INTERNET AMERICA INC, SB-2, 1999-05-17

INTERNET AMERICA INC
SB-2, 1999-05-17
PREPACKAGED SOFTWARE

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As Filed with the Securities and Exchange Commission on May 17, 1999
Registration No. 333-__________
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

INTERNET AMERICA, INC.
(Exact name of registrant as specified in its charter)

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TEXAS 7372 86-0778979
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)

MICHAEL T. MAPLES
ONE DALLAS CENTRE ONE DALLAS CENTRE
350 NORTH ST. PAUL, SUITE 3000 350 NORTH ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 861-2500 (214) 861-2500
(Address and telephone of registrant's principal executive (Address and telephone of registrant's principal executive
offices) offices)
</TABLE>

Copies of communications to:

RICHARD F. DAHLSON
JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75202-3797
TELEPHONE: (214) 953-6000
TELECOPIER: (214) 953-5822

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If this Form is filed to register additional Common Stock for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]

If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]

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CALCULATION OF REGISTRATION FEE

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<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Title of each class Proposed Proposed maximum
of securities to be Amount to be maximum offering aggregate offering price Amount of
registered registered price per unit registration fee
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<S> <C> <C> <C> <C>
Common Stock, par
value $.01 per share 382,635 shares $26.25 $10,044,168.75 $2,792.28
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rules 457(c) and 457(h), the offering price and
registration fee are computed on the basis of the average of the high
and low prices of the Common Stock as reported on the Nasdaq National
Market on May 13, 1999.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.

<PAGE> 3
SUBJECT TO COMPLETION, DATED MAY 17, 1999

PROSPECTUS 382,635 SHARES

INTERNET AMERICA, INC.

COMMON STOCK
-----------------------------

The shareholders of Internet America, Inc. listed under "Principal and
Selling Shareholders" on page 41, below, are offering and selling 382,635 shares
of Internet America Common Stock under this Prospectus. The selling shareholders
acquired the shares in connection with our purchase of all of the issued and
outstanding securities of CyberRamp, L.L.C., a Texas limited liability company,
or of the net assets of CompuNet, Inc., a Texas corporation.

Some or all of the selling shareholders expect to sell their shares.
The selling shareholders may offer their shares of Common Stock through public
or private transactions, on or off the Nasdaq National Market, at prevailing
market prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of shares by the selling shareholders. The selling
shareholders will pay any selling commissions from the sales, and we will pay
all other registration expenses relating to the offer and sale of the stock.

The Common Stock is listed on the Nasdaq National Market under the
symbol "GEEK." On May 13, 1999, the last reported sale price of the Common Stock
was $26.00 per share.

---------------

INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this Prospectus is May 17, 1999.

INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED UNTIL THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
NOR DOES IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including Notes thereto, appearing
elsewhere in this Prospectus. References to fiscal years by date refer to the
fiscal year ended June 30 of that year. This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. In addition to
the other information in this Prospectus, prospective investors should carefully
consider the information set forth under the heading "Risk Factors" on page 6,
below. The "Glossary of Technical Terms" on page 49, below, contains definitions
of certain technical terms.

THE COMPANY

Internet America provides a wide array of Internet services tailored to
meet the needs of individual and business subscribers. As of March 31, 1999, we
had approximately 79,000 subscribers. Our business model is to create high user
density in each geographic area we serve. We use television as our primary
marketing tool. We have built brand awareness in our existing markets through
our 1-800-BE-A-GEEK television campaigns, which emphasize the speed and quality
of our Internet services and our commitment to customer care.

Our most popular service package provides unlimited dial-up Internet
access for $19.95 a month. We also offer value-added services for additional
fees, including multiple e-mail boxes, personalized e-mail addresses and
personal Web sites. Our Airnews.net product provides access to our news service
for customers of other Internet companies and news access on a wholesale basis
to businesses and other Internet service providers ("ISPs"). We provide business
subscribers with a full range of services including dedicated high speed access
(such as T-1, xDSL and ISDN), Web hosting, server co-location and domain name
registration and hosting.

Outstanding service and customer care are crucial to subscriber
acquisition and retention in our industry. Our goal is to attain 100% customer
satisfaction by providing superior systems and network performance along with
high quality service and technical support. Our customer care department, which
is open 24 hours-a-day, 7 days-a-week, is structured to provide prompt,
effective and friendly support.

Our systems and network infrastructure can be expanded to accommodate
rapid subscriber growth and is designed to provide fast, reliable performance.
Our primary operations center and largest point of presence ("POP") is in
Dallas. We have additional physical POPs in four other Texas cities,
incorporating modems, terminal servers and routers. To expand our geographic
coverage and facilitate technological upgrades, we have also implemented a
"Virtual POP" architecture with telecommunications providers. With this Virtual
POP architecture, we can provide local access services without investing in
physical infrastructure. This architecture also lowers operating costs and
reduces exposure to technological obsolescence.

In December 1998, we completed our initial public offering of 2.3
million shares of Common Stock at $13 per share. We sold 1.7 million shares in
that offering and certain of our shareholders sold 600,000 shares. We raised
approximately $20 million from this offering, after deducting underwriting
discounts and offering expenses.

We were formed in 1994 and reincorporated in Texas in 1995. Our
principal executive office is located at One Dallas Centre, 350 N. St. Paul St.,
Dallas, Texas 75201, and our telephone number is (214) 861-2500. Our World Wide
Web home page is at http://www.airmail.net. Information contained in our Web
site is not part of this Prospectus.

GROWTH STRATEGY

At this stage of our industry's development, we believe our highest
priority should be to rapidly build profitable market share, rather than to
deploy a large network infrastructure with a substantial number of underutilized
POPs. Our growth strategy focuses on (1) adding subscribers in our existing
markets and (2) deploying our user density business

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model in new markets. In each market, our goal is to quickly build a "critical
mass" of subscribers that will support profitable operations.

Elements of our growth strategy include:

Strategic and Add-On Acquisitions to Rapidly Acquire a
Critical Mass of Subscribers. We intend to pursue strategic
acquisitions that will jump-start our entry into new markets, as well
as add-on acquisitions in our existing markets. We completed a
strategic acquisition in fiscal 1997, an add-on acquisition in fiscal
1998, and two add-on acquisitions in fiscal 1999.

Aggressive Use of Advertising to Build the Internet America
Brand. We use two of the more effective and efficient advertising media
-- television and outdoor billboards -- to acquire subscribers quickly
and build brand awareness.

Cost-Effective Development of Network Infrastructure. In
deploying physical infrastructure, we will continue to apply our
disciplined approach, which is premised upon the achievement of
substantial economies of scope and scale. The Virtual POP architecture
enables us to serve existing markets more efficiently and enter certain
new markets more quickly.

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

Maintenance of a First-Rate Customer Care Department. Our
sophisticated, high quality customer care is designed to assist both
novice and experienced Internet users and ensure that every
subscriber's experience is efficient, productive and enjoyable. We
believe that superior customer care is a substantial competitive
advantage.

RECENT ACQUISITIONS

On January 29, 1999, we acquired the net assets of CompuNet, Inc., a
Dallas-based Internet service provider with a concentration of business clients.
On February 18, 1999, we acquired all of the outstanding securities of
CyberRamp, L.L.C., a Dallas-based Internet service provider with approximately
16,000 customers. These combinations were accounted for as
poolings-of-interests. As a result, our financial statements have been restated
to include the accounts and results of operations of CompuNet and CyberRamp.

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THE OFFERING

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Common Stock offered by the selling shareholders............ 382,635 shares
Common Stock outstanding (as of May 14, 1999)(1)............ 6,893,530 shares
Nasdaq National Market symbol............................... GEEK
</TABLE>

- ------------------

(1) Excludes as of March 31, 1999 (i) 225,000 shares of Common Stock
reserved for issuance under the 1996 Incentive Stock Option Plan (the
"1996 Option Plan"), of which options to purchase 42,368 shares were
outstanding at a weighted average exercise price of $1.67 per share,
(ii) 400,000 shares of Common Stock reserved for issuance under the
1998 Nonqualified Stock Option Plan (the "1998 Option Plan"), of which
184,000 options were outstanding at a weighted average exercise price
of $17.89 per share, (iii) 891,100 shares of Common Stock issuable upon
exercise of other outstanding options at a weighted average exercise
price of $2.18 per share, and (iv) 200,000 shares of Common Stock
reserved for issuance under the Employee Stock Purchase Plan. See
"Management -- 1996 Incentive Stock Option Plan," "-- Nonqualified
Stock Options Issued to Officers and Directors," "-- 1998 Nonqualified
Stock Option Plan" and "-- Employee Stock Purchase Plan."

SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)

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NINE MONTHS ENDED
Year Ended June 30, MARCH 31,
----------------------------- -----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
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STATEMENT OF OPERATIONS DATA:
Total revenue ....................................... $ 11,303 $ 14,078 $ 10,413 $ 13,136
Total operating expenses ............................ 15,385 14,030 9,940 14,716
------------ ------------ ------------ ------------
Income (loss) from operations ....................... (4,082) 48 474 (1,581)
Interest income (expense) ........................... (517) (670) (524) 26
Income tax expense .................................. -- (24) (18) (10)
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (4,599) $ (646) $ (69) $ (1,565)
============ ============ ============ ============
Net income (loss) per share(1):
Basic ............................................... $ (1.21) $ (0.16) $ (0.02) $ (0.31)
Diluted ............................................. $ (1.21) $ (0.16) $ (0.02) $ (0.31)
Weighted average shares(1):
Basic ............................................... 3,800 3,915 3,915 5,081
Diluted ............................................. 3,800 3,915 3,915 5,081
OTHER DATA:
Number of subscribers at end of period .............. 47,900 61,600 59,100 79,000
EBITDA(2) ........................................... $ (2,282) $ 1,787 $ 1,779 $ (176)
EBITDA margin(2) .................................... (20.2)% 12.7% 17.1% (1.3)%
Cash flow provided by (used in):
Operating activities ............................. (1,695) 2,025 $ 1,488 $ (7)
Investing activities ............................. (2,121) (897) (523) (913)
Financing activities ............................. 3,758 (531) (705) 16,962
</TABLE>

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JUNE 30,
-------------------------------
1997 1998 March 31, 1999
------------ ------------ --------------
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BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 22 $ 618 $ 16,661
Working capital (deficit)...................... (7,968) (8,280) 10,274
Total assets................................... 3,954 4,062 20,127
Long-term debt, net of current portion......... 1,133 1,182 297
Total shareholders' equity (deficit)........... (5,950) (6,688) 12,509
</TABLE>

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(1) See Notes 1 and 8 of Notes to Financial Statements for information
concerning the calculation of basic and diluted net income (loss) per
share.

(2) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of total revenue less connectivity and operations expense,
sales and marketing expense, general and administrative expense and
impairment of equipment expense. EBITDA is provided because it is a
measure commonly used by investors to analyze and compare companies on
the basis of operating performance. EBITDA is presented to enhance an
understanding of Internet America's operating results and is not
intended to represent cash flows or results of operations in accordance
with generally accepted accounting principles ("GAAP") for the periods
indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures for other
companies. EBITDA margin represents EBITDA as a percentage of total
revenue.

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RISK FACTORS

An investment in the Common Stock involves a high degree of risk. In
addition to the other information contained in this Prospectus, you should
carefully consider the following factors before purchasing any of the shares of
Common Stock. Further, this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, goals, objectives, expectations and intentions. You are cautioned that,
while the forward-looking statements reflect our good faith beliefs, they are
not guarantees of future performance, and involve known and unknown risks and
uncertainties. You should not place undue reliance on any forward-looking
statement. Our actual results could differ materially from those discussed in
this Prospectus. Some of the factors that could cause or contribute to such
differences include the risk factors discussed below, as well as those discussed
elsewhere in this Prospectus. If any of the following risks actually occur, our
business, financial condition or results of operations would suffer and the
trading price of our Common Stock may decline.

WE ARE A RELATIVELY NEW COMPANY AND HAVE A HISTORY OF OPERATING LOSSES

Internet America was incorporated in December 1994 and began offering
Internet access in January 1995. We have only a limited operating history upon
which an evaluation of our prospects can be made. Moreover, our current
management is relatively new. We are subject to the substantial risks, expenses
and difficulties encountered by new entrants into the Internet services
industry. Those risks include our ability to:

- successfully implement our business model;

- expand our subscriber base and increase subscriber revenues;

- successfully compete in a highly competitive market;

- introduce new products and services;

- upgrade our network and systems infrastructure; and

- attract and retain qualified personnel.

As of March 31, 1999, we had an accumulated deficit of approximately
$11.8 million. Our recent expansion plan has resulted in operating losses for
the last two fiscal quarters, and we expect to incur operating losses in future
periods. Our ability to attain profitability and positive cash flow is dependent
upon a number of factors, including our ability to increase revenues while
reducing costs per subscriber. There can be no assurance that we will be
successful in increasing or maintaining revenues or achieving positive cash
flow. As a result, we may not be as profitable as hoped.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY

Our success depends on a number of factors, many of which are beyond
our control. These factors include (1) the rate of new subscriber acquisition
and related costs, subscriber retention, capital expenditures and other costs
relating to the expansion of operations, (2) the timing of new product and
service announcements, (3) changes in our pricing policies and those of our
competitors, (3) market acceptance of new or enhanced versions of our services,
(4) changes in operating expenses, (5) changes in strategy, (6) personnel
changes, (7) the introduction of alternative technologies, (8) the timing and
effect of potential acquisitions, (9) increased competition in current and
prospective markets and (10) other general economic factors.

Our operating results, cash flows and liquidity may fluctuate
significantly. Our revenues depend on our ability to attract and retain
subscribers. Our monthly subscribers, who account for a majority of our
revenues, have the option of discontinuing service at the end of any month for
any reason. Our expense levels are based, in part, on our expectations regarding
future revenues, which could be inaccurate. Moreover, our operations often
require up-front expenses, but result in trailing revenues. To the extent that
revenues are below expectations, we may be unable to reduce expenses
proportionately, and operating results, cash flow and liquidity could be
negatively affected. Subscribers are spending more time online, which increases
our expenses. Our entry into new markets will involve substantial expenditures
on advertising, customer care and other operating needs. To remain competitive,
we may not be able to

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increase subscription fees to match these increasing expenses and could
experience deteriorating profit margins or losses. Due to these and other
factors, in future periods our operating results and/or growth rate may be below
the expectations of analysts, management and investors. This, in turn, could
cause the price of our Common Stock to drop.

OUR GROWTH STRATEGY IS UNTESTED; IF WE FAIL TO INTEGRATE OUR ACQUISITIONS
SUCCESSFULLY, OUR RESULTS OF OPERATIONS WILL SUFFER

Our growth strategy is new and untested. We may not be successful in
implementing our growth strategy, and any failure could cause our financial
condition and results of operations to suffer. One component of our growth
strategy, the strategic acquisition of businesses and subscriber accounts,
involves numerous risks, including, among others, the following:

- the difficulty of assimilating acquired operations and
personnel;

- the potential disruption of our ongoing business;

- the potential inability of management to successfully
incorporate acquired technology and rights into our service
offerings and to maintain uniform standards, controls,
procedures and policies;

- the risks of entering markets in which we have little or no
direct prior experience; and

- the potential impairment of relationships with employees and
customers as a result of changes in management.

We may not be successful in overcoming these risks or any other
problems encountered in connection with acquisitions. In addition, any such
transaction could negatively affect our operating results due to dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and other intangible assets, if
any.

COMPETITION FOR ACQUISITIONS MAY IMPEDE OUR BUSINESS STRATEGY

The increased consolidation within our industry and the increased
numbers of ISPs going public has intensified competition for acquisition
targets. This results in fewer acquisition targets and increased expectations by
potential targets. Accordingly, it will be more difficult to make acquisitions
at reasonable prices or at all. This increased competition could negatively
affect our subscriber and revenue growth and profitability.

INTENSE COMPETITION MAY RESULT IN REDUCED REVENUES AND PROFITABILITY

The market for the provision of Internet access to individuals and
small businesses is extremely competitive and highly fragmented. There are no
substantial barriers to entry, and we expect competition to intensify. We
believe that the primary competitive factors for success in this market are a
reputation for reliability and service, effective customer support, competitive
pricing, creative marketing, easy-to-use software and geographic coverage. Other
important factors include the timing of introductions of new products and
services, as well as industry and general economic trends.

As a result of an increase in the number of competitors and vertical
and horizontal integration in the industry, we face significant competition,
including pressure to reduce prices. Our current primary competitors include
Internet service providers and on-line service providers with a significant
national presence that focus on individual and small business subscribers,
including America Online, Verio, MindSpring and EarthLink. Most of these
competitors have significantly broader market presence and brand recognition and
greater financial, technical and marketing resources. They also have extensive
coast-to-coast access to Internet backbones, which provides them with greater
scalability and the ability to provide better service quality. We also compete
with independent regional and local Internet service providers such as FlashNet
and PDQ Net, computer hardware and software and other technology companies such
as IBM, Microsoft and Gateway, as well as wireless communications companies,
satellite companies and nonprofit or educational Internet access providers.

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All the major long-distance companies, including AT&T, MCI WorldCom and
Sprint, compete with us by offering Internet access services. Local exchange
carriers, including regional Bell operating companies and competitive local
exchange carriers, have also entered the Internet service provider market.
Long-distance and local carriers are moving toward horizontal integration
through acquisitions of, and joint ventures with, Internet service providers.
Accordingly, we expect increased competition from the traditional
telecommunications carriers for customers and potential acquisitions. Many of
these telecommunications carriers, in addition to their substantially greater
coverage, market presence and financial, technical and marketing resources, also
have large, commercial customer bases. Telecommunications providers also may
have the ability to bundle Internet access with basic local and long-distance
telecommunications services. This bundling of services may make it difficult for
us to compete with telecommunications providers and may force us to lower
prices, resulting in reduced revenues.

New competitors, including large computer hardware and software, media
and telecommunications companies, may continue to enter the Internet services
market, resulting in greater competition. In particular, we may face increased
competition from companies that provide connections to consumers' homes,
including local and long distance telephone companies, cable companies, electric
utility companies and wireless communications companies. For example, cable
television companies, such as Tele-Communications, Inc., Time Warner, TCA Cable,
Inc. and Marcus Cable, Inc., offer Internet access through their cable
facilities at significantly faster rates than existing modem speeds. These
companies can bundle Internet access with basic services or offer access for a
nominal charge. In addition, they could deny us access to their networks.

Competition could also result in increased selling and marketing
expenses, related customer acquisition costs and customer attrition, all of
which could adversely affect our operations and financial condition. We may not
be able to offset the effects of such increased costs. For further information
on competitive risks, see "Business --Competition" on page 30 below.

ELECTRONIC COMMERCE MAY EXPOSE US TO LIABILITY

Many of our subscribers are using the Internet for commercial purposes,
such as financial services and retail. Additionally, in the future, we may offer
our subscribers certain commercial services such as credit card clearing and
commercial website hosting. Our subscribers or other Interest users doing
business with our subscribers may sue us for damages incurred in connection with
such commercial uses of the Internet and our services. The law in this area is
untested and it is possible that we could have significant liability to our
subscribers or others in such transactions.

FUTURE GROWTH WILL STRAIN OUR RESOURCES

We must plan and manage effectively during periods of rapid growth. Our
growth will place a significant strain on our managerial, operational and
financial resources. To manage growth effectively, we must improve our
operational, financial and management information systems and attract, integrate
and retain qualified personnel. These demands will require additional management
personnel and development of additional expertise by existing management. The
successful integration of acquired businesses and the expansion of our
subscriber base will require (1) close monitoring of quality of service, (2)
identification and acquisition of physical sites, (3) acquisition and
installation of equipment and facilities, (4) increased marketing in new and
existing markets, (5) employment of qualified personnel for such sites and (6)
expansion of our managerial, operational and financial resources. In particular,
our customer service and technical support resources, as well as our systems
capacity, may not be sufficient to manage rapid growth.

IF WE FAIL TO ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS, WE
WILL NOT BE COMPETITIVE

Our industry is subject to rapidly changing technology, evolving
industry standards, changes in subscriber needs and frequent new service
introductions. Our future success depends, in part, on our ability to meet
changing

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subscriber needs on a timely and cost-effective basis. Thus, we must use new
technologies effectively, continue to develop our technical expertise, improve
our existing services and develop new services. We cannot be certain that we
will be successful in those endeavors. We believe that our ability to compete
successfully is also dependent upon the continued compatibility and
interoperability of our services with products and architectures offered by
various vendors. Although we intend to support emerging standards in the market
for Internet services, we cannot be certain that industry standards will be
established or, if they are established, that we will be able to conform to them
in a timely fashion and maintain a competitive position in the market. In
addition, there is a risk that services or technologies developed by others will
render our services or technology uncompetitive or obsolete.

We are also at risk to fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Many alternative methods to access the Internet
are available or under development, including cable modems, high speed dedicated
access, screen based telephones, satellite technologies, wireless
telecommunications technologies and other consumer electronic devices. These
methods may transmit data at substantially faster speeds than modems we
currently use. As these alternative methods gain greater use, or as subscriber
requirements change the way Internet access is provided, we will have to develop
or use new technology or modify our existing technology to remain competitive.
Adjusting to such technological advances may require substantial time and
expense, and we may not succeed in addressing these competitive pressures or
adapting our business to alternative access methods.

NETWORK CAPACITY CONSTRAINTS OR SYSTEMS FAILURES COULD CAUSE US TO LOSE
SUBSCRIBERS

Our business depends on the capacity, reliability and security of our
network infrastructure. We will be required to expand and adapt our network
infrastructure as the number of subscribers increases and the amount of
information transferred expands. The expansion and adaptation of network
infrastructure will require substantial financial, operational and management
resources. We may be unable to timely expand or adapt our network infrastructure
to meet additional demand or changing subscriber requirements at a reasonable
cost or at all.

Capacity constraints may occur in system-wide services, such as e-mail
or newsgroups, or in particular POP's. We could experience delayed delivery from
suppliers of new telephone lines, modems, terminal servers and other equipment.
If these delays are severe, incoming modem lines may become full during peak
times. Further, if we do not maintain sufficient bandwidth capacity in our
network connections, subscribers will experience a slowdown of Internet
services. Similar problems can occur if we are unable to expand the capacity of
our servers for e-mail, news and the World Wide Web fast enough to keep up with
increasing demand. New high-speed, broadband technologies will cause increasing
congestion on the Internet backbone. If the capacity of our servers is exceeded,
subscribers will experience delays. Since the majority of our traffic flows
through the Dallas POP, a capacity constraint, supplier delay or other slowdown
at the Dallas POP would affect a majority of our subscribers.

Damage to our equipment from fire, earthquakes, power loss,
telecommunications failures and similar events could cause service
interruptions. A significant portion of our equipment, including critical
equipment dedicated to our Internet access services, is located at a single
facility in Dallas, Texas. Despite precautions, natural disasters or other
unanticipated problems at our headquarters, network hub or a POP could cause
service interruptions. We do not currently maintain fully redundant Internet
services, backbone facilities or telecommunications networks. System failures
could result in a loss of subscribers.

Our billing and management information systems are subject to potential
damage, malfunction or other loss. We bill the majority of our subscribers by
automatic charges to subscribers' credit cards or bank accounts. Any failure of
our billing and management information systems could result in delayed
collections and reduced revenues.

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WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS

We rely on local telephone companies and other companies to provide
data communications capacity. These providers may experience disruptions of
service or have limited capacity, which could disrupt our services. We may not
be able to replace or supplement these services on a timely basis or at all. In
addition, local phone service is sometimes available only from a local monopoly
telephone company. Telecommunications carriers could prevent us from delivering
Internet access through their data transmission networks. Because we rely on
third-party telecommunications companies for our backbone connections to the
Internet, we face limitations on our ability to serve our subscribers, including
the following:

- we do not control decisions regarding availability of service
at any particular time;

- we may not be able to deploy new technologies when we want to
because our telecommunications providers may not be able to
support that technology on their backbones;

- we may not be able to establish new POPs rapidly enough to
respond to increased subscriber demand; and

- we may not be able to negotiate favorable interconnectivity
agreements with other Internet service providers.

