10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 30, 2003

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-25147

Internet America, Inc.

(Name of registrant as specified in its charter)

Texas	86-0778979
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
350 N. St. Paul, Suite 3000 Dallas, Texas	75201
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (214) 861-2500

Securities registered pursuant to Section 12(b) of the Exchange Act:

(Not applicable)

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, Par Value $.01 Per Share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

Based on the closing price of the registrant’s Common Stock on December 31, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant is $2,368,450.70. Solely for the purposes of this calculation, all executive officers and directors of the registrant and all shareholders reporting beneficial ownership of more then 5% of the registrant’s Common Stock are considered to be affiliates.

The number of shares of Common Stock outstanding as of September 22, 2003 was 10,379,938.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on November 12, 2003, to be filed within 120 days after the end of our fiscal year, are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

TABLE OF CONTENTS

			Page
PART I	Item 1.	Business	3
	Item 2.	Properties	7
	Item 3.	Legal Proceedings	7
	Item 4.	Submission of Matters to a Vote of Security Holders	8
PART II	Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters	8
	Item 6.	Selected Financial Data	9
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 7a.	Quantitative and Qualitative Disclosure About Market Risk	16
	Item 8.	Financial Statements and Supplementary Data	16
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	16
	Item 9A.	Controls and Procedures	16
PART III	Item 10.	Directors and Executive Officers	17
	Item 11.	Executive Compensation	17
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	17
	Item 13.	Certain Relationships and Related Transactions	17
	Item 14.	Principal Accountant Fees and Services	17
PART IV	Item 15.	Exhibits and Reports on Form 8-K	17
SIGNATURES			19
INDEX TO FINANCIAL STATEMENTS			F-1

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This Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results, performance or achievements, or industry results, may be materially different from those described in the forward-looking statements due to a number of risk factors. Such risks and uncertainties include those set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K. See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Statement.”

PART I

Item 1. Business

General

Internet America is an Internet service provider (“ISP”) that provides a wide array of Internet services tailored to meet the needs of individual and business subscribers. As of June 30, 2003, we served approximately 82,000 subscribers. Internet America was incorporated in Texas in 1995 and currently has operations in Texas and Louisiana. Our business model is to create high user density in each geographic area we serve, which allows us to realize substantial marketing and operating efficiencies. Our growth strategy focuses on growth in revenues while maintaining reasonable cash flow. We will maintain our focus on the high user density model.

Elements of our growth strategy include:

Creative Use of Advertising to Maintain the Internet America Brand. We have used primarily outdoor billboard, radio and print media advertising. We are currently developing marketing using billboards and print media.

Cost-Effective Development of Network Infrastructure. We deploy network infrastructure in a disciplined manner to achieve substantial economies of scope and scale. We have been consolidating our Texas operations and have realized substantial efficiencies from this consolidation. With our “Virtual POP” architecture, we can provide local access services quickly and efficiently without investing in additional physical infrastructure. See “—Infrastructure,” below.

Development of Value-Added Revenue Streams. We continue to develop value-added revenue streams such as dedicated broadband connectivity, news access and Web hosting. In addition, we continue to evaluate other value-added service opportunities such as Internet telephony. We believe that a user dense, regional customer base provides an excellent platform for the introduction of new value-added services, taking advantage of existing brand awareness and economies of scale.

Services

We offer Internet services tailored to meet the needs of both individual and business subscribers. Our primary service offerings are broadband and dial-up Internet access, as well as related value-added services. For our business subscribers, we offer dedicated high speed Internet access, Web hosting, colocation and other business related services. Our services are offered in several different packages to provide subscribers a broad range of choices to satisfy their Internet needs. The majority of our consumer subscribers have month-to-month subscriptions and the majority of our business customers are under service contracts for a term. We bill most consumer subscribers through automatic charges to their credit cards or bank accounts, and we bill most of our business customers by monthly invoices. We offer discounts on almost all of our services for subscribers who prepay for a longer term.

High Speed Connectivity; DSL Services. We offer broadband connectivity for business and consumers, including 64k/128k Integrated Service Digital Network (ISDN) access, 1.5M Asymmetrical Digital Subscriber Lines (ADSL), fractional to full T-1, and DS-3 level connectivity. Our DSL products provide high-speed Internet access over existing telephone lines, and may allow subscribers to simultaneously use a single telephone line for voice service and for access to the Internet. DSL provides an “always on” connection thereby removing wait times associated with dialing into a network. The DSL products offer our residential and business subscribers a cost-effective way to substantially increase the speed at which they access the Internet.

Dial-Up Internet Access. Our most popular dial-up Internet access package includes basic Internet access and related Internet applications such as World Wide Web browsing, e-mail, file transfer protocol (FTP), and USENET news access. Available value-added services include multiple e-mail mailboxes, national roaming services, personalized e-mail addresses, personal Web sites and enhanced USENET news access.

USENET. Our Airnews.net product provides access to Internet America’s newsgroup services for subscribers of other Internet services and on a wholesale basis to other businesses or ISPs.

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Web Services. We offer Web hosting through our Airweb.net service for businesses and other organizations that wish to create their own World Wide Web sites without maintaining their own Web servers and high-speed Internet connections. Web hosting subscribers are responsible for building their own Web sites and then uploading the pages to an Internet America server. This Web hosting service features state-of-the-art servers for high speed and reliability, a high quality connection to the Internet, specialized customer support and advanced services features, such as secure transactions and site usage reports.

Customer Care

Our goal of 100% customer satisfaction begins with providing superior systems and network performance. We focus on scalability, reliability and speed in the technical design and maintenance of our systems. In addition to the provision of superior systems and network performance, we emphasize high quality customer care and technical support. We strive to retain our subscribers by prompt response to customer problems via telephone, email and newsgroups.

Individuals accessing the Internet have many different operating system, hardware and network configurations, coupled with varying levels of computer sophistication. Consequently, our customer care department must be able to efficiently and effectively address:

• Problems affecting a variety of hardware systems

• Start-up or other basic problems of new subscribers or new Internet users

• Highly technical issues that sophisticated users may encounter

• Operating system defects/workarounds.

We had approximately 69 customer care employees at June 30, 2003. Customer care is available to subscribers 24-hours-a-day, 7-days-a-week. The customer care department is organized in tiers designed to respond to varying types of support needs. In addition to diagnosing and resolving subscribers’ technical problems, our customer care department answers questions about account status and billing information, provisions new product requests and provides configuration information.

We maintain a comprehensive description of our customer care services on our Web site, as well as troubleshooting tips and configuration information. Additionally, we offer our subscribers free educational classes, which are held monthly in our Dallas office. Subscribers can also obtain recorded system and network status reports at any time and review extensive system and network performance on the World Wide Web.

Marketing

Our marketing strategy focuses on penetration of high density urban markets in order to acquire a critical mass of subscribers to support profitable operations. Our approach focuses on brand building advertising. In the past, we have used primarily outdoor billboard, radio and print media advertising. We believe that the demand for our services in the future will be more application based, and we currently are evaluating many value-added services for existing and new customers.

Infrastructure

Our network provides subscribers with local dial-up and broadband (DSL) access in all major metropolitan areas of Texas, as well as dial-up access in many tier 2 and tier 3 cities. Our systems and network infrastructure is designed to provide reliability and speed. Reliability is achieved through redundancy in mission critical systems that minimizes the number of single points of failure. Speed is achieved through clustered systems, diverse network architecture, multi-peered Internet backbone connections and aggressive load balancing.

Physical and Virtual POPs. Subscribers dial a local phone number and connect to one of our points of presence (POPs), consisting of inbound telephone lines, modems and related computer equipment. The POPs are either facilities owned by Internet America or “Virtual POPs” owned by telecommunication companies. Virtual POP architecture allows us to provide local access services without deploying additional physical infrastructure. The Virtual POP architecture enables subscribers to dial a local phone number and connect to a modem owned and housed by a telecommunications provider. The subscriber’s data call is then routed across leased lines to our internal network. Unlike simply leasing network capacity from a third-party provider, the Virtual POP architecture allows us to maintain substantial control over quality of service and capacity. The benefits of this architecture include substantially reduced capital expenditures and reduced exposure to technological obsolescence. In addition, when entering new markets, the Virtual POP architecture allows us to more precisely match capacity needs to actual sales in that market.

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Internal Network Infrastructure. Subscribers enter our network from either the physical POP or Virtual POP. Our primary internal network is designed to maximize sustained high-speed traffic and provide both resiliency to failure and redundancy. Our facilities are powered by a computer controlled uninterruptible power supply that provides battery backup, surge protection and power conditioning. Automatic onsite diesel generators provide power for prolonged power outages.

We also maintain a Network Operations Control Center (“NOCC”) in Dallas, which is staffed 24 hours a day. The NOCC is responsible for monitoring the status of all networking facilities, components, applications and equipment deployed throughout our infrastructure. The NOCC is responsible for operational communications among internal departments and is also responsible for communication with external service providers. Sophisticated historical and statistical analysis software used in the NOCC provides data about the quality of service most subscribers are experiencing, as well as information to help control costs by purchasing additional bandwidth and services only when needed.

We maintain our applications on a variety of systems from a number of vendors. The major applications, such as e-mail and newsgroup access services, utilize a network of servers which are connected directly to our network backbone through high-availability network routers. We deploy PC style hardware in clusters for distributing the load of other applications and providing fault-tolerance against application failure. These distributed applications are housed on low cost, easily obtainable components with minimal interdependency.

Management Information Systems. Our MIS department uses a near real-time customer database, billing and flow-through fulfillment system to handle all customer contact and billing information for the services we provide. The system maintains access controls for the authentication servers and various applications. The system also creates customer invoices and automatically processes credit card charges and automatic check handling. Our PDQ subsidiary uses a similar system, while our NeoSoft subsidiary uses a database to manage customer information but provisions services manually. We are transitioning to an integrated financial and information reporting system that will include all subsidiaries, automate many additional functions and provide financial, marketing and management reports.

Technology and Development

Although we do not focus a significant amount of resources on creating new technologies, we continuously evaluate new technologies and applications for possible introduction or incorporation into our services. High-speed connectivity is essential to the commercially viable deployment of new, value-added services such as Internet telephony, particularly VoIP, video and audio programming distribution and other high-bandwidth, low-latency applications. We believe that we are well positioned to efficiently market and deploy our broadband products and other new, value-added services due to the high density of our subscriber base.

Proprietary Rights

General. We believe that our success is more dependent upon technical, marketing and customer service expertise than upon our proprietary rights. However, our success and ability to compete are dependent in part upon proprietary rights. We primarily rely on copyright and trademark laws. “Internet America,” the Internet America logo, “1-800-Be-A-Geek,” “PDQ.Net,” “ExpressLane DSL,” “Airmail.net,” “Airnews.net” and “Airweb.net” are registered service marks of Internet America or its subsidiaries. We have applied to register “Airscreen.net.”

There can be no assurance that the steps we take will be adequate to prevent the misappropriation of our technology or that our competitors will not independently develop technologies and services that are substantially equivalent or superior to ours.

Competition

The Internet services market is extremely competitive. There are no substantial barriers to entry, and we expect that competition will continue to intensify. We believe that the primary competitive factors determining success in this market include pricing, access speed, a reputation for reliability and service, effective customer support, and access to capital. Our current and prospective competitors include many large companies that have substantially greater market presence and financial, technical, marketing and other resources than we have. Increased competition for users of Internet services may result in lower subscriber growth rates or subscriber loss. Competitors may charge less than we do, causing us to reduce or preventing us from raising our fees. As a result, our business and revenues may suffer. We currently compete or expect to compete with the following types of Internet access providers:

• commercial online service providers, such as AOL Time Warner and the Microsoft Network;

• national ISPs, such as EarthLink;

• national telecommunications providers, such as AT&T, Qwest, MCI and Sprint;

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• regional telecommunications providers, such as SBC Communications;

• free and low cost providers, such as United Online;

• numerous regional and local ISPs;

• computer hardware and software companies, and other technology companies, such as IBM, Microsoft, Dell and Gateway;

• cable operators, such as Time Warner and Comcast;

• fixed wireless communications companies; and

• satellite companies.

The market for broadband services is extremely competitive. The markets we serve have been flooded with DSL, cable and wireless offers from our competitors, some of which have greater resources than we have and are able to offer their products at lower prices than we offer. We have to rely on local loop providers with which we compete to provide DSL services to our customers. These providers have been exerting pressure on independent ISPs, including raising prices and changing billing relationships, all of which puts us at a competitive disadvantage. Many local loop providers have consolidated or failed, causing fewer choices for us to offer to our customers. Furthermore, other methods of broadband delivery which we do not currently offer, such as cable or wireless transmission, may be more successful than DSL.

We expect to continue to experience competition from numerous telecommunications providers, including the traditional telecommunications carriers, local exchange carriers and traditional long-distance companies, many of which have greater coverage and market presence, as well as substantial financial, technical and marketing resources. These telecommunications providers may have the ability to bundle Internet access with basic voice services, which may make it difficult for us to compete effectively. We also face competition from companies that provide connections to consumers’ homes, including national and regional telecommunications providers, cable companies, electric utility companies and terrestrial and satellite wireless communications companies. For example, cable television operators offer Internet access through their cable facilities at significantly faster rates than existing analog modem speeds. These companies include Internet access in the basic bundle of services, or offer such access for a nominal additional charge, and could prevent us from delivering Internet access through wire and cable connections owned by these competitors.

