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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

FOR THE TRANSITION PERIOD FROM                          TO                         

COMMISSION FILE NUMBER  000-25147

INTERNET AMERICA, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (214) 861-2500

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

OUTSTANDING AT MAY 12, 2003

Common Stock at $.01 par value: 10,337,476 shares

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

Financial Statements—Continued

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Financial Statements—Continued

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of the Company’s financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the financial statements for the year ended June 30, 2002, included in the Company’s Annual Report on Form 10-K (File No 000-25147).

2. Basic and Diluted Net Income (Loss) Per Share

There are no adjustments required to be made to net income (loss) for the purpose of computing basic and diluted earnings per share (“EPS”) for the three and nine months ended March 31, 2003. During the three and nine months ended March 31, 2003, options to purchase 18,000 shares of common stock were included in the computation of diluted EPS because the options were “in the money” as of March 31, 2003 and it resulted in 4,340 and 4,950 common stock equivalents to be added to the weighted average shares for the three and nine months ended March 31, 2003, respectively. During the three and nine months ended March 31, 2003, options to purchase 1,099,557 shares of common stock were not included in the computation of diluted EPS because the options were not “in the money” as of March 31, 2003. During the three and nine months ended March 31, 2002, options to purchase 1,194,870 shares of common stock were not included in the computation of diluted EPS because the Company incurred a net loss for the period and the effect of such instruments was antidilutive. During the three and nine months ended March 31, 2003 and 2002, no options to purchase shares of common stock were exercised. Also see Note 7 regarding an option to purchase 9,428,571 shares of common stock of the Company at the price of $0.35 per share.

3. Issuance of Shares of Common Stock

Pursuant to a Stock Purchase Agreement entered into during September 2000, the Company issued 200,000 shares of its common stock to an officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $685,500. The purchase price per share of the common stock under the Stock Purchase Agreement was the closing price of the common stock on the date the Company’s board of directors approved the transaction. Under the terms of the Stock Purchase Agreement, the officer had the option to put the shares of common stock to the Company during the term of the Stock Purchase Agreement for $3.4375 per share. The officer exercised the put agreement on August 6, 2001. On that day another stock purchase agreement was entered into between the officer and the Company. The Company issued 200,000 shares of common stock to the officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $82,000. Under the terms of the new Stock Purchase Agreement, the officer has the option to put the shares of common stock to the Company during the term of the Stock Purchase Agreement for $0.42 per share. In connection with the put option, the Company recognized a non-cash compensation expense of $26,000 and $60,000 during the nine months ended March 31, 2003 and 2002, respectively, which was a result of the decrease in the price of the Company’s common stock between July 1, 2002 and March 31, 2003 and July 1, 2001 and March 31, 2002, respectively.

4. Recently Issued Accounting Pronouncements

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

In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS 144 are generally effective for financial

statements issued for fiscal years beginning after December 15, 2001. The Company’s adoption of this standard did not have a material impact on its financial statements.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 rescinds certain standards and modifies certain standards related to the extinguishment of debt and sale-leaseback transactions. The provisions of SFAS 145 are generally effective after May 15, 2002. The Company’s adoption of this standard did not have a material impact on its financial statements.

In June 2002, the FASB issued SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 establishes standards for accounting for costs associated with exit or disposal activities and nullifies EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company’s adoption of this standard did not have a material impact on its financial statements.

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

5. Other Assets

The carrying value of other assets at March 31, 2003 is as follows:

The Company adopted SFAS No. 142 effective July 1, 2002. If the Company had adopted SFAS No. 142 on July 1, 2001, the Company’s net loss for the three and nine months ended March 31, 2002 would have been as follows:

6. Employee Stock Option Plans

The Company applies APB No. 25 and related Interpretations in accounting for its employee stock option 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 three and nine months ended March 31, 2003 and 2002 related to stock option plans.

Had compensation cost for the Company’s stock options been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company’s net income (loss) and income (loss) per share for the three and nine months ended March 31, 2003 and 2002 would have been as indicated below:

7. Letter of Credit Security Commitment Agreement

On September 18, 2001, the Company entered into a Letter of Credit Security Commitment Agreement with a director and former Chairman, William O. Hunt, to finance an appeal bond in the approximate amount of $3.3 million in connection with a judgment entered against the Company. Under this agreement, Mr. Hunt collateralized a letter of credit in the amount of $3.3 million and the Company paid Mr. Hunt a commitment fee of 8% per annum, paid quarterly. On May 6, 2003, related to a settlement of the judgment, the Company notified Mr. Hunt that it intends to reduce the collateral in full. Accordingly, under the Letter of Credit Security Commitment Agreement, Mr. Hunt has a transferable option to purchase 9,428,571 shares of common stock of the Company at the price of $0.35 per share. The purchase option expires 120 days after the notice of reduction. The Company will continue to pay the commitment fee to Mr. Hunt for an additional thirty days after the notice of reduction or until the court releases the appeal bond, whichever is later.

