UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED MARCH 31, 2008





OR





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


SECURITIES
      ACT OF 1934





FOR
      THE
      TRANSITION PERIOD FROM _________ TO _____





COMMISSION
      FILE NUMBER 000-25147





INTERNET
      AMERICA, INC.


(Exact
      name of registrant as specified in its charter)





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





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





(713)
      968-2500


(Registrant's
      telephone number, including area code)





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





Yes xNo
o





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




Yes oNo x




As
      of May
      09, 2008, registrant had 16,857,031 shares of Common Stock at $.01 par value,
      outstanding.





Transitional
      Small Business Disclosure Format (Check one): Yes oNo x







**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1 - FINANCIAL STATEMENTS**





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





March
                31,
            
            June
                30,2008
            
            2007(unaudited)
            
            (audited)ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            4,433,442
            
            $
            782,887Restricted
                cash
            
            
            6,432
            
            
            -Accounts
                receivable, net of allowance for uncollectible accounts of $11,775
                and
                $6,391 as of March 31, 2008 and June 30, 2007,
                respectively
            
            
            213,686
            
            
            117,056Inventory
            
            
            328,128
            
            
            282,886Prepaid
                expenses and other current assets
            
            
            654,622
            
            
            485,074Total
                current assets
            
            
            5,636,310
            
            
            1,667,903Property
                and equipment, net
            
            
            2,380,255
            
            
            854,580Goodwill,
                net
            
            
            4,313,127
            
            
            4,313,127Subscriber
                acquisition costs, net
            
            
            1,441,115
            
            
            882,940Other
                assets, net
            
            
            34,934
            
            
            27,285TOTAL
            
            $
            13,805,741
            
            $
            7,745,835LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            303,396
            
            $
            534,253Accrued
                liabilities
            
            
            643,708
            
            
            447,939Deferred
                revenue
            
            
            1,344,615
            
            
            1,234,558Current
                portion of long-term debt
            
            
            617,377
            
            
            468,480Total
                current liabilities
            
            
            2,909,096
            
            
            2,685,230Long-term
                debt
            
            
            1,471,710
            
            
            452,457Minority
                interest in subsidiary
            
            
            5,632
            
            
            -Total
                liabilities
            
            
            4,386,438
            
            
            3,137,687COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock, 10% cumulative, convertible, $.01 par value: 5,000,000 shares
                authorized, 2,889,076 and 0 issued and outstanding as of March 31,
                2008
                and June 30, 2007, respectively
            
            
            28,891
            
            
            -Common
                stock, $.01 par value: 40,000,000 shares authorized, 16,857,031 and
                12,508,914 issued and outstanding as of March 31, 2008 and June 30,
                2007,
                respectively
            
            
            168,571
            
            
            125,089Additional
                paid-in capital
            
            
            63,547,070
            
            
            57,161,980Accumulated
                deficit
            
            
            (54,325,229
            )
            
            (52,678,921
            )Total
                shareholders' equity
            
            
            9,419,303
            
            
            4,608,148TOTAL
            
            $
            13,805,741
            
            $
            7,745,835




See
      accompanying notes to condensed consolidated financial
      statements.


2


**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**





Three Months Ended
            
            Nine Months EndedMarch 31,
            
            March 31,2008
            
            2007
            
            2008
            
            2007REVENUES:Internet
                services
            
            $
            2,173,992
            
            $
            1,971,684
            
            $
            6,423,159
            
            $
            6,057,407Other
            
            
            102,183
            
            
            -
            
            
            295,219
            
            
            66Total
            
            
            2,276,175
            
            
            1,971,684
            
            
            6,718,378
            
            
            6,057,473OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,513,966
            
            
            1,242,352
            
            
            4,360,372
            
            
            3,734,050Sales
                and marketing
            
            
            117,055
            
            
            60,918
            
            
            428,342
            
            
            155,433General
                and administrative
            
            
            828,618
            
            
            524,194
            
            
            2,675,935
            
            
            1,635,792Provision
                for bad debt expense
            
            
            (418
            )
            
            2,875
            
            
            5,383
            
            
            5,579Depreciation
                and amortization
            
            
            297,318
            
            
            203,917
            
            
            867,973
            
            
            617,609Total
            
            
            2,756,539
            
            
            2,034,256
            
            
            8,338,005
            
            
            6,148,463LOSS
                FROM OPERATIONS
            
            
            (480,364
            )
            
            (62,572
            )
            
            (1,619,627
            )
            
            (90,990
            )INTEREST
                EXPENSE, NET
            
            
            4,874
            
            
            302
            
            
            27,469
            
            
            9,377Minority
                interest in loss of consolidated subsidiary
            
            
            393
            
            
            -
            
            
            788
            
            
            -NET
                LOSS
            
            $
            (484,845
            )
            $
            (62,874
            )
            $
            (1,646,308
            )
            $
            (100,367
            )NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            $
            (0.01
            )
            $
            (0.11
            )
            $
            (0.01
            )DILUTED
            
            $
            (0.03
            )
            $
            (0.01
            )
            $
            (0.11
            )
            $
            (0.01
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            16,857,031
            
            
            12,508,914
            
            
            14,357,119
            
            
            12,508,914DILUTED
            
            
            16,857,031
            
            
            12,508,914
            
            
            14,357,119
            
            
            12,508,914





See
      accompanying notes to condensed consolidated financial
      statements.


3





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





Nine Months EndedMarch 31,2008
            
            2007OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (1,646,308
            )
            $
            (100,367
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Minority
                interest
            
            
            (788
            )
            
            -Depreciation
                and amortization
            
            
            867,973
            
            
            617,609Gain
                on disposal of fixed assets
            
            
            -
            
            
            (89
            )Provision
                for bad debt expense
            
            
            5,383
            
            
            5,579Non-cash
                stock compensation expense
            
            
            92,211
            
            
            30,438Changes
                in operating assets and liabilities (net of effects of assets acquired,
                less liabilities assumed):Accounts
                receivable
            
            
            (32,794
            )
            
            9,539Inventory
            
            
            97,785
            
            
            100,945Prepaid
                expenses and other current assets
            
            
            (153,863
            )
            
            (166,636
            )Other
                assets
            
            
            (33,850
            )
            
            -Other
                long-term liabilities
            
            
            -
            
            
            (47,320
            )Accounts
                payable and accrued liabilities
            
            
            (248,828
            )
            
            (352,782
            )Deferred
                revenue
            
            
            77,077
            
            
            (25,610
            )Net
                cash (used in) provided by operating activities
            
            
            (976,002
            )
            
            71,306INVESTING
                ACTIVITIES:Purchases
                of property and equipment, net
            
            
            (1,067,168
            )
            
            (219,258
            )Change
                in restricted cash
            
            
            (6,432
            )
            
            -Proceeds
                from sale of property and equipment
            
            
            -
            
            
            600Cash
                received from acquisitions
            
            
            655,102
            
            
            -Net
                cash used in investing activities
            
            
            (418,498
            )
            
