1. General Information and Summary of Significant Accounting Policies

Internet America, Inc. (the "Company" or "we") is an internet service provider ("ISP") that is focused on providing wireless high-speed broadband internet in rural markets to residential and business subscribers. The Company was founded in 1995.

Basis of Consolidation - The consolidated financial statements include the accounts of Internet America, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Revenue Recognition - Revenues derived from set-up charges are amortized over the expectant life of the customer. The Company bills its subscribers in advance for direct access to the internet, but defers recognition of these revenues until the services are provided. Deferred revenue was approximately $768,000 and $781,000 at June 30, 2013 and 2012, respectively.

Business Combinations - We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimates as of the date of acquisition. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 805, Business Combinations, we recognize and measure goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired. If, in the rare occasion, fair value of net assets acquired exceeds purchase price, the excess is recognized as gain from a bargain purchase. All acquisition-related transaction costs have been expensed as incurred rather than capitalized as a part of the cost of the acquisition.

Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable, as collateral is generally not required. We maintain cash accounts in major U.S. financial institutions. The balances of these accounts sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits. During the years ended June 30, 2013 and 2012, the Company recorded net bad debt recovery of approximately $7,700 and net bad debt expense of approximately $4,200, respectively. Charges and recoveries were recorded as a result of monthly evaluations during the year of the collectability of accounts receivable and as accounts became 90 days or older from the date of billing, including consumer accounts. Delinquent accounts deemed uncollectable were disconnected but collection efforts were continued on such accounts.

Financial Instruments - The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short-term nature of these accounts because the interest rates are commensurate with debt instruments carrying similar credit risk. The fair values for debt and lease obligations, which have fixed interest rates, do not differ materially from their carrying values.

Fair Value - U. S. generally accepted accounting principles defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:

Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 - Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash on hand and cash deposited in money market accounts, occasionally in excess of federally insured limits. Cash and cash equivalents are stated at cost, which approximates fair value.

Restricted Cash - Restricted cash consists of cash deposited in a bank account by United States Department of Agriculture Rural Utilities Service ("RUS") for advances on the Company's loan. Money in the account is to be used solely for the purposes for which each advance is made. Restricted cash is stated at cost, which approximates fair value.

Inventory - The Company values inventory at the lower of cost or market using the weighted average method. Inventory consists primarily of wireless internet access equipment and routers.

Property and Equipment - Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line or double declining method over the estimated useful lives of the assets, ranging from three to fifteen years.

Goodwill - Goodwill is the excess of the acquisition costs of a business over the fair value of the identifiable net assets acquired. Goodwill is no longer amortized but is subject to annual impairment tests. The Company performs a qualitative evaluation of goodwill on an annual basis in the fourth quarter or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the Company's evaluation indicates an impairment may exist, the Company then determines if book value exceeds fair value and the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded equal to that excess.

The Company performed its annual impairment tests at June 30, 2013 and 2012. During the years ended June 30, 2013 and 2012, the Company recorded impairment losses of $69,000 and $0, respectively. See Note 4 for further details.

Subscriber Acquisition Costs - Subscriber acquisition costs primarily relate to business combinations or acquisitions of subscribers. Subscriber acquisition costs are amortized over the average life of a customer which is estimated at 48 months. The Company reviews intangible assets with definite lives, including subscriber acquisition costs, for impairment whenever conditions arise that indicate the carrying value may not be recoverable, such as economic downturn in a market or a change in the assessment of future operations.

Long-Lived Assets - The Company periodically reviews the values assigned to long-lived assets, such as property and equipment, to determine if any impairments have occurred in accordance with the guidance on impairment or disposal of long-lived assets. If the undiscounted future cash flows of an asset to be held and used in operations are less than the carrying value, the Company would recognize a loss equal to the difference between the carrying value and fair market value. The Company has concluded that no impairment occurred in the years ended June 30, 2013 or 2012.

Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with the FASB guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values as of the date of grant.

Advertising Expenses - The Company expenses advertising production costs in the period in which the advertisement is first aired. All other advertising costs are expensed as incurred. Advertising expenses for the years ended June 30, 2013 and 2012 were approximately $58,000 and $82,000, respectively. The Company focuses primarily on a direct mail form of advertising.

Income Taxes - Deferred tax assets and liabilities are determined using the asset and liability method in accordance with the FASB guidance on income taxes. Under this method, deferred tax assets and liabilities are established for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets are offset by valuation allowances when we believe it is more likely than not that such net deferred tax assets will not be realized.

The Company's federal and state income tax returns for the years ended 2008 through 2012 are open to examination. At June 30, 2013 and 2012, the Company evaluated its open tax years in all known jurisdictions. Based on this evaluation, the Company did not identify any uncertain tax positions. We will account for interest and penalties relating to uncertain tax positions in the current period statement of operations as necessary.

Basic and Diluted Net Income (Loss) Per Share - Basic earnings per share is computed using the weighted average number of common shares outstanding and excludes any anti-dilutive effects of options, warrants and convertible securities. Diluted earnings per share reflect the potential dilution that could occur upon exercise or conversion of these instruments.

Our diluted earnings per share calculation excludes 1,189,026 and 1,825,866 of potentially dilutive shares for the years ended June 30, 2013 and 2012, respectively, due to their anti-dilutive effect. The following reconciles basic and diluted weighted average shares outstanding:

	Year ended June 30,
	2013		2012

Basic weighted average shares outstanding		16,729,562		16,729,562
Dilutive effect of:
Convertible preferred stock		2,718,428		2,718,428
Stock options		1,897		-
Diluted weighted average shares outstanding		19,449,887		19,447,990

Use of Estimates - The preparation of 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 liabilities 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.

Comprehensive Income (Loss) - Because the Company has no components of other comprehensive income (loss), comprehensive income (loss) is the same as net income (loss) for the years ended June 30, 2013 and 2012.

Reclassifications - Certain reclassifications have been made to the prior year financial statements in order to conform to the current year presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity.

New accounting standards - The Company has implemented all accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.