In addition, we provide Internet access exclusively through Virtual
POPs in some markets. Our service in those markets is dependent upon the ability
and willingness of third-parties to provide POP access to our subscribers. If we
are unable to secure alternative POP arrangements, our services and ability to
expand in new markets would be significantly limited. There can be no assurance
that, if access to one or more Virtual POPs is lost, any alternative
arrangements will be available on acceptable terms. We do not currently have any
plans or commitments with respect to alternative POP arrangements. Moreover,
while our third-party providers are contractually obligated to provide
commercially reliable service to our subscribers, there can be no assurance that
such services will meet our requirements.

Our operations and services could be interrupted if our third-party
network providers or telecommunications providers experience systems failures or
equipment damage due to fire, earthquakes, power loss and similar events. Thus,
any such event could cause us to lose subscribers, which could have an adverse
effect on our business, financial condition and results of operations.

We are dependent on third-party suppliers of hardware components.
Increasing demand for these components places a significant strain on suppliers.
If we do not have alternative sources of supply, there could be delays and
increased costs in expanding our network infrastructure.

Our telecommunications providers sell or lease their products and
services to our competitors. They may enter into exclusive arrangements with our
competitors or stop selling or leasing their products or services to us at
commercially reasonable prices or at all. In addition, our telecommunication
providers may become our direct competitors.

IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS WILL SUFFER

Our success depends upon the continued efforts of our senior management
team and our technical, marketing and sales personnel. These employees may
terminate their employment at any time, as we have no employment agreements. Our
success also depends on our ability to attract and retain additional highly
qualified management, technical, marketing and sales personnel. The market for
employees with the combination of skills and attributes required to carry out
our strategy is extremely competitive. We may not be able to retain or integrate
existing personnel or identify and hire additional qualified personnel. The loss
of the services of our key personnel, or the inability to attract additional
qualified personnel, could cause the quality of our services or management to
deteriorate. This could adversely affect our subscriber retention, revenue and
profitability.

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<PAGE> 13

OUR NETWORK IS VULNERABLE TO SECURITY RISKS, SUCH AS HACKING AND VIRUSES

Despite security measures, our network infrastructure may be vulnerable
to computer viruses, hacking or similar problems caused by subscribers or other
persons. Computer viruses or problems could lead to interruptions, delays or
cessation in service, causing subscribers to seek Internet access from other
providers. Inappropriate use of the Internet by third parties could jeopardize
the security of confidential information stored in our computer systems or our
subscribers' computer systems. In addition, we expect that our subscribers will
increasingly use the Internet for commercial transactions. Any network
malfunction, overload or security breach could cause these transactions to be
delayed, not completed at all or completed with compromised security, which may
result in claims against us. Further, the security and privacy concerns of
existing and potential Internet users may inhibit the growth of the Internet,
our subscriber base and revenues.

A DROP IN DEMAND FOR INTERNET ACCESS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE

The market for Internet access and related products is in an early
stage of growth. Our success depends upon the development and expansion of the
Internet and the market for Internet access. Critical issues concerning
commercial and personal use of the Internet (including practice standards and
protocol, security, reliability, cost, ease of use, access and quality of
service) remain uncertain and may affect the growth of the Internet.

Our business will not grow as we intend and the price of our Common
Stock may decline if:

- the market for Internet access services fails to continue to
develop;

- the Internet market develops more slowly than anticipated;

- the Internet market becomes saturated with competitors; or

- the Internet access and related products and services we offer
are not widely accepted.

WE MAY BE LIABLE FOR INFORMATION DISSEMINATED OVER OUR NETWORK

We have limited control over our subscribers' online practices and the
information passed through and stored on our systems. We may be liable for
information disseminated through our network. A number of lawsuits have sought
to impose liability on Internet service providers for defamatory speech and
infringement of copyrighted materials. The possible imposition of liability on
Internet service providers for materials disseminated through their systems
could require us to implement measures to reduce our exposure. These measures,
as well as existing and proposed federal and state legislation, may require the
expenditure of substantial resources or the discontinuation of some product or
service offerings.

In addition, the Communications Decency Act of 1996 imposes fines on
any entity that: (1) by means of a telecommunications device, knowingly sends
indecent or obscene material to a minor; (2) by means of an interactive computer
service sends or displays indecent material to a minor; or (3) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not been established. Certain defenses to liability under the
statute are available but may not apply. Although we do not actively monitor the
content of our subscribers' Internet transmissions, a court may determine that
we have knowledge of such content. Although no such claims or lawsuits have been
asserted against us to date, there can be no assurance that if we were
prosecuted that any defenses to liability would be applicable.

WE DEPEND ON THE PROTECTION OF OUR PROPRIETARY RIGHTS

We rely on a combination of copyright, trademark and trade secret laws,
and contractual restrictions to establish and protect our proprietary
technology. We cannot be certain that the steps we have taken are adequate to
prevent

11
<PAGE> 14

misappropriation of our technology or that our competitors will not
independently develop technologies that are equivalent or superior to ours.

We have obtained permission and, in certain cases, licenses from each
manufacturer of software that we bundle in our front-end software product for
customers. Although we do not believe that the software or trademarks we use
infringe on the proprietary rights of any third parties, third parties could
assert infringement claims against us. The defense of such claims could result
in substantial costs and diversion of management resources, which could
adversely affect our operations and financial condition. Parties asserting such
claims could secure judgments awarding substantial damages, as well as
injunctive or equitable relief that could block our ability to sell services. In
the event a claim relating to proprietary technology or information is asserted,
we may seek licenses to use such intellectual property. However, we cannot be
certain that we could obtain licenses on acceptable terms, if at all.

PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE SERVICES

The Year 2000 issue could result in system failures or miscalculations,
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. For
further information on our efforts to handle the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance" on page 19, below.

GOVERNMENT REGULATION MAY INCREASE OUR COSTS OF DOING BUSINESS

Although we are not currently directly regulated by the Federal
Communications Commission or any other federal or state agency, changes in the
regulatory environment relating to the Internet access market could affect the
prices at which we sell our services. These changes may include regulatory
changes which directly or indirectly affect telecommunications costs or increase
the likelihood or scope of competition from regional Bell operating companies or
other telecommunications companies. For example, the imposition of interstate
access charges to local telephone companies or the elimination of reciprocal
compensation for local telephone companies may increase our costs of serving
dial-up subscribers.

Furthermore, the FCC may, in the future, reconsider its past ruling
that Internet access providers should be classified as unregulated "information
service providers" rather than regulated "telecommunications providers." In that
event, Internet service providers would be required to pay a percentage of their
gross revenues to the universal service fund, which subsidizes phone service for
rural and low income consumers and supports Internet access among schools and
libraries. If the FCC were to require universal service contributions from
providers of Internet access or Internet backbone services, our costs of doing
business could increase substantially, and we may not be able to recover these
costs from our subscribers.

Due to the increasing popularity and use of the Internet, it is
possible that additional federal, state or other laws and regulations may be
adopted with respect to the Internet. These laws and regulations may address
issues such as content, privacy, pricing, encryption standards, consumer
protection, electronic commerce, taxation, copyright infringement and other
intellectual property issues. Additional regulations relating to the Internet
access industry, including those that affect telecommunication costs or increase
competition from regional telephone companies or others, could have a material
adverse effect on our financial condition. For more information on regulation of
our business, see "Business--Government Regulation," on page 31 below.

WE MAY NOT HAVE SUFFICIENT CAPITAL TO SUCCESSFULLY EFFECT OUR BUSINESS
STRATEGIES

As of March 31, 1999, we had approximately $16.6 million in
unrestricted cash. We cannot be certain that this is sufficient capital for our
acquisition and marketing strategy. In our past two acquisitions, we were able
to use Common Stock as consideration; however due to the competitive nature of
acquisitions, we may be forced or choose to use cash for future acquisitions. In
addition, during the transaction period following an acquisition, we could lose

12
<PAGE> 15

money as we integrate the operations of the acquired company. Moreover, we may
have insufficient capital to respond to unanticipated technological developments
or competitive pressures or to take advantage of unanticipated opportunities,
such as special marketing opportunities, the development of new services or
larger than anticipated acquisitions of complementary businesses or assets. As a
result, we may need to raise additional funds through equity or debt financings.
There can be no assurance that such additional financings will be available on
terms acceptable to us or at all. Further, any such financings may be on terms
that are dilutive or potentially dilutive to our shareholders. If alternative
financing is required but is insufficient or unavailable, we will have to
curtail our growth and operating plans. As a result, our business may not
produce the level of growth or profitability we hope to achieve.

MANAGEMENT HAS SUBSTANTIAL OWNERSHIP OF OUR COMMON STOCK

Currently, our officers, directors and 10% shareholders beneficially
own approximately 35.4% of our outstanding voting stock (assuming the exercise
of all derivative securities currently outstanding, such persons would
beneficially own approximately 40.7% of the outstanding voting stock). As a
result, these shareholders will be able to influence the election of directors,
the appointment of management and the approval of certain actions requiring the
approval of a majority of our shareholders. Such concentration of ownership may
have the effect of delaying or preventing a change in control, even if such
change in control is beneficial to the shareholders.

In connection with our initial public offering in December 1998, our
officers and directors and certain other shareholders signed six-month lock-up
agreements with the underwriter. These lock-up agreements expire on June 7,
1999. For more information on management's ownership of stock, see "Sales of Our
Common Stock in the Public Market May Lower Our Stock Price and Impair Our
Ability to Raise Funds in Future Offerings" on page 13, below.

OUR COMMON STOCK MAY BE DIFFICULT TO RESELL AND YOU MAY NOT BE ABLE TO RESELL
SHARES FOR MORE THAN YOU PAID

Prior to our initial public offering in December 1998, you could not
buy or sell our Common Stock publicly. The active public market for our Common
Stock may not be sustained. You may not be able to resell your shares at or
above the price you pay for them due to a number of factors, including:

- actual or anticipated fluctuations in our operating results;

- changes in expectations as to our future financial performance
or changes in financial estimates of securities analysts;

- announcements of technological innovations by our existing or
future competitors;

- conditions and trends in the Internet services and technology
industries;

- departures of key personnel;

- the operating and stock price performance of other comparable
companies; and

- general market conditions.

The stock market in general, and the stocks of Internet companies in
particular, have recently experienced extreme price and volume fluctuations that
are often unrelated or disproportionate to operating performance. These broad
market and industry fluctuations may adversely affect the price of our Common
Stock. After periods of volatility in the price of a company's stock, securities
class action litigation has often been filed. Such litigation may be filed
against us. Such litigation could result in substantial costs and divert
management's attention and resources. Any adverse rulings in such litigation
could subject us to significant liabilities.

SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY LOWER OUR STOCK PRICE AND
IMPAIR OUR ABILITY TO RAISE FUNDS IN FUTURE OFFERINGS

If our shareholders sell substantial amounts of our Common Stock in the
public market, the market price of our Common Stock could fall. The price of our
Common Stock could also drop as a result of the exercise of options

13
<PAGE> 16

for Common Stock or the perception that such sales or exercise of options could
occur. These factors also could make it more difficult for us to raise funds
through future offerings of our Common Stock.

The holders of 1,660,769 outstanding shares have certain rights to have
shares registered under the Securities Act pursuant to the terms of agreements
between such holders and us. Of those 1,660,769 shares, 769,149 shares are
freely tradeable, subject in certain cases to the lock-up period described below
and the restrictions of Rule 144. In connection with our initial public
offering, we and our executive officers, directors and certain shareholders
(including all those with registration rights) who hold, collectively, 2,620,642
outstanding shares of Common Stock, have agreed not to offer or sell any shares
of Common Stock until June 7, 1999 without the prior written consent of Hoak
Breedlove Wesneski & Co., except under limited circumstances. If this lock-up
period is waived by Hoak Breedlove Wesneski & Co., then those shares would be
freely tradeable subject to the restrictions of Rule 144 for shares held by
affiliates or for less than the required two-year period. We anticipate that
after June 7, 1999, these shareholders will sell shares of Common Stock. In
addition, we have filed Registration Statements on Form S-8 to register a total
of 1,215,000 shares of Common Stock, which is all shares reserved for issuance
under our 1996 Stock Option Plan and our Employee Stock Purchase Plan, as well
as shares underlying certain nonqualified options granted to certain current and
former officers, directors and employees. Accordingly, shares issued upon
exercise of such options or under such plans will be freely tradeable by holders
who are not affiliates of the Company and, subject to volume and other
limitations of Rule 144, by holders who are affiliates of the Company.

ANTI-TAKEOVER MATTERS

Our Articles of Incorporation, as amended, and Bylaws, as amended,
contain provisions that may have the effect of delaying, deterring or preventing
a potential takeover of us, even if the takeover is in the best interest of our
shareholders. The Articles and Bylaws prevent shareholders from calling a
special meeting of shareholders, prevent shareholders from amending the Bylaws
and prohibit shareholder action by written consent. The Articles also authorize
only the Board of Directors to fill vacancies, including newly-created
directorships, and state that directors may be removed only for cause and only
by the affirmative vote of holders of at least two-thirds of the outstanding
shares of the voting stock. Article XIII of the Texas Business Corporation Act
contains provisions that restrict certain business combinations with interested
shareholders. This may have the effect of preventing a non-negotiated merger or
other business combination involving us, even if such transaction is in the best
interest of our shareholders.

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<PAGE> 17

USE OF PROCEEDS

All net proceeds from the sale of 382,635 shares of Common Stock
offered by this Prospectus will go to the selling shareholders. Accordingly, we
will not receive any of the proceeds from the sale of shares of Common Stock
offered by this Prospectus.

DIVIDEND POLICY

To date, we have neither declared nor paid any dividends on our Common
Stock nor do we anticipate that dividends will be declared or paid in the
foreseeable future. Rather, we intend to retain any earnings to finance the
growth and development of our business. Any payment of cash dividends on our
Common Stock in the future will be dependent, among other things, upon our
earnings, financial condition, capital requirements and other factors which the
Board of Directors deems relevant.

PRICE RANGE OF COMMON STOCK

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 the Common Stock. As of May 14, 1999, we
had approximately 14,000 holders of our Common Stock. The closing sales price of
the Common Stock on May 13, 1999 was $26.00 per share. The following table sets
forth, for the period indicated, the high and low sales price of the Common
Stock.

<TABLE>
<CAPTION>
PERIOD High Low
- ------ ---- --------
<S> <C> <C>
Quarter ended December 31, 1999
(from December 10, 1999).................... $61 $11 1/2
Quarter ended March 31, 1999......................... 44 22 1/4
Quarter ending June 30, 1999
(up to May 13, 1999)............................ 35 24 1/4
</TABLE>

CAPITALIZATION

The following table sets forth our capitalization at March 31, 1999. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our Financial Statements and
Notes thereto and other financial and operating data included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
Long-term debt, net of current portion ............................... $ 297
Shareholders' equity (deficit):
Common Stock, $0.01 par value; 40,000,000 shares authorized;
6,893,530 shares issued and outstanding(1) ................... 69
Additional paid-in capital ......................................... 24,217
Accumulated deficit ................................................ (11,777)
--------
Total shareholders' equity ................................. 12,509
--------
Total capitalization ....................................... $ 12,806
========
</TABLE>

- ----------

(1) Excludes (i) 225,000 shares reserved for issuance under the 1996 Option
Plan, of which options to purchase 42,368 shares were outstanding at a
weighted average exercise price of $1.67 per share, (ii) 400,000 shares
reserved for issuance under the 1998 Option Plan, of which 184,000
options were outstanding at a weighted average exercise price of $17.89
per share, (iii) 891,100 shares of Common Stock issuable upon exercise
of other outstanding options at a weighted average exercise

15
<PAGE> 18

price of $2.18 per share, and (iv) 200,000 shares reserved for issuance
under the Employee Stock Purchase Plan. See "Management -- 1996
Incentive Stock Option Plan," "-- Nonqualified Stock Options Issued to
Officers and Directors," "-- 1998 Nonqualified Stock Option Plan," and
"-- Employee Stock Purchase Plan."

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<PAGE> 19

SELECTED FINANCIAL AND OPERATING DATA

The following selected historical financial data as of and for the years
ended June 30, 1997 and 1998 has been derived from Internet America's financial
statements included elsewhere herein and audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report thereon also included herein.
The selected historical financial data as of and for the nine months ended March
31, 1998 and 1999 was derived from Internet America's unaudited financial
statements, which in the opinion of management reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of results for such periods. Results for the nine months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year. The following selected financial data should
be read in conjunction with, and is qualified in its entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------- ---------------------
1997 1998 1998 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Access ....................................................... $ 9,501 $ 12,118 $ 8,905 $ 11,436
Business services ............................................ 1,553 1,919 1,454 1,620
Other ........................................................ 249 41 54 80
-------- -------- -------- --------
Total revenue ............................................. 11,303 14,078 10,413 13,136
Expenses
Connectivity and operations .................................. 7,432 7,417 5,411 6,284
Sales and marketing .......................................... 2,181 1,925 1,120 4,204
General and administrative ................................... 3,356 2,948 2,103 2,824
Depreciation and amortization ................................ 1,800 1,739 1,305 1,405
Impairment of equipment ...................................... 615 -- -- --
-------- -------- -------- --------
Total operating expenses .................................. 15,385 14,030 9,940 14,717
-------- -------- -------- --------
Income (loss) from operations ................................... (4,082) 48 474 (1,581)
Interest income (expense) ....................................... (517) (670) (524) 26
Income tax expense .............................................. -- (24) (18) (10)
-------- -------- -------- --------
Net loss ........................................................ $ (4,599) $ (646) $ (69) $ (1,670)
======== ======== ======== ========
Net loss per share(1):
Basic ........................................................ $ (1.21) $ (0.16) $ (0.02) $ (0.31)
Diluted ...................................................... $ (1.21) $ (0.16) $ (0.02) $ (0.31)
Weighted average shares(1):
Basic ........................................................ 3,800 3,915 3,915 5,081
Diluted ...................................................... 3,800 3,915 3,915 5,081
OTHER DATA:
Approximate number of subscribers at end of period............ 47,900 61,600 59,100 79,000
EBITDA(2) .................................................... $ (2,282) $ 1,787 $ 1,779 $ (176)
EBITDA margin(2) ............................................. (20.2)% 12.7% 17.1% (1.3)%
Cash flow provided by (used in):
Operating activities ...................................... $ (1,695) $ 2,025 $ 1,488 $ (7)
Investing activities ...................................... (2,121) (897) (523) (913)
Financing activities ...................................... 3,758 (531) (705) 16,962
</TABLE>

17
<PAGE> 20

<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1997 1998 March 31, 1999
---------------- ------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents........................... $ 22 $ 618 $ 16,661
Working capital (deficit)...................... (7,968) (8,280) 10,274
Total assets................................... 3,954 4,062 20,127
Long-term debt, net of current portion......... 1,133 1,182 297
Total shareholders' equity (deficit)........... (5,950) (6,688) 12,509
</TABLE>

- ----------

(1) See Notes 1 and 8 of Notes to Financial Statements for information
concerning the calculation of basic and diluted net income (loss) per
share.

(2) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, general and administrative expense and impairment of
equipment expense. EBITDA is provided because it is a measure commonly
used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is presented to enhance an understanding
of Internet America's operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP
for the periods indicated. EBITDA is not a measurement under GAAP and
is not necessarily comparable with similarly titled measures for other
companies. EBITDA margin represents EBITDA as a percentage of total
revenue.

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<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Internet America, Inc. provides a wide array of Internet services tailored
to meet the needs of individual and business subscribers. As of March 31, 1999
we had approximately 79,000 subscribers. Our business model is to create high
user density in each geographic area in which we offer services. This user
density has enabled us to realize substantial marketing, network and operating
efficiencies.

STATEMENT OF OPERATIONS

Our access revenues are derived primarily from individual dial-up Internet
access, whether analog or ISDN, and revenues derived from value-added services,
such as multiple e-mail boxes and personalized e-mail addresses. We derive
business services revenues primarily from dedicated connectivity, bulk dial-up
access, web services and bulk access to newsgroups. Other revenues are derived
primarily from advertising fees.

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

Connectivity and operations expenses consist primarily of setup
costs for new customers, telecommunication costs, and wages of network
operations and customer support personnel. Setup costs include cost of
diskettes and other media, manuals, packaging and delivery costs. The
Company does not defer customer setup costs, but expenses such items as
incurred. Connectivity costs include (i) fees paid to telephone companies
for customers' 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, media
and production costs, and call center employee wages. These expenses
include the cost of our television and billboard campaigns and other
advertising. We do not defer any advertising costs, but expenses such items
as incurred. We expect to significantly increase our level of marketing
activities as we expand into new markets.

General and administrative expenses consist primarily of
accounting and administrative wages, professional services, rent and other
general business expenses.

As we expand into new markets, both costs of operations and general and
administrative expenses will increase. The early phases of entering new markets
will involve substantial expenditures on advertising, customer care and other
operating needs.

Depreciation is computed using the straight line method over the estimated
useful life of the assets. Our data communications equipment, computers, data
server and office equipment are depreciated over three years. We depreciate our
furniture, fixtures and leasehold improvements over five years. The costs of
acquired subscriber bases are amortized over three to five years.

Our business is not subject to any significant seasonal influences. Sales
during the third fiscal quarter of a given year, however, have historically been
slightly higher due to new users who get personal computers during the holiday
season of the prior year.

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<PAGE> 22

RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998

Total revenues. Total revenues increased by $2.7 million, or 26.1%, to
$13.1 million for the nine months ended March 31, 1999, from $10.4 million for
the same period in the prior year. Access revenues increased by $2.5 million, or
28.4%, to $11.4 million for the nine months ended March 31, 1999, primarily due
to the increase in the number of subscribers from the same period in the prior
year. As of March 31, 1999, we had 79,000 subscribers compared to 59,100 as of
March 31, 1998, which represents an increase of 33.7%. Business services
revenues increased by $166,000, or 11.4%, to $1.6 million for the nine months
ended March 31, 1999, from $1.5 million for the same period in the prior year.
This increase is primarily attributable to revenue associated with our web
hosting service, a product that was introduced during fiscal 1999.

Connectivity and operations. Connectivity and operations expenses
increased by $872,000, or 16.1%, to $6.3 million for the nine months ended March
31, 1999, from $5.4 million from the same period in the prior year. Connectivity
and operations expenses as a percentage of total revenues decreased to 47.8% for
the nine months ended March 31, 1999 from 52.0% for the nine months ended March
31, 1998. The decrease as a percentage of revenues is due to cost efficiencies
achieved for wages and connectivity resulting from greater user density in
existing markets.

Sales and marketing. Sales and marketing expenses increased by $3.1
million, or 275%, to $4.2 million for the nine months ended March 31, 1999,
compared to the same period in the prior year. The increase is primarily due to
our continued marketing efforts in our existing markets and entry into nine new
markets during the second and third quarters of fiscal 1999. Total sales and
marketing expenses of $4.2 million for the nine months ended March 31, 1999
included $3.2 million in television, print and billboard advertising.

General and administrative. General and administrative expenses
increased by $720,000, or 34.3%, to $2.8 million for the nine months ended March
31, 1999, from $2.1 million for the same period in the prior year. As a
percentage of revenues, general and administrative expenses increased by 1.3% to
21.5% for the nine months ended March 31, 1999, from 20.2% for the same period
in the prior year, primarily due to professional service fees associated with
the combinations with CompuNet and CyberRamp.

Depreciation and amortization. Depreciation and amortization
increased by $100,000, or 7.7%, to $1.4 million for the nine months ended March
31, 1999, from $1.3 million for the same period in the prior year. This increase
is due to additional depreciation expense resulting from routine purchases of
property and equipment.

Interest income/expense. We realized $213,000 of interest income for
the nine months ended March 31, 1999. We had no interest income for the nine
months ended March 31, 1998. Upon completion of the initial public offering in
December of 1998, we invested the net proceeds in investment grade securities
thereby generating interest income for the period. Interest expense decreased by
$337,000, or 64.3%, to $188,000 for the nine months ended March 31, 1999 from
$524,000 for the nine months ended March 31, 1998. During the nine months ended
March 31, 1998, we had several outstanding notes payable to shareholders bearing
interest up to 18%. During fiscal 1999, the notes payable to shareholders were
refinanced and the interest rate decreased from 18% to prime rate. See "Certain
Transactions."

YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997

Total revenue. Total revenue increased by $2.8 million, or 24.6%, to
$14.1 million for fiscal 1998 from $11.3 million for fiscal 1997. Access revenue
increased by $2.6 million, or 27.5%, to $12.1 million for fiscal 1998 from $9.5
million for fiscal 1997. The increase in access revenue is primarily due to
increased subscription fees derived from an increase in the number of dial-up
access customers which totaled 61,600 at June 30, 1998, as compared to 47,900 at
June 30, 1997. Business services revenue increased by $366,000, or 23.6%, to
$1.9 million for fiscal 1998 from $1.6

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million for fiscal 1997. The increase in business services revenue is primarily
due to an increase in the number of business customers and price increases from
the prior year. Other revenue decreased by $208,000, or 83.4%, to $41,000 for
fiscal 1998 from $249,000 for fiscal 1997. The decrease in other revenue is
primarily attributable to the termination of a contract to provide customer care
services to another ISP and the termination of charges for browser software
provided to customers.

Connectivity and operations. Connectivity and operations expense
decreased by $14,000, or 0.2%, to $7.4 million for fiscal 1998. As a percentage
of revenue, connectivity and operations expenses decreased by 13.1% to 52.7% for
fiscal 1998 from 65.8% for fiscal 1997. The majority of the reduction in these
expenses is associated with the cost control program which commenced in the
fourth quarter of fiscal 1997, consisting of (1) a decrease in wages resulting
from reduced staffing, (2) a decrease in software costs and (3) a decrease in
Internet and telephone connectivity costs due to improved cost efficiencies in
our network infrastructure.

Sales and marketing. Sales and marketing expenses decreased by
$256,000, or 11.7%, to $1.9 million for fiscal 1998 from $2.2 million for fiscal
1997. For the first and second quarters of fiscal 1998, we suspended virtually
all advertising resulting in a decrease in advertising expenses from the prior
year. We began a new television and advertising campaign in January 1998.

General and administrative. General and administrative expenses
decreased by $409,000, or 12.2%, to $2.9 million for fiscal 1998 from $3.4
million for fiscal 1997. The decrease in general and administrative expenses was
primarily due to decreased staffing, and decreases in telephone expenses,
professional services and equipment leases in connection with our cost control
program.

Depreciation and amortization. Depreciation and amortization
decreased by $61,000, or 3.4%, to $1.7 million for fiscal 1998 from $1.8 million
for fiscal 1997.

Interest expense. Interest expense increased by $153,000, or 29.6%,
to $670,000 for fiscal 1998 from $517,000 for fiscal 1997. The increase in
interest expense relates primarily to interest on certain indebtedness accruing
at a default rate of 18%. See "Certain Transactions."

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

Total revenue. Total revenue increased by $7.4 million, or 192%, to
$11.3 million for fiscal 1997 from $3.9 million for fiscal 1996. Access revenue
increased by $6.3 million, or 202%, to $9.5 million for fiscal 1997 from $3.1
million for fiscal 1996. The increase in access revenue is primarily due to
increased subscription fees derived from an increase in the number of dial-up
access customers, which totaled 47,900 at June 30, 1997 as compared to 30,900 at
June 30, 1996. Business services revenue increased by $1.1 million, or 278%, to
$1.6 million in fiscal 1997 from $411,000 in fiscal 1996. In fiscal 1997
business services revenue primarily increased as a result of the addition of new
business customers and price increases.

Connectivity and operations. Connectivity and operations expenses
increased by $4.6 million, or 162%, to approximately $7.4 million in fiscal 1997
from $2.8 million in fiscal 1996. These expenses increased as a result of
increased customer support wages and increased connectivity expenses related to
the increase in the number of customers and excessive staffing during fiscal
1997 prior to our reorganization and implementation of our cost control program.

Sales and marketing. Sales and marketing expenses increased by
$403,000, or 22.6%, to $2.2 million for fiscal 1997 from $1.8 million for fiscal
1996. This increase was primarily a result of increased staffing in sales and
marketing and the cost of providing promotional kits to customers.

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<PAGE> 24

General and administrative. General and administrative expenses
increased by $207,000, or 6.6%, to $3.3 million for fiscal 1997 from $3.1
million for fiscal 1996.

Depreciation and amortization. Depreciation and amortization
expenses increased by $1.2 million, or 206%, to $1.8 million in fiscal 1997 from
$590,000 in fiscal 1996 as our fixed assets continued to grow with subscriber
growth. In fiscal 1997, we also recognized amortization expenses related to the
acquisition of an ISP located in San Angelo, Texas.

Impairment of equipment. Operating expenses for fiscal 1997 include
an impairment loss recognized for certain modem and telecommunication equipment.
Due to the emergence of a new standard in modem speeds, management deemed these
assets to be fully impaired by the fourth quarter of fiscal 1997, and we
recognized an impairment loss of $615,000.

Interest expense. Interest expense increased by $440,000, or 571%,
to $517,000 for fiscal 1997 from $77,000 for fiscal 1996. The increase was due
to the issuance of promissory notes in fiscal 1997 to shareholders for working
capital and notes issued in connection with the acquisition of an ISP located in
San Angelo, Texas. See "Certain Transactions."

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date primarily through (1) public
and private sales of equity securities, (2) loans from shareholders and third
parties and (3) cash flows from operations. We completed an initial public
offering in December 1998, issuing 1,700,000 shares of Common Stock at a price
of $13.00 per share. The proceeds to us of such offering were approximately $20
million, net of underwriting discounts and expenses. Upon completion of such
offering, we repaid the remaining balances of shareholder notes and related
accrued interest which totaled $1.4 million. In addition, we repaid certain
other notes and capital lease obligations totaling $625,000.

Cash used in operating activities totaled $7,000 for the nine months
ended March 31, 1999, compared to cash provided by operating activities of $1.5
million for the same period in the prior year. Payments for advertising costs of
$3.2 million were included in the nine months ended March 31, 1999, versus
$570,000 for the same period in the prior year.

Cash used in investing activities was $913,000 for the nine months
ended March 31, 1999, and consisted of routine purchases of property and
equipment to maintain network reliability.

For the nine months ended March 31, 1999, cash provided by financing
activities totaled $17.0 million, which consisted of proceeds from the initial
public offering of approximately $20 million and proceeds from the exercise of
stock options by option holders less payments of $3.5 million to service and
retire shareholder notes and long-term obligations.

We estimate that cash on hand as of March 31, 1999 of $16.7 million
will meet our operating needs for the next twelve months. Depending on our
financial condition, results of operations and level of acquisition activity, we
may require additional equity or debt financing. There can be no assurance that
additional financing will be available when required. We are currently in
discussions with various lenders concerning a possible credit facility, but
there can be no assurance that we will enter into any facility, and if so, on
what terms.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective with the first quarter of 1999, we were subject to the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." This statement had no impact on our financial
statements as we do not have any items of "comprehensive income." We will
continue to review this statement over

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time to determine if any additional disclosures are necessary based on evolving
circumstances. Also effective with the first quarter of 1999, we were subject to
the provisions of Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information."
The Company does not believe this Statement will have a significant impact on
our financial position or results of operations.

YEAR 2000

The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

State of Readiness

In order to address Year 2000 issues, we have developed and are
implementing a plan to become Year 2000 ready. Our Year 2000 plan covers: (1)
software products that we supply to our customers and (2) our information and
other systems technology. In addition, we will identify and assess the systems
and services of our major vendors, third party network service providers and
other material service providers, and take appropriate remedial actions and
develop contingency plans where appropriate in connection with such third party
systems.

We supply our customers with a software package that, among other
things, allows our customers to access our services. The software package
consists of internally developed software which is bundled with third party
software (collectively, the "Installation Package"). We believe that the current
shipping version of our software package is Year 2000 ready. In addition, we
believe that substantially all of our customer base is presently using a version
of this software package that is Year 2000 ready.

We continue to evaluate our information and other systems technology to
identify and eliminate Year 2000 issues in order to achieve Year 2000 readiness.
We have performed a review of the systems of our more critical third party
providers and have surveyed the publicly available statements issued by vendors
of such systems. Most of our critical third-party providers have made
representations to the effect that they are, or will be, Year 2000 compliant.
We, however, have not undertaken an in-depth evaluation of our critical or other
third-party providers in relation to the Year 2000 issue. Furthermore, we have
no control over whether our third-party providers are, or will be, Year 2000
compliant.

Costs

There are no significant historical costs associated with our Year 2000
readiness efforts and the magnitude of any future costs will depend upon the
nature and extent of any problems that are identified. We expect our future
Year 2000 compliance costs to be less than $100,000.

Risks

The failure to correct a material Year 2000 problem could result in a
complete failure or degradation of the performance of our network or other
systems, including the disruption of operations, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. Presently, however, we believe that our most reasonably likely worst
case scenario related to the Year 2000 is associated with potential concerns
with third-party services or products. Specifically, we are heavily dependent on
a significant number of third-party vendors to provide both network services or
equipment. A significant Year 2000-related disruption of the network services or
equipment provided to us by third-party vendors could cause customers to seek
alternate providers or cause an unmanageable burden on customer service and
technical support, which in turn could materially and adversely affect our
results of operations, liquidity and financial condition. We are not presently
aware of any vendor-related Year 2000 issue that is likely to result in such a
disruption. Although there is inherent uncertainty in the Year 2000 issue, we
expect that as we progress with our Year 2000 Plan, the level of uncertainty
about the impact of the Year 2000 issue will be reduced

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<PAGE> 26

and we should be better positioned to identify the nature and extent of material
risk as a result of any Year 2000 disruptions.

Contingency Plans

We are continuing to assess our risks related to the Year 2000 issue
and determine what contingency plans, if any, need to be implemented. As we
progress with our Year 2000 Plan and identify specific risk areas, we intend to
timely implement additional remedial actions and contingency plans.

The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Our expectations
about risks, future costs, and the timely completion of our Year 2000 efforts
are subject to uncertainties that could cause actual results to differ
materially from what has been discussed above. Factors that could influence
risks, amount of future costs and the effective timing of remediation efforts
include our success in identifying and correcting potential Year 2000 issues and
the ability of third parties to appropriately address their Year 2000 issues.

SAFE HARBOR STATEMENT

The following "Safe Harbor" Statement is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the Statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, we seek the
protections afforded by the Private Securities Litigation Reform Act of 1995.
These risks include, without limitation, (1) that we will not retain or grow our
subscriber base, (2) that we will fail to be competitive with existing and new
competitors, (3) that we will not be able to sustain our current growth, (4)
that we will not adequately respond to technological developments impacting the
Internet, and (5) that needed financing will not be available to us if and as
needed. This list is intended to identify certain of the principal factors that
could cause actual results to differ materially from those described in the
forward-looking statements included elsewhere herein. These factors are not
intended to represent a complete list of all risks and uncertainties inherent in
our business, and should be read in conjunction with the more detailed
cautionary statements included in our other publicly filed reports and
documents.

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BUSINESS

GENERAL

Internet America provides a wide array of Internet services tailored to
meet the needs of individual and business subscribers. As of March 31, 1999 we
had approximately 79,000 subscribers. Our business model is to create high user
density in each geographic area in which we offer services.

INDUSTRY OVERVIEW

Internet access and related value-added services ("Internet services")
represent one of the fastest growing segments of the telecommunications services
marketplace. According to industry estimates, the number of Internet users in
the United States who access the World Wide Web reached approximately 29.2
million in 1997 and is projected to grow to approximately 72.1 million by the
year 2000. In addition, total ISP revenues in the United States are projected to
grow from $4.6 billion in 1997 to $18.3 billion in 2000. Declining prices in the
PC market, continuing improvements in Internet connectivity, advancements in
Internet navigation technology, and the proliferation of services, applications,
information and other content on the Internet have attracted a rapidly growing
number of users.

Numerous companies have moved to enter the Internet services market,
such as (1) telecommunications services providers, including national and
regional interexchange carriers, incumbent local exchange carriers ("LECs") and
competitive LECs, (2) online commercial information service providers, (3)
computer hardware and software providers, (4) cable television operators and (5)
national, regional and local companies that focus primarily on providing
Internet services. These companies pursue a wide variety of business strategies.
For example, cable television operators, who are not required to grant third
party ISPs access to their local networks, are deploying high-speed cable modems
among their subscribers. Incumbent and competitive LECs, which generally provide
third party ISPs access to their local networks, are deploying high-speed data
transmission technologies such as xDSL to support the provision of Internet
services.

There are more than 4,000 national, regional and local ISPs. Some of
these ISPs have chosen to focus on business subscribers, others on individual
subscribers. Most national ISPs have made a major investment in network
infrastructure in anticipation of future high subscriber growth. As a result,
the average national ISP has been experiencing an extended period of losses as
it works to build a profitable base of subscribers in each of the many markets
it serves. In addition to these losses, national ISPs are exposed to a high
level of technological obsolescence risk as Internet access technology continues
to evolve. At the other end of the spectrum, many regional and local ISPs, which
have a much lower investment in network infrastructure, lack the marketing
skills and resources to build a critical mass of subscribers.

STRATEGY

We believe that at the current stage of our industry's development, the
highest priority should be to rapidly build profitable market share, and not to
deploy a large network infrastructure with a substantial number of underutilized
owned or leased POPs. Our growth strategy is focused on (1) acquiring additional
subscribers in our existing markets and (2) deploying our user density business
model in other selected markets. Our goal is to quickly build in a given market
a critical mass of subscribers that will support profitable operations.

Elements of our growth strategy include:

Strategic and Add-On Acquisitions to Rapidly Acquire a Critical Mass of
Subscribers. Our primary growth strategy is to acquire ISPs in new and existing
markets. We are currently investigating strategic acquisition opportunities that
would jump-start our entry into new markets. We also continue to evaluate add-on
acquisitions in existing markets.

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We have already made add-on acquisitions, successfully transitioning four
smaller ISPs' subscribers to the Internet America infrastructure and brand while
eliminating duplicative facilities and operations.

Aggressive Use of Advertising to Build the Internet America Brand. We
extensively use two of the more effective and efficient advertising media --
television and outdoor billboard displays -- to highlight our high-speed,
quality services and strong customer care. We believe these media are
particularly effective in acquiring subscribers, particularly new Internet
users, and building brand awareness. We are currently preparing aggressive
advertising campaigns for new markets. See "-- Marketing and Sales."

Cost-Effective Development of Network Infrastructure. We seek to
develop our network infrastructure in a cost-effective way by deploying physical
infrastructure, particularly POPs, where we can rapidly develop a substantial
subscriber base. Through this disciplined approach, we have been able to achieve
economies of scope and scale more quickly than most other ISPs. The Virtual POP
architecture that we are deploying enables us to enter new markets quickly with
a smaller commitment of long-term capital resources, lower operating costs and
less exposure to technological obsolescence. See "-- Network Infrastructure."

Development of Value-Added Revenue Streams. We provide a number of
value-added services, such as dedicated broadband connectivity, news access, Web
hosting and server co-location. We continue to evaluate and develop potential
new value-added services, seeking to leverage our current sales, marketing and
network capabilities to create additional revenue opportunities. These revenue
streams may arise from technological changes, such as the introduction of
Internet telephony, or other factors. We believe that our business model
provides an excellent platform for the introduction of new value-added services
that can take advantage of brand awareness and economies of scope and scale,
potentially including video and audio programming distribution.

Maintenance of a First-Rate Customer Care Operation. Our sophisticated,
high-quality customer care operation is designed to make every customer's
Internet experience efficient, productive and enjoyable, whether that customer
is a novice or an experienced Internet user. We believe that this operation is a
substantial competitive advantage. See "-- Customer Care."

SERVICES

We offer Internet services tailored to meet the needs of both our
individual and business subscribers. We offer our individual subscribers dial-up
Internet access and value-added services. Our business subscribers take
advantage of dedicated high speed Internet access, Web hosting and other
services. Our services are offered in various prices and packages so that
subscribers may customize their subscription with services that meet their
particular requirements.

The majority of our subscribers have month-to-month subscriptions. We
offer a 30-day money-back satisfaction guarantee for new subscribers.
Subscriptions can be started by calling the 1-800-BE-A-GEEK phone number,
e-mailing the Company or enrolling through our Web site. The majority of our
subscribers are billed through automatic charges to their credit cards or bank
account, although some of our subscribers are invoiced. We offer discounts
ranging from 10% to 20% on most of our services for subscribers who prepay.

Internet Access. Our primary service is a dial-up Internet access
package, which includes unlimited Internet access and various Internet
applications such as World Wide Web, e-mail, Internet relay chat, file transfer
protocol and Usenet news access. The package costs $19.95 per month plus a
$29.95 activation fee. Value-added services available for an additional fee
include multiple e-mail mailboxes, personalized e-mail addresses and personal
Web sites. We also offer individual dedicated analog connections for $79 a month
plus a $79 setup fee.

Airnews.net. Our Airnews.net provides access to our news services for
subscribers of other Internet services and on a wholesale basis to other
businesses or ISPs. The service has approximately 3,800 subscribers in 35
countries

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and provides access to millions of articles. The service is included
in our dial-up access package and costs $10 per month for other retail
subscribers.

High Speed Connectivity. In addition to offering dial-up and dedicated
analog access, we also offer our business subscribers dedicated high speed
access, including ISDN, xDSL and full and partial T-1 connectivity, which can
service hundreds of users at once. We offer numerous services related to a
subscriber's T-1 connection, including hardware configuration and local loop
installation. In addition, we provide 24-hour network monitoring to alert
subscribers of any circuit trouble. T-1 connections have a setup fee of $995 and
monthly fees ranging from $470 to $1295, depending on the type of services
purchased. Fees for dedicated ISDN access are $540 for setup and $300 to $400
per month depending on the speed of the circuit.

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. With this "virtual Web server" service, Web hosting subscribers can
use their own domain names in their World Wide Web addresses. Web hosting
subscribers are responsible for building their own Web sites and then uploading
the pages to our Web server. Our Web hosting service features state-of-the-art
Web 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. We currently offer various price
plans for Web hosting subscribers beginning at $20 per month. We had
approximately 1,350 Web hosting subscribers as of March 31, 1999.

We offer Web server co-location services at our headquarters in Dallas
for subscribers who want to maintain their own Web servers in our
state-of-the-art data telecommunications environment and receive a high-speed,
full-time connection to the Internet. Our co-location services include 24-hour
security monitoring, uninterruptible power (battery and generator), climate
control and after-hours access for the subscriber. We also offer domain name
registration and hosting to protect the use of the name of a subscriber's Web
site address.

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. See "-- Systems
Infrastructure." 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 prioritizing fast response to customer
problems. Individuals accessing the Internet have many different hardware
configurations and varying levels of computer sophistication. Consequently, our
customer care department must be able to efficiently and effectively address (1)
problems affecting a variety of hardware systems, (2) start-up or other basic
problems of new subscribers or new Internet users and (3) more technical issues
that sophisticated users may encounter. We are committed to providing the best
technical support in the industry, especially for new users, while maintaining
the ability to resolve the most difficult problems that a sophisticated user may
present.

Our customer care department includes approximately 70% of our
employees, or approximately 90 employees as of March 31, 1999. Customer care is
available to subscribers 24-hours-a-day, 7-days-a-week. The department is
organized in three-tiers designed to respond to varying types of support needs.
The three tiers are staffed with knowledgeable and experienced support
technicians able to diagnose customer problems and prescribe corrective
measures. Each call is routed to the appropriate tier of the department for
response. Our customer care department answers approximately 5,000 calls per
week. The average "hold" time is less than 45 seconds, and approximately 65% of
all calls are resolved within four minutes of the caller's initial contact with
the technician. In addition to diagnosing and resolving subscribers' technical
problems, our customer care department answers subscriber account questions,
responds to software requests and provides configuration information.

Subscribers can access customer support services through a local
telephone number or e-mail. We maintain on our Web site a comprehensive
description of our customer care services, as well as troubleshooting tips and

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configuration information. Additionally, we offer to our subscribers free
educational classes, which are held weekly at our Dallas location. Subscribers
can also obtain recorded system and network status reports at any time and
review extensive system and network performance via the World Wide Web.

MARKETING

Our marketing approach is to focus on rapid penetration of a given
market to acquire a critical mass of subscribers to support profitable
operations. Our approach combines direct response with brand building
advertising. We make extensive use of television and outdoor billboard displays,
rather than print, radio or direct mail. We continually evaluate the
effectiveness of our marketing methods, primarily by analyzing sales statistics
such as call volumes, sales volumes, media mix and incentive offer response, so
that we can refine our marketing campaign. We also use input from focus groups
and other subscriber contacts to determine what marketing methods and incentives
will be most effective.

We reinforce the subscriber's purchase decision and stimulate referral
business by sending the subscriber a welcome letter with the start-up package.
We also send all subscribers quarterly e-mail newsletters containing information
and updates on our services, as well as reminders about our referral incentive
programs.

Our integrated marketing and sales approach includes the following
elements:

Direct Response Television Advertising. We believe that television is
the most effective and efficient way of reaching potential subscribers,
particularly first-time Internet users. Through our television advertising
campaign, we have been able to elicit a strong response from potential
subscribers, who are asked to contact us through a telephone call to
1-800-BE-A-GEEK. Television advertising also helps to reinforce brand awareness
of Internet America.

Outdoor Advertising and Other Media. We use billboard campaigns to
establish and reinforce brand awareness. We use other media to reach potential
subscribers only under special circumstances. For example, we have used
alternative print media to reach Internet "power users."

INFRASTRUCTURE

Our current network provides subscribers with local dial-up access in
our market areas. Our systems and network infrastructure are designed to provide
subscribers with reliability and speed. Reliability is primarily 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.

Network Infrastructure. Our primary internal network consists of Fiber
Distributed Data Interface networks that incorporate FDDI Full Duplex
Technology, coupled with a Dual Redundant Digital GIGASwitch. This internal
backbone solution is superior in our ability to handle sustained high-speed
traffic, resilience to failure and redundancy. The internal backbone's level of
redundancy substantially reduces potential data loss and avoids congestion
common with other backbone architectures. The technology incorporated into the
GIGASwitch is capable of operating under extreme loads and is fault-tolerant.
This design and backbone network system is similar to that deployed at most of
the more advanced Internet switching centers worldwide.

Our network system incorporates safety features to separate internal
data from external sources, as well as provides a redundant network in case of
catastrophic network failure. Our facilities are powered by a computer
controlled uninterruptible power supply that provides company-wide battery
backup, surge protection and power conditioning. An automatic onsite diesel
generator provides power for prolonged power outages.

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We also maintain a Network Operations and Control Center ("NOCC") with
a full-time staff. This continually staffed facility is responsible for
monitoring the status of all networking facilities, components, applications and
equipment deployed throughout our infrastructure. The NOCC is responsible for
all operational communications between our internal departments as well as
external providers of services. The NOCC utilizes software which provides
real-time monitoring of each component or application and is responsible for
notifications of quality of service problems as well as failures. Sophisticated
historical and statistical analysis software used in the NOCC provides data to
management about the quality of service our 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 news access services,
utilize a network of servers connected directly to our FFDT backbone. These
systems are also connected, via another FFDT network, to our high-availability
network file server. This direct connection minimizes latency for subscribers
accessing these applications. 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. Utilizing lower
cost hardware has resulted in significantly reduced operations expense and high
reliability. We expect to minimize our future use of high cost equipment by
employing multiple lower cost hardware components as we develop and apply new
technologies. Notwithstanding the attributes of our network, it is subject to
malfunctions and other limitations, any of which could have a material adverse
effect on our business, financial condition and results of operations. See "Risk
Factors -- Network Capacity Constraints or Systems Failure Could Cause Us to
Lose Subscribers."

Physical and Virtual POPs. We currently have five physical POPs, which
are located in leased space containing inbound local telephone lines, modems and
related communications equipment. Additionally, we have implemented a "Virtual
POP" architecture, which allows us to provide local access services without
deploying physical infrastructure. The benefits of this architecture include
substantially reduced capital expenditures, lower operating costs 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. Our intent is to transition our subscribers to our
Virtual POP architecture as soon as services, capacity and reliability are
available at reasonable costs.

The Virtual POP architecture enables subscribers to dial a local phone
number and connect to a modem owned by and housed at 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. Other regional ISPs commonly use leased
network capacity, which can result in their subscribers' Internet experiences
being almost entirely outside of the ISPs' control. In fact, utilizing a leased
network may cause the subscriber to compete with subscribers of other ISPs for
access and bandwidth. In contrast, our Virtual POP architecture uses private
networks to carry subscriber data calls back to our network and application
servers. In this manner, we maintain strict quality control over our
subscribers' Internet experiences, leading to higher levels of customer
satisfaction. At March 31, 1999, approximately 93% of our subscribers were
serviced by Virtual POPs.

