UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





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


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)
  10930
                  West Sam Houston Pkwy., N., Suite 200, Houston
              77064(Address
                  of principal executive offices)
              (Zip
                  Code)


(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
      November 8, 2007, registrant had 12,857,031 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**





September
                30,
            
            June
                30,2007
            
            2007(unaudited)
            
            (audited)ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            1,075,215
            
            $
            782,887Restricted
                cash
            
            
            32,437
            
            
            -Accounts
                receivable, net of allowance for uncollectible accounts of $19,653
                and
                $6,391as
                of September 30, 2007 and June 30, 2007, respectively
            
            
            205,434
            
            
            117,056Inventory
            
            
            468,956
            
            
            282,886Prepaid
                expenses and other current assets
            
            
            563,824
            
            
            485,074Total
                current assets
            
            
            2,345,866
            
            
            1,667,903PROPERTY
                AND EQUIPMENT---Net
            
            
            1,858,998
            
            
            854,580OTHER
                ASSETS---Net
            
            
            6,036,866
            
            
            5,223,352TOTAL
            
            $
            10,241,730
            
            $
            7,745,835LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                accounts payable
            
            $
            858,088
            
            $
            534,253Accrued
                liabilities
            
            
            428,806
            
            
            447,939Deferred
                revenue
            
            
            1,284,049
            
            
            1,234,558Current
                portion of long-term debt
            
            
            880,272
            
            
            468,480Total
                current liabilities
            
            
            3,451,215
            
            
            2,685,230Long-term
                debt
            
            
            1,761,822
            
            
            452,457Minority
                interest in subsidiary
            
            
            6,229
            
            
            -Total
                liabilities
            
            
            5,219,266
            
            
            3,137,687COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Common
                stock, $.01 par value: 40,000,000 shares authorized, 12,558,914 and
                12,508,914issued
                and outstanding as of September 30, 2007 and June 30, 2007,
                respectively
            
            
            125,589
            
            
            125,089Additional
                paid-in capital
            
            
            57,949,777
            
            
            57,161,980Accumulated
                deficit
            
            
            (53,052,902
            )
            
            (52,678,921
            )Total
                shareholders' equity
            
            
            5,022,464
            
            
            4,608,148TOTAL
            
            $
            10,241,730
            
            $
            7,745,835





See
      accompanying notes to condensed consolidated financial
      statements.


2





Financial
      Statements - Continued





**INTERNET
      AMERICA, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(Unaudited)**





Three
                Months EndedSeptember
                30,2007
            
            2006REVENUES:Internet
                services
            
            $
            2,095,028
            
            $
            2,083,976Other
            
            
            77,166
            
            
            -Total
            
            
            2,172,194
            
            
            2,083,976OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,078,564
            
            
            992,284Sales
                and marketing
            
            
            138,409
            
            
            41,357General
                and administrative
            
            
            1,036,168
            
            
            829,236Provision
                for bad debt expense
            
            
            11,355
            
            
            1,002Depreciation
                and amortization
            
            
            266,423
            
            
            206,975Total
            
            
            2,530,919
            
            
            2,070,854INCOME
                (LOSS) FROM OPERATIONS
            
            
            (358,725
            )
            
            13,122INTEREST
                EXPENSE, NET
            
            
            15,447
            
            
            6,607Minority
                interest in loss of consolidated subsidiary
            
            
            191
            
            
            -NET
                INCOME (LOSS)
            
            $
            (373,981
            )
            $
            6,515NET
                INCOME (LOSS) PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            $
            0.00DILUTED
            
            $
            (0.03
            )
            $
            0.00WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:BASIC
            
            
            12,545,871
            
            
            12,508,914DILUTED
            
            
            12,545,871
            
            
            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)**




Three
                Months EndedSeptember
                30,2007
            
            2006OPERATING
                ACTIVITIES:Net
                income (loss)
            
            $
            (373,981
            )
            $
            6,515Adjustments
                to reconcile net income (loss) to net cashused
                in operating activities:Minority
                interest
            
            
            (191
            )
            
