INTERNET AMERICA INC, 10KSB40, 2000-09-26

INTERNET AMERICA INC
10KSB40, 2000-09-26
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-25147

INTERNET AMERICA, INC.
(Name of small business issuer in its charter)

<TABLE>
<S> <C>
TEXAS 86-0778979
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

350 N. ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
</TABLE>

(214) 861-2500
(Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:
(NOT APPLICABLE)

Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

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

Issuer's revenues for fiscal year ended June 30, 2000: $29,345,474

Based upon the closing price of the registrant's Common Stock as of
September 20, 2000, the aggregate market value of the Common Stock held by
non-affiliates of the registrant is $24,644,801.*

The number of shares of Common Stock outstanding as of September 20, 2000
was 9,719,790.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on November 1, 2000, to be filed within 120 days after
the end of our fiscal year, are incorporated by reference into Part III, Items
10-13 of this Form 10-KSB.
---------------

* Solely for purposes of this calculation, all executive officers and directors
of the registrant and all shareholders reporting beneficial ownership of more
than 5% of the registrant's Common Stock are considered to be affiliates.

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TABLE OF CONTENTS

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<S> <C> <C> <C>
PAGE
----
PART I Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 7. Financial Statements and Supplementary Data................. 15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 15
PART Item 9. Directors and Executive Officers, Promoters and Control
III Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 16
Item 10. Executive Compensation...................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 16
Item 12. Certain Relationships and Related Transactions.............. 16
Item 13. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES..................................................................... 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-1
</TABLE>

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Certain statements contained in this Form 10-KSB constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act. These
statements, identified by words such as "anticipate," "believe," "estimate,"
"should," "expect" and similar expressions, include our expectations and
objectives regarding our future financial position, operating results and
business strategy. These statements reflect the current views of management with
respect to future events and are subject to risks, uncertainties and other
factors that may cause our actual results, performance or achievements, or
industry results, to be materially different from those described in the
forward-looking statements. Such risks and uncertainties include those set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Form 10-KSB. We do not intend
to update the forward-looking information to reflect actual results or changes
in the factors affecting such forward-looking information.

PART I

ITEM 1. BUSINESS

GENERAL

Internet America is an ISP that provides a wide array of Internet services
tailored to meet the needs of individual and business subscribers. As of June
30, 2000, we served approximately 152,000 subscribers in the southwestern United
States. Our business model is to create high user density in each geographic
area we serve, which allows us to realize substantial marketing and operating
efficiencies. Our growth strategy focuses on continuing to add customers in
existing markets and quickly building a critical mass of subscribers in new
markets.

Internet America was incorporated in 1994 and has operated as an ISP since
inception. Our subscriber base has grown from 47,900 at June 30, 1997, to 61,600
at June 30, 1998, to 100,000 at June 30, 1999 and to 152,000 at June 30, 2000.

Elements of our growth strategy include:

Strategic and Add-On Acquisitions to Rapidly Acquire a Critical Mass of
Subscribers. We pursue strategic acquisitions to launch our entry into new
markets and pursue add-on acquisitions in our existing markets.

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.
See "Marketing" below.

Attract New Subscribers and Migrate Existing Subscribers to Our DSL
Products. We emphasize our DSL products in marketing efforts to increase our
total subscriber base and our average revenue per subscriber.

Cost-Effective Development of Network Infrastructure. We deploy network
infrastructure in a disciplined manner to achieve substantial economies of scope
and scale. With our "Virtual POP" architecture, we can provide local access
services without investing in additional physical infrastructure. See
"-- Infrastructure," below.

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

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RECENT ACQUISITIONS

On November 22, 1999, we acquired all of the outstanding shares of PDQ.Net,
Inc. ("PDQ"), a Houston-based ISP, in exchange for 2,425,000 shares of Common
Stock. We also issued options to purchase 352,917 shares of Common Stock with a
weighted average exercise price of $1.62 per share in replacement of all of the
outstanding stock options of PDQ. The transaction was accounted for as a
purchase. PDQ is a wholly owned subsidiary of Internet America and constitutes
the majority of our Houston operations.

On August 9, 1999, we acquired the Texas dial-up subscribers of Pointe
Communications Corporation, Inc., a Nevada corporation ("PointeCom"). Under the
terms of an Asset Purchase Agreement, we made an initial payment of $1,000,000
in cash. The remaining payment of $1,000,000 was contingent on the actual number
of PointeCom customers that transitioned to Internet America's service. In
January 2000, we received a refund of $750,000 from the initial payment based on
the actual number of PointeCom subscribers that transitioned to our service.

On July 28, 1999, we acquired the subscribers of INTX Networking, L.L.C., a
Texas limited liability company ("INTX"), under the terms of an Asset Purchase
Agreement. According to the agreement, we agreed to pay up to $380,600 in cash,
half of which was paid upon closing. The remaining payment was contingent on the
actual number of INTX subscribers that transitioned to our service by January
24, 2000. We do not expect to make any further payments under the agreement.

On July 26, 1999, we acquired the subscribers of King Dinosaur, Inc. d/b/a
KDI Internet Solutions, a Texas corporation ("KDi"). Under the terms of an Asset
Purchase Agreement, we paid a total of $259,250 based on the actual number of
KDi subscribers that transitioned to our service.

On June 30, 1999, we acquired all the outstanding common stock of NeoSoft,
Inc. ("NeoSoft"), an ISP in Houston, Texas, for $8.1 million. Assets of NeoSoft
include approximately 9,500 individual and corporate Internet access accounts,
including customer support and network operations facilities in Houston and New
Orleans. This transaction was accounted for as a purchase.

On January 29, 1999, we acquired the net assets of CompuNet, Inc.
("CompuNet"), a Dallas-based Internet service provider with a concentration of
business clients, in exchange for 16,910 shares of Common Stock. On February 18,
1999, we acquired all of the outstanding securities of CyberRamp, L.L.C.
("CyberRamp"), a Dallas-based Internet service provider with approximately
16,000 customers, in exchange for 365,725 shares of Common Stock. 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.

SERVICES

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

High Speed Connectivity; DSL Services. We offer Digital Subscriber Line
(DSL) service for business and consumers, dedicated ISDN access, and full and
partial T-1 connectivity, which can service hundreds of users at once. Our DSL
products provide high-speed Internet access over existing telephone lines, and
may allow subscribers to simultaneously use a single telephone line for voice
service and for access to the Internet. In addition, the products provide an
"always on" connection thereby removing wait times associated with dialing into
a network. The DSL products offer our residential and business subscribers a
cost-effective way to substantially increase the speed at which they access the
Internet.

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

USENET. Our Airnews.net product provides access to Internet America's
newsgroup services for subscribers of other Internet services and on a wholesale
basis to other businesses or ISPs. As of June 30, 2000, there were approximately
6,300 Airnews.net subscribers.

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

CUSTOMER CARE

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

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

- problems affecting a variety of hardware systems,

- start-up or other basic problems of new subscribers or new Internet
users, and

- highly technical issues that sophisticated users may encounter.

We have customer care departments in our Dallas facilities consisting of
approximately 89 employees and in our PDQ Houston facilities consisting of
approximately 63 employees. Our Dallas customer care department is available to
subscribers 24-hours-a-day, 7-days-a-week. Both departments are organized in
tiers designed to respond to varying types of support needs. In addition to
diagnosing and resolving subscribers' technical problems, our customer care
departments answer questions about account status, respond to software requests
and provide configuration information.

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

MARKETING

Our marketing strategy focuses on rapid penetration of high density urban
markets in order to acquire a critical mass of subscribers to support profitable
operations. Our approach combines direct response marketing and brand building
advertising. We use a variety of mediums to communicate our marketing message,
including television, outdoor billboards, print, radio, direct mail and on-line
marketing activities. Because we believe that the demand for high-speed
connectivity is growing, our advertising currently focuses almost exclusively on
our DSL products.