Our competition is likely to continue increasing, especially as diversified telecommunications and media companies begin providing Internet services, ISPs consolidate into larger more competitive companies and new competitors enter the Internet services market. The ability of these competitors or others to enter into business combinations, strategic alliances or joint ventures or to bundle services and products with Internet access could put us at a significant competitive disadvantage.

Government Regulation

We are not currently subject to direct regulation by the Federal Communications Commission or any other agency, other than regulations applicable to businesses and public companies generally. The FCC classifies Internet access providers as “information service providers” rather than regulated “telecommunications providers” under the 1996 Telecommunications Act. As such, we are not subject to regulations that apply to telephone companies and similar carriers. However, we provide Internet access through transmissions over public telephone lines, which transmissions are governed by regulations and policies of the FCC establishing charges, terms and conditions. Changes in the FCC’s policies relating to the classification of telecommunications services and information services could have a material adverse effect on our business. If we became classified as a provider of telecommunications services, regulations could affect the charges we pay to connect to the local telephone network, could impede our ability to compete for broadband customers and could cause us to have to increase prices for our services.

For example, Internet access providers currently are not required to pay carrier access charges. If Internet communications become regulated by the FCC in the same manner as traditional telecommunications services, access fees similar to those paid by long distance telephone carriers could be imposed on Internet access providers. Access fees could increase the cost of the Internet to users, most of whom currently enjoy unlimited, flat-fee usage. This in turn could slow the growth of the Internet and cause an adverse effect on our business. The FCC also does not currently require ISPs to contribute to the Universal Service Fund (although most telecommunications providers charge these fees to their customers, including us). Telecommunications carriers are actively seeking reconsideration or reversal of the FCC decisions regarding universal service as well as carrier access fees. In addition, a reclassification of Internet services as telecommunications services would jeopardize Internet access providers’ current right to nondiscriminatory access to the telephone lines owned by incumbent local telephone companies for use for broadband services. We cannot predict the outcome of FCC proceedings or other federal legislation, but if adopted, these and other regulatory actions could have a material adverse effect on our business, financial condition and results of operation. Finally, any change in the FCC’s policy of not regulating Internet access providers may cause states to regulate aspects of our business as telecommunications services.

The FCC also does not currently regulate the use of cable infrastructure for Internet access as a telecommunications service or cable service. This classification will likely protect cable modem service providers from regulation, including regulations requiring open access to cable infrastructure. Although some cable operators are voluntarily providing access to competing service providers,

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the FCC’s classifications decrease our potential to provide Internet access services via the cable television infrastructure.

Due to the increasing popularity and use of the Internet, it is possible that additional laws, regulations, or legal precedent may be adopted with respect to the Internet, covering issues such as content, privacy, pricing, unsolicited email, encryption standards, consumer protection, electronic commerce, taxation, copyright infringement and other intellectual property issues. We cannot predict the impact, if any, that any future legal or regulatory changes or developments may have on our business, financial condition and results of operations. Changes in the legal or regulatory environment relating to the Internet access industry, including changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies, cable operators or others, could have a material adverse effect on our business, financial condition and results of operations.

Employees

As of June 30, 2003, we employed approximately 119 people, almost all of whom are full-time employees. None of our current employees are represented by a labor organization, and we consider employee relations to be good.

Executive Officers (as of September 22, 2003)

The following table sets forth certain information concerning our executive officers as of September 22, 2003.

Name	Age	Position
William E. Ladin, Jr.	62	Chief Executive Officer and Chairman of the Board
David E. Allard	45	Executive Vice President – Strategic Implementation
Elizabeth P. Daane	37	Vice President, General Counsel and Secretary

William E. Ladin, Jr. Mr. Ladin became CEO and Chairman of the Board of Directors in September 2003 after serving as Vice Chairman of the Board since January 2000. He joined us in connection with our acquisition of PDQ.Net, a Houston-based Internet service provider that Mr. Ladin formed in 1997. Mr. Ladin served as chief executive officer of PDQ.Net until its acquisition by Internet America. Ladin was instrumental in growing PDQ.Net into Houston’s largest independent Internet service provider, known for providing quality connectivity at an affordable price. Prior to forming PDQ.Net, Ladin was a successful entrepreneur having been involved with founding and/or operating a number of publicly held companies, including The ForeFront Group, a Houston based Internet company; ComputerCraft, a chain of micro-computer retail stores that grew to 65 stores during his management; Mobil Communications Corporation, known as MobilCom, a national paging company that was sold to Bell South in 1988; Lifemark, a hospital company that merged with AMI in 1984; and First of Texas Incorporated, a Houston based investment banking firm.

David E. Allard joined us in April 2003 as Executive Vice President—Strategic Implementation. Mr. Allard previously was employed by Primedia Workplace Learning, where as Chief Operating Officer, he created and managed new products and strategies to increase revenue and EBITDA. As Executive Vice President and Chief Financial Officer of E-Train from 1997 to 2000, Mr. Allard administered major business combinations and developed a business turnaround plan to create significant savings. From 1992 to 1996, Mr. Allard was Senior Vice President – Business Development of Westcott Communications, Inc., where he managed product lines and business combinations. Mr. Allard is a certified public accountant and a former partner of Farmer and Allard, P.C.

Elizabeth Palmer Daane joined us in August 1999 as Vice President, General Counsel and Secretary. Prior to joining us, Ms. Daane was an attorney at the law firm of Jackson Walker LLP, where she specialized in corporate and securities law.

Item 2. Properties

Our corporate headquarters are located in downtown Dallas, Texas at One Dallas Center, 350 N. St. Paul, Suite 3000, where all executive functions exist. We lease approximately 30,000 square feet in Dallas, Texas and approximately 5,600 square feet in Houston, Texas. All systems, sales and technical support functions take place in our Dallas and Houston facilities. We do not own any real estate. We believe that all of our facilities are adequately maintained and suitable for their present use.

Item 3. Legal Proceedings

On May 6, 2003, the Company paid $3.25 million to settle the claims of a former employee which resulted in a judgment against the Company and two former directors. The case was filed in the Dallas County District Court on November 12, 1999. The case had been on appeal by the plaintiff and defendants since July 2001, with the plaintiff asking the court to increase the amount of the judgment to approximately $5.5 million, plus post judgment interest. The plaintiff, Cindy Carradine, is a former employee who asserted claims for fraud in connection with her sale of options to the Company in 1998. Pursuant to indemnification agreements, the Company has agreed to indemnify the individual defendants for losses incurred by them in connection with this lawsuit.

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On August 29, 2003, the Company filed a lawsuit in Dallas County District Court against a former director, William O. Hunt, in connection with his attempt to sell a controlling interest in the company. Mr. Hunt held an option to purchase 9,428,571 shares of the company’s common stock, which he obtained in connection with the financing of an appeal bond in 2001. Mr. Hunt’s stock and option, if exercised, would have constituted 51% of the company’s outstanding shares. The lawsuit alleged breaches of Mr. Hunt’s fiduciary duties in connection with his actions since the option became exercisable. On September 3, 2003, the Company purchased the option from Mr. Hunt for $150,000 and subsequently dismissed the lawsuit.

On July 16, 2003, the District Court of Harris County, Texas issued a summary judgment in favor of Internet America in a lawsuit filed on September 12, 2002 by William E. Ladin, Jr., then the Vice Chairman of the Board and now CEO and Chairman of the Board. In the lawsuit, Mr. Ladin alleged that Internet America breached an employment agreement when it terminated his employment in November 2001, and sought damages, interest and attorneys’ fees. The judgment was final on August 15, 2003.

We are involved from time to time in routine disputes and legal proceedings occurring in the ordinary course of business. Management believes these matters, individually and in the aggregate, are immaterial to our financial condition, results of operations and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2003.

PART II

Item 5. Market For Registrant’s Common Stock and Related Stockholder Matters

Our common stock began trading on the Nasdaq National Market on December 10, 1998 under the symbol “GEEK.” Before that date, there was no established public trading market for our common stock. Our common stock was delisted effective August 15, 2001 and currently trades on the OTC Bulletin Board. The following table shows the high and low bid quotations per share of the common stock for the periods indicated. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	High		Low
Fiscal Year Ended June 30, 2003:
First Quarter	$	0.38	$	0.22
Second Quarter		0.38		0.20
Third Quarter		0.44		0.30
Fourth Quarter		0.20		0.30
Fiscal Year Ended June 30, 2002:
First Quarter	$	0.66	$	0.30
Second Quarter		0.38		0.20
Third Quarter		0.45		0.29
Fourth Quarter		0.40		0.26

At September 22, 2003, there were 247 holders of record of our common stock. The last reported sale price of the common stock on the OTC Bulletin Board on September 22, 2003 was $0.96 per share.

We have neither declared nor paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant.

Information regarding securities authorized for issuance under the Company’s equity compensation plans is incorporated by reference to Item 12 of this Form 10-K, which in turn incorporated by reference a section of the Company’s definitive proxy statement.

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Item 6. Selected Financial Data

	Year Ended June 30,
	2003			2002			2001			2000			1999
	(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA REVENUES:
Internet Services	$	17,493		$	25,417		$	34,642		$	28,893		$	18,010
Other		30			73			233			452			109
Total		17,523			25,490			34,875			29,345			18,119
OPERATING COSTS AND EXPENSES:
Connectivity and operations		8,736			12,719			22,013			17,154			8,801
Sales and marketing		487			699			3,348			5,561			6,045
General and administrative		4,333			5,335			7,713			6,816			3,920
Provision for bad debt Expense		703			2,254			3,283			688			324
Depreciation and Amortization		669			15,510			15,787			11,995			1,685
Gain on vendor settlement		—			—			(2,395	)		—			—
Accrued lawsuit (gain) expense		(321	)		—			3,200			—			—
Total		14,607			36,517			52,949			42,214			20,775
INCOME (LOSS) FROM OPERATIONS		2,916			(11,027	)		(18,074	)		(12,869	)		(2,656	)
INTEREST INCOME		22			20			73			108			405
INTEREST EXPENSE		(636	)		(558	)		(66	)		(73	)		(220	)
NET INCOME (LOSS) BEFORE INCOME TAX BENEFIT		2,302			(11,565	)		(18,067	)		(12,834	)		(2,471	)
INCOME TAX BENEFIT		—			—			—			8			8
NET INCOME (LOSS)	$	2,302		$	(11,565	)	$	(18,067	)	$	(12,826	)	$	(2,463	)
NET INCOME (LOSS) PER COMMON SHARE:
BASIC	$	0.22		$	(1.15	)	$	(1.82	)	$	(1.49	)	$	(0.45	)
DILUTED	$	0.22		$	(1.15	)	$	(1.82	)	$	(1.49	)	$	(0.45	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,255,671			10,049,450			9,906,502			8,613,127			5,533,670
DILUTED		10,268,296			10,049,450			9,906,502			8,613,127			5,533,670
BALANCE SHEET DATA:
Cash and cash equivalents	$	1,968		$	2,902		$	1,513		$	1,374		$	5,846
Other assets, net		4,381			4,451			18,654			32,885			9,196
Total assets		7,275			9,434			23,913			39,287			18,913
Accrued lawsuit liability		—			3,300			3,300			—			—
Long-term debt		—			—			—			54			152
Total stockholders’ equity		2,924			413			11,911			29,340			11,625
OTHER DATA:
EBITDA (1)		3,585			4,483			(2,287	)		(874	)		(971	)
Cash flows related to:
Operating activities		(762	)		2,714			1,091			(2,382	)		(659	)
Investing activities		(143	)		(552	)		(491	)		(1,695	)		(11,366	)
Financing activities	$	(29	)	$	(774	)	$	(461	)	$	56		$	17,253
Reconciliation of net income (loss) to EBITDA:
Net income (loss)	$	2,302		$	(11,565	)	$	(18,067	)	$	(12,826	)	$	(2,463	)
Add:
Depreciation and Amortization		669			15,510			15,787			11,995			1,685
Interest income		(22	)		(20	)		(73	)		(108	)		(405	)
Interest expense		636			558			66			73			220
Income tax benefit		—			—			—			(8	)		(8	)
EBITDA (1)	$	3,585		$	4,483		$	(2,287	)	$	(874	)	$	(971	)

(1) 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.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the financial condition and results of operations of Internet America, Inc. for the years ending June 30, 2003, 2002 and 2001. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

Safe Harbor Statement

Certain statements contained in this Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. 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 and worse than those described in the forward-looking statements. Such risks and uncertainties include those set forth in this section and elsewhere in this Form 10-K. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the Private Securities Litigation Reform Act of 1995.