Our Virtual POP architecture and user density business model position
us to quickly take advantage of emerging high-speed technologies such as xDSL,
wireless and other Internet delivery methods. Leveraging a dense subscriber base
should enable us to economically offer other emerging technologies, such as
Internet telephony, particularly Voice Over Internet Protocol, video and audio
distribution and other high-bandwidth, low latency technologies.

Management Information Systems. Our MIS department uses a near
real-time subscriber database, billing and flow-through fulfillment system. This
system handles all subscriber contact and billing information for our dial-up
access, Airnews.net and Airmail.net services. The system maintains access
controls for the authentication servers and various applications. The system
also creates subscriber invoices and automatically processes credit card charges
and

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automatic check handling. We are currently transitioning to an integrated
financial and information reporting system that will automate many additional
functions and provide financial, marketing and management reports.

TECHNOLOGY AND DEVELOPMENT

We continuously evaluate new technology and applications for possible
introduction. In particular, we have recently deployed a high-speed connectivity
technology, xDSL, in our established markets. xDSL uses existing twisted copper
pair wires running from a LEC's central office to a subscriber's home or office
to provide high-speed connectivity. Initially, provisioning of xDSL service is
expected to be difficult and time-consuming, requiring close coordination
between the provisioning LEC, us and our subscriber. We believe that because of
our user density business model, we will be able to spread the personnel,
hardware, marketing and other costs of such deployment over a sufficiently large
base of subscribers in a specific local market.

High-speed connectivity is essential to the commercially viable
deployment of new, value-added services such as Internet telephony, particularly
Voice Over Internet Protocol, video and audio programming distribution and other
high-bandwidth, low-latency applications. Again, we believe that our user
density business model is particularly well suited to the marketing and
deployment of these services. We continue to stay abreast of developments in
these and other areas.

PROPRIETARY RIGHTS

General. Although we believe that our success is more dependent upon
our technical, marketing and customer service expertise than our proprietary
rights, our success and ability to compete are dependent in part upon our
proprietary rights. We rely on a combination of copyright, trademark and trade
secret laws. "Internet America" and "1- 800-BE-A-GEEK" are registered service
marks of Internet America. Service mark applications are pending for the
registration of "Airnews.net," "Airmail.net," "Airweb.net," their respective
logos and the Internet America logo. There can be no assurance that the steps we
have taken will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. See "Risk Factors -- We
Depend on the Protection of Our Proprietary Rights."

Licenses. We have obtained authorization to use the products of each
manufacturer of software that we bundle in our front-end software product for
Windows and Macintosh subscribers. The particular applications included in the
our start-up package have, when necessary, been licensed. We currently intend to
maintain or negotiate renewals of all existing software licenses and
authorizations as necessary. We may also want or need to license other
applications in the future. Other applications included in our start-up package
are shareware that we have obtained permission to distribute or that are from
the public domain and are freely distributable.

COMPETITION

The market for the provision of Internet access to individuals is
extremely competitive and highly fragmented. 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 are a
reputation for reliability and service, access speed, effective customer
support, pricing, creative marketing, easy-to-use software and geographic
coverage. Other important factors include the timing of introductions of new
products and services and industry and general economic trends.

Our current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than we do. We currently compete or expect to
compete with the following types of Internet access providers: (1) national
commercial providers, such as Verio, Inc., Mindspring Enterprises, Inc. and
EarthLink Network, Inc.; (2) numerous regional and local commercial providers
which vary widely in quality, service offerings and pricing such as FlashNet,
Inc. and PDQ Net, Inc.; (3) established online commercial

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<PAGE> 33

information service providers, such as America Online, Inc.; (4) computer
hardware and software and other technology companies, such as International
Business Machines Corporation, Microsoft Corp. and Gateway, Inc.; (5) national
telecommunications providers, such as AT&T, MCI WorldCom, Sprint and WinStar
Communications, Inc.; (6) regional telecommunications providers, such as SBC
Communications and IXC Communications; (7) cable operators, such as
Tele-Communications, Inc., Time Warner, Inc., TCA Cable, Inc. and Marcus Cable,
Inc.; (8) wireless communications companies; (9) satellite companies; and (10)
nonprofit or educational Internet access providers.

All of the major long-distance companies offer Internet access services
and compete with us. Local exchange carriers, including regional Bell operating
companies and competitive local exchange carriers, also have entered the
Internet service provider market. We believe long-distance and local carriers
are moving toward horizontal integration through acquisitions of, and joint
ventures with, Internet service providers. Accordingly, we expect we will
experience increased competition from the traditional telecommunications
carriers both for customers and potential acquisitions. Many of these
telecommunications carriers, in addition to their substantially greater
coverage, market presence and financial, technical and marketing resources, also
have large, existing commercial customer bases. Telecommunications providers
also may have the ability to bundle Internet access with basic local and
long-distance telecommunications services. This bundling of services may make it
difficult for us to compete effectively with telecommunications providers and
may cause us to lower our prices, which will result in reduced revenues.

As consumer awareness of the Internet grows, existing competitors are
likely to increase their emphasis on Internet access services. Additionally, new
competitors, including large computer hardware and software, media and
telecommunications companies, will continue to enter the Internet services
market, resulting in even greater competition. In particular, we may face
increased competition in the future from companies that provide connections to
consumers' homes, including local and long distance telephone companies, cable
companies, electric utility companies and wireless communications companies. For
example, cable television companies offer Internet access through their cable
facilities at significantly faster rates than existing modem speeds. These
companies can include Internet access in their basic bundle of services or offer
access for a nominal additional charge, and could prevent us from delivering
Internet access through the wire and cable connections that they own.

In addition to reduced pricing, competition could also result in
increased selling and marketing expenses, related customer acquisition costs and
customer attrition, all of which could materially adversely affect our
operations and financial condition. We cannot be certain that we will be able to
offset the effects of any such increased costs or reductions in our prices
through an increase in the number of our customers, higher revenues from
enhanced services, cost reductions or otherwise, or that we will have the
resources to continue to compete successfully. See "Risk Factors-- Intense
Competition May Result in Reduced Revenues and Profitability" on page 6.

GOVERNMENT REGULATION

We provide Internet access, in part, through transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. As an Internet access
provider, we are not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. In a report to Congress adopted
on April 10, 1998, the FCC reaffirmed that Internet access providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the 1996 Telecommunications
Act. The consequence of this finding is that we are not subject to regulations
applicable to telephone companies and similar carriers merely because we provide
our services via telecommunications networks. We also are not required to
contribute to the universal service fund, which subsidizes phone service for
rural and low income consumers and supports Internet access among schools and
libraries. The FCC action may also discourage states from regulating Internet
access providers as telecommunications carriers or imposing similar subsidy
obligations.

Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider

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<PAGE> 34

whether to regulate voice and fax telephony services provided over the Internet
as "telecommunications" even though Internet access itself would not be
regulated. The FCC is also considering whether such Internet-based telephone
services should be subject to the universal service support obligations
discussed above, or should pay carrier access charges on the same basis as
traditional telecommunications companies. Access charges are assessed by local
telephone companies to long distance companies for the use of the local
telephone network to originate and terminate long distance calls, generally on a
per-minute basis. Access charges have been a matter of continuing dispute, with
long distance companies complaining that the rates are substantially in excess
of cost and local telephone companies arguing that access rates are justified to
subsidize lower local rates for end users and other purposes. Both local and
long distance companies, however, contend that Internet-based telephony should
be subject to these charges. We currently do not offer telephony, and so are not
directly affected by these developments. However, should we offer telephony in
the future, we may be affected by these issues. Additionally, we cannot predict
whether these debates will cause the FCC to reconsider its current policy of not
regulating Internet access providers.

In a notice of proposed rulemaking adopted on August 6, 1998, the FCC
proposed that if an incumbent LEC established a separate affiliate to pursue the
deployment of advanced telecommunications services such as xDSL and that
affiliate interconnected with the LEC's network on the same terms and conditions
as the LEC's competitors did, then the affiliate would not be subject to the
unbundling requirement that applied to the LEC. If the FCC ultimately adopted
this proposal or similar proposals, our access to xDSL and other high-speed data
technology could be curtailed. Such curtailment could have a material adverse
effect on our business, financial condition and results of operations.

Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, pricing, encryption
standards, consumer protection, electronic commerce, taxation, copyright
infringement and other intellectual property issues. We cannot predict the
impact, if any, that any future regulatory changes or development may have on
our business, financial condition and results of operations. Changes in the
regulatory environment relating to the Internet access industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on our business,
financial condition and results of operations. See "Risk Factors -- Government
Regulation May Increase Our Costs of Doing Business" on page 6.

PROPERTIES

Our corporate office is located in downtown Dallas at One Dallas
Centre, 350 N. St. Paul, Suite 3000, where all executive, systems, sales and
technical support functions exist. We lease approximately 31,000 square feet
under multiple leases that terminate November 1, 2001. Aggregate monthly rental
payments under such leases are approximately $33,000. We also have leased small
equipment room facilities for each of our other physical POPs in Corsicana,
Denison, Weatherford and San Angelo, Texas. We do not own any real estate. We
believe that all of our facilities are adequately maintained and suitable for
their present use.

EMPLOYEES

As of March 31, 1999, we had approximately 130 employees, which
includes 93 customer care employees. We anticipate that the development of our
business will require the hiring of additional employees. None of our current
employees are represented by a labor organization, and our management considers
our employee relations to be good. See "Risk Factors -- If We Cannot Attract and
Retain Key Personnel, Our Business Will Suffer."

LEGAL PROCEEDINGS

We are not involved in any material pending legal proceeding.

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<PAGE> 35

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The names, ages and positions of the executive officers and directors
of the Company, are:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael T. Maples....................... 43 President, Chief Executive Officer and Director
Douglas L. Davis........................ 32 Executive Vice President and Chief Operating Officer
James T. Chaney......................... 43 Vice President, Chief Financial Officer, Secretary and Treasurer
John James Stewart III................... 38 Vice President -- Customer Care
William O. Hunt(1)(2)................... 65 Chairman of the Board
Jack T. Smith(1)(2)..................... 45 Director
Gary L. Corona(1)(2).................... 47 Director
Douglas G. Sheldon....................... 39 Director
</TABLE>

- ----------

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Directors are elected to hold office until the next annual meeting of
the shareholders or until their successors are duly elected and qualified.
Officers serve at the discretion of the Board of Directors.

MICHAEL T. MAPLES has served as our President and Chief Executive
Officer since March 1997 and has served as one of our directors since April
1997. Mr. Maples joined us in September 1996. Prior to joining us, Mr. Maples
was Vice President of Westcott Communications, Inc., a provider of educational,
motivational and instructional programming for various industries via satellite
delivered television or videotape. From 1988 to 1996, Mr. Maples was the General
Manager of the Automotive and Government Services business units of Westcott
Communications, Inc.

DOUGLAS L. DAVIS has served as our Executive Vice President and Chief
Operating Officer since July 1996, and served as our Chief Technology Officer
from January to July 1996. Mr. Davis joined us as the head of R&D in November
1995. From 1991 to October 1995, Mr. Davis was the Director of Computer
Operations for the School of Engineering and Applied Science at Southern
Methodist University, where he was in charge of developing and supporting the
school's technological infrastructure and also contributed to and published
several papers on Internet matters. From 1989 to 1991, Mr. Davis was a software
engineer for Dallas-based Logic Process, Inc., a company that manufactures
single and multi-processor Unix systems.

JAMES T. CHANEY joined us in December 1997 as Chief Financial Officer,
and has served as Vice President, Chief Financial Officer, Secretary and
Treasurer since February 1998. Prior to joining us, Mr. Chaney was Tax Manager
at Judd, Thomas, Smith & Co., CPA's, Dallas, Texas, where he managed the tax
department and performed tax and financial planning for clients in the real
estate and oil and gas industries. From 1990 to 1994, he was self-employed as a
Certified Public Accountant.

JOHN JAMES STEWART III has served as our Vice President -- Customer
Care since May 1997. Mr. Stewart joined us in September 1995 as the Director of
Technical Support, and has also served as Director of Training and Customer
Retention Officer. From February 1993 until joining us, Mr. Stewart was employed
by Toys R Us. While at Toys R Us, he served as Assistant Store Director and
Department Manager.

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<PAGE> 36

WILLIAM O. HUNT has served as our Chairman of the Board and as one of
our directors since May 1995. Mr. Hunt is currently Chairman of the Board and
director of Intellicall, Inc., a diversified telecommunications company
providing products and services to pay telephone networks on a worldwide basis.
From December 1992 to May 1998, Mr. Hunt served as Chief Executive Officer of
Intellicall, Inc. From August 1990 to March 1996, Mr. Hunt served as Chairman or
Vice Chairman of the Board and director of Hogan Systems, Inc., a designer of
integrated online application software products for financial institutions. He
is also a director of American Homestar Corporation, Dr. Pepper Bottling
Holdings, Inc., The Allen Group, Inc., DSC Communications Corporation and OpTel,
Inc.

JACK T. SMITH has served as one of our directors since November 1995.
Mr. Smith is currently the President and Chief Operating Officer of Jayhawk
Acceptance Corporation, a specialized financial services company, and has served
as a director of that company since its inception. From June 1996 to September
1997, Mr. Smith was employed as an independent business consultant. From 1989
until its acquisition by Primedia, Inc., in June 1996, Mr. Smith was President
and Chief Operating Officer of Westcott Communications. He is also a director of
First Extended Service Corporation and FFG Insurance Company.

GARY L. CORONA has served as one of our directors May 1998. Mr. Corona
is currently the General Manager of the Automotive Division of Jayhawk. From
July 1996 to July 1997, Mr. Corona served as a business consultant for Carl
Westcott LLC. From July 1990 until its acquisition by Primedia, Inc., in June
1996, Mr. Corona was Vice President, New Business Development of Westcott
Communications. Mr. Corona is a director of First Extended Service Corporation
and FFG Insurance Company.

DOUGLAS G. SHELDON served as our Vice President -- Marketing from
September 1997 through May 1999, and has served as one of our directors since
June 1996. From 1986 through May 1996, Mr. Sheldon served in a managerial
capacity with the combined companies of the American Broadcasting Co., Capital
Cities/ABC, Inc. and The Disney Company. He has also served as a director of
FuturDallas, Dallas Advertising League, American Women in Radio and Television
and President and director of D/FW Radio Marketing Association.

BOARD COMMITTEES

The Compensation Committee currently consists of Messrs. Hunt, Smith
and Corona. The Compensation Committee recommends compensation for all executive
officers and administers incentive compensation and benefit plans.

The Audit Committee currently consists of Messrs. Hunt, Smith and
Corona. The Audit Committee meets periodically with our management and
independent auditors and reviews the results and scope of the audit and other
services provided by our independent auditors, our accounting procedures and the
adequacy of our internal controls.

COMPENSATION OF DIRECTORS

Upon consummation of our initial public offering, directors who were
not also our employees ("Independent Directors") received an annual retainer
upon election to the Board of $6,000 (pro rata for existing Independent
Directors for the first partial year) and an additional $750 for each Board
meeting attended. All of our directors are reimbursed for travel, lodging and
other out-of-pocket expenses in connection with their attendance at Board and
committee meetings. Each Independent Director, upon election to the Board of
Directors will receive a non-qualified option to purchase 22,500 shares of
Common Stock (which will be immediately exercisable), and following his initial
term, if reelected, and every fourth year thereafter, if reelected, such
director will receive a non-qualified option to purchase 20,000 shares of Common
Stock (with such options vesting 25% annually, commencing on the date of
issuance and continuing on the first, second and third anniversaries of the date
of issuance, subject to such director's continued reelection to the Board of
Directors). Each Independent Director holding office at the time of consummation
of our initial public offering received such options as if he had been initially
elected as of such date. All other options issued

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<PAGE> 37

to Independent Directors will be issued pursuant to the 1998 Option Plan. See
"-- 1998 Nonqualified Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors has a Compensation Committee, which currently is
comprised of Messrs. Hunt, Smith and Corona. None of our executive officers
currently serves on the compensation committee of another entity or any other
committee of the board of directors of another entity performing similar
functions.

EXECUTIVE COMPENSATION

The following table sets forth the information regarding compensation
(on an annualized basis) for our Chief Executive Officer and other most highly
compensated executive officer for the period indicated. No other executive
officers were compensated over $100,000 in fiscal 1998.

SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
--------------------------- ---- ------ ------------ -------
<S> <C> <C> <C> <C>
Michael T. Maples,
Chief Executive Officer........... 1998 $108,333 -- 157,500(1)

Douglas L. Davis,
Chief Operating Officer........... 1998 110,000 -- --
</TABLE>

- --------------------

(1) Mr. Maples was granted an option to purchase 157,500 shares of Common
Stock at an exercise price of $1.67 per share on March 24, 1998.

The following table sets forth the information regarding option grants
during the last fiscal year for our Chief Executive Officer and certain other
executive officers.

OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
---- ------- ----------- --------- ----
<S> <C> <C> <C> <C> <C>
Michael T. Maples... 157,500 40% $ 1.67 March 24, 2008
Douglas L. Davis.... -- -- -- --
</TABLE>

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<PAGE> 38

The following table sets forth the information regarding our aggregate
option exercises in the last fiscal year and fiscal year-end option values for
our Chief Executive Officer and certain other executive officers.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED I-THE-MONEY OPTIONS
SHARES OPTIONS AT FY END(#) AT FY END ($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Maples -- -- 67,500 157,500 $1,642,275 $3,831,975
Douglas L. Davis. -- -- 112,500 -- 2,737,125 --
</TABLE>

- -----------------

(1) The value of the options is based on the difference between the option
exercise price of $1.67 per share for all options and $26.00 (which
was the closing sales price per share of the Common Stock on May 13,
1999 as reported on Nasdaq) multiplied by the number of shares of
Common Stock underlying the option. No public market existed for the
Common Stock at the fiscal year ended June 30, 1998.

1996 INCENTIVE STOCK OPTION PLAN

Our 1996 Incentive Stock Option Plan (the "1996 Option Plan") was
adopted by the Board of Directors and our shareholders in December 1996.
Pursuant to the 1996 Option Plan, we may grant incentive and nonstatutory
(nonqualified) stock options to our key employees and directors. A total of
225,000 shares of Common Stock have been reserved for issuance under the 1996
Option Plan.

The Compensation Committee has the authority to select the employees
and directors to whom stock options are granted. Subject to the limitations set
forth in the 1996 Option Plan, the Compensation Committee has the sole
discretion and authority to determine from time to time the persons to whom
options shall be granted and the number of shares covered by each option, to
interpret the 1996 Option Plan, to establish vesting schedules, to specify the
type of consideration to be paid upon exercise and, subject to certain
restrictions, to specify other terms of the options.

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. Options granted under the 1996 Option Plan are in
most cases nontransferable and generally expire within three months after the
termination of the optionee's services to us. In general, if an optionee is
disabled, dies or retires from his or her service to us, 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.

The exercise price of incentive stock options must be not less than the
fair market value of the 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. The term of those options cannot exceed five years.

We currently have 42,368 options outstanding to our employees under the
1996 Option Plan. These options are exercisable at $1.67 per share of Common
Stock. The exercise price of 38,619 of such options was adjusted from $3.33 per
share to $1.67 per share on March 24, 1998 by the Board of Directors. We have
filed a registration statement on Form S-8 for the 225,000 shares of Common
Stock reserved for issuance under the 1996 Option Plan.

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<PAGE> 39

NONQUALIFIED STOCK OPTIONS

Mr. Maples was granted an option to purchase 67,500 shares of Common
Stock at an exercise price of $3.33 per share on October 27, 1996. The exercise
price of this option was adjusted to $1.67 per share by the Board of Directors
on March 24, 1998. Additionally, on March 24, 1998, Mr. Maples was granted an
option to purchase 157,500 shares of Common Stock at an exercise price of $1.67
per share. Mr. Sheldon was granted an option to purchase 22,500 shares of Common
Stock at an exercise price of $3.33 per share (such exercise price was adjusted
to $1.67 per share on March 24, 1998) and an option to purchase 67,500 shares of
Common Stock at an exercise price of $1.67 per share, on June 27, 1996 and March
24, 1998, respectively. On April 5, 1996, Messrs. Hunt and Smith were each
granted an option to purchase 22,500 shares of Common Stock at an exercise price
of $1.67 per share. On December 15, 1995, Mr. Davis was granted an option to
purchase 112,500 shares of Common Stock at an exercise price of $1.67 per share.
Mr. Chaney was granted an option to purchase 78,750 shares of Common Stock at an
exercise price of $1.67 per share on March 24, 1998. Mr. Stewart was granted an
option to purchase 56,250 shares of Common Stock at an exercise price of $1.67
per share on March 24, 1998. All of the options granted to our directors and
officers are nonqualified stock options.

Additionally, on October 27, 1996, 215,026 options were granted to
certain of our founders at an exercise price of $3.33 per share in connection
with such founders' pledge of their Internet America stock to guarantee the
bridge loan from First Computer Services Corporation. The exercise price of
these options was adjusted to $1.67 per share by the Board of Directors on March
24, 1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

We currently have 891,100 nonqualified options outstanding to certain
of our officers, employees and advisors. These options are exercisable at prices
ranging from $0.09 per share of Common Stock to $8.00 per share of Common Stock.
We have filed registration statements on Form S-8 for 730,000 shares of Common
Stock in connection with non-qualified stock options granted to certain current
and former officers, directors and employees.

1998 NONQUALIFIED STOCK OPTION PLAN

Our 1998 Nonqualified Stock Option Plan (the "1998 Option Plan") was
adopted by the Board of Directors and our shareholders on July 13, 1998. The
purpose of the 1998 Option Plan is to promote our growth and general prosperity
by permitting us to grant to our employees, directors and advisors options to
purchase Common Stock. Pursuant to the 1998 Option Plan, we may grant
nonstatutory (nonqualified) stock options to our employees, directors and
advisors. A total of 400,000 shares of Common Stock have been reserved for
issuance under the 1998 Option Plan. In July 1998, Mr. Corona was issued an
option to purchase 22,500 shares of Common Stock at an exercise price of $8.00
per share pursuant to the 1998 Option Plan. In December 1998, Messrs. Corona,
Hunt and Smith were each issued options to purchase 22,500 shares of Common
Stock at an exercise price of $13.00 per share pursuant to the 1998 Option Plan.
In April 1999, Mr. Corona was issued options to purchase 75,000 shares of Common
Stock at an exercise price of $25.00 per share pursuant to the 1998 Option Plan.
Additionally, in December 1998, certain of our employees were issued options to
purchase an aggregate of 19,000 shares of Common Stock at the exercise price of
$13.00 per share under the 1998 Option Plan.

The Compensation Committee has the authority to select the employees,
directors and advisors to whom stock options are granted. Subject to the
limitations set forth in the 1998 Option Plan, the Compensation Committee has
the sole discretion and authority to determine the persons to whom options shall
be granted and the number of shares covered by each option, to interpret the
1998 Option Plan, to establish vesting schedules, to specify the type of
consideration to be paid upon exercise and, subject to certain restrictions, to
specify other terms of the options.

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

37
<PAGE> 40

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.

EMPLOYEE STOCK PURCHASE PLAN

On April 20, 1999, our Board of Directors approved the Employee Stock
Purchase Plan subject to shareholder approval at our next annual meeting of
shareholders. The purpose of the Employee Plan is to provide eligible employees
with an opportunity to purchase our Common Stock through accumulated payroll
withholding amounts and to thereby acquire or increase their proprietary
interest in us. The Employee Plan provides that 200,000 shares of Common Stock
will be reserved for offerings under the Employee Plan, subject to adjustment
upon the occurrence of certain events. To the extent Common Stock is available
for purchase by eligible employees under the Employee Plan, we may make
consecutive quarterly offerings of Common Stock, but we reserve the right to
terminate the Employee Plan at any time. The provisions of the Employee Plan are
intended to satisfy the requirements of Section 423 of the Internal Revenue Code
of 1986, as amended, and to comply with Section 16(b) of the Securities Exchange
Act of 1934, as amended. The Employee Plan is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended, and is not a
qualified plan under Internal Revenue Code Section 401(a). The Employee Plan is
administered by the Board of Directors or by a committee of individuals, who may
be our officers, appointed from time to time by the Board of Directors.

