##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2006
 OR
 o
    
    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
  Georgia
    
    58-1592285(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
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
 þ o
  o o þ
 o þ
  Outstanding at August 10, 2006Common Stock $.10 par value per share
    
    12,280,610 Shares




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##### 



INNOTRAC CORPORATION
 INDEX
  
 PagePart I. Financial InformationItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets at
June 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20Part II. Other InformationItem 1A.
    
    Risk Factors
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24EX-10.4 FIRST AMENDMENT AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE PFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE PFO
  1




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Part I  Financial Information
 
   2




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INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 June 30, 2006
    
    
    December 31, 2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,007
    
    
    $
    2,068Accounts receivable (net of allowance for doubtful accounts of $309 at
June 30, 2006 and $2,791 at December 31, 2005)
    
    
    14,658
    
    
    
    12,745Inventory
    
    
    2,934
    
    
    
    4,676Prepaid expenses and other
    
    
    1,552
    
    
    
    1,383Total current assets
    
    
    20,151
    
    
    
    20,872Property and equipment:Rental equipment
    
    
    382
    
    
    
    427Computer software and equipment
    
    
    35,896
    
    
    
    30,514Furniture, fixtures and leasehold improvements
    
    
    5,169
    
    
    
    5,13341,447
    
    
    
    36,074Less accumulated depreciation and amortization
    
    
    (26,955
    )
    
    
    (25,320
    )14,492
    
    
    
    10,754Goodwill
    
    
    25,169
    
    
    
    25,169Other assets, net
    
    
    1,225
    
    
    
    1,177Total assets
    
    $
    61,037
    
    
    $
    57,972LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,818
    
    
    $
    6,707Line of credit
    
    
    7,398
    
    
    
    Accrued expenses and other
    
    
    3,656
    
    
    
    3,036Total current liabilities
    
    
    14,872
    
    
    
    9,743Noncurrent liabilities:Other noncurrent liabilities
    
    
    1,023
    
    
    
    1,038Total noncurrent liabilities
    
    
    1,023
    
    
    
    1,038Commitments 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,
12,280,610 shares issued and outstanding
    
    
    1,228
    
    
    
    1,228Additional paid-in capital
    
    
    65,974
    
    
    
    65,911Accumulated deficit
    
    
    (22,060
    )
    
    
    (19,948
    )Total shareholders equity
    
    
    45,142
    
    
    
    47,191Total liabilities and shareholders equity
    
    $
    61,037
    
    
    $
    57,972
  3




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INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2006 and 2005
(in thousands, except per share amounts)
 Three Months Ended June 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Revenues
    
    $
    16,577
    
    
    $
    18,943Cost of revenues
    
    
    7,980
    
    
    
    9,680Selling, general and administrative expenses
    
    
    8,478
    
    
    
    8,632Depreciation and amortization
    
    
    862
    
    
    
    1,208Total operating expenses
    
    
    17,320
    
    
    
    19,520Operating (loss)
    
    
    (743
    )
    
    
    (577
    )Other expense:Interest expense
    
    
    91
    
    
    
    42Total other expense
    
    
    91
    
    
    
    42(Loss) before income taxes
    
    
    (834
    )
    
    
    (619
    )Income taxes
    
    
    
    
    
    
    Net (loss)
    
    $
    (834
    )
    
    $
    (619
    )(Loss) per share:Basic
    
    $
    (0.07
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.05
    )Weighted average shares outstanding:Basic
    
    
    12,281
    
    
    
    12,222Diluted
    
    
    12,281
    
    
    
    12,222
  4




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INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2006 and 2005
(in thousands, except per share amounts)
 Six Months Ended June 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Revenues
    
    $
    33,906
    
    
    $
    38,181Cost of revenues
    
    
    16,878
    
    
    
    19,633Selling, general and administrative expenses
    
    
    17,299
    
    
    
    16,886Depreciation and amortization
    
    
    1,683
    
    
    
    2,460Total operating expenses
    
    
    35,860
    
    
    
    38,979Operating (loss)
    
    
    (1,954
    )
    
    
    (798
    )Other expense:Interest expense
    
    
    158
    
    
    
    109Total other expense
    
    
    158
    
    
    
    109(Loss) before income taxes
    
    
    (2,112
    )
    
    
    (907
    )Income taxes
    
    
    
    
    
    
    Net (loss)
    
    $
    (2,112
    )
    