These risks include, without limitation, that the Company (1) will not increase revenues or improve EBITDA, profitability or product margins, (2) will not retain or grow its customer base, including its broadband and commercial services customers, (3) will not continue to achieve operating efficiencies, and (4) will be adversely affected by dependence on network infrastructure, telecommunications carriers and other suppliers, by regulatory changes and by general competitive, economic and business conditions.

Overview

Internet America is an Internet service provider (“ISP”) that provides a wide array of Internet services tailored to meet the needs of individual and business subscribers. We afford our subscribers a high quality Internet experience with fast, reliable service and responsive customer care. As of June 30, 2003, we served approximately 82,000 subscribers in the southwestern United States, primarily in Texas.

The growth of the Internet has resulted in increased competition for existing services and increased demand for new products and services. Increases in demand and a surge in Internet users have fostered an increase in the number of ISPs providing access to the Internet. Our competitors advertise in our existing markets with aggressive new promotions or offers of free Internet access. We believe we are well positioned to deal with these competitive forces by continuing to build high user density and maintaining a rational business plan.

High user density is the cornerstone of our business strategy. We will continue to pursue an ambitious growth strategy, but in a controlled manner. Our goal is to rapidly create high user density in specific markets to achieve and maintain positive operating results.

Recent technological developments have facilitated the increased adoption of broadband access via mechanisms such as cable, fixed/mobile wireless, and copper pair allowing voice, video, and data to occur simultaneously over one connection. The emergence of low-cost broadband solutions will significantly impact the ability of many ISPs to compete. We are committed to offering cost effective broadband solutions to individuals and businesses. We believe it is essential to offer commercially viable, new, value-added services such as Internet telephony, particularly Voice Over Internet Protocol (VoIP), video and audio programming distribution and other applications. We believe we are well positioned to efficiently market and deploy these new products due to the high density of our subscriber base. In addition, we are well positioned to offer add on services to new and existing dial-up customers, such as increased speed, help-desk services, virus protection, desk top video conferencing, spam filtering and other applications.

Given the high level of competition in the industry for new subscribers, we will be more selective with investing in direct response advertising. We plan to concentrate our direct response advertising more heavily in markets where we have established branding than in new markets.

Our amortization expense increased through fiscal year 2002 as the costs of purchased subscriber bases were written off. No amortization expense was recorded for the twelve months ended June 30, 2003 and no amortization expense will be recorded for future periods because all of the Company’s intangible assets, excluding goodwill, were fully amortized by June 30, 2002 and, in addition, the adoption of Statement of Financial Accounting Standards Board No. 142, “Goodwill and Other Intangible Assets”, “SFAS No. 142” related to intangible assets as of July 1, 2002 and our test for impairment in June 2003 resulted in no impairment related to goodwill.

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We have an accumulated deficit of $52.8 million at June 30, 2003 and have had annual operating losses since inception until the current fiscal year as a result of building network infrastructure and rapidly increasing market share.

Statement of Operations

Internet services revenue is derived from individual dial-up Internet access, including analog and ISDN access, DSL access, dedicated connectivity, bulk dial-up access, Web hosting services, and value-added services, such as multiple e-mail boxes and personalized e-mail addresses.

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, 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 and (ii) fees paid to backbone providers for connections from our network to the Internet.

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 business expenses.

Depreciation and amortization are computed using the straight line method over the estimated useful lives of the assets. Data communications equipment, computers, data servers and office equipment are depreciated over three years. We depreciate furniture, fixtures and leasehold improvements over five years. For fiscal years prior and ending June 30, 2002, purchased subscriber bases and related goodwill were amortized over 30 to 36 months. Effective July 1, 2002, it was determined that the Company’s goodwill would not be amortized due to the adoption of SFAS No. 142.

Our business is not subject to any significant seasonal influences.

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Results of Operations

Year Ended June 30, 2003 Compared to June 30, 2002

The following table shows financial data for the years ended June 30, 2003 and 2002. Operating results for any period are not necessarily indicative of results for any future period. Dollar amounts are shown in thousands (except per share data).

	Year Ended June 30, 2003					Year Ended June 30, 2002
	(000’s)			% of Revenues		(000’s)			% of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services	$	17,493		99.8	%	$	25,417		99.7	%
Other		30		0.2	%		73		0.3	%
Total		17,523		100.0	%		25,490		100.0	%
OPERATING COSTS AND EXPENSES:
Connectivity and operations		8,736		49.9	%		12,719		49.9	%
Sales and marketing		487		2.8	%		699		2.7	%
General and administrative		4,333		24.7	%		5,335		20.9	%
Provision for bad debt expense		703		4.0	%		2,254		8.8	%
Depreciation and amortization		669		3.8	%		15,510		60.8	%
Accrued lawsuit gain		(321	)	(1.8	)%		—		0.0	%
Total		14,607		83.4	%		36,517		143.3	%
OPERATING INCOME (LOSS)		2,916		16.6	%		(11,027	)	(43.3	)%
INTEREST EXPENSE, NET		(614	)	(3.5	)%		(538	)	(2.1	)%
NET INCOME (LOSS)	$	2,302		13.1	%	$	(11,565	)	(45.4	)%
NET INCOME (LOSS) PER COMMON SHARE:
BASIC	$	0.22				$	(1.15	)
DILUTED	$	0.22				$	(1.15	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,255,671					10,049,450
DILUTED		10,268,296					10,049,450
OTHER DATA:
Subscribers at end of period		82,000					125,000
Number of employees at end of period		119					160
EBITDA(1)	$	3,585				$	4,483
EBITDA margin(2)		20.5	%				17.6	%
CASH FLOW DATA:
Cash flow from operations	$	(762	)			$	2,714
Cash flow used in investing activities	$	(143	)			$	(552	)
Cash flow used in financing activities	$	(29	)			$	(774	)
Reconciliation of net loss to EBITDA:
Net income (loss)	$	2,302				$	(11,565	)
Add:
Depreciation and amortization		669					15,510
Interest expense, net		614					538
EBITDA(1)	$	3,585				$	4,483

(1) 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.

(2) EBITDA margin represents EBITDA as a percentage of total revenue.

Total revenue. Total revenue, which primarily consists of dial-up internet access revenue, decreased by $8.0 million, or 31.4%, to $17.5 million in fiscal 2003 from $25.5 million in fiscal 2002. The Company’s subscriber count decreased by 43,000, or 34.4%, to 82,000 as of June 30, 2003 compared to 125,000 as of June 30, 2002. The decrease in the subscriber count is attributable to tightened credit policies and procedures, normal customer attrition exceeding our rate of new sales, and the loss of DSL customers due to the bankruptcy of one of our DSL providers. Our subscriber count also decreased due to the consolidation of several billing systems which eliminated counting multiple products sold to one customer, which did not impact revenues.

Connectivity and operations. Connectivity and operations expenses decreased by $4.0 million, or 31.5%, to $8.7 million for fiscal 2003 from $12.7 million for fiscal 2002. The decrease is primarily due to the consolidation of internet and telephone connections and

12

circuits which was a result of decreased revenues. As a percentage of total revenue, connectivity and operations expenses remained constant at 49.9% for the current fiscal year compared to the prior fiscal year.

Sales and marketing. Sales and marketing expenses decreased by $212,000, or 30.3%, to $487,000 for fiscal 2003 from $699,000 for the prior fiscal year. The majority of the decrease relates to a reduction of personnel costs. Sales and marketing expense as a percentage of revenue remained fairly constant at 2.8% for the current fiscal year compared to 2.7% for the prior fiscal year. In the future, we plan to increase sales and marketing expenditures to the extent we can develop cost effective and efficient techniques in the sale of new and existing products.

General and administrative. General and administrative expenses decreased by $1.0 million, or 18.9%, to $4.3 million for fiscal 2003 from $5.3 million for fiscal 2002. The decrease is mainly related to our overall effort in cost reduction including the consolidation of operations. General and administrative expenses as a percentage of total revenue increased to 24.7% in fiscal 2003 from 20.9% in the prior year.

Provision for bad debt expense. Provision for bad debt expense decreased by $1.6 million, or 69.6%, to $0.7 million for fiscal 2003 from $2.3 million for fiscal 2002. Provision for bad debt expense as a percentage of revenue decreased to 4.0 % in fiscal 2003 from 8.8% in the prior fiscal year due to tightened credit policies and procedures. As of June 30, 2003, we are fully reserved for all customer accounts that are at least 90 days old.

Depreciation and amortization. Depreciation and amortization expense decreased significantly by $14.8 million, or 95.5%, to $0.7 million for fiscal 2003 from $15.5 million for fiscal 2002. Due to the adoption of SFAS No. 142, we recorded no amortization expense for fiscal 2003. Amortization expense was $14.1 million for fiscal 2002.

Accrued lawsuit gain. The $321,000 gain for fiscal year 2003 represents the excess reserve related to the settlement of the Carradine lawsuit which was offset with legal fees related to the lawsuit. See Item 3, Legal Proceedings.

Interest expense, net. Interest expense increased $76,000, or 14.1%, to $614,000 for fiscal 2003 from $538,000 for fiscal 2002. We recorded $150,000 in interest expense for fiscal 2003 related to the fair value of the option which was purchased from Mr. Hunt. We recorded post judgment interest related to an adverse judgment in the Carradine litigation of $240,000 for fiscal year 2003 compared to $320,000 for fiscal year 2002, a decrease of $80,000.

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Year Ended June 30, 2002 Compared to June 30, 2001

The following table shows financial data for the years ended June 30, 2002 and 2001. Operating results for any period are not necessarily indicative of results for any future period. Dollar amounts are shown in thousands (except per share data).

	Year Ended June 30, 2002					Year Ended June 30, 2001
	(000’s)			% of Revenues		(000’s)			% of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services	$	25,417		99.7	%	$	34,642		99.3	%
Other		73		0.3	%		233		0.7	%
Total		25,490		100.0	%		34,875		100.0	%
OPERATING COSTS AND EXPENSES:
Connectivity and operations		12,719		49.9	%		22,013		63.1	%
Sales and marketing		699		2.7	%		3,348		9.6	%
General and administrative		5,335		20.9	%		7,714		22.1	%
Provision for bad debt expense		2,254		8.8	%		3,282		9.4	%
Depreciation and amortization		15,510		60.8	%		15,787		45.3	%
Gain on vendor settlement		—		0.0	%		(2,395	)	(6.9	)%
Accrued lawsuit expense		—		0.0	%		3,200		9.2	%
Total		36,517		143.3	%		52,949		151.8	%
OPERATING LOSS		(11,027	)	(43.3	)%		(18,074	)	(51.8	)%
INTEREST EXPENSE, NET		(538	)	(2.1	)%		7		0.0	%
NET LOSS	$	(11,565	)	(45.4	)%	$	(18,067	)	(51.8	)%
100 NET LOSS PER COMMON SHARE:
BASIC	$	(1.15	)			$	(1.82	)
DILUTED	$	(1.15	)			$	(1.82	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,049,450					9,906,502
DILUTED		10,049,450					9,906,502
OTHER DATA:
Subscribers at end of period		125,000					147,000
Number of employees at end of period		160					200
EBITDA(1)	$	4,483				$	(2,287	)
EBITDA margin(2)		17.6	%				(6.6	)%
CASH FLOW DATA:
Cash flow from operations	$	2,714				$	1,091
Cash flow used in investing activities	$	(552	)			$	(491	)
Cash flow used in financing activities	$	(774	)			$	(461	)
Reconciliation of net loss to EBITDA:
Net loss	$	(11,565	)			$	(18,067	)
Add:
Depreciation and amortization		15,510					15,787
Interest expense, net		538					(7	)
EBITDA(1)	$	4,483				$	(2,287	)

(1) 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.

(2) EBITDA margin represents EBITDA as a percentage of total revenue.

Total revenue. Total revenue decreased by $9.4 million, or 26.9%, to $25.5 million in fiscal 2002 from $34.9 million in fiscal 2001. The decrease in total revenue is primarily attributable to the sale of DSL customers to Covad as part of a settlement agreement with Covad, tightened credit policies and normal customer attrition exceeding our rate of new sales. Our subscriber count decreased by 22,000, or 15%, to 125,000 as of June 30, 2002 compared to 147,000 as of June 30, 2001.

Connectivity and operations. Connectivity and operations expenses decreased by $9.3 million, or 42.3%, to $12.7 million for fiscal 2002 from $22.0 million for fiscal 2001. As a percentage of total revenue, connectivity and operations expenses decreased to 49.9% for the current year from 63.1% for the previous year. The decrease is primarily due to the costs eliminated as a result of the sale of DSL customers to Covad, our consolidation of operations and a decrease in our per unit connectivity costs.

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Sales and marketing. Sales and marketing expenses decreased by $2.6 million, or 78.8%, to $0.7 million for fiscal 2002 from $3.3 million for the prior fiscal year. Sales and marketing expense decreased as a percentage of revenue to 2.7% for the current year from 9.6% for the previous year. The majority of the decrease relates to an elimination of television advertising in all markets.