            -Depreciation
                and amortization
            
            
            266,423
            
            
            206,975Provision
                for bad debt expense
            
            
            11,355
            
            
            1,002Non-cash
                stock compensation expense
            
            
            17,853
            
            
            10,146Changes
                in operating assets and liabilities (net of effectsof
                assets acquired, less liabilities assumed):Accounts
                receivable
            
            
            (45,642
            )
            
            17,031Inventory
            
            
            (43,045
            )
            
            93,564Prepaid
                expenses and other current assets
            
            
            (63,065
            )
            
            (134,352
            )Other
                assets
            
            
            (21,238
            )
            
            -Other
                long-term liabilities
            
            
            -
            
            
            (18,975
            )Accounts
                payable and accrued liabilities
            
            
            90,962
            
            
            (332,712
            )Deferred
                revenue
            
            
            16,511
            
            
            (17,385
            )Net
                cash used in operating activities
            
            
            (144,058
            )
            
            (168,191
            )INVESTING
                ACTIVITIES:Purchases
                of property and equipment, net
            
            
            (204,662
            )
            
            (88,212
            )Change
                in restricted cash
            
            
            (32,437
            )
            
            -Cash
                received from acquisitions
            
            
            655,102
            
            
            -Net
                cash provided by (used in) investing activities
            
            
            418,003
            
            
            (88,212
            )FINANCING
                ACTIVITIES:Proceeds
                from issuance of common stock
            
            
            -
            
            
            -Proceeds
                from issuance of long-term debt
            
            
            71,787
            
            
            -Principal
                payments under capital lease obligations
            
            
            -
            
            
            (15,762
            )Principal
                payments of long-term debt
            
            
            (53,404
            )
            
            (47,126
            )Net
                cash provided by (used in) financing activities
            
            
            18,383
            
            
            (62,888
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            292,328
            
            
            (319,291
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            782,887
            
            
            937,401CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            1,075,215
            
            $
            618,110SUPPLEMENTAL
                INFORMATION:Cash
                paid for interest
            
            $
            19,971
            
            $
            16,184NON
                CASH INVESTING AND FINANCING ACTIVITIES:Assets
                acquired through accounts payable
            
            $
            -
            
            $
            68,744Stock
                issued in connection with acquisitions
            
            $
            770,443
            
            $
            32,500Debt
                issued in connection with acquisitions
            
            $
            863,500
            
            $
            94,612Minority
                interest liability
            
            $
            6,420
            
            $
            -





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 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 Income Per
                  Share





There
      are
      no adjustments required to be made to net income for the purpose of computing
      basic and diluted earnings per share (“EPS”) for the three months ended
      September 30, 2007 and 2006. During the three months ended September 30, 2007
      and 2006, options to purchase 333,641 and 263,302 shares of common stock,
      respectively, were not included in the computation of diluted EPS because the
      options were not “in the money” as of September 30, 2007 and 2006, respectively.
      There were no options “in the money” at September 30, 2007 and 2006. There were
      no options exercised to purchase shares of common stock during the three months
      ended September 30, 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. As described further in Note
      10, the adjustments were determined and the notes and shares of common stock
      were issued on October 25, 2007.





During
      the year ended June 30, 2007, the Company completed the acquisition of assets
      of
      three wireless Broadband Internet service providers. During the quarter ended
      September 30, 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:





September
                30,
            
            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.




5





5.
            Other
                Assets





Other
      assets consist of the following:





September
                30,
            
            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
            
            
            2,790,674
            
            
            1,895,893Accumulated
                amortization-subscriber acquisition costs
            
            
            (1,116,608
            )
            
            (1,012,953
            )Total
                subscriber acquisition costs, net
            
            
            1,674,066
            
            
            882,940Deposits
                and other assets
            
            
            49,673
            
            
            27,285Total
                other assets, net
            
            $
            6,036,866
            
            $
            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 September 30, 2006, these costs were amortized over 36 months.
      Amortization expense for the three months ended September 30, 2007 and 2006,
      was
      $103,657 and $67,440, respectively. As of September 30, 2007, amortization
      expense for the fiscal years ended June 30, 2008, 2009, 2010 and 2011 is
      expected to be $474,451, $457,302, $399,018 and $366,243, respectively.




