UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-Q
 
 (X)  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For the
Quarterly Period Ended June 30, 2008
 
 OR
 
 (   )  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
ACT OF 1934
 
 For the
transition period from  _____________
to _____________
  Commission
file number  000-23740
 
 INNOTRAC CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 
 Georgia
              58-1592285(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      Number)6655 Sugarloaf Parkway Duluth,
      Georgia
              30097(Address
      of principal executive offices)
              (Zip
      Code)
 
 Registrant's
telephone number, including area code:(678)
584-4000
  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 o  No x
 
  Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
      accelerated filer  o
              Accelerated
      filer  oNon-accelerated
      filer    o (Do not
      check if a smaller reporting company)
              Smaller
      reporting company  x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b-2 of the Act) Yes o  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 August
      8, 2008Common
      Stock $.10 par value per share
              12,319,803
      Shares
  
  INNOTRAC
CORPORATION
 
 INDEX
 
 
 PagePart
      I.  Financial InformationItem
      1.
              Financial
      Statements:
              2Condensed
      Balance Sheets at  June 30, 2008 (Unaudited) and December 31,
      2007
              3Condensed
      Statements of Operations for the Three Months Ended June 30, 2008 and 2007
      (Unaudited)
              4Condensed
      Statements of Operations for the Six Months Ended June 30, 2008 and
      2007 (Unaudited)
              5Condensed
      Statements of Cash Flows for the Three Months Ended March 31, 2008 and
      2007 (Unaudited)
              6Notes
      to Condensed Financial Statements (Unaudited)
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              15Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              25Item
      4.
              Controls
      and Procedures
              25Part
      II.  Other InformationItem
      4.
              Submission
      of Matters to a Vote of Security Holders
              26Item
      6.
              Exhibits
              26Signatures
              
              
              27
 
 1
  Part I – Financial
Information
 
 Item 1 – Financial
Statements
 The
following condensed financial statements of Innotrac Corporation, a Georgia
corporation (“Innotrac” or the “Company”), have been prepared in accordance with
the instructions to Form 10-Q and, therefore, omit or condense certain footnotes
and other information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America.  In the opinion of management, all adjustments are of a
normal and recurring nature, except those specified as otherwise, and includes
those necessary for a fair presentation of the financial information for the
interim periods reported.  Results of operations for the six months
ended June 30, 2008 are not necessarily indicative of the results for the entire
year ending December 31, 2008.  These financial statements should be
read in conjunction with the statements and notes thereto included in the
Company’s 2007 Annual Report on Form 10-K, which is available on our website at
www.innotrac.com.
  2
 INNOTRAC
CORPORATION
 CONDENSED
BALANCE SHEETS
 (in
thousands, except share data)
 
 ASSETS
                  
                  June 30,
    2008
                  
                  
                  December 31,
      2007(unaudited)Current
    assets:Cash and cash
      equivalents
                  
                  
                  $
                  343
                  
                  
                  $
                  1,079Accounts receivable (net of
      allowance for doubtful accounts of $235 atJune 30, 2008 and $288 at December
      31, 2007)
                  
                  
                  21,342
                  
                  
                  
                  28,090Inventories,
      net
                  
                  
                  
                  822
                  
                  
                  
                  599Prepaid expenses and
      other
                  
                  
                  
                  1,594
                  
                  
                  
                  1,100Total current
      assets
                  
                  
                  
                  24,101
                  
                  
                  
                  30,868Property and
      equipment:Rental
      equipment
                  
                  
                  
                  240
                  
                  
                  
                  286Computer software and
      equipment
                  
                  
                  
                  41,619
                  
                  
                  
                  40,479Furniture, fixtures and leasehold
      improvements
                  
                  
                  8,088
                  
                  
                  
                  7,81549,947
                  
                  
                  
                  48,580Less accumulated depreciation and
      amortization
                  
                  
                  (32,902
                  )
                  
                  
                  (30,878
                  )17,045
                  
                  
                  
                  17,702Goodwill
                  
                  
                  
                  25,169
                  
                  
                  
                  25,169Other assets,
      net
                  
                  
                  
                  1,105
                  
                  
                  
                  1,192Total
assets
                  
                  
                  $
                  67,420
                  
                  
                  $
                  74,931LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  
                  $
                  6,294
                  
                  
                  $
                  14,050Line of
    credit
                  
                  
                  
                  5,220
                  
                  
                  
                  6,168Term Loan
                  
                  
                  
                  5,000
                  
                  
                  
                  5,000Accrued expenses and
      other
                  
                  
                  
                  5,000
                  
                  
                  
                  5,708Total current
      liabilities
                  
                  
                  
                  21,514
                  
                  
                  
                  30,926Noncurrent
      liabilities:Other noncurrent
      liabilities
                  
                  
                  
                  954
                  
                  
                  
                  993Total noncurrent
      liabilities
                  
                  
                  
                  954
                  
                  
                  
                  993Commitments and contingencies (see
      Note 5)Shareholders’
      equity:Preferred stock: 10,000,000 shares
      authorized, $0.10 par value,no shares issued or
      outstanding
                  
                  
                  
                  -
                  
                  
                  
                  -Common stock: 50,000,000 shares
      authorized, $0.10 par value,12,585,759 issued and 12,319,803
      shares outstanding
                  
                  
                  1,259
                  
                  
                  
                  1,259Additional paid-in
      capital
                  
                  
                  
                  66,334
                  
                  
                  
                  66,251Accumulated
      deficit
                  
                  
                  
                  (22,641
                  )
                  
                  
                  (24,498
                  )Total shareholders’
      equity
                  
                  
                  
                  44,952
                  
                  
                  
                  43,012Total liabilities and
      shareholders’ equity
                  
                  $
                  67,420
                  
                  
                  $
                  74,931
 See notes to condensed financial
statements.
  3
  Financial
Statements-Continued
 
 INNOTRAC
CORPORATION
 CONDENSED
STATEMENTS OF OPERATIONS
 For
the Three Months Ended June 30, 2008 and 2007
 (in
thousands, except per share amounts)
 
 Three Months Ended June
      30,2008
                  
                  
                  2007(unaudited)
                  
                  
                  (unaudited)Service
      revenues
                  
                  $
                  23,418
                  
                  
                  $
                  22,533Freight
      revenues
                  
                  
                  6,109
                  
                  
                  
                  5,521Total
    revenues
                  
                  
                  29,527
                  
                  
                  
                  28,054Cost of service
      revenues
                  
                  
                  10,559
                  
                  
                  
                  10,325Freight
    expense
                  
                  
                  6,016
                  
                  
                  
                  5,468Selling, general and
      administrative expenses
                  
                  
                  10,583
                  
                  
                  
                  10,737Depreciation and
      amortization
                  
                  
                  1,021
                  
                  
                  
                  1,317Total operating
      expenses
                  
                  
                  28,179
                  
                  
                  
                  27,847Operating
      income
                  
                  
                  1,348
                  
                  
                  
                  207Other
    expense:Interest
      expense
                  
                  
                  353
                  
                  
                  
                  162Total other
      expense
                  
                  
                  353
                  
                  
                  
                  162Income before income
      taxes
                  
                  
                  995
                  
                  
                  
                  45Income
taxes
                  
                  
                  -
                  
                  
                  
                  -Net income
                  
                  $
                  995
                  
                  
                  $
                  45Income per
      share:Basic
                  
                  $
                  0.08
                  
                  
                  $
                  0.00Diluted
                  
                  $
                  0.08
                  
                  
                  $
                  0.00Weighted average shares
      outstanding:Basic
                  
                  
                  12.320
                  
                  
                  
                  12,282Diluted
                  
                  
                  12,418
                  
                  
                  
                  12,283
 See notes to condensed financial
statements.
 4
  Financial
Statements-Continued
 
 INNOTRAC
CORPORATION
 CONDENSED
STATEMENTS OF OPERATIONS
 For
the Six Months Ended June 30, 2008 and 2007
 (in
thousands, except per share amounts)
 
 
 Six Months Ended June
      30,2008
                  
                  
                  2007(unaudited)
                  
                  
                  (unaudited)Service
      revenues
                  
                  $
                  48,888
                  
                  
                  $
                  44,649Freight
      revenues
                  
                  
                  13,351
                  
                  
                  
                  11,180Total
    revenues
                  
                  
                  62,239
                  
                  
                  
                  55,829Cost of service
      revenues
                  
                  
                  22,657
                  
                  
                  
                  20,716Freight
    expense
                  
                  
                  13,265
                  
                  
                  
                  11,030Selling, general and
      administrative expenses
                  
                  
                  21,662
                  
                  
                  
                  21,901Depreciation and
      amortization
                  
                  
                  2,072
                  
                  
                  
                  2,602Total operating
      expenses
                  
                  
                  59,656
                  
                  
                  