General and administrative. General and administrative expenses decreased by $2.4 million, or 31.2%, to $5.3 million for fiscal 2002 from $7.7 million for fiscal 2001. General and administrative expenses as a percentage of total revenue decreased to 20.9% in fiscal 2002 from 22.1% in the prior year. General and administrative expense for the year ended June 30, 2001 includes $567,500 in non-cash compensation expense related to an officer’s stock purchase agreement compared to only $30,000 for the year ended June 30, 2002. The remainder of the decrease is related to consolidation of operations.

Provision for bad debt expense. Provision for bad debt expense decreased by $1.0 million, or 30.3%, to $2.3 million for fiscal 2002 from $3.3 million for fiscal 2001. Provision for bad debt expense as a percentage of revenue decreased to 8.8% in fiscal 2002 from 9.4% in the prior year. As of June 30, 2002, we were fully reserved for all customer accounts that were at least 90 days old.

Depreciation and amortization. Depreciation and amortization expense decreased by $0.3 million, or 1.9%, to $15.5 million for fiscal 2002 from $15.8 million for fiscal 2001.

Gain on vendor settlement. We recognized a gain of $2.4 million for fiscal year 2001 in connection with the settlement agreement with Covad.

Accrued lawsuit expense. A charge of $3.2 million was recorded for fiscal year 2001 due to the adverse judgment in the Carradine litigation. See Item 3, Legal Proceedings.

Interest expense, net. Interest expense was $538,000 for fiscal 2002 compared to interest income of $7,000 for fiscal 2001. The interest expense for fiscal 2002 is mainly due to post judgment interest of approximately $320,000 related to an adverse judgment in the Carradine litigation and $207,000 in interest expense related to a $3.3 million letter of credit agreement with a former director, William O. Hunt.

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.

Net cash (used in) or provided by operations totaled ($762,000) for fiscal 2003 compared to $2.7 million for fiscal 2002. Net cash used in operating activities for fiscal 2003 was negatively impacted by the $3.25 million Carradine lawsuit settlement and the $761,000 decrease in deferred revenue. Deferred revenue decreased as a result of the decrease in our subscriber count.

Net cash used in investing activities was $143,000 for fiscal 2003 compared to $551,000 for fiscal 2002, and consisted of equipment lease buyouts and routine purchases of property and equipment to expand and upgrade our network.

For fiscal 2003, net cash used in financing activities totaled $29,000 compared to $774,000 for fiscal 2002. Net cash used for financing activities for fiscal 2003 consisted of proceeds of $56,000 from the issuance of common stock related to the employee stock purchase plan offset by payments of $85,000 to service capital lease and long-term debt obligations. Net cash used for financing activities for fiscal 2002 consisted of proceeds of $37,000 from the issuance of common stock related to the employee stock purchase plan offset by payments of $811,000 to service long-term debt and capital lease obligations.

On September 18, 2001, we entered into an agreement with a former director, William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter of credit in the approximate amount of $3.3 million to appeal a judgment entered against the Company, Mr. Hunt and a former executive officer of the Company. Internet America initially collateralized a portion of the appeal bond by placing approximately $200,000 in short term certificates of deposit required to be in place for the duration of the appeal. In August 2002, Internet America increased the amount of these short-term certificates of deposit by approximately $332,000 in order to significantly reduce the annual premium of the appeal bond. There were one time transaction costs to post this appeal bond. Annual recurring financing costs for this bond were up to $316,000. In connection with this agreement, we granted Mr. Hunt a security interest in our assets other than accounts receivable.

On May 6, 2003, the Company settled the judgment described in the preceding paragraph. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million had been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to

15

approximately $5.5 million, plus post-judgment interest. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million. As a result of the settlement, the appeal bond was released and, under the financing agreement with Mr. Hunt, Mr. Hunt received an option to purchase approximately 9,428,571 shares of common stock. We purchased the option from Mr. Hunt for $150,000 on September 3, 2003. See Note 12 – Subsequent Events of the Notes to the Consolidated Financial Statements.

We estimate that cash on hand of $2.0 million at June 30, 2003 along with anticipated cash flow from operations will be sufficient for meeting our working capital needs for fiscal 2004 with regard to continuing operations in existing markets. Additional financing will be required to fund acquisitions or expansion into new markets.

If additional capital financing arrangements, including public or private sales of debt or equity securities, or additional borrowings from commercial banks, 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. In such case, it is likely that our advertising expenditures would be downscaled to a level where positive cash flows are generated from operations. We have no long term advertising commitments.

In addition, the following are contractual cash obligations due by fiscal year for the Company as of June 30, 2003:

	Total		2004		2005		2006		2007
Connectivity contracts	$	1,415,670	$	1,364,373	$	51,297	$	—	$	—
Operating leases		798,160		291,311		225,266		225,266		56,317
Capital leases		14,235		14,235		—		—		—
	$	2,228,065	$	1,669,919	$	276,563	$	225,266	$	56,317

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We do not issue or engage in trading of market-risk sensitive instruments. We also do not purchase for investment, hedging or for purposes “other than trading”, instruments that are likely to expose the Company to market risk. We have not entered into any forward nor purchased any futures contracts, nor purchased any options or entered into any swaps. We invest in short-term high grade interest bearing instruments. In this regard, our interest income is most sensitive to changes in the general level of U.S. interest rates.

Item 8. Financial Statements and Supplementary Data

The financial statements of Internet America and Subsidiaries are attached hereto as pages F-1 through F-16 and include our Balance Sheets as of June 30, 2003 and 2002, Statements of Operations for the three years in the period ended June 30, 2003, Statements of Shareholders’ Equity for the three years in the period ended June 30, 2003, Statements of Cash Flows for the three years in the period ended June 30, 2003, and the Notes to the Consolidated Financial Statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. 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 June 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of June 30, 2003, 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 significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the conclusion of their evaluation.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Information required by this Item is incorporated by reference from the sections entitled “Election of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2003 Annual Meeting of Shareholders. Information about Executive Officers of the Company is included in Item 1 of Part I of this Annual Report on Form 10-K.

Item 11. Executive Compensation

Information required by this Item is incorporated by reference from the section entitled “Executive Compensation” in the Company’s Proxy Statement for its 2003 Annual Meeting of Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this Item is incorporated by reference from the section entitled “Security Ownership of Management and Certain Shareholders” in the Company’s Proxy Statement for its 2003 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

Information required by this Item is incorporated by reference from the section entitled “Certain Relationships and Related Transactions” in the Company’s Proxy Statement for its 2003 Annual Meeting of Shareholders.

Item 14. Principal Accountant Fees and Services

Information required by this Item is incorporated by reference from the section entitled “Principal Accountant Fees and Services” in the Company’s Proxy Statement for its 2003 Annual Meeting of Shareholders.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Documents filed as part of this Report:

Independent Auditors’ Report

  Consolidated Financial Statements of Internet America, Inc.

  Consolidated Balance Sheets

  Consolidated Statements of Operations

  Consolidated Statements of Shareholders’ Equity (Deficit)

  Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Internet America, Inc.’s Articles of Incorporation

Internet America, Inc.’s Bylaws, as amended

Amendment to Letter of Credit Security Commitment Agreement dated April 23, 2003

Redemption Agreement dated September 3, 2003

Consultation Agreement dated September 19, 2003

Statement regarding computation of per share earnings

Subsidiaries List

Consent of Deloitte & Touche LLP

Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.

Rule 13a-14(a)/15d-14(a) Certification of Mark Novy

Section 1350 Certification of William E. Ladin, Jr.

Section 1350 Certification of Mark Novy

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of fiscal 2003.

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(c) The following exhibits are either provided with this Report or are incorporated herein by reference:

Exhibit	Description
3.1	Internet America, Inc.’s Articles of Incorporation(1)
3.2	Internet America, Inc.’s Bylaws, as amended(2)
10.1	Amendment to Letter of Credit Security Commitment Agreement dated April 23, 2003 by and between Internet America, Inc. and William O. Hunt*
10.2	Redemption Agreement dated September 3, 2003 by and between Internet America, Inc. and William O. Hunt*
10.3	Consultation Agreement dated September 19, 2003 by and between Internet America, Inc. and Jack T. Smith*
11.1	Statement regarding computation of per share earnings(3)
21.1	Subsidiaries list*
23.1	Consent of Deloitte & Touche LLP*
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 Mark Novy*
32.1	Section 1350 Certification of William E. Ladin, Jr.*
32.2	Section 1350 Certification of Mark Novy*

*Filed herewith

(1) Previously filed as an exhibit to Internet America’s Registration Statement on Form SB-2 as amended (file no. 333-59527) initially filed on July 21, 1998, and incorporated herein by reference.

(2) Previously filed as an exhibit to Internet America’s Registration Statement on Form SB-2, as amended (file no. 333-59527) initially filed on July 21, 1998, and Quarterly Report on Form 10-QSB filed on November 15, 1999, and incorporated herein by reference.

(3) See Note 1 to the Financial Statements.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 29th day of September, 2003.

INTERNET AMERICA, INC.

/s/ William E. Ladin, Jr.

William E. (Billy) Ladin, Jr.

Chief Executive Officer

and Chairman of the Board

/s/ Mark Novy

Mark Novy

Chief Accounting Officer

and Controller

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ William E. Ladin, Jr. William E. (Billy) Ladin, Jr.	Chairman of the Board and Chief Executive Officer	September 29, 2003
/s/ Gary L. Corona Gary L. Corona	Director	September 29, 2003

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors’ Report	F-2
Consolidated Financial Statements:
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Shareholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

F-1

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of Internet America, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Internet America, Inc. and subsidiaries (the “Company”) as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 4 to the financial statements, the Company changed its method of accounting for goodwill as of July 1, 2002, as required by SFAS No. 142, “Goodwill and Other Intangible Assets”.

DELOITTE & TOUCHE LLP

Dallas, TX

September 3, 2003

F-2

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,
	2003			2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,968,091		$	2,901,545
Restricted cash		—			200,000
Accounts receivable, net of allowance for uncollectible accounts of $1,133,944 and $2,038,054 in 2003 and 2002, respectively		347,674			672,979
Prepaid expenses and other current assets		166,557			269,832
Total current assets		2,482,322			4,044,356
PROPERTY AND EQUIPMENT — Net		411,926			938,587
OTHER ASSETS — Net		4,380,393			4,451,044
TOTAL	$	7,274,641		$	9,433,987
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	795,714		$	853,538
Accrued liabilities		1,472,827			1,939,107
Deferred revenue		2,068,404			2,829,393
Current portion of capital lease obligations		14,096			73,480
Current maturities of long-term debt		—			6,746
Total current liabilities		4,351,041			5,702,264
CAPITAL LEASE OBLIGATIONS, net of current portion		—			18,749
ACCRUED LAWSUIT LIABILITY		—			3,300,000
Total liabilities		4,351,041			9,021,013
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS’ EQUITY:
Common stock, $.01 par value; 40,000,000 shares authorized, 10,337,476 and 10,105,249 issued and outstanding in 2003 and 2002, respectively		103,375			101,052
Additional paid-in capital		55,733,257			55,527,213
Note receivable from a shareholder		(82,000	)		(82,000	)
Accumulated deficit		(52,831,032	)		(55,133,291	)
Total shareholders’ equity		2,923,600			412,974
TOTAL	$	7,274,641		$	9,433,987

See notes to consolidated financial statements.

F-3

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended June 30,
	2003			2002			2001
REVENUES:
Internet Services	$	17,493,106		$	25,417,011		$	34,642,131
Other		30,030			72,885			232,722
Total		17,523,136			25,489,896			34,874,853
OPERATING COSTS AND EXPENSES:
Connectivity and operations		8,736,398			12,718,757			22,013,190
Sales and marketing		486,933			698,923			3,347,788
General and administrative		4,332,879			5,335,091			7,713,447
Provision for bad debt expense		702,580			2,253,582			3,282,854
Depreciation and amortization		669,383			15,510,588			15,786,281
Gain on vendor settlement		—			—			(2,395,401	)
Accrued lawsuit (gain) expense		(321,201	)		—			3,200,000
Total		14,606,972			36,516,941			52,948,159
INCOME (LOSS) FROM OPERATIONS		2,916,164			(11,027,045	)		(18,073,306	)
INTEREST INCOME		21,719			20,437			72,901
INTEREST EXPENSE		(635,624	)		(558,251	)		(66,220	)
INCOME (LOSS) BEFORE INCOME TAXES		2,302,259			(11,564,859	)		(18,066,625	)
INCOME TAX EXPENSE		—			—			(487	)
NET INCOME (LOSS)	$	2,302,259		$	(11,564,859	)	$	(18,067,112	)
NET INCOME (LOSS) PER COMMON SHARE:
BASIC	$	0.22		$	(1.15	)	$	(1.82	)
DILUTED	$	0.22		$	(1.15	)	$	(1.82	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,255,671			10,049,450			9,906,502
DILUTED		10,268,296			10,049,450			9,906,502

See notes to consolidated financial statements.