6.
            Income
                Taxes





During
      the three months ended September 30, 2007, the Company generated a net loss
      of
      $373,981, while for the same period ended 2006 the Company generated net income
      of $6,515. No provision for income taxes has been recorded for the three months
      ended September 30, 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 months ended September 30, 2006. As of September 30, 2007, the Company
      continues to maintain a full valuation allowance for its net deferred tax assets
      of approximately $12.3 million. Given its limited history of generating net
      income, the Company has concluded that it is not more likely than not that
      the
      net deferred tax assets will be realized.





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.


6





7.
            Long-Term
                Debt





Long-term
      debt consists of:




September
                30,
            
            June
                30,2007
            
            2007Note
                payable due November 15, 2007, payable in monthly installments of
                $1,825, bearing interest at prime plus 3%
            
            $
            5,105
            
            $
            10,415Note
                payable due September 22, 2007, payable in annual installments of
                $41,667 with interest imputed at 8% (net of unamortized discount
                of
                $3,086)
            
            
            38,580
            
            
            38,580Note
                payable due July 19, 2009, payable in quarterly payments of $7,751
                with interest imputed at 9% (net of unamortized discount of
                $12,294)
            
            
            80,657
            
            
            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
                $5,579)
            
            
            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%
            
            
            150,000
            
            
            150,000Note
                payable due June 30, 2008 payable in an annual installment of $150,000
                with interest at 11.25%
            
            
            150,000
            
            
            150,000Note
                payable due August 28, 2010, payable in monthly installments of $490
                with
                interest imputed at 9% (net of unamortized discount of
                $2,496)
            
            
            15,138
            
            
            49,813Note
                payable due June 20, 2012, payable in monthly installments of $2,088
                with
                interest imputed at 9% (net of unamortized discount of
                $22,459)
            
            
            96,548
            
            
            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
                $5,496)
            
            
            56,304
            
            
            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
                $4,259)
            
            
            43,638
            
            
            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 installments of
                $26,199
                with interest imputed at 5.25% (net of unamortized discount of
                $79,678)
            
            
            863,500
            
            
            -Loan
                and Security Agreement with United States Department of Agriculture
                Rural
                Utilities Service
            
            
            987,834
            
            
            -Line
                of credit due October 15, 2007, with imputed interest of prime plus
                1%
            
            
            25,000
            
            
            -2,642,094
            
            
            920,937Less
                current portion
            
            
            (880,272
            )
            
            (468,480
            )Total
                long-term debt
            
            $
            1,761,822
            
            $
            452,457





The
      Company’s long-term debt is unsecured except for approximately $1,119,423 and
      $227,229 as of September 30, 2007 and June 30, 2007, respectively, which is
      secured by certificates of deposit and certain inventory and equipment. The
      prime rate at September 30, 2007 and June 30, 2007 was 7.75% and 8.25%,
      respectively.




7


8.
            Related
                Parties





The
      following table shows amounts paid to three 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 three months ended
      September 30, 2007 and 2006:





Three
                Months EndedSeptember
                30,2007
            
            2006Troy
                LeMaile Stovall
            
            $
            7,000
            
            $
            4,000Justin
                McClure
            
            
            7,000
            
            
            3,750John
                Palmer
            
            
            10,265
            
            
            3,750Cynthia
                Ocker
            
            
            13,825
            
            
            -$
            38,090
            
            $
            11,500





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 10), 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 10. 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.





9.
            New
                Accounting Pronouncements





On July
      1, 2007, we 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.
            Subsequent
                Events





*Series
      A Preferred Stock*





On
      October 17, 2007, the Company entered into a Purchase Agreement with certain
      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 8.





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. 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 Agreement, the Company
      and the Purchasers entered into a Registration Rights Agreement, pursuant to
      which the Company has agreed to grant “piggyback” registration rights to the
      Purchasers.




8




The
      Company intends to 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.




