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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-25147

INTERNET AMERICA, INC.

(Exact name of registrant as specified in its charter)

(214) 861-2500

(Registrant’s telephone number, including area code)

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

As of May 13, 2004, registrant had 10,434,652 shares of Common Stock at $.01 par value, outstanding

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.

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Financial Statements - Continued

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Financial Statements - Continued

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2003, included in the Company’s Annual Report on Form 10-K (File No 000-25147).

There are no adjustments required to be made to net income for the purpose of computing basic and diluted earnings per share (“EPS”) for the three and nine months ended March 31, 2004. For the three months ended March 31, 2004, diluted earnings per share is the same as basic earnings per share due to the net loss. During the nine months ended March 31, 2004, options to purchase 20,000 shares of common stock were included in the computation of diluted EPS because the options were “in the money” as of March 31, 2004 and it resulted in 7,391 common stock equivalents to be added to the weighted average shares for the nine months ended March 31, 2004. During the nine months ended March 31, 2004 and 2003, options to purchase 465,037 and 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, 2004 and 2003, respectively. There were no options exercised to purchase shares of common stock during the three and nine months ended March 31, 2003. During the three and nine months ended March 31, 2004, options to purchase 18,000 and 23,000 shares of common stock were exercised, respectively.

The carrying value of other assets at March 31, 2004 is as follows:

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 the quoted market price of the Company’s common shares at the date of grant over the amount an employee must pay to acquire the common shares of the Company. No compensation expense has been charged against operations for the three and nine months ended March 31, 2004 and 2003 related to stock option plans.

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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) income and (loss) income per share for the three and nine months ended March 31, 2004 and 2003 would have been as indicated below:

During the nine months ended March 31, 2004 and 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, 2004, the Company continues to maintain a full valuation allowance for its net deferred tax assets of $11.7 million. 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.

The Company entered into a consulting agreement for a one-year term beginning October 1, 2003 with the former Chairman and CEO of the Company, Jack T. Smith. The agreement states that a consulting fee is to be paid at a rate of $10,000 per month. During the nine months ended March 31, 2004, the Company paid a total of $70,000 in consulting fees to Mr. Smith of which $10,000 was recorded as a prepaid expense as of March 31, 2004. The Company also has an $82,000 note receivable due from Mr. Smith and, as a result, has accrued interest income due on the note totaling $2,754 during the nine months ended March 31, 2004.

During the nine months ended March 31, 2004, the Company paid $44,915 in consulting fees related to marketing and advertising for the Company to Marc Ladin Consulting. Marc Ladin is the son of William E. Ladin, the Chairman and CEO of the Company.

The Company engaged Gary Corona, a former non-employee board of director of the Company, as a consultant to the Company at a rate of $6,000 per month. Per this agreement, Mr. Corona was paid $26,000 during the nine months ended March 31, 2004. In addition, in April 2004, the Company settled a lawsuit it had filed against Mr. Corona and, as a result, has recorded lawsuit settlement expense of $212,500 during the nine months ended March 31, 2004. Included in accounts payable and short-term note payable on the balance sheet as of March 31, 2004, is $75,000 and $137,500, respectively, related to the settlement with Mr. Corona. The note payable is a non-interest bearing note due in eleven monthly installments of $12,500. The Company recorded the settlement expense in March 2004 in accordance with generally accepted accounting principals.

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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, 2003 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”) offering a wide array of Internet services tailored to meet the needs of individual and business subscribers. We provide a high quality Internet experience with fast, reliable service and responsive customer care. As of March 31, 2004, we served approximately 65,000 subscribers in the southwestern United States, primarily in Dallas and Houston, Texas.

High user density is the cornerstone of our business strategy. We will pursue a growth strategy based on the introduction of new products and services, focusing on the Dallas and Houston markets, where we have established branding, rather than in new markets. Our goal is to create high user density in specific markets to maintain operating efficiencies and achieve positive operating results.

The quarter ending March 31, 2004 was challenging. Our subscriber attrition (loss), which was (9.2%) for the three months December 31, 2003, was reduced to (5.8%) for the three months ended March 31, 2004. We believe this improvement was due to our increased marketing and advertising efforts and our introduction of a number of new products. This positive trend continued in April and is expected to continue through the date of this filing. While we are not able to predict exactly when we will stop losing customers and return to growth on a net basis, we believe that we are making progress in that direction. We intend to introduce new products in May and June 2004 that we believe will contribute to subscriber increases. Additionally, we are examining a number of new broadband products, including wireless and broadband over power lines.