Under the Employee Plan, eligible employees are granted an option to
purchase the greatest number of whole shares of our Common Stock that may be
purchased with the amount elected by the eligible employee to be withheld from
the eligible employee's after-tax base pay, up to 10% of the before-tax base
pay, during a calendar quarter. An eligible employee may not purchase more than
$25,000 in value of Common Stock under the Employee Plan during any calendar
year. The price paid for each share of Common Stock under the Employee Plan is
the lesser of (1) 85% of the fair market value of a share of Common Stock on the
first day of each calendar quarter, or (2) 85% of the fair market value of a
share Common Stock on the exercise date. We will pay all transaction costs,
including brokerage commissions, in connection with the purchase of Common Stock
under the Employee Plan.

We have commenced a quarterly offering under the Employee Plan, but to
date, no shares of Common Stock have been purchased under the Employee Plan. We
have filed a registration statement on Form S-8 for the 200,000 shares of Common
Stock reserved for issuance under the Employee Plan.

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<PAGE> 41

CERTAIN TRANSACTIONS

On January 31, 1997, we entered into a letter agreement (the "First
Extended Agreement") with First Extended, Inc. (successor in interest to First
Computer Services Corporation, which was owned by Carl Westcott, one of our
principal shareholders) and William O. Hunt, one of our directors. First
Extended acted as a nominee for Jack T. Smith, one of our directors, Michael T.
Maples, our Chief Executive Officer and one of our directors, and Mr. Westcott.
Under the terms of the First Extended Agreement, we made a promissory note in
the original principal amount of $650,000 in favor of First Extended (the "First
Extended Note"). The First Extended Note and First Extended Agreement provided
that we could borrow up to $650,000 from First Extended. All advances under the
First Extended Note and First Extended Agreement were made at First Extended's
discretion. We had borrowed a total of $250,000 under the First Extended Note
and First Extended Agreement. The First Extended Note bore interest at 18% per
annum, and all principal and interest were originally payable on April 1, 1997.
The First Extended Note, which was in default, was refinanced at prime rate in
June 1998 as set forth below and was paid off on July 14, 1998.

On March 24, 1998, Carl Westcott LLC, as nominee for Messrs. Westcott,
Maples, Smith, Corona and others, and Messrs. Hunt and Sheldon entered into a
Stock Purchase Agreement pursuant to which Carl Westcott LLC, as nominee, and
Messrs. Hunt and Sheldon purchased all of the 1,987,124 shares of Common Stock
held by Messrs. Maynard, Nanni and Martin in exchange for $883,166.

Mr. Hunt personally guaranteed payment under a promissory note made by
us in the original principal amount of $350,000 payable to NationsBank, N.A.
(the "NationsBank Note"). A total of $225,000 was borrowed under the NationsBank
Note, which bore interest at the bank's prime rate. The NationsBank Note
originally matured on July 15, 1997 and was renewed through December 15, 1998. A
guarantee fee would accrue to Mr. Hunt at 18% minus the bank's prime rate if the
NationsBank Note became in default. The guarantee fee and all principal were
payable upon demand of the guarantor. All advances under the NationsBank Note
required the consent of the guarantor.

In June 1998, we refinanced the First Computer Note and the First
Extended Note pursuant to a Letter Agreement between us and Messrs. Hunt, Smith
and Westcott (the "Letter Agreement"). Pursuant to the Letter Agreement, we made
the following promissory notes: (1) Amended and Restated Promissory Note payable
to Mr. Smith in the principal amount of $229,450, (2) Amended and Restated
Promissory Note payable to Mr. Smith in the principal amount of $77,694, (3)
Amended and Restated Promissory Note payable to Mr. Westcott in the principal
amount of $1,538,263 and (4) Amended and Restated Promissory Note payable to Mr.
Westcott in the principal amount of $172,306 (collectively, the "Amended
Notes"). All of the Amended Notes bore interest per annum at the NationsBank of
Texas, N.A. prime rate. Pursuant to the Letter Agreement, we were to make a
monthly payment of $140,000, which would be applied pro rata to the repayment of
the Amended Notes and the NationsBank Note. In the event of default under any of
the Amended Notes, the outstanding indebtedness of such note was convertible
into shares of Common Stock at the price of $0.44 per share at the option of the
noteholders. Mr. Maples sold his interest in the Amended Notes to Carl Westcott.
Under the Amended Notes and the Letter Agreement, in the event of any offering
of our securities pursuant to a registration statement declared effective by the
Securities and Exchange Commission or the sale or issuance of our securities
through which we raise a minimum of $1.0 million, we had to use all of the
proceeds of such offering, sale or issuance to pay off the Amended Notes and the
NationsBank Note until all such debt was extinguished. We used approximately
$2.0 million of the net proceeds of our initial public offering in December 1998
to prepay the Amended Notes and the NationsBank Note.

Chase Bank has made available a stand-by letter of credit in the
original principal amount of $150,000. Payment under this letter of credit has
been personally guaranteed by Mr. Hunt. Approximately $66,000 of this letter of
credit has been pledged as collateral under a three year capital lease. This
stand-by letter of credit has been terminated.

On April 20, 1999, we entered into a Consulting Agreement with Mr.
Corona as an independent contractor for his services in identifying and
contacting potential acquisition candidates for us, as well as such other
advisory and

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<PAGE> 42
management services as our Chief Executive Officer may request from time to
time. The Consulting Agreement is for a term of four years, but may be
terminated by either party upon thirty days prior written notice. As
compensation under the Consulting Agreement, we granted Mr. Corona an option to
purchase 75,000 shares of our Common Stock at an exercise price of $25.00 per
share. In addition, we agreed to reimburse Mr. Corona for all reasonable and
necessary travel and other expenses incurred by him in performing his duties
under the Consulting Agreement.

Also on April 20, 1999, we entered into a letter agreement with Carl
Westcott LLC by which we retained Carl Westcott LLC as our non-exclusive
financial advisor. Under the letter agreement, Carl Westcott LLC will assist us
in identifying and contacting potential acquisition or business combination
candidates, evaluate and value such candidate businesses, assist in structuring
transaction proposals, develop strategies for successful consummation of
transactions, analyze the economic effects to us of a transaction, assist in the
negotiation of transaction proposals and preparation of documents, assist in the
due diligence process and complete other matters related to closing such
transactions. As compensation for rendering such services, we will pay Carl
Westcott LLC a fee equal to two percent of the estimated annual revenue, for the
twelve months after a closing, of a company acquired by us due to Carl Westcott
LLC's performance of services under the letter agreement; provided, however,
that in no event shall such fee for any acquisition be less than $25,000 nor
more than $75,000. We also agreed to reimburse Carl Westcott LLC for all
reasonable expenses, and agreed to indemnify Westcott LLC for damages relating
to any transaction contemplated by the engagement of Westcott LLC under the
letter agreement. The letter agreement is effective until terminated by either
party upon thirty days written notice.

Carl Westcott owns a significant interest in Jayhawk Acceptance
Corporation, First Extended Service Corporation and FFG Insurance Company. Carl
Westcott LLC and Westcott Communications, Inc. are current and former affiliates
of Carl Westcott.

FUTURE TRANSACTIONS

We have adopted a policy providing that all transactions between us and
related parties will be subject to approval by a majority of all disinterested
directors and must be on terms no less favorable than those that could otherwise
be obtained from unrelated third parties.

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<PAGE> 43

PRINCIPAL AND SELLING SHAREHOLDERS

The shares offered hereby are owned by and offered for the account of
CompuNet, Inc., James G. Hazlewood, Richard D. Evans, John H. Jackson, David
Hazlewood, Stephanie Hazlewood, Jennifer Hazlewood and Allison Hazlewood
(Messrs. Evans and James and the Hazlewoods are referred to as the "CyberRamp
Shareholders"). We will not receive any of the proceeds from the sale of the
shares. The selling shareholders received their shares of Common Stock in
connection with our acquisitions of CompuNet and CyberRamp. The CyberRamp
Shareholders acquired their shares under a Securities Purchase Agreement dated
as of February 18, 1999, by and between us, CyberRamp, L.L.C. and the CyberRamp
Shareholders, pursuant to which we purchased all of the issued and outstanding
securities of CyberRamp. CompuNet acquired its shares under an Asset Purchase
Agreement dated as of January 29, 1998, by and among us, our wholly owned
subsidiary and CompuNet, pursuant to which we purchased the net assets of
CompuNet.

The CyberRamp Securities Purchase Agreement contained a registration
rights provision pursuant to which we agreed to register the shares of Common
Stock received by the CyberRamp Shareholders as consideration for our
acquisition of CyberRamp. Accordingly, we have caused to be prepared and have
filed with the Securities and Exchange Commission the Registration Statement of
which this Prospectus forms a part, with respect to the sale by the selling
shareholders from time to time of the shares in accordance with the intended
methods of distribution described under "Plan of Distribution." We have agreed
to use commercially reasonable efforts to cause the Registration Statement to be
declared effective and to remain effective until the earlier of August 18, 2001
or the date that all shares included in the Registration Statement are sold. In
addition, we have agreed to pay all expenses incurred by us in connection with
the Securities Act registration of the shares, including, without limitation,
registration and filing fees, printing expenses, and fees and disbursements of
our counsel and accountants. All selling expenses, such as taxes, selling
commissions, and fees and disbursements for Seller's counsel shall be paid by
the selling shareholders.

In the CompuNet Asset Purchase Agreement, we granted piggyback
registration rights to CompuNet in the event that we should register shares on
certain terms within one year of the date of the agreement. Accordingly, the
Registration Statement of which this Prospectus is a part also registers the
shares held by CompuNet.

The following table sets forth certain information as of May 13, 1999,
regarding the beneficial ownership of Common Stock of (1) each person or group
known by us to beneficially own 5% or more of the outstanding shares of Common
Stock, (2) each of our directors and executive officers, (3) all executive
officers and directors as a group and (4) each selling shareholder. Unless
otherwise noted, the persons named below have sole voting and investment power
with respect to the shares shown as beneficially owned by them.

<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering(4)
Name, Address and Office --------------------------- Shares ---------------------------
of Beneficial Owner(1) Number Percent Offered Number Percent
- ---------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael T. Maples(2) ....... 206,779 3.0% -- 206,779 3.0%
Douglas L. Davis(2) ........ 225,000 3.3% -- 225,000 3.3%
James T. Chaney ............ 19,688 * -- 19,688 *
John James Stewart III(2) .. 15,914 * -- 15,914 *
Douglas G. Sheldon(2) ...... 331,877 4.8% -- 331,877 4.8%
William O. Hunt(2)(3) ...... 1,112,490 16.1% -- 1,112,490 16.1%
Jack T. Smith(2) ........... 471,811 6.8% -- 471,811 6.8%
Gary L. Corona(2) .......... 77,624 1.1% -- 77,624 1.1%
All directors and executive
officers as a group (eight
persons)(2) .............. 2,461,183 35.7% -- 2,461,183 35.7%
Carl Westcott .............. 588,811 8.5% -- 588,811 8.5%
Selling Shareholders:
CompuNet, Inc. ........... 16,910 * 16,910 -- --
James G. Hazlewood ....... 295,725 4.3% 295,725 -- --
Richard D. Evans ......... 21,870 * 21,870 -- --
John H. Jackson .......... 21,870 * 21,870 -- --
David Hazelwood .......... 6,565 * 6,565 -- --
Stephanie Hazlewood ...... 6,565 * 6,565 -- --
Jennifer Hazlewood ....... 6,565 * 6,565 -- --
Allison Hazlewood ........ 6,565 * 6,565 -- --
</TABLE>

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<PAGE> 44

- ----------

* Less than one percent.

(1) The address of each of our officers and directors and Mr. Westcott is
in care of us at One Dallas Centre, 350 North St. Paul, Suite 3000,
Dallas, Texas 75201. The address of CompuNet is 11350 Hillguard Road,
Dallas, Texas 75243. The addresses of the CyberRamp Shareholders are:
James G. Hazlewood, Stephanie Hazlewood, Jennifer Hazlewood and Allison
Hazlewood, 5215 Yolanda Lane, Dallas, Texas 75229; John H. Jackson,
9201 Meadowbrook Drive, Dallas, Texas 75220; Richard D. Evans, 706
Agape Circle, Rockwall, Texas 75087; and David Hazlewood, 810 Blossom
Road, Garland, Texas 75041.

(2) Includes options to purchase 106,875, 112,500, 19,688, 15,914, 39,375,
45,000, 45,000 and 45,000 shares of Common Stock granted to Messrs.
Maples, Davis, Chaney, Stewart, Sheldon, Hunt, Smith and Corona,
respectively, that are exercisable within 60 days of May 1, 1998.

(3) Includes 297,301 shares of Common Stock owned by BCG Partnership, Ltd.,
a limited partnership in which Mr. Hunt and his wife serve as general
partners, 306,804 shares of Common Stock owned by B&G Partnership,
Ltd., a limited partnership in which Mr. Hunt and his wife serve as
general partners, and 463,385 shares of Common Stock owned by the
William O. Hunt, Jr. Rollover IRA, of which Mr. Hunt is the
beneficiary.

(4) Assumes the sale of all 382,635 shares covered by this Prospectus and
no other sales of Common Stock.

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<PAGE> 45

DESCRIPTION OF SECURITIES

GENERAL

We are a Texas corporation and are governed by our Articles of
Incorporation, Bylaws and the Texas Business Corporation Act (the "TBCA"). The
following description of our capital stock is qualified in all respects by the
Articles and the Bylaws, which have been filed as exhibits to our Registration
Statement on Form SB-2, filed in connection with our initial public offering in
December 1998.

Our authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share (the "Preferred Stock").

COMMON STOCK

As of May 14, 1999, we had approximately 14,000 holders of our Common
Stock. The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock do not have cumulative voting rights and are entitled to one
vote per share on all matters on which the holders of Common Stock are entitled
to vote. The Common Stock is not entitled to preemptive rights and is not
subject to redemption or conversion. Upon our liquidation, dissolution or
winding-up, the assets (if any) legally available for distribution to
shareholders are distributable ratably among the holders of Common Stock after
payment of all our debts and liabilities and the liquidation preference of any
outstanding class or series of Preferred Stock. All outstanding shares of Common
Stock are validly issued, fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock will be subject to the preferential
rights of any outstanding class or series of Preferred Stock that we may issue
in the future.

PREFERRED STOCK

The Board of Directors may, without further action of our shareholders,
issue shares of Preferred Stock in one or more series and fix or alter the
rights and preferences thereof, including the voting rights, redemption
provisions (including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences, conversion rights and any other rights, preferences,
privileges and restrictions of any wholly unissued series of Preferred Stock.
The rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any Preferred Stock. As of the date of
this Prospectus, there are two series of Preferred Stock authorized, but no
shares of either series are issued or outstanding.

On November 10, 1995, the Board of Directors authorized and issued a
series of Preferred Stock, which currently consists of 400,000 authorized shares
of Preferred Stock (such amount may from time to time be increased or decreased
by the Board of Directors), designated as Series A Preferred Stock. The Series A
Preferred Stock, with respect to rights on liquidation, winding up and
dissolution, ranks senior to all classes and series of Common Stock and may rank
senior to other classes of Preferred Stock. The Series A Preferred Stock has no
specified dividend rate and the holders of Series A Preferred Stock are entitled
to receive the same dividends as the holders of the Common Stock. The holders of
Series A Preferred Stock are entitled to vote in all matters as to which the
holders of the Common Stock are entitled to vote (on an "as converted" basis) in
the same manner and with the same effect as such holders of Common Stock, voting
together with the holders of Common Stock and Series A Preferred Stock as one
class. Each share of Series A Preferred Stock is convertible at any time into
2.25 shares of Common Stock. Each share of Series A Preferred Stock issued and
outstanding prior to our initial public offering was automatically converted
into 2.25 fully paid and nonassessable shares of Common Stock upon completion of
the initial public offering. There are currently no shares of Series A Preferred
Stock issued or outstanding.

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<PAGE> 46

On May 15, 1996, the Board of Directors authorized and issued a series
of Preferred Stock, which currently consists of 300,000 authorized shares of
Preferred Stock (such amount may from time to time be increased or decreased by
the Board of Directors), designated as Series B Preferred Stock. The Series B
Preferred Stock, with respect to rights on liquidation, winding up and
dissolution, ranks equally to the Series A Preferred Stock, ranks senior to all
classes and series of Common Stock and may rank senior to other classes of
Preferred Stock. The Series B Preferred Stock has no specified dividend rate and
the holders of Series B Preferred Stock are entitled to receive the same
dividends as the holders of the Common Stock. The holders of Series B Preferred
Stock are entitled to vote in all matters as to which the holders of the Common
Stock are entitled to vote, in the same manner and with the same effect as such
holders of Common Stock (on an "as converted" basis), voting together with the
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
as one class. Each share of Series B Preferred Stock is convertible at any time
into 2.25 shares of Common Stock. Each share of Series B Preferred Stock issued
and outstanding prior to our initial public offering was automatically converted
into 2.25 fully paid and nonassessable shares of Common Stock upon completion of
the initial public offering. There are currently no shares of Series B Preferred
Stock issued or outstanding.

REGISTRATION RIGHTS

Holders of 1,660,769 shares of Common Stock have certain rights to have
such shares registered under the Securities Act pursuant to the terms of
agreements between such holders. Specifically, such holders have the one-time
right to demand that the Company use its best efforts to register all their
shares of Common Stock. Additionally, if at any time the Company proposes to
register its securities under the Securities Act (other than on a Form S-4 or
Form S-8), the Company must notify the holders of such proposed offering, and,
upon their request the Company must use its best efforts to register all shares
of Common Stock owned by the holders. In such instances, the Company is
responsible for the expenses related to the registration of such shares.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our Articles of Incorporation provide that to the fullest extent
permitted by applicable law, a director will not be liable to us or our
shareholders for monetary damages for an act or omission in the director's
capacity as a director.

The TBCA permits the indemnification of directors, employees, officers
and agents of Texas corporations. Our Articles and Bylaws provide that we shall
indemnify any person to the fullest extent permitted by law. Under the TBCA, an
officer or director may be indemnified if he acted in good faith and reasonably
believed that his conduct (1) was in our best interests and if he acted in his
official capacity or (2) was not opposed to our best interests in all other
cases. In addition, the indemnitee may not have reasonable cause to believe that
his conduct was unlawful in the case of a criminal proceeding. In any case, the
indemnitee may not have been found liable to us for improperly receiving

44
<PAGE> 47

a personal benefit or for willful or intentional misconduct in the performance
of his duty to us. We (1) must indemnify an officer or director for reasonable
expenses if he is successful, (2) may indemnify an officer or director for such
reasonable expenses unless he was found liable for willful or intentional
misconduct in the performance of his duty to us and (3) may advance reasonable
defense expenses if the officer or director undertakes to reimburse us if he is
later found not to satisfy the standard for indemnification expenses. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. This
provision in the Articles does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under Texas law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

TRADING MARKET, TRANSFER AGENT AND REGISTRAR

The Common Stock is quoted on the Nasdaq National Market under the
symbol "GEEK." The Transfer Agent and Registrar for the Common Stock is
ChaseMellon Shareholder Services, L.L.C.

TEXAS ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS

As a Texas corporation, we are subject to the provisions of the Texas
Business Combination Law ("TBCL") that became effective on September 1, 1997. In
general, the TBCL prohibits a Texas "issuing public corporation" (such as us)
from engaging in a "business combination" with any shareholder who is a
beneficial owner of 20% or more of the corporation's outstanding stock for a
period of three years after such shareholder's acquisition of a 20% ownership
interest, unless: (1) the board of directors of the corporation approves the
transaction or the shareholder's acquisition of the shares prior to the
acquisition or (2) two-thirds of the unaffiliated shareholders of the
corporation approve the transaction at a shareholders' meeting. The TBCL may
have the effect of inhibiting a non-negotiated merger or other business
combination involving us. We are subject to the terms of the TBCL, unless its
shareholders or directors take action electing not to be governed by its terms
(which action is not currently contemplated).

Our Articles and Bylaws prevent shareholders from calling a special
meeting of shareholders, prevent shareholders from amending the Bylaws and
prohibit shareholder action by written consent. Our Bylaws also authorize only
the Board of Directors to fill vacancies, including newly-created directorships
and state that our directors may be removed only for cause and only by the
affirmative vote of holders of at least a majority of the outstanding shares of
the voting stock, voting together as a single class.

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<PAGE> 48

SHARES ELIGIBLE FOR FUTURE SALE

As of May 14, 1999, there were 6,893,530 shares of Common Stock
outstanding. In addition, as of May 14, 1999, we had outstanding options to
purchase 1,117,468 shares of Common Stock. Of the outstanding shares, the
2,645,000 shares sold in our initial public offering are freely transferable
without restriction or limitation under the Securities Act, except for any
shares purchased by our "affiliates," as defined in the Securities Act. In
addition, a total of 1,212,022 shares have been sold pursuant to Rule 144 and
are now freely transferable. The 382,635 shares offered by the selling
shareholders under this Prospectus will be freely transferable. The remaining
2,658,873 shares constitute "restricted securities" within the meaning of Rule
144, and the resale of such shares is restricted for one year from the date they
were acquired. All of these "restricted securities" have been held for the
required one-year period and are freely tradeable, subject in certain cases to
the 180-day lock-up period described below and the 90-day information
requirement of Rule 144 for shares held by affiliates or for less than the
required two-year period. In addition, the holders of 1,660,769 outstanding
shares have certain rights to have shares registered under the Securities Act
pursuant to the terms of agreements between such holders and us. See
"Description of Securities -- Registration Rights." Of those 1,660,769 shares,
769,149 shares are freely tradeable, subject in certain cases to the 180-day
lock-up period described below and the 90-day information requirement of Rule
144 for shares held by affiliates or for less than the required two-year period.

In general, under Rule 144, as currently in effect, a person (or
persons whose shares are required to be aggregated) who has beneficially owned,
for at least one year, shares of Common Stock that have not been registered
under the Securities Act or that were acquired from an "affiliate" is entitled
to sell within any three-month period the number of shares of Common Stock which
does not exceed the greater of one percent of the number of then outstanding
shares or the average weekly reported trading volume during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain
notice and manner of sale requirements and to the availability of current public
information about Internet America and must be made in unsolicited brokers'
transactions or to a market maker. A person (or persons whose shares are
aggregated) who is not an "affiliate" of the Company under the Securities Act
during the three months preceding a sale and who has beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such rule. Rule 144 does not require the same person to have held the
securities for the applicable periods.

In connection with our initial public offering, we and our officers,
directors and certain shareholders, who hold collectively 2,620,642 outstanding
shares of Common Stock, have agreed not to offer or sell any shares of Common
Stock until June 7, 1999 without the prior written consent of Hoak Breedlove
Wesneski & Co., subject to certain limited exceptions. If this 180-day lock-up
period is waived by Hoak Breedlove Wesneski & Co., then those shares would be
freely tradeable subject to the 90-day information requirement of Rule 144 for
shares held by affiliates or for less than the required two-year period. We
anticipate that after June 7, 1999, these shareholders will sell shares of
Common Stock.

In addition, we have filed Registration Statements on Form S-8 to
register a total of 1,215,000 shares of Common Stock, which is the aggregate of
all shares reserved for issuance pursuant to the 1996 Option Plan, the Employee
Stock Purchase Plan and shares underlying certain nonqualified options granted
to certain current and former officers, directors and employees. Accordingly,
shares issued upon exercise of such options or under such plans will be freely
tradeable by holders who are not our affiliates and, subject to the volume and
other limitations of Rule 144 and the lock-up agreements, by holders who are our
affiliates.

Prior to the initial public offering, there has been no market for the
Common Stock. No predictions can be made of the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of Common Stock could adversely affect the prevailing market
price of the Common Stock, as well as impair our ability to raise capital
through the issuance of additional equity securities. See "Risk Factors -- Sales
of Our Common Stock in the Public Market May Lower Our Stock Price and Impair
Our Ability to Raise Funds in Future Offerings."

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<PAGE> 49

PLAN OF DISTRIBUTION

We are registering the shares of Common Stock on behalf of CompuNet and
the CyberRamp Shareholders (the "Selling Shareholders"). For purposes of this
discussion regarding the plan of distribution, "Selling Shareholders" includes
donees and pledgees selling shares received from a named Selling Shareholder
after the date of this prospectus. We will bear all costs, expenses and fees in
connection with the registration of the shares of Common Stock offered hereby.
The Selling Shareholders will bear brokerage commissions and similar selling
expenses, if any, attributable to the sale of shares of Common Stock. The
Selling Shareholders may sell shares of Common Stock from time to time in one or
more types of transactions (which may include block transactions):

- on the Nasdaq National Market;

- in the over-the-counter market;

- in negotiated transactions;

- through put or call options transactions relating to the
shares of Common Stock; and

- through short sales or a combination of such methods of sale.