F-4

INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock					Additional Paid-in Capital			Note Receivable from Shareholder			Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount
BALANCE, JUNE 30, 2000	9,705,798		$	97,059		$	54,743,828		$	—		$	(25,501,320	)	$	29,339,567
Issuance of common stock	271,480			2,714			753,434			—			—			756,148
Note receivable from a shareholder for common stock	—			—			—			(685,500	)		—			(685,500	)
Stock compensation expense	—			—			567,500			—			—			567,500
Net loss	—			—			—			—			(18,067,112	)		(18,067,112	)
BALANCE, JUNE 30, 2001	9,977,278			99,773			56,064,762			(685,500	)		(43,568,432	)		11,910,603
Issuance of common stock	127,971			1,279			35,951			—			—			37,230
Put of common stock from a shareholder for note receivable	(200,000	)		(2,000	)		(685,500	)		685,500			—			(2,000	)
Note receivable from a shareholder for common stock	200,000			2,000			82,000			(82,000	)		—			2,000
Stock compensation expense	—			—			30,000			—			—			30,000
Net loss	—			—			—			—			(11,564,859	)		(11,564,859	)
BALANCE, JUNE 30, 2002	10,105,249			101,052			55,527,213			(82,000	)		(55,133,291	)		412,974
Issuance of common stock	232,227			2,323			54,044			—			—			56,367
Stock compensation expense	—			—			2,000			—			—			2,000
Issuance of stock option pursuant to letter of credit agreement							150,000			—			—			150,000
Net income	—			—			—			—			2,302,259			2,302,259
BALANCE, JUNE 30, 2003	10,337,476		$	103,375		$	55,733,257		$	(82,000	)	$	(52,831,032	)	$	2,923,600

See notes to consolidated financial statements

F-5

INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended June 30,
	2003			2002			2001
OPERATING ACTIVITIES:
Net income (loss)	$	2,302,259		$	(11,564,859	)	$	(18,067,112	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		669,383			15,510,588			15,786,281
Provision for bad debt expense		702,580			2,253,582			3,282,354
Non-cash stock compensation expense		2,000			30,000			567,500
Issuance of stock option pursuant to letter of credit agreement		150,000			—			—
Gain on vendor settlement		—			—			(2,395,401	)
Changes in operating assets and liabilities:
Restricted cash		200,000			(200,000	)		—
Accounts receivable		(377,275	)		(1,200,010	)		(2,846,651	)
Prepaid expenses and other current assets		103,275			105,986			(227,046	)
Other assets		70,651			55,691			10,493
Accounts payable and accrued liabilities		(524,106	)		(739,118	)		2,153,375
Deferred revenue		(760,989	)		(1,538,123	)		(472,308	)
Accrued lawsuit expense		(3,300,000	)		—			3,300,000
Net cash (used in) provided by operating activities		(762,222	)		2,713,737			1,091,485
INVESTING ACTIVITIES:
Purchases of property and equipment, net		(142,720	)		(551,219	)		(491,176	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock		56,367			37,230			70,648
Principal payments under capital lease obligations		(78,133	)		(214,097	)		(255,396	)
Principal payments of long-term debt		(6,746	)		(597,229	)		(276,224	)
Net cash used in financing activities		(28,512	)		(774,096	)		(460,972	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(933,454	)		1,388,422			139,337
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		2,901,545			1,513,123			1,373,786
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,968,091		$	2,901,545		$	1,513,123
SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	245,624		$	238,251		$	66,220
Equipment acquired under capital leases	$	—		$	107,682		$	—
Issuance of 200,000 shares of common stock in exchange for note receivable from a shareholder and officer of the company	$	—		$	82,000		$	685,500
Conversion of vendor payable to note payable as part of vendor settlement	$	—		$	—		$	650,000

See notes to consolidated financial statements.

F-6

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003 and 2002

1. General Information and Summary of Significant Accounting Policies

Basis of Presentation — Internet America, Inc. is an Internet service provider (“ISP”) in the southwestern United States. The Company provides a wide array of Internet services tailored to meet the needs of individual and business customers.

The Company has experienced cumulative operating losses, and its operations are subject to certain risks and uncertainties including, among others, risks associated with technology and regulatory trends, evolving industry standards, dependence on its network infrastructure and suppliers, growth and acquisitions, actual and prospective competition by entities with greater financial and other resources, the development of the Internet market and need for additional capital or refinancing of existing obligations. There can be no assurance that the Company will be successful in sustaining profitability and positive cash flow in the future.

Revenue Recognition — Revenues derived from monthly subscribers and set-up charges are recognized as services are provided. The Company bills its subscribers in advance for direct access to the Internet, but defers recognition of these revenues until the service is provided.

Credit Risk — The Company’s accounts receivable potentially subjects the Company to credit risk, as collateral is generally not required.

During the years ended June 30, 2003, 2002 and 2001, the Company has recorded a provision for bad debt expense totaling $0.7 million, $2.3 million, and $3.3 million, respectively. The charges were recorded as a result of monthly evaluations during the year of the collectibility of accounts receivable and as accounts became 90 days or older from the date of billing, including consumer accounts. Delinquent accounts deemed uncollectible were disconnected and collection efforts were continued on such accounts.

Financial Instruments — The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair values for debt and lease obligations, which have fixed interest rates, do not differ materially from their carrying values.

Cash and Cash Equivalents — Cash and cash equivalents consist of cash on hand and cash deposited in money market accounts. Cash and cash equivalents are stated at cost, which approximates fair value.

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

Equipment Under Capital Lease — The Company leases certain of its data communication and other equipment under agreements accounted for as capital leases. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital lease are depreciated over the shorter of their estimated useful lives or the related lease term.

Other Assets — Other assets consist primarily of subscriber acquisition costs and goodwill related to the acquisition of NeoSoft, Inc. and PDQ.Net, Incorporated. The Company allocates the purchase price to acquired subscriber bases and goodwill based on reasonable allocation methods at the time of acquisition. Prior to July 1, 2002, amortization of subscriber acquisition costs and goodwill were provided using the straight-line method over three years commencing upon completion of the transaction.

In July 2001, the Financial Accounting Standard Board issued Statement No. 141 (SFAS No. 141), “Business Combinations,” and Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill.

The Company evaluated the impact that SFAS No. 142 would have on its financial statements, and determined that, effective July 1, 2002, the Company’s goodwill would not be amortized.

F-7

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 August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS 144 are generally effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company’s adoption of this standard did not have a material impact on its financial statements.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the undiscounted future cash flows of an asset to be held and used in operations is less than the carrying value, the Company would recognize a loss for the difference between the carrying value and fair market value.

In July 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” SFAS 143 establishes standards associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company’s adoption of this standard did not have a material impact on its financial statements.

Stock-Based Compensation — The Company continues to account for its employee stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”) and provides pro forma disclosures in the notes to the financial statements, as if the measurement provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” had been adopted.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the interim disclosure provisions for the quarter ended March 31, 2003. The Company did not elect to change to the fair value based method of accounting for stock-based employee compensation.

Had compensation cost for the Company’s stock options been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company’s net income (loss) and income (loss) per share would have been as indicated below:

		2003		2002			2001
Net income (loss)	As reported	$	2,302,259	$	(11,564,859	)	$	(18,067,112	)
	Pro Forma		1,664,910		(12,437,266	)		(18,881,982	)
Basic and diluted income (loss) per share	As reported	$	0.22	$	(1.15	)	$	(1.82	)
	Pro Forma		0.16		(1.24	)		(1.91	)

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, 2003, 2002 and 2001 were $135,180, $144,349 and $1,953,810, respectively.

Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of existing assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in

F-8

which those temporary differences are expected to reverse.

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 dilutive effects of options, warrants and convertible securities. Diluted earnings per share reflects the potential dilution that could occur upon exercise or conversion of these instruments. Due to the net losses reported for the fiscal years ended June 30, 2002 and 2001, all of the Company’s stock options and warrants were antidilutive for those respective periods, and basic and diluted loss per share amounts were therefore the same for all periods presented.

	For the Years Ended June 30,
	2003		2002			2001
Basic earnings per share:
Net income (loss)	$	2,302,259	$	(11,564,859	)	$	(18,067,112	)
Weighted avg. common shares		10,255,671		10,049,450			9,906,502
Basic earnings per share	$	0.22	$	(1.15	)	$	(1.82	)
Diluted earnings per share:
Net income (loss)	$	2,302,259	$	(11,564,859	)	$	(18,067,112	)
Weighted avg. common shares		10,255,671		10,049,450			9,906,502
Effect of dilutive stock options		12,625		—			—
Diluted weighted avg. shares		10,268,296		10,049,450			9,906,502
Diluted earnings per share	$	0.22	$	(1.15	)	$	(1.82	)

During the year ended June 30, 2003, options to purchase 1,049,557 shares of common stock were not included in the computation of diluted earnings per share because the options were not “in the money” based on the average market price for the year ended June 30, 2003.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.

Comprehensive Income — The Company has no components of other comprehensive income such that comprehensive income is the same as net income for the years ended June 30, 2003, 2002 and 2001.

Recently Issued Accounting Pronouncements — In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the interim disclosure provisions for the quarter ended March 31, 2003. The Company did not elect to change to the fair value based method of accounting for stock-based employee compensation.

Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Covad Settlement

During fiscal 2001, the Company entered into a Purchase and Settlement Agreement with one of its DSL providers, Covad Communications, to resolve certain disputes and settle outstanding claims and liabilities between the companies. Under this agreement, the Company satisfied approximately $3.6 million in liabilities by transferring to Covad its Digital Subscriber Line (DSL) accounts then currently serviced by Covad, making an immediate payment to Covad of $300,000 and entering into a promissory note in the principal amount of $650,000. These DSL customers had the option to be migrated to Covad.net or to one of Covad’s Internet service providers. The Company continued to render services to those customers during the transition of accounts. In addition, the two companies released all claims in connection with their prior relationship. The total impact on the statement of operations of this transaction of approximately $2.7 million has been recorded against connectivity and operations expense ($0.3 million) and as a separate line item as a gain on vendor settlement ($2.4 million).

F-9

3. Property and Equipment

Property and equipment consist of:

	June 30,
	2003			2002
Data communications and office equipment	$	5,060,200		$	4,919,347
Leasehold improvements		632,390			632,390
Furniture and fixtures		252,562			252,562
Computer software		717,348			717,348
		6,662,400			6,521,647
Less accumulated depreciation and amortization		(6,250,474	)		(5,583,060	)
	$	411,926		$	938,587

Depreciation expense charged to operations was $669,383, $1,363,077 and $1,567,298 for the years ended June 30, 2003, 2002 and 2001, respectively.

4. Other Assets

Other assets consist of:

	June 30,
	2003			2002
Goodwill	$	26,023,407		$	26,023,407
Accum. amortization-goodwill		(21,721,395	)		(21,721,395	)
Acquired subscribers		—			16,814,981
Other		—			6,533
Accum. amortization-other		—			(16,821,514	)
Total intangible assets, net		4,302,012			4,302,012
Deposits		78,381			149,032
Total other assets, net	$	4,380,393		$	4,451,044

Other assets consist primarily of subscriber acquisition costs and goodwill related to the acquisition of NeoSoft, Inc. and PDQ.Net, Incorporated. The Company allocates the purchase price to acquired subscriber bases and goodwill based on reasonable allocation methods at the time of acquisition. Prior to July 1, 2002, amortization of subscriber acquisition costs and goodwill were provided using the straight-line method over three years commencing upon completion of the transaction.

Acquired subscribers were fully amortized as of June 30, 2002. Upon adoption of SFAS No. 142 on July 1, 2002, no further amortization expense was recorded. Amortization expense for the years ended June 30, 2002 and 2001 was $14.1 million and $14.2 million, respectively.

In connection with the adoption of SFAS No.142, goodwill as of June 30, 2003 was evaluated and tested to determine if there was any impairment of goodwill. The evaluation was based on undiscounted cash flow projections of the Company. An excess of carrying value over projected undiscounted cash flows would result in recognition of an impairment loss. As of June 30, 2003, no impairment loss was recorded based on the evaluation. Goodwill will be evaluated and tested for any impairment on an annual basis as of June 30.

The Company adopted SFAS No. 142 effective July 1, 2002. If the Company had adopted SFAS No. 142 on July 1, 2001, the Company’s results of operations would have been as follows:

	For the Years Ended June 30,					2001
	2003		2002
Reported net income (loss)	$	2,302,259	$	(11,564,859	)	$	(18,067,112	)
Add back amortization expense		—		8,800,000			8,800,000
Pro forma net income (loss)	$	2,302,259	$	(2,764,859	)	$	(9,267,112	)
Reported net income (loss) per share	$	0.22	$	(1.15	)	$	(1.82	)
Add back amortization expense		—		0.87			0.88
Pro forma net income (loss) per share	$	0.22	$	(0.28	)	$	(0.94	)

F-10

5. Accrued Liabilities

Accrued liabilities consists of:

	June 30,
	2003		2002
Telecommunications expenses	$	429,960	$	431,250
Employee wages and benefits		341,891		499,682
Acquisition fees		325,749		325,749
Accrued interest		—		220,001
Deferred rent		37,580		192,626
Reserve for settlement expense		131,572		—
Property, franchise and sales tax expenses		66,583		111,658
Other		139,492		158,141
	$	1,472,827	$	1,939,107

6. Long-Term Debt

Long-term debt consists of:

	June 30,
	2003		2002
Other notes payable due from March 2000 through July 2002, with interest ranging from the prime rate to 16%		—		6,746
		—		6,746
Less current portion		—		(6,746	)
	$	—	$	—

7. Commitments and Contingencies

The Company leases certain of its facilities under operating leases. Rental expense under these leases was approximately $584,966, $1,085,958 and $1,113,830 for the years ended June 30, 2003, 2002 and 2001, respectively. At June 30, 2003, future minimum lease payments on capital and operating leases were approximately as follows:

	Capital Leases			Operating Leases
2004	$	14,235		$	291,311
2005		—			225,266
2006		—			225,266
2007		—			56,317
Thereafter		—			—
Total minimum lease payments		14,235		$	798,160
Less amounts representing interest		(139	)
Present value of minimum capitalized lease payments		14,096
Less current portion		(14,096	)
Long-term capitalized lease obligations	$	—

In the normal course of business, the Company enters into telephone and internet backbone connectivity contracts with various vendors. The Company currently has minimum annual obligations as follows: $1,364,373 for the fiscal year ended 2004, $51,297 for the fiscal year ended 2005 and $0 thereafter.