Following resolution of the previously announced lawsuit with a former director, management is once again able to focus more intently on the operations of the Company. However, during the quarter ending March 31, 2004 the settlement of a lawsuit and the fees directly associated with the prosecution and settlement of that suit totaled approximately $525,000. Part of these settlement expenses were offset during the year by a one time gain of approximately $303,000 from a sales tax refund and interest income associated with that refund. The Company collected the refund receivable in April 2004.

The growth of the Internet and new technologies has resulted in increased competition for existing services and increased demand for new products and services. We believe we can successfully deal with these competitive forces through the introduction of new products and services and can efficiently market and deploy our products due to the high density of our subscriber base. Given the high level of competition in the industry for new subscribers, we have increased and plan to continue to increase our marketing efforts but will remain selective when investing in advertising. We plan to concentrate our advertising more heavily in markets where we have established branding than in new markets.

The adoption of broadband access via DSL, cable, wireless and other mechanisms has increased, and we believe, particularly with the emergence of low-cost high-speed solutions, that broadband will continue to grow as the preferred method of connectivity by businesses and consumers. 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.

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We believe this will significantly impact our ability as well as other ISPs to compete. At this time, our broadband offerings consist of DSL services and business oriented dedicated connectivity such as T-1 access, but we do not offer a cable or wireless service. We are, however, committed to being a leader in offering cost effective broadband solutions to individuals and businesses, and we will continue to pursue alternative methods of low-cost high-speed connectivity.

Additionally, because all of our DSL services include a local loop sold to us at wholesale prices by either SBC Communications, Inc. (“SBC”) or Verizon Communication, Inc. (“Verizon”), pricing and availability of our DSL services are subject to the competitive pressures of those local exchange carriers, both of which also sell their own DSL services on a retail basis. Thus, pressures from SBC or Verizon may cause us to decrease the price of our DSL services, resulting in a decrease in revenue per subscriber, or may cause us to make fewer new sales of DSL services.

Statement of Operations

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

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

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

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

General and administrative expenses consist primarily of administrative salaries, professional services, rent and other general business expenses. For the quarter ended March 31, 2004 general and administrative expenses also included lawsuit settlement expense and legal expenses related to the settlement of approximately $213,000 and $312,000, respectively.

Provision for bad debt expenses consist primarily of customer accounts that have been deemed uncollectible and will potentially be written off in future periods. Historically, the expense has been based on the aging of customer accounts whereby all customer accounts that are 90 days or older have been provided for as a bad debt expense.

Depreciation expense 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. For fiscal years prior and ended June 30, 2003, purchased subscriber bases and related goodwill were amortized over 30 to 36 months.

Our business is not subject to any significant seasonal influences.

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Results of Operations

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

The following table sets forth certain unaudited financial data for the three months ended March 31, 2004 and 2003. 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).

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Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 (Continued)

Total revenue. Total revenue decreased by $1.4 million, or 32.4%, to $2.8 million for the three months ended March 31, 2004, from $4.2 million for the three months ended March 31, 2003. The Company’s subscriber count decreased by 38,000, or 36.9%, to 65,000 as of March 31, 2004 compared to 103,000 as of March 31, 2003. The decrease in the subscriber count is attributable to tightened credit policies and procedures and customer attrition exceeding our rate of new sales.

Connectivity and operations. Connectivity and operations expense decreased by $0.7 million or 32.4%, to $1.3 million for the three months ended March 31, 2004 from $2.0 million for the three months ended March 31, 2003. Approximately $242,000 of the decrease relates to a credit received in the three months ended March 31, 2004 for a refund of sales tax overpaid during 2000 and approximately $296,000 of the decrease relates to the consolidation of internet and telephone connections and circuits to more closely align with demand, as well as the renegotiation of contracts with several of our major telecom vendors. The remaining decrease relates primarily to staff reductions. As a percentage of total revenue, connectivity and operations expense before the sales tax credit was 56.0% for the three months ended March 31, 2004 compared to 47.3% for the three months ended 2003, primarily due to the decrease in revenues.

Sales and marketing. Sales and marketing expense increased by $194,000, or 163%, to $313,000 for the three months ended March 31, 2004, compared to $119,000 for the three months ended March 31, 2003. The increase relates to the Company’s increased marketing efforts including billboard and print advertising in two of the Company’s major markets, Dallas and Houston.

General and administrative. General and administrative expense increased by $0.2 million, or 16.7%, to $1.2 million for the three months ended March 31, 2004, from $1.0 million for the three months ended March 31, 2003. The increase is primarily a result of increased legal fees and lawsuit settlement costs offset by decreases in personnel costs and office expenses. General and administrative personnel costs decreased by $284,000 or 54.0%, to $242,000 for the three months ended March 31, 2004, compared to $526,000 for the three months ended March 31, 2003 primarily as a result of the Company’s staff reductions. Office expense decreased by $99,000, or 44.0%, to $224,000 for the three months ended March 31, 2003 compared to $125,000 for the three months ended March 31, 2004, primarily as a result of the consolidation of the Houston offices, the renegotiation of the Dallas office lease as well as decreases in employee benefits related to the reduction in staff. The Dallas office lease was renegotiated effective November 1, 2003, resulting in a costs savings of approximately $55,000 during the three months ended March 31, 2004 compared to the three months ended March 31, 2003.