                  56,249Operating income
      (loss)
                  
                  
                  2,583
                  
                  
                  
                  (420
                  )Other
    expense:Interest
      expense
                  
                  
                  726
                  
                  
                  
                  329Total other
      expense
                  
                  
                  726
                  
                  
                  
                  329Income (loss) before income
      taxes
                  
                  
                  1,857
                  
                  
                  
                  (749
                  )Income
taxes
                  
                  
                  -
                  
                  
                  
                  -Net income
      (loss)
                  
                  $
                  1,857
                  
                  
                  $
                  (749
                  )Income (loss) per
      share:Basic
                  
                  $
                  0.15
                  
                  
                  $
                  (0.06
                  )Diluted
                  
                  $
                  0.15
                  
                  
                  $
                  (0.06
                  )Weighted average shares
      outstanding:Basic
                  
                  
                  12,320
                  
                  
                  
                  12,281Diluted
                  
                  
                  12,403
                  
                  
                  
                  12,281
 See notes
to condensed financial statements.
  5
  Financial
Statements-Continued
 
 
 INNOTRAC
CORPORATION
 CONDENSED
STATEMENTS OF CASH FLOWS
 For
the Six Months Ended June 30, 2008 and 2007
 (in
thousands)
  Six Months Ended June
      30,2008
                  
                  
                  2007(unaudited)
                  
                  
                  (unaudited)Cash flows from operating
      activities:Net income
      (loss)
                  
                  $
                  1,857
                  
                  
                  $
                  (749
                  )Adjustments to reconcile net
      income (loss) to net cash provided byoperating
      activities:Depreciation and
      amortization
                  
                  
                  2,072
                  
                  
                  
                  2,602Provision for bad
      debts
                  
                  
                  (50
                  )
                  
                  
                  (21
                  )Stock compensation expense-stock
      options.........
                  
                  
                  46
                  
                  
                  
                  51Stock compensation
      expense-restricted stock......
                  
                  
                  37
                  
                  
                  
                  -Stock issued to settle employee
      stock bonus
                  
                  
                  -
                  
                  
                  
                  111Changes in operating assets and
      liabilities:Decrease in accounts receivable,
      gross
                  
                  
                  6,798
                  
                  
                  
                  2,896(Increase) decrease in
      inventory
                  
                  
                  (223
                  )
                  
                  
                  645Increase in prepaid expenses and
      other
                  
                  
                  (407
                  )
                  
                  
                  (329
                  )Decrease in accounts
      payable
                  
                  
                  (7,756
                  )
                  
                  
                  (1,422
                  )Decrease in accrued expenses and
      other
                  
                  
                  (750
                  )
                  
                  
                  (1,124
                  )Net cash provided by operating
      activities
                  
                  
                  1,624
                  
                  
                  
                  2,660Cash flows from investing
      activity:Capital
      expenditures
                  
                  
                  (1,412
                  )
                  
                  
                  (2,737
                  )Installment payment on previous
      acquisition of business
                  
                  
                  -
                  
                  
                  
                  (800
                  )Net cash used in investing
      activities
                  
                  
                  (1,412
                  )
                  
                  
                  (3,537
                  )Cash flows from financing
      activities:Net (repayments)
      borrowings under line of credit
                  
                  
                  (948
                  )
                  
                  
                  418Loan commitment
      fees
                  
                  
                  -
                  
                  
                  
                  (10
                  )Net cash (used in) provided by
      financing activities
                  
                  
                  (948
                  )
                  
                  
                  408Net decrease in cash and cash
      equivalents
                  
                  
                  (736
                  )
                  
                  
                  (469
                  )Cash and cash equivalents,
      beginning of period
                  
                  
                  1,079
                  
                  
                  
                  1,014Cash and cash equivalents, end of
      period
                  
                  $
                  343
                  
                  
                  $
                  545Supplemental cash flow
      disclosures:Cash paid for
      interest
                  
                  $
                  381
                  
                  
                  $
                  351
 See notes
to condensed financial statements.
 
 6
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 
 1.            
SIGNIFICANT ACCOUNTING
POLICIES
 
 The
accounting policies followed for quarterly financial reporting are the same as
those disclosed in the Notes to Financial Statements included in the Company’s
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2007.  Certain of the Company’s more
significant accounting policies are as follows:
 
 Accounting
Estimates.The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures 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 from those estimates.
 
 Goodwill and Other
Acquired Intangibles.Goodwillrepresents the cost of an acquired
enterprise in excess of the fair market value of the net tangible and
identifiable intangible assets acquired.  The Company tests goodwill
annually for impairment as of January 1 or sooner if circumstances
indicate.
 
 Impairment of Long-Lived
Assets.  The Company reviews long-lived assets and certain
intangible assets for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment
would be measured based on a projected cash flow model.  If the
projected undiscounted cash flows for the asset are not in excess of the
carrying value of the related asset, the impairment would be determined based
upon the excess of the carrying value of the asset over the projected discounted
cash flows for the asset.
 
 Accounting for Income
Taxes.Innotrac utilizes the liability method of accounting
for income taxes.  Under the liability method, deferred taxes are
determined based on the difference between the financial and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance was recorded against
the net deferred tax asset as of December 31, 2007 and June 30, 2008 (see Note
4).
  Revenue
Recognition.Innotrac derives its revenue primarily
from two sources: (1) fulfillment operations and (2) the delivery ofcall centerservicesintegrated with our fulfillment
operations.Innotrac's fulfillment services
operations recordrevenueat the conclusion ofthe material selection, packaging and
shipping process.The shipping process is considered
complete after transfer to an independent freight carrier and receipt of a bill
of lading or shipping manifest from that carrier.Innotrac'scall centerservice revenueisrecognizedaccording to written pricing agreements
based onthenumber of calls, minutes or hourly rateswhen those calls and time rated services
occur.All other revenues are
recognized as services are rendered.
  Stock-Based Compensation
Plans.In December
2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” which
revises SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized as compensation expense in the financial
statements based on their fair values.  That expense will be
recognized over the period during which an employee is required to provide
services in exchange for the award, known as the requisite service period
(usually the vesting period).  The Company adopted SFAS No. 123(R)
effective January 1, 2006 using the Modified Prospective Application
Method.  Under this method, SFAS 123(R) applies to new awards and to
awards modified, repurchased or cancelled after the effective
date.  Additionally, compensation expense for the portion of awards
for which the requisite service has not been rendered that are outstanding as of
the required effective date shall be recognized as the requisite service is
performed on or after the required effective date.  Under the
requirements of SFAS No. 123(R) the Company recorded $25,000 and $31,000 in
compensation expense for the three months ended June 30, 2008 and 2007,
respectively.  For the six months ended June 30, the Company recorded
$46,000 and $51,000 in 2008 and 2007, respectively.  As of June
30, 2008, approximately $66,000 of unrecognized compensation expense related to
non-vested stock options is expected to be recognized over the following 34
months.  In addition, on April, 16, 2007, 265,956 restricted shares
were issued under the terms provided in the Executive Retention Plan, which plan
was approved by the Board of Directors in 2005 with the restricted shares issued
from the shares available under the 2000 Stock Option and Incentive Award
Plan.  In accordance with SFAS No. 123(R) the market value of the
265,956 shares was determined at the date of grant to be $750,000 and is
being amortized using the straight-line method over the 10 year maximum vesting
period defined in the Executive Retention Plan.  During the three and
six months ended June 30, 2008, the Company recorded $19,000 and $37,000,
respectively, in compensation expense related to the issuance of the restricted
stock.
 
 7
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 The fair
value of each option was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
 
 Six
      months ended June 30,2008
                
                2007Risk-free
      interest rate
                4.1%
                
                5.1%Expected
      dividend yield
                0%
                
                0%Expected
      lives
                2.3
      Years
                
                2.1
      YearsExpected
      volatility
                75.9%
                
                71.7%
  Fair Value Measurements. In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures
about fair value measurements. SFAS No. 157 was effective for fiscal
years beginning after November 15, 2007, with earlier application
encouraged. There was no impact on the Company’s financial statements upon
adoption on January 1, 2008.
 
 Effective
January 1, 2008 on a prospective basis, we determined the fair values of certain
financial instruments based on the fair value hierarchy established in SFAS No.
157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value.
 
 Level 1:
quoted price (unadjusted) in active markets for identical assets
 
 Level 2:
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
instrument
 
 Level 3:
inputs to the valuation methodology are unobservable for the asset or
liability
 
 SFAS No.
157 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
 
 8
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 To
measure fair value, we obtain statements of amounts outstanding for our debt
instruments since our debt instruments consist of a revolving credit line and a
term note which mature within one year of June 30, 2008.
  We did
not have any assets or liabilities measured at fair value on a recurring basis
using quoted market prices in active markets (Level 1), significant other
observable inputs (Level 2) or significant unobservable inputs (Level 3) during
the period.
 
