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 DECEMBER 31, 2007





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
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)





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





(713)
      968-2500


(Registrant's
      telephone number, including area code)





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





Yes x   No o





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


Yes o  No x





As
      of
      February 10, 2008, registrant had 16,857,031 shares of Common Stock at $.01
      par
      value, outstanding.





Transitional
      Small Business Disclosure Format (check one).


Yes o  No x








**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1 - FINANCIAL STATEMENTS**





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





December 31,
            
            June 30,2007
            
            2007(unaudited)
            
            (audited)ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            5,597,333
            
            $
            782,887Restricted
                cash
            
            
            6,432
            
            
            -Accounts
                receivable, net of allowance for uncollectible accounts of $12,192
                and
                $6,391 as of December 31, 2007 and June 30, 2007,
                respectively
            
            
            200,892
            
            
            117,056Inventory
            
            
            505,348
            
            
            282,886Prepaid
                expenses and other current assets
            
            
            627,627
            
            
            485,074Total
                current assets
            
            
            6,937,632
            
            
            1,667,903PROPERTY
                AND EQUIPMENT—Net
            
            
            1,922,830
            
            
            854,580OTHER
                ASSETS—Net
            
            
            5,907,684
            
            
            5,223,352TOTAL
            
            $
            14,768,146
            
            $
            7,745,835LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            634,974
            
            $
            534,253Accrued
                liabilities
            
            
            741,412
            
            
            447,939Deferred
                revenue
            
            
            1,307,839
            
            
            1,234,558Current
                portion of long-term debt
            
            
            575,578
            
            
            468,480Total
                current liabilities
            
            
            3,259,803
            
            
            2,685,230Long-term
                debt
            
            
            1,631,716
            
            
            452,457Minority
                interest in subsidiary
            
            
            6,025
            
            
            -Total
                liabilities
            
            
            4,897,544
            
            
            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 December
                31, 2007
                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 December 31, 2007 and June
                30,
                2007, respectively
            
            
            168,571
            
            
            125,089Additional
                paid-in capital
            
            
            63,513,524
            
            
            57,161,980Accumulated
                deficit
            
            
            (53,840,384
            )
            
            (52,678,921
            )Total
                shareholders' equity
            
            
            9,870,602
            
            
            4,608,148TOTAL
            
            $
            14,768,146
            
            $
            7,745,835





See
      accompanying notes to condensed consolidated financial
      statements.


2





Financial
      Statements - Continued





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**





Three
                Months Ended
            
            Six
                Months EndedDecember
                31,
            
            December
                31,2007
            
            2006
            
            2007
            
            2006REVENUES:Internet
                services
            
            $
            2,154,139
            
            $
            2,001,747
            
            $
            4,249,167
            
            $
            4,085,723Other
            
            
            115,870
            
            
            66
            
            
            193,036
            
            
            66Total
            
            
            2,270,009
            
            
            2,001,813
            
            
            4,442,203
            
            
            4,085,789OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,135,915
            
            
            1,037,329
            
            
            2,214,479
            
            
            2,029,613Sales
                and marketing
            
            
            172,878
            
            
            53,158
            
            
            311,287
            
            
            94,515General
                and administrative
            
            
            1,443,076
            
            
            744,447
            
            
            2,479,244
            
            
            1,573,684Provision
                for bad debt expense
            
            
            (5,554
            )
            
            1,702
            
            
            5,801
            
            
            2,704Depreciation
                and amortization
            
            
            304,232
            
            
            206,717
            
            
            570,655
            
            
            413,692Total
            
            
            3,050,547
            
            
            2,043,353
            
            
            5,581,466
            
            
            4,114,208LOSS
                FROM OPERATIONS
            
            
            (780,538
            )
            
            (41,540
            )
            
            (1,139,263
            )
            