*TeleShare
      Communications Services, Inc.*




As
      reported in Note 3, on October 25, 2007, the final adjustments to the TeleShare
      acquisition were determined and the Company and it 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, TeleShare (now Internet America) has 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. Under the terms of the RUS approval, the Company agreed
      to add $2 million in equity within 60 days of closing of the TeleShare
      acquisition, which tool place on July 27, 2007. Management has been in
      communication with the RUS regarding the deadline and believes that the addition
      of approximately $2.4 million in equity from the issuance of approximately
      $1.7
      million of Series A Preferred Stock, and the issuance of approximately 298,000
      shares of the Company’s common stock valued at approximately $750,000 upon
      settlement of the TeleShare escrow, will satisfy the RUS’s equity contribution
      requirement. Upon receipt of confirmation from the RUS that the equity
      raise has been met, the Company can resume borrowing on the $3 million
      commitment.




*Acquisition*





On
      October 31, 2007, the Company entered into an agreement to purchase the assets
      of a wireless broadband Internet service provider in the San Antonio area.
      The
      consideration includes a $5,000 payment and approximately $34,000 in notes
      payable.




9


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 34,400 subscribers in Texas, as of September 30, 2007. Of the
      Company’s 34,400 total subscribers, approximately 7,5000 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 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 7,500 subscribers as of September 30, 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.





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, TeleShare (now Internet America) has 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. We intend to continue network expansion utilizing
      funds
      under the existing borrowing facility.  Under the terms of the RUS
      approval, the Company agreed to add $2 million in equity
      within 60 days of closing, which took place on July 27, 2007.  On October
      17, 2007, the Company completed an initial equity raise to a limited number
      of
      accredited investors in a private placement. Management has been in
      communication with the RUS regarding the deadline and believes that the addition
      of approximately $2.4 million in equity from the issuance of approximately
      $1.7
      million of Series A Preferred Stock, and the issuance of approximately 298,000
      shares of the Company’s common stock valued at approximately $750,000 upon
      settlement of the TeleShare escrow, will satisfy the RUS’s equity contribution
      requirement.While it is possible that the RUS could withhold its approval,
      management’s past experience with the RUS leads us to believe that they will
      cooperate with us as we complete the documentation requirements.
      Upon receipt of confirmation from the RUS that the equity raise
      has been met, the Company can resume borrowing on the $3 million
      commitment.




10




While
      there is no guarantee that we will make significant or numerous acquisitions,
      the 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 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
      January of 2006, the Company announced its intention to relocate its corporate
      headquarters to Houston from Dallas. That move was completed in March 2006;
      also
      in March, the Company ceased operations of its small “computer centers” which
      offered computer repair services in some local markets, after a review of them
      indicated that they were only marginally profitable and did not provide the
      tactical marketing advantages that management had originally
      presumed.





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





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




11





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.




12


**Results
      of Operations**





*Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006*





The
      following table sets forth certain unaudited financial data for the three months
      ended September 30, 2007 and 2006. Operating results for any period are not
      indicative of results for any future period.




**Three
                Months Ended****September
                30, 2007**
            
            **September
                30, 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
            
            $
            2,095
            
            
            96.5
            %
            $
            2,084
            
            
            100.0
            %Other
            
            
            77
            
            
            3.5
            %
            
            -
            
            
            0.0
            %Total
            
            
            2,172
            
            
            100.0
            %
            
            2,084
            
            
            100.0
            %OPERATING
                COSTS AND EXPENSES:Connectivity
                and operations
            
            
            1,079
            
            
            49.7
            %
            
            992
            
            
            47.6
            %Sales
                and marketing
            
            
            139
            
            
            6.4
            %
            
            41
            
            
            2.0
            %General
                and administrative
            
            
            1,036
            
            
            47.7
            %
            
            830
            
            
            39.8
            %Provision
                for bad debt expense
            
            
            11
            
            
            0.5
            %
            
            1
            
            
            0.0
            %Depreciation
                and amortization
            
            
            266
            
            
            12.2
            %
            
            207
            
            
            9.9
            %Total
            
            
            2,531
            
            
            116.5
            %
            
            2,071
            
            
            99.4
            %OPERATING
                INCOME (LOSS)
            
            
            (359
            )
            
            -16.5
            %
            
            13
            
            
            0.6
            %INTEREST
                EXPENSE, NET
            
            
            (15
            )
            
            -0.7
            %
            
            (6
            )
            
            -0.3
            %Minority
                interest in loss of consolidated subsidiary
            
            
            (0
            )
            
            0.0
            %
            
            -
            
            
            0.0
            %NET
                INCOME(LOSS)
            