 Assets
and Liabilities Recorded at Fair Value on a Non-recurring Basis
 
 As
allowed under FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, as of
January 1, 2008, we have elected not to fully adopt SFAS No. 157 and are
deferring adoption for certain non-financial assets and liabilities until
January 1, 2009.  We are evaluating the effect, if any, of the full
adoption of SFAS No. 157 for certain non-financial assets and
liabilities.
 
 
 2.            
FINANCING
OBLIGATIONS
 
 The
Company has a revolving credit facility with Wachovia Bank, which has a maximum
borrowing limit of $15.0 million.  The revolving credit facility is
used to fund the Company’s capital expenditures, operational working capital and
seasonal working capital needs.  At June 30, 2008 the Company also had
a $5.0 million second lien loan outstanding to a credit management
company.  The specific terms of the $5.0 million second lien loan are
more fully described below.  The combined amount outstanding at June
30, 2008 under these two financing obligations was $10.2 million.
 
 The
revolving bank credit agreement matures in March 2009 and has a maximum
borrowing limit of $15.0 million.  Although the maximum borrowing
limit is $15.0 million, the credit facility limits borrowings to a specified
percentage of eligible accounts receivable and inventory, which totaled $17.1
million at June 30, 2008.  As provided for in the second waiver
agreement dated April 16, 2007, our Chairman and Chief Executive Officer, Scott
Dorfman, has granted to the bank a security interest in $2.0 million of his
personal securities, which after application of a 75% factor, results in $1.5
million of additional collateral to support the borrowing limit of $15.0 million
under the credit facility.  Additionally, the terms of the credit
facility provide that the amount borrowed and outstanding at any time combined
with letters of credit outstanding be subtracted from the total collateral
adjusted for certain reserves to arrive at an amount of unused availability to
borrow under the line of credit.  The total collateral under the
credit facility at June 30, 2008 amounted to $18.6 million.  The
amount borrowed and outstanding including letters of credit outstanding at June
30, 2008 amounted to $6.9 million.  As a result, the Company had $8.1
million of borrowing availability under the $15.0 million revolving credit line
at June 30, 2008.
 
 The
Company has granted a security interest in all of its assets to the lender as
collateral under this revolving credit agreement.  The revolving
credit agreement contains a restrictive fixed charge coverage
ratio.  The provisions of the revolving credit agreement require that
the Company maintain a lockbox arrangement with the lender, and allows the
lender to declare any outstanding borrowing amounts to be immediately due and
payable as a result of noncompliance with any of the
covenants.  Accordingly, in the event of noncompliance, these amounts
could be accelerated.  The fixed charge coverage ratio requires the
Company to maintain a minimum twelve month trailing fixed charge coverage ratio
of  1.05 to 1.0 from June through September 2008 and 1.1 to 1.0 from
October 2008 through the maturity of the facility in March 2009.  The
Company was in compliance with the terms and conditions of the revolving credit
agreement, as amended, and the Second Lien Credit Agreement as of June 30,
2008.
 
 9
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 On
September 28, 2007 the Company and the bank entered into the fifth amendment to
its revolving bank credit facility entitled “Fifth Amendment Agreement” (the
“Fifth Amendment”) whereby the bank agreed to the Company’s entering into a debt
obligation described as the “Second Lien Credit Agreement” which is subordinated
to the bank’s position as senior lender to the Company.  The Second
Lien Credit Agreement was entered into with Chatham Credit Management III, LLC,
as agent for Chatham Investment Fund III, LLC, Chatham Investment Fund QP III,
LLC, and certain other lenders party thereto from time to time, and Chatham
Credit Management III, LLC, as administrative agent (Chatham Credit Management
III, LLC, Chatham Investment Fund III, LLC, Chatham Investment Fund QP III, LLC,
and Chatham Credit Management III, LLC are collectively referred to as
“Chatham”).  The proceeds of the $5.0 million Second Lien Credit
Agreement were needed to fund fourth quarter 2007 capital expenditure projects
and provide seasonal working capital needs in the same quarter resulting from
high revenue growth through the nine months ended September 30,
2007.  We anticipate repaying the term loan, from cash generated from
operations, before September 28, 2008, the one year anniversary of its
inception.
 
 The
Second Lien Credit Facility has a one year term with the option to renew for
five months resulting in an ultimate maturity date of March 1, 2009, the same
date on which the revolving bank credit agreement, described above,
matures.  If the option to renew for five months is exercised, the
Company will be obligated to pay a $62,500 success fee which amount is five
twelfths of the success fee paid when the loan was entered into on September 28,
2007.  There are no scheduled principal payments before maturity under
the Second Lien Credit Facility.  Borrowings under the Second Lien
Credit Facility bear interest at an annual rate equal to the greater of (a)
LIBOR or (b) 5.75% plus 9.25% for a rate of 15%.  Interest on
borrowings under the Second Lien Credit Facility which accrued from inception to
December 31, 2007 was paid on January 2, 2008.  Interest accruing
during the period from January 1, 2008 through June 30, 2008 was, according to
the terms of the Second Lien Credit Facility paid on January 1, 2008 when the
Company signed an additional note for the value of the interest for that period
of $379,000.    The additional note will be repaid in
accordance with the terms of the Second Lien Credit Agreement.  In the
event of default, all obligations will bear interest at the otherwise applicable
rate plus 2.00% per annum until the event of default is cured.
 
 The
Company’s obligations under the Second Lien Credit Facility are secured by a
second priority security interest in, and a second priority lien on,
substantially all of the assets and property of the Company.  The
Company’s obligations under the Second Lien Credit Facility are partially
guaranteed by Scott Dorfman, the Company’s Chairman, President, and Chief
Executive Officer, pursuant to a Limited Guaranty Agreement between Mr. Dorfman
and Chatham Credit Management III, LLC.  Mr. Dorfman has also pledged
as partial collateral for the loans under the Second Lien Credit Facility,
pursuant to a Guarantor Pledge Agreement between Mr. Dorfman and Chatham Credit
Management III, LLC, the membership interests he owns in Chatham Investment Fund
II, LLC and Chatham Investment Fund III, LLC (collectively, the “Chatham
Funds”).  Mr. Dorfman’s guarantee is limited to the value of this
Chatham Funds collateral.  Chatham Investment Fund III, LLC is one of
the lenders under the Second Lien Credit Agreement, and both of the Chatham
Funds are affiliated with the other Chatham entities acting as agents and
lenders under the Second Lien Credit Agreement.  Mr. Dorfman
previously served on the advisory board of Chatham Investment Fund II,
LLC.
 
 The
Second Lien Credit Agreement contains a fixed charge coverage ratio covenant
with the same ratio requirements as those included in the revolving credit
agreement with Wachovia.  The Second Lien Credit Agreement also limits
the amount of capital expenditures the Company may make in any fiscal year
beginning in the fiscal year 2008 to $4,500,000.  The Second Lien
Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default (and, as appropriate, grace
periods).  Simultaneous with the execution of the Fifth Amendment and
the Second Lien Credit Agreement on September 28, 2007, the bank and Chatham
entered into an intercreditor agreement defining the relative priority of
security interests and other subordination terms.
 
 10
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 Interest
on borrowings under the revolving credit agreement is payable monthly at rates
equal to the prime rate, or at the Company’s option, LIBOR plus up to 200 basis
points; however so long as the fixed charge ratio is less than 1.00 to 1.00, the
interest rate will be equal to the prime rate plus 1% or at the Company’s
option, LIBOR plus 285 basis points.  Interest on borrowings under the
Second Lien Credit Agreement is accrued on a monthly basis equal to the greater
of (a) LIBOR or (b) 5.75% plus 9.25% for a rate of 15% of the principal balance
plus accrued interest payable outstanding on the $5.0 million loan.
 
 For the
three months ended June 30, 2008, we recorded interest expense of $57,000 on the
revolving credit agreement at a weighted average interest rate of 4.05% and
$190,000 of interest expense on the Second Lien Credit Agreement at a constant
interest rate for the three months of 15.0%, excluding the amortization of loan
costs of $104,000 for the three months ended June 30, 2008.  For the
three months ended June 30, 2007, we recorded interest expense of $152,000 at a
weighted average rate of 7.73% on the revolving credit agreement and did not
have any outstanding balance or interest expense for the Second Lien Credit
Agreement.  Our weighted average interest rate for the three months
ended June 30, 2008, including amounts borrowed under both the revolving credit
agreement and the Second Lien Credit Agreement, was 9.16%.  At June
30, 2008, the rate of interest being charged on the revolving credit agreement
and the Second Lien Credit Agreement was 3.96% and 15.0%,
respectively.  The Company also incurred unused revolving credit
facility fees of approximately $4,000 and $10,000 for the three months ended
June 30, 2008 and 2007, respectively.
 
