##### Table of Contents



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, 2002

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
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

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

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

|                               |  |                               |  |  | 
|------------------------------ |  | ----------------------------- |  |  | 
|                               |  | Outstanding at August 7, 2002
|                               |  |                              
|Common Stock at $.10 par value |  | 11,674,595 Shares            





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TABLE OF CONTENTS



|                                         |                                                                                                |                                                           |  |  |  |  |  | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|Part I  Financial Information          
|                                         | Item 1  Financial Statements                                                                 
|                                         |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                    
|                                         |                                                                                                | CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|                                         |                                                                                                | CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|                                         |                                                                                                | CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                         |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                                         | Item 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                         | Item 3  Quantitative and Qualitative Disclosure About Market Risks                           
|Part II  Other Information             
|                                         | Item 4  Submission of Matters to a Vote of Securities Holders                                
|                                         | Item 6  Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                              
|Loan Documents Modification Agreement   
|Certification of Chief Executive Officer
|Certification of Chief Financial Officer



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INNOTRAC CORPORATION

INDEX

|                              |                                                                                               |                                                                                                               |    |     
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | -- | ----
|                              |                                                                                               |                                                                                                               |    | Page
|                              |                                                                                               |                                                                                                               |    |     
|Part I. Financial Information |                                                                                               |                                                                                                              
|                              |                                                                                               |                                                                                                              
|                              | Item 1. Financial Statements:                                                                 |                                                                                                               | 2 
|                             
|                              |                                                                                               | Condensed
Consolidated Balance Sheets 
June 30, 2002 (Unaudited) and December 31, 2001                       |    | 3   
|                              |                                                                                               |                                                                                                              
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2002 and 2001 (Unaudited) |    | 4   
|                              |                                                                                               |                                                                                                              
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2002 and 2001 (Unaudited)   |    | 5   
|                              |                                                                                               |                                                                                                              
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (Unaudited)   |    | 6   
|                              |                                                                                               |                                                                                                              
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                              |    | 7   
|                              |                                                                                               |                                                                                                              
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                               | 11
|                              |                                                                                               |                                                                                                              
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |                                                                                                               | 19
|                              |                                                                                               |                                                                                                              
|Part II. Other Information    |                                                                                               |                                                                                                              
|                             
|                              | Item 4. Submission of Matters to a Vote of Securities Holders                                 |                                                                                                               | 20
|                              |                                                                                               |                                                                                                              
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                               | 20
|                              |                                                                                               |                                                                                                              
|Signatures                    |                                                                                               | 21                                                                                                           

1



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##### Table of Contents






Part I  Financial Information




Item 1  Financial Statements

The following condensed consolidated financial statements of Innotrac
Corporation, a Georgia corporation (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 generally accepted
accounting principles. In the opinion of management, all adjustments are
of a normal and recurring nature, except those specified otherwise, and
include those necessary for a fair presentation of the financial
information for the interim periods reported. Results of operations for
the three and six months ended June 30, 2002 are not necessarily
indicative of the results for the entire year ending December 31, 2002.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Companys 2001 Annual Report on Form 10-K.