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INFRASTRUCTURE

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

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

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

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

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

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

TECHNOLOGY AND DEVELOPMENT

Although we do not focus a significant amount of resources on creating new
technologies, we continuously evaluate new technologies and applications for
possible introduction or incorporation into our

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services. In the fourth quarter of fiscal 1999, we deployed Expresslane DSL, a
high-speed connectivity technology, in our established markets. This DSL product
uses existing twisted copper pair wire extending from a local exchange carrier's
central office to a subscriber's home or office to provide high-speed
connectivity. High-speed connectivity is essential to the commercially viable
deployment of new, value-added services such as Internet telephony, particularly
VoIP, video and audio programming distribution and other high-bandwidth,
low-latency applications. We believe that we are well positioned to efficiently
market and deploy our broadband products and other new, value-added services due
to the high density of our subscriber base.

PROPRIETARY RIGHTS

General. We believe that our success is more dependent upon technical,
marketing and customer service expertise than upon our proprietary rights.
However, our success and ability to compete are dependent in part upon
proprietary rights. We rely on a combination of copyright, trademark and trade
secret laws. "Internet America," the Internet America logo, "1-800-Be-A-Geek,"
"PDQ.Net," "Airmail.net," "Airnews.net" and "Airweb.net" are registered service
marks of Internet America or its subsidiaries. Service mark applications are
pending for the registration of "Expresslane DSL" and its logo.

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

Licenses. We have obtained authorization to use the products of each
software company that are bundled in our front-end software product for Windows
and Macintosh subscribers. The particular applications included in our start-up
package have been licensed when necessary. We intend to maintain or negotiate
renewals of existing software licenses and authorizations as required. 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,

- pricing,

- access speed,

- effective customer support,

- access to capital,

- creative marketing,

- easy-to-use software, and

- geographic coverage.

Our current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical, marketing
and other resources than we have. We currently compete or expect to compete with
the following types of Internet access providers:

- commercial online service providers, such as America Online;

- national ISPs, such as EarthLink, Juno, and Prodigy;

- numerous regional and local ISPs;

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

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

- regional telecommunications providers, such as SBC Communications;

- cable operators, such as Time Warner and AT&T;

- wireless communications companies; and

- satellite companies.

We believe that new competitors, including large computer hardware and
software, media and telecommunications companies, will continue to enter the
Internet services market. In addition, as consumer awareness of the Internet
grows, existing competitors are likely to further increase their emphasis on
Internet access services, resulting in even greater competition. The ability of
these competitors or others to enter into business combinations, strategic
alliances or joint ventures or to bundle services and products with Internet
access could put us at a significant competitive disadvantage.

The market for broadband services is still in an early stage of development
and is extremely competitive. The markets we serve have been flooded with DSL
offers from our competitors, some of which have greater resources than we have
and are able to offer DSL products at lower prices than we offer. In addition,
other methods of broadband delivery which we do not currently offer, such as
cable or wireless transmission, may be more successful than DSL.

We face increased competition from certain ISPs that provide free Internet
access to consumers. Under this "free access" business model, revenues are
derived primarily from companies that place advertisements in small banners or
windows on users' computer screens while they are online. Subscribers are
generally required to provide demographic information which is used by
advertisers to deliver targeted messages to the users' screens that cannot be
closed or removed. ISPs employing this business model could continue to attract
a sizable number of users and exert pressure on prices.

Most 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, have also 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 to experience
increased competition from the traditional telecommunications carriers for both
customers and potential acquisitions. Many of these telecommunications carriers
have greater coverage and market presence, as well as substantial financial,
technical and marketing resources. These telecommunications providers may have
the ability to bundle Internet access with basic local and long-distance voice
services. This bundling of services may make it difficult for us to compete
effectively and may cause us to lower our prices.

We expect to face competition in the future from companies that provide
connections to consumers' homes, including national and regional
telecommunications providers, cable companies, electric utility companies and
terrestrial and satellite wireless communications companies. For example, cable
television operators offer Internet access through their cable facilities at
significantly faster rates than existing analog modem speeds. These companies
include Internet access in the basic bundle of services, or offer such access
for a nominal additional charge, and could prevent us from delivering Internet
access through wire and cable connections owned by these competitors. This could
negatively affect our business, financial condition and results of operations.

To date, the Federal Communications Commission ("FCC") has not elected to
force cable television companies to give ISPs access to their broadband
facilities, though a few local governments have voted to impose such a
requirement. Our ability to compete with cable television companies may depend
on future legislation or regulations guaranteeing open access to their broadband
networks.

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GOVERNMENT REGULATION

We are not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations applicable
to businesses and public companies generally. The FCC classifies Internet access
providers as "information service providers" rather than regulated
"telecommunications providers" under the 1996 Telecommunications Act. As such,
we are not subject to regulations that apply to telephone companies and similar
carriers.

However, changes in the FCC's policies relating to the telecommunications
industry could have a material adverse effect on our business. For example,
several telecommunications carriers are seeking to have Internet communications
regulated by the FCC in the same manner as traditional telecommunications
services. In addition, local telephone carriers are seeking to impose access
fees on Internet access providers similar to those paid by long distance
telephone carriers, generally on a per-minute basis. If imposed, access fees
would increase the cost of the Internet to users, most of whom currently enjoy
unlimited, flat-fee usage. This in turn could slow the growth of the Internet
and cause an adverse effect on our business. The FCC is also considering whether
carrier access charges should apply to Internet-based telephony. We do not
currently offer telephony services, but if we offer them in the future, we may
be affected by these issues. Finally, any change in the FCC's policy of not
regulating Internet access providers may cause states to regulate aspects of our
business as telecommunications services.

Our services are subject to Texas state sales taxes at a rate of 8.25% of
gross receipts. Accordingly, we are responsible for collecting and remitting the
taxes to the state. Effective on October 1, 1999, the first $25 per month of the
Internet access service fee collected from each customer is exempt from Texas
sales taxes.

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, fraud,
privacy violations, 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.

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

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EMPLOYEES

As of June 30, 2000, we employed approximately 280 people, almost all of
whom are full time employees. We anticipate that the development of our business
will require that we hire additional employees. None of our current employees
are represented by a labor organization, and we consider employee relations to
be good.

EXECUTIVE OFFICERS

The following table sets forth certain information concerning our executive
officers.

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NAME AGE POSITION
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Jack T. Smith................ 47 President, Chief Executive Officer and Director(1)
Michael T. Maples............ 44 Former President, Chief Executive Officer and
Director(1)
James T. Chaney.............. 45 Vice President, Chief Financial Officer and
Treasurer
Elizabeth Palmer Daane....... 34 Vice President, General Counsel and Secretary
John James Stewart III....... 40 Vice President -- Customer Care
Marc Ladin................... 30 Vice President -- Marketing
Bobby R. B. Manson........... 44 Vice President -- Network Operations
Richard L. Kelley, Jr. ...... 41 Vice President -- Commercial and Broadband Services
</TABLE>

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(1) Mr. Maples resigned as President and Chief Executive Officer and as a
director, and Mr. Smith was elected President and Chief Executive Officer,
on September 5, 2000.

Jack T. Smith has served as our President and Chief Executive Officer since
September 5, 2000 and as one of our directors since November 1995. Mr. Smith is
also employed by Carl Westcott LLC, a private capital firm. From March 1997 to
February 1999, Mr. Smith was President and Chief Operating Officer of Jayhawk
Acceptance Corporation, a specialized financial services company. 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, Inc. He is
also a director of First Extended Service Corporation and FFG Insurance Company.

Michael T. Maples served as President and Chief Executive Officer from
March 1997 to September 5, 2000 and served as a director from April 1997 to
September 2000. 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.

James T. Chaney joined us in December 1997 as Chief Financial Officer, and
has served as Vice President, Chief Financial Officer and Treasurer since
February 1998. Prior to joining us, Mr. Chaney was Tax Manager at Judd, Thomas,
Smith & Co., CPAs, 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.