 For the
six months ended June 30, 2008, we recorded interest expense of $135,000 on the
revolving credit agreement at a weighted average interest rate of 4.76% and
$379,000 of interest expense on the Second Lien Credit Agreement at a constant
interest rate for the six months of 15.0%, excluding the amortization of loan
costs of $208,000.  For the six months ended June 30, 2007, we
recorded interest expense of $310,000 at a weighted average rate of 7.67% on the
revolving credit agreement and did not have any outstanding balance or interest
expense for the Second Lien Credit Agreement.  Our weighted average
interest rate for the six months ended June 30, 2008, including amounts borrowed
under both the revolving credit agreement and the Second Lien Credit Agreement,
was 9.54%.  The Company also incurred unused revolving credit facility
fees of approximately $9,000 and $20,000 for the six months ended June 30, 2008
and 2007 respectively.
 
 Based on
current projections, the Company believes that it will be able to comply with
the terms and conditions of the revolving credit agreement, as amended, and the
Second Lien Credit Agreement.
  11
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
  3.            
EARNINGS PER
SHARE
  The
following table shows the shares (in thousands) used in computing diluted
earnings per share (“EPS”) in accordance with Statement of Financial Accounting
Standards No. 128, “Earnings per Share”:
 
 Three
      Months
                  Ended
      June 30,
                
                
                Six
      Months
                  Ended
      June 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Diluted
      earnings per share:Weighted
      average shares outstanding
                
                
                12,320
                
                
                
                12,282
                
                
                
                12,320
                
                
                
                12,281Employee
      and director stock options and unvested restricted shares
                
                
                98
                
                
                
                1
                
                
                
                83
                
                
                
                -Weighted
      average shares assuming
                  dilution
                
                
                12,418
                
                
                
                12,283
                
                
                
                12,403
                
                
                
                12,281
 
 Options
outstanding to purchase 945,000 shares of the Company’s common stock for the
three months ended June 30, 2008 and 1.0 million shares for six months ended
June 30, 2008 were not included in diluted earnings per share because their
effect was anti-dilutive. Options outstanding to purchase 1.9 million shares for
both the three and six months ended June 30, 2007 were not included in the
computation of diluted EPS because their effect was anti-dilutive.  On
April 16, 2007, 265,956 restricted shares were issued, but not vested, under the
terms provided in the Executive Retention Plan which plan was approved by the
Board of Directors in 2005 with the restricted shares issued from the shares
available under the 2000 Stock Option and Incentive Award Plan.  These
restricted shares are included in  the fully diluted earnings per
share calculation.
  4.            
INCOME
TAXES
  Innotrac
utilizes the liability method of accounting for income taxes.  Under
the liability method, deferred taxes are determined based on the difference
between the financial and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse.  A valuation allowance is recorded against deferred tax
assets if the Company considers it is more likely than not that deferred tax
assets will not be realized.  Innotrac’s gross deferred tax asset as
of June 30, 2008 and December 31, 2007 was approximately $18.7 million and $18.9
million, respectively.  This deferred tax asset was generated
primarily by net operating loss carryforwards created mainly by a special charge
of $34.3 million recorded in 2000 and the net losses generated in 2002, 2003,
2005 and 2006.  Innotrac has a net operating loss carryforward which
expires between 2022 and 2027 and totaled $49.1 million at December 31,
2007.
 
 Innotrac’s
ability to generate the expected amounts of taxable income from future
operations is dependent upon general economic conditions, competitive pressures
on sales and margins and other factors beyond management’s
control.  These factors, combined with losses in recent years, create
uncertainty about the ultimate realization of the gross deferred tax asset in
future years.  Therefore, a valuation allowance of approximately $13.1
million and $13.8 million has been recorded as of June 30, 2008 and December 31,
2007, respectively.  Income taxes associated with future earnings will
be offset by the utilization of the net operating loss carryforward resulting in
a reduction in the valuation allowance.  For the three and six months
ended June 30, 2008, the deferred tax expense of $387,000 and $724,000,
respectively, was offset by a corresponding decrease of the deferred tax asset
valuation allowance.  When, and if, the Company can return to
consistent profitability, and management determines that it is likely it will be
able to utilize the net operating losses prior to their expiration, then the
valuation allowance can be reduced or eliminated.
 
 12
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109(“FIN 48”), which
clarifies the accounting for uncertainty intax positions. This
Interpretation requires that the Company determine whether it is more likely
than not that a tax position will be sustained upon audit, based on the
technical merits of the position.  A tax position that meets the more
likely than not recognition threshold is measured to determine the amount of
benefit to recognize in the financial statements.  The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. The Company adopted FIN 48 effective
January 1, 2007.  The Company has a gross deferred tax asset of
approximately $18.9 million at December 31, 2007, which did not change
significantly during the six months ended June 30, 2008.  As discussed
in Note 6 to the financial statements in the 2007 Form 10-K, the Company has a
valuation allowance against the full amount of its deferred tax
asset.   The Company currently provides a valuation allowance
against deferred tax assets when it is more likely than not that deferred tax
assets will not be realized.  The Company has recognized tax benefits
from all tax positions we have taken, and there has been no adjustment to any
net operating loss carryforwards as a result of FIN 48 and there are no
unrecognized tax benefits and no related FIN 48 tax liabilities at June 30,
2008.  Therefore, the application of FIN 48 had no material impact on
the financial statements.
 
 The
Company generally recognizes interest and/or penalties related to income tax
matters in general and administrative expenses.  As of June 30, 2008,
we have no accrued interest or penalties related to uncertain tax
positions.
  5.            
COMMITMENTS
AND CONTINGENCIES
  Legal
Proceedings.The
Company issubject to
various legal proceedings and claims that arise in the ordinary course of
business.  There are no material pending legal proceedingsto which the Company is a
party.
 
 Employment
Commitment.  In June 1999, in conjunction with the opening of a
new call center facility, the Company entered into an employment commitment
agreement with the City of Pueblo, Colorado, whereby the Company received cash
incentives of $968,000.  These funds were accounted for as a reduction
in the basis of the assets acquired.  In return for this
consideration, the Company is obligated to employ a minimum number of full-time
employees at its Pueblo facility, measured on a quarterly basis.  This
obligation, which became effective June 2002, will continue through June
2009.  In the event that the number of full-time employees fails to
meet the minimum requirement, the Company will incur a quarterly penalty of
$96.30 for each employee less than the minimum required
amount.  During the three and six months ended June 30, 2008 and 2007,
the Company did not meet the minimum employee requirements of 359 full-time
employees, as measured on a quarterly basis, incurring a penalty of
approximately $4,000 and $2,000 for the three months ended June 30, 2008 and
2007, respectively.  The Company incurred a penalty of approximately
$4,000 and $7,000 for the six months ended June 30, 2008 and 2007
respectively.
  6.            
RELATED
PARTY TRANSACTION
  In early
2004, the Company learned that certain trading activity of the IPOF Fund L.P.,
an owner of more than 5% of the outstanding Common Stock, may have violated the
short-swing profit rules under Section 16(b) of the Securities Exchange Act of
1934.  The Company promptly conducted an investigation of the
matter.  IPOF Fund L.P. and its affiliates entered into a settlement
agreement with the Company on March 4, 2004 regarding the potential Section
16(b) liability issues that provided for the Company’s recovery of $301,957 no
later than March 3, 2006.  In December 2005, the United States
District Court in Cleveland, Ohio appointed a receiver to identify and
administer the assets of the IPOF Fund, L.P. and its general partner, David
Dadante.  The Company informed the IPOF receiver of such agreement,
but the likelihood of recovering such amount from the receiver is
doubtful.  The Company has not recorded any estimated receivable from
this settlement.  Additionally, the Federal Court has prohibited the
financial institutions holding Company stock owned by the IPOF Fund and Mr.
Dadante in margin accounts from selling any of these shares through September 5,
2008.  The court has permitted open market sales by the receiver as he
may in his sole discretion determine to be consistent with his duty to maximize
the value of the assets of IPOF Fund, and as warranted by market
conditions.  The receiver has indicated to the Company that he does
not intend to direct any open market sales during this period except in
circumstances in which he believes that there would be no material adverse
impact on the market price for the Company’s shares.
 
 13
 INNOTRAC
CORPORATION
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 June
30, 2008 and 2007
 (Unaudited)
 Pursuant
to the Third Amendment to the Company’s revolving bank credit agreement, Scott
Dorfman, the Company’s Chairman, President and CEO has granted Wachovia Bank a
security interest in certain personal assets to be treated as additional
collateral under the credit agreement until the earlier of (x) April 30, 2008
and (y) the date all deferred payments in connection with the ClientLogic
acquisition are paid in full, so long as no default exists and the fixed charge
coverage ratio for the most recent period is equal to or greater than 1.05 to
1.00.  As of June 30, 2008, the Company still included the
personal assets as collateral.
 