            (218,658
            )FINANCING
                ACTIVITIES:Net
                proceeds from issuance of common stock
            
            
            3,987,625
            
            
            -Net
                proceeds from issuance of preferred stock
            
            
            1,307,183Proceeds
                from issuance of long term debt
            
            
            71,787
            
            
            -Principal
                payments under capital lease obligations
            
            
            -
            
            
            (44,949
            )Principal
                payments of long-term debt
            
            
            (321,540
            )
            
            (73,941
            )Net
                cash provided by (used in) financing activities
            
            
            5,045,055
            
            
            (118,890
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            3,650,555
            
            
            (266,242
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            782,887
            
            
            937,401CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            4,433,442
            
            $
            671,159SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            88,155
            
            $
            17,744NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Stock
                issued in connection with acquisitions
            
            $
            770,443
            
            $
            -Debt
                assumed in connection with acquisitions
            
            $
            100,529
            
            $
            -Debt
                issued in connection with acquisitions, net
            
            $
            863,500
            
            $
            -Minority
                interest
            
            $
            5,632
            
            $
            -Borrowings
                extinguished for preferred stock
            
            $
            300,000
            
            $
            -




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 310(b) of
      Regulation S-B of the Securities and Exchange Commission. The accompanying
      unaudited condensed consolidated financial statements reflect, in the opinion
      of
      management, all adjustments necessary to achieve a fair 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 consolidated financial statements
      should be read in conjunction with the consolidated financial statements for
      the
      year ended June 30, 2007, included in the Company’s Annual Report on Form 10-KSB
      (SEC Accession No. 0001144204-07-051533).





2.
            Reclassifications





Certain
      reclassifications have been made to the 2007 financial statements to conform
      to
      the 2008 presentation. These classifications had no effect on 2007 net loss
      or
      shareholders’ equity.








3.
            Basic
                and Diluted Net Earnings Per Share





There
      are
      no adjustments required to be made to net loss for the purpose of computing
      basic and diluted earnings per share (“EPS”) for the three and nine months ended
      March 31, 2008 and 2007. For the three and nine months ended March 31, 2008
      and
      2007, diluted earnings per share is the same as basic earnings per share due
      to
      the net loss. During the three and nine months ended March 31, 2008, options
      to
      purchase 572,288 shares of common stock were not included in the computation
      of
      diluted EPS because the effect would be anti-dilutive; 412,972 of these shares
      were “in the money” as of March 31, 2008. During the three and nine months ended
      March 31, 2007, options to purchase 195,597 shares of common stock were not
      included in the computation of diluted EPS because the options were not “in the
      money” as of March 31, 2007. There were no options exercised to purchase shares
      of common stock during the nine months ended March 31, 2008 and
      2007.




4.
            Acquisitions




On
      July
      27, 2007, Internet America acquired substantially all of the outstanding shares
      of TeleShare Communications Services, Inc. (“TeleShare”) from Mark Ocker and
      Cynthia Ocker for $1,850,000, payable in shares of Company common stock and
      a
      note, and subject to certain adjustments 90 days after closing. TeleShare,
      based
      in Crosby, Texas, serves approximately 1,500 wireless broadband Internet service
      customers and provides telex messaging services. On October 25, 2007, the final
      adjustments to the TeleShare acquisition were determined, and the Company issued
      a note payable for approximately $864,000 and 298,117 shares of Common Stock
      to
      the former owners of TeleShare.




TeleShare
      had a loan commitment under a program administered by the Rural Utilities
      Service of the United States Department of Agriculture (the “RUS”). Under the
      program administered by the RUS, Internet America assumed a loan commitment
      of
      approximately $4 million with approximately $3 million still available for
      providing financial assistance for the expansion of broadband services in rural
      areas.


5




4.
            Acquisitions
                (continued)





During
      the year ended June 30, 2007, the Company completed the acquisition of assets
      of
      three wireless broadband Internet service providers. During the nine months
      ended March 31, 2008, in accordance with these asset purchase agreements, the
      Company adjusted the purchase price to reflect certain adjustments to the total
      consideration. The approximate adjusted amounts are summarized
      below:





March 31,
            
            June 30,2008
            
            2007Purchase
                price:Cash
            
            $
            266,000
            
            $
            266,000Assumed
                liabilities
            
            
            65,000
            
            
            72,000Notes
                (net of imputed interest of $8,000)
            
            
            218,000
            
            
            348,000Assumption
                of long term debt
            
            
            100,000
            
            
            100,000Total
            
            $
            649,000
            
            $
            786,000Allocation
                of purchase price:Fixed
                assets and inventory
            
            $
            120,000
            
            $
            134,000Subscriber
                acquisition cost
            
            
            529,000
            
            
            652,000Total
            
            $
            649,000
            
            $
            786,000





5.
            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.




6.
            Goodwill,
                net and Subscriber Acquisition Costs,
                net





The
      carrying value of these assets at March 31, 2008 and June 30, 2007 is as
      follows:





March
                31,
            
            June
                30,2008
            
            2007Goodwill
            
            $
            26,047,266
            
            $
            26,047,266Accumulated
                amortization-goodwill
            
            
            (21,734,139
            )
            
            (21,734,139
            )Total
                goodwill, net
            
            $
            4,313,127
            
            $
            4,313,127Subscriber
                acquisition costs
            
            $
            2,818,027
            
            $
            1,895,893Accumulated
                amortization-subscriber acquisition costs
            
            
            (1,376,912
            )
            
            (1,012,953
            )Total
                subscriber acquisition costs, net
            
            $
            1,441,115
            
            $
            882,940





The
      weighted average amortization period for subscriber acquisition costs is 48
      months for both dial-up and wireless broadband Internet customers. From July
      1,
      2006 to December 31, 2006, these costs were amortized over 36 months.
      Amortization expense for the three and nine months ended March 31, 2008 was
      approximately $130,200 and $364,000, respectively. As of March 31, 2008,
      amortization expense for the fiscal years ended June 30, 2008, 2009, 2010 and
      2011 is expected to be approximately $495,000, $485,000 $427,000 and $394,000,
      respectively.


6





7.
            Income
                Taxes





During
      the three and nine months ended March 31, 2008, the Company generated a net
      loss
      of $484,845 and $1,646,308, respectively. For the three and nine months ended
      March 31, 2007, the Company generated a net loss of $62,874 and $100,367,
      respectively. No provision for income taxes has been recorded for the three
      and
      nine months ended March 31, 2008 and 2007, as the Company has net operating
      losses generated in the current and prior periods well in excess of the net
      income for the three and nine months ended March 31, 2007. As of March 31,
      2008,
      the Company continues to maintain a full valuation allowance for its net
      deferred tax assets of approximately $12.8 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 Financial Account Standards Board Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB
      Statement No. 109” (“FIN 48”). As a result of the implementation of FIN 48,
      management assessed its various income tax positions, and this assessment
      resulted in no adjustment. The preparation of various tax returns requires
      the
      use of estimates for federal and state income tax purposes. Those estimates
      may
      be subject to review by respective taxing authorities. A revision, if any,
      to an
      estimate may result in assessment of additional taxes, penalties and interest.
      At this time, a range in which our estimates may change is not quantifiable
      and
      a change, if any, is not expected to be material. The Company will account
      for
      interest and penalties related to uncertain tax positions in the current period
      income statement, as necessary. The 2004, 2005 and 2006 tax periods remain
      subject to examination by various federal, and state tax
      jurisdictions.