In July 2001, a District Court of Dallas County, Texas entered a judgment against the Company and two former directors in the approximate amount of $3.2 million, plus post judgment interest. The plaintiff is a former employee who asserted claims for fraud in connection with her sale of options to the Company in 1998. The Company agreed to indemnify the individual defendants for losses incurred by them in connection with this lawsuit. The plaintiff had also filed an appeal to increase the amount of the judgment to approximately $5.5 million, plus post judgment interest. The Company accrued $3.3 million (including $100,000 of prepaid post-judgment interest) during fiscal 2001 in the event the judgment was not overturned. The Company recorded the judgment and charged operations in the fiscal year ended June 30, 2001.

On September 18, 2001, the company entered into a Letter of Credit Security Commitment Agreement with William O. Hunt, one of the individual defendants and then the Company’s Chairman, to finance an appeal bond in the approximate amount of $3.3 million in connection with the judgment entered against the Company. Under this agreement, Mr. Hunt collateralized a letter of credit in the

F-11

amount of $3.3 million and the Company paid Mr. Hunt a commitment fee of 8% per annum, paid quarterly. The Company paid the commitment fee to Mr. Hunt through June 6, 2003, the date the court released the appeal bond.

On May 6, 2003, the Company entered into a settlement agreement with the plaintiff and made a cash payment of $3.25 million to the plaintiff. Prior to the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million. As a result of the settlement of the judgment, the Company notified Mr. Hunt that it reduced the collateral in full. Accordingly, under the Letter of Credit Security Commitment Agreement, the Company issued to Mr. Hunt a transferable option to purchase 9,428,571 shares of common stock of the Company at a price of $0.35 per share. On September 3, 2003, the Company purchased the option from Mr. Hunt for $150,000. The estimated fair value of the option of $150,000 was recorded as interest expense and additional paid in capital in May 2003.

On July 16, 2003, the District Court of Harris County, Texas issued a summary judgment in favor of Internet America in a lawsuit filed by William E. Ladin, Jr., then the Vice Chairman of the Board and now CEO and Chairman of the Board. In the lawsuit, Mr. Ladin alleged that Internet America breached an employment agreement when it terminated his employment in November 2001, and sought damages, interest and attorneys’ fees. The judgment was final on August 15, 2003.

The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations and cash flows.

8. Shareholders’ Equity

Earnings Per Share — Potentially dilutive securities have been excluded from the computation of earnings per share (“EPS”) for the years ended June 30, 2002 and 2001 as their effect is antidilutive. For the year ended June 30, 2003, options to purchase 58,000 shares of common stock were included in the computation of diluted EPS because the options were “in the money” as of June 30, 2003 and it resulted in 12,625 common stock equivalents to be added to the weighted average shares for the year ended June 30, 2003 (determined using the treasury stock method at the estimated average fair value).

Common Stock — The Company has authorized 40,000,000 shares of $0.01 par value common stock.

Note Receivable from a shareholder and officer for common stock — Pursuant to a Stock Purchase Agreement entered into during September 2000, the Company issued 200,000 shares of its common stock to an officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $685,500. The note provided for payment of interest on a quarterly basis beginning October 1, 2000 with principal due August 29, 2007. The purchase price of the common stock under the Stock Purchase Agreement was based on the closing price of the common stock on the date the Company’s board of directors approved the transaction.

Under the terms of the Stock Purchase Agreement, the officer had the option to put the shares of common stock to the Company during the term (which would have expired September 5, 2007) of the Stock Purchase Agreement for $3.4375 per share. In connection with the put option, the Company recognized a non-cash compensation expense of $567,500 during the year ended June 30, 2001, which was a result of the decrease in the price of the Company’s common stock between the date of the Stock Purchase Agreement and June 30, 2001. The officer exercised the put agreement on August 6, 2001. In connection with the put option, the Company recognized a non-cash compensation expense of $30,000 during the year ended June 30, 2002, which was a result of the decrease in the price of the Company’s common stock between July 1, 2001 and August 6, 2001.

On August 6, 2001, another stock purchase agreement was entered into between the officer and the Company. The Company issued 200,000 shares of common stock to the officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $82,000. Under the terms of this Stock Purchase Agreement, the officer has the option to put the shares of common stock to the Company during the term of the Stock Purchase Agreement for $0.42 per share. In connection with the put option, the Company recognized non-cash compensation expense of $2,000 during the year ended June 30, 2003, based on the price of the Company’s common stock as of June 30, 2003.

Employee Stock Purchase Plan — Effective April 30, 1999, the Company’s Board of Directors adopted the Employee Stock Purchase Plan (the “Purchase Plan”), which initially provided for the issuance of a maximum of 200,000 shares of Common Stock and was initially approved by the Company’s shareholders on November 4, 1999. In fiscal 2002, the Board of Directors approved an amendment including the reservation of an additional 500,000 shares for issuance under the Purchase Plan, which amendment was approved by the shareholders on November 11, 2002. Eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s Common Stock on every July 1, October 1, January 1 and April 1. The price of the Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each three-month offering period or the specified purchase date. During the year ended

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2003, 232,227 shares were purchased ranging in price from $0.22 to $0.28 per share. At June 30, 2003, 267,789 shares were available under the Purchase Plan for future issuance.

Stock Option Plans — The Company’s 1996 Nonqualified Stock Option Plan (the “1996 Option Plan”) was adopted by the Board of Directors and the Company’s shareholders in December 1996. Pursuant to the 1996 Option Plan, the Company may grant incentive and nonqualified stock options to key employees of the Company. A total of 225,000 shares of common stock have been reserved for issuance under the 1996 Option Plan.

The maximum term of options granted under the 1996 Option Plan is ten years. The aggregate fair market value of the stock with respect to which incentive stock options are first exercisable in any calendar year may not exceed $100,000 per incidence. The exercise price of incentive stock options must be equal or greater than the fair market value of common stock on the date of grant. The exercise price of incentive stock options granted to any person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock must be at least 110% of the fair market value of such stock on the date of grant, and the term of these options cannot exceed five years. The Company currently has 6,890 options outstanding to its employees under the 1996 Option Plan at June 30, 2003. These options are exercisable at $1.67 per share of common stock.

The Company’s 1998 Nonqualified Stock Option Plan (the “1998 Option Plan”) was adopted by the Board of Directors and the Company’s shareholders in July 1998. A total of 1,200,000 shares of common stock have been reserved for issuance under the 1998 Option Plan.

The maximum term of options granted under the 1998 Option Plan is ten years. Options granted under the 1998 Option Plan are in most cases nontransferable and generally expire within 30 days after the termination of the optionee’s services, except in cases when the optionee is terminated “for cause” (as such term is defined therein). In such cases, the option typically expires automatically on the date of termination. In general, if an optionee is disabled or dies, such option may be exercised up to 12 months following such disability or death, unless the Compensation Committee determines to allow a longer period for exercise. In general, if an optionee retires from his or her service to us, such option may be exercised up to three months following such retirement, unless the Compensation Committee determines to allow a longer period for exercise. The Company currently has 524,088 options outstanding to its employees under the 1998 Option Plan at June 30, 2003. These options are exercisable at prices ranging at $0.34 to $13.75 per share of common stock.

During fiscal 2002, 190,000 options to purchase shares of common stock were granted to certain officers and employees of the Company under the 1998 Option Plan at exercise prices ranging from $0.34 to $0.35 per share which were equal to the fair market values on the dates of grant.

The Company’s Employee and Consultant Stock Option Plan (the “Employee and Consultant Option Plan”) was approved by the Board of Directors in September 1999 in connection with the acquisition of PDQ. The plan was subsequently approved by the shareholders at a special meeting of shareholders in November 1999. This plan was created in connection with the acquisition of PDQ so that each outstanding PDQ incentive stock option could be exchanged for an incentive stock option to purchase Internet America Common Stock. Pursuant to the Employee and Consultant Stock Option Plan, the company may grant incentive and nonqualified stock options to our employees, consultants, directors and advisors. A total of 260,063 shares of Common Stock have been reserved for issuance under the Employee and Consultant Option Plan and 1,953 were still outstanding at June 30, 2003. These options are exercisable at $2.69 per share of common stock.

The Company also has granted nonqualified stock options to employees that are not included under any of the stock option plans noted above. The Company currently has 574,626 options outstanding to its employees that are not related to any plan at June 30, 2003. These options are exercisable at prices ranging at $0.09 to $2.25 per share of common stock. The strike price of these options were equal to the fair market value of the stock on the date of grant.

The Company applies APB No. 25 and related Interpretations in accounting for its employee plans. The estimated fair value of each option grant was determined by reference to quoted market price or recent private, arm’s length sales of common and preferred stock prior to the company’s initial public offering. In cases where there were no arm’s length transactions on or around the date of an option grant, the Board of Directors determined the value. No compensation expense has been charged against operations for the years ended June 30, 2003, 2002 and 2001 related to stock option plans.

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A summary of the status of the Company’s stock options as of June 30, 2003, 2002, and 2001, and changes during the years ended on those dates is presented below:

	2003				2002				2001
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of period	1,119,323		$	3.88	1,103,002		$	4.17	1,247,663		$	3.77
Granted	—			—	190,000			0.35	215,000			2.02
Exercised	—			—	—			—	(8,920	)		1.68
Forfeited	(11,766	)		11.43	(173,679	)		1.86	(350,741	)		8.10
Outstanding at end of Period	1,107,557			3.80	1,119,323			3.88	1,103,002			4.17
Options exercisable at year end	859,807			4.14	740,335			4.21	704,075			3.80

The following table summarizes information about stock options outstanding at June 30, 2003:

	Options Exercisable		Options Outstanding
Range of Exercise Prices	Number Outstanding at 6/30/03	Weighted-Average Remaining Contractual Life as of 6/30/03(Years)	Number Exercisable at 6/30/03
$  0.09	18,000	2.2	18,000
0.34	40,000	8.5	20,000
0.35	150,000	8.1	37,500
1.12	60,588	3.8	60,588
1.67	413,516	1.7	413,516
2.25	150,000	7.3	75,000
2.69	1,953	6.0	1,953
8.00	22,500	5.0	22,500
9.25	54,000	6.5	40,500
10.00	75,000	6.4	56,250
13.00	67,500	5.4	67,500
13.19	22,500	6.5	22,500
13.75	32,000	6.1	24,000
	1,107,557		859,807

The fair value of each option granted is estimated using the Black-Scholes pricing model with the following assumptions: option term until exercise ranging from 2 to 10 years, volatility ranging from 80% to 120%, risk-free interest rate of 5.0%, and an expected dividend yield of zero. The weighted average grant date fair value of options granted was $0.33 and $1.94 for the years ended June 30, 2002 and 2001, respectively. No options were granted during the year ended June 30, 2003.

9. Income Taxes

No provision for federal income taxes has been recognized for the years ended June 30, 2003, 2002 and 2001. For the years ended June 30, 2003 and 2001, the Company has incurred net operating losses for income tax purposes and has no carryback potential. For the year ended June 30, 2002, the Company incurred taxable income, and offset such taxable income with net operating losses generated in prior periods.

Deferred tax assets and liabilities as of June 30, 2003 and 2002, consist of:

	June 30,
	2003			2002
Deferred tax assets:
Net operating loss carryforwards	$	8,402,000		$	7,402,000
Intangible assets		2,644,000			2,938,000
Allowance for doubtful accounts		386,000			878,000
Property and equipment		228,000			97,000
Legal settlement reserve		—			1,122,000
Other		85,000			183,000
Total deferred tax assets		11,745,000			12,620,000
Valuation allowance		(11,745,000	)		(12,620,000	)
Net deferred tax assets	$	—		$	—

The Company has provided a valuation allowance for net deferred tax assets, as it is more likely than not that these assets will not be realized.

At June 30, 2003, the Company has net operating loss carryforwards of approximately $24.7 million for federal income tax purposes. These net operating loss carryforwards may be carried forward in varying amounts until 2023 and may be limited in their use due to significant changes in the Company’s ownership.