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

John James Stewart III has served as 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.

Marc Ladin joined us in November 1999 as Vice President -- Marketing. Prior
to joining us, Mr. Ladin was the Director of Marketing of PDQ since June 1997.
From January 1995 until joining PDQ, Mr. Ladin was a Business Development
Manager for Compaq Computer Corporation, where he helped establish Compaq's
first Internet division and Internet partnerships with leading technology
companies, including Microsoft,

8
<PAGE> 11

PointCast and Marimba. Mr. Ladin is the son of William E. Ladin, Jr., the Vice
Chairman of our Board of Directors.

Bobby R.B. Manson has served as our Vice President -- Network Operations
since January 2000. He has been with us since February 1999 as Director of
Network Engineering and from April 1995 to February 1997 as Vice President of
Network Operations. From April 1998 to February 1999, Mr. Manson was Director of
Operations of Allegiance Telecom, Inc. Prior to that, Mr. Manson was acting Vice
President of Dallas Operations of Winstar Wireless from October 1997 to April
1998 and Regional Director of Operations of Advanced Radio Telecom from February
1997 to October 1997. Prior to joining Internet America in April 1995, Mr.
Manson was a manager in the technical operations department of Metropolitan
Fiber Systems (now a part of MCI WorldCom).

Richard L. Kelley, Jr. has served as our Vice President -- Commercial and
Broadband Services since June 2000. Mr. Kelley joined us as Vice President and
General Manager of PDQ in November 1999. Mr. Kelley was one of the founders of
PDQ in December 1996 and served as Vice President of PDQ until November 1999.
From November 1991 until December 1996 he served as President of Desktop
Solutions, Inc., a systems integrator and VAR in Houston, Texas. Prior to
joining Desktop Solutions, Mr. Kelley served as Technology Manager for the
litigation and bankruptcy practice of Price Waterhouse.

ITEM 2. PROPERTIES

Our corporate headquarters are located in downtown Dallas at One Dallas
Center, 350 N. St. Paul, Suite 3000, where all executive functions exist. We
lease approximately 31,000 square feet in Dallas, Texas and approximately 36,000
square feet in Houston, Texas under multiple leases. All systems, sales and
technical support functions take place in our Dallas and Houston facilities. We
also lease small equipment room facilities for each of our other physical POPs
in Louisiana. We do not own any real estate. We believe that all of our
facilities are adequately maintained and suitable for their present use.

ITEM 3. LEGAL PROCEEDINGS

Our wholly owned subsidiary, PDQ, and our Vice Chairman, William E. Ladin,
Jr., were named as defendants in a lawsuit filed on April 10, 2000 by Santa Fe
Capital Group, Inc. in the District Court of Santa Fe County, New Mexico. The
plaintiff alleges a finders fee was owed to plaintiff in connection with
Internet America's acquisition of PDQ. Plaintiff asserts claims for breach of
contract, restitution, fraud and unfair trade practices, and alleges damages in
the amount of $960,000. We believe this lawsuit is without merit and intend to
defend it vigorously.

Internet America, our former Chief Executive Officer, Michael T. Maples,
and our Chairman, William O. Hunt were named as defendants in a lawsuit filed on
November 12, 1999 by Cindy Carradine, a former employee, in the District Court
of Dallas County, Texas. The plaintiff asserts claims for fraud and negligent
misrepresentation in connection with the sale of plaintiff's options to Internet
America in 1998. The plaintiff alleges actual and punitive damages in an
unspecified amount. We believe this lawsuit is without merit and intend to
defend it vigorously.

We are involved from time to time in various disputes and litigation in the
ordinary course of business. In our opinion, none of these matters is expected
to have a material adverse effect on our financial condition.

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

No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 2000.

9
<PAGE> 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock began trading on the NASDAQ national market on December
10, 1998 under the symbol "GEEK." Before that date, there was no established
public trading market for our common stock. The following table shows for the
period indicated the high and low sales prices per share of the common stock as
reported by the NASDAQ National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 2000:
First Quarter............................................. $23.50 $11.50
Second Quarter............................................ 27.00 8.00
Third Quarter............................................. 15.25 8.25
Fourth Quarter............................................ 8.69 3.94
Fiscal Year Ended June 30, 1999:
Second Quarter (beginning December 10, 1998).............. $61.00 $11.50
Third Quarter............................................. 44.00 22.38
Fourth Quarter............................................ 35.00 15.00
</TABLE>

On June 30, 2000, the last reported sale price of the common stock on the
NASDAQ National Market was $5.0265 per share. At June 30, 2000, there were 195
holders of record of our common stock.

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

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This section may contain forward-looking statements relating to future
financial results or business expectations, which involve risks and
uncertainties. Business plans may change as circumstances warrant and actual
results may differ materially as a result of a number of risk factors. These
risk factors include, without limitation, that Internet America (1) will not
retain or grow its customer base, (2) will not successfully integrate
acquisitions or achieve operating efficiencies, (3) will not be competitive with
existing or new competitors, (4) will not keep up with industry pricing and
technology trends and evolving industry standards, and (5) will be adversely
affected by dependence on network infrastructure, telecommunications carriers
and other suppliers, by regulatory changes and by general economic and business
conditions. These risk factors are not intended to represent a complete list of
all risks and uncertainties in the Company's business and should be read in
conjunction with the more detailed cautionary statements included in the
Company's other recent SEC filings. The following discussion and analysis should
be read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Form 10-KSB.

OVERVIEW

Internet America is an Internet service provider ("ISP") that provides a
wide array of Internet services tailored to meet the needs of individual and
business subscribers. We afford our subscribers a high quality Internet
experience with fast, reliable service and responsive customer care. As of June
30, 2000, we served approximately 152,000 subscribers in the southwestern United
States.

The growth of the Internet has resulted in increased competition for
existing services and increased demand for new products and services. Increases
in demand and a surge in Internet users have fostered an increase in the number
of ISPs providing access to the Internet. Our competitors have begun to
advertise in our existing markets with aggressive new promotions or offers of
free Internet access. We believe we are well

10
<PAGE> 13

positioned to deal with these competitive forces by continuing to build high
user density and maintaining a rational business plan.

Rapid growth and high user density are the cornerstones of our business
strategy. We will continue to pursue an ambitious growth strategy, but in a
controlled manner. Our goal is to create high user density in specific markets
to achieve and maintain positive EBITDA (Earnings Before Interest, Taxes,
Depreciation, and Amortization).

Recent technological developments have allowed for the propagation of
broadband, a transmission medium that can carry numerous voice, video, and data
channels simultaneously. The emergence of low-cost broadband solutions will
significantly impact the ability of many ISPs to compete. We are committed to
being a leader in offering broadband solutions to individuals and businesses.
High-speed connectivity is essential to the commercially viable deployment of
new, value-added services such as Internet telephony, particularly Voice Over
Internet Protocol (VoIP), video and audio programming distribution and other
high bandwidth applications. We believe we are well positioned to efficiently
market and deploy our DSL products due to the high density of our subscriber
base.

Given the increased level of competition in the industry for new
subscribers, we will be more selective with regard to investing in direct
advertising. We plan to concentrate our direct advertising more heavily in
markets where we have established branding than in new markets. We have found
that the most effective way to initially penetrate new markets is through an
aggressive acquisition strategy. Management believes the level of consolidation
in the industry will escalate, and a viable acquisition strategy is the most
efficient way to rapidly build market share.

We expect our total sales and marketing expenses to remain relatively
stable as a percentage of total revenue. However, we anticipate a lower cost of
adding new subscribers by using a market development fund provided by a
telecommunications company with which we have an agreement to deliver DSL.

The execution of our acquisition strategy has increased our amortization
expense as the costs of purchasing the subscriber bases are amortized. In the
coming quarters we expect to report net losses, primarily due to amortization
expense, while generating positive EBITDA. There can be no assurance we will be
able to achieve or sustain positive EBITDA or net income in the future.