The decreases in certain general and administrative costs were offset by expenses incurred in connection with the settlement of the lawsuit with former, non-employee director, Mr. Gary Corona. Expenses incurred during the three months ended March 31, 2004, in connection with the settlement with Mr. Corona include legal fees of approximately $312,000 and lawsuit settlement expense of approximately $213,000 for total costs in the quarter of approximately $525,000.

Provision for bad debt expense. Provision for bad debt expense decreased by $173,000, or 76.0%, to $55,000 for the three months ended March 31, 2004, from $228,000 for the three months ended March 31, 2003. The decrease is mainly related to an overall improvement in the Company’s aging of customer accounts that are at least 90 days old and improved billing and collection efforts. Provision for bad debt expense as a percentage of revenue decreased to 1.9% for the three months ended March 31, 2004, from 5.4% for the three months ended March 31, 2003. As of March 31, 2004, the Company continues to be fully reserved for all customer accounts that are at least 90 days old.

Depreciation. Depreciation decreased by $62,000, or 48.1%, to $67,000 for the three months ended March 31, 2004, from $129,000 for the three months ended March 31, 2003. The decrease is due to certain property and equipment becoming fully depreciated.

Interest (income) expense, net. For the three months ended March 31, 2004, the Company recorded no interest expense, but did record approximately $71,000 in interest income of which approximately $62,000 relates to interest earned on an overpayment of sales tax during 2000 with the remainder related to interest earned on the Company’s cash balances.

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Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003

The following table sets forth certain unaudited financial data for the nine months ended March 31, 2004 and 2003. 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).

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Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003 (Continued)

Total revenue. Total revenue decreased by $4.4 million, or 32.1%, to $9.4 million for the nine months ended March 31, 2004, from $13.8 million for the nine months ended March 31, 2003. The Company’s subscriber count decreased by 38,000, or 36.9%, to 65,000 as of March 31, 2004 compared to 103,000 as of March 31, 2003. 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 the loss of DSL customers due to the bankruptcy of one of our DSL providers.

Connectivity and operations. Connectivity and operations expense decreased by $1.8 million or 26.2%, to $4.9 million for the nine months ended March 31, 2004 from $6.7 million for the nine months ended March 31, 2003. Approximately $242,000 of the decrease relates to a credit received in the nine months ended March 31, 2004 for a refund of sales tax overpaid during 2000 and approximately $1.0 million of the decrease relates to the consolidation of internet and telephone connections and circuits to more closely align with demand, as well as the renegotiation of contracts with several of our major telecom vendors. The remaining decrease relates primarily to staff reductions. As a percentage of total revenue, connectivity and operations expense before the sales tax credit was 55.0% for the nine months ended March 31, 2004 compared to 48.3% for the nine months ended 2003, primarily due to the decrease in revenues.

Sales and marketing. Sales and marketing expense increased by $40,000, or 9.8%, to $447,000 for the nine months ended March 31, 2004, compared to $407,000 for the nine months ended March 31, 2003. The increase relates to the Company’s increased marketing efforts including billboard and print advertising in two of the Company’s major markets, Dallas and Houston.

General and administrative. General and administrative expense decreased by $0.4 million, or 12.2%, to $3.0 million for the nine months ended March 31, 2004, from $3.4 million for the nine months ended March 31, 2003. The decrease is primarily related to a decline in personnel and office costs offset by increased legal fees and lawsuit settlement costs. General and administrative personnel costs decreased by $801,000 or 49.7%, to $809,000 for the nine months ended March 31, 2004, compared to $1,610,000 for the nine months ended March 31, 2003 primarily as a result of the Company’s reduction in staff in an effort to reduce costs. Office expense decreased by $169,000, or 27.5%, to $445,000 for the nine months ended March 31, 2004 compared to $614,000 for the nine months ended March 31, 2003, primarily as a result of the consolidation of the Houston offices, the renegotiation of the Dallas office lease as well as reductions in employee benefits related to the reduction in staff. The Dallas office lease was renegotiated effective November 1, 2003, resulting in a costs savings of approximately $111,000 during the nine months ended March 31, 2004 compared to the nine months ended March 31, 2003.