 On
September 28, 2007, the Company entered into a Second Lien Credit Agreement in
the amount of $5.0 million with Chatham Credit Management III, LLC
(“Chatham”).  Scott Dorfman is a private investor in various funds
managed by Chatham.  The Loan is subordinated to the revolving credit
facility held with Wachovia Bank, N.A.  Additionally, the Second Lien
Credit agreement is partially guaranteed by Mr. Dorfman in an amount up to the
value of Mr. Dorfman’s investment in the Chatham Funds.  The terms of
the loan are more fully described in the Liquidity and Capital Resources section
of this Quarterly Report on Form 10-Q.
 
 14
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The
following discussion may contain certain forward-looking statements that are
subject to conditions that are beyond the control of the
Company.  Actual results may differ materially from those expressed or
implied by such forward-looking statements.  Factors that could cause
actual results to differ include, but are not limited to, the Company’s reliance
on a small number of major clients; risks associated with the terms and pricing
of our contracts; reliance on the telecommunications and direct marketing
industries and the effect on the Company of the downturns, consolidation and
changes in those industries in the past three years; risks associated with the
fluctuations in volumes from our clients; risks associated with upgrading,
customizing, migrating or supporting existing technology; risks associated with
competition; and other factors discussed in more detail under “Item 1A – Risk
Factors” in our Annual Report on Form 10-K.  We undertake no
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
 
 Overview
 
 Innotrac
Corporation (“Innotrac” or the “Company”), founded in 1984 and headquartered in
Atlanta, Georgia, is a full-service fulfillment and logistics provider serving
enterprise clients and world-class brands.  The Company employs
sophisticated order processing and warehouse management technology and operates
eight fulfillment centers and two call centers in seven cities spanning all time
zones across the continental United States.
 
 We
receive most of our clients’ orders either through inbound call center services,
electronic data interchange (“EDI”) or the Internet.  On a same-day
basis, depending on product availability, the Company picks, packs, verifies and
ships the item, tracks inventory levels through an automated, integrated
perpetual inventory system, warehouses data and handles customer support
inquiries.  Our fulfillment and customer support services interrelate
and are sold as a package, however they are individually priced.  Our
clients may utilize our fulfillment services, our customer support services, or
both, depending on their individual needs.
 
 Our core
service offerings include the following:
 
 Fulfillment
Services:
 ·      sophisticated
warehouse management technology
 ·      automated
shipping solutions
 ·      real-time
inventory tracking and order status
 ·      purchasing
and inventory management
 ·      channel
development
 ·      zone
skipping for shipment cost reduction
 ·      product
sourcing and procurement
 ·      packaging
solutions
 ·      back-order
management; and
 ·      returns
management.
 
 Customer
Support Services:
 ·      inbound
call center services
 ·      technical
support and order status
 ·      returns
and refunds processing
 ·      call
centers integrated into fulfillment platform
 ·      cross-sell/up-sell
services
 ·      collaborative
chat; and
 ·      intuitive
e-mail response.
 
 15
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The
Company is primarily focused on five diverse lines of business, or industry
verticals.  This is a result of a significant effort made by the
Company to diversify both its industry concentration and client base over the
past several years.
 
 Business
Mix
 
 Three
      Months Ended
                  June
      30,
                
                
                Six
      Months Ended
                  June
      30,Business
      Line/Vertical
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Direct
      Marketing
                
                
                35.8
                %
                
                
                30.2
                %
                
                
                36.4
                %
                
                
                31.0
                %eCommerce
      / Direct to Consumer
                
                
                36.3
                
                
                
                35.3
                
                
                
                35.4
                
                
                
                33.5Modems
                
                
                18.6
                
                
                
                17.8
                
                
                
                18.4
                
                
                
                17.8Business-to-Business
      (“B2B”)
                
                
                5.5
                
                
                
                11.1
                
                
                
                6.2
                
                
                
                12.0Telecommunications
                
                
                3.8
                
                
                
                5.6
                
                
                
                3.6
                
                
                
                5.7100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
  eCommerce
/ Direct-to-Consumer and Direct Marketing.  The
Company provides a variety of fulfillment and customer support services for a
significant number of eCommerce, direct–to-consumer and direct marketing
clients, including such companies as Target.com, a Division of Target
Corporation, Ann Taylor Retail, Inc., Smith & Hawken, Ltd., Porsche Cars
North America, Inc. and Thane International.  We take orders for
our  eCommerce and direct marketing clients via the Internet, through
customer service representatives at our Pueblo and Reno call centers or through
direct electronic transmission from our clients.  The orders are
processed through one of our order management systems and then transmitted to
one of our eight fulfillment centers located across the country and are shipped
to the end consumer or retail store location, as applicable, typically within 24
hours of when the order is received.  Inventory for our eCommerce and
direct marketing clients is held on a consignment basis, with minor exceptions,
and includes items such as shoes, dresses, accessories, books, outdoor
furniture, electronics, small appliances, home accessories, sporting goods and
toys.  Our revenues are sensitive to the number of orders and customer
service calls received.  Our client contracts do not guarantee
volumes.  We anticipate that the percentage of our total revenues
attributable to our eCommerce and direct marketing clients will increase during
the remainder of 2008 due to the projected growth rates of our clients’ business
in these verticals being greater than other verticals’ projected rates of
growth.
  Telecommunications and
Modems.  The Company has historically been a major provider of
fulfillment and customer support services to the telecommunications
industry.  In spite of a significant contraction and consolidation in
this industry in the past several years, the Company continues to provide
customer support services and fulfillment of consumer telephones and caller ID
equipment and Digital Subscriber Line Modems (“Modems”) for clients such as
AT&T, Inc. and Qwest Communications International, Inc. and their
customers.  The consolidation in the telecommunications industry
resulted in the acquisition of BellSouth by AT&T in December of
2006.  On November 6, 2007, AT&T notified us that it intended to
transition its fulfillment business in-house.  The transition date was
initially planned for the fourth quarter of 2008 but is now expected to occur
some time in 2009.  After that transition is complete, we project that
our telecommunications and modems customers may represent less than 5% of our
annual revenues.
 
 16
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Business-to-Business.  The
Company also provides fulfillment and customer support services for
business-to-business (“B2B”) clients, including Books Are Fun, Ltd. (a
subsidiary of Reader’s Digest), NAPA and The Walt Disney Company.
 
 Results
of Operations
 
 The
following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three and six months ended June 30, 2008 and
2007.  The data has been prepared on the same basis as the annual
financial statements.  In the opinion of management, it reflects
normal and recurring adjustments necessary for a fair presentation of the
information for the periods presented.  Operating results for any
period are not necessarily indicative of results for any future
period.
 
 The
financial information provided below has been rounded in order to simplify its
presentation.  However, the percentages below are calculated using the
detailed information contained in the condensed financial
statements.
 
 Three
      Months Ended
                  June
      30,
                
                
                Six
      Months Ended
                  June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Service
      revenues
                
                
                79.3
                %
                
                
                80.3
                %
                
                
                78.5
                %
                
                
                80.0
                %Freight
      revenues
                
                
                20.7
                
                
                
                19.7
                
                
                
                21.5
                
                
                
                20.0Total
      Revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of service revenues
                
                
                35.8
                
                
                
                36.8
                
                
                
                36.4
                
                
                
                37.1Cost
      of freight expense
                
                
                20.4
                
                
                
                19.5
                
                
                
                21.3
                
                
                
                19.8Selling,
      general and administrative expenses
                
                
                35.8
                
                
                
                38.3
                
                
                
                34.8
                
                
                
                39.2Depreciation
      and amortization
                
                
                3.4
                
                
                
                4.7
                
                
                
                3.3
                
                
                
                4.6Operating  income
      (loss)
                
                
                4.6
                
                
                
                0.7
                
                
                
                4.2
                
                
                
                (0.7
                )Other
      expense, net
                
                
                (1.2
                )
                
                
                (0.5
                )
                
                
                (1.2
                )
                
                
                (0.6
                )Income
      (loss) before income taxes
                
                
                3.4
                
                
                
                0.2
                
                
                
                3.0
                
                
                
                (1.3
                )Income
      tax benefit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net  income
      (loss)
                
                
                3.4
                %
                
                
                0.2
                %
                
                
                3.0
                %
                
                
                (1.3
                )%
  Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
 
 Service revenues.Net service revenuesincreased 3.9% to $23.4
million for the three months ended June 30, 2008 from $22.5 million for the
three months ended June 30, 2007.  This increase was primarily
attributable to a $1.6 million increase in our direct marketing vertical
resulting from the addition of several new clients and increased volume from
existing clients, a $661,000 increase in our  eCommerce /
direct-to-consumer vertical resulting from increased volume and improved pricing
from existing clients, a $484,000 increase in revenues from our DSL clients due
to improved pricing from existing clients, offset by a $1.4 million
decrease in revenues from our B2B vertical due to the loss of a customer and a
$465,000 reduction in revenue from our Telecom vertical resulting from decreased
volumes.
 