            (28,419
            )INTEREST
                EXPENSE, NET
            
            
            7,148
            
            
            2,468
            
            
            22,595
            
            
            9,075Minority
                interest in loss of consolidated subsidiary
            
            
            204
            
            
            -
            
            
            395
            
            
            -NET
                LOSS
            
            $
            (787,482
            )
            $
            (44,008
            )
            $
            (1,161,463
            )
            $
            (37,494
            )NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.06
            )
            $
            (0.00
            )
            $
            (0.09
            )
            $
            (0.00
            )DILUTED
            
            $
            (0.06
            )
            $
            (0.00
            )
            $
            (0.09
            )
            $
            (0.00
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            13,682,584
            
            
            12,508,914
            
            
            13,120,749
            
            
            12,508,914DILUTED
            
            
            13,682,584
            
            
            12,508,914
            
            
            13,120,749
            
            
            12,508,914





See
      accompanying notes to condensed consolidated financial
      statements.


3


Financial
      Statements - Continued


**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





Six
                Months EndedDecember
                31,2007
            
            2006OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (1,161,463
            )
            $
            (37,494
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Minority
                interest
            
            
            (395
            )
            
            -Depreciation
                and amortization
            
            
            570,655
            
            
            413,692Gain
                on disposal of fixed assets
            
            
            -
            
            
            (89
            )Provision
                for bad debt expense
            
            
            5,801
            
            
            2,704Non-cash
                stock compensation expense
            
            
            58,665
            
            
            20,292Changes
                in operating assets and liabilities(net
                of effects of assets acquired, less liabilities assumed):Accounts
                receivable
            
            
            (35,546
            )
            
            (22,858
            )Inventory
            
            
            (79,435
            )
            
            132,888Prepaid
                expenses and other current assets
            
            
            (126,868
            )
            
            (172,266
            )Other
                assets
            
            
            (22,125
            )
            
            -Other
                long-term liabilities
            
            
            -
            
            
            (37,950
            )Accounts
                payable and accrued liabilities
            
            
            180,454
            
            
            (259,045
            )Deferred
                revenue
            
            
            40,301
            
            
            (37,689
            )Net
                cash (used in) provided by operating activities
            
            
            (569,956
            )
            
            2,185INVESTING
                ACTIVITIES:Purchases
                of property and equipment, net
            
            
            (442,659
            )
            
            (174,985
            )Change
                in restricted cash
            
            
            (6,432
            )
            
            -Proceeds
                from sale of property and equipment
            
            
            -
            
            
            600Cash
                received from acquisitions, net
            
            
            655,102
            
            
            -Net
                cash provided by (used in) investing activities
            
            
            206,011
            
            
            (174,385
            )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
            
            
            -
            
            
            (31,874
            )Principal
                payments of long-term debt
            
            
            (188,204
            )
            
            (58,715
            )Net
                cash provided by (used in) financing activities
            
            
            5,178,391
            
            
            (90,589
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            4,814,446
            
            
            (262,789
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            782,887
            
            
            937,401CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            5,597,333
            
            $
            674,612SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            56,948
            
            $
            30,167NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Assets
                acquired through accounts payable
            
            $
            -
            
            $
            68,913Stock
                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 liability
            
            $
            6,420
            
            $
            -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.  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 six months ended
      December 31, 2007 and 2006. For the three and six months ended December 31,
      2007
      and 2006, diluted earnings per share is the same as basic earnings per share
      due
      to the net loss. During the three and six months ended December 31, 2007,
      options to purchase 331,141 shares of common stock were not included in the
      computation of diluted EPS because the effect would be anti-dilutive; 198,361
      of
      these shares were “in the money” as of December 31, 2007. During the three and
      six months ended December 31, 2006, options to purchase 248,470 shares of common
      stock were not included in the computation of diluted EPS because the options
      were not “in the money” as of December 31, 2006. There were no options exercised
      to purchase shares of common stock during the six months ended December 31,
      2007
      and 2006.