2



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##### Table of Contents






INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                     |                                                |                      |                                            |                   |        |               |        |                   |        |        |        | 
|------------------------------------ | ---------------------------------------------- | -------------------- | ------------------------------------------ | ----------------- | ------ | ------------- | ------ | ----------------- | ------ | ------ | ------ | 
|                                     |                                                |                      |                                            |                   |        | June 30, 2002 |        | December 31, 2001
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        | (Unaudited)   |        |                   |        |       
|ASSETS                               |                                                |                      |                                            |                   |        |               |        |                  
|Current assets:                      |                                                |                      |                                            |                   |        |               |        |                  
|                                     | Cash and cash equivalents                      |                      | $                                          | 2,329             |        |               | $      | 9,413             |       
|                                     | Accounts receivable, net                       |                      |                                            | 11,518            |        |               |        | 13,662            |       
|                                     | Inventories, net                               |                      |                                            | 18,143            |        |               |        | 27,264            |       
|                                     | Deferred income taxes                          |                      |                                            |                  |        |               |        | 2,736             |       
|                                     | Prepaid expenses and other                     |                      |                                            | 1,664             |        |               |        | 5,018             |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                | Total current assets |                                            |                   | 33,654 |               |        |                   | 58,093 |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|Property and equipment:              |                                                |                      |                                            |                   |        |               |        |                  
|                                     | Rental equipment                               |                      |                                            | 1,680             |        |               |        | 2,003             |       
|                                     | Computer software and equipment                |                      |                                            | 25,552            |        |               |        | 19,715            |       
|                                     | Furniture, fixtures and leasehold improvements |                      |                                            | 4,211             |        |               |        | 4,005             |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | 31,443                                     |                   |        |               | 25,723 |                  
|                                     | Less accumulated depreciation and amortization |                      |                                            | (11,630           | )      |               |        | (11,223           | )     
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | 19,813                                     |                   |        |               | 14,500 |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|Goodwill, net                        |                                                |                      | 24,758                                     |                   |        |               | 25,213 |                  
|Deferred income taxes                |                                                |                      | 5,726                                      |                   |        |               | 438    |                  
|Other assets, net                    |                                                |                      | 1,492                                      |                   |        |               | 1,149  |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | Total assets                               |                   | $      | 85,443        |        |                   | $      | 99,393 |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                |                      |                                            |                   |        |               |        |                  
|Current liabilities:                 |                                                |                      |                                            |                   |        |               |        |                  
|                                     | Accounts payable                               |                      | $                                          | 11,330            |        |               | $      | 8,581             |       
|                                     | Accrued earn-out payment                       |                      |                                            |                  |        |               |        | 15,275            |       
|                                     | Accrued expenses and other                     |                      |                                            | 6,201             |        |               |        | 11,861            |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | Total current liabilities                  |                   |        | 17,531        |        |                   |        | 35,717 |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|Total noncurrent liabilities         |                                                |                      | 1,943                                      |                   |        |               | 393    |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            | Total liabilities |        |               | 19,474 |                   |        |        | 36,110 | 
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|Commitments and contingencies        |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|Shareholders equity:                |                                                |                      |                                            |                   |        |               |        |                  
|                                     | Common stock                                   |                      |                                            | 1,167             |        |               |        | 1,136             |       
|                                     | Additional paid-in capital                     |                      |                                            | 62,578            |        |               |        | 61,023            |       
|                                     | Retained earnings                              |                      |                                            | 2,479             |        |               |        | 1,201             |       
|                                     | Accumulated other comprehensive income         |                      |                                            |                  |        |               |        | 178               |       
|                                     | Less: Treasury stock                           |                      |                                            | (255              | )      |               |        | (255              | )     
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | Total shareholders equity                 |                   |        | 65,969        |        |                   |        | 63,283 |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  
|                                     |                                                |                      | Total liabilities and shareholders equity |                   | $      | 85,443        |        |                   | $      | 99,393 |       
|                                     |                                                |                      |                                            |                   |        |               |        |                  

The accompanying notes are an
integral part of these condensed consolidated balance sheets.

3



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Financial Statements-Continued




INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and 2001
(in thousands, except per share amounts)