7


8.
            Long-Term
                Debt





Long-term
      debt consists of:





March 31,
            
            June 30,2008
            
            2007Note
                payable due November 15, 2007, payable in monthly installments of
                $1,825, bearing interest at prime plus 3%
            
            $
            -
            
            $
            10,415Note
                payable due September 22, 2007, payable in annual installments of
                $41,667 with interest imputed at 8%
            
            
            -
            
            
            38,580Note
                payable due July 19, 2009, payable in quarterly payments of $7,751
                with interest imputed at 9% (net of unamortized discount of
                $8,769)
            
            
            68,679
            
            
            86,468Note
                payable due January 23, 2011 payable in bi-annual installments of
                $13,917 with interest imputed at 8% (net of unamortized discount
                of
                $4,419)
            
            
            23,106
            
            
            35,534Credit
                card line of credit advance, payable on demand, bearing interest
                at prime
                plus 6.5%
            
            
            -
            
            
            1,839Note
                payable due June 30, 2008 payable in an annual installment of $150,000
                with interest at 11.25%
            
            
            -
            
            
            150,000Note
                payable due June 30, 2008 payable in an annual installment of $150,000
                with interest at 11.25%
            
            
            -
            
            
            150,000Note
                payable due August 28, 2010, payable in monthly installments of $1,033
                beginning October 2008 with interest imputed at 5% (net of unamortized
                discount of $642)
            
            
            22,813
            
            
            49,813Note
                payable due June 20, 2012, payable in monthly installments of $2,088
                with
                interest imputed at 9% (net of unamortized discount of
                $18,269)
            
            
            88,210
            
            
            100,529Note
                payable due July 20, 2010, payable in monthly installments of $1,818
                with
                interest imputed at 6.5% (net of unamortized discount of
                $3,790)
            
            
            47,105
            
            
            58,860Note
                payable due July 20, 2010, payable in monthly installments of $1,409
                with
                interest imputed at 6.5% (net of unamortized discount of
                $2,937)
            
            
            36,507
            
            
            45,618Note
                payable due October 11, 2010, payable in quarterly payments of $9,068
                with
                interest imputed at 5.5% (net of unamortized discount of
                $7,795)
            
            
            91,953
            
            
            193,281Note
                payable due December 23, 2010, payable in monthly payments of $26,199
                with
                interest imputed at 5.5% (net of unamortized discount of $61,146),
                partially secured by CDs of $667,825
            
            
            803,434
            
            
            -Note
                payable due February 12, 2009, payable in monthly payments of $1,261
                with
                zero interest imputed.
            
            
            13,867
            
            
            -Loan
                and Security Agreement with United States Department of Agriculture
                Rural
                Utilities Service
            
            
            893,413
            
            
            -2,089,087
            
            
            920,937Less
                current portion
            
            
            (617,377
            )
            
            (468,480
            )Long-term
                debt
            
            $
            1,471,710
            
            $
            452,457




The
      Company’s long-term debt is unsecured except for approximately $1,740,941 and
      $227,229 as of March 31, 2008 and June 30, 2007, respectively, which is secured
      by certain inventory and equipment. The prime rate at March 31, 2008 and June
      30, 2007 was 5.25% and 8.25%, respectively.


8


9.
            Shareholders’
                Equity





*Series
      A Preferred Stock*





On
      October 17, 2007, the Company entered into a Purchase Agreement (the “October
      Agreement”) with certain purchasers (the “Purchasers”), pursuant to which the
      Company sold 2,889,076 shares of a newly designated Series A Preferred Stock,
      for a per share purchase price of $0.586 and an aggregate purchase price of
      $1,693,000, in a privately-negotiated transaction. Mr. Ladin, the Chairman
      of
      the Board and Chief Executive Officer of the Company, and Ambassador Palmer,
      a
      director of the Company, participated in the sale as Purchasers, as described
      in
      Note 10.





Each
      share of Series A Preferred Stock is convertible at any time, at the option
      of
      the holder, into one share of Company common stock. The Series A Preferred
      Stock
      is subject to mandatory conversion, at the option of the Company, in the event
      that the per share trading price of the Company’s common stock is equal to or
      greater than $3.00 per share for 90 consecutive trading days. The Series A
      Preferred Stock has a liquidation preference of $0.586 per share, plus all
      accrued but unpaid dividends thereon, whether or not earnings are available
      in
      respect of such dividends and whether or not such dividends have been declared.
      The holders of Series A Preferred Stock shall be entitled to receive out of
      the
      assets of the Company, when and if declared by the Board out of funds legally
      available for that purpose, cumulative cash dividends at a rate of 10% per
      annum
      for each share of Series A Preferred Stock. Such dividends are cumulative from
      the date the Series A Preferred Stock is issued and payable in arrears, when
      and
      as declared by the Board, quarterly. Cumulative dividends in arrears were
      approximately $76,500 at March 31, 2008. The holders of the Series A Preferred
      Stock are entitled to vote on an as-converted basis with the Common Stock,
      and
      separately with respect to specified corporate acts that would adversely affect
      the Series A Preferred Stock. In connection with the October Agreement, the
      Company and the Purchasers entered into a Registration Rights Agreement,
      pursuant to which the Company agreed to grant “piggyback” registration rights to
      the Purchasers.




The
      Company will use the proceeds from the issuance of the Series A Preferred Stock
      to continue network expansion and for general corporate purposes, including
      working capital and potential business opportunities.




*Common
      Stock*





On
      December 10, 2007, the Company, entered into a Purchase Agreement (the “December
      Agreement”) with The Steven G. Mihaylo Trust (the “Trust”), pursuant to which
      the Company sold 4,000,000 shares of Common Stock, for a per share purchase
      price of $1.00 and an aggregate purchase price of $4,000,000, in a
      privately-negotiated transaction. The December Agreement contains customary
      representations, warranties and indemnification provisions.





Additionally,
      in connection with the December Agreement, the Company amended its Rights
      Agreement between the Company and American Stock Transfer & Trust Company
      dated August 9, 2004. Prior to adoption of the amendment, the acquisition by
      a
      beneficial owner of in excess of 15% of the outstanding shares of Common Stock
      was an event that triggered the issuance of Common Shares to holders of rights
      under the Rights Agreement. The Board of Directors determined that it was in
      the
      best interest of the Company to exempt the Trust from the provisions of the
      Rights Agreement, with the result that no Common Shares would be issuable to
      the
      holders of the Rights upon the sale of Common Stock under the December
      Agreement. Further the Board approved the acquisition by the Trust of up to
      25%
      of the outstanding Common Shares, so long as such acquisition is not made in
      connection with a tender or exchange offer.