3.
      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





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





December
                31,
            
            June
                30,2007
            
            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





4.
      Use of
      estimates





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


6


5. Other
      Assets





Other
      assets consist of the following:





December
                31,
            
            June
                30,2007
            
            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
            
            
            2,811,299
            
            
            1,895,893Accumulated
                amortization-subscriber acquisition costs
            
            
            (1,246,676
            )
            
            (1,012,953
            )Total
                subscriber acquisition costs, net
            
            
            1,564,623
            
            
            882,940Deposits
                and other assets
            
            
            29,934
            
            
            27,285Total
                other assets, net
            
            $
            5,907,684
            
            $
            5,223,352





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 six months ended December 31, 2007,
      was
      approximately $130,100 and $233,700, respectively. As of December 31, 2007,
      amortization expense for the fiscal years ended June 30, 2008, 2009, 2010 and
      2011 is expected to be $493,849, $483,160, $424,876 and $392,167, respectively.





6.
      Income
      Taxes





During
      the three and six months ended December 31, 2007, the Company generated a net
      loss of $787,482 and $1,161,463, respectively. For the three and six months
      ended December 31, 2006, the Company generated a net loss of $44,008 and $
      37,494, respectively. No provision for income taxes has been recorded for the
      three and six months ended December 31, 2007 and 2006, 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 six months ended December 31, 2006. As of
      December 31, 2007, the Company continues to maintain a full valuation allowance
      for its net deferred tax assets of approximately $12.5 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





7.
      Long-Term Debt





Long-term
      debt consists of:





December
                31,
            
            June
                30,2007
            
            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
                $10,464)
            
            
            74,735
            
            
            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
                $4,940)
            
            
            31,916
            
            
            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 $1,612
                with interest imputed at 9% (net of unamortized discount of
                $1,785)
            
            
            13,891
            
            
            49,813Note
                payable due June 20, 2012, payable in monthly installments of $2,088
                with
                interest imputed at 9% (net of unamortized discount of
                $20,317)
            
            
            92,426
            
            
            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
                $4,605)
            
            
            51,742
            
            
            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
                $3,569)
            
            
            40,101
            
            
            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
                $10,942)
            
            
            97,874
            
            
            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
                $79,678)
            
            
            863,500
            
            
            -Loan
                and Security Agreement with United States Department of Agriculture
                Rural
                Utilities Service
            
            
            941,109
            
            
            -2,207,294
            
            
            920,937Less
                current portion
            
            
            (575,578
            )
            
            (468,480
            )Total
                long-term debt
            
            $
            1,631,716
            
            $
            452,457





The
      Company’s long-term debt is unsecured except for approximately $1,044,552 and
      $227,229 as of December 31, 2007 and June 30, 2007, respectively, which is
      secured by certificates of deposit and certain inventory and equipment. The
      prime rate at December 31, 2007 and June 30, 2007 was 7.25% and 8.25%,
      respectively.


8




8.
      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 9.





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
      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 $35,000 at December 31, 2007. 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





9.
      Related Parties





The
      following table shows amounts paid to four non-employee directors for serving
      on
      the Company’s board of directors and payments made to Cynthia Ocker, former
      owner of TeleShare, for contract services during the six months ended December
      31, 2007 and 2006:





Six
                Months EndedDecember
                31,2007
            
            2006Troy
                LeMaile Stovall
            
            $
            11,500
            
            $
            8,250Justin
                McClure
            
            
            11,500
            
            
            8,000John
                Palmer
            
            
            16,662
            
            
            7,500Steven
                Mihaylo
            
            
            4,378
            
            
            -Cindy
                Ocker
            
            
            56,623
            
            
            -$
            100,663
            
            $
            23,750





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 8), 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 8. 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 8. 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.





10.  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 33,200 subscribers in Texas, as of December 31, 2007. Of the
      Company’s 33,200 total subscribers, approximately 7,800 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 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 included the integration of four acquired
      entities; one time expenses related to marketing, legal fees and abandoned
      leases. Management believes that the synergies of providing customer support
      and
      billing services to acquired wireless Broadband customers will begin in the
      third quarter, now that these integrations have been completed. Additionally,
      Management is undertaking cost-reduction measures and expects to return the
      Company to EBITDA profitability on an ongoing basis by the end of the third
      quarter ,
      after
      March 31, 2008 .