We expect general and administrative expenses to increase to support our
growth. Connectivity costs will increase after acquisitions, since there is some
duplication of inbound telephone connectivity and Internet connectivity during
the transition period. However, we believe we can quickly transition even
sizable acquisitions and realize connectivity and networking economies of scale.

We have an accumulated deficit of $25.5 million at June 30, 2000 and have
had annual operating losses since inception as a result of building network
infrastructure and rapidly increasing market share.

RECENT ACQUISITIONS

agreed to pay up to $380,600 in cash, half of which was paid upon closing. The
remaining payment was contingent on the actual number of INTX subscribers that
transitioned to our service by January 24, 2000. We do not expect to make any
further payments under the agreement.

STATEMENT OF OPERATIONS

Access revenues are derived primarily from individual dial-up Internet
access, whether analog or ISDN, and value-added services, such as multiple
e-mail boxes and personalized e-mail addresses. Business services revenues are
derived primarily from dedicated connectivity, bulk dial-up access and Web
services.

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

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

Sales and marketing expenses consist primarily of creative and production
costs, costs of media placement, management salaries and call center wages. The
Company expenses advertising production costs in the period in which the
advertisement is first aired. All other advertising costs are expensed as
incurred.

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

Depreciation is computed using the straight line method over the estimated
useful lives of the assets. Data communications equipment, computers, data
servers and office equipment are depreciated over three years. We depreciate
furniture, fixtures and leasehold improvements over five years. Purchased
subscriber bases and related goodwill are amortized over three years. The assets
and liabilities acquired in business combinations are recorded at estimated fair
values. The excess of the cost of the net assets acquired over their fair value
is recorded as goodwill and amortized over an estimated life of three years.
Depreciation and amortization increased substantially during fiscal 2000 due to
the acquisition of PDQ and other recent acquisitions.

Our business is not subject to any significant seasonal influences.

12
<PAGE> 15

RESULTS OF OPERATIONS

The following table shows financial data for the years ended June 30, 2000
and 1999. All amounts have been restated to reflect the poolings-of-interests
with CompuNet and CyberRamp. Operating results for any period are not
necessarily indicative of results for any future period. Dollar amounts are
shown in thousands (except per share data).

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------------- ---------------------
% OF % OF
(000'S) REVENUES (000'S) REVENUES
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Access.......................................... $ 22,375 76.2% $ 15,912 87.8%
Business services............................... 6,518 22.2 2,098 11.6
Other........................................... 452 1.5 109 0.6
---------- ----- ---------- -----
Total................................... 29,345 100.0% 18,119 100.0%
---------- ----- ---------- -----
OPERATING COSTS AND EXPENSES:
Connectivity and operations..................... 17,154 58.5% 8,801 48.6%
Sales and marketing............................. 5,561 19.0 6,045 33.4
General and administrative...................... 7,504 25.6 4,245 23.4
Depreciation and amortization................... 11,995 40.9 1,685 9.3
---------- ----- ---------- -----
Total................................... 42,214 143.9% 20,776 114.7%
---------- ----- ---------- -----
OPERATING LOSS.................................... (12,869) (43.9)% (2,657) (14.7)%
INTEREST INCOME, NET.............................. 35 0.1% 185 1.0%
---------- ----- ---------- -----
LOSS BEFORE INCOME TAX............................ (12,834) (43.7)% (2,472) (13.6)%
INCOME TAX BENEFIT................................ 8 0.0% 8 0.0%
---------- ----- ---------- -----
NET LOSS.......................................... $ (12,826) (43.7)% $ (2,464) (13.6)%
========== ===== ========== =====
NET LOSS PER COMMON SHARE:
BASIC........................................... $ (1.49) $ (0.45)
========== ==========
DILUTED......................................... $ (1.49) $ (0.45)
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC........................................... 8,613,127 5,533,670
DILUTED......................................... 8,613,127 5,533,670
OTHER DATA:
Subscribers at end of period.................... 152,000 100,000
Number of employees at end of period............ 280 190
EBITDA(1)....................................... $ (874) $ (971)
EBITDA margin(2)................................ (3.0)% (5.4)%
CASH FLOW DATA:
Cash flow used in operations.................... $ (2,832) $ (659)
Cash flow used in investing activities.......... $ (1,695) $ (11,366)
Cash flow from financing activities............. $ 56 $ 17,253
</TABLE>

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

(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, and general and administrative 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 our operating results and is not intended to
represent cash flows or results of operations in accordance

13
<PAGE> 16

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.

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

YEAR ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999

Total revenue. Total revenue increased by $11.2 million, or 62.0%, to $29.3
million in fiscal 2000 from $18.1 million in fiscal 1999. The majority of the
increase in total revenue is attributable to the increase in access revenue of
$6.5 million, or 40.6%, to $22.4 million in fiscal 2000 from $15.9 million in
the prior year. Approximately $5.1 million of the increase in access revenue is
attributable to the acquisitions of PDQ.Net and NeoSoft, while the remainder is
attributable to other growth of our customer base. We began marketing our
Expresslane DSL products to homes and businesses in this fiscal year which has
contributed to the increase in average revenue per subscriber. Business services
revenue increased by $4.4 million, or 211.0%, to $6.5 million for fiscal 2000
from $2.1 million for the prior year, primarily as a result of the PDQ and
NeoSoft acquisitions. We anticipate that business services revenue will continue
to increase as a percentage of total revenue as an increasing number of
businesses are finding uses for Internet services. Other revenue increased by
$343,000, or 315.0%, to $452,000 for the current fiscal year from $109,000 for
the prior fiscal year. The increase in other revenue is primarily due to
increased peripheral equipment sales and advertising revenue generated from our
web site.

Connectivity and operations. Connectivity and operations expenses increased
by $8.4 million, or 94.9%, to $17.2 million for fiscal 2000 from $8.8 million
for fiscal 1999. As a percentage of total revenue, connectivity and operations
expenses increased to 58.5% for the current year from 48.6% for the previous
year. The increase as a percentage of revenue is due primarily to additional
connectivity costs related to our entry into new markets and the development of
our DSL products.

Sales and marketing. Sales and marketing expenses decreased by $484,000, or
(8%), to $5.6 million for fiscal 2000 from $6.0 million for the prior fiscal
year. Sales and marketing expense decreased as a percentage of revenue to 19.0%
for the current year from 33.4% for the previous year. These reductions were
achieved by restricting advertising to markets with established branding and
utilizing a market development fund provided by our primary DSL service
provider.

General and administrative. General and administrative expenses increased
by $3.3 million, or 76.8%, to $7.5 million for fiscal 2000 from $4.2 million for
fiscal 1999. General and administrative expenses as a percentage of total
revenue increased to 25.6% in fiscal 2000 from 23.4% in the prior year,
primarily due to administrative support related to our growth strategy.

Depreciation and amortization. Depreciation and amortization expense
increased by $10.3 million, or 612.0%, to $12.0 million for fiscal 2000 from
$1.7 million for fiscal 1999. Approximately $10.1 million of the increase
relates to amortization of goodwill arising from the acquisitions of PDQ and
NeoSoft.

Interest income. We realized $108,000 of interest income for fiscal 2000
compared to $405,000 during fiscal 1999. The income was generated from the
investment of proceeds from our December 1998 initial public offering, a
substantial part of which was expended as part of our acquisition strategy
during the current fiscal year.

Interest expense. Interest expense decreased by $147,000, or 66.9%, to
$73,000 for fiscal 2000 from $220,000 for the prior year. Upon completion of our
initial public offering, we repaid substantially all outstanding indebtedness,
resulting in a reduction in interest expense.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date primarily through (i) public and
private sales of equity securities, (ii) loans from shareholders and third
parties and (iii) revenue collections. We completed an initial public offering
in December 1998 and received net proceeds of approximately $19.8 million. We
repaid approximately $2.1 million in shareholder notes and certain other
indebtedness.