In
      connection with the December Agreement, the Company and the Trust entered into
      a
      Registration Rights Agreement dated as of December 10, 2007, pursuant to which
      the Company agreed to grant “piggyback” registration rights to the Trust.




The
      Company will use the proceeds from the issuance of the Common Stock to continue
      network expansion and for general corporate purposes, including working capital
      and potential business opportunities.


9




10.
            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 nine months ended March
      31,
      2008 and 2007:





Nine Months EndedMarch 31,2008
            
            2007Troy
                LeMaile Stovall
            
            $
            15,250
            
            $
            12,250Justin
                McClure
            
            
            15,250
            
            
            12,000John
                Palmer
            
            
            20,161
            
            
            11,250Steven
                Mihaylo
            
            
            8,656
            
            
            -Cynthia
                Ocker
            
            
            155,634
            
            
            -$
            214,951
            
            $
            35,500





On
      June
      15, 2007 the Company issued an unsecured Promissory Note to each of Mr. Ladin,
      the Chairman of the Board and Chief Executive Officer of the Company, and
      Ambassador Palmer, a director of the Company, for $150,000 (the “Notes”). The
      Notes bore interest at 11.25% per annum payable monthly. The principal was
      due
      in full on the earlier to occur of July 1, 2008 or the sale of the Series A
      Preferred Stock by the Company (see Note 9), subject to acceleration in certain
      events. The Notes were paid in full on October 17, 2007 upon the receipt by
      the
      Company of the proceeds from the sale of the shares of Series A Preferred Stock.





On
      October 17, 2007, the Company sold 2,889,076 shares of Series A Preferred Stock
      for a per share purchase price of $0.586 and an aggregate purchase price of
      $1,693,000, in a privately-negotiated transaction, which is fully described
      in
      Note 9. Mr. Ladin and Ambassador Palmer participated in the sale as Purchasers,
      and the consideration paid by them included, in addition to cash, the
      cancellation of the Notes. GulfSouth, a private investment firm owned by
      Ambassador Palmer and of which Justin McClure, a director of the Company, is
      the
      president, also participated in the sale as a Purchaser.





On
      December 10, 2007, the Company sold 4,000,000 shares of Common Stock for a
      per
      share purchase price of $1.00 and an aggregate purchase price of $4,000,000
      in a
      privately-negotiated transaction which is fully described in Note 9. All shares
      were purchased by The Steven G. Mihaylo Trust. Mr. Mihaylo is the sole trustee
      of that trust and is a director of the Company.





11.
            New
                Accounting Pronouncements





On July
      1, 2007, the Company adopted FIN 48, and as a result management assessed its
      various income tax positions, and this assessment resulted in no adjustment
      to
      the tax asset or liability. The preparation of our various tax returns requires
      the use of estimates for federal and state income tax purposes. These estimates
      may be subjected to review by the respective taxing authorities. A revision,
      if
      any, to an estimate may result in an 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. We will
      account for interest and penalties relating to uncertain tax positions in the
      current period income statement, as necessary. The 2004, 2005 and 2006 tax
      years
      remain subject to examination by various federal and state tax
      jurisdictions.




10




**ITEM
      2.**




**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**





*Certain
      statements contained in this Form 10-QSB constitute "forward-looking statements"
      within the meaning of Section 27A of the Securities Act of 1933 and Section
      21E
      of the Securities Exchange Act of 1934. These statements, identified by words
      such as "anticipate," "believe," "estimate," "should," "expect" and similar
      expressions include our expectations and objectives regarding our future
      financial position, operating results and business strategy. These statements
      reflect the current views of management with respect to future events and are
      subject to risks, uncertainties and other factors that may cause our actual
      results, performance or achievements, or industry results, to be materially
      different from those described in the forward-looking statements. We do not
      intend to update the forward-looking information to reflect actual results
      or
      changes in the factors affecting such forward-looking information. Our Annual
      Report on Form 10-KSB for the fiscal year ended June 30, 2007 and other publicly
      filed reports discuss some additional important factors that could cause our
      actual results to differ materially from those in any forward-looking
      statements.*





**Overview**





Internet
      America, Inc. (the “Company”) is an Internet service provider (“ISP’) serving
      approximately 31,800 subscribers in Texas, as of March 31, 2008. Of the
      Company’s 31,800 total subscribers, approximately 8,100 customer accounts are
      wireless broadband 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. In
      fiscal 2007, the Company continued to adjust its focus and business away from
      reliance on providing dialup Internet and wired broadband connectivity services
      in major metropolitan markets to providing wireless broadband Internet
      connectivity to under-served, suburban and rural markets in the southwest United
      States, with our initial focus in Texas markets. Our current activities are
      near
      our wireless broadband Internet operational centers in San Antonio, Stafford
      (an
      adjoining suburb of Houston), Victoria, North Dallas, and Corsicana. These
      operational centers provide installation, construction and repair services
      to
      their surrounding geographic areas. The rural and suburban markets that Internet
      America sells to are typically avoided or overlooked by Incumbent Local Exchange
      Carriers (“ILEC’s”) and cable television companies. The rural and suburban
      wireless ISP (“WISP”) industry is fragmented with ample consolidation
      opportunity. The Company estimates that there are up to 2,500 potential WISP
      acquisition candidates in the United States, including approximately 150 in
      Texas.





The
      Company has incurred
      net operating losses to date in fiscal 2008. A number of factors, which are
      more
      fully described in Results of Operations below, have attributed to these losses.
      These include the integration of four acquired entities, one time expenses
      related to employee
      quality training, marketing,
      legal fees and abandoned leases. Management believes that the synergies of
      providing customer support and billing services to acquired wireless Broadband
      customers will continue in the fourth quarter,
      now that these integrations have been completed. Additionally, m anagement
      is engaged
      in cost-reduction
      measures and
      will
      continue these measures on
      an
      ongoing basis with the
      goal of returning the Company to net operating profits during fiscal
      2009.





During
      the quarter ended March 31, 2008 the Company invested approximately $51,000
      in
      college-level management training for employees. The training focused on
      building quality into all aspects of our operation by making employees active
      and enthusiastic partners in the enterprise, rather than creating controls
      and
      procedures that simply hassle employees without producing results. This training
      continued in the fourth quarter, and management invested an additional $42,000
      in April 2008, for a total of $93,000 in direct costs to complete the training
      of all managers. Management believes that this was an important investment
      in
      the organization and that the principles learned will allow employees to be
      more
      productive, allowing us to expand without incremental increases in head-count
      and related costs, which will contribute to our ability to acquire and retain
      customers and become profitable.