The obligations to Mr. Hunt are secured by the Company’s assets other than accounts receivable. Under a registration agreement, Mr. Hunt has demand and piggyback registration rights with respect to any shares issued under the Letter of Credit Security Commitment Agreement. The demand registration right is subject to a 120 day deferral if the Board of Directors determines that such registration would be seriously detrimental to the Company or its shareholders. See Note 12—Subsequent Events.

8. Restricted Cash

On September 18, 2001, the Company entered into an agreement with a director and former Chairman, William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter of credit in the approximate amount of $3.3 million to appeal a judgment entered against the Company, Mr. Hunt and a former executive officer of the Company. Internet America collateralized a portion of the appeal bond by placing $200,000 in short term certificates of deposit required to be in place for the duration of the appeal. In August 2002, the Company increased the amount of these short term certificates of deposit by approximately $332,000 in order to significantly reduce the annual premium of the appeal bond. The lawsuit was settled on May 6, 2003, and the Company expects the appeal bond to be released. See Note 12—Subsequent Events.

9. Income Taxes

During the three and nine months ended March 31, 2003, the Company generated net income. No provision for income taxes has been recorded as the Company has reduced the valuation allowance on its net operating losses generated in prior periods. As of March 31, 2003, the Company continues to maintain a full valuation allowance for its net deferred tax assets. Given its limited history of generating net income, the Company does not consider the future recoverability of the net deferred tax assets to be more likely than not at this time. Net operating losses of the Company will potentially be limited if there is a change in control.

10. Commitments and Contingencies

On May 6, 2003, the Company entered into a settlement agreement with the plaintiff in the lawsuit styled Cindy Carradine v. Internet America, Inc., William O. Hunt and Michael T. Maples filed in the District Court of Dallas County, Texas. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million has been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $6 million. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million. See Note 12—Subsequent Events.

There have been no other material changes in the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002 and subsequent Quarterly Reports on Form 10-Q.

11. Reclassifications

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

12. Subsequent Events

On May 6, 2003, the Company entered into a settlement agreement with the plaintiff in the lawsuit styled Cindy Carradine v. Internet America, Inc., William O. Hunt and Michael T. Maples filed in the District Court of Dallas County, Texas. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million has been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $6 million. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million. After payment of the settlement amount and release of the appeal bond, management expects the Company to have a cash balance of approximately $1.75 million. Management expects the settlement payment to result in a pretax gain of approximately $419,000 on the Company’s income statement for the quarter ended June 30, 2003. Ongoing costs of the appeal that will be eliminated by the settlement total approximately $636,000 per year, including post-judgment interest, financing fees and bond fees. The use of the Company’s cash in lieu of the financing will, however, reduce the Company’s current assets while reducing long term debt, causing a reduction of the Company’s net working capital of $2.88 million.

The Company entered into a Letter of Credit Security Commitment Agreement in September 2001 with a director and former Chairman, William O. Hunt, to finance the appeal bond in the approximate amount of $3.3 million in connection with that lawsuit. Under this agreement, Mr. Hunt collateralized a letter of credit in the amount of $3.3 million and the Company paid Mr. Hunt a commitment fee of 8% per annum, paid quarterly. Upon settlement of the lawsuit on May 6, 2003, the Company notified Mr. Hunt that it intends to reduce the collateral in full. Accordingly, under the Letter of Credit Security Commitment Agreement, Mr. Hunt has a transferable option to purchase 9,428,571 shares of common stock of the Company at the price of $0.35 per share. The purchase option expires 120 days after the notice of reduction. The Company will continue to pay the commitment fee to Mr. Hunt for an additionalthirty days after the notice of reduction or until the court releases the appeal bond, whichever is later.

ITEM 2-

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as “anticipate,” “believe,” “estimate,” “should,” “expect” and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2002 and other publicly filed reports discuss some additional important factors that could cause our actual results to differ materially from those in any forward-looking statements.

Overview

Internet America 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 March 31, 2003, we served approximately 103,000 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 advertise in our existing markets with aggressive new promotions or offers of free Internet access. We believe we are well positioned to deal with these competitive forces by continuing to build high user density and maintaining a rational business plan.