The decreases in certain general and administrative costs were offset by expenses incurred in connection with the settlement of the lawsuit with former, non-employee director, Mr. Gary Corona. Expenses incurred during the nine months ended March 31, 2004, in connection with the settlement with Mr. Corona include legal fees of approximately $312,000 and lawsuit settlement expense of approximately $213,000 for total costs of approximately $525,000 for the nine months ended March 31, 2004.

Provision for bad debt expense. Provision for bad debt expense decreased by $344,000, or 65.2%, to $184,000 for the nine months ended March 31, 2004, from $528,000 for the nine months ended March 31, 2003. The decrease is mainly related to an overall improvement in the Company’s aging of customer accounts that are at least 90 days old and improved billing and collection efforts. Provision for bad debt expense as a percentage of total revenue decreased to 2.0% for the nine months ended March 31, 2004, from 3.8% for the nine months ended March 31, 2003. As of March 31, 2004, the Company continues to be fully reserved for all customer accounts that are at least 90 days old.

Depreciation. Depreciation decreased by $301,000, or 53.6%, to $261,000 for the nine months ended March 31, 2004, from $562,000 for the nine months ended March 31, 2004. The decrease is due to certain property and equipment becoming fully depreciated.

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Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003 (Continued)

Interest (income) expense, net. For the nine months ended March 31, 2004, the Company recorded no interest expense, but did record approximately $89,000 in interest income of which approximately $62,000 relates to interest earned on an overpayment of sales tax during 2000 with the remainder related to interest earned on the Company’s cash balances. For the nine months ended March 31, 2003, the Company recorded interest expense of $198,000 related to a $3.3 million letter of credit agreement with the Company’s former Chairman, William O. Hunt, and approximately $240,000 in interest expense related to post-judgment interest on a lawsuit judgment.

Liquidity and Capital Resources

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

Cash (used in) provided by operating activities totaled ($24,000) and $1.7 million for the nine months ended March 31, 2004 and 2003, respectively. Cash used in operating activities for the none months ended March 31, 2004 was the result of $844,000 in EBITDA, which was offset by a reduction in accounts payable and accrued liabilities of $700,000 and a reduction in deferred revenues of $331,000. The significant decrease in accounts payable and accrued liabilities is the result of the company paying vendors on a timelier basis and the resolution of billing disputes with telecommunications vendors. Cash provided by operating activities for the nine months ended March 31, 2003 was the result of $2.8 million in positive EBITDA which was offset by uses of cash for restricted cash, accounts receivable and deferred revenue for a total of $1.2 million.

Cash used in investing activities totaled $25,000 and $88,000 for the nine months ended March 31, 2004 and 2003, respectively, which consisted of routine purchases of property and equipment to expand and upgrade our network.

Cash used in financing activities totaled $135,000 and $23,000 for the nine months ended March 31, 2004 and 2003, respectively. Cash used in financing activities for the nine months ended March 31, 2004 consisted primarily of $150,000 paid to purchase an outstanding stock option of the Company from William O. Hunt. There was also proceeds of $29,000 from the issuance of common stock related to the employee stock purchase plan which was offset by $14,000 in payments to service capital lease obligations for the nine months ended March 31, 2004.

We estimate that cash on hand of $1.8 million at March 31, 2004 along with anticipated cash flow from operations will be sufficient for meeting our working capital needs for fiscal 2005 with regard to continuing operations in existing markets. Additional financing will be required to fund acquisitions or expansion into new markets. Continued decreases in revenues and subscriber count may ultimately affect the liquidity of the Company. The Company has started to advertise in Dallas and Houston with billboards and in newspapers and will continue to advertise for future periods to stabilize and potentially increase revenues. The Company currently has no long term advertising commitments.

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.

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“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 improve 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.

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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) in effect as of March 31, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of March 31, 2004, the design and operation of these disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the conclusion of their evaluation.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 30, 2004, the Company filed a lawsuit against Gary Corona (“Corona”), one of its two directors, alleging that the Company had learned that Corona had disseminated confidential information about Internet America to certain selected shareholders and seeking a temporary restraining order, temporary injunction and permanent injunction which, among other matters, would 1) enjoin Corona from disseminating confidential corporate information to Internet America shareholders, stockbrokers or any third party, 2) enjoin Corona from taking certain actions with regard to the management rights or obligations of Internet America without board authorization and 3) order Corona to return certain corporate documents to Internet America.

On April 22, 2004, the Company entered into a settlement agreement with Corona, whereby two independent directors were appointed to the Company’s Board of Directors, Corona resigned as a director of the Company and the Company agreed to pay Corona $75,000 in cash and issue a note payable to Corona for $137,500 for a total payment of $212,500.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

The Company filed a report on Form 8-K on February 2, 2004, disclosing the initiation of the Corona litigation by the Company.

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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.

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INDEX TO EXHIBITS

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