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





The
      Company’s customer count for wireless broadband Internet services has increased
      to approximately 8,100 subscribers as of March 31, 2008. Management believes
      that we are poised for additional growth as we have targeted areas where
      competition is less intense and demand for Internet connectivity may be
      under-served. This growth will help to replace declining revenues due to
      attrition in our dial-up services, and management believes this will allow
      the
      Company to stabilize and then begin to increase revenue and profits. During
      the
      quarter, the Company embarked on a program to upgrade and expand areas where
      our
      network has been experiencing congestion due to the bandwidth demands created
      by
      the growth of our customer base. Total capital expenditures for
      improvements and repairs during the quarter totaled $522,000 and fiscal year
      to
      date related capital expenditures totaled $718,000. During this upgrade process,
      we have restricted the addition of new wireless customers to certain areas
      of
      the network until the capacity can be expanded to meet the demand and provide
      quality service to our customers.  We have and may continue to experience a
      reduction in the rate of growth of the Company’s wireless customer count during
      the period in which the improvements are being made.


11





On
      July
      27, 2007 we completed the acquisition of TeleShare Communications Services,
      Inc.
      (“TeleShare”) for $1,850,000, subject to certain adjustments 90 days after
      closing. TeleShare, based in Crosby, Texas served approximately 1,500 wireless
      broadband Internet service customers, had a loan commitment under a program
      administered by the Rural Utilities Service of the Department of Agriculture
      (“RUS”), and provided telex messaging services. Under the program administered
      by the RUS, the Company assumed a loan commitment of approximately $4 million
      with approximately $3 million still available for providing financial assistance
      for the expansion of broadband services in rural areas.





The
      Company’s customer count for wireless broadband Internet services was increased
      primarily through acquisitions of smaller WISP’s during the first quarter. Since
      then, we have focused on the integration and simplification of our systems
      and
      system upgrades for existing customers. We will continue our efforts to further
      standardize our systems and continue to document our process for integration
      of
      smaller WISP’s so that we may more rapidly and cost-effectively integrate future
      acquisitions. We may not complete additional acquisitions in the fourth quarter
      and beyond, until these initiatives are complete. Additionally there is no
      guarantee that we will make significant or numerous acquisitions, management
      of
      the Company believes that there are many WISP'S who need the sales, marketing,
      and management experience that Internet America offers and who also need access
      to the systems and capital that will be necessary to grow their businesses.
      The
      Company is focusing on markets that enhance its geographic and strategic plans.
      As we have gained experience in both opening de novo markets and acquiring
      smaller ISP’s and WISP’s, acquisitions remain attractive as an important method
      of acquiring substantial subscriber bases that we can enlarge and to which
      we
      can provide qualified, experienced management.





Our
      acquisition targets are typically capital constrained and have minimal marketing
      budgets and underutilized network capacity. Our material reduction in operating
      costs and simplification provided by integration into our customer care and
      network monitoring systems allows for expanded EBITDA ( Earnings
      Before Interest, Taxes, Depreciation and Amortization) margins
      and more aggressive expansion under our management. The introduction of our
      proven marketing programs can contribute to greater penetration in the acquired
      network footprint further expanding the contribution of acquired WISP’s to our
      EBITDA.





Company
      management believes the initiatives identified above are instrumental to the
      achievement of our goals, but they may be subject to competitive, regulatory,
      and other events and circumstances that are beyond our control. We can provide
      no assurance that we will be successful in achieving any or all of the
      initiatives, that the achievement or existence of such initiatives will result
      in profit improvements, or that other factors will not arise that would
      adversely affect future profits.




**Statement
      of Operations**




Internet
      services revenue is derived from dial-up Internet access, including analog
      and
      ISDN access, DSL access, dedicated connectivity, wireless access, bulk dial-up
      access, web hosting services, and value-added services, such as multiple e-mail
      boxes, personalized e-mail addresses and Fax-2-Email services. In connection
      with the acquisition of TeleShare, the Company derives other revenues from
      providing telex messaging services since July 27, 2007.





In
      March
      of 2006, the Company relocated its corporate headquarters to Houston from Dallas
      and ceased operations of its small “computer centers” which offered computer
      repair services in some local markets. In December 2007, the Company closed
      all
      operations at its downtown Dallas office. Due to the high percentage of
      corporate office space vacancies in downtown Dallas, the Company has been unable
      to identify a potential sub-tenant for the 19,000 square feet former
      headquarters. In the quarter ended December 31, 2007, the Company recorded
      a one
      time expense for the remaining rental expense of approximately $227,500 due
      through October 2008.


12





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





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





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





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




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





Depreciation
      expense is computed using the straight-line method over the estimated useful
      lives of the assets or the capital lease term, as appropriate. Data
      communications equipment, computers, data servers and office equipment are
      depreciated over five years. We depreciate furniture, fixtures and leasehold
      improvements over five years. 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.


13





**Results
      of Operations**





*Three
      Months Ended March 31, 2008 Compared to Three Months Ended March 31,
      2007*





The
      following table sets forth certain unaudited financial data for the three months
      ended March 31, 2008 and 2007. Operating results for any period are not
      indicative of results for any future period. Dollar amounts are shown in
      thousands (except per share data and subscriber counts).





**Three Months Ended****March 31, 2008**
            
            **March 31, 2007****(000’s, except**
              **share and per**
              **share data)**
            
            **% of**
              **Revenues**
            
            **(000’s, except**
              **share and per**
              **share data)**
            
            **% of**
              **Revenues**STATEMENT
                OF OPERATIONS DATA:REVENUES:Internet
                services
            
            $
            2,174
            
            
            95.5
            %
            $
            1,972
            
            
            100.0
            %Other
            
            
            102
            
            
            4.5
            %
            
            -
            
            
            0.0
            %Total
            
            
            2,276
            
            
            100.0
            %
            
            1,972
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,514
            
            
            66.5
            %
            
            1,243
            
            
            63.0
            %Sales
                and marketing
            
            
            117
            
            
            5.1
            %
            
            61
            
            
            3.1
            %General
                and administrative
            
            
            829
            
            
            36.4
            %
            
            524
            
            
            26.6
            %Provision
                for bad debt expense
            
            
            (1
            )
            
            0.0
            %
            
            3
            
            
            0.2
            %Depreciation
                and amortization
            
            
            297
            
            
            13.0
            %
            
            204
            
            
            10.3
            %Total
            
            
            2,756
            
            
            121.0
            %
            
            2,035
            
            
            103.2
            %OPERATING
                LOSS
            
            
            (480
            )
            
            (21.0
            )%
            
            (63
            )
            
            (3.2
            )%INTEREST
                EXPENSE, NET
            
            
            (5
            )
            
            (0.2
            )%
            
            -
            
            
            0.0
            %Minority
                interest in loss of consolidated subsidiary
            
            
            (0
            )
            
            0.0
            %
            
            -
            
            
            0.0
            %NET
                LOSS
            
            $
            (485
            )
            
            (21.2
            )%
            $
            (63
            )
            
            (3.2
            )%NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            
            
            
            $
            (0.01
            )DILUTED
            
            $
            (0.03
            )
            
            
            
            $
            (0.01
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            16,857,031
            
            
            
            
            
            12,508,914DILUTED
            
            
            16,857,031
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            31,800
            
            
            
            
            
            34,000EBITDA(2)
            
            $
            (183
            )
            
            
            
            $
            141EBITDA
                margin(3)
            
            
            -8.0
            %
            
            
            
            
            7.0
            %Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (485
            )
            
            
            
            $
            (63
            )Add:Depreciation
                and amortization
            
            
            297
            
            
            
            
            
            204Interest
                expense, net
            
            
            5
            
            
            
            
            
            -EBITDA
                (2)
            
            $
            (183
            )
            
            
            
            $
            141





(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.