    $
    (907
    )(Loss) per share:Basic
    
    $
    (0.17
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.17
    )
    
    $
    (0.07
    )Weighted average shares outstanding:Basic
    
    
    12,281
    
    
    
    12,111Diluted
    
    
    12,281
    
    
    
    12,111
  5




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INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(in thousands)
 Six Months Ended June 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Cash flows from operating activities:Net loss
    
    $
    (2,112
    )
    
    $
    (907
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    1,683
    
    
    
    2,460Provision for bad debts
    
    
    74
    
    
    
    (435
    )Amortization of deferred compensation
    
    
    63
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in accounts receivable, gross
    
    
    (1,987
    )
    
    
    962Decrease (increase) in inventory
    
    
    1,742
    
    
    
    (91
    )(Increase) decrease in prepaid expenses and other
    
    
    (200
    )
    
    
    31(Decrease) increase in accounts payable
    
    
    (2,889
    )
    
    
    295Increase in accrued expenses and other
    
    
    605
    
    
    
    49Net cash (used in) provided by operating activities
    
    
    (3,021
    )
    
    
    2,364Cash flows from investing activity:Capital expenditures
    
    
    (5,418
    )
    
    
    (583
    )Net cash used in investing activities
    
    
    (5,418
    )
    
    
    (583
    )Cash flows from financing activities:Net borrowings (repayments) under line of credit
    
    
    7,398
    
    
    
    (3,063
    )Loan commitment fees
    
    
    (20
    )
    
    
    Repayment of capital lease and other obligations
    
    
    
    
    
    
    (36
    )Exercise of employee stock options
    
    
    
    
    
    
    1,264Net cash provided by (used in) financing activities
    
    
    7,378
    
    
    
    (1,835
    )Net decrease in cash and cash equivalents
    
    
    (1,061
    )
    
    
    (54
    )Cash and cash equivalents, beginning of period
    
    
    2,068
    
    
    
    1,377Cash and cash equivalents, end of period
    
    $
    1,007
    
    
    $
    1,323Supplemental cash flow disclosures:Cash paid for interest
    
    $
    126
    
    
    $
    121
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INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
 (Unaudited)
 1.
    
    SIGNIFICANT ACCOUNTING POLICIESThe accounting policies followed for quarterly financial reporting are the same
as those disclosed in the Notes to Consolidated 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, 2005. 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.Goodwill represents 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, 2005 and June 30, 2006 (see Note 4).Revenue Recognition.Innotrac derives its revenue primarily from two sources: (1) fulfillment
operations and (2) the delivery of call center services. Innotracs fulfillment services operations
record revenue at the conclusion of the material selection, packaging and shipping process.
Innotracs call center services business recognizes revenue according to written pricing agreements
based on the number of calls, minutes or hourly rate basis. 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 consolidated 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. The adoption of SFAS No. 123(R) resulted in recording $22,000 and
$63,000 in compensation
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INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
 expense for the three and six months ended June 30, 2006, respectively. As of June 30,
2006, approximately $133,000 of unrecognized compensation expense related to non-vested stock
options is expected to be recognized over the following 42 months.For the three and six months ended June 30, 2005, had compensation cost for stock options been
determined under a fair value based method, in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure, the Companys net loss and net
loss per share would have been the following pro forma amounts (in 000s, except per share data):
 Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2005Net loss
    
    $
    (619
    )
    
    $
    (907
    )Pro forma net loss
    
    $
    (725
    )
    
    $
    (1,120
    )Basic and diluted net loss per
share
    
    $
    (0.05
    )
    
    $
    (0.07
    )Basic and diluted pro forma
net loss per share
    
    $
    (0.06
    )
    
    $
    (0.09
    )
 Under the fair value based method, compensation cost, net of tax would have been $106,000 and
$213,000 for the three and six months ended June 30, 2005, respectively. During the three and six
months ended June 30, 2005, options representing 214,617 and 275,617 shares were exercised,
respectively.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 endedJune 30,
    
    
    June 30,2006
    
    
    2005Risk-free interest rate
    
    
    5.11
    %
    
    
    4.00
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected lives
    
    2.1 Years
    
    
    2.1 YearsExpected volatility
    
    
    71.8
    %
    
    
    73.0
    %
 2.
    