14
<PAGE> 17

Cash used in operations totaled $2.8 million for fiscal 2000 compared to
$660,000 for fiscal 1999. Increases in general and administrative expenses of
$3.3 million related to our growth strategy contributed to additional cash used
in operations for the year ended June 30, 2000, as compared to the same period a
year ago. In addition, sales and marketing expenses decreased by $484,000 as the
company shifted to a more modest advertising strategy.

Cash used in investing activities was $1.7 million for fiscal 2000, and
consisted of $808,000 in business and subscriber acquisitions and $887,000 in
routine purchases of property and equipment to expand and upgrade our network.

For fiscal 2000, cash provided by financing activities totaled $56,000,
which consisted of proceeds of $658,000 from the exercise of stock options by
option holders less payments of $602,000 to service long-term obligations and
capital lease obligations.

We estimate that cash on hand of $1.4 million at June 30, 2000 along with
anticipated revenue collections will be sufficient for meeting our working
capital needs for fiscal 2001 with regard to continuing operations in existing
markets. Additional financing will be required to fund acquisitions or expansion
into new markets.

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. In addition, we have arranged capital
financing to fund a portion of equipment purchases during this fiscal year,
which are estimated to total approximately $750,000.

If additional capital financing arrangements, including public or private
sales of debt or equity securities, or additional borrowings from commercial
banks, are insufficient or unavailable, or if we experience shortfalls in
anticipated revenues or increases in anticipated expenses, we will modify our
operations and growth strategies to match available funding. In such case, it is
likely that our advertising expenditures would be downscaled to a level where
positive cash flows are generated from operations. We have no long term
advertising commitments, and our scheduled television commercials may be
cancelled with less than two weeks notice.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of Internet America and Subsidiaries are attached
hereto as pages F-1 through F-15 and include our Balance Sheets as of June 30,
2000 and 1999, Statements of Operations for the years ended June 30, 2000 and
1999, Statements of Shareholders' Equity for the years ended June 30, 2000 and
1999, Statements of Cash Flows for the years ended June 30, 2000 and 1999, and
the Notes to the Consolidated Financial Statements, together with a report
thereon of Deloitte & Touche LLP, dated September 13, 2000.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

15
<PAGE> 18

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Information required by this Item is incorporated by reference from the
sections entitled "Election of Directors," and "Section 16 Requirements" in the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.
Information about Executive Officers of the Company is included in Item 1 of
Part I of this Annual Report on Form 10-KSB.

ITEM 10. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference from the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 2000 Annual Meeting of Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Shareholders" in
the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is incorporated by reference from the
section entitled "Related Party Transactions" in the Company's Proxy Statement
for its 2000 Annual Meeting of Shareholders.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 -- Asset Purchase Agreement dated as of January 29, 1999 by
and among CompuNet, Inc., William Thompson, Internet
America, Inc. and Geek Assets, Inc.(1)
2.2 -- Securities Purchase Agreement dated as of February 18,
1999 by and among CyberRamp, L.L.C., its Members and
Internet America, Inc.(2)
2.3 -- Agreement and Plan of Merger dated as of June 30, 1999 by
and among Internet America, Inc., NeoSoft, Inc. and
certain of the shareholders of NeoSoft, Inc.(3)
2.4 -- Agreement and Plan of Merger dated as of September 12,
1999 by and among Internet America, Inc., GEEK Houston
II, Inc., PDQ.Net, Incorporated. and certain of the
shareholders of PDQ.Net, Incorporated(4)
3.1 -- Internet America, Inc.'s Articles of Incorporation(5)
3.2 -- Internet America, Inc.'s Bylaws, as amended(6)
4.1 -- Specimen Common Stock certificate(1)
4.2 -- Pages from the Articles and Bylaws that define the rights
of holders of Common Stock(7)
10.1 -- Consulting Agreement dated April 20, 1999 by and between
Internet America, Inc. and Gary L. Corona(8)
10.2 -- Financial Advisory Agreement dated April 20, 1999 by and
among Carl Westcott LLC and Internet America, Inc.(8)
10.3 -- Letter Agreement dated September 5, 2000 by and between
Internet America, Inc. and Michael T. Maples*
</TABLE>

16
<PAGE> 19

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.4 -- Letter Agreement dated September 5, 2000 by and between
Internet America, Inc. and Jack T. Smith*
10.5 -- Stock Purchase Agreement dated September 5, 2000 by and
between Internet America, Inc, and Jack T. Smith*
10.6 -- Promissory Note dated September 5, 2000 by and between
Internet America, Inc, and Jack T. Smith*
10.7 -- Pledge and Security Agreement dated September 5, 2000 by
and between Internet America, Inc, and Jack T. Smith*
11.1 -- Statement regarding computation of per share earnings(9)
21.1 -- Subsidiaries list(7)
23.1 -- 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 Current Report on Form
8-K, as amended, filed on February 16, 1999, 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 March 1, 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 July 15, 1999 and incorporated herein by
reference.

(4) Previously filed as Exhibit A to the preliminary proxy statement and
definitive proxy statement filed on October 7, 1999 and October 19, 1999,
respectively, and incorporated herein by reference.

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

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

(7) Previously filed as an Exhibit to Internet America's Registration Statement
on Form SB-2, as amended (file No. 333-95179), initially filed on January
21, 2000, and incorporated by reference.

(8) Previously filed as an exhibit to Internet America's Registration Statement
on Form SB-2, as amended (file no. 333-78615) filed on May 17, 1999, and
incorporated herein by reference.

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

(b) Reports on Form 8-K. On May 11, 2000, we filed a Current Report on Form
8-K to report our announcement of preliminary financial results for the quarter
ended March 30, 2000 and our intention to restate our first and second quarter
results to adjust for a data processing error. On May 16, 2000 we filed an
amendment to a current report on Form 8-K originally filed on December 7, 1999
to report the acquisition of PDQ.Net.

17
<PAGE> 20

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of the 21st day of September, 2000.

INTERNET AMERICA, INC.

By: /s/ JACK T. SMITH
----------------------------------
Jack T. Smith
President and Chief Executive
Officer

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

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>

/s/ JACK T. SMITH President and Chief Executive Officer and September 21, 2000
--------------------------------------------- Director (Principal Executive Officer)
Jack T. Smith

/s/ JAMES T. CHANEY Vice President, Chief Financial Officer September 21, 2000
--------------------------------------------- and Treasurer (Principal Financial
James T. Chaney Officer and Principal Accounting
Officer)

/s/ WILLIAM O. HUNT Chairman September 21, 2000
---------------------------------------------
William O. Hunt

/s/ WILLIAM E. LADIN, JR. Vice Chairman September 21, 2000
---------------------------------------------
William E. Ladin, Jr.