Such transactions may be made at market prices prevailing at the time
of sale or at negotiated prices, and may or may not involve brokers or dealers.
The Selling Shareholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares of Common Stock by the Selling Shareholders.

The Selling Shareholders may sell shares of Common Stock directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers of shares of Common Stock from whom such broker-dealers may act as
agents or to whom they sell as principal, or both. Any compensation as to a
particular broker-dealer might be in excess of customary commissions.

The Selling Shareholders and any broker-dealers that act in connection
with the sale of shares of Common Stock might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the shares of
Common Stock sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. Because the
Selling Shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the Selling Shareholders will be subject to
the prospectus delivery requirements of the Securities Act. We have informed the
Selling Shareholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the market.

Selling Shareholders also may resell all or a portion of the shares of
Common Stock in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of Rule 144.

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<PAGE> 50
LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be
passed upon for us by Jackson Walker L.L.P., Dallas, Texas.

EXPERTS

The financial statements as of June 30, 1997 and 1998 and for the years
then ended included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission. You may read and
copy any documents we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C., 20549. You should
call 1-800-SEC-0330 for more information on the public reference room. The SEC
maintains an Internet site at http://www.sec.gov where certain information
regarding issuers (including Internet America) may be found.

This Prospectus is part of the Registration Statement that we filed
with the SEC. The Registration Statement contains more information than this
Prospectus regarding Internet America and the Common Stock, including certain
exhibits and schedules. You can get a copy of the Registration Statement from
the SEC at the address listed above or from its internet site.

We maintain an Internet site at http://www.airmail.net. Information
contained on our Web site is not a part of this Prospectus. Industry information
presented is based on sources that we believe are reliable, although we have not
independently verified this information.

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<PAGE> 51

GLOSSARY OF TECHNICAL TERMS

BACKBONE A high-speed network that connects smaller,
independent networks.

BANDWIDTH The number of bits of information that can move over
a communications medium in a given amount of time.

BROADBAND A transmission facility that has a bandwidth greater
than a voice grade line of 3 kHz and which may carry
numerous voice, video and data channels
simultaneously.

CENTRAL OFFICE A switching unit in a telecommunications
system which provides service to the general public,
having the necessary equipment and operating
arrangements for terminating and interconnecting
customer lines and trunks or trunks only.

DOMAIN NAME Part of the official name of a computer on the
Internet.

DUAL REDUNDANT A device which contains a backup or spare part which
is automatically put into service when a primary part
fails.

ELECTRONIC MAIL
OR E-MAIL An application that allows a user to send or receive
messages to or from any other user with an Internet
address, commonly termed an e-mail address.

FDDI Fiber Distributed Data Interface Network. A set of
ANSI protocols for sending digital data over fiber
optic cable. FDDI networks are token-passing
networks, and support data rates of up to 100 Mbps
(100 million bits) per second. FDDI networks are
typically used as backbones for wide-area network
extensions to FDDI, called FDDI-2, supports the
transmission of voice and video information as well
as data.

FFDT FDDI Full Duplex Technology. Another variation of
FDDI-2 that uses the same network infrastructure but
can potentially support data rates up to 200 Mbps.

FTP File Transfer Protocol. A protocol that allows file
transfer between a host and a remote computer.

GRAPHICAL USER
INTERFACE A means of communicating with a computer by
manipulating icons and windows rather than using text
commands.

INTERNET An open global network of interconnected commercial,
educational and governmental computer networks that
utilize a common communications protocol, TCP/IP. 56

INTERNET
BACKBONE The Internet backbone consists of high-speed networks
that link the smaller, independent networks of the
Internet.

ISDN Integrated Services Digital Network. A digital
network that combines voice and digital network
services through a single medium, making it possible
to offer subscribers digital data services as well as
voice connections.

ISP Internet Service Provider. A company that provides
access to the Internet. For a monthly fee, the
service provider gives you a software package,
username, password and access

49
<PAGE> 52

phone number. Equipped with a computer and modem, you
can then connect to the Internet and browse the World
Wide Web and USENET, and send and receive e-mail.

LEC Local Exchange Carrier. A telecommunications utility
that has been granted either a certificate of
convenience and necessity or a certificate of
operating authority to provide local exchange
telephone service, basic local telecommunications
service, or switched access service within the state.
A local exchange carrier is also referred to as a
local exchange company.

LOCAL EXCHANGE
TELEPHONE SERVICE Telecommunications service provided within an
exchange to establish connections between customer
premises within the exchange, including connections
between a customer premises and a long distance
provider serving the exchange. The term includes tone
dialing, service connection charges, and directory
assistance services when offered in connection with
basic local telecommunications service and
interconnection with other service providers. Local
exchange telephone service may also be referred to as
local exchange service. However, a competitive
exchange service is not local exchange telephone
service. This fact, and the definition of competitive
exchange service, shall be liberally construed to
encourage a competitive marketplace.

MODEM A piece of equipment that connects a computer to a
data transmission line (typically a telephone line).

NEWSGROUP Same as forum, an on-line discussion group. On the
Internet, there are literally tens of thousands of
newsgroups covering every conceivable interest. To
view and post messages to a newsgroup, you need a
news reader, a program that runs on your computer and
connects you to a news server on the Internet.

POP Point of Presence. The Company defines a POP as a
local geographic point of presence where subscribers
can access the Company's services via a local
telephone call. To the Company's knowledge, there is
no industry-wide definition of an Internet access
POP, and other companies may define a POP
differently.

ROUTER A device that receives and transmits data packets
between segments in a network or different networks.

SERVER Software that allows a computer to offer a service to
another computer. Other computers contact the server
program by means of matching client software. In
addition, such term means the computer on which
server software runs.

T-1 A data communications line capable of transmission
speeds of 1.54 Mbps.

TERMINAL SERVER A specialized computer that supports multiple
communications connections.

USENET A worldwide bulletin board system that can be
accessed through the Internet or through many online
services. The USENET contains tens of thousands of
forums, called newsgroups, that cover every
imaginable interest group. It is used daily by
millions of people around the world.

50
<PAGE> 53

VIRTUAL POP Modems without a geographically specific location
typically housed or co-located at central offices
inside of a LEC Network. Private networks connect
these facilities with the Company.

WINDOWS A computer operating system developed by Microsoft
Corporation that provides a graphical user interface
and multitasking capabilities.

WORLD WIDE WEB A network of computer servers that uses a
special communications protocol to link different
servers throughout the Internet and permits
communication of graphics, video and sound.

xDSL An abbreviation that refers collectively to all types
of digital subscriber lines, the two main categories
being ADSL and SDSL. Two other types of xDSL
technologies are High-data- rate DSL ("HDSL") and
symmetric digital subscriber lines ("SDSL"). DSL
technologies use sophisticated modulation schemes to
pack data onto copper wires. They are sometimes
referred to as last-mile technologies because they
are used only for connections from a telephone
switching station to a home or office, not between
switching stations. xDSL is similar to ISDN inasmuch
as both operate over existing copper telephone lines
(POTS) and both require the short runs to a central
telephone office (usually less than 20,000 feet).
However, xDSL offers much higher speeds -- up to 32
Mbps for downstream traffic.

51
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report F-2

Financial Statements:

Balance Sheets F-3

Statements of Operations F-4

Statements of Shareholders' Equity (Deficit) F-5

Statements of Cash Flows F-6

Notes to Financial Statements F-7
</TABLE>

F-1
<PAGE> 55

INDEPENDENT AUDITORS' REPORT

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

We have audited the balance sheets of Internet America, Inc. as of June 30,
1997 and 1998, and the related statements of operations, shareholders' equity,
and cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet America, Inc. as of
June 30, 1997 and 1998, and the results of its operations and its cash flows for
each of the years then ended in conformity with generally accepted accounting
principles.

The financial statements give retroactive effect to the combination of
CompuNet, Inc. and CyberRamp, L.L.C. which were both accounted for as a pooling
of interests as described in Note 11 to the financial statements.

DELOITTE & TOUCHE LLP

May 14, 1999
Dallas, Texas

F-2
<PAGE> 56

INTERNET AMERICA, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
JUNE 30,
---------------------------- MARCH 31,
ASSETS 1997 1998 1999
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 21,574 $ 618,290 $ 16,661,431
Accounts receivable, net of allowance for uncollectible accounts
of $126,707 and $198,155 in 1997 and 1998, respectively 342,432 494,961 781,643
Prepaid expenses and other current assets 63,256 30,824 120,153
------------ ------------ ------------

Total current assets 427,262 1,144,075 17,563,227

PROPERTY AND EQUIPMENT - Net 2,890,686 2,132,131 2,084,572

OTHER ASSETS - Net 636,077 785,634 479,498
------------ ------------ ------------

TOTAL $ 3,954,025 $ 4,061,840 $ 20,127,297
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Trade accounts payable $ 1,785,510 $ 1,153,728 $ 1,450,322
Accrued liabilities 888,930 1,322,356 1,298,481
Current portion of capital lease obligations 408,251 358,645 212,482
Current maturities of long-term debt 619,988 686,302 272,328
Advances under line of credit 243,000 225,000 --
Notes payable to shareholders 2,017,713 2,017,713 --
Deferred revenue 2,431,643 3,660,006 4,055,448
------------ ------------ ------------

Total current liabilities 8,395,035 9,423,750 7,289,061

CAPITAL LEASE OBLIGATIONS, net of current portion 375,851 143,915 32,328

LONG-TERM DEBT, net of current portion 1,133,299 1,182,273 297,162
------------ ------------ ------------

Total liabilities 9,904,185 10,749,938 7,618,551

COMMITMENTS AND CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $.01 par value; 400,000 shares
authorized, 379,672 issued and outstanding in
1997 and 1998 3,796 3,796 --
Series B convertible preferred stock, $.01 par value, 300,000
shares authorized, 73,667 issued and outstanding in
1997 and 1998 737 737 --
Common stock, $.01 par value; 40,000,000 shares authorized,
3,942,965 and 3,914,840 issued in 1997 and 1998,
respectively, and 3,914,840 outstanding in 1997 and 1998 39,429 39,148 68,928
Additional paid-in capital 3,584,507 3,480,288 24,217,070
Common stock in treasury, 28,125 shares at cost in 1997 (12,500) -- --
Accumulated deficit (9,566,129) (10,212,067) (11,777,252)
------------ ------------ ------------

Total shareholders' equity (deficit) (5,950,160) (6,688,098) 12,508,746
------------ ------------ ------------

TOTAL $ 3,954,025 $ 4,061,840 $ 20,127,297
============ ============ ============
</TABLE>

See notes to financial statements.

F-3
<PAGE> 57

INTERNET AMERICA, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Access $ 9,501,212 $ 12,117,587 $ 8,905,034 $ 11,435,757
Business services 1,552,777 1,919,326 1,454,085 1,620,498
Other 248,933 41,312 54,282 79,773
------------ ------------ ------------ ------------

Total 11,302,922 14,078,225 10,413,401 13,136,028
------------ ------------ ------------ ------------

OPERATING COSTS AND EXPENSES:
Connectivity and operations 7,432,200 7,417,819 5,411,223 6,283,527
Sales and marketing 2,181,380 1,925,180 1,119,799 4,203,665
General and administrative 3,356,651 2,947,828 2,103,610 2,824,363
Depreciation and amortization 1,799,844 1,739,301 1,305,173 1,405,340
Impairment of Equipment 614,971 -- -- --
------------ ------------ ------------ ------------

Total 15,385,046 14,030,128 9,939,805 14,716,895
------------ ------------ ------------ ------------

INCOME (LOSS) FROM OPERATIONS (4,082,124) 48,097 473,596 (1,580,867)

INTEREST INCOME -- -- -- 213,190

INTEREST EXPENSE (517,337) (670,035) (524,461) (187,508)

INCOME TAX EXPENSE -- (24,000) (18,000) (10,000)
------------ ------------ ------------ ------------

NET LOSS $ (4,599,461) $ (645,938) $ (68,865) $ (1,565,185)
============ ============ ============ ============

NET LOSS PER COMMON SHARE:

BASIC $ (1.21) $ (0.16) $ (0.02) $ (0.31)
============ ============ ============ ============

DILUTED $ (1.21) $ (0.16) $ (0.02) $ (0.31)
============ ============ ============ ============

WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:

BASIC 3,800,443 3,914,856 3,914,856 5,081,299
============ ============ ============ ============

DILUTED 3,800,443 3,914,856 3,914,856 5,081,299
============ ============ ============ ============
</TABLE>

See notes to financial statements.

F-4
<PAGE> 58

INTERNET AMERICA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996 453,339 $ 4,533 3,383,815 $ 33,838 $ 3,371,961

Issuance of common stock:
For cash -- -- 544,149 5,441 226,846
For services -- -- 15,001 150 24,850
Deferred compensation for stock options
issued below deemed fair value -- -- -- -- (39,150)

Purchase of treasury stock at cost -- -- -- -- --

Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------

BALANCE, JUNE 30, 1997 453,339 4,533 3,942,965 39,429 3,584,507

Purchase of stock options -- -- -- -- (92,000)

Cancellation of treasury stock -- -- (28,125) (281) (12,219)

Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------

BALANCE, JUNE 30, 1998 453,339 4,533 3,914,840 39,148 3,480,288

Conversion of preferred stock (453,339) (4,533) 1,020,013 10,200 (5,667)

Issuance of common stock:
For initial public offering, net proceeds 1,700,000 17,000 19,758,156
Cash 258,050 2,580 673,107

Contribution of capital in exchange for note payable -- -- -- -- 311,186

Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------

BALANCE, MARCH 31, 1999 -- $ -- 6,892,903 $ 68,928 $ 24,217,070
============ ============ ============ ============ ============

<CAPTION>
TOTAL
TREASURY STOCK SHAREHOLDERS'
----------------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1996 -- $ -- $ (4,966,668) $ (1,556,336)

Issuance of common stock:
For cash -- -- -- 232,287
For services -- -- -- 25,000
Deferred compensation for stock options
issued below deemed fair value -- -- -- (39,150)

Purchase of treasury stock at cost 28,125 (12,500) -- (12,500)

Net loss -- -- (4,599,461) (4,599,461)
------------- ------------ ------------ ------------

BALANCE, JUNE 30, 1997 28,125 (12,500) (9,566,129) (5,950,160)

Purchase of stock options -- -- -- (92,000)

Cancellation of treasury stock (28,125) 12,500 -- --

Net loss -- -- (645,938) (645,938)
------------- ------------ ------------ ------------

BALANCE, JUNE 30, 1998 -- -- (10,212,067) (6,688,098)

Conversion of preferred stock -- -- -- --

Issuance of common stock:
For initial public offering, net proceeds 19,775,156
Cash 675,687

Contribution of capital in exchange for note payable -- -- -- 311,186

Net loss -- -- (1,565,185) (1,565,185)
------------- ------------ ------------ ------------

BALANCE, MARCH 31, 1999 -- $ -- $(11,777,252) $ 12,508,746
============= ============ ============ ============

</TABLE>

See notes to financial statements

F-5
<PAGE> 59

INTERNET AMERICA, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,599,461) $ (645,938) $ (68,865) $ (1,565,185)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,799,844 1,739,301 1,305,173 1,405,340
Impairment of equipment 614,971 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, net (175,387) (152,529) (218,277) (286,682)
Prepaid expenses and other current assets 54,014 32,432 24,849 (89,330)
Other assets (319,916) 21,511 (291,165) (139,085)
Accounts payable and accrued liabilities (162,596) (198,356) (864,442) 272,719
Deferred revenue 1,093,882 1,228,363 1,601,110 395,442
------------ ------------ ------------ ------------

Net cash provided by (used in) operating activities (1,694,649) 2,024,784 1,488,383 (6,781)
------------ ------------ ------------ ------------

INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,785,376) (846,725) (472,700) (912,560)
Purchase of subscribers (356,670) (50,000) (50,000) --
Proceeds from sale of equipment 21,500 -- -- --
------------ ------------ ------------ ------------

Net cash used in investing activities (2,120,546) (896,725) (522,700) (912,560)
------------ ------------ ------------ ------------

FINANCING ACTIVITIES:
Proceeds from issuance of common equity 232,287 -- -- 20,450,844
Purchase of stock options -- (92,000) (92,000) --
Purchase of treasury stock (12,500) -- -- --
Proceeds from issuance of shareholder loans 2,017,713 -- -- --
Proceeds from issuance of long term debt 1,781,270 311,186 -- --
Proceeds from sale and leaseback 422,302 -- -- --
Principal payments of notes payable to shareholders -- -- -- (1,456,539)
Principal payments under capital lease obligations (358,119) (436,850) (612,573) (1,257,750)
Principal payments of long-term debt (361,666) (295,679) -- (549,073)
Loan origination costs (56,289) -- -- --
Proceeds (payments) on line of credit 93,000 (18,000) -- (225,000)
------------ ------------ ------------ ------------

Net cash provided by (used in) financing activities 3,757,998 (531,343) (704,573) 16,962,482
------------ ------------ ------------ ------------

NET INCREASE (DECREASE) IN CASH (57,197) 596,716 261,110 16,043,141

CASH, BEGINNING OF PERIOD 78,771 21,574 21,574 618,290
------------ ------------ ------------ ------------

CASH, END OF PERIOD $ 21,574 $ 618,290 $ 282,684 $ 16,661,431
============ ============ ============ ============

SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 319,224 $ 750,522 $ 738,698 $ 234,733
Equipment acquired under capital leases $ 833,890 $ 127,500 $ -- $ 31,500
Subscriber purchase assumption of service obligations $ 377,216 $ 412,422 $ 412,422 $ --
Contribution of capital in exchange for note payable $ -- $ -- $ -- $ 311,186
</TABLE>

See notes to financial statements.

F-6
<PAGE> 60

INTERNET AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1998 AND NINE MONTHS
ENDED MARCH 31, 1999 (UNAUDITED)

1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - Internet America, Inc. is a leading 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, including customers with little or no
online experience.

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.

The financial statements have been restated to reflect the combinations
of CompuNet, Inc. ("CompuNet") and CyberRamp, L.L.C. ("CyberRamp") as if
the combinations occurred at the beginning of the earliest period
presented. The combinations have been accounted for as a pooling of
interests under the provisions of Accounting Principles Board Opinion No.
16, "Business Combinations." (See note 11.)

INTERIM FINANCIAL STATEMENTS - The balance sheet as of March 31, 1999, and
the statements of operations, shareholders' equity (deficit) and cash
flows for the nine months ended March 31, 1998 and 1999, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which included only normal, recurring adjustments) necessary
to present fairly the financial position, at March 31, 1999 and the
results of operations and cash flows for the nine months ended March 31,
1998 and 1999, have been made. The results of operations for the nine
months ended March 31, 1999, are not necessarily indicative of the results
to be expected for the full year.

REVENUE RECOGNITION - Revenues are 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. The
Company's risk of loss is limited due to advance billings to customers for
services, the use of preapproved charges to customer credit cards, and the
ability to terminate access on delinquent accounts. The large number of
customers comprising the customer base mitigates the concentration of
credit risk.

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 floating interest rate on the
Company's lines of credit reflects current market rates and, accordingly,

F-7
<PAGE> 61

their carrying values approximate fair value. The fair values for other
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, cash deposited in highly liquid money market accounts, and
investments in high grade commercial paper or treasury notes having
maturities of three months or less when purchased. There were no
commercial paper or treasury notes outstanding at June 30, 1997 and 1998.

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 one 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.

ACQUIRED SUBSCRIBER BASE - The Company capitalizes specific costs incurred
for the purchase of subscriber bases from other Internet Service Providers
("ISPs"). The subscriber acquisition costs include the actual fee paid to
the selling ISPs as well as the assumption of deferred service obligations
and legal expenses specifically related to the transactions. Amortization
is provided using the straight line method over three years commencing
when the subscriber base is received.

LONG-LIVED ASSETS - On an annual basis, the Company reviews the values
assigned to long-lived assets, such as property and equipment to determine
if any impairments have occurred. Provisions for asset impairments are
based on discounted cash flow projections in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," and such assets are written down to their estimated fair values. An
impairment loss of $614,971 related to the write down of modem equipment
was recognized during the year ended June 30, 1997.

COMMON 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.

ADVERTISING EXPENSES - The Company accounts for advertising costs as
expenses in the period in which they are incurred. Advertising expenses
for the years ended June 30, 1998 and 1997 were $1,233,726 and $1,657,849.

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 which those temporary differences are
expected to reverse.

EARNINGS PER SHARE - Share and per share amounts have been adjusted
retroactively for the 2.25-to-1.00 stock split which was effected in July
1998. 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.

USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
disclosure of contingent assets and liabilities at the date of the
financial

F-8
<PAGE> 62

statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from these
estimates.

RECENT ACCOUNTING PRONOUNCEMENTS - In February 1997, the FASB issued SFAS
No. 129, "Disclosure of Information about Capital Structure," which
establishes standards for disclosing information about an entity's capital
structure and is effective for financial statements for periods ending
after December 15, 1997. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in the
financial statements for fiscal years beginning after December 15, 1997.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has determined that the
impact on its financial statements of adopting SFAS Nos. 129, 130 and 131
is not material.

CERTAIN RECLASSIFICATIONS - Certain reclassifications have been made to
prior period amounts to conform to the fiscal 1998 presentation. The
reclassifications had no effect on stockholders' equity or net income.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Data communications and office equipment $ 3,840,311 $ 4,530,373 $ 5,265,943
Leasehold improvements 453,937 450,360 511,964
Furniture and fixtures 300,283 307,404 309,966
Computer software 96,364 249,484 362,307
----------- ----------- -----------

4,690,895 5,537,621 6,450,180

Less accumulated depreciation and amortization (1,800,209) (3,405,490) (4,365,608)
----------- ----------- -----------

$ 2,890,686 $ 2,132,131 $ 2,084,572
=========== =========== ===========
</TABLE>

Depreciation expense charged to operations was $1,187,934 and $1,605,280
for the years ended June 30, 1997 and 1998, respectively.

F-9
<PAGE> 63

3. OTHER ASSETS

Other assets consist of:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Acquired subscribers $ 733,886 $ 1,072,462 $ 1,010,539
Loan origination fees 61,289 20,353 20,353
Deposits 65,331 61,811 73,380
Deferred costs -- 50,000 --
Other 925 925 925
----------- ----------- -----------
861,431 1,205,551 1,105,197
Less accumulated amortization (225,354) (419,917) (625,699)
----------- ----------- -----------

$ 636,077 $ 785,634 $ 479,498
=========== =========== ===========
</TABLE>

In July 1996 the Company acquired approximately 900 subscribers of
Webstar, Inc. for approximately $357,000. In October 1996, the company
acquired approximately 1,000 subscribers of Computek, Inc for $377,000. On
November 26, 1997, the Company acquired approximately 4,600 subscribers of
WHY? Telecommunications, Inc. for a cash payment of $50,000 and the
assumption of deferred service obligations of approximately $412,000.

Deferred costs consist of costs incurred in connection with the Company's
initial public offering of common stock.

4. LINE OF CREDIT AGREEMENTS

Borrowings under a revolving credit agreement bear interest at the bank's
prime rate plus 2% (10.5% at June 30, 1997 and 1998) and are
collateralized by substantially all assets of the Company, and by the
guarantees of certain officers, shareholders and a director. The
outstanding borrowings at June 30, 1997 and 1998 were $18,000 and $0;
respectively, with $131,291 committed to a standby letter of credit
securing a lease.

In addition, the Company could borrow, subject to the approval of a
director of the Company, up to $350,000 under a revolving credit agreement
that matured December 15, 1998 or upon the effective date of a defined
securities registration. Borrowings under the agreement bear interest at
the bank's prime rate (8.5% at June 30, 1997 and 1998) and are guaranteed
by a Director. The Director receives guaranty fees, payable on demand,
equal to 18% of the outstanding borrowings, less interest paid to the
bank. The outstanding borrowings at June 30, 1997 and 1998 were $225,000.
The balance was repaid in December 1998 using proceeds from the Company's
initial public offering.