    FINANCING OBLIGATIONSThe Company has a revolving bank credit agreement with a maximum borrowing limit
of $25.0 million, which will mature in March 2009. Although the maximum borrowing limit is
$25.0 million, the credit facility limits borrowings to a specified percentage of eligible
accounts receivable and inventory, which totaled $13.0 million at June 30, 2006. At June
30, 2006 the Company had $7.4 million outstanding and $2.8 million of additional
availability under the revolving credit agreement.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 fixed charge coverage
ratio, change
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INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
 of ownership control and other covenants. Noncompliance with any of the covenants allows the
lender to declare any outstanding borrowing amounts to be immediately due and payable.The financial covenants require the Company to maintain a minimum fixed charge ratio of between
0.70 and 1.00 to 1.00, depending on the particular fiscal quarter, for each of the Companys
quarters through the end of its fiscal year 2006, and a ratio of 1.15 to 1.00 thereafter. The
Company was in compliance at June 30, 2006 with a fixed charge ratio of 0.73 to 1.00. Compliance
with the fixed charge coverage ratio covenant is determined on a quarterly basis.Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Companys
option, LIBOR plus up to 200 basis points. During the three months ended June 30, 2006 and 2005,
the Company incurred interest expense related to the line of credit of approximately $78,000 and
$30,000, respectively, resulting in a weighted average interest rate of 6.37% and 5.31%,
respectively. During the six months ended June 30, 2006 and 2005, the Company incurred interest
expense related to the line of credit of approximately $120,000 and $82,000, respectively,
resulting in a weighted average interest rate of 6.47% and 4.95%, respectively. The Company also
incurred unused revolving credit facility fees of approximately $13,000 and $10,000 during the
three months ended June 30, 2006 and 2005, respectively, and $27,000 and $23,000 during the six
months ended June 30, 2006 and 2005, respectively.3. EARNINGS PER SHAREThe 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
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Diluted earnings per share:Weighted average shares outstanding
    
    
    12,281
    
    
    
    12,222
    
    
    
    12,281
    
    
    
    12,111Employee and director stock options and
unvested restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares assuming
dilution
    
    
    12,281
    
    
    
    12,222
    
    
    
    12,281
    
    
    
    12,111
 Options outstanding to purchase 1.7 million shares of the Companys common stock for both the three
and six months ended June 30, 2006, and 1.3 million shares for both the three and six months ended
June 30, 2005, were not included in the computation of diluted EPS because their effect was
anti-dilutive.4.
    
    INCOME TAXESInnotrac 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, 2006 and December 31, 2005 was approximately $16.9 million and $15.6 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 and 2005. Innotrac has a net operating loss
carryforward of $37.5 million at December 31, 2005 that expires between 2020 and 2025.
 9




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INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
 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 $12.9 million and
$12.2 million has been recorded as of June 30, 2006 and December 31, 2005, 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, 2006, the deferred tax benefit of $728,000 was offset by a
corresponding increase 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.5.
    
    COMMITMENTS AND CONTINGENCIESShareholder Rights Plan. In December 1997, the Companys Board of Directors approved a
Shareholder Rights Plan (the Rights Plan). The Rights Plan provides for the distribution
of one right for each outstanding share of the Companys common stock held of record as of
the close of business on January 1,
1998 or that thereafter becomes outstanding prior to the earlier of the final expiration date
of the rights or the first date upon which the rights become exercisable. Each right
entitles the registered holder to purchase from the Company one one-hundredth of a share of
Series A participating cumulative preferred stock, par value $.10 per share, at a price of
$60.00 (the Purchase Price), subject to adjustment. The rights are not exercisable until
ten calendar days after a person or group (an Acquiring Person) buys, or announces a tender
offer for, 15% or more of the Companys common stock. Such ownership level has been increased
to 40% for a particular shareholder that owned approximately 34.0% of the shares outstanding
on June 30, 2006. In the event the rights become exercisable, each right will entitle the
holder to receive that number of shares of common stock having a market value equal to the
Purchase Price. If, after any person has become an Acquiring Person (other than through a
tender offer approved by qualifying members of the Board of Directors), the Company is
involved in a merger or other business combination where the Company is not the surviving
corporation, or the Company sells 50% or more of its assets, operating income, or cash flow,
then each right will entitle the holder to purchase, for the Purchase Price, that number of
            shares of common or other capital stock of the acquiring entity which at the time of such
transaction have a market value of twice the Purchase Price. The rights will expire on
January 1, 2008, unless extended, unless the rights are earlier exchanged, or unless the
rights are earlier redeemed by the Company in whole, but not in part, at a price of $0.001
per right. No shares have been issued under the Rights Plan.Legal Proceedings.The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. There are no material pending legal proceedings to 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, 2006 and 2005, the Company did not meet the minimum employee
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INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
 requirements of 359 full-time employees, as measured on a quarterly basis, incurring a
penalty of approximately $9,000 and $100 for the three months ended June 30, 2006 and 2005,
respectively, and approximately $18,000 and $5,000 for the six months ended June 30, 2006 and
2005, respectively.6.
    