14





*Total
      revenue.* Total
      revenue increased by $304,000, or 15.4%, to $2,276,000 for the three months
      ended March 31, 2008, from $1,972,000 for the three months ended March 31,
      2007.
      The Company’s total subscriber count decreased by 2,200, or 6.5%, to 31,800 as
      of March 31, 2008 compared to 34,000 as of March 31, 2007. The Company’s
      wireless broadband Internet subscriber count increased by 3,900, or 92.9%,
      to
      8,100 as of March 31, 2008, compared to 4,200 as of March 31, 2007. Wireless
      broadband Internet revenue increased by $523,000 to $1,117,000 as of March
      31,
      2008 compared to $594,000 as of March 31, 2007. This increase was primarily
      due
      to the acquisition of four companies and organically growing the Company’s
      subscriber count through increased sales efforts. The increase in wireless
      broadband Internet revenues was offset by the decrease in dial-up Internet
      subscriber counts and related revenue of $219,000. This decrease 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 March 31, 2008 totaled
      $102,000.





*Connectivity
      and operations.* Connectivity
      and operations expense increased by $271,000, or 21.8%, to $1,514,000 for the
      three months ended March 31, 2008, from $1,243,000 for the three months ended
      March 31, 2007. There was an increase in salaries, wages and related personnel
      costs of approximately $151,000 to $658,000 as of March 31, 2008 compared to
      $507,000 as of March 31, 2007. Installation and service call expenses increased
      by $56,000 to $212,000 as of March 31, 2008 compared to $156,000 as of March
      31,
      2007. Data and telecommunications expense decreased by $33,000 to $457,000
      as of
      March 31, 2008 compared to $490,000 as of March 31, 2007 due to lower cost
      for
      dial up customers offset by increases in bandwidth costs for wireless customers.
      Tower lease expense increased by $69,000 to $99,000 as of March 31, 2008
      compared to $30,000 as of March 31, 2007. The increase in salaries and wages,
      data and certain telecommunications expense and tower leases all relate to
      the
      growth of the Company’s wireless broadband Internet subscriber counts and
      operations and the positioning of our Company for our anticipated future growth
      being driven by our wireless broadband Internet operations.





Management
      has reclassified certain expenses related to field personnel and travel costs
      for our wireless Broadband operations that were previously presented as general
      and administrative costs. Cost for previous quarters have also been
      reclassified. These changes do not affect total net loss reported.




*Sales
      and marketing.* Sales
      and
      marketing expense increased by $56,000, or 91.8%, to $117,000 for the three
      months ended March 31, 2008, compared to $61,000 for the three months ended
      March 31, 2007. Salaries and wages increased $66,000 to $104,000 as of March
      31,
      2008 compared to $38,000 as of March 31, 2007 due to the added personnel for
      the
      expansion of the wireless broadband Internet segment of the Company’s business.
      The Company spent $14,000 in advertising, travel and consulting expenses as
      of
      March 31, 2008 compared to $23,000 as of March 31, 2007 in our effort to grow
      the wireless broadband Internet segment of our business.





*General
      and administrative.* General
      and administrative expense (G&A) increased by $305,000, or 58.2%, to
      $829,000 for the three months ended March 31, 2008, from $524,000 for the three
      months ended March 31, 2007. Salaries and wages increased $162,000 to $318,000
      as of March 31, 2008 compared to $156,000 as of March 31, 2007 due to an
      increase in administrative personnel costs to support the anticipated organic
      and acquisition growth of our wireless broadband Internet operations. During
      the
      quarter ended March 31, 2008, the Company invested approximately $51,000 in
      college-level management training for employees which was a one time increase
      to
      G&A expense. This training continued in the fourth quarter, and management
      invested an additional $42,000 in April 2008 to complete the training of all
      managers.





Rent
      and
      utilities expenses decreased by $56,000 to $76,000 as of March 31, 2008 compared
      to $132,000 as of March 31, 2007. In December 2007, the Company closed all
      operations at its downtown Dallas office. Due to the high percentage of
      corporate office space vacancies in downtown Dallas, the Company has been unable
      to identify a potential sub-tenant for the 19,000 square feet former
      headquarters. In the quarter ended December 31, 2007, the Company recorded
      a one
      time expense for the remaining rental expense of approximately $227,500 due
      through October 2008. This decrease was partially offset by additional office
      space leased resulting from recently completed acquisitions.





The
      Company issued stock options in the fiscal fourth quarter of 2007 and the fiscal
      first quarter of 2008, which caused an increase in expenses of $26,000 to
      $48,000 as of March 31, 2008 compared to $22,000 as of March 31, 2007.
      Professional and consulting fees increased by approximately $99,000, to $178,000
      as of March 31, 2008 compared to $79,000 as of March 31, 2007 primarily due
      to
      expenses related to outsource management fees for telex messaging customers
      acquired from TeleShare in July 2007 totaling approximately $114,000 for the
      three months ended March 31, 2008. The remaining net increase of $23,000 in
      G&A was primarily the result of an increase in property and telecom taxes
      after acquiring TeleShare. **


15





*Provision
      for bad debt expense.* Provision
      for bad debt expense decreased by $4,000 for the three months ended March 31,
      2008, from $3,000 for the three months ended March 31, 2007. This decrease
      is
      due primarily to an increase in recoveries due to the transition of accounts
      receivable of recently acquired subscribers. As of March 31, 2008, we are fully
      reserved for all customer accounts that are at least 90 days old.





*Depreciation
      and amortization.* Depreciation and amortization increased by $93,000, or 45.6%, to $297,000 for
      the three months ended March 31, 2008, from $204,000 for the three months ended
      March 31, 2007. The increase relates to the capitalization of customer premises
      equipment (CPE) and the improvement of the Company’s wireless broadband Internet
      network as well as an increase in amortization expense due to the newly acquired
      companies.




*Interest
      expense, net.* For
      the
      three months ended March 31, 2008 and 2007, the Company recorded net interest
      expense of $5,000 and $0, respectively. For the three months ended March 31,
      2008, the interest expense increased due to the issuance of additional notes
      relating to newly acquired companies.