            $
            (374
            )
            
            -17.2
            %
            $
            7
            
            
            0.3
            %NET
                LOSS PER COMMON SHARE:BASIC
            
            $
            (0.03
            )
            
            
            
            $
            -DILUTED
            
            $
            (0.03
            )
            
            
            
            $
            -WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING:BASIC
            
            
            12,545,871
            
            
            
            
            
            12,508,914DILUTED
            
            
            12,545,871
            
            
            
            
            
            12,508,914OTHER
                DATA:Subscribers
                at end of period (1)
            
            
            34,400
            
            
            
            
            
            38,500EBITDA
                (Loss) (2)
            
            $
            (93
            )
            
            
            
            $
            220EBITDA
                margin(3)
            
            
            -4.3
            %
            
            
            
            
            10.6
            %CASH
                FLOW DATA:Cash
                flow used in operations
            
            $
            (144
            )
            
            
            
            $
            (168
            )Cash
                flow provided by (used in) investing activities
            
            $
            418
            
            
            
            
            $
            (88
            )Cash
                flow provided by (used in) financing activities
            
            $
            18
            
            
            
            
            $
            (63
            )Reconciliation
                of net income (loss) to EBITDA:Net
                income (loss)
            
            $
            (374
            )
            
            
            
            $
            7Add:Depreciation
                and amortization
            
            
            266
            
            
            
            
            
            207Interest
                income
            
            
            (10
            )
            
            
            
            
            (7
            )Interest
                expense
            
            
            25
            
            
            
            
            
            13EBITDA
                (2)
            
            $
            (93
            )
            
            
            
            $
            220







(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.




13


*Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006 (Continued)*





*Total
      revenue.* Total
      revenue increased by $88,000, or 4.2%, to $2,172,000 for the three months ended
      September 30, 2007, from $2,084,000 for the three months ended September 30,
      2006. The Company’s total subscriber count decreased by 4,100, or 10.6%, to
      34,400 as of September 30, 2007 compared to 38,500 as of September 30, 2006.
      The
      Company’s wireless broadband Internet subscriber count increased by 4,100, or
      120.6% to 7,500 as of September 30, 2007, compared to 3,400 as of September
      30,
      2006. Wireless broadband Internet revenue increased by $488,000 to $886,000
      as
      of September 30, 2007 compared to $398,000 as of September 30, 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 $400,000. This
      decrease is attributed to the loss of dial-up customers moving to other
      providers’ broadband service.





*Connectivity
      and operations.* Connectivity
      and operations expense increased by $87,000, or 8.8%, to $1,079,000 for the
      three months ended September 30, 2007, from $992,000 for the three months ended
      September 30, 2006. There was an increase in salaries and wages of approximately
      $54,000 to $365,000 as of September 30, 2007 compared to $311,000 as of
      September 30, 2006. Data and telecommunications expense increased by $63,000
      to
      $490,000 as of September 30, 2007 compared to $427,000 as of September 30,
      2006.
      Tower lease expense increased by $46,000 to $72,000 as of September 30, 2007
      compared to $26,000 as of September 30, 2006. The increase in salaries and
      wages, data and telecommunications 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
      $101,000 to $76,000 as of September 30, 2007 compared to $177,000 as of
      September 30, 2006. The decrease was primarily due to the capitalization of
      customer premises equipment (CPE) that began at the beginning of this fiscal
      year. The remaining increase in expense of approximately $24,000 relates to
      contract labor for the messaging segment acquired with TeleShare.




*Sales
      and marketing.* Sales
      and
      marketing expense increased by $97,000, or 236.6%, to $138,000 for the three
      months ended September 30, 2007, compared to $41,000 for the three months ended
      September 30, 2006. Salaries and wages increased $45,000 to $77,000 as of
      September 30, 2007 compared to $32,000 as of September 30, 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 and
      increase in advertising, travel and consulting expenses by $52,000 to $60,000
      as
      of September 30, 2007 compared to $8,000 as of September 30, 2006.