 17
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Freight Revenues.The
Company’s freight revenues increased 10.7% to $6.1 million for the three months
ended June 30, 2008 from $5.5 million for the three months ended June 30,
2007.  The increase in freight revenues of $558,000 is primarily
attributable to a $ 471,000 increase in our direct marketing vertical resulting
from the addition of new clients and increased volume from existing clients and
a $165,000 increase in revenue from our eCommerce / direct-to-consumer vertical
due to increased volume from an existing client.
 
 Cost of service
revenues.Cost
of service revenues increased 2.3% to $10.6 million for the three months ended
June 30, 2008, compared to $10.3 million for the three months ended June 30,
2007.  The cost of revenue increase was primarily due to the increase
in labor costs associated with the increase in service revenues.
 
 Freight
Expense.  The Company’s freight expense increased 10.0% to $6.0
million for the three months ended June 30, 2008 compared to $5.5 million for
the three months ended June 30, 2007 due to the increase in freight revenue for
the reasons listed above.
 
 Selling, General and Administrative
Expenses.S,G&A expenses for the three months ended June
30, 2008 decreased slightly to $10.6 million, or 35.8% of total revenues,
compared to $10.7 million, or 38.3% of total revenues, for the same period in
2007.  The decrease in S,G&A expenses as a percentage of revenue
in 2008 as compared to 2007 was primarily attributable to the overall increase
in revenue and our ability to manage our business growth while maintaining a
constant administrative overhead expense.
 
 Interest
Expense.Interest expense for the three months ended June 30,
2008 and June 30, 2007 was $353,000 and $162,000, respectively.  The
increase was related to the interest and amortization of loan costs for the
loans outstanding under the $5.0 million term loan which was not outstanding in
the second quarter of 2007, partially offset by a decrease in the amount
outstanding under the revolving credit agreement and a reduction in the weighted
average interest rate.
 
 Income Taxes.The Company’s
effective tax rate for the three months ended June 30, 2008 and 2007 was
0%.  At December 31, 2003, a valuation allowance was recorded against
the Company’s net deferred tax assets as losses in recent years created
uncertainty about the realization of tax benefits in future
years.  Income taxes associated with income for the three months ended
June 30, 2008 were offset by a corresponding decrease of the valuation allowance
resulting in an effective tax rate of 0% for the three months ended June 30,
2008.  Income taxes associated with the profit for the three months
ended June 30, 2007 were offset by a corresponding decrease of the valuation
allowance resulting in an effective tax rate of 0% for the three months ended
June 30, 2007.
 
 Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
 
 Service revenues.Net service revenuesincreased 9.5% to $48.9
million for the six months ended June 30, 2008 from $44.6 million for the six
months ended June 30, 2007.  This increase was primarily attributable
to a $3.4 million increase in our direct marketing vertical resulting from the
addition of several new clients and increased volume from existing clients, a
$2.7 million increase in our eCommerce vertical resulting from increased volume
and improved pricing from existing clients, a $1.5 million increase in revenues
from our DSL clients due to increased volumes and improved pricing from existing
clients, offset by a $2.6 million decrease in revenues from our B2B vertical due
to the loss of a customer and a $987,000 reduction in revenue from our Telecom
vertical resulting from decreased volumes.
 
 Freight Revenues.The
Company’s freight revenues increased 19.4% to $13.4 million for the six months
ended June 30, 2008 from $11.2 million for the six months ended June 30,
2007.  The increase in freight revenues of $2.2 million is primarily
attributable to a $1.9 million increase in our direct marketing vertical
resulting from the addition of new clients and increased volume from existing
clients and a $453,000 increase in revenue from our eCommerce /
direct-to-consumer vertical due to increased volume from an existing
client.
 
 18
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Cost of service
revenues.Cost
of service revenues increased 9.4% to $22.7 million for the six months ended
June 30, 2008, compared to $20.7 million for the six months ended June 30,
2007.  The cost of revenue increase was primarily due to the increase
in labor costs associated with the increase in service revenues.
 
 Freight
Expense.  The Company’s freight expense increased 20.3% to
$13.3 million for the six months ended June 30, 2008 compared to $11.0 million
for the six months ended June 30, 2007 due to the increase in freight
revenue for the reasons listed above.
 
 Selling, General and Administrative
Expenses.S,G&A expenses for the six months ended June 30,
2008 decreased slightly to $21.7 million, or 34.8% of total revenues, compared
to $21.9 million, or 39.2% of total revenues, for the same period in
2007.  The decrease in S,G&A expenses as a percentage of revenue
in 2008 as compared to 2007 was primarily attributable to the overall increase
in revenue and our ability to manage our business growth while maintaining a
constant administrative overhead expense.
 
 Interest
Expense.Interest expense for the six months ended June 30,
2008 and June 30, 2007 was $726,000 and $329,000, respectively.  The
increase was related to the interest and amortization of loan costs for the
loans outstanding under the $5.0 million term loan which was not outstanding in
the second quarter of 2007, partially offset by a decrease in the amount
outstanding under the revolving credit agreement and a reduction in the weighted
average interest rate.
 
 Income Taxes.The Company’s
effective tax rate for the six months ended June 30, 2008 and 2007 was
0%.  At December 31, 2003, a valuation allowance was recorded against
the Company’s net deferred tax assets as losses in recent years created
uncertainty about the realization of tax benefits in future
years.  Income taxes associated with income for the six months ended
June 30, 2008 were offset by a corresponding decrease of the valuation allowance
resulting in an effective tax rate of 0% for the six months ended June 30,
2008.  Income taxes associated with the loss for the six months ended
June 30, 2007 were offset by a corresponding increase of the valuation allowance
resulting in an effective tax rate of 0% for the six months ended June 30,
2007.
 
 Liquidity
and Capital Resources
 
 The
Company has a revolving credit facility with Wachovia Bank, which has a maximum
borrowing limit of $15.0 million.  The revolving credit facility is
used to fund the Company’s capital expenditures, operational working capital and
seasonal working capital needs.  At June 30, 2008 the Company also had
a $5.0 million second lien loan outstanding to a credit management
company.  The specific terms of the $5.0 million second lien loan are
more fully described below.  The combined amount outstanding at June
30, 2008 under these two financing obligations was $10.2 million.
 
 The
Company had cash and cash equivalents of approximately $343,000 at June 30, 2008
as compared to $1.1 million at December 31, 2007.  The reduced amount
of cash and cash equivalents at June 30, 2008 as compared to December 31, 2007
is the result of our consolidation of cash accounts under our revolving credit
line at June 30, 2008 thereby lowering our loan outstanding and increasing our
availability under the credit line.  Additionally, the Company
decreased its borrowings outstanding under its revolving credit facility
(discussed below) to $5.2 million at June 30, 2008, as compared to $6.2 million
at December 31, 2007.  This reduction resulted from the use of funds
provided by a reduction in Accounts Receivable of $6.8 million during the six
months ended June 30, 2008 resulting from improved collection efforts during the
second quarter of 2008.  The Company generated positive cash flow from
operations of $1.6 million during the six months ended June 30, 2008, as
compared to $2.7 million in the same period in 2007.  The $1.0 million
decrease in cash flow generated from operations was mostly due to the combined
result of generating a net profit of $1.9 million compared to a net loss of
$749,000 offset by the net effect of all working capital accounts using $2.3
million of cash during the six months ended June 30, 2008 compared with the net
effect of all working capital accounts providing $666,000 of cash during the six
months ended June 30, 2007.
 
 19
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The
revolving bank credit agreement matures in March 2009 and has a maximum
borrowing limit of $15.0 million.  Although the maximum borrowing
limit is $15.0 million, the credit facility limits borrowings to a specified
percentage of eligible accounts receivable and inventory, which totaled $17.1
million at June 30, 2008.  As provided for in the second waiver
agreement dated April 16, 2007, our Chairman and Chief Executive Officer, Scott
Dorfman, has granted to the bank a security interest in $2.0 million of his
personal securities, which after application of a 75% factor, results in $1.5
million of additional collateral to support the borrowing limit of $15.0 million
under the credit facility.  Additionally, the terms of the credit
facility provide that the amount borrowed and outstanding at any time combined
with letters of credit outstanding be subtracted from the total collateral
adjusted for certain reserves to arrive at an amount of unused availability to
borrow under the line of credit.    The total collateral
under the credit facility at June 30, 2008 amounted to $18.6
million.  The amount borrowed and outstanding including letters of
credit outstanding at June 30, 2008 amounted to $6.9 million.  As a
result, the Company had $8.1 million of borrowing availability under the $15.0
million revolving credit line at June 30, 2008.
 