16





*Nine
      Months Ended March 31, 2008 Compared to Nine Months Ended March 31,
      2007*





The
      following table sets forth certain unaudited financial data for the nine months
      ended March 31, 2008 and 2007. Operating results for any period are not
      indicative of results for any future period. Dollar amounts are shown in
      thousands (except per share data and subscriber counts).





**Nine Months Ended****March 31, 2008**
            
            **March 31, 2007****(000’s, except**
              **share and per**
              **share data)**
            
            **% of Revenues**
            
            **(000’s, except**
              **share and per**
              **share data)**
            
            **% of**
              **Revenues**STATEMENT
                OF OPERATIONS DATA:REVENUES:Internet
                services
            
            $
            6,423
            
            
            95.6
            %
            $
            6,057
            
            
            100.0
            %Other
            
            
            295
            
            
            4.4
            %
            
            -
            
            
            0.0
            %Total
            
            
            6,718
            
            
            100.0
            %
            
            6,057
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            4,360
            
            
            64.9
            %
            
            3,734
            
            
            61.6
            %Sales
                and marketing
            
            
            429
            
            
            6.4
            %
            
            155
            
            
            2.6
            %General
                and administrative
            
            
            2,676
            
            
            39.8
            %
            
            1,636
            
            
            27.0
            %Provision
                for bad debt expense
            
            
            5
            
            
            0.1
            %
            
            6
            
            
            0.1
            %Depreciation
                and amortization
            
            
            868
            
            
            12.9
            %
            
            617
            
            
            10.2
            %Total
            
            
            8,338
            
            
            124.0
            %
            
            6,148
            
            
            101.5
            %OPERATING
                LOSS
            
            
            (1,620
            )
            
            (24.1
            )%
            
            (91
            )
            
            (1.5
            )%INTEREST
                EXPENSE, NET
            
            
            (27
            )
            
            (0.4
            )%
            
            (9
            )
            
            (0.1
            )%Minority
                interest in loss of consolidated subsidiary
            
            
            1
            
            
            0.0
            %
            
            -
            
            
            0.0
            %NET
                LOSS
            
            $
            (1,646
            )
            
            (24.5
            )%
            $
            (100
            )
            
            (1.6
            )%NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.11
            )
            
            
            
            $
            (0.01
            )DILUTED
            
            $
            (0.11
            )
            
            
            
            $
            (0.01
            )WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            14,357,119
            
            
            
            
            
            12,508,914DILUTED
            
            
            14,357,119
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            31,800
            
            
            
            
            
            34,000EBITDA(2)
            
            $
            (751
            )
            
            
            
            $
            526EBITDA
                margin(3)
            
            
            -11.2
            %
            
            
            
            
            8.7
            %CASH
                FLOW DATA:Cash
                flow provided by (used in)operations
            
            $
            (976
            )
            
            
            
            $
            71Cash
                flow used in investing activities
            
            $
            (418
            )
            
            
            
            $
            (219
            )Cash
                flow provided by (used in) financing activities
            
            $
            5,045
            
            
            
            
            $
            (119
            )Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (1,646
            )
            
            
            
            $
            (100
            )Add:Depreciation
                and amortization
            
            
            868
            
            
            
            
            
            617Interest
                expense, net
            
            
            27
            
            
            
            
            
            9EBITDA
                (2)
            
            $
            (751
            )
            
            
            
            $
            526





(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.


17


*Total
      revenue.* Total
      revenue increased by $661,000, or 10.9%, to $6,718,000 for the nine months
      ended
      March 31, 2008, from $6,057,000 for the nine months ended March 31, 2007. The
      Company’s total subscriber count decreased by 2,200, or 6.5%, to 31,800 as of
      March 31, 2008 compared to 34,000 as of March 31, 2007. The Company’s wireless
      broadband Internet subscriber count increased by 3,900, or 92.9%, to 8,100
      as of
      March 31, 2008, compared to 4,200 as of March 31, 2007. Wireless broadband
      Internet revenue increased by $1,488,000 to $3,038,000 as of March 31, 2008
      compared to $1,550,000 as of March 31, 2007. This increase was primarily due
      to
      the acquisition of four companies and organically growing the Company’s
      subscriber count through increased sales efforts. The increase in wireless
      broadband Internet revenues was offset by the decrease in dial-up Internet
      subscriber counts and commercial services related revenue of $1,122,000. This
      decrease 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, which totaled $295,000 for the nine months ended March 31,
      2008.




*Connectivity
      and operations.* Connectivity
      and operations expense increased by $626,000, or 16.8%, to $4,360,000 for the
      nine months ended March 31, 2008, from $3,734,000 for the nine months ended
      March 31, 2007. There was an increase in salaries and wages of approximately
      $348,000 to $1,963,000 as of March 31, 2008 compared to $1,615,000 as of March
      31, 2007. Data and telecommunications expense increased by $86,000 to $1,456,000
      as of March 31, 2008 compared to $1,370,000 as of March 31, 2007. Tower lease
      expense increased by $183,000 to $266,000 as of March 31, 2008 compared to
      $83,000 as of March 31, 2007. Travel and mileage increased by $89,000 to
      $126,000 as of March 31, 2008 compared to $37,000 as of March 31, 2007. The
      increase in salaries and wages, data and telecommunications expenses, tower
      leases and travel all relate to the growth of the Company’s wireless broadband
      Internet subscriber counts and operations and the positioning of our Company
      for
      our anticipated future growth being driven by our wireless broadband Internet
      operations.





The
      increases in the previously discussed expenses were offset by a decrease in
      installation expenses of $86,000 to $401,000 as of March 31, 2008 compared
      to
      $487,000 as of March 31, 2007. The decrease was primarily due to the
      capitalization of customer premises equipment (CPE) starting at the beginning
      of
      this fiscal year. The remaining increase in expense of approximately $6,000
      primarily relates to the increase in merchant fees due to converting customers
      to credit card method of payment.




*Sales
      and marketing.* Sales
      and
      marketing expense increased by $274,000, or 176.8%, to $429,000 for the nine
      months ended March 31, 2008, compared to $155,000 for the nine months ended
      March 31, 2007. Salaries and wages increased $187,000 to $300,000 as of March
      31, 2008 compared to $113,000 as of March 31, 2007 due to the increase of our
      inside and outside sales force to grow the wireless broadband Internet segment
      of the Company’s business. Our effort to grow the wireless broadband Internet
      segment of our business also resulted in an increase in advertising, travel
      and
      consulting expenses by $86,000 to $129,000 as of March 31, 2008 compared to
      $43,000 as of March 31, 2007. Approximately $50,000 of this advertising was
      incurred during our initial launch of reselling municipal Wi-Fi in Corpus
      Christi, which is a non-recurring expense.





*General
      and administrative.* G&A
      increased by $1,040,000, or 63.6%, to $2,676,000 for the nine months ended
      March
      31, 2008, from $1,636,000 for the nine months ended March 31, 2007. Salaries
      and
      wages increased $299,000 to $791,000 as of March 31, 2008 compared to $492,000
      as of March 31, 2007 due to an increase in administrative personnel costs to
      support the anticipated organic and acquisition growth of our wireless broadband
      Internet operations. During the quarter ended March 31, 2008, the Company
      invested approximately $51,000 in college-level management training for
      employees, which was a one time increase to G&A expense. This training
      continued in the fourth quarter, and management invested an additional $42,000
      in April 2008 to complete the training of all managers.




