED
                            
                            
                            16,602,659
                            
                            
                            
                            
                            
                            
                            
                            16,857,031OTHER
      DATA:Subscribers
      at end of period (1)
                            
                            
                            26,400
                            
                            
                            
                            
                            
                            
                            
                            28,400EBITDA(loss)(2)
                            
                            $
                            (244
                            )
                            
                            
                            
                            
                            
                            $
                            (43
                            )EBITDA
      margin(3)
                            
                            
                            (6.7
                            )%
                            
                            
                            
                            
                            
                            
                            (1.1
                            )%CASH
      FLOW DATA:Cash
      flow used in operations
                            
                            $
                            (446
                            )
                            
                            
                            
                            
                            
                            $
                            (438
                            )Cash
      flow used in investing activities
                            
                            $
                            (156
                            )
                            
                            
                            
                            
                            
                            $
                            (141
                            )Cash
      flow used in financing activities
                            
                            $
                            (340
                            )
                            
                            
                            
                            
                            
                            $
                            (286
                            )Reconciliation
      of net loss to EBITDA (loss):Net
      loss
                            
                            $
                            (787
                            )
                            
                            
                            
                            
                            
                            $
                            (636
                            )Add:Depreciation
      and amortization
                            
                            
                            504
                            
                            
                            
                            
                            
                            
                            
                            573Interest
      income
                            
                            
                            7
                            
                            
                            
                            
                            
                            
                            
                            28Interest
      expense
                            
                            
                            (46
                            )
                            
                            
                            
                            
                            
                            
                            (48
                            )EBITDA
      (loss)(2)
                            
                            $
                            (244
                            )
                            
                            
                            
                            
                            
                            $
                            (43
                            )





(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.





15




(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.




16




Six Months Ended December 31, 2009
Compared to Six Months Ended December 31, 2008 (Continued)





Total
revenue.Total revenue decreased by $321,000, or 8.0%, to
$3,672,000 for the six months ended December 31, 2009, from $3,993,000 for the
six months ended December 31, 2008.  The Company’s total subscriber
count decreased by 2,000, or 7.0%, to 26,400 as of December 31, 2009 compared to
28,400 as of December 31, 2008.  The Company’s wireless broadband
Internet subscriber count increased slightly to 8,200 as of December 31, 2009,
compared to 7,900 as of December 31, 2008.  Wireless broadband
Internet revenue increased by $179,000 to $2,281,000 as of December 31, 2009
compared to $2,102,000 as of December 31, 2008.  This increase was
primarily due to the stability of the subscriber base and customers migrating to
upgraded service levels upon completion of infrastructure upgrades in certain
areas as well as purchasing additional services. Presently stable revenues
derived from wireless broadband Internet subscribers were offset by the decrease
in other types of Internet service revenues of $473,000. This is attributed to
the expected decline of dial-up customers who may move to other providers’
broadband service.  In connection with the acquisition of TeleShare,
the Company derives other revenues from providing telex messaging
services.  Messaging revenues decreased by $27,000, or 24.8%, to
$81,000 as of December 31, 2009, compared to $108,000 as of December 31,
2008.





Connectivity and operations.Connectivity and operations expense decreased by $148,000, or 5.5%, to
$2,543,000 for the six months ended December 31, 2009, from $2,691,000 for the
six months ended December 31, 2008.  There was a decrease in salaries
and wages of approximately $118,000 to $1,160,000 as of December 31, 2009
compared to $1,278,000 as of December 31, 2008.  Installation expenses
decreased by $53,000 to $241,000 as of December 31, 2009 compared to $294,000 in
December 2008.  In the prior period, one-time expenses were incurred
as the Greater Houston Texas region was hit by a natural disaster, Hurricane
Ike, increasing service calls.  Data and telecommunications expense
decreased by $22,000 to $745,000 as of December 31, 2009 compared to $767,000 as
of December 31, 2008.  The decrease in data and telecommunications
expense is due to our renegotiating more favorable terms with telecommunications
service providers.  The remaining decrease in expense primarily
relates to a decrease in merchant fees by $6,000 and a decrease in travel
expenses by $12,000.





The
decreases in the previously discussed expenses were offset by an increase of
other expenses by $32,000 for a one time conversion cost related to transfer
email services to a hosted outsource service provider.   Tower
lease expense increased by $31,000 to $232,000 as of December 31, 2009 compared
to $201,000 as of December 31, 2008. The increase in tower leases relates to
improvements in the Company’s wireless broadband infrastructure and increases in
tower rental rates.