 The
Company has granted a security interest in all of its assets to the lender as
collateral under this revolving credit agreement.  The revolving
credit agreement contains a restrictive fixed charge coverage
ratio.  The provisions of the revolving credit agreement require that
the Company maintain a lockbox arrangement with the lender, and allows the
lender to declare any outstanding borrowing amounts to be immediately due and
payable as a result of noncompliance with any of the
covenants.  Accordingly, in the event of noncompliance, these amounts
could be accelerated.  The fixed charge coverage ratio requires the
Company to maintain a minimum twelve month trailing fixed charge coverage ratio
of 1.05 to 1.0 from June through September 2008 and 1.1 to 1.0 from October 2008
through the maturity of the facility in March 2009.  The Company was
in compliance with the terms and conditions of the revolving credit agreement,
as amended, and the Second Lien Credit Agreement as of June 30,
2008.
 
 On
September 28, 2007 the Company and the bank entered into the fifth amendment to
its revolving bank credit facility entitled “Fifth Amendment Agreement” (the
“Fifth Amendment”) whereby the bank agreed to the Company’s entering into a debt
obligation described as the “Second Lien Credit Agreement” which is subordinated
to the bank’s position as senior lender to the Company.  The Second
Lien Credit Agreement was entered into with Chatham Credit Management III, LLC,
as agent for Chatham Investment Fund III, LLC, Chatham Investment Fund QP III,
LLC, and certain other lenders party thereto from time to time, and Chatham
Credit Management III, LLC, as administrative agent (Chatham Credit Management
III, LLC, Chatham Investment Fund III, LLC, Chatham Investment Fund QP III, LLC,
and Chatham Credit Management III, LLC are collectively referred to as
“Chatham”).  The proceeds of the $5.0 million Second Lien Credit
Agreement were needed to fund fourth quarter 2007 capital expenditure projects
and provide seasonal working capital needs in the same quarter resulting from
high revenue growth through the nine months ended September 30,
2007.  We anticipate repaying the term loan, from cash generated from
operations, before September 28, 2008, the one year anniversary of its
inception.
 
 20
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The
Second Lien Credit Facility has a one year term with the option to renew for
five months resulting in an ultimate maturity date of March 1, 2009, the same
date on which the revolving bank credit agreement, described above,
matures.  There are no scheduled principal payments before maturity
under the Second Lien Credit Facility.  If the option to renew for
five months is exercised, the Company will be obligated to pay a $62,500 success
fee which amount is five twelfths of the success fee paid when the loan was
entered into on September 28, 2007.  There are no scheduled principal
payments before maturity under the Second Lien Credit
Facility.  Borrowings under the Second Lien Credit Facility bear
interest at an annual rate equal to the greater of (a) LIBOR or (b) 5.75% plus
9.25% for a rate of 15%.  Interest on borrowings under the Second Lien
Credit Facility which accrued from inception to December 31, 2007 was paid on
January 2, 2008.  Interest accruing during the period from January 1,
2008 through June 30, 2008 was, according to the terms of the Second Lien Credit
Facility paid on January 1, 2008 when the Company signed an additional note for
the value of the interest for that period of $379,000.  The additional
note will be repaid in accordance with the terms of the Second Lien Credit
Agreement.  In the event of default, all obligations will bear
interest at the otherwise applicable rate plus 2.00% per annum until the event
of default is cured.
 
 The
Company’s obligations under the Second Lien Credit Facility are secured by a
second priority security interest in, and a second priority lien on,
substantially all of the assets and property of the Company.  The
Company’s obligations under the Second Lien Credit Facility are partially
guaranteed by Scott Dorfman, the Company’s Chairman, President, and Chief
Executive Officer, pursuant to a Limited Guaranty Agreement between Mr. Dorfman
and Chatham Credit Management III, LLC.  Mr. Dorfman has also pledged
as partial collateral for the loans under the Second Lien Credit Facility,
pursuant to a Guarantor Pledge Agreement between Mr. Dorfman and Chatham Credit
Management III, LLC, the membership interests he owns in Chatham Investment Fund
II, LLC and Chatham Investment Fund III, LLC (collectively, the “Chatham
Funds”).  Mr. Dorfman’s guarantee is limited to the value of this
Chatham Funds collateral.  Chatham Investment Fund III, LLC is one of
the lenders under the Second Lien Credit Agreement, and both of the Chatham
Funds are affiliated with the other Chatham entities acting as agents and
lenders under the Second Lien Credit Agreement.  Mr. Dorfman
previously served on the advisory board of Chatham Investment Fund II,
LLC.
 
 The
Second Lien Credit Agreement contains a fixed charge coverage ratio covenant
with the same ratio requirements as those included in the revolving credit
agreement with Wachovia.  The Second Lien Credit Agreement also limits
the amount of capital expenditures the Company may make in any fiscal year
beginning in the fiscal year 2008 to $4,500,000.  The Second Lien
Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default (and, as appropriate, grace
periods).  Simultaneous with the execution of the Fifth Amendment and
the Second Lien Credit Agreement on September 28, 2007, the bank and Chatham
entered into an intercreditor agreement defining the relative priority of
security interests and other subordination terms.
 
 Interest
on borrowings under the revolving credit agreement is payable monthly at rates
equal to the prime rate, or at the Company’s option, LIBOR plus up to 200 basis
points; however so long as the fixed charge ratio is less than 1.00 to 1.00, the
interest rate will be equal to the prime rate plus 1% or at the Company’s
option, LIBOR plus 285 basis points.  During the six month period
ended June 30, 2008, the Company maintained a fixed charge ratio above
1.0.  For the six months ended June 30, 2008 and 2007, the Company
incurredinterest
expense related to the revolving credit agreement of approximately$135,000 and $310,000,
respectively.  The Company also incurred unused revolving credit
facility fees of approximately $9,000 and $20,000 during the six months ended
June 30, 2008 and 2007, respectively.
 
 Interest
on borrowings under the Second Lien Credit Agreement is accrued on a monthly
basis equal to the greater of (a) LIBOR or (b) 5.75% plus 9.25% for a rate of
15% of the principal balance plus accrued interest payable outstanding on the
$5.0 million loan.  For the six months ended June 30, 2008 and 2007,
the Company incurredinterest expense related to
the Second Lien Credit Agreement of approximately$379,000 and $0,
respectively.
 
 21
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 For the
six months ended June 30, 2008, we recorded interest expense of $135,000 on the
revolving credit agreement at a weighted average interest rate of 4.76% and
$379,000 of interest expense on the Second Lien Credit Agreement at a constant
rate of 15.0%.  Our weighted average interest rate for the six months
ended June 30, 2008, including amounts borrowed under both the revolving credit
agreement and the Second Lien Credit Agreement, was 9.54%.  At June
30, 2008, the rate of interest being charged on the revolving credit agreement
and the Second Lien Credit Agreement was 3.96% and 15.0%,
respectively.
 
 For the
six months ended June 30, 2008, compared to the same six month period in 2007,
the Company had a decrease in cash generated from operating activities of $1.0
million resulting from positive cash flow from operations of $1.6 million in
2008 compared to $2.7 million in 2007.  The $1.0 million decrease for
the six months ended June 30, 2008 from the same period ended 2007 was mostly
due to the combined result of generating a net profit of $1.9 million compared
to a net loss of $749,000 offset by the net effect of all working capital
accounts using $2.3 million of cash during the six months ended June 30, 2008
compared with the net effect of all working capital accounts providing $666,000
of cash during the six months ended June 30, 2007.  The net use of
cash in 2008 working capital accounts resulted mainly from the payment of fourth
quarter seasonal accounts payable in the first six months of 2008 which
reduction did not occur until after June 30th in
2007.  Additionally, non cash expenses for depreciation, which are
included in net profit, were $2.1 million compared to $2.6 million for the six
months ended June 30, 2008 and 2007, respectively.
 
 During
the six months ended June 30, 2008, net cash used in investing activities was
$1.4 million as compared to $2.7 million in the same period in
2007.  The decrease of $1.3 million was due to expenditures made in
2007 relating to the Target facility that did not reoccur in
2008.  Expenditures have been made in the second quarter of 2008 to
improve certain facilities’ work flow and to accommodate the addition of a new
client.
 
 During
the six months ended June 30, 2008, net cash used in financing activities was
$948,000 compared to net cash provided from financing activities of $408,000 in
the same period of 2007.  The $1.4 million increase in cash used in
financing activities is due to additional repayments of the obligations
outstanding under the revolving credit facility in 2008 as compared to
2007.
 