|                                      |                                              |                          |              |            |       |                             |        |        |        |        |       | 
|------------------------------------- | -------------------------------------------- | ------------------------ | ------------ | ---------- | ----- | --------------------------- | ------ | ------ | ------ | ------ | ----- | 
|                                      |                                              |                          |              |            |       | Three Months Ended June 30,
|                                      |                                              |                          |              |            |       | 2002                        |        | 2001  
|                                      |                                              |                          |              |            |       |                             |        |       
|Revenues, net                         |                                              | $                        | 16,225       |            |       | $                           | 26,025 |       
|Cost of revenues                      |                                              |                          | 7,182        |            |       |                             | 12,282 |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      |                                              |                          | Gross margin |            |       | 9,043                       |        |        |        | 13,743 |      
|                                      |                                              |                          |              |            |       |                             |        |        |       
|Operating expenses:                   |                                              |                          |              |            |       |                             |        |       
|                                      | Selling, general and administrative expenses |                          |              | 7,543      |       |                             |        | 10,770 |       
|                                      | Special credit                               |                          |              | (359       | )     |                             |        |       |       
|                                      | Depreciation and amortization                |                          |              | 1,271      |       |                             |        | 1,191  |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      |                                              | Total operating expenses |              |            | 8,455 |                             |        |        | 11,961 |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|Operating income                      |                                              |                          | 588          |            |       |                             | 1,782  |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      |                                              |                          |              |            |       |                             |        |       
|Other expenses (income), net          |                                              |                          | 48           |            |       |                             | (197   | )     
|                                      |                                              |                          |              |            |       |                             |        |        |       
|Income before income taxes            |                                              |                          | 540          |            |       |                             | 1,979  |       
|Income tax provision                  |                                              |                          | (227         | )          |       |                             | (944   | )     
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      |                                              |                          |              | Net income |       | $                           | 313    |        |        | $      | 1,035 | 
|                                      |                                              |                          |              |            |       |                             |        |        |       
|Basic and diluted earnings per share: |                                              |                          |              |            |       |                             |        |       
|                                      | Basic                                        |                          | $            | 0.03       |       |                             | $      | 0.09   |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      | Diluted                                      |                          | $            | 0.03       |       |                             | $      | 0.09   |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|Weighted average shares outstanding:  |                                              |                          |              |            |       |                             |        |       
|                                      | Basic                                        |                          |              | 11,623     |       |                             |        | 11,319 |       
|                                      |                                              |                          |              |            |       |                             |        |        |       
|                                      | Diluted                                      |                          |              | 12,017     |       |                             |        | 11,739 |       
|                                      |                                              |                          |              |            |       |                             |        |        |       

The accompanying notes are an integral part of these condensed consolidated
financial statements.

4



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##### Table of Contents



Financial Statements-Continued




INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2002 and 2001
(in thousands, except per share amounts)

|                                                 |                                              |                          |        |                           |        |      |        |        |        | 
|------------------------------------------------ | -------------------------------------------- | ------------------------ | ------ | ------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                 |                                              |                          |        | Six Months Ended June 30,
|                                                 |                                              |                          |        | 2002                      |        | 2001
|                                                 |                                              |                          |        |                           |        |     
|Revenues, net                                    |                                              | $                        | 32,555 |                           |        | $    | 50,946 |       
|Cost of revenues                                 |                                              |                          | 14,171 |                           |        |      | 23,590 |       
|Special credit                                   |                                              |                          | (293   | )                         |        |      |       |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|                                                 |                                              | Gross margin             |        |                           | 18,677 |      |        |        | 27,356 | 
|                                                 |                                              |                          |        |                           |        |      |        |       
|Operating expenses:                              |                                              |                          |        |                           |        |      |        |       
|                                                 | Selling, general and administrative expenses |                          |        | 15,338                    |        |      |        | 24,010 |       
|                                                 | Special credit                               |                          |        | (1,321                    | )      |      |        |       |       
|                                                 | Depreciation and amortization                |                          |        | 2,489                     |        |      |        | 2,387  |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|                                                 |                                              | Total operating expenses |        |                           | 16,506 |      |        |        | 26,397 | 
|                                                 |                                              |                          |        |                           |        |      |        |       
|Operating income                                 |                                              |                          | 2,171  |                           |        |      | 959    |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|Other expenses (income), net                     |                                              |                          | 43     |                           |        |      | (409   | )     
|                                                 |                                              |                          |        |                           |        |      |        |       
|Income before income taxes and minority interest |                                              |                          | 2,128  |                           |        |      | 1,368  |       
|Income tax provision                             |                                              |                          | (849   | )                         |        |      | (704   | )     
|                                                 |                                              |                          |        |                           |        |      |        |       
|Net income before minority interest              |                                              |                          | 1,279  |                           |        |      | 664    |       
|Minority interest, net of income tax benefit     |                                              |                          |       |                           |        |      | 871    |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|                                                 |                                              | Net income               |        | $                         | 1,279  |      |        | $      | 1,535  | 
|                                                 |                                              |                          |        |                           |        |      |        |       
|Basic and diluted earnings per share:            |                                              |                          |        |                           |        |      |        |       
|                                                 | Basic                                        |                          | $      | 0.11                      |        |      | $      | 0.14   |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|                                                 | Diluted                                      |                          | $      | 0.11                      |        |      | $      | 0.13   |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|Weighted average shares outstanding:             |                                              |                          |        |                           |        |      |        |       
|                                                 | Basic                                        |                          |        | 11,570                    |        |      |        | 11,319 |       
|                                                 |                                              |                          |        |                           |        |      |        |       
|                                                 | Diluted                                      |                          |        | 11,902                    |        |      |        | 11,645 |       
|                                                 |                                              |                          |        |                           |        |      |        |       