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.





The
      Company’s customer count for wireless broadband Internet services has increased
      to approximately 7,800 subscribers as of December 31, 2007. Management believes
      that we are poised for additional growth as we have targeted areas where
      competition is less intense and demand for Internet connectivity may be
      under-served. This growth will help to replace declining revenues due to
      attrition, and management believes this will allow the Company to stabilize
      and
      then begin to regain revenue and profits.


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.





While
      there is no guarantee that we will make significant or numerous acquisitions,
      management of the Company believes that there are many WISPS 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 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 addition
      to
      miscellaneous revenue, other revenue for 2006 includes wireless equipment
      reseller revenues which were discontinued in March 2006. 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 December 31, 2007 Compared to Three Months Ended December 31,
      2006*





The
      following table sets forth certain unaudited financial data for the three months
      ended December 31, 2007 and 2006. Operating results for any period are not
      indicative of results for any future period.





**Three
                Months Ended****December
                31, 2007**
            
            **December
                31, 2006****(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
            
            $
            2,154
            
            
            94.9
            %
            $
            2,002
            
            
            100.0
            %Other
            
            
            116
            
            
            5.1
            %
            
            -
            
            
            0.0
            %Total
            
            
            2,270
            
            
            100.0
            %
            
            2,002
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,136
            
            
            50.0
            %
            
            1,037
            
            
            51.8
            %Sales
                and marketing
            
            
            173
            
            
            7.6
            %
            
            53
            
            
            2.6
            %General
                and administrative
            
            
            1,443
            
            
            63.6
            %
            
            745
            
            
            37.3
            %Provision
                for bad debt expense
            
            
            (6
            )
            
            -0.3
            %
            
            2
            
            
            0.1
            %Depreciation
                and amortization
            
            
            304
            
            
            13.3
            %
            
            207
            
            
            10.3
            %Total
            
            
            3,050
            
            
            134.2
            %
            
            2,044
            
            
            102.1
            %OPERATING
                LOSS
            
            
            (780
            )
            
            -34.2
            %
            
            (42
            )
            
            -2.1
            %INTEREST
                EXPENSE, NET
            
            
            (7
            )
            
            -0.3
            %
            
            (2
            )
            
            -0.1
            %Minority
                interest in loss of consolidated subsidiary
            
            
            (0
            )
            
            0.0
            %
            
            -
            
            
            0.0
            %NET
                LOSS
            
            $
            (787
            )
            
            -34.5
            %
            $
            (44
            )
            
            -2.2
            %NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.06
            )
            
            
            
            $
            (0.00
            )DILUTED
            
            $
            (0.06
            )
            
            
            
            $
            (0.00
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            13,682,584
            
            
            
            
            
            12,508,914DILUTED
            
            
            13,682,584
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            33,200
            
            
            
            
            
            37,000EBITDA(2)
            
            $
            (476
            )
            
            
            
            $
            165EBITDA
                margin(3)
            
            
            -21.0
            %
            
            
            
            
            8.2
            %Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (787
            )
            
            
            
            $
            (44
            )Add:Depreciation
                and amortization
            
            
            304
            
            
            
            
            
            207Interest
                income
            
            
            (24
            )
            
            
            
            
            (7
            )Interest
                expense
            
            
            31
            
            
            
            
            
            9EBITDA
                (2)
            
            $
            (476
            )
            
            
            
            $
            165





_________


(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. Subscriber data is not in 000’s.