F-14

A reconciliation of the income tax provision computed at statutory tax rates to the income tax provision for the years ended June 30, 2003, 2002 and 2001 is as follows:

	Years ended June 30,
	2003		2002		2001
Federal income tax benefit at statutory rate	(34	)%	(34	)%	(34	)%
Valuation allowance	34		(6	)	8
Amortization of goodwill	—		40		26
Total income tax provision	0	%	0	%	0	%

10. Employee Benefit Plan

The Company has established a 401(k) plan for the benefit of its employees. Employees may contribute to the plan up to 15% of their salary, pursuant to a salary reduction agreement, upon meeting age requirements. The Company made no discretionary contributions to the Plan through June 30, 2003.

11. Quarterly Financial Data (Unaudited)

	2003
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Revenues	$	4,986		$	4,627		$	4,192		$	3,718
Total expenses		4,270			3,781			3,514			3,0421
Income from operations		716			846			678			676
Net Income		572			704			535			491
Net Income Per Common Share:
BASIC	$	0.06		$	0.07		$	0.05		$	0.05
DILUTED	$	0.06		$	0.07		$	0.05		$	0.05
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,168			10,228			10,291			10,337
DILUTED		10,173			10,280			10,296			10,460
	2002
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Revenues	$	7,298		$	6,539		$	6,196		$	5,457
Total expenses		9,766			9,363			9,025			8,363
Loss from operations		(2,468	)		(2,824	)		(2,829	)		(2,906	)
Net Loss		(2,565	)		(2,975	)		(2,972	)		(3,053	)
Net Loss Per Common Share:
BASIC	$	(0.26	)	$	(0.30	)	$	(0.30	)	$	(0.30	)
DILUTED	$	(0.26	)	$	(0.30	)	$	(0.30	)	$	(0.30	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		10,002			10,027			10,065			10,105
DILUTED		10,002			10,027			10,065			10,105
	2001
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Revenues	$	8,967		$	8,742		$	8,758		$	8,408
Total expenses		14,001			14,884			12,226			11,8382
Loss from operations		(5,034	)		(6,142	)		(3,468	)		(3,430	)
Net Loss		(5,038	)		(6,139	)		(3,461			(3,428	)
Net Loss Per Common Share:
BASIC	$	(0.52	)	$	(0.62	)	$	(0.35	)	$	(0.34	)
DILUTED	$	(0.52	)	$	(0.62	)	$	(0.35	)	$	(0.34	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		9,773			9,927			9,951			9,977
DILUTED		9,773			9,927			9,951			9,977

¹ Included in expenses for the fourth quarter 2003 is a $321,000 benefit recognized in connection with the lawsuit settlement discussed in Note 7.

² Included in expenses for the fourth quarter 2001 are the $2.4 million gain recognized in connection with the Covad settlement discussed in Note 2 and the $3.2 million charge recorded related to the lawsuit judgment discussed in Note 7.

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12. Subsequent Events

On August 29, 2003, the Company filed a lawsuit in Dallas County District Court against a former director, William O. Hunt, in connection with his attempt to sell a controlling interest in the company. Mr. Hunt held an option to purchase 9,428,571 shares of the company’s common stock, which he obtained in connection with the financing of an appeal bond in 2001 and which became exercisable on June 6, 2003. Mr. Hunt’s stock and option, if exercised, would have constituted 51% of the company’s outstanding shares. The lawsuit alleged breaches of Mr. Hunt’s fiduciary duties in connection with his actions since the option became exercisable. On September 3, 2003, the Company purchased the option from Mr. Hunt for $150,000 and subsequently dismissed the lawsuit.

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EX-10.1

Exhibit 10.1

April 23, 2003

William O. Hunt

17604 Woods Edge Drive

Dallas, Texas 75287

Re: Letter of Credit Security Commitment Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt (the “Hunt Agreement”)

Dear Bill:

As you are aware, Internet America has been in discussions with Cindy Carradine regarding settlement of the judgment rendered against Internet America and the other defendants in the lawsuit styled Cindy Carradine v. Internet America, Inc., Michael T. Maples and William O. Hunt. If the defendants enter into a settlement agreement with Carradine (a “Settlement Agreement”), certain amendments to the Hunt Agreement may be necessary or desirable. This letter is intended to amend the Hunt Agreement in accordance with Section 13.6 of the Hunt Agreement.

If the defendants enter into a Settlement Agreement with Carradine, you agree to waive Internet America’s obligation to give you thirty days prior written notice of a reduction in commitment, as contained in Section 2.3 of the Hunt Agreement. You agree to allow Internet America to give you written notice of a reduction in commitment at the time of a Settlement Agreement. Should this occur, the Holder’s Election Notice, as defined in Section 2.3 of the Hunt Agreement, must be given within 120 days after the date of the Settlement Agreement, and Internet America will continue to pay you the commitment fee referenced in Section 2.2 of the Hunt Agreement until thirty days after the date of the Settlement Agreement or until the Commitment Termination Date, as defined in Article 1 of the Hunt Agreement, whichever is later. Notwithstanding the foregoing, should the Commitment Termination Date occur after thirty days after the date of a Settlement Agreement, then the Holder’s Election Notice must be given within 90 days after the Commitment Termination Date.

If you agree to this amendment to the Hunt Agreement, please sign below and return the executed original to me at your earliest convenience

INTERNET AMERICA, INC.

/s/ Jack T. Smith                        

Jack T. Smith, Chairman and CEO

AGREED:

/s/ William O. Hunt

William O. Hunt

Date: April 23, 2003

EX-10.2

Exhibit 10.2

REDEMPTION AGREEMENT

This Redemption Agreement, dated as of September 3, 2003 (this “Agreement”), is by and among William O. Hunt (“Hunt” or the “Seller”) and Internet America, Inc., a Texas corporation (the “Purchaser” or the “Company”).

WHEREAS, Hunt and the Company, are parties to that certain Letter of Credit Security Commitment Agreement, dated as of September 18, 2001, as amended pursuant to that certain amendment thereto dated April 23, 2003 (the “Letter of Credit Agreement”), pursuant to which, among other things, and in accordance with Section 2.3 thereof, Hunt and his assigns may elect to purchase 9,428,571 shares of Common Stock (the “Option Shares”) from the Company at a purchase price of $0.35 per share (the “Option”); and

WHEREAS, Hunt desires to transfer and assign to Purchaser the Option, and Purchaser desires to acquire and redeem the Option and such other rights on the terms and subject to the conditions set forth herein; and

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 DEFINED TERMS. The following terms, as used herein, shall have the following meanings:

“Affiliate” means, as to a Person, any other Person controlling, controlled by, or under common control with such first Person. As used in this definition, the term “control” means the power, directly or indirectly, to vote more than ten percent (10%) of the outstanding voting equity of an entity, or the right, directly or indirectly, to designate a majority of the directors of a Person (in the case of a corporation) or the Persons exercising similar functions (in the case of an unincorporated Person). All officers and directors of a Person shall be Affiliates of such Person.

“Agreement” has the meaning set forth in the first paragraph of this Agreement.

“Business Day” means any day other than a Saturday, Sunday, or other day on which federally chartered commercial banks in Dallas, Texas, are authorized by law to close.

“Claims” means all claims, demands, lawsuits, proceedings, losses, assessments, fines, penalties, administrative orders, obligations, costs, expenses, liabilities and damages, including interest, penalties and reasonable attorneys’ fees and costs of investigation asserted against or incurred by Purchaser.

“Common Stock” means the Company’s Common Stock.

“Company” has the meaning set forth in the recitals of this Agreement.

“Contractual Rights” means all of the rights of the Holder (as defined in the Letter of Credit Agreement) that are set forth in Section 2.3, Article VI, Article IX, Article XI, Article XII and Article XIII of the Letter of Credit Agreement, as well as all of the rights of the Holder set forth in or otherwise evidenced by the Registration Rights Agreement, the Security Agreement and the Financing Statements.

“Hunt” has the meaning set forth in the first paragraph of this Agreement.

“Law” or “Laws” means any and all applicable statutes, laws, ordinances, proclamations, regulations, published requirements, orders, decrees, and rules of any foreign, federal, state, or local government, political subdivision, or governmental or regulatory authority, agency, board, bureau, commission, instrumentality, or court or quasi-governmental authority, including, without limitation, those covering environmental, tax, energy, safety, health, transportation, bribery, record keeping, zoning, discrimination, antitrust, and wage and hour matters, and in each case as amended and in effect from time to time.

“Letter of Credit Agreement” has the meaning set forth in the recitals of this Agreement.

“Lien” means any lien, pledge, claim, charge, security interest, mortgage, or encumbrance of any nature whatsoever.

“Option” has the meaning set forth in the recitals of this Agreement.

“Person” means a corporation, an association, a partnership, a limited liability company, an organization, a business, any other entity, an individual, a government or political subdivision thereof, or a government agency.

“Purchaser” has the meaning set forth in the first paragraph of this Agreement.

“Purchaser’s Representatives” means Purchaser and its respective officers, directors, employees, agents, attorneys and Affiliates.

“Schedule” means a schedule accompanying this Agreement. The Schedules shall correspond to the numbered sections of this Agreement to which each Schedule relates. An item disclosed in a particular Schedule shall be deemed disclosed under the Schedule to which it is contained only.

“SEC” means the Securities and Exchange Commission.

“Security Agreement” means that certain Security Agreement, dated as of September 18, 2001, by and among the Company and Hunt.

“Seller” has the meaning set forth in the first paragraph of this Agreement.

“Transactions” means the transactions contemplated by this Agreement.

1.2 INTERPRETATION. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) the terms defined in Section 1.1 and elsewhere in this Agreement include the plural as well as the singular;

(b) all references to “Articles” and “Sections” shall be to Articles and Sections of this Agreement unless otherwise clearly indicated otherwise; and

(c) the words “herein,” “hereof,” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision.

ARTICLE II

THE TRANSACTIONS

2.1 DESCRIPTION OF THE TRANSACTIONS. Concurrently with the execution and delivery of this Agreement and subject to the terms and conditions hereof:

(a) Hunt hereby sells, transfers and assigns to Purchaser the Contractual Rights, free and clear of all Liens.

(b) Purchaser shall pay Hunt by wire transfer the sum of $150,000.

(c) The Company shall dismiss with prejudice the lawsuit against Hunt filed August 29, 2003, in the 44th Judicial District Court, Dallas County, Texas, by submitting to such court a Notice of Nonsuit with Prejudice and proposed Order for Dismissal with Prejudice in substantially the forms set forth as Exhibits A and B hereto, respectively. The Company and Hunt shall further execute mutual releases in the form as set forth as Exhibit C hereto.

2.2 FURTHER ASSURANCES. The parties shall, concurrently herewith and from time to time hereafter at the request of another party and without further consideration, execute and deliver or cause to be executed and delivered to the other party such further instruments of transfer, assignment and conveyance, and shall take or cause to be taken such other action as reasonably requested, as may be necessary to effectively transfer to Purchaser the Contractual Rights, and to implement and carry into effect the Transactions.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Purchaser as follows:

3.1 POWER; AUTHORIZATION. Seller has all requisite power and authority to execute and deliver this Agreement, to perform fully his obligations hereunder, and to consummate the

Transactions. The execution and delivery by Seller of this Agreement, and the consummation of the Transactions, have been duly authorized by all requisite action of Seller. Seller has duly executed and delivered this Agreement. This Agreement is a legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting generally the enforcement of creditors’ rights and by general principles of equity.

3.2 NO CONFLICTS. The execution, delivery and performance by Seller of this Agreement, and the consummation of the Transactions, do not and will not conflict with or result in a violation of or under (with or without the giving of notice or the lapse of time or both) (a) any Law applicable to a Seller or any of its respective properties or assets, or (b) any contract, agreement or other instrument applicable to a Seller or any of its respective properties or assets, including without limitation the Contractual Rights.

3.3 LITIGATION. Other than the lawsuit filed on August 29, 2003 by the Company, there is no action, claim, suit or proceeding pending, or to any Seller’s knowledge threatened, by or against or affecting Seller in connection with or relating to the Transactions or any action taken or to be taken in connection herewith or the consummation of the Transactions.

3.4 BROKERS. All negotiations relating to this Agreement, and the Transactions, have been carried on without the participation of any Person acting on behalf of Seller or his Affiliates in such manner as to give rise to any valid claim against Purchaser for any brokerage or finder’s commission, fee or similar compensation upon consummation of the Transactions.

3.5 OWNERSHIP, VALID ISSUANCE, TRANSFERABILITY AND ENFORCEABILITY; CAPITALIZATION. Hunt is the sole valid holder of any and all rights and interest as the “Holder” under the Letter of Credit Agreement and the Registration Rights Agreement (as such term is defined in each of such agreements), including, without limitation, the holder of the sole right to exercise the Option and to exercise the rights of a “Holder” under the Registration Rights Agreement, and such rights and interest were granted to Hunt in compliance with all applicable Laws and Hunt’s right to exercise the Option is fully enforceable by Hunt as against the Company. Hunt’s rights and interest as the “Holder” under the Letter of Credit Agreement, include, without limitation, the right to exercise the Option.