F-10
<PAGE> 64
5. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to an unrelated third party, bearing interest at
16.5%, payable in equal monthly installments of $10,266,
including interest, through January 1999. The note is
collateralized by substantially all of the assets of the Company
and by the limited guarantee of an officer; and contains, among
other things, a restriction on the payment of dividends on
common stock. In connection with this note, the Company issued
detachable warrants during March 1996 to purchase 33,750 shares
of common stock at $1.67 per share. The fair value of the
warrants have not been reflected in the financial statements as
the amount was immaterial. The warrants are exercisable from
January 1, 1998 through December 31, 1999 $ 191,482 $ 79,773 $ --

Notes payable to vendors maturing through February 1998, bearing
interest at 6% to 18% 183,970 -- --

Note payable in connection with acquisition of Webstar, Inc.
subscriber base, due June 30, 1999 or upon the effective date of
a defined securities registration, bearing interest at 14%,
payable monthly. Prior to the end of any calendar quarter, the
lender may demand a principal payment of up to $50,000 352,125 352,125 --

Note payable to a financial institution maturing December 31,
2003, bearing interest at 10.5%, with principal and interest
payable monthly 526,618 473,126 --

Note payable in connection with the acquisition of a subscriber
base, due December 31, 2003, bearing interest at 8%, interest
payable monthly for the first three years, and principal and
interest payable monthly during 2000 and 2003 178,000 178,000 --
</TABLE>

F-11
<PAGE> 65

<TABLE>
<S> <C> <C> <C>
Note payable to a third party maturing March 10, 1998 bearing
interest at 1 percent per month on the unpaid balance, with
principal and interest due monthly 45,000 -- --

Note payable in connection with equipment acquisitions, due at
varying dates from July 2000 to November 2001, bearing interest
at 7% and 8%, with principal and interest due monthly 238,340 448,481 461,190

Note payable in connection with equipment acquisitions, due June
2000, bearing interest at 11%, with principal and interest due
monthly -- -- 47,818

Note payable in connection with equipment acquisitions, due
October 2001, bearing interest at 12%, with principal and
interest due monthly -- -- 40,712

Note payable in connection with equipment acquisitions, due
March 2000, bearing interest at 16%, with principal and interest
due monthly 37,752 25,884 19,770
----------- ----------- -----------

1,753,287 1,868,575 569,490

Less current portion (619,988) (686,302) (272,328)
----------- ----------- -----------

$ 1,133,299 $ 1,182,273 $ 297,162
=========== =========== ===========
</TABLE>

6. NOTES PAYABLE TO SHAREHOLDERS

During fiscal 1997, the Company entered into two loan agreements with
entities acting as nominees for current shareholders, with borrowings of
$1,767,713 and $250,000. The notes bear interest at 10% and 18% and were
due September 25, 1997 and April 1, 1997, respectively. The assets of the
Company collateralized the notes. On June 30, 1998, the loan agreements,
which were in default, were refinanced at the prime rate (8.5% as of June
30 ,1998), with borrowings due in monthly payments approximating $129,000
or upon the effective date of a defined securities registration. In the
event of default, the borrowings convert to common stock at the price of
$0.44 per share at the option of the noteholder. The balance was repaid in
December 1998 using proceeds from the Company's initial public offering.

F-12
<PAGE> 66

7. COMMITMENTS AND CONTINGENCIES

The Company leases certain of its facilities under operating leases.
Rental expense under these leases was approximately $373,000 and $574,000
for the years ended June 30, 1997 and 1998, respectively. At June 30,
1998, future minimum lease payments on capital and operating leases were
approximately as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
Leases Leases
--------- ----------
<S> <C> <C>
1999 $ 420,059 $ 678,566
2000 105,184 625,036
2001 41,799 89,193
2002 31,896 1,215
2003 5,316 441,572
--------- ----------

Total minimum lease payments 604,254 $1,835,582
==========

Less amounts representing interest (101,694)
---------

Present value of minimum capitalized lease payments 502,560

Less current portion (358,645)
---------
Long-term capitalized lease obligations $ 143,915
=========
</TABLE>

In August 1997, the Company entered into a network services agreement for
telecommunications services with a competitive local exchange carrier
("CLEC") that commits the Company to the CLEC's services through December
31, 1998. The Company is in the process of converting its customers to
this service and estimates that the monthly recurring commitment will be
approximately $50,000.

The Company is involved in various 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 (DEFICIT)

EARNINGS PER SHARE - Potentially dilutive securities have been excluded
from the computation of earnings per share for the years ended June 30,
1997 and 1998 as their effect is antidilutive. Had the Company been in a
net income position, diluted earnings per share would have included an
additional 319,500 shares related to outstanding options and warrants,
(determined using the treasury stock method at the estimated average fair
value) and for convertible preferred stock not included above for the
years ended June 30, 1997 and 1998.

COMMON STOCK - The Company has authorized 40,000,000 shares of $0.01 par
value common stock. During the year ended June 30, 1997, the Company
issued 544,149 shares of its common stock in exchange for cash of
$232,287. The Company also issued 15,001 shares of common stock in
exchange for services provided by one of the Company's employees. The
shares issued were recorded at $25,000, the value of the services
provided.

F-13
<PAGE> 67

During March 1998, three former shareholders of the Company sold 1,987,124
shares of common stock to an entity acting as nominee for current
shareholders in exchange for $883,166.

During July 1998, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission
permitting the Company to issue shares of its common stock in an initial
public offering early in fiscal 1999. Also in July 1996, options to
purchase 22,500 shares of common stock were granted to a director of the
Company under the 1998 Nonqualified Stock Option Plan. Such options are
exercisable at $8.00 per share, expire in 10 years and vest over four
years.

During December 1998, the Company completed an initial public offering
(the "Offering") of its common stock and sold 1,700,000 shares at a price
of $13 per share. Proceeds from the Offering, net of underwriting
discounts and offering expenses, were $19.8 million. Part of these
proceeds were used to pay certain indebtedness of $2.1 million.

PREFERRED STOCK - The Company authorized 5,000,000 shares of preferred
stock issuable in series. The Company authorized 400,000 shares of $0.01
par value Series A Preferred Stock. Each share of the Series A Preferred
Stock was convertible at any time into 2.25 shares of the Company's common
stock and has the same dividend rights as the common stock. Each share of
the Series A Preferred Stock was automatically converted into 2.25 shares
of the Company's common stock 30 days following the public offering of
shares of common stock of the Company. In the event of liquidation of the
Company, whether voluntary or involuntary, the holders of the Series A
Preferred Stock were entitled to be paid out of the assets of the Company
available for distribution to its shareholders, an amount in cash equal to
the purchase price for each share of the Series A Preferred Stock
outstanding, prior to any distributions to common shareholders.

The Company authorized 300,000 shares of $0.01 par value Series B
Preferred Stock. Each share of Series B Preferred Stock was convertible at
any time into 2.25 shares of the Company's common stock. The Series B
Preferred Stock automatically converted to common stock 30 days following
the public offering of shares of the Company's common stock. In the event
of liquidation of the Company, whether voluntary or involuntary, the
holders of Series B Preferred Stock were entitled to receive an amount in
cash equal to the purchase price for each share of Series B Preferred
Stock outstanding, prior to any distributions to common shareholders. The
liquidation preference payable to holders of Series A and Series B
Preferred Stock was to be made based on the aggregate purchase price for
the shares of the Series A Preferred Stock and Series B Preferred Stock,
respectively. The Series A and Series B Preferred Stock had no specific
dividend rate and the holders of each class of preferred stock are
entitled to receive the same dividends as holders of common stock.

The Company agreed with the holders of Series A Preferred Stock that the
Company will not issue common stock, or securities convertible into or
exchangeable for shares of common stock, or any options, warrants or other
rights to acquire shares of common stock at a price per share less than
$1.67. However, as noted above, the Company issued common stock at a price
of $0.43 per share, with the express permission of the holders of Series A
Preferred Stock.

STOCK OPTION PLAN - The Company's 1996 Incentive 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

F-14
<PAGE> 68

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 61,756 options outstanding to
its employees under the 1996 Option Plan. These options are exercisable at
either $1.67 per share of common stock or $3.33 per share of common stock.

In October 1996, an option to purchase 67,500 shares of common stock at an
exercise price of $3.33 per share was granted to an officer of the
Company. The Board of Directors adjusted the exercise price of this option
to $1.67 per share in March 1998. Additionally, in March 1998, 393,750
options to purchase shares of common were granted to certain officers and
employees of the Company at an exercise price of $1.67 per share.

During October 1996, 215,026 nonqualified stock options were granted to
certain founders of the Company in connection with such founders' pledge
of their stock of the Company to guarantee a bridge loan. The Company
currently has 1,381,651 nonqualified options outstanding to certain of its
officers, employees and advisors. These options are exercisable at prices
ranging from $0.09 per share of common stock to $3.33 per share of common
stock.

During May 1998, outstanding options to purchase 258,750 shares of common
stock with an exercise price of $0.09 per share were repurchased from
former employees for $0.36 per share.

The Company applies APB No. 25 and related Interpretations in accounting
for its plans. The estimated fair value of each option grant was
determined by reference to recent private arm's length sales of common and
preferred stock. In cases where these were no arm's length transactions on
or around the date of an option grant, the value was determined by the
Board of Directors. The compensation cost (recovery) that has been charged
against operations for the stock options was $(39,150) and $0 in the years
ended June 30, 1997 and 1998, respectively.

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 loss and loss per share would
have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1998
------------ ----------
<S> <C> <C> <C>
Net loss As reported $ (4,599,461) $ (645,938)
Pro Forma (4,619,583) (660,400)

Basic and Diluted loss per share As reported $ (1.21) $ (0.16)
Pro Forma $ (1.22) $ (0.17)
</TABLE>

F-15
<PAGE> 69

A summary of the status of the Company's stock options as of June 30, 1997
and 1998, and changes during the years ended on those dates is presented
below:

<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,206,765 $ 1.37 1,260,364 $ 1.85
Granted 563,778 3.30 393,750 1.67
Exercised -- 0.00 -- 0.00
Forfeited (510,179) 2.30 (205,388) 2.43
Purchased -- 0.00 (258,750) 0.09
------------ ------------
Outstanding at end of period 1,260,364 1.85 1,189,976 1.59
============ ============

Options exercisable at year end 1,002,845 1.62 733,793 1.55
============ ============
</TABLE>

The following table summarizes information about stock options outstanding
at June 30, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
NUMBER WEIGHTED-AVERAGE NUMBER NUMBER
RANGE OF OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE EXERCISABLE
EXERCISE PRICES AT 6/30/98 LIFE AS OF 6/30/98 (YEARS) AT 6/30/97 AT 6/30/98
--------------- ---------- -------------------------- ----------- ----------
<S> <C> <C> <C> <C>
$ 0.09 78,750 7.4 78,750 337,500
1.67 1,083,407 8.9 627,224 366,251
3.33 22,500 8.6 22,500 293,775
</TABLE>

During March 1998, the exercise price of 343,645 options to purchase
shares of common stock was adjusted from $3.33 per share to $1.67 per
share, of which 310,541 options were exercisable at June 30, 1998. The
adjustment of the exercise price of these options decreased the weighted
average exercise price of the outstanding options as of June 30, 1998 by
$0.40 per share.

F-16
<PAGE> 70
9. INCOME TAXES

No provision for income taxes has been recognized for the year ended June
30, 1997 as the Company has incurred net operating losses for income tax
purposes and has no carryback potential. A current tax provision of
$24,000 was recognized for the year ended June 30, 1998 related to the
federal corporate alternative minimum tax.

Deferred tax assets and liabilities as of June 30, 1997 and 1998, consist
of:

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,418,000 $ 2,195,000
Stock options granted at a discount 142,000 31,000
Deferred revenue 141,000 44,000
Allowance for doubtful accounts 191,000 124,000
Impairment of equipment 43,000 67,000
Depreciation and amortization 183,000 387,000
Other 55,000 44,000
----------- -----------

Total deferred tax assets 3,173,000 2,892,000

Valuation allowance (3,173,000) (2,892,000)
----------- -----------

Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>

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, 1998, the Company has net operating loss carryforwards of
approximately $5 million for federal income tax purposes. These net
operating loss carryforwards may be carried forward in varying amounts
until 2012 and may be limited in their use due to significant changes in
the Company's ownership.

A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended June 30, 1997 and
1998 is as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1997 1998
<S> <C> <C>
Federal income tax benefit at statutory rate (34)% (34)%
State tax benefit, net of federal benefit (3)% (3)%
Valuation allowance alternative minimum tax 37% 37%
Alternative minimum tax 0% 2%
-------- --------
Total income tax provision 0% 2%
======== ========
</TABLE>

F-17
<PAGE> 71

10. EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) plan for the benefits 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, 1998.

11. BUSINESS COMBINATIONS

On January 29, 1999, the Company exchanged 16,910 shares of common stock,
par $0.01 per share, for substantially all of the net assets of CompuNet.
On February 18, 1999, the Company exchanged 365,725 shares of common stock
of Internet America, Inc. for all the members' interest of CyberRamp.
These combinations were accounted for as a pooling of interests.
Accordingly, the financial statements included herein have been restated
to include CompuNet and CyberRamp as of the beginning of the earliest
period presented. There were no intercompany transactions prior to their
combination. No significant adjustments were required to adopt the same
accounting practices. The following summarizes the results of operations
for each of the combining companies prior to the combinations:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------- ------------------
1997 1998 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Internet America $ 9,470,922 $ 10,643,272 $ 6,367,821
CompuNet 643,440 1,271,534 558,539
CyberRamp 1,188,560 2,163,419 1,453,539
------------ ------------ ------------
Total $ 11,302,922 $ 14,078,225 $ 8,379,899
============ ============ ============

Net loss:
Internet America $ (3,823,529) $ 1,006,002 $ 176,819
CompuNet (507,668) (684,251) (322,536)
CyberRamp (268,264) (967,689) (710,572)
------------ ------------ ------------
Total $ (4,599,461) $ (645,938) $ (856,289)
============ ============ ============
</TABLE>

******

F-18
<PAGE> 72

================================================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY INTERNET AMERICA OR THE SELLING
SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY OF THE COMMON STOCK OFFERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF INTERNET AMERICA SINCE
SUCH DATE.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary .............................................. 2
Risk Factors .................................................... 6
Use Of Proceeds ................................................. 15
Dividend Policy ................................................. 15
Capitalization .................................................. 15
Selected Financial and Operating Data ........................... 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 19
Business ........................................................ 25
Management ...................................................... 33
Certain Transactions ............................................ 39
Principal and Selling Shareholders .............................. 41
Description of Securities ....................................... 43
Shares Eligible for Future Sale ................................. 46
Plan of Distribution............................................. 47
Legal Matters ................................................... 48
Experts ......................................................... 48
Available Information ........................................... 48
Glossary of Technical Terms ..................................... 49
Financial Statements ............................................ F-1
</TABLE>

---------------

================================================================================

382,635 SHARES

INTERNET AMERICA LOGO

COMMON STOCK

------------------------
PROSPECTUS
------------------------

May 17, 1999

================================================================================
<PAGE> 73

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Articles of Incorporation, as amended (the "Articles"), of the
Registrant provide that to the fullest extent permitted by applicable law,
a director of the Registrant will not be liable to the Registrant or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director. The Registrant has also entered into an agreement
with each of its directors and certain of its officers wherein it has
agreed to indemnify each of them to the fullest extent permitted by law.

The Texas Business Corporation Act ("TBCA") permits the
indemnification of directors, employees, officers and agents to Texas
corporations. The Registrant's Articles and Bylaws, as amended (the
"Bylaws"), provide that the Registrant shall indemnify any person to the
fullest extent permitted by law. Under the TBCA, an officer or director
may be indemnified if he acted in good faith and reasonably believed that
his conduct (i) was in the best interests of the Registrant if he acted in
his official capacity or (ii) was not opposed to the best interests of the
Registrant in all other cases. In addition, the indemnitee may not have
reasonable cause to believe that his conduct was unlawful in the case of a
criminal proceeding. In any case, the indemnitee may not have been found
liable to the Registrant for improperly receiving a personal benefit or
for willful or intentional misconduct in the performance of his duty to
the Registrant. The Registrant (i) must indemnify an officer or director
for reasonable expenses if he is successful, (ii) may indemnify an officer
or director for such reasonable expenses unless he was found liable for
willful or intentional misconduct in the performance of his duty to the
Registrant and (iii) may advance reasonable defense expenses if the
officer or director undertakes to reimburse the Registrant if he is later
found not to satisfy the standard for indemnification expenses. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. This provision in the
Articles does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Texas law. This provision
also does not affect a director's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental
laws.

At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification by any officer or director.

II-1
<PAGE> 74

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement will
be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 2,792.28
Nasdaq listing fee 7,652.70
Printing and engraving expenses 10,000.00
Accounting fees and expenses 18,000.00
Legal fees and expenses 30,000.00
Fees and expenses (including legal fees) for qualification
under state securities laws 0
Registrar and Transfer Agent's fees and expenses 0
Miscellaneous 5,000.00
----------
TOTAL $73,444.98
==========
</TABLE>

All amounts except the Securities and Exchange Commission
registration fee and the Nasdaq listing fee are estimated.

The Selling Shareholders will pay any selling commissions from the
sales of the Common Stock, and the Company is paying all of the other
registration expenses related to the offer and sale of Common Stock
offered by the Principal and Selling Shareholders.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

From July to October 1996, the Company issued 575,822 shares of its
Common Stock to ten sophisticated investors at prices ranging from $0.57
to $1.67 per share in separate transactions for aggregate proceeds of
$671,135 cash. The shares were issued in reliance on the exemption from
registration under section 4(2) of the Securities Act.

During June 1996, the Registrant issued 1,125 shares of Common Stock
in exchange for services valued at $3,750 provided by an officer of the
Registrant. The shares were issued to the officer, a sophisticated
investor, in reliance on the exemption from registration under section
4(2) of the Securities Act.

In a private offering completed in June 1996 and exempt under
Regulation D, the Registrant sold 73,667 shares of Series B Preferred
Stock at $7.50 per share, for aggregate proceeds of $552,503 cash. The
shares were sold to a total of three institutional and individual
investors that qualify as "accredited investors" under the federal
securities laws. The Registrant did not engage any brokers to act as
placement agents, and the private offering was made on a best efforts
basis. The shares sold by the Registrant in the private offering were sold
in reliance on the exemption from registration under the Securities Act
provided by Rule 506 of Regulation D promulgated thereunder.

On September 25, 1996, the Registrant entered into a Securities
Purchase Agreement with First Computer Services Corporation, pursuant to
which the Registrant issued 544,149 shares of Common Stock to First
Computer Services Corporation at a price equal to approximately $0.43 per
share, for aggregate proceeds of $233,984 cash. The shares were issued to
First Computer Services Corporation, a sophisticated investor, in reliance
on the exemption from registration under section 4(2) of the Securities
Act.

II-2
<PAGE> 75

During fiscal 1997, the Registrant also issued 15,001 shares of
Common Stock in exchange for services valued at $6,667 provided by one of
the employees of the Registrant. The shares were issued to the employee, a
sophisticated investor, in reliance on the exemption from registration
under section 4(2) of the Securities Act.

During fiscal 1996, options to purchase 45,000 shares of Common
Stock were granted to two directors of the Registrant at an exercise price
of $1.67 per share. Also in 1996, an option to purchase 22,500 shares of
Common Stock was granted to a director of the Registrant at an exercise
price of $3.33 per share. The Board of Directors adjusted the exercise
price of this option to $1.67 per share in March 1998. In addition to the
above, in October 1996, an option to purchase 67,500 shares of Common
Stock at an exercise price of $3.33 per share was granted to an officer of
the Registrant. The Board of Directors adjusted the exercise price of this
option to $1.67 per share in March 1998. Additionally, in March 1998,
393,750 options to purchase shares of Common Stock were granted to certain
officers and employees of the Company at an exercise price of $1.67 per
share. Certain of these options were subsequently registered by the
Registrant on Form S-8.

During October 1996, 215,026 nonqualified stock options were granted
to certain founders of the Registrant in connection with such founders'
pledge of their stock of the Registrant to guarantee a bridge loan. The
Registrant had 1,381,651 nonqualified options outstanding as of March 31,
1998 to certain of its officers, employees and advisors. These options are
exercisable at prices ranging from $0.09 per share of Common Stock to
$3.33 per share of Common Stock. Certain of these options were
subsequently registered by the Registrant on Form S-8.

In July 1998, a nonqualified option to purchase 22,500 shares of
Common Stock was granted to a director at an exercise price of $8.00 per
share of Common Stock pursuant to the Registrant's 1998 Nonqualified Stock
Option Plan.

On July 13, 1998, the Registrant's Board authorized a 2.25-for-1.00
stock split of Common Stock effected in the form of a dividend. The stock
split was effected on July 13, 1998.

In December 1998 and pursuant to the Registrant's 1998 Nonqualified
Stock Option Plan, the Registrant granted certain options to purchase a
total of 86,500 shares of Common Stock to certain directors and employees
at an exercise price of $13.00 per share of Common Stock.

On January 29, 1999, the Registrant issued 16,910 shares of Common
Stock to CompuNet, Inc. in connection with the Registrant's acquisition of
the net assets of CompuNet, Inc. The shares were issued in reliance on the
exemption from registration under section 4(2) of the Securities Act.

On February 18, 1999, the Registrant issued 365,725 shares of Common
Stock to the security holders of CyberRamp, L.L.C. in connection with the
Registrant's acquisition of all of the outstanding securities of
CyberRamp, L.L.C. The shares were issued in reliance on the exemption
from registration under section 4(2) of the Securities Act.

During April 1999 and pursuant to the Registrant's 1998 Nonqualified
Stock Option Plan, the Registrant granted an option to purchase 75,000
shares of Common Stock to a director at an exercise price of $25.00 per
share.

Unless otherwise indicated, the issuance of the securities described
above was effected without the involvement of an underwriter.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
2.1 Securities Purchase Agreement dated September 25, 1996 by
and among First Computer Services Corporation and Internet
America, Inc.(1)

2.2 Asset Purchase Agreement dated July 31, 1996 by and between
Internet America, Inc. and Webstar, Inc.(1)

2.3 Asset Purchase Agreement dated November 26, 1997 by and
between Internet America, Inc. and Why? Telecommunications,
Inc.(1)

2.4 Asset Purchase Agreement dated as of January 29, 1999 by and
among CompuNet, Inc., William Thompson, Internet America,
Inc. and Geek Assets, Inc.(2)

2.5 Securities Purchase Agreement dated as of February 18, 1999
by and among CyberRamp, L.L.C., its Members and Internet
America, Inc.(3)
</TABLE>

II-3
<PAGE> 76

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3.1 Internet America, Inc.'s Articles of Incorporation(1)

3.2 Internet America, Inc.'s Articles of Amendment to Articles
of Incorporation(1)

3.3 Internet America, Inc.'s Bylaws(1)

3.4 Internet America, Inc.'s Amendment to Bylaws(1)

3.5 Application for Certificate of Withdrawal of Internet
America, Inc.(1)

3.6 Articles of Merger merging Internet America, Inc., an
Arizona Corporation, with and into INTRNTUSA, INC., a Texas
corporation(1)

4.1 Specimen Common Stock certificate(1)

4.2 Certificate of Designation of the Series A Preferred Stock
of Internet America, Inc.(1)

4.3 Amended Certificate of Designation of the Series A Preferred
Stock of Internet America, Inc.(1)

4.4 Certificate of Designation of the Series B Preferred Stock
of Internet America, Inc.(1)

5.1 Opinion of Jackson Walker L.L.P.*

10.1 Network Services Agreement dated August 25, 1997 by and
between Internet America, Inc. and Golden Harbor of Texas,
Inc.(1)

10.2 Consulting Agreement dated April 20, 1999 by and between
Internet America, Inc. and Gary L. Corona*

10.3 Financial Advisory Agreement dated April 20, 1999 by and
among Carl Westcott LLC and Internet America, Inc.*

11.1 Statement regarding computation of per share earnings(4)

16.1 Letter on change in certifying accountant(1)

23.1 Consent of Jackson Walker L.L.P. (included in its opinion
filed as Exhibit 5.1)*

23.2 Consent of Deloitte & Touche LLP*

24.1 Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney contained
therein

27.1 Financial Data Schedule*
</TABLE>

- ----------
* Filed herewith.
(1) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2 (No. 333-59527), and incorporated herein
by reference.
(2) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on February 16, 1999, and
incorporated herein by reference.
(3) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on March 1, 1999, and
incorporated herein by reference.