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

Recent technological developments have facilitated the increased adoption of broadband access via mechanisms such as cable, fixed/mobile wireless, and copper pair allowing voice, video, and data to occur simultaneously over one connection. The emergence of low-cost broadband solutions will significantly impact the ability of many ISPs to compete. We are committed to being a leader in offering cost effective 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 broadband products due to the high density of our subscriber base.

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

Our amortization expense increased through fiscal year 2002 as the costs of purchased subscriber bases were written off. No amortization expense was recorded for the three and nine months ended March 31, 2003 and no amortization expense will be recorded for future quarters because all of the Company’s intangible assets, excluding goodwill, were fully amortized by June 30, 2002 and, in addition, the adoption of SFAS No. 142 related to intangible assets resulted in no amortization expense related to goodwill. As a result, in future quarters with otherwise similar results, we expect to report positive EBITDA and net income. However, there can be no assurance we will be able to sustain positive EBITDA or net income in the future.

We have an accumulated deficit of $53.3 million at March 31, 2003 and have had annual operating losses since inception until the current fiscal year as a result of building network infrastructure and rapidly increasing market share.

9

Settlement of Lawsuit and Status of Financing

On May 6, 2003, the Company entered into a settlement agreement with the plaintiff in the lawsuit styled Cindy Carradine v. Internet America, Inc., William O. Hunt and Michael T. Maples filed in the District Court of Dallas County, Texas. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million has been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $6 million. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million.

The Company entered into a Letter of Credit Security Commitment Agreement in September 2001 with a director and former Chairman, William O. Hunt, to finance the appeal bond in the approximate amount of $3.3 million in connection with that lawsuit. Under this agreement, Mr. Hunt collateralized a letter of credit in the amount of $3.3 million and the Company paid Mr. Hunt a commitment fee of 8% per annum, paid quarterly. Upon settlement of the lawsuit on May 6, 2003, the Company notified Mr. Hunt that it intends to reduce the collateral in full. Accordingly, under the Letter of Credit Security Commitment Agreement, Mr. Hunt has a transferable option to purchase 9,428,571 shares of common stock of the Company at the price of $0.35 per share. The purchase option expires 120 days after the notice of reduction. The Company will continue to pay the commitment fee to Mr. Hunt for an additional thirty days after the notice of reduction or until the court releases the appeal bond, whichever is later.

After payment of the settlement amount and release of the appeal bond, management expects the Company to have a cash balance of approximately $1.75 million. Management expects the settlement payment to result in a pretax gain of approximately $419,000 on the Company’s income statement for the quarter ended June 30, 2003. Ongoing costs of the appeal which will be eliminated by the settlement, total approximately $636,000 per year, including post-judgment interest, financing fees and bond fees. The use of the Company’s cash in lieu of the financing will, however, reduce the Company’s current assets while reducing long term debt, causing a reduction of the Company’s net working capital of $2.88 million.

Statement of Operations

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

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

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

Sales and marketing expenses consist primarily of creative and production costs, costs of media placement, management salaries and call center wages. Sales and marketing costs are expensed as incurred, net of co-marketing credits.

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 30 to 36 months. 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 36 to 42 months.

Our business is not subject to any significant seasonal influences.

Results of Operations

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

The following table sets forth certain unaudited financial data for the three months ended March 31, 2003 and 2002. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber counts).

Total revenue. Total revenue decreased by $2.0 million, or 32.3%, to $4.2 million for the three months ended March 31, 2003, from $6.2 million for the three months ended March 31, 2002. The Company’s subscriber count decreased by 34,000, or 24.8%, to 103,000 as of March 31, 2003 compared to 137,000 as of March 31, 2002. The decrease in the subscriber count is attributable to tightened credit policies and procedures and normal customer

attrition exceeding our rate of new sales and loss of DSL customers due to the bankruptcy of one of the Company’s DSL providers.

Connectivity and operations. Connectivity and operations expense decreased by $1.0 million or 33.3%, to $2.0 million for the three months ended March 31, 2003 from $3.0 million for the three months ended March 31, 2002. The decrease is primarily due to a decrease in our per unit connectivity costs which resulted mainly from the consolidation of internet and telephone connections and circuits. As a percentage of revenue, connectivity and operations expense decreased slightly to 47.3% for the three months ended March 31, 2003, from 47.7% for the three months ended March 31, 2002.