(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




*Three
      Months Ended December 31, 2007 Compared to Three Months Ended December 31,
      2006
      (Continued)*





*Total
      revenue.* Total
      revenue increased by $268,000, or 13.4%, to $2,270,000 for the three months
      ended December 31, 2007, from $2,002,000 for the three months ended December
      31,
      2006. The Company’s total subscriber count decreased by 3,800, or 10.3%, to
      33,200 as of December 31, 2007 compared to 37,000 as of December 31, 2006.
      The
      Company’s wireless broadband Internet subscriber count increased by 4,000, or
      105.3%, to 7,800 as of December 31, 2007, compared to 3,800 as of December
      31,
      2006. Wireless broadband Internet revenue increased by $478,000 to $1,036,000
      as
      of December 31, 2007 compared to $558,000 as of December 31, 2006. 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 $210,000. 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 December 31, 2007 totaled
      $108,000.





*Connectivity
      and operations.* Connectivity
      and operations expense increased by $99,000, or 9.5%, to $1,136,000 for the
      three months ended December 31, 2007, from $1,037,000 for the three months
      ended
      December 31, 2006. There was an increase in salaries, wages and related
      personnel costs of approximately $45,000 to $397,000 as of December 31, 2007
      compared to $352,000 as of December 31, 2006. Data and telecommunications
      expense increased by $53,000 to $505,000 as of December 31, 2007 compared to
      $452,000 as of December 31, 2006. Tower lease expense increased by $66,000
      to
      $92,000 as of December 31, 2007 compared to $26,000 as of December 31, 2006.
      The
      increase in salaries and wages, data and 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.





The
      increases in the previously discussed expenses were offset by a decrease in
      installation expenses of $70,000 to $89,000 as of December 31, 2007 compared
      to
      $159,000 as of December 31, 2006. 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
      relates to increase in merchant fees due to converting customers to credit
      card
      method of payment and other expenses.




*Sales
      and marketing.* Sales
      and
      marketing expense increased by $120,000, or 226.4%, to $173,000 for the three
      months ended December 31, 2007, compared to $53,000 for the three months ended
      December 31, 2006. Salaries and wages increased $76,000 to $117,000 as of
      December 31, 2007 compared to $41,000 as of December 31, 2006 and was due to
      the
      added personnel for the expansion of 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 $44,000 to $56,000 as of December 31, 2007 compared
      to
      $12,000 as of December 31, 2006. 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.* General
      and administrative expense (G&A) increased by $699,000, or 93.9%, to
      $1,443,000 for the three months ended December 31, 2007, from $744,000 for
      the
      three months ended December 31, 2006. Salaries and wages increased $140,000
      to
      $529,000 as of December 31, 2007 compared to $389,000 as of December 31, 2006
      and was due to an increase in administrative personnel costs to support the
      anticipated organic and acquisition growth of our wireless broadband Internet
      operations.





Rent,
      utilities and telecommunications expenses increased by $291,000 to $464,000
      as
      of December 31, 2007 compared to $173,000 as of December 31, 2006. 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. 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.





Travel
      expenses increased by $26,000 to $45,000 as of December 31, 2007 from $19,000
      as
      of December 31, 2006 due to travel required to investigate and negotiate
      potential acquisitions and increased travel by wireless field operations
      managers. 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
      $32,000 to $55,000 as of December 31, 2007 compared to $23,000 as of December
      31, 2006. Professional and consulting fees increased by approximately $190,000,
      to $258,000 as of December 31, 2007 compared to $68,000 as of December 31,
      2006
      primarily due to expenses related to outsource management fees for telex
      messaging customers acquired from TeleShare in July 2007 totaling approximately
      $83,000 for the three months ended December 31, 2007. Additionally the Company
      expensed in legal fees $38,000 related to ongoing litigation against a former
      landlord, in which the Company is the plaintiff. The remaining net increase
      of
      $19,000 in G&A was primarily the result of an increase in insurance and
      property taxes after acquiring TeleShare. **




15




*Provision
      for bad debt expense.* Provision
      for bad debt expense decreased by $8,000 for the three months ended December
      31,
      2007, from $2,000 for the three months ended December 31, 2006. This decrease
      is
      due primarily to an increase in the first quarter of fiscal 2008 due to the
      transition of accounts receivable of recently acquired subscribers. As of
      December 31, 2007, we are fully reserved for all customer accounts that are
      at
      least 90 days old.