/s/ GARY L. CORONA Director September 21, 2000
---------------------------------------------
Gary L. Corona

/s/ JOHN PALMER Director September 21, 2000
---------------------------------------------
John Palmer
</TABLE>

18
<PAGE> 21

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit).............................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>

F-1
<PAGE> 22

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying balance sheets of Internet America, Inc.
and subsidiaries (the "Company") as of June 30, 2000 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2000 and 1999,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

DELOITTE & TOUCHE LLP
Dallas, TX

September 13, 2000

F-2
<PAGE> 23

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,373,786 $ 5,845,562
Accounts receivable, net of allowance for uncollectible
accounts of $322,327 and $366,940 in 2000 and 1999,
respectively........................................... 2,162,252 1,122,894
Prepaid expenses and other current assets................. 148,772 126,433
------------ ------------
Total current assets.............................. 3,684,810 7,094,889
PROPERTY AND EQUIPMENT -- Net............................... 2,717,715 2,622,637
INTANGIBLE AND OTHER ASSETS -- Net.......................... 32,884,893 9,195,878
------------ ------------
TOTAL............................................. $ 39,287,418 $ 18,913,404
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Trade accounts payable.................................... $ 2,573,700 $ 2,131,201
Accrued liabilities....................................... 1,850,088 1,068,774
Deferred revenue.......................................... 4,839,824 3,358,347
Current portion of capital lease obligations.............. 247,146 41,195
Current maturities of long-term debt...................... 176,267 434,934
------------ ------------
Total current liabilities......................... 9,687,025 7,034,451
CAPITAL LEASE OBLIGATIONS, net of current portion........... 206,894 102,246
LONG-TERM DEBT, net of current portion...................... 53,932 151,997
------------ ------------
Total liabilities................................. 9,947,851 7,288,694
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY :
Common stock, $.01 par value; 40,000,000 shares
authorized, 9,705,798 and 6,912,930 issued and
outstanding in 2000 and 1999, respectively............. 97,059 69,130
Additional paid-in capital................................ 54,743,828 24,231,065
Accumulated deficit....................................... (25,501,320) (12,675,485)
------------ ------------
Total shareholders' equity........................ 29,339,567 11,624,710
------------ ------------
TOTAL............................................. $ 39,287,418 $ 18,913,404
============ ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 24

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
REVENUES:
Access.................................................... $ 22,375,157 $15,911,844
Business services......................................... 6,518,273 2,097,774
Other..................................................... 452,044 109,412
------------ -----------
Total............................................. 29,345,474 18,119,030
------------ -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations............................... 17,154,351 8,800,924
Sales and marketing....................................... 5,560,909 6,044,762
General and administrative................................ 7,504,348 4,244,557
Depreciation and amortization............................. 11,994,961 1,685,097
------------ -----------
Total............................................. 42,214,569 20,775,340
------------ -----------
LOSS FROM OPERATIONS........................................ (12,869,095) (2,656,310)
INTEREST INCOME............................................. 108,238 405,287
INTEREST EXPENSE............................................ (72,866) (220,182)
------------ -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (12,833,723) (2,471,205)
INCOME TAX BENEFIT.......................................... 7,888 7,787
------------ -----------
NET LOSS.................................................... $(12,825,835) $(2,463,418)
============ ===========
NET LOSS PER COMMON SHARE:
BASIC..................................................... $ (1.49) $ (0.45)
============ ===========
DILUTED................................................... $ (1.49) $ (0.45)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC..................................................... 8,613,127 5,533,670
============ ===========
DILUTED................................................... 8,613,127 5,533,670
============ ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 25

INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDERS'
------------------ ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- ------- --------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1998............. 453,339 $ 4,533 3,914,840 $39,148 $ 3,480,288 $(10,212,067) $ (6,688,098)
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 19,742,714 -- 19,759,714
Other........................... -- -- 278,077 2,782 1,013,730 -- 1,016,512
Net loss.......................... -- -- -- -- -- (2,463,418) (2,463,418)
-------- ------- --------- ------- ----------- ------------ ------------
BALANCE, JUNE 30, 1999............ -- -- 6,912,930 69,130 24,231,065 (12,675,485) 11,624,710
Issuance of common stock.......... -- -- 2,792,868 27,929 30,448,947 -- 30,476,876
Contribution of capital in
exchange for note payable....... -- -- -- -- 63,816 -- 63,816
Net loss.......................... -- -- -- -- -- (12,825,835) (12,825,835)
-------- ------- --------- ------- ----------- ------------ ------------
BALANCE, JUNE 30, 2000............ -- $ -- 9,705,798 $97,059 $54,743,828 $(25,501,320) $ 29,339,567
======== ======= ========= ======= =========== ============ ============
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 26

INTERNET AMERICA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(12,825,835) $ (2,463,418)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 11,994,961 1,685,097
Changes in operating assets and liabilities:
Accounts receivable, net............................. (787,828) (858,500)
Prepaid expenses and other current assets............ 141,780 (114,905)
Other assets......................................... (85,556) (126,580)
Accounts payable and accrued liabilities............. (1,060,025) 1,360,104
Deferred revenue..................................... (209,574) (140,836)
------------ ------------
Net cash used in operating activities............. (2,832,077) (659,038)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (886,955) (3,395,765)
Purchase of subscribers, net of cash acquired............. (808,432) (7,970,442)
------------ ------------
Net cash used in investing activities............. (1,695,387) (11,366,207)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common equity................... 657,573 21,025,726
Principal payments of notes payable to shareholders....... -- (2,017,713)
Principal payments under capital lease obligations........ (144,983) (359,119)
Principal payments of long-term debt...................... (456,902) (1,171,377)
Payments on line of credit................................ -- (225,000)
------------ ------------
Net cash provided by financing activities......... 55,688 17,252,517
------------ ------------
NET INCREASE (DECREASE) IN CASH............................. (4,471,776) 5,227,272
CASH, BEGINNING OF PERIOD................................... 5,845,562 618,290
------------ ------------
CASH, END OF PERIOD......................................... $ 1,373,786 $ 5,845,562
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest.................................... $ 86,289 $ 156,630
Equipment acquired under capital leases................... $ 247,242 $ --
Subscriber purchase assumption of service obligations..... $ 774,550 $ 183,457
Contribution of capital in exchange for note payable...... $ 63,816 $ --
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 27

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999

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.

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

Revenue Recognition -- Revenues derived from monthly subscribers and set-up
charges are recognized as services are provided. The Company bills its
subscribers in advance for direct access to the Internet, but defers recognition
of these revenues until the service is provided. Management believes the
Company's accounting policies comply with Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements."

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 and
the use of preapproved charges to customer credit cards. 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 fair values for debt and lease
obligations, which have fixed interest rates, do not differ materially from
their carrying values.

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

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

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

Intangible and Other Assets -- Other assets consist primarily of subscriber
acquisition costs and goodwill related to the acquisition of NeoSoft and PDQ.
The Company allocates the purchase price to acquired subscriber bases and
goodwill based on reasonable allocation methods at the time of acquisition.
Amortization of subscriber acquisition costs and goodwill are provided using the
straight-line method over three years commencing upon completion of the
transaction.

The carrying values of subscriber acquisition costs and goodwill are
periodically reviewed and impairments, if any, are recognized when expected
future benefit to be derived from individual intangible assets is less than its
carrying value.

Long-Lived Assets -- The Company periodically reviews the values assigned
to long-lived assets, such as property and equipment to determine if any
impairments have occurred. Provisions for asset impairments are based on
discounted cash flow projections in accordance with Statement of Financial
Accounting Standards
F-7
<PAGE> 28
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

("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.

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 expenses advertising production costs
in the period in which the advertisement is first aired. All other advertising
costs are expensed as incurred. Advertising expenses for the years ended June
30, 2000 and 1999 were $3,663,305 and $4,751,092, respectively.

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

Basic and Diluted Net Loss Per Share -- Basic earnings per share is
computed using the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share reflects the potential dilution that could occur upon
exercise or conversion of these instruments. Due to the net losses reported for
the periods presented herein, all of the Company's stock options and warrants
are antidilutive, and basic and diluted loss per share amounts are therefore the
same for all periods presented.

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

Comprehensive Income -- The Company has no components of other
comprehensive income such that comprehensive income is the same as net income
for the years ended June 30, 2000 and 1999.

Recently Issued Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Among other provisions, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for all fiscal years after
June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.

2. ACQUISITIONS

F-8
<PAGE> 29
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a refund of $750,000 from the initial payment based on the actual number of
PointeCom subscribers that transitioned to our service.

The following summarizes the unaudited proforma revenue and results of
operations of the companies for the year ended June 30, 2000 as if the companies
were combined at the beginning of the fiscal year.