Sales and marketing. Sales and marketing expense decreased by $112,000, or 48.5%, to $119,000 for the three months ended March 31, 2003, compared to $231,000 for the three months ended March 31, 2002. The majority of the decrease relates to a reduction of personnel costs.

General and administrative. General and administrative expense decreased by $0.3 million, or 21.4%, to $1.1 million for the three months ended March 31, 2003, from $1.4 million for the three months ended March 31, 2002. The decrease is mainly related to the Company’s overall effort in cost reduction. General and administrative expense as a percentage of total revenue increased to 25.1% for the three months ended March 31, 2003, from 22.6% for the three months ended March 31, 2002.

Provision for bad debt expense. Provision for bad debt expense decreased by $309,000, or 57.5%, to $228,000 for the three months ended March 31, 2003, from $537,000 for the three months ended March 31, 2002. The decrease is mainly related to an overall improvement in the Company’s aging of customer accounts that are at least 90 days old. Provision for bad debt expense as a percentage of revenue decreased to 5.4% for the three months ended March 31, 2003, from 8.7% for the three months ended March 31, 2002. As of March 31, 2003, the Company continues to be fully reserved for all customer accounts that are at least 90 days old.

Depreciation and amortization. Depreciation and amortization decreased significantly by $3.8 million, or 97.4%, to $129,000 for the three months ended March 31, 2003, from $3.9 million for the three months ended March 31, 2002. Due to the adoption of SFAS No. 142, the Company recorded no amortization expense for the three months ended March 31, 2003. Amortization expense was $3.5 million for the three months ended March 31, 2002.

Interest expense, net. Interest expense, net was $143,000 for the three months ended March 31, 2003 and 2002. The interest expense for the three months ended March 31, 2003 and 2002 consists of $80,000 in post-judgment interest on an adverse judgment in a lawsuit and $66,000 interest related to a $3.3 million letter of credit agreement with a director, William O. Hunt, which was offset by a small amount of interest income. Due to the settlement of the lawsuit on May 6, 2003 and reduction of the financing provided by Mr. Hunt, management expects a reduction in interest expense for the three months ending June 30, 2003 and subsequent quarters. See Management’s Discussion and Analysis of Financial Condition and Results of Operation – Settlement of Lawsuit and Status of Financing.

Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002

The following table sets forth certain unaudited financial data for the nine months ended March 31, 2003 and 2002. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber counts).

Total revenue. Total revenue decreased by $6.2 million, or 31.0%, to $13.8 million for the nine months ended March 31, 2003, from $20.0 million for the nine months ended March 31, 2002. The Company’s subscriber count decreased by 34,000, or 24.8%, to 103,000 as of March 31, 2003 compared to 137,000 as of March 31, 2002. The decrease in the subscriber count is attributable to tightened credit policies and procedures and normal customer

attrition exceeding our rate of new sales and loss of DSL customers due to the bankruptcy of one of the Company’s DSL providers.

Connectivity and operations. Connectivity and operations expense decreased by $3.3 million, or 33.0%, to $6.7 million for the nine months ended March 31, 2003 from $10.0 million for the nine months ended March 31, 2002. The decrease is primarily due to a decrease in our per unit connectivity costs which resulted mainly from the consolidation of internet and telephone connections and circuits. As a percentage of revenue, connectivity and operations expense decreased to 48.3% for the nine months ended March 31, 2003, from 49.8% for the nine months ended March 31, 2002.

Sales and marketing. Sales and marketing expense decreased by $166,000, or 29.0%, to $407,000 for the nine months ended March 31, 2003, compared to $573,000 for the nine months ended March 31, 2002. The majority of the decrease relates to a reduction of personnel costs.

General and administrative. General and administrative expense decreased by $1.0 million, or 22.7%, to $3.4 million for the nine months ended March 31, 2003, from $4.4 million for the nine months ended March 31, 2002. The decrease is mainly related to the Company’s overall effort in cost reduction. General and administrative expense as a percentage of total revenue increased to 24.7% for the nine months ended March 31, 2003, from 21.8% for the nine months ended March 31, 2002.

Provision for bad debt expense. Provision for bad debt expense decreased by $1.1 million, or 68.8%, to $528,000 for the nine months ended March 31, 2003, from $1.6 million for the nine months ended March 31, 2002. The decrease is mainly related to an overall improvement in the Company’s aging of customer accounts that are at least 90 days old. Provision for bad debt expense as a percentage of revenue decreased to 3.8% for the nine months ended March 31, 2003, from 7.9% for the nine months ended March 31, 2002. As of March 31, 2003, the Company continues to be fully reserved for all customer accounts that are at least 90 days old.