*Depreciation
      and amortization.* Depreciation and amortization increased by $97,000, or 46.9%, to $304,000 for
      the three months ended December 31, 2007, from $207,000 for the three months
      ended December 31, 2006. 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
      three months ended December 31, 2007 and 2006, the Company recorded net interest
      expense of $7,000 and $2,000, respectively. For the three months ended December
      31, 2007, the interest expense increased due to the issuance of additional
      notes
      relating to newly acquired companies.




16




*Six
      Months Ended December 31, 2007 Compared to Six Months Ended December 31,
      2006*





The
      following table sets forth certain unaudited financial data for the six months
      ended December 31, 2007 and 2006. Operating results for any period are not
      indicative of results for any future period.





**Six Months Ended****December
                31, 2007**
            
            **December
                31, 2006****(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
            
            $
            4,249
            
            
            95.7
            %
            $
            4,086
            
            
            100.0
            %Other
            
            
            193
            
            
            4.3
            %
            
            -
            
            
            0.0
            %Total
            
            
            4,442
            
            
            100.0
            %
            
            4,086
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            2,214
            
            
            49.8
            %
            
            2,030
            
            
            49.7
            %Sales
                and marketing
            
            
            311
            
            
            7.0
            %
            
            95
            
            
            2.3
            %General
                and administrative
            
            
            2,479
            
            
            55.8
            %
            
            1,573
            
            
            38.5
            %Provision
                for bad debt expense
            
            
            6
            
            
            0.1
            %
            
            3
            
            
            0.1
            %Depreciation
                and amortization
            
            
            571
            
            
            12.9
            %
            
            413
            
            
            10.1
            %Total
            
            
            5,581
            
            
            125.6
            %
            
            4,114
            
            
            100.7
            %OPERATING
                LOSS
            
            
            (1,139
            )
            
            -25.6
            %
            
            (28
            )
            
            -0.7
            %INTEREST
                EXPENSE, NET
            
            
            (23
            )
            
            -0.5
            %
            
            (9
            )
            
            -0.2
            %Minority
                interest in loss of consolidated subsidiary
            
            
            (0
            )
            
            0.0
            %
            
            -
            
            
            0.0
            %NET
                LOSS
            
            $
            (1,162
            )
            
            -26.1
            %
            $
            (37
            )
            
            -0.9
            %NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.09
            )
            
            
            
            $
            (0.00
            )DILUTED
            
            $
            (0.09
            )
            
            
            
            $
            (0.00
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            13,120,749
            
            
            
            
            
            12,508,914DILUTED
            
            
            13,120,749
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            33,200
            
            
            
            
            
            37,000EBITDA(2)
            
            $
            (568
            )
            
            
            
            $
            385EBITDA
                margin(3)
            
            
            -12.8
            %
            
            
            
            
            9.4
            %CASH
                FLOW DATA:Cash
                flow used in operations
            
            $
            (570
            )
            
            
            
            $
            (2
            )Cash
                flow provided by (used in) investing activities
            
            $
            206
            
            
            
            
            $
            (174
            )Cash
                flow provided by (used in) financing activities
            
            $
            5,178
            
            
            
            
            $
            (91
            )Reconciliation
                of net loss to EBITDA:Net
                loss
            
            $
            (1,162
            )
            
            
            
            $
            (37
            )Add:Depreciation
                and amortization
            
            
            571
            
            
            
            
            
            413Interest
                income
            
            
            (34
            )
            
            
            
            
            (13
            )Interest
                expense
            
            
            57
            
            
            
            
            
            22EBITDA
                (2)
            
            $
            (568
            )
            
            
            
            $
            385





_________


(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. Subscriber data is not in 000’s.





(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.




17




*Six
      Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006
      (Continued)*





*Total
      revenue.* Total
      revenue increased by $356,000, or 8.7%, to $4,442,000 for the six months ended
      December 31, 2007, from $4,086,000 for the six months ended December 31, 2006.
      The Company’s total subscriber count decreased by 3,800, or 10.3%, to 33,200 as
      of December 31, 2007 compared to 37,000 as of December 31, 2006. The Company’s
      wireless broadband Internet subscriber count increased by 4,000, or 105.3%,
      to
      7,800 as of December 31, 2007, compared to 3,800 as of December 31, 2006.
      Wireless broadband Internet revenue increased by $966,000 to $1,921,000 as
      of
      December 31, 2007 compared to $955,000 as of December 31, 2006. 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 $610,000.
      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 $178,000 for the six months ended December 31,
      2007.





*Connectivity
      and operations.* Connectivity
      and operations expense increased by $184,000, or 9.1%, to $2,214,000 for the
      six
      months ended December 31, 2007, from $2,030,000 for the six months ended
      December 31, 2006. There was an increase in salaries and wages of approximately
      $94,000 to $757,000 as of December 31, 2007 compared to $663,000 as of December
      31, 2006. Data and telecommunications expense increased by $120,000 to $996,000
      as of December 31, 2007 compared to $876,000 as of December 31, 2006. Tower
      lease expense increased by $111,000 to $164,000 as of December 31, 2007 compared
      to $53,000 as of December 31, 2006. The increase in salaries and wages, data
      and
      telecommunications expenses 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.





The
      increases in the previously discussed expenses were offset by a decrease in
      installation expenses of $148,000 to $190,000 as of December 31, 2007 compared
      to $338,000 as of December 31, 2006. 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 $7,000
      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 $216,000, or 227.4%, to $311,000 for the six
      months ended December 31, 2007, compared to $95,000 for the six months ended
      December 31, 2006. Salaries and wages increased $120,000 to $196,000 as of
      December 31, 2007 compared to $76,000 as of December 31, 2006 and was 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 $96,000 to $116,000 as of
      December 31, 2007 compared to $20,000 as of December 31, 2006. 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 $905,000, or 57.4%, to $2,479,000 for the six months ended December
      31, 2007, from $1,574,000 for the six months ended December 31, 2006. Salaries
      and wages increased $245,000 to $1,025,000 as of December 31, 2007 compared
      to
      $780,000 as of December 31, 2006 and was due to an increase in administrative
      personnel costs to support the anticipated organic and acquisition growth of
      our
      wireless broadband Internet operations.





Rent,
      utilities and telecommunications expenses increased by $337,000 to $703,000
      as
      of December 31, 2007 compared to $366,000 as of December 31, 2006. 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. 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. Travel expenses
      increased by $69,000 to $106,000 as of December 31, 2007 from $37,000 as of
      December 31, 2006 due to travel required to investigate and negotiate potential
      acquisitions and increased travel by wireless field operations managers.




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 $38,000 to
      $58,000 as of December 31, 2007 compared to $20,000 as of December 31, 2006.
      Professional and consulting fees increased by approximately $189,000, to
      $395,000 as of December 31, 2007 compared to $206,000 as of December 31, 2006
      primarily due to expenses related to outsource management fees for telex
      messaging customers acquired from TeleShare in July 2007 totaling approximately
      $121,000 for the six months ended December 31, 2007.  Additionally
      the Company expensed in legal fees $38,000 related to ongoing litigation against
      a former landlord, in which the Company is the plaintiff. As of December 31,
      2006, the Company had received lawsuit settlement income of $15,000 compared
      to
      $0 as of December 31, 2007. Property taxes and insurance expenses increased
      by
      $17,000 to $74,000 as of December 31, 2007 from $57,000 as of December 31,
      2006
      due primarily to the acquisition of TeleShare. The remaining net decrease of
      $4,000 was primarily a result of various cost saving measures implemented during
      fiscal 2007. **





*Provision
      for bad debt expense.* Provision
      for bad debt expense increased by $3,000, or 100%, to $6,000 for the six months
      ended December 31, 2007, from $3,000 for the six months ended December 31,
      2006.
      This increase is due primarily to the increase in revenues. As of December
      31,
      2007, we are fully reserved for all customer accounts that are at least 90
      days
      old.





*Depreciation
      and amortization.* Depreciation and amortization increased by $157,000, or 37.9%, to $571,000
      for
      the six months ended December 31, 2007, from $414,000 for the six months ended
      December 31, 2006. 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
      six months ended December 31, 2007 and 2006, the Company recorded net interest
      expense of $23,000 and $9,000, respectively. For the six months ended December
      31, 2007, 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 six months ended December
      31, 2007, cash used in operations was $570,000 compared to cash provided by
      operations of $2,000 for the six months ended December 31, 2006. For the six
      months ended December 31, 2007, net loss plus non-cash items used cash of
      $527,000. 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 six months ended December 31, 2006, net
      loss plus non-cash items contributed $399,000 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 six months ended December
      31, 2006 by approximately $133,000 due to the Company discontinuing its wireless
      equipment reseller business.





Cash
      provided by investing activities totaled $206,000 for the six months ended
      December 31, 2007, 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 $443,000. Cash
      used in investing activities totaled $174,000 for the six months ended December
      31, 2006, which relates primarily to the deployment of new wireless broadband
      Internet infrastructure.





Cash
      provided by financing activities, which totaled $5,178,000 for the six months
      ended December 31, 2007, consists of the issuance of common and preferred stock
      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 $91,000 for the six months ended December 31, 2006, consisted
      primarily of principal payments on debt and capital leases.





We
      estimate that cash on hand of $5,597,333 at December 31, 2007 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.




19




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.





**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.




**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 December 31, 2007. Based upon that
      evaluation, the Chief Executive Officer and Chief Accounting Officer concluded
      that, as of December 31, 2007, the design and operation of these disclosure
      controls and procedures were effective in timely alerting them to the material
      information relating to the Company required to be included in its periodic
      filings with the Securities and Exchange Commission. There were no changes
      in
      our internal control over financial reporting during the three months ended
      December 31, 2007 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.




20


**PART
      II - OTHER INFORMATION**





**ITEM
      2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





Reference
      is made to the Current Reports on Form 8-K of the Company filed October 23,
      2007
      and December 11, 2007 for more details on the sales by the Company of
      unregistered equity securities in the quarter ended December 31,
      2007.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




The
      Annual Meeting of Shareholders of the Company was held on December 19, 2007,
      at
      which meeting the stockholders voted on proposals to: (1) re-elect. Justin
      McClure as a director, (2) ratify the selection of Pannell Kerr Forster of
      Texas, P.C. (“PKF”) to audit its fiscal year 2007 financial statements, and (3)
      ratify the 2007 Stock Option Plan. The voting results for each proposal
      submitted to a vote are listed below




*Election
      of Director*




The
      sole
      nominee, Mr. McClure, was elected to another three year term. Results of voting
      were as follows: 14,481,848 votes for and 332,888 votes withheld.




*Ratification
      of PKF as Company Auditors*




Voting
      results for ratifying PKF were as follows: 14,569,702 for; 227,130 against
      and
      17,904 abstain.




*2007
      Stock Option Plan*


Voting
      results for the 2007 Stock Option Plan were as follows: 8,031,887 for; 703,893
      against; 10,750 abstain; and 6,068,206 non-votes. ****





**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





21





**SIGNATURES**





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





INTERNET
                AMERICA, INC.(Registrant)Date:
                02/14/07
            By:
            /s/
                William E. Ladin, Jr.William
                E. Ladin, Jr.Chairman
                and Chief Executive OfficerDate:
                02/14/07
            By:
            /s/
                Jennifer S. LeBlancJennifer
                S. LeBlancChief
                Financial and Accounting Officer





22




**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




23