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue.................................................. $ 33,105,755 $ 25,019,725
Net loss................................................. $(14,567,738) $(13,460,483)
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment consist of:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Data communications and office equipment................... $ 4,013,258 $ 7,522,836
Leasehold improvements..................................... 753,234 513,937
Furniture and fixtures..................................... 284,935 315,919
Computer software.......................................... 812,108 424,156
----------- -----------
5,863,535 8,776,848
Less accumulated depreciation and amortization............. (3,145,820) (6,154,211)
----------- -----------
$ 2,717,715 $ 2,622,637
=========== ===========
</TABLE>

Depreciation and amortization expense charged to operations was $1,821,659
and $1,685,097 for the years ended June 30, 2000 and 1999, respectively.

F-9
<PAGE> 30
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INTANGIBLE AND OTHER ASSETS

Intangible and other assets consist of:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
------------ ----------
<S> <C> <C>
Goodwill................................................... $ 26,023,407 $5,432,658
Acquired subscribers....................................... 17,277,402 4,382,057
Other...................................................... 9,508 38,389
Accumulated Amortization................................... (10,637,664) (733,263)
------------ ----------
Total Intangible Assets.................................... 32,672,653 9,119,841
Deposits................................................... 212,240 76,037
------------ ----------
Total Intangible and Other Assets................ $ 32,884,893 $9,195,878
============ ==========
</TABLE>

In June 1999, the Company acquired approximately 9,500 subscribers of
NeoSoft, Inc. for approximately $8.3 million, including acquisition costs. In
November 1999, the Company acquired approximately 41,400 subscribers of PDQ.Net
for approximately $30.9 million, including acquisition costs. The purchase price
was allocated to subscriber acquisition costs and goodwill based on the fair
value of customers acquired.

5. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
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................................................... $ 143,123 $ 397,251
Other notes payable due from March 2000 through July 2002,
with interest ranging from the prime rate to 16%.......... 87,076 189,680
--------- ---------
230,199 586,931
Less current portion........................................ (176,267) (434,934)
--------- ---------
$ 53,932 $ 151,997
========= =========
</TABLE>

F-10
<PAGE> 31
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES

The Company leases certain of its facilities under operating leases. Rental
expense under these leases was approximately $1,160,101 and $601,000 for the
years ended June 30, 2000 and 1999, respectively. At June 30, 2000, future
minimum lease payments on capital and operating leases were approximately as
follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2001........................................................ $ 300,209 $1,998,879
2002........................................................ 199,665 1,084,974
2003........................................................ 20,758 629,334
2004........................................................ -- 576,421
2005........................................................ -- 579,732
Thereafter.................................................. -- 724,679
--------- ----------
Total minimum lease payments................................ 520,632 $5,594,019
==========
Less amounts representing interest.......................... (66,592)
---------
Present value of minimum capitalized lease payments......... 454,040
Less current portion........................................ (247,146)
---------
Long-term capitalized lease obligations..................... $ 206,894
=========
</TABLE>

The Company has commitments with Southwestern Bell for certain inbound
telephone connectivity. Scheduled minimum commitments under these contracts are
as approximately as follows:

<TABLE>
<S> <C>
2001.................................................... $ 739,500
2002.................................................... 739,500
2003.................................................... 1,384,395
2004.................................................... 1,599,360
2005.................................................... 590,460
Thereafter.............................................. 57,960
----------
Total connectivity commitment........................... $5,111,175
==========
</TABLE>

In the normal course of business, we enter into telephone and internet
backbone connectivity contracts with various vendors. In addition to the
commitments mentioned above, we currently have minimum annual obligations as
follows: $2,365,000 for the fiscal year ended 2001, $1,620,000 for the fiscal
year ended 2002, and $95,000 for the fiscal year ended 2003.

Internet America, the Company's former President and Chief Executive
Officer, Michael T. Maples, and the Company's Chairman, William O. Hunt were
named as defendants in a lawsuit filed on November 12, 1999 by Cindy Carradine,
a former employee, in the District Court of Dallas County, Texas. The plaintiff
asserts claims for fraud and negligent misrepresentation in connection with the
sale of plaintiff's options to Internet America in 1998. The plaintiff alleges
actual and punitive damages in an unspecified amount. Management believes this
lawsuit is without merit and intend to defend it vigorously. However, management
cannot represent that the litigation will be resolved in the Company's favor. If
resolved adversely, the result could have a material adverse effect on the
Company's financial position, results of operations and cash flows.

The Company's wholly owned subsidiary, PDQ, and its Vice Chairman, William
E. Ladin, Jr., were named as defendants in a lawsuit filed on April 10, 2000 by
Santa Fe Capital Group, Inc. in the District Court of Santa Fe County, New
Mexico. The plaintiff alleges a finders fee was owed to plaintiff in connection
with Internet America's acquisition of PDQ. Plaintiff asserts claims for breach
of contract, restitution, fraud and unfair trade practices, and alleges damages
in the amount of $960,000. Management believes this lawsuit is
F-11
<PAGE> 32
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

without merit and intend to defend it vigorously. However, management cannot
represent that the litigation will be resolved in the Company's favor. If
resolved adversely, the result could have a material adverse effect on the
Company's financial position, results of operations and cash flows.

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

7. SHAREHOLDERS' EQUITY

Earnings Per Share -- Potentially dilutive securities have been excluded
from the computation of earnings per share for the years ended June 30, 2000 and
1999 as their effect is antidilutive. Had the Company been in a net income
position, diluted earnings per share would have included an additional 813,163
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 year ended June 30, 2000.

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

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 approximately $19.8 million. Part of these proceeds were used to
pay certain indebtedness of $2.1 million with a significant portion of the
remainder used to fund acquisitions and operations.

Employee Stock Purchase Plan -- Effective April 30, 1999, the Company's
Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase
Plan"), which provides for the issuance of a maximum of 200,000 shares of Common
Stock. Eligible employees can have up to 15% of their earnings withheld, up to
certain maximums, to be used to purchase shares of the Company's Common Stock on
every July 1, October 1, January 1 and April 1. The price of the Common Stock
purchased under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the Common Stock on the commencement date of each three-month
offering period or the specified purchase date. During the year ended 2000,
9,453 shares were purchased ranging in price from $7.18 to $16.05 per share. At
June 30, 2000, 190,547 shares were available under the Purchase Plan for future
issuance. The Purchase Plan was approved by the company's shareholders on
November 4, 1999.

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

The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. The exercise price of incentive stock options
must be equal or greater than the fair market value of common stock on the date
of grant. The exercise price of incentive stock options granted to any person
who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant, and the term of these options
cannot exceed five years. The Company currently has 18,549 options outstanding
to its employees under the 1996 Option Plan. These options are exercisable at
$1.67 per share of common stock.

In connection with a note payable for $79,773, the Company issued
detachable warrants during 1996 to purchase 33,750 shares of common stock at
$1.67 per share. The fair value of the warrants was not reflected in

F-12
<PAGE> 33
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the financial statements, as the amount was immaterial. The warrants were
exercised and all outstanding principal and interest on the note was paid in
1998.

The Company's 1998 Nonqualified Stock Option Plan (the "1998 Option Plan")
was adopted by the Board of Directors and the Company's shareholders in July
1998. A total of 800,000 shares of common stock have been reserved for issuance
under the 1998 Option Plan.

The maximum term of options granted under the 1998 Option Plan is ten
years. Options granted under the 1998 Option Plan are in most cases
nontransferable and generally expire within 30 days after the termination of the
optionee's services, except in cases when the optionee is terminated "for cause"
(as such term is defined therein). In such cases, the option typically expires
automatically on the date of termination. In general, if an optionee is disabled
or dies, such option may be exercised up to 12 months following such disability
or death, unless the Compensation Committee determines to allow a longer period
for exercise. In general, if an optionee retires from his or her service to us,
such option may be exercised up to three months following such retirement,
unless the Compensation Committee determines to allow a longer period for
exercise. The Company currently has 420,088 options outstanding to its employees
under the 1998 Option Plan. These options are exercisable at prices ranging at
$1.12 to $25.00 per share of common stock.