Depreciation and amortization. Depreciation and amortization decreased significantly by $11.1 million, or 94.9%, to $562,000 for the nine months ended March 31, 2003, from $11.7 million for the nine months ended March 31, 2002. Due to the adoption of SFAS No. 142, the Company recorded no amortization expense for the nine months ended March 31, 2003. Amortization expense was $10.6 million for the nine months ended March 31, 2002.

Interest expense, net. Interest expense, net increased by $38,000, or 9.7%, to $429,000 for the nine months ended March 31, 2003, from $391,000 for the nine months ended March 31, 2002. Due to the settlement of a lawsuit on May 6, 2003 and reduction of financing provided by a director, management expects a reduction in interest expense for the three months ending June 30, 2003 and subsequent quarters. See Management’s Discussion and Analysis of Financial Condition and Results of Operation—Settlement of Lawsuit and Status of Financing.

Liquidity and Capital Resources

We have financed our operations to date primarily through (i) cash flows from operations, (ii) public and private sales of equity securities and (iii) loans from shareholders and third parties.

Cash provided by operating activities totaled $1.7 million and $2.3 million for the nine months ended March 31, 2003 and 2002, respectively. Cash provided by operating activities for the nine months ended March 31, 2003 was mainly the result of $1.8 million in net income generated by the Company.

Cash used in investing activities totaled $88,000 and $504,000 for the nine months ended March 31, 2003 and 2002, respectively, which consisted of routine purchases of property and equipment including lease buyouts to expand and upgrade our network.

Cash used in financing activities totaled $23,000 and $724,000 for the nine months ended March 31, 2003 and 2002, respectively. Cash used in financing activities for the nine months ended March 31, 2003 consisted mainly of payments of $67,000 to service capital leases and long-term obligations which was reduced by proceeds of $44,000 from the issuance of common stock related to the employee stock purchase plan.

On September 18, 2001, we entered into an agreement with a director, William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter of credit in the approximate amount of $3.3 million to appeal a judgment entered against the Company, Mr. Hunt and a former executive officer of the Company. Internet America

collateralized a portion of the appeal bond by placing $200,000 in short term certificates of deposit required to be in place for the duration of the appeal. In August 2002, the Company increased the amount of these short term certificates of deposit by approximately $332,000 in order to significantly reduce the annual premium of the appeal bond. There were one time transaction costs to post this appeal bond. Annual recurring financing costs for this bond are up to $316,000. In connection with the agreement, we granted Mr. Hunt a security interest in our assets other than accounts receivable.

On May 6, 2003, the Company settled the judgment described in the preceding paragraph. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million has been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $6 million. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million.

Cash and restricted cash at March 31, 2003 was $5.0 million. After payment of the settlement amount and release of the appeal bond, the Company expects to have a cash balance of approximately $1.75 million. Management believes this cash balance, along with anticipated EBITDA, will be sufficient for meeting our working capital needs for fiscal 2003 with regard to continuing operations in existing markets. Additional financing will be required to fund acquisitions or expansion into new markets.

“Safe Harbor” Statement

The following “Safe Harbor” Statement is made pursuant to the Private Securities Litigation Reform Act of 1995. Certain of the Statements contained in the body of this Report are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, that (1) we will not retain or grow our subscriber base, including DSL and commercial services customers, (2) we will not increase revenues, EBITDA, profitability or product margins, (3) we will not continue to achieve operating efficiencies, (4) we will not be competitive with existing or new competitors, (5) we will not keep up with industry pricing or technological developments impacting the Internet, (6) needed financing will not be available to us if and as needed, and (7) we will be adversely affected by dependence on network infrastructure, telecommunications providers and other vendors, by regulatory changes and by general economic and business conditions. This list is intended to identify certain of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere herein. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in our other publicly filed reports and documents.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have occurred to the Company’s previously reported risk profile for market-risk sensitive instruments.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the conclusion of their evaluation.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 6, 2003, the Company entered into a settlement agreement with the plaintiff in the lawsuit styled Cindy Carradine v. Internet America, Inc., William O. Hunt and Michael T. Maples filed in the District Court of Dallas County, Texas. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million has been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $6 million. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million.

There have been no other material changes in the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002 and subsequent Quarterly Reports on Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the quarter ended March 31, 2003.

SIGNATURES

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

CERTIFICATIONS

I, Jack T. Smith, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/S/    JACK T. SMITH

Jack T. Smith

Chief Executive Officer

I, Mark Novy, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and