II-4
<PAGE> 77

(4) Statement omitted because not applicable or because the required
information is contained in the Financial Statements or Notes
thereto.

ITEM 28. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:

(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement; and

(iii) Include any additional or changed material
information on the plan of distribution.

(2) That, for determining liability under the Securities Act, to
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time shall be deemed to be the initial bona
fide offering.

(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end
of the offering.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer
or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.

II-5
<PAGE> 78

SIGNATURES

In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on From SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in
the City of Dallas, State of Texas, on May 17, 1999.

INTERNET AMERICA, INC.

By: /s/ Michael T. Maples
--------------------------------
Michael T. Maples
(Principal Executive Officer)

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Michael T. Maples and James
T. Chaney his true and lawful attorneys-in-fact, each acting alone, with
full powers of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments,
including any post-effective amendments, to this registration statement,
and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their
substitutes, each acting alone, may lawfully do or cause to be done by
virtue hereof.

In accordance with the requirements of the Securities Act of 1933,
the registration statement was signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE

<S> <C> <C>
/s/ Michael T. Maples Chief Executive Officer, President and May 17, 1999
----------------------------- Director (Principal Executive Officer)
Michael T. Maples

/s/ James T. Chaney Chief Financial Officer, Vice President, May 17, 1999
----------------------------- Secretary and Treasurer (Principal
James T. Chaney Financial and Accounting Officer)

/s/ William O. Hunt Chairman of the Board May 17, 1999
-----------------------------
William O. Hunt

/s/ Douglas G. Sheldon Director May 17, 1999
-----------------------------
Douglas G. Sheldon

/s/ Jack T. Smith Director May 17, 1999
-----------------------------
Jack T. Smith

/s/ Gary L. Corona Director May 17, 1999
-----------------------------
Gary L. Corona
</TABLE>

II-6
<PAGE> 79

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
2.1 Securities Purchase Agreement dated September 25, 1996 by
and among First Computer Services Corporation and Internet
America, Inc.(1)

2.2 Asset Purchase Agreement dated July 31, 1996 by and between
Internet America, Inc. and Webstar, Inc.(1)

2.3 Asset Purchase Agreement dated November 26, 1997 by and
between Internet America, Inc. and Why? Telecommunications,
Inc.(1)

2.4 Asset Purchase Agreement dated as of January 29, 1999 by and
among CompuNet, Inc., William Thompson, Internet America,
Inc. and Geek Assets, Inc.(2)

2.5 Securities Purchase Agreement dated as of February 18, 1999
by and among CyberRamp, L.L.C., its Members and Internet
America, Inc.(3)

3.1 Internet America, Inc.'s Articles of Incorporation(1)

3.2 Internet America, Inc.'s Articles of Amendment to Articles
of Incorporation(1)

3.3 Internet America, Inc.'s Bylaws(1)

3.4 Internet America, Inc.'s Amendment to Bylaws(1)

3.5 Application for Certificate of Withdrawal of Internet
America, Inc.(1)

3.6 Articles of Merger merging Internet America, Inc., an
Arizona Corporation, with and into INTRNTUSA, INC., a Texas
corporation(1)

4.1 Specimen Common Stock certificate(1)

4.2 Certificate of Designation of the Series A Preferred Stock
of Internet America, Inc.(1)

4.3 Amended Certificate of Designation of the Series A Preferred
Stock of Internet America, Inc.(1)

4.4 Certificate of Designation of the Series B Preferred Stock
of Internet America, Inc.(1)

5.1 Opinion of Jackson Walker L.L.P.*

10.1 Network Services Agreement dated August 25, 1997 by and
between Internet America, Inc. and Golden Harbor of Texas,
Inc.(1)

10.2 Consulting Agreement dated April 20, 1999 by and between
Internet America, Inc. and Gary L. Corona*

10.3 Financial Advisory Agreement dated April 20, 1999 by and
among Carl Westcott LLC and Internet America, Inc.*

11.1 Statement regarding computation of per share earnings(4)

16.1 Letter on change in certifying accountant(1)
</TABLE>

II-7
<PAGE> 80

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
23.1 Consent of Jackson Walker L.L.P. (included in its opinion
filed as Exhibit 5.1)*

23.2 Consent of Deloitte & Touche LLP*

24.1 Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney contained
therein

27.1 Financial Data Schedule*
</TABLE>

<PAGE> 1

EXHIBIT 5.1

May 17, 1999

Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 3000
Dallas, Texas 75201

Re: Registration Statement on Form SB-2 of Internet America, Inc.

Ladies and Gentlemen:

We are acting as counsel for Internet America, Inc., a Texas
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of the offering and sale of up
to 382,635 shares of the Company's Common Stock, par value $0.01 per share (the
"Shares"), by certain of the Company's shareholders. A Registration Statement
(as amended, the "Registration Statement") on Form SB-2 covering the offering
and sale of the Shares is expected to be filed with the Securities and Exchange
Commission (the "Commission") on or about the date hereof.

In reaching the conclusions expressed in this opinion, we have examined
and relied upon originals or certified copies of all documents, certificates and
instruments as we have deemed necessary to the opinions expressed herein. In
making the foregoing examinations, we have assumed the genuineness of all
signatures on original documents, the authenticity of all documents submitted to
us as originals and the conformity of original documents to all copies submitted
to us.

Based solely upon the foregoing, subject to the comments hereinafter
stated, and limited in all respects to the laws of the State of Texas and the
federal laws of the United States of America, it is our opinion that the Shares
are duly authorized and, upon issuance in accordance with the Securities
Purchase Agreement dated as of February 18, 1999 by and among CyberRamp, L.L.C.,
its Members and the Company and the Asset Purchase Agreement dated as of January
29, 1999 by and among CompuNet, Inc., its shareholder, the Company and its
wholly-owned subsidiary, were validly issued, fully paid and nonassessable.

We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to us under "Legal Matters" in the
prospectus forming part of the Registration Statement. In giving this consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission promulgated thereunder.
Very truly yours,

/s/ JACKSON WALKER L.L.P.

JACKSON WALKER L.L.P.

<PAGE> 1
EXHIBIT 10.2

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as
of the 20th day of April, 1999, by and between Internet America, Inc., a Texas
corporation (the "Company"), and Gary L. Corona ("Consultant").

W I T N E S S E T H:

WHEREAS, the Company desires to retain Consultant as provided herein,
and Consultant desires to be so retained; and

WHEREAS, Consultant shall, as a consultant to the Company, have access
to confidential information with respect to the Company;

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

1. DUTIES. Consultant is hereby retained to serve as a consultant to
the Company to identify and contact potential acquisition candidates of the
Company and to provide other related consulting, advisory and management
services on behalf of the Company as the Chief Executive Officer of the Company
may from time to time reasonably request (collectively, the "Duties").
Consultant agrees to devote his attention, skills, benefits and reasonable
efforts to the performance of the Duties and to the promotion of the business
and interest of the Company.

2. TERM. The term of this Agreement shall commence on the date hereof
and shall continue for a period of four (4) years thereafter (the "Term");
provided, however, that this Agreement may be terminated by either party hereto
at any time upon at least thirty (30) days prior written notice to the other
party.

3. COMPENSATION. As compensation for rendering the Duties, the Company
shall grant Consultant options to purchase 75,000 shares of the Company's common
stock, par value $.01 per share, on the terms and conditions to be set forth in
that certain Nonqualified Stock Option Agreement of the Company, a copy of which
is attached hereto as Exhibit A. Additionally, during the Term, the Company
shall reimburse Consultant for all reasonable and necessary out-of-pocket travel
and other expenses incurred by Consultant in performing the Duties, such
reimbursement to be on a monthly basis, within thirty (30) days after submission
of a detailed monthly statement and reasonable supporting documentation. The
compensation set forth in this Section 3 will be the sole compensation payable
to Consultant for performing the Duties, and no additional compensation or fee
will be payable by the Company to Consultant by reason of any benefit gained by
the Company directly or indirectly through Consultant's performing the Duties,
nor shall the Company be liable

- 1 -
CONSULTING AGREEMENT

<PAGE> 2

in any way for any additional compensation or fee for performing the Duties
unless the Company shall have expressly agreed thereto in writing.

4. INDEPENDENT CONTRACTOR STATUS. The Company and Consultant agree that
Consultant is an independent contractor under this Agreement and shall in no way
be considered to be an agent or employee of the Company and, accordingly,
Consultant shall not be entitled to any benefits, coverages or privileges made
available to employees of the Company, including without limitation, social
security, unemployment, medical or pension payments. Consultant shall only
consult and render advice, and shall not undertake to commit the Company to any
course of action in relation to third persons, except as requested in writing by
the Company. The Company shall not deduct any social security or income taxes
from Consultant's payments set forth in Section 3.

5. CONFIDENTIALITY.

(a) ACKNOWLEDGMENT OF PROPRIETARY INTEREST. Consultant recognizes the
proprietary interest of the Company in any Confidential and Proprietary
Information (as hereinafter defined) of the Company. Consultant acknowledges and
agrees that any and all Confidential and Proprietary Information communicated
to, learned of, developed or otherwise acquired by the Consultant during the
course of his engagement by the Company after the date hereof, whether developed
by Consultant alone or in conjunction with others or otherwise, shall be and is
the property of the Company. Consultant further acknowledges and understands
that his disclosure of any Confidential and Proprietary Information will result
in irreparable injury and damage to the Company. As used herein, "Confidential
and Proprietary Information" means, but is not limited to, information derived
from reports, investigations, experiments, research, work in progress, drawings,
designs, plans, proposals, codes, marketing and sales programs, client lists,
client mailing lists, financial projections, cost summaries, pricing formula,
contracts analyses, financial information, projections, maps, confidential
filings with any state or federal agency, and all other concepts, ideas,
materials or information prepared or performed for, by or on behalf of the
Company by its employees, officers, directors, agents, representatives or
consultants (including, without limitation, acquisition strategies, acquisition
candidates, acquisition contacts and proposed terms of acquisitions).

(b) COVENANT NOT-TO-DIVULGE CONFIDENTIAL AND PROPRIETARY INFORMATION.
Consultant acknowledges and agrees that the Company is entitled to prevent the
disclosure of Confidential and Proprietary Information. As a portion of the
consideration for the retainment of Consultant and for the compensation being
paid to Consultant by the Company, Consultant agrees at all times during the
term of this Agreement and thereafter to hold in strictest confidence and not to
disclose to any person, firm or corporation, other than to persons engaged by
the Company to further the business of the Company, and not to use except in the
pursuit of the business of the Company, Confidential and Proprietary
Information, without the prior written consent of the Company, including
Confidential and Proprietary Information developed by Consultant during the
course of his engagement hereunder; provided, however, that notwithstanding the
foregoing, Consultant shall not

- 2 -
CONSULTING AGREEMENT

<PAGE> 3

be obligated to keep secret and not to disclose Confidential and Proprietary
Information generally known to the public through no wrongful act of Consultant.

(c) RETURN OF MATERIALS. In the event of any termination of this
Agreement for any reason whatsoever, or at any time upon the request of the
Company, Consultant will promptly deliver to the Company all documents, data and
other information pertaining to Confidential and Proprietary Information.
Consultant shall not take any documents or other information, or any
reproduction or excerpt thereof, containing or pertaining to any Confidential
and Proprietary Information, unless as otherwise authorized in writing by the
President of the Company.

6. REMEDIES. Consultant recognizes and acknowledges that in the event
of any default in, or breach of any of, the terms, conditions or provisions of
this Agreement (either actual or threatened) by Consultant, the Company's
remedies at law shall be inadequate. Accordingly, Consultant agrees that in such
event, the Company shall have the right of specific performance and/or
injunctive relief in addition to any and all other remedies and rights at law or
in equity, and such rights and remedies shall be cumulative.

7. NOTICES. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given in writing and personally
delivered or sent by facsimile or mail, registered or certified, postage prepaid
with return receipt requested, as follows:

If to the Company: Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Attn: Michael T. Maples

If to Consultant: Gary L. Corona

---------------------------

Notices delivered personally shall be deemed communicated as of actual
receipt; mailed notices shall be deemed communicated as of three days after
mailing.

8. ENTIRE AGREEMENT. This Agreement contains the entire agreement of
the parties hereto with respect to the subject matter contained herein and
supersedes all prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof. No modification or
amendment of any of the terms, conditions or provisions herein may be made
otherwise than by written agreement signed by the parties hereto.

- 3 -
CONSULTING AGREEMENT

<PAGE> 4

9. GOVERNING LAW. This agreement and the rights and obligations of the
parties hereto shall be governed, construed and enforced in accordance with the
laws of the State of Texas (except the choice of law rules).

10. PARTIES BOUND. This Agreement and the rights and obligations of the
parties hereto shall be binding upon and inure to the benefit of the Company and
Consultant and their respective heirs, personal representatives, successors and
assigns. No person or entity shall be deemed a third party beneficiary of this
Agreement. Consultant may not assign any of his rights, obligations or duties
hereunder without the prior written consent of the Company.

11. 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.

12. WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a wavier of any
subsequent breach by any party.

13. CAPTIONS. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.

14. COSTS. If it is necessary to enforce or interpret the terms of this
Agreement by action at law or in equity, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which he or it may be entitled.

15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument, but only one of which need be produced.

- 4 -
CONSULTING AGREEMENT

<PAGE> 5

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

INTERNET AMERICA, INC.

By: /s/Michael T. Maples
-----------------------------------
Michael T. Maples, President and
Chief Executive Officer

/s/Gary L. Corona
-----------------------------------
Gary L. Corona

- 5 -
CONSULTING AGREEMENT

<PAGE> 1

EXHIBIT 10.3

April 20, 1999

Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Attn: Michael T. Maples, Chief Executive Officer

Gentlemen:

By this letter agreement (the "Agreement"), Internet America, Inc. (the
"Company") retains Carl Westcott LLC ("Westcott") as its non-exclusive financial
advisor, on the terms and subject to the conditions set forth herein, in
connection with one or more transaction (individually the "Transaction")
generally described as the purchase of one or more companies engaged in the
business of providing Internet services (individually, the "Target"). This
Agreement confirms the understanding between the Company and Westcott with
respect to the services Westcott will provide and confirm the parties'
understanding concerning fees and expenses, indemnification obligations and
other matters. Westcott will provide and confirms the parties' understanding
concerning fees and expenses, indemnification obligations and other matters. The
appointment of Westcott hereunder shall commence on the date hereof and shall
continue until terminated by either party upon at least thirty (30) days prior
written notice to the other party (the "Appointment Period").

1. Services Provided. In undertaking this assignment,
Westcott will, as appropriate and requested, provide the following services:

i) assisting the Company in identifying and/or contacting
potential Targets, including Targets that the Company may have
previously identified;
ii) evaluating and valuing the Target businesses and/or assets to
be acquired;
iii) assisting in the structuring of Transaction proposals;
iv) analyzing the economic effects of various Transaction
structures on the Company;
v) developing strategies for consummating a Transaction
successfully;
vi) preparing and presenting a transaction proposal, and assisting
in the negotiation of changes to such proposal;
vii) assisting in the due diligence process for the Transaction
viii) preparing and negotiating documents related to the
Transaction; and
ix) completing other matters related to closing the Transaction.

2. Compensation and Expense Reimbursement. As
compensation for rendering the above services, the Company shall pay Westcott a
fee (the " Fee") equal to two percent (2%) of the Acquired Revenues (as defined
below) of each Acquired Company (as defined below); provided, however, that in
no event shall the Fee for any be less than $25,000 nor more than $75,000.
Additionally, during the Appointment Period, the Company shall reimburse
Westcott for all

<PAGE> 2

reasonable and necessary out-of-pocket travel and other expenses incurred by
Westcott in performing the above services, such reimbursement to be on a monthly
basis, within thirty (30) days after submission of a detailed monthly statement
and reasonable supporting documentation.

The term "Acquired Company" shall mean any business entity acquired by
the Company under an agreement directly attributable to the performance by
Westcott of the above services, but does not include any business entity
acquired by the Company in a transaction closing more than six months after the
termination of the Appointment Period. The terms "acquire," "acquired," or
"acquisition" refer to any transaction in which the Company or any of its
subsidiaries purchases all or substantially all of the assets or securities of
another business entity, whether by asset purchase, securities purchase, merger
or otherwise. The term "Acquired Revenues" shall mean the estimated annual
revenue of an Acquired Company for the twelve-month period immediately following
the closing of the Company's acquisition of the Acquired Company, with such
estimate to be made by the Chief Financial Officer of the Company and agreed to
by Westcott; provided, however, in the event that the Chief Financial Officer of
the Company and Westcott are unable to reach agreement regarding any such
estimate, the Company's independent accountants shall determine such estimate,
which determination shall be final and binding upon the parties hereto.

The compensation set forth in this Section 2 will be the sole
compensation payable to Westcott for performing the above services and no
additional compensation or fee will be payable by the Company to Westcott by
reason of any benefit gained by the Company directly or indirectly through
Westcott's performing the above services, nor shall the Company be liable in any
way for any additional compensation or fee for performing the above services
unless the Company shall have expressly agreed thereto in writing.

3. Indemnification. The Company agrees to indemnify and
hold Westcott harmless in accordance with the terms and conditions of Exhibit A
attached hereto and made a part hereof.

4. Certain Agreements of the Company. The Company agrees
to make available to Westcott all information relating to the Company and, to
the extent in the Company's possession, the Targets as Westcott reasonably
requests in connection with providing its services hereunder. The Company
acknowledges that Westcott may rely on the completeness and accuracy of the
information furnished to it by the Company or any other party or potential party
to a Transaction without undertaking independent verification.

5. Survival. The provisions of Sections 2, 3,5 and 6
through 8, and Exhibit A shall survive the termination of this Agreement.

6. Governing Law. This Agreement is governed by the
laws of the State of Texas, without regard to principles of conflicts of laws.

-2-

<PAGE> 3
'

7. Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and, except as otherwise explicitly provided, supersedes all prior
understandings, written or oral, with respect to the subject matter hereof. This
Agreement may be amended by an agreement in writing signed by Westcott and the
Company.

8. Miscellaneous. Any determination that any provision
of this Agreement may be or is unenforceable shall not affect the enforceability
of the remaining provisions of this Agreement. The Section headings in this
Agreement are for convenience of reference and are not to be deemed to be a part
if this Agreement. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same instrument.

If the terms set forth in this Agreement are acceptable to you, please
sign the enclosed copy of this letter and return it to Westcott.

CARL WESTCOTT, LLC

By: /s/ CARL WESTCOTT
---------------------------
Title: Manager
------------------------

Agreed and accepted
as of the date first above written

INTERNET AMERICA, INC.

By: /s/ Michael T. Maples
------------------------------------
Michael T. Maples,
Chief Executive Officer

-3-

<PAGE> 4

EXHIBIT A

Recognizing that transactions of this type contemplated in this
Agreement sometimes result in litigation and that Westcott's role is advisory,
the Company agrees to indemnify and hold harmless Westcott, its partners,
employees, agents, affiliates and persons deemed to be in control of Westcott
within the meaning of either Section 15 of the Securities At of 1933, as
amended, or Section 20 of the Securities Exchange Act of 1934, as amended
(collectively, the "Indemnified Parties"), from and against any claims, damages
and liabilities, joint or several, related to or arising in any manner our of
any transaction, proposal or any other matter (the "Matters") contemplated by
the engagement of Westcott hereunder. The Company also agrees that neither
Westcott nor any other Indemnified Party shall have any liability to the Company
for any losses, claims or expenses related to or arising out of any Matters. The
Company will promptly reimburse any preparation for or defense of any pending or
threatened claim related to or arising in any manner out of any Matter
contemplated by the engagement of Westcott hereunder, or any action or
proceeding arising therefrom; provided, however, that each Indemnified Party so
reimbursed shall repay such expenses in the event that it is ultimately
determined that such Indemnified Party is not entitled to indemnification for
such Matter pursuant to the provisions of this Agreement.

The Company may assume the defense of any litigation or proceeding in
respect of which indemnity may be sought hereunder, including the employment of
counsel and experts reasonably satisfactory to Westcott and the payment of the
fees and expenses of such counsel and experts, in which event, except as
provided below, the Company shall not be liable for the fees and expenses of any
other counsel or expert retained by any Indemnified Party in connection with
such litigation or proceeding. In any such litigation or proceeding the defense
of which the Company shall have so assumed, any Indemnified Party shall have the
right to participate in such litigation or proceedings and to retain its own
counsel and experts, but the fees and expenses of such counsel and experts shall
be at the expense of such Indemnified Party unless (i) the Company and such
Indemnified Party shall have mutually agreed in writing to the retention of such
counsel or experts, (ii) the Company shall have failed in a timely manner to
assume the defense of, and employ counsel or experts reasonably satisfactory to
Westcott in, such litigation or proceeding, or (iii) the named parties to any
such litigation or proceeding (including any impleaded parties) include the
Company and such Indemnified Party and representation of the Company and any
Indemnified Party by the same counsel or experts would, in the reasonable
opinion of Westcott, be inappropriate due to actual or potential differing
interests between the Company and any such Indemnified Party. Notwithstanding
the foregoing, in no event shall the Company be obligated to reimburse the fees
or expenses of more than one counsel for any Indemnified Party.

The Company shall not be liable, and the Indemnified Parties shall not
be exculpated, in respect of any claims, damages, liabilities or expenses that
are finally judicially determined to have resulted directly from the gross
negligence or willful misconduct of an Indemnified Party. The Company agrees
that the exculpation, indemnification and reimbursement commitments set forth in
this engagement letter shall apply whether or not such Indemnified Party is a
formal party to any such claim, action or proceeding. Neither the Company nor an
Indemnified Party shall be liable for

A-1

<PAGE> 5

any settlement of any litigation or proceeding effected without its written
consent, unless such settlement, compromise or consent includes an unconditional
release of the Company or each Indemnified Party, as the case may be, from all
liability arising out of such claim, action, suit or proceeding.

The Company agrees that if any exculpation, indemnification or
reimbursement sought pursuant to this Agreement were for any reason not to be
available to any Indemnified Party or insufficient to hold it harmless as and to
the extent contemplated by this Agreement, then the Company shall contribute to
the amount paid or payable by the Indemnified Party as a result of the claims,
damages and liabilities in such proportion as is appropriate to reflect the
relative benefits to the Company on the one hand, and Westcott on the other
hand, in connection with the transaction to which such exculpation,
indemnification or reimbursement relates and, to the extent required by
applicable law, the relative faults of such parties as well as any other
equitable considerations. The Company and Westcott agree that it would not be
just and equitable if the contribution provided for herein were determined by
pro rata allocation or any other method which does not take into account the
equitable considerations referred to above. It is hereby agreed that the
relative benefits to the Company, on the one hand, and Westcott, on the other
hand, with respect to this engagement shall be deemed to be in the same
proportion as (i) the aggregate transaction value of the Transaction (whether or
not consummated) for which Westcott is engaged to render financial advisory
services bears to (ii) the Fee paid to Westcott in connection with such
Transaction. In no event shall Westcott contribute in excess of the amount
actually received by Westcott pursuant to the terms of the Agreement.

A-2

<PAGE> 1

EXHIBIT 23.2

We consent to the use in this Registration Statement of Internet
America, Inc. on Form SB-2 of our report dated May 14, 1999, appearing in the
Prospectus, which is part of this Registration Statement and to the reference to
us under the headings "Selected Financial and Operating Data" and "Experts" in
such Prospectus.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Dallas, Texas

May 17, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERNET AMERICA, INC. FOR THE NINE MONTHS ENDED MARCH
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

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<FISCAL-YEAR-END> JUN-01-1999 JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1996 JUL-01-1997
<PERIOD-END> MAR-31-1999 JUN-30-1997 JUN-30-1998
<CASH> 16,661 22 618
<SECURITIES> 0 0 0
<RECEIVABLES> 882 469 693
<ALLOWANCES> 100 127 198
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 17,563 427 1,144
<PP&E> 6,450 4 5,538
<DEPRECIATION> 4,366 4,691 3,405
<TOTAL-ASSETS> 20,127 1,800 4,062
<CURRENT-LIABILITIES> 7,289 3,954 9,424
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<INCOME-PRETAX> (1,555) (4,609) (670)
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<INCOME-CONTINUING> (1,565) (4,599) (646)
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<NET-INCOME> (1,565) (4,599) (646)
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