During December 1999, 159,000 options to purchase shares of common stock
were granted to certain directors and employees of the Company under the 1998
Option Plan at an exercise price of $9.25 which is the fair market value on the
date of grant. During January 2000, an option to purchase 22,500 shares of
common stock at an exercise price of $13.19 per share, the fair market value on
the date of grant, was granted to a director of the Company.

The Company's Employee and Consultant Stock Option Plan (the "Employee and
Consultant Option Plan") was approved by the Board of Directors in September
1999 in connection with the acquisition of PDQ. The plan was subsequently
approved by our shareholders at a special meeting of shareholders in November
1999. This plan was created in connection with the acquisition of PDQ so that
each outstanding PDQ incentive stock option could be exchanged for an incentive
stock option to purchase Common Stock. Pursuant to the Employee and Consultant
Stock Option Plan, the Company may grant incentive and nonqualified stock
options to our employees, consultants, directors and advisors. A total of
260,063 shares of Common Stock have been reserved for issuance under the
Employee and Consultant Option Plan.

The Company applies APB No. 25 and related Interpretations in accounting
for its employee plans. The estimated fair value of each option grant was
determined by reference to quoted market price or recent private, arm's length
sales of common and preferred stock prior to the Company's initial public
offering. In cases where there were no arm's length transactions on or around
the date of an option grant, the Board of Directors determined the value. No
compensation expense has been charged against operations for the years ended
June 30, 2000 and 1999.

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 as
indicated below:

<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C> <C>
Net loss..................................... As reported $(12,825,835) $(2,463,418)
Pro Forma (13,455,964) (2,713,242)
Basic and Diluted loss per share............. As reported $ (1.49) $ (0.45)
Pro Forma (1.56) (0.49)
</TABLE>

F-13
<PAGE> 34
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the Company's stock options as of June 30, 2000
and 1999, and changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
2000 1999
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period... 1,042,616 $4.32 1,218,693 $ 1.56
Granted.............................. 672,138 6.21 184,000 15.87
Exercised............................ (358,415) 1.43 (244,338) 1.57
Forfeited............................ (108,676) 9.93 (115,739) 1.67
--------- ---------
Outstanding at end of period......... 1,247,663 5.63 1,042,616 4.32
========= =========
Options exercisable at year end...... 720,332 3.77 572,420 3.10
========= =========
</TABLE>

The following table summarizes information about stock options outstanding
at June 30, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE
EXERCISE PRICES AT 6/30/00 LIFE AS OF 6/30/00 (YEARS) AT 6/30/00
--------------- ----------- -------------------------- -----------
<S> <C> <C> <C> <C>
$ 0.09 18,000 5.2 18,000
1.12 95,653 9.3 90,770
1.23 49,388 8.0 41,714
1.48 59,802 8.6 34,433
1.67 564,463 7.0 396,266
2.69 25,857 9.0 7,399
8.00 22,500 8.0 22,500
9.25 131,000 9.5 --
10.00 75,000 9.4 --
13.00 69,500 8.4 68,000
13.19 22,500 9.5 22,500
13.75 39,000 9.1 --
25.00 75,000 9.8 18,750
--------- -------
1,247,663 720,332
========= =======
</TABLE>

The Black-Scholes value of each option granted is estimated using the
Black-Scholes pricing model with the following assumptions: option term until
exercise ranging from 3 to 5 years, volatility of 80%, risk-free interest rate
of 5.4% for the Employee and Consultant Stock Option Plan and 6.2% for
Nonqualified Stock Option Plans, and an expected dividend yield of zero. The
weighted average grant date fair value of options granted was $7.60 and $7.01
for the years ended June 30, 2000 and 1999, respectively.

F-14
<PAGE> 35
INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

No provision for income taxes has been recognized for the year ended June
30, 2000 as the Company has incurred net operating losses for income tax
purposes and has no carryback potential.

Deferred tax assets and liabilities as of June 30, 2000 and 1999, consist
of:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 7,779,000 $ 4,695,000
Intangible assets........................................ 1,042,000 --
Deferred revenue......................................... 200,000 113,000
Allowance for doubtful accounts.......................... 110,000 --
Property and equipment................................... 329,000 517,000
Other.................................................... 68,000 44,000
----------- -----------
Total deferred tax assets.................................. 9,528,000 5,369,000
Valuation allowance........................................ (9,528,000) (5,369,000)
----------- -----------
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, 2000, the Company has net operating loss carryforwards of
approximately $22.9 million for federal income tax purposes. These net operating
loss carryforwards may be carried forward in varying amounts until 2020 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, 2000 and 1999 is
as follows:

<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
--------------
2000 1999
---- ----
<S> <C> <C>
Federal income tax benefit at statutory rate................ (34)% (34)%
State tax benefit, net of federal benefit................... (3) (3)
Valuation allowance......................................... 19 37
Non-deductible intangibles.................................. 18 --
--- ---
Total income tax provision........................ 0% 0%
=== ===
</TABLE>

9. EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) plan for the benefit of its employees.
Employees may contribute to the plan up to 15% of their salary, pursuant to a
salary reduction agreement, upon meeting age requirements. The Company made no
discretionary contributions to the Plan through June 30, 2000.

F-15
<PAGE> 36
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of January 29, 1999 by and
among CompuNet, Inc., William Thompson, Internet America, Inc.
and Geek Assets, Inc.(1)

2.2 Securities Purchase Agreement dated as of February 18, 1999 by
and among CyberRamp, L.L.C., its Members and Internet America,
Inc.(2)

2.3 Agreement and Plan of Merger dated as of June 30, 1999 by and
among Internet America, Inc., NeoSoft, Inc. and certain of the
shareholders of NeoSoft, Inc.(3)

2.4 Agreement and Plan of Merger dated as of September 12, 1999 by
and among Internet America, Inc., GEEK Houston II, Inc., PDQ.Net,
Incorporated, and certain of the shareholders of PDQ.Net,
Incorporated(4)

3.1 Internet America, Inc.'s Articles of Incorporation(5)

3.2 Internet America, Inc.'s Bylaws, as amended(6)

4.1 Specimen Common Stock certificate(1)

4.2 Pages from the Articles and Bylaws that define the rights of
holders of Common Stock(7)

10.1 Consulting Agreement dated April 20, 1999 by and between Internet
America, Inc. and Gary L. Corona(8)

10.2 Financial Advisory Agreement dated April 20, 1999 by and among
Carl Westcott LLC and Internet America, Inc.(8)

10.3 Letter Agreement dated September 5, 2000 by and between Internet
America, Inc. and Michael T. Maples*

10.4 Letter Agreement dated September 5, 2000 by and between Internet
America, Inc. and Jack T. Smith*

10.5 Stock Purchase Agreement dated September 5, 2000 by and between
Internet America, Inc. and Jack T. Smith*

10.6 Promissory Note dated September 5, 2000 by and between Internet
America, Inc, and Jack T. Smith*

10.7 Pledge and Security Agreement dated September 5, 2000 by and
between Internet America, Inc, and Jack T. Smith*

11.1 Statement regarding computation of per share earnings(9)

21.1 Subsidiaries list(7)

23.1 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> 37

----------

* Filed herewith.

(1) 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

(2) 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.

(3) Previously filed as an exhibit to Internet America's Current Report on Form
8-K, as amended, filed on July 15, 1999 and incorporated herein by
reference.

(4) Previously filed as Exhibit A to the preliminary proxy statement and
definitive proxy statement filed on October 7, 1999 and October 19, 1999,
respectively, and incorporated herein by reference.

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

(7) Previously filed as an Exhibit to Internet America's Registration Statement
on Form SB-2, as amended (file no. 333-95179), initially filed on January
21, 2000, and incorporated by reference.

(8) Previously filed as an exhibit to Internet America's Registration Statement
on Form SB-2, as amended (file no. 333-78615) filed on May 17, 1999, and
incorporated herein by reference.

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