Rent,
      utilities and telecommunications expenses increased by $291,000 to $841,000
      as
      of March 31, 2008 compared to $550,000 as of March 31, 2007. In December 2007,
      the Company closed all operations at its downtown Dallas office. Due to the
      high
      percentage of corporate office space vacancies in downtown Dallas, the Company
      has been unable to identify a potential sub-tenant for the 19,000 square feet
      former headquarters. In the quarter ended December 31, 2008, the Company
      recorded a one time expense for the remaining rental expense of approximately
      $227,500 due through October 2008. The remaining increase was due to additional
      office space leased resulting from recently completed acquisitions, a
      reclassification of telecommunications taxes and fees from connectivity and
      operations and the restructuring of our network communications.


18





The
      Company issued stock options in the
      fiscal fourth quarter of 2007 and the fiscal first quarter of 2008, which caused
      an increase in expenses of $67,000 to $133,000 as of March 31, 2008 compared
      to
      $66,000 as of March 31, 2007. Professional and consulting fees increased by
      approximately $300,000, to $573,000 as of March 31, 2008 compared to $273,000
      as
      of March 31, 2007 primarily due to expenses related to outsource management
      fees
      for telex messaging customers acquired from TeleShare in July 2007 totaling
      approximately $235,000 for the nine months ended March 31,
      2008. Additionally the Company expensed $38,000 in legal fees related to
      ongoing litigation against a former landlord, in which the Company is the
      plaintiff. As of March 31, 2007, the Company had received lawsuit settlement
      income of $15,000 compared to $0 as of March 31, 2008. Property taxes and
      insurance expenses increased by $16,000 to $105,000 as of March 31, 2008 from
      $89,000 as of March 31, 2007 due primarily to the acquisition of TeleShare.
      The
      remaining net decrease of $7,000 was primarily a result of various cost saving
      measures implemented during fiscal 2007.**





*Provision
      for bad debt expense.*Provision for bad debt expense decreased by $1,000, or 16.7%, to $5,000
      for
      the nine months ended March 31, 2008, from $6,000 for the nine months ended
      March 31, 2007. This decrease is due primarily to the effort by the Company
      to
      have customers pay by ACH or credit cards. As of March 31, 2008, we are fully
      reserved for all customer accounts that are at least 90 days old.





*Depreciation
      and amortization.*
      Depreciation and amortization increased by $251,000, or 40.7%, to $868,000
      for
      the nine months ended March 31, 2008, from $617,000 for the nine months ended
      March 31, 2007. The increase relates to the capitalization of CPE and the
      improvement of the Company’s wireless broadband Internet network as well as an
      increase in amortization expense due to the newly acquired companies.




*Interest
      expense, net.*For the
      nine months ended March 31, 2008 and 2007, the Company recorded net interest
      expense of $5,000 and $0, respectively. For the nine months ended March 31,
      2008, the interest expense increased due to the issuance of additional notes
      relating to newly acquired companies.





**Liquidity
      and Capital Resources**





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





Cash
      used
      in operating activities is net income or loss adjusted for certain non-cash
      items and changes in assets and liabilities. For the nine months ended March
      31,
      2008, cash used in operations was $976,000 compared to cash provided by
      operations of $71,000 for the nine months ended March 31, 2007. For the nine
      months ended March 31, 2008, net loss plus non-cash items used cash of $682,000.
      Additional decreases in accounts receivable, purchases of inventory, and
      purchase of other assets were offset by increases of accounts payable and an
      increase in deferred revenue. For the nine months ended March 31, 2007, net
      loss
      plus non-cash items contributed $553,000 in cash which was then provided
      primarily for purchases of inventory, payments of accounts payable and accrued
      expenses and a decrease in deferred revenue. Inventory, which primarily includes
      modems and wireless access radios, decreased in the nine months ended March
      31,
      2007 by approximately $101,000 due to the Company discontinuing its wireless
      equipment reseller business.





Cash
      used
      in investing activities totaled $418,000 for the nine months ended March 31,
      2008, which relates primarily to approximately $655,000 in cash provided by
      the
      acquisition of TeleShare, offset primarily by the deployment of new wireless
      broadband Internet infrastructure of approximately $1,067,000. Cash used in
      investing activities totaled $219,000 for the nine months ended March 31, 2007,
      which relates primarily to the deployment of new wireless broadband Internet
      infrastructure.





Cash
      provided by financing activities, which totaled $5,045,000 for the nine months
      ended March 31, 2008, consists of the issuance of common and preferred stock
      which resulted in net proceeds of $5,295,000, offset by principal payments
      on
      long term-debt and borrowings on the RUS loan. Cash used in financing
      activities, which totaled $119,000 for the nine months ended March 31, 2007,
      consisted primarily of principal payments on debt and capital leases.





We
      estimate that cash on hand of $4,433,442 at March 31, 2008 along with
      anticipated cash flow from operations will be sufficient for meeting our working
      capital needs for the next twelve months with regard to continuing operations
      in
      existing markets. Additional financing may be required to fund acquisitions
      or
      expansion into new markets. Continued decreases in our legacy dial-up and metro
      market Internet services revenues and subscriber count may adversely affect
      the
      liquidity of the Company.




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


19





**Off
      Balance Sheet Arrangements**





None.





**“Safe
      Harbor” Statement**





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


20





**ITEM
      3. CONTROLS AND PROCEDURES**





An
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Accounting
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934) in effect as of March 31, 2008. Based upon that
      evaluation, the Chief Executive Officer and Chief Accounting Officer concluded
      that, as of March 31, 2008, the design and operation of these disclosure
      controls and procedures were effective in timely alerting them to the material
      information relating to the Company required to be included in its periodic
      filings with the Securities and Exchange Commission. There were no changes
      in
      our internal control over financial reporting during the three months ended
      March 31, 2008 that materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.


21





**PART
      II - OTHER INFORMATION**





**ITEM
      6. EXHIBITS**





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




22





**SIGNATURES**





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




INTERNET AMERICA, INC.(Registrant)Date:
                05/12/08
            By:/s/
                William E. Ladin, Jr.William
              E. Ladin, Jr.Chairman and Chief Executive OfficerDate:
                05/12/08
            By:/s/
                Jennifer S. LeBlancJennifer
              S. LeBlancChief Financial and Accounting Officer


23





**INDEX
      TO EXHIBITS**





Exhibit No.
            
            Description31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of William E. Ladin,
                Jr.31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Jennifer S.
                LeBlanc32.1
            
            Section
                1350 Certification of William E. Ladin, Jr.32.2
            
            Section
                1350 Certification of Jennifer S.
                LeBlanc




24