    RELATED PARTY TRANSACTIONIn 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, Mr. 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.
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Item 2 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    
    
    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.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business Mix
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Business Line/VerticalTelecommunications
    
    
    7.6
    %
    
    
    13.2
    %
    
    
    8.1
    %
    
    
    13.3
    %Modems
    
    
    25.6
    
    
    
    17.5
    
    
    
    26.2
    
    
    
    18.7Retail/Catalog
    
    
    34.4
    
    
    
    30.7
    
    
    
    31.3
    
    
    
    28.6Direct Marketing
    
    
    23.1
    
    
    
    30.0
    
    
    
    21.9
    
    
    
    28.9Business-to-Business (B2B)
    
    
    9.3
    
    
    
    8.6
    
    
    
    12.5
    
    
    
    10.5100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Telecommunications and Modems
 Retail, Catalog and Direct Marketing.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business-to-Business.
 Results of Operations
  14




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    48.1
    
    
    
    51.1
    
    
    
    49.8
    
    
    
    51.4Selling, general and administrative expenses
    
    
    51.2
    
    
    
    45.6
    
    
    
    51.0
    
    
    
    44.2Depreciation and amortization
    
    
    5.2
    
    
    
    6.4
    
    
    
    5.0
    
    
    
    6.5Operating (loss) income
    
    
    (4.5
    )
    
    
    (3.1
    )
    
    
    (5.8
    )
    
    
    (2.1
    )Other expense, net
    
    
    .5
    
    
    
    .2
    
    
    
    .4
    
    
    
    .3(Loss) income before income taxes
    
    
    (5.0
    )
    
    
    (3.3
    )
    
    
    (6.2
    )
    
    
    (2.4
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (5.0
    )%
    
    
    (3.3
    )%
    
    
    (6.2
    )%
    
    
    (2.4
    )%
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenues.
 Cost of Revenues.
 Selling, General and Administrative Expenses.
 Interest Expense.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Income Taxes.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Revenues.
 Cost of Revenues.
 Selling, General and Administrative Expenses.
 Interest Expense.
 Income Taxes.
 Liquidity and Capital Resources
  16




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       17
    Table of Contents   MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Critical Accounting Policies
  Goodwill and Other Acquired Intangibles.
  Accounting for Income Taxes.
  18




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Accounting Estimates.
 Recent Accounting Pronouncements
  Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109
 19




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risks
  
 Item 4  Controls and Procedures
   20




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##### Table of Contents



Part II  Other Information
 
 Item 1A. Risk Factors
 Our common stock lacks liquidity and is held by a small number of investors, one of which is in
receivership where its creditors would like to sell our shares as soon as possible.
   21




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##### Table of Contents



Item 4
 Submission of Matters to a Vote of Security Holders
   Number of VotesFor
    
    WithheldMartin J. Blank
    
    
    12,060,014
    
    
    
    106,445Joel E. Marks
    
    
    12,020,643
    
    
    
    145,816
  
 Item 5  Other Information
  22




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##### Table of Contents



Item 6
 Exhibits
 Exhibits:10.4
    
    First Amendment Agreement to the Third Amended and Restated Loan
and Security Agreement between Innotrac Corporation and Wachovia Bank,
National Association, Successor by merger to SouthTrust Bank, dated July 24,
2006.31.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d  14(a).31.2
    
    Certification of principal 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 principal financial officer Pursuant to 18 U.S.C. § 1350.
 23




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##### Table of Contents



SIGNATURES
  INNOTRAC CORPORATION
(Registrant)Date: August 14, 2006
    
    By:
    
    /s/ Scott D. DorfmanScott D. DorfmanPresident, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)Date: August 14, 2006
    
    
    
    /s/ Christine A. HerrenChristine A. HerrenSenior Director and Controller (Principal
Financial Officer and Principal Accounting
Officer)
 24