ARTICLE IV

INDEMNIFICATION

4.1 INDEMNIFICATION BY SELLER. Seller shall defend, indemnify, and hold Purchaser and the Purchaser’s Representatives harmless from, against and in respect of any and all Claims, which arise or result from or relate to:

(a) the untruth, breach, or failure of any representation or warranty made by Sellers under or contained in this Agreement or in any other document executed and delivered in connection with this Agreement; or

(b) the breach by Seller of or failure of Seller to perform any of his covenants, commitments, agreements or obligations under or contained in this Agreement or in any other document executed and delivered in connection with this Agreement.

4.2 INDEMNIFICATION BY PURCHASER. Purchaser shall defend, indemnify and hold Seller and his heirs, successors, assigns, agents and Affiliates, harmless from, against and in respect of any and all Claims, which arise or result from or relate to:

(a) the breach by Purchaser of or failure of Purchaser to perform any of its covenants, commitments, agreements or obligations under or contained in this Agreement or any other document executed and delivered in connection with this Agreement; or

(b) any Claim by or on behalf of the Company or its shareholders against Seller or his Affiliates based on any theory of recovery arising from or related to the Transactions hereby.

The obligations of Purchaser to indemnify Sellers under this Section shall include the obligation to defend any action subject hereto, including the fees of counsel to Sellers, even if separate counsel is required because of conflicts of interest. The obligations of Purchaser under this Section shall survive the closing of this Agreement.

4.3 NEGLIGENCE OF INDEMNITEE. THE RIGHTS OF A PARTY TO INDEMNIFICATION HEREUNDER SHALL NOT BE AFFECTED BY THE NEGLIGENCE OF ANY OTHER PARTY OR THEIR REPRESENTATIVES.

4.4 AFFIRMATION OF INDEMNITY AGREEMENT ETC. Purchaser hereby acknowledges that the Indemnity Agreement dated September 22, 1995 executed between Hunt and the Purchaser, as well as Purchaser’s bylaws and resolutions (including without limitation the resolutions of the Board of Directors dated August 15, 2001) remain effective in accordance with their respective terms.

ARTICLE V

MISCELLANEOUS

5.1 COOPERATION; RELATIONSHIP OF THE PARTIES. Seller hereby agrees to cooperate with Purchaser in all manners reasonably requested by Purchaser to effect the consummation of the Transactions and the intent of the parties as expressed in this Agreement.

5.2 NATURE OF STATEMENTS; SURVIVAL. All statements of fact contained in any documents delivered by or on behalf of any party pursuant or in connection with the Transactions shall be deemed representations and warranties of such party. Notwithstanding any investigation heretofore or hereafter made by or on behalf of any of the parties to this Agreement, the representations and warranties contained in this Agreement and in any other document executed and delivered in connection with this Agreement shall survive the consummation of the Transactions for a period of 12 months.

5.3 NOTICES. All notices, requests, consents, directions, and other instruments and communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, if sent by third party courier or overnight delivery service, if mailed first-class, postage prepaid, registered or certified mail, or if sent by telecopy, telecommunication or other similar form of communication (with receipt confirmed), as follows:

If to Sellers, to:	William O. Hunt
	17604 Woods Edge Drive
	Dallas, Texas 75287
	Facsimile: (972) 931-4032

with a copy (which shall not constitute notice) to:	Andrews & Kurth, L.L.P.
	1717 Main Street, Suite 3700
	Dallas, Texas 75201
	Attn: Ronald L. Brown
	Facsimile: (214) 659-4819

If to Purchaser, to:	Internet America, Inc.
	One Dallas Centre
	350 N. St. Paul, Suite 3000
	Dallas, Texas 75201
	Attn: CEO and Legal Department
	Facsimile: (214) 861-2663

with a copy (which shall not constitute notice) to:	Fulbright & Jaworski,L.L.P.
	1301 McKinney, Suite 5100
	Houston, Texas 77010-3034
	Attn: Robert F. Gray, Jr.
	Facsimile: (713) 651-5246

or to such other address and to the attention of such other person(s) or officer(s) as any party may designate by written notice. Any notice mailed shall be deemed to have been given and received on the third Business Day following the day of mailing.

5.4 ASSIGNMENT. No party to this Agreement may sell, transfer, assign, pledge, or hypothecate his or its rights, interests, or obligations under this Agreement without the prior written consent of the other parties hereto.

5.5 SUCCESSORS. This Agreement shall inure to the benefit of, be binding upon, and be enforceable by the parties hereto and their respective successors, heirs and permitted assigns.

5.6 ENTIRE AGREEMENT; MODIFICATION. This Agreement and the Exhibits and Schedules hereto and the other documents executed and delivered in connection with this Agreement constitute the entire agreement and understanding between the parties relating to the

subject matter hereof and thereof and supersede all prior representations, endorsements, premises, agreements, memoranda, communications, negotiations, discussions, understandings, and arrangements, whether oral, written, or inferred, between the parties relating to the subject matter hereof. This Agreement may not be modified, amended, rescinded, canceled, altered or supplemented, in whole or in part, except upon the execution and delivery of a written instrument executed by the parties hereto.

5.7 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in all respects in accordance with the laws of the State of Texas without regard to the conflicts of laws principles thereof. The parties agree that any litigation directly or indirectly relating to this Agreement must be brought before and determined by a court of competent jurisdiction within Dallas County, Texas, and the parties hereby agree to waive any rights to object to, and hereby agree to submit to, the jurisdiction of such courts.

5.8 WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition.

5.9 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.

5.10 NO THIRD PARTY BENEFICIARIES. Except to the extent a third party is expressly given rights herein, any agreement contained, expressed or implied in this Agreement shall be only for the benefit of the parties hereto and their respective legal representatives, successors, heirs and permitted assigns and such agreements shall not inure to the benefit of the obligees of any indebtedness of any party hereto, it being the intention of the parties hereto that no person or entity shall be deemed a third party beneficiary of this Agreement, except to the extent a third party is expressly given rights herein.

5.11 REMEDIES. In addition to the rights and remedies of the parties specifically provided for herein, each party hereto shall have such other remedies as shall be available under applicable law or in equity for the other party’s breach or failure to perform any of his or its representations, warranties, covenants, agreements, or obligations under or contained in this Agreement or in any other document executed and delivered in connection with this Agreement.

5.12 HEADINGS. The headings of the Articles, Sections, and subsections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof or affect in any way the meaning or interpretation of this Agreement.

5.13 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission will be deemed the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmission by signing a duplicate original document.

5.14 CONFIDENTIALITY. Each party agrees to maintain the confidentiality of the terms of this Agreement, except as disclosure thereof may be required by applicable laws or governmental, SRO or stock exchange rules or regulations.

5.15 TAX TREATMENT. Each party agrees to treat the Transactions hereby as a redemption of the Contractual Rights.

[The next following page is a signature page.]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.

PURCHASER:

INTERNET AMERICA, INC.

By: /s/ JACK T. SMITH

Jack T. Smith, President

SELLER:

/s/ WILLIAM O. HUNT

William O. Hunt

EX-10.3

Exhibit 10.3

CONSULTATION AGREEMENT

THIS CONSULTATION AGREEMENT made as of the 19th day of September, 2003, between Internet America, Inc., a Texas corporation, with its principal operating offices located in Dallas, Texas (the “Company”), and Jack T. Smith, residing in Dallas, Texas (the “Consultant”),

W I T N E S S E T H

WHEREAS, the Board of Directors of the Company (the “Board”) desires to obtain the services of the Consultant, and the Consultant has expertise that is pertinent to the business of the Company;

WHEREAS, the Board and the Company each desire that the services of the Consultant be provided to the Company upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows:

1. Services. Subject to the terms and conditions hereinafter set forth, the Consultant hereby agrees to advise the Board and the Company, in the capacity and for the Term hereof (as hereinafter defined).

2. Scope of Consultation. During the Term hereof, the Consultant shall serve as a general advisor and consultant to the Company and the Board on any matters pertaining to the business of the Company with respect to which the Board or the Chief Executive Officer of the Company seeks the Consultant’s advice.

3. Compensation. As compensation for his services hereunder, the Company shall pay the Consultant, subject to the terms and conditions of this Agreement, $10,000.00 per month during the Term hereof, with such payment beginning October 1 and continuing on the first day of each month of the Term thereafter.

4. Term. The “Term,” as used herein, shall mean a period commencing on the date hereof and ending on the first anniversary of the date hereof, unless sooner terminated by the Company upon a breach by Consultant of any term of this Agreement or by the Consultant upon written notice to the Company. At the end of the Term of this Agreement, the Company and the Consultant may agree to continue this Agreement under mutually acceptable terms.

5. Limitation on Authority. It is expressly understood and agreed that during the Term hereof and thereafter, Consultant shall not be authorized to enter into any contract on behalf of the Company or in any other manner whatsoever bind the Company without the prior written approval of the Board. Consultant agrees to make no representation to any person, corporation or firm inconsistent in any manner with the provisions of this Section 5.

6. Independent Contractor. The Consultant shall employ his own means and methods of accomplishing the projects assigned to him by the Board of the Company from time to time and shall not be subjected to the control of the Company in respect to the details of such work. During the Term, the Consultant may request the services of Beth Prothro to aid him in the completion of his duties and in transition from his former position as an officer of the Company, provided that such services do not interfere with the performance of her regular duties to the Company. Subject to the CEO’s prior approval, the Consultant may have contact with officers of the Company in fulfilling his duties hereunder as may be requested from time to time. It is understood and agreed that the Consultant shall act as an independent contractor in the undertaking of this Agreement. It is expressly understood and stipulated that no employer-employee relationship exists between the Company and the Consultant.

7. Advisory Board Member. The Board will appoint Consultant and Consultant will agree to serve during the Term as an Advisory Director to the Company pursuant to the Company’s Bylaws or until sooner terminated upon Consultant’s death, disability, resignation or removal. For so long as Consultant serves as an Advisory Director, Consultant may participate in the Company’s health insurance plan, subject to the terms and limitations of such plan and payment of the related premium by Consultant.

8. Assignment. This Agreement is a personal contract and the rights and interests of the Consultant hereunder may not be sold, transferred, assigned, pledged or hypothecated.

9. Successors. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns and upon the Consultant and his legal representatives.

10. Entire Agreement. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Consultant and the Chairman of the Board of the Company.

11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas.

12. Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and if to the Consultant, addressed to him at 100 Crescent Ct., Suite 1620, Dallas, TX 75201, and if to the Company, addressed to it at One Dallas Centre, 350 N. St. Paul, Suite 3000, Dallas, Texas 75201 (Attention: CEO and Legal Dept.), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Consultant has executed this Agreement as of the date first above written.

INTERNET AMERICA, INC.

By /s/ William E. Ladin, Jr.

        William E. Ladin, Jr.

        Chairman of the Board

CONSULTANT

/s/ Jack T. Smith

Jack T. Smith

EX-21.1

Exhibit 21.1

Wholly owned subsidiaries:

PDQ.Net, Incorporated, a Texas corporation

NeoSoft, Inc., a Texas corporation

EX-23.1

Exhibit 23.1

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in the Registration Statements of Internet America, Inc., on Form S-8 (Nos. 333-70461, 333-72109, 333-72111, 333-77153, 333-80277, 355-80285, and 333-92295) of our report dated September 3, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s change in its method of accounting for goodwill), appearing in the Annual Report on Form 10-K of Internet America, Inc., for the year ended June 30, 2003.

DELOITTE & TOUCHE LLP

Dallas, Texas

September 29, 2003

EX-31.1

Exhibit 31.1

I, William E. Ladin, Jr., Chief Executive Officer of Internet America, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Internet America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Date: September 29, 2003	/s/ William E. Ladin, Jr.
	William E. (Billy) Ladin, Jr.
	Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Mark Novy, Chief Accounting Officer and Controller of Internet America, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Internet America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Date: September 29, 2003	/s/ Mark Novy
	Mark Novy
	Chief Accounting Officer and Controller

EX-32.1

Exhibit 32.1

CERTIFICATION IN ACCORDANCE WITH

18 U.S.C. SECTION 1350

AS ADOPTED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Internet America, Inc. (the “Company”) for the period ending June 30, 2003 as filed with the Securities and Exchange commission on the date hereof (the “Report”), I, William E. Ladin, Jr., Chief Executive Officer of the Company, certify in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William E. Ladin, Jr.

William E. (Billy) Ladin, Jr.

Chief Executive Officer

Date: September 29, 2003

EX-32.2

Exhibit 32.2

CERTIFICATION IN ACCORDANCE WITH

18 U.S.C. SECTION 1350

AS ADOPTED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Internet America, Inc. (the “Company”) for the period ending June 30, 2003 as filed with the Securities and Exchange commission on the date hereof (the “Report”), I, Mark Novy, Controller and Chief Accounting Officer of the Company, certify in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Mark Novy

Mark Novy

Controller and Chief Accounting Officer

Date: September 29, 2003