Sales and marketing.Sales
and marketing expense increased by $5,000, or 3.4%, to $148,000 for the six
months ended December 31, 2009, compared to $143,000 for the six months ended
December 31, 2008.    Advertising expense increased by
$6,000 to $26,000 as of December 31, 2009 compared to $20,000 as of December 31,
2008.  The Company is focusing on direct advertising in all improved
or enhanced network areas in fiscal year 2010.  These increases were
offset by a slight decrease in salaries of $1,000.





General and
administrative.G&A decreased by $26,000, or 2.2%, to
$1,228,000 for the six months ended December 31, 2009 from $1,202,000 for the
six months ended December 31, 2008. Professional and consulting fees decreased
by $55,000 to $183,000 as of December 31, 2009 compared to $238,000 as of
December 31, 2008 primarily due to non recurring expenses that were related to
the failed KeyOn Merger and declining consulting fees paid to contract labor for
telex messaging services. Salaries and wages decreased by $44,000 to $436,000 as
of December 31, 2009 compared to $480,000 as of December 31, 2008 which is
attributed to efficiencies gained from quality process
initiatives.  Insurance expenses decreased by $21,000 to $40,000 as of
December 31, 2009 from $61,000 as of December 31, 2008 due to the renegotiation
of insurance contracts.  Facilities costs decreased by $18,000 to
$129,000 as of December 31, 2009 compared to $147,000 as of December 31, 2008
due to closing a few offsite storage units and  overall reduction in
utility usage due to the decrease in  weather
temperatures.  Travel expenses decreased by $8,000 to $7,000 as of
December 31, 2009 compared to $15,000 as of December 31, 2008.The expense
related to the issuance of stock options and directors’ fees decreased by $4,000
to $73,000 as of December 31, 2009 compared to $77,000 as of December 31, 2008
due to the termination of employment of some grantees.





17




The above
decreases were offset primarily by non-recurring expenses totaling $120,000
in connection with our
application for a grant under the ARRA to expand access to broadband into areas
in Southeast Texas adjacent to existing operations.G&A
other increased  by approximately $31,000 to $133,000 as of December
31, 2009 compared to $102,000 as of December 31, 2008 primarily due to non
recurring expenses in fiscal year 2010,  including  employee
training and adjustment to value of used
inventory.  Telecommunications expense increased by $25,000 to
$107,000 as of December 31, 2009 compared to $82,000 as of December 31, 2008 due
primarily to purchasing increased bandwidth capacity.





Provision for bad debt expense
(recovery).Provision for bad debt expense increased by $2,000
for the six months ended December 31, 2009.  As of December 31, 2009,
we are fully reserved for all customer accounts that are at least 90 days
old.





Depreciation and
amortization.  Depreciation and amortization decreased by
$69,000, or 12.0%, to $504,000 for the six months ended December 31, 2009 from
$573,000 for the six months ended December 31, 2008.  The decrease in
depreciation totaling $10,000 relates to the increase in fully depreciated
assets still in use, offset by the improvement of the Company’s wireless
broadband Internet network. The decrease in amortization expense totaling
$59,000 for acquired subscriber costs is the result of early wireless
acquisitions in fiscal 2005 and 2006 becoming fully amortized.





Interest income and expense.For the six months ended December 31, 2009 and 2008, the Company recorded
interest expense of $46,000 and $48,000, respectively.  The $2,000
decrease in interest expense is the result of the reduction in the Company’s
long-term debt offset by the issuance of the promissory note for the
acquisition cost of TeleShare held in escrow. Interest income decreased by
$21,000, or 75.9%, to $7,000 due to changes in cash on hand, declining
interest rates, and closing of our interest bearing accounts. As a precautionary
measure, in February 2009, the Company transferred all funds from interest
bearing accounts during this economic crisis to ensure all funds were covered by
the Temporary Guaranty Liquidity Program initiated by the Federal Reserve
Board.





18




Liquidity
and Capital Resources





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





Cash used
in operating activities is net income or loss adjusted for certain non-cash
items and changes in assets and liabilities.  For the six months ended
December 31, 2009, cash used in operations was $446,000 compared to cash used in
operations of $438,000 for the six months ended December 31, 2008. For the six
months ended December 31, 2009, net loss plus non-cash items used cash of
$231,000.  Increases in accounts receivable, inventory and purchase of
other assets were offset by decreases in, prepaid expenses, accounts payable and
deferred revenue.  For the six months ended December 31, 2008, net
loss plus non-cash items used cash of $17,000. Increases in accounts receivable
and purchase of other assets were offset by decreases in inventory, prepaid
expenses, accounts payable and deferred revenue.