The accompanying notes are an
integral part of these condensed consolidated financial statements.

5



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##### Table of Contents



Financial Statements-Continued




INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(in thousands)

|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------- | ------ | ------ | ------ | ------ | -
|                                                     |                                                                                   | Six Months
Ended June 30,                        
|                                                     |                                                                                   | 2002                                              |                                           | 2001   
|                                                     |                                                                                   |                                                   |                                           |        
|Cash flows from operating activities:                |                                                                                   |                                                   |                                           |         |        |         |        |       
|                                                     | Net income                                                                        |                                                   | $                                         | 1,279   |        |         | $      | 1,535  |       
|                                                     | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                   |                                           |         |        |         |        |        |       
|                                                     |                                                                                   | Depreciation and amortization                     |                                           |         | 2,489  |         |        |        | 2,387  |       
|                                                     |                                                                                   | Loss on disposal of fixed assets                  |                                           |         | 501    |         |        |        | 164    |       
|                                                     |                                                                                   | Deferred income taxes                             |                                           |         | (2,177 | )       |        |        | 22     |       
|                                                     |                                                                                   | Minority interest in subsidiary                   |                                           |         |       |         |        |        | (871   | )     
|                                                     |                                                                                   | Amortization of deferred compensation             |                                           |         | 36     |         |        |        | 67     |       
|                                                     |                                                                                   | Decrease in accounts receivable                   |                                           |         | 2,144  |         |        |        | 6,438  |       
|                                                     |                                                                                   | Decrease in inventories                           |                                           |         | 9,120  |         |        |        | 3,523  |       
|                                                     |                                                                                   | Decrease in prepaid expenses and other            |                                           |         | 2,180  |         |        |        | 620    |       
|                                                     |                                                                                   | Decrease in accounts payable and accrued expenses |                                           |         | (1,130 | )       |        |        | (6,486 | )     
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|                                                     |                                                                                   |                                                   | Net cash provided by operating activities |         |        | 14,442  |        |        |        | 7,399  |  
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Cash flows from investing activities:                |                                                                                   |                                                   |                                           |         |        |         |        |       
|                                                     | Capital expenditures                                                              |                                                   |                                           | (8,039  | )      |         |        | (3,490 | )     
|                                                     | Payment for business acquired                                                     |                                                   |                                           | (13,727 | )      |         |        |       |       
|                                                     | Sale of marketable securities                                                     |                                                   |                                           | 435     |        |         |        |       |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|                                                     |                                                                                   |                                                   | Net cash (used in) investing activities   |         |        | (21,331 | )      |        |        | (3,490 | )
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Cash flows from financing activities:                |                                                                                   |                                                   |                                           |         |        |         |        |       
|                                                     | Repayment of capital lease obligations                                            |                                                   |                                           | (145    | )      |         |        | (22    | )     
|                                                     | Loan fees paid                                                                    |                                                   |                                           | (50     | )      |         |        |       |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|                                                     |                                                                                   |                                                   | Net cash (used in) financing activities   |         |        | (195    | )      |        |        | (22    | )
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Net (decrease) increase in cash and cash equivalents |                                                                                   |                                                   | (7,084                                    | )       |        |         | 3,887  |       
|Cash and cash equivalents, beginning of period       |                                                                                   |                                                   | 9,413                                     |         |        |         | 18,334 |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Cash and cash equivalents, end of period             |                                                                                   | $                                                 | 2,329                                     |         |        | $       | 22,221 |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Supplemental cash flow disclosures:                  |                                                                                   |                                                   |                                           |         |        |         |        |       
|                                                     | Cash paid for interest                                                            |                                                   | $                                         | 154     |        |         | $      | 25     |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|                                                     | Cash paid for income taxes, net of refunds received                               |                                                   | $                                         | (18     | )      |         | $      | (68    | )     
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       
|Noncash transactions:                                |                                                                                   |                                                   |                                           |         |        |         |        |       
|                                                     | Stock issued for business acquired                                                |                                                   | $                                         | 1,550   |        |         | $      |       |       
|                                                     |                                                                                   |                                                   |                                           |         |        |         |        |        |       