 The
Company estimates that its cash and financing needs through the rest of 2008
will be met by cash flows from operations and its operating cash flows will
provide sufficient liquidity to repay the Second Lien Credit Agreement before
its one year anniversary on September 28, 2008.
 
 Critical
Accounting Policies
 
 Critical
accounting policies are those policies that can have a significant impact on the
presentation of our financial position and results of operations and demand the
most significant use of subjective estimates and management
judgment.  Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.  Specific risks
inherent in our application of these critical policies are described
below.  For all of these policies, we caution that future events
rarely develop exactly as forecasted, and the best estimates routinely require
adjustment.  These policies often require difficult judgments on
complex matters that are often subject to multiple sources of authoritative
guidance.  Additional information concerning our accounting policies
can be found in Note 1 to the condensed financial statements in this Form 10-Q
and Note 2 to the financial statements appearing in our Annual Report on Form
10-K for the year ended December 31, 2007.  The policies that we
believe are most critical to an investor’s understanding of our financial
results and condition and require complex management judgment are discussed
below.
 
 22
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Goodwill and Other Acquired
Intangibles.   The Company accounts for goodwill and other
intangible assets in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”.  Under SFAS No. 142, goodwill impairment is deemed
to exist if the net book value of a reporting unit exceeds its estimated fair
value.
 
 Innotrac’s
goodwill carrying amount as of June 30, 2008 was $25.2 million. This asset
relates to the goodwill associated with the Company’s acquisition of Universal
Distribution Services (“UDS”) in December 2000 (including an earn out payment
made to the former UDS shareholders in February 2002), and the acquisition of
iFulfillment, Inc. in July 2001.  In accordance with SFAS No. 142, the
Company performed a goodwill valuation in the first quarter of
2008.  The valuation supported that the fair value of the reporting
unit at January 1, 2008 exceeded the carrying amount of the net assets,
including goodwill, and thus no impairment was determined to
exist.  The Company performs this impairment test annually as of
January 1 or sooner if circumstances indicate.
 
 Accounting for Income
Taxes.Innotrac utilizes the liability method of accounting
for income taxes.  Under the liability method, deferred taxes are
determined based on the difference between the financial and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.  A valuation allowance is
recorded against deferred tax assets if the Company considers it more likely
than not that deferred tax assets will not be realized.  Innotrac’s
gross deferred tax asset as of June 30, 2008 and December 31, 2007 was
approximately $18.7 million and $18.9 million, respectively.  This
deferred tax asset was generated primarily by net operating loss carryforwards
created primarily by the special charge of $34.3 million recorded in 2000 and
the net losses generated in 2002, 2003, 2005 and 2006.  Innotrac’s net
operating loss carryforward expires between 2022 and 2027 and totaled $49.1
million at December 31, 2007.
 
 Innotrac’s
ability to generate the expected amounts of taxable income from future
operations is dependent upon general economic conditions, competitive pressures
on sales and margins and other factors beyond management’s
control.  These factors, combined with losses in recent years, create
uncertainty about the ultimate realization of the gross deferred tax asset in
future years.  Therefore, a valuation allowance of approximately $13.1
million and $13.8 million has been recorded as of June 30, 2008 and December 31,
2007, respectively.  Income taxes associated with future earnings will
be offset by the utilization of the net operating loss carryforward resulting in
a reduction in the valuation allowance.  For the six months ended June
30, 2008, an income tax expense of $724,000 was offset by a corresponding
decrease of the deferred tax asset valuation allowance.  When, and if,
the Company can return to consistent profitability, and management determines
that it will be able to utilize net operating losses prior to their expiration,
then the valuation allowance can be reduced or eliminated.
 
 Accounting 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 liabilities and
the disclosures 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 from those
estimates.
 
 23
 Item
2 -
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Recent
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures
about fair value measurements. SFAS No. 157 was effective for fiscal
years beginning after November 15, 2007, with earlier application
encouraged. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings
(deficit) in the year of adoption. There was no impact on the Company’s
financial statements upon adoption on January 1, 2008.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose
to measure certain financial assets and liabilities at fair
value.  SFAS No. 159 also revises provisions of SFAS No. 115 that
apply to available-for-sale and trading securities.  This statement is
effective for fiscal years beginning after November 15, 2007.  There
was no impact on the Company’s financial statements upon adoption on January 1,
2008.
 
 In December 2007, the FASB issued SFAS
No 141(R) which revised SFAS 141 “Business Combinations”.  This
revised standard will be effective for fiscal years beginning after December 15,
2008 and changes the requirements for measuring the value of acquired assets,
the date of the measurement of the acquired assets, the use of fair value
accounting and rules for capitalization of costs of
acquisition.  Since SFAS 141(R) will apply to acquisitions occurring
in the future, the Company does not expect there to be any impact on the
historic reported financial statements of the Company when it is
adopted.
 
 In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements” which amended Accounting Research Bulletin
No. 51.  This standard will be effective for fiscal years beginning
after December 15, 2008 and applies to reporting requirements for minority
interest ownership.  The
Company does not expect the effect, if any, of adopting SFAS No. 160 on its
financial statements will be material.
  24
 Item 3 - Quantitative and
Qualitative Disclosures About Market Risks
 
 Management
believes the Company’s exposure to market risks (investments, interest rates and
foreign currency) is immaterial.  Innotrac holds no market risk
sensitive instruments for trading purposes.  At present, the Company
does not employ any derivative financial instruments, and does not currently
plan to employ them in the future.  The Company does not transact any
sales in foreign currency.  To the extent that the Company has
borrowings outstanding under its credit facility and its second lien term loan,
the Company will have market risk relating to the amount of borrowings due to
variable interest rates under the credit facility.  All of the
Company’s lease obligations are fixed in nature as noted in Note 5 to the
Financial Statements contained in our Annual Report on Form 10-K for the year
ended December 31, 2007, and the Company has no long-term purchases
commitments.
 
 Item 4 – Controls and
Procedures
  Evaluation
of Disclosure Controls and Procedures
  The
Company’s management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial (and principal accounting)
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of June
30, 2008.  Based upon that evaluation, and the identification of the
material weakness in the Company’s internal control over financial reporting as
described below and more fully in “Item 9A – Controls and Procedures –
Management’s Report on Internal Control over Financial Reporting” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were ineffective as of the end of the period
covered by this report.  The identified material weakness consists of
an understaffed financial and accounting function, and the need for additional
personnel to prepare and analyze financial information in a timely manner and to
allow review and on-going monitoring and enhancement of our
controls.
 
 Changes in Internal Control Over
Financial Reporting
 
 During
the three months ended June 30, 2008, we completed our review of our staffing
requirements for our financial reporting and disclosure functions.  At
June 30, 2008 we have partially filled the identified positions with expected
full staffing before the end of September 2008.  Accordingly, the
material weakness discussed above has not been corrected resulting in a
reasonable possibility that a material misstatement could result in our
financial reporting.    As described more fully in “Item 9A
– Controls and Procedures – Plan for Remediation of Material Weaknesses” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007, to
address such material weakness, we continue to monitor our disclosure and
financial reporting control procedures and are reviewing staffing requirements
to remediate the material weakness.
 
 25
 Part II – Other
Information
 
 Item 4 – Submission of
Matters to a Vote of Security Holders
 
 On June
5, 2008, the Company held its annual meeting of shareholders in Duluth,
Georgia.  As of the record date, May 2, 2008, there were 12,585,759
shares of Common Stock issued, outstanding and entitled to vote at the annual
meeting.  Represented at the meeting in person or by proxy were
11,923,956 shares representing 94.7% of the total shares of Common Stock
entitled to vote at the meeting.
 
 The
purpose of the meeting was to re-elect the following director to a three-year
term expiring in 2011.  The following table sets forth the number of
votes cast “for” reelection and the number of votes “withheld” for the
director.
 
 Number
      of VotesFor
                
                WithheldBruce
      V. Benator
                11,280,984
                
                642,972
 
 The
directors whose terms continued after the meeting are Martin J. Blank, Scott D.
Dorfman, Thomas J. Marano and Joel E. Marks.
 
 Item 6 –
Exhibits
 
 Exhibits:
 
 31.1
                Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d –
      14(a).
 31.2
                Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d –
      14(a).
 32.1
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. §
  1350.
 32.2
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. §
  1350.
  26
 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.
 
  INNOTRAC
      CORPORATION(Registrant)Date:  August
      14, 2008
                  By:
                  /s/
      Scott D. DorfmanScott
      D. DorfmanPresident,
      Chief Executive Officer and Chairman
                    of
      the Board (Principal Executive Officer)
 Date:  August
      14, 2008
                By:
                /s/
      George M. HareGeorge
      M. HareChief
      Financial Officer (Principal Financial
                  Officer
      and Principal Accounting Officer)   27