Cash used
in investing activities totaled $156,000 for the six months ended December 31,
2009, which relates primarily to approximately $162,000 in cash used to purchase
new wireless broadband Internet infrastructure.  Cash used in
investing activities totaled $141,000 for the six months ended December 31,
2008, which relates primarily to approximately $152,000 in cash used to purchase
new wireless broadband Internet infrastructure, offset by $6,000 of
proceeds on sales of equipment.





Cash used in financing activities,
which totaled $340,000 for the six months ended December 31, 2009, consisted of
principal payments on long term debt including notes related to acquisitions,
the RUS loan and capital leases.  Cash used in financing activities
for the six months ended December 31, 2008 totaled $286,000 and relates to the
principal payments on long-term debt.





Cash on
hand declined by $942,000 during the six months ended December 31,
2009.  At December 31, 2009, cash on hand was $1,479,000 compared to
$2,421,000 at June 30, 2009.  Anticipated cash flow from operations in
the near future may not be sufficient for meeting our working capital needs in
fiscal 2010 for continuing operations as well as the addition of value-added
services to both new and existing subscribers.   We believe our
continued efforts to improve the quality and efficiency of our operations over
the last few years, additional value-added services which increase ARPU as well
as additional service offerings such as desktop video conferencing and VoIP may
lead to a more rapid rate of growth and revenue per subscriber and result in
improved cash flow from operations.





However, in the near term the Company
must reduce certain discretionary spending to provide funds to support its
operations and for any capital expenditure in both existing and new markets.
Management believes that the Company will be able to meet the service
obligations related to the deferral of revenue. Continued decreases in revenues
and subscriber count may adversely affect the liquidity of the
Company.  We can provide no assurance that we will be successful in
achieving any or all of our initiatives, or that the achievement or existence of
such initiatives will result in positive cash flow.  Additional
capital financing arrangements, including public or private sales of debt or
equity securities, or additional borrowings from commercial banks, shareholders
and third parties, may be insufficient or unavailable.




Off
Balance Sheet Arrangements





None.





19





“Safe
Harbor” Statement





“Safe Harbor”
Statement





The following "Safe Harbor" Statement is
made pursuant to the Private Securities Litigation Reform Act of
1995.  Certain of the statements contained in the body of this Report
are forward-looking statements (rather than historical facts) that are subject
to risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. With respect to such
forward-looking statements, we seek the protections afforded by the Private
Securities Litigation Reform Act of 1995.  These risks include,
without limitation, that (1) we will not be able to increase our rural customer
base at the expected rate, (2) we will not improve EBITDA, profitability or
product margins, (3) we will not receive grant funding sought after in our
application to theBroadband Technology Opportunity Programto expand our wireless
infrastructure to additional unserved and underserved areas available under The
American Recovery and Reinvestment Act, (4) we will not expand our coverage in
public-private partnerships with state or local governments, utility providers,
or other entities seeking to participate in grant programs or those partnerships
may not be successful, (5) Internet revenue in high-speed broadband will
continue to increase at a slower pace than the decrease in other Internet
services resulting in greater operating losses in future periods,  (6)
financing will not be available to us if and as needed, (7) we will not be
competitive with existing or new competitors, (8) we will not keep up with
industry pricing or technological developments impacting the Internet, (9) we
will be adversely affected by dependence on network infrastructure,
telecommunications providers and other vendors or by regulatory changes, (10)
service interruptions or impediments could harm our business, (11) we may be
accused of infringing upon the  intellectual property rights of third
parties, which is costly to defend and could limit our ability to use certain
technologies in the future, (12) government regulations could force us to change
our business practices, (13) we may be unable to hire and retain qualified
personnel, including our key executive officers, (14) future acquisitions of
wireless broadband Internet customers and infrastructure may not be available on
attractive terms and if available we may not successfully integrate those
acquisitions into our operations, (15) provisions in our certificate of
incorporation, bylaws and shareholder rights plan could limit our share price
and delay a change of management, and (16) our stock price has been volatile
historically and may continue to be volatile.   This list is intended
to identify certain of the principal factors that could cause actual results to
differ materially from those described in the forward-looking statements
included elsewhere herein.  These factors are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed risk factors
included in our other publicly filed reports.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable




ITEM
4T.  CONTROLS AND PROCEDURES





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





20




PART
II - OTHER INFORMATION




ITEM
6.    EXHIBITS




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





21




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:  02/16/10
                    By:
      /s/ William E. Ladin, Jr.William
      E. Ladin, Jr.Chairman
      and Chief Executive OfficerDate:  02/16/10
                    By:
      /s/ Jennifer S. LeBlancJennifer
      S. LeBlancChief
      Financial and Accounting
Officer





22