The accompanying notes are an
integral part of these condensed consolidated financial statements.

6



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##### Table of Contents






INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

1.    SIGNIFICANT ACCOUNTING POLICIES



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 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 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2002 for the year ended
December 31, 2001.

2.    SPECIAL CHARGES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At June 30, 2002 and December 31, 2001, the Company had approximately $2.0
million and $4.6 million, respectively, in accruals related to the special
charges incurred during the year ended December 31, 2000. The remaining
accruals at June 30, 2002 included $652,000 for the Companys shift to a
fee-for-service business model and $1.3 million for e-commerce costs.
Cash payments relating to these accruals for the three and six months
ended June 30, 2002 were approximately $377,000 and $466,000,
respectively. The Company reversed to income approximately $359,000 and
$1.6 million in special charge accruals during the three and six months
ended June 30, 2002, respectively as these accruals were no longer
required for certain accounts receivable and inventory items related to
the shift to a fee-for-service business model. The majority of the
remaining accruals, except for that associated with one specific client
which represents about 40% of the remaining accrual and is classified as
long-term, are expected to be utilized during the remainder of the year
ending December 31, 2002. Any unused accruals will be reversed to income
and reported as a special credit.

3.    FINANCING OBLIGATIONS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has a revolving credit agreement with a bank for borrowings up
to $40 million. In May 2002, the Company extended its credit facility
through June 1, 2005 under similar terms and conditions as the previous
revolving credit agreement. The Company and its subsidiaries have pledged
all of its assets and provided guarantees to the lender as collateral under
this revolving credit agreement. At June 30, 2002 and 2001, the Company
did not have any outstanding borrowings under the line of credit. The
revolving line of credit agreement contains various restrictive financial
and change of ownership control covenants. The May 2002 amendment added
provisions limiting borrowings under the agreement to a margin or borrowing
base, as defined, which totaled $25.3 million at June 30, 2002 and
tightened certain of the financial covenants. At June 30, 2002, the
Company was in compliance with all covenants under the credit agreement.



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest on borrowings is payable monthly at rates equal to the prime rate,
or at the Companys option, LIBOR plus up to 225 basis points. During the
three and six months ended June 30, 2002, the Company incurred interest
expense related to the line of credit of approximately $15,400 and $49,400,
respectively, resulting in a weighted average interest rate of 4.22% and
4.33%, respectively.

7



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##### Table of Contents



INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

4.    MINORITY INTERESTS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company had a majority ownership in Return.com Online, LLC
(Return.com) during the three months ended March 31, 2001. The remaining
interest was owned by Mail Boxes Etc (MBE). In March 2001, United
Parcel Services, Inc. (UPS) announced a definitive agreement to purchase
MBE. As a result of this agreement, the Company agreed to reacquire MBEs
40% ownership interest in Return.com in April 2001. The note receivable
of $3.4 million due from MBE was forgiven by the Company in exchange for
MBEs ownership interest in Return.com, resulting in 100% ownership by the
Company. All remaining contractual commitments for additional funding by
the Company were also cancelled.



| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the first quarter of 2001, the Company recorded $2.8 million in
impairment reserves for its investment in Return.com. The Company
utilized these reserves during the fourth quarter of 2001 to write off its
investment in Return.com. At December 31, 2001, Return.com was no longer
in operation.

5.    EARNINGS PER SHARE



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table shows the amounts used in computing earnings per share
(EPS) in accordance with Statement of Financial Accounting Standards No.
128 and the effects on income and the weighted average number of shares of
potential diluted common stock. Certain options outstanding to purchase
shares of the Companys common stock aggregating 1.1 million and 871,000
were not included in the computation of diluted EPS for both the three
months ended June 30, 2002 and 2001, respectively, because their effect
was anti-dilutive. For the six months ended June 30, 2002 and 2001,
certain options outstanding to purchase shares of the Companys common
stock aggregating 1.1 million and 1.2 million, respectively, were not
included in the computation of diluted EPS because their effect was
anti-dilutive. Shares used to compute diluted EPS for the three and six
months ended June 30, 2002 and 2001 are as follows (in 000s):

|                            |                                           |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|--------------------------- | ----------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                            |                                           |  | Three Months Ended |        | Six Months Ended
|                            |                                           |  | June 30,           |        | June 30,        
|                            |                                           |  |                    |        |                 
|                            |                                           |  | 2002               |        | 2001             |  | 2002 |        | 2001
|                            |                                           |  |                    |        |                  |  |      |        |     
|Diluted earnings per share: |                                           |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |       
|                            | Weighted average shares outstanding       |  |                    | 11,623 |                  |  |      | 11,319 |      |  |  | 11,570 |  |  |  | 11,319 | 
|                            | Employee and director stock options       |  |                    | 394    |                  |  |      | 420    |      |  |  | 332    |  |  |  | 326    | 
|                            |                                           |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|                            | Weighted average shares assuming dilution |  |                    | 12,017 |                  |  |      | 11,739 |      |  |  | 11,902 |  |  |  | 11,645 | 
|                            |                                           |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 

8



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##### Table of Contents



INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

6.    OTHER COMPREHENSIVE INCOME



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No. 130, Reporting Comprehensive Income, established standards
for reporting and display of comprehensive income and its components
in financial statements. For the three and six month periods ended
June 30, 2002 and 2001, comprehensive income was the same as net
income.

7.    RECENT ACCOUNTING PRONOUNCEMENTS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and FASB No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 prohibits the use of pooling-of-interest for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are
completed after June 30, 2001. There are also transition provisions that
apply to business combinations completed after July 1, 2001, that were
accounted for by the purchase method. SFAS No. 142 changes the accounting for
goodwill and other indefinite life intangible assets from an amortization
method to an impairment only approach.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company adopted this statement effective January 1, 2002, and in
accordance with the statement, the Company no longer amortizes goodwill.
The Company completed its impairment analysis required upon the adoption of
SFAS No. 142 during the second quarter of 2002 and determined that no
impairment existed. During the three and six months ended June 30, 2001,
amortization expense associated with goodwill was approximately $42,000 and
$85,000, respectively. The Companys proforma consolidated net income and
earnings per share for the three and six months ended June 30, 2001,
excluding goodwill amortization, would have been $1,057,000 ($0.09 per
share, basic and diluted) and $1,576,000 ($0.14 per share, basic and
diluted), respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has intangible assets that continue to be subject to
amortization under the provisions of SFAS No. 142. The intangible assets
consist of acquired customer contracts, which are included in other assets
in the Companys condensed consolidated balance sheet and which are
amortized over a period of 1 to 5 years on a straight-line basis. At June
30, 2002 and 2001, the Company had intangible assets of approximately
$690,000 and $892,000, net of accumulated amortization of $570,000 and
$118,000, respectively. Amortization expense of these intangible assets
amounted to approximately $134,000 and $51,000 during the three months
ended June 30, 2002 and 2001, respectively, and approximately $247,000 and
$101,000 during the six months ended June 30, 2002 and 2001, respectively.

9



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##### Table of Contents



INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, and amends APB Opinion No. 51, Consolidated Financial Statements.
SFAS No. 