*General
      and administrative.* General
      and administrative expense (G&A) increased by $206,000, or 24.8%, to
      $1,036,000 for the three months ended September 30, 2007, from $830,000 for
      the
      three months ended September 30, 2006. Salaries and wages increased $108,000
      to
      $494,000 as of September 30, 2007 compared to $386,000 as of September 30,
      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 $48,000
      to $239,000 as of September 30, 2007 compared to $191,000 as of September 30,
      2006. The 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 $39,000 to $57,000 as of September
      30, 2007 from $18,000 as of September 30, 2006 due to discussions regarding
      potential acquisitions. The Company issued stock options in the fiscal forth
      quarter of 2007 and the fiscal first quarter of 2008, which caused an increase
      in expenses of $18,000 as of September 30, 2007 compared to $0 as of September
      30, 2006. Professional and consulting fees decreased by approximately $12,000,
      to $104,000 as of September 30, 2007 compared to $116,000 as of September 30,
      2006. As of September 30, 2006, the Company had received lawsuit settlement
      income of $15,000 compared to $0 as of September 30, 2007. The remaining net
      decrease of $10,000 was primarily a result of various cost saving measures
      implemented during fiscal 2007. **





*Provision
      for bad debt expense.* Provision
      for bad debt expense increased to $11,000 for the three months ended September
      30, 2007, from $1,000 for the three months ended September 30, 2006. This
      increase is due primarily to the increase of our wireless subscribers. As of
      September 30, 2007, we are fully reserved for all customer accounts that are
      at
      least 90 days old.




14





*Depreciation
      and amortization.* Depreciation and amortization increased by $59,000, or 28.5%, to $266,000 for
      the three months ended September 30, 2007, from $207,000 for the three months
      ended September 30, 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) income, net.* For
      the
      three months ended September 30, 2007 and 2006, the Company recorded net
      interest expense of $15,000 and $6,000, respectively. For the three months
      ended
      September 30, 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 adjusted for certain non-cash items and
      changes in assets and liabilities. For the three months ended September 30,
      2007, cash used in operations was $144,000 compared to cash used in operations
      of $168,000 for the three months ended September 30, 2006. For the three months
      ended September 30, 2007, net loss plus non-cash items used cash of $79,000.
      Additional increases in accounts receivable, purchases of inventory, and
      purchase of other assets and were offset by increases of accounts payable and
      an
      increase in deferred revenue. For the three months ended September 30, 2006,
      net
      income plus non-cash items contributed $225,000 in cash which was then used
      primarily for purchases of inventory, payments of accounts payable and accrued
      expenses and a decrease in deferred revenue. Inventory, which primarily includes
      modems and wireless access radios, decreased in the three months ended September
      30, 2006 by approximately $94,000 due to the Company discontinuing its wireless
      equipment reseller business.





Cash
      provided by investing activities totaled $418,000 for the three months ended
      September 30, 2007, which relates primarily to cash provided by the acquisition
      of TeleShare, offset by the deployment of new wireless broadband Internet
      infrastructure. Cash used in investing activities totaled $88,000 for the three
      months ended September 30, 2006, which relates primarily to the deployment
      of
      new wireless broadband Internet infrastructure.





Cash
      provided by financing activities, which totaled $18,000 for the three months
      ended September 30, 2007, consist of principal payments on long term-debt,
      offset by borrowings on RUS loan. Cash used in financing activities, which
      totaled $63,000 for the three months ended September 30, 2006, consisted
      primarily of principal payments on debt and capital leases.





We
      estimate that cash on hand of $1,075,215 at September 30, 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..




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.




15




**ITEM
      3. CONTROLS AND PROCEDURES**





An
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Accounting
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934) in effect as of September 30, 2007. Based upon that
      evaluation, the Chief Executive Officer and Chief Accounting Officer concluded
      that, as of September 30, 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
      September 30, 2007 that materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.




16


**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





17





**SIGNATURES**





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





INTERNET
              AMERICA,
              INC.
              ****(Registrant)Date: 11/13/07
            By:
            /s/ William
              E. Ladin, Jr.William
              E. Ladin, Jr.Chairman
              and Chief Executive Officer Date:
              11/13/07
            By:
            /s/ Jennifer
              S. LeBlancJennifer
              S. LeBlancChief
              Financial and Accounting Officer




18





**INDEX
      TO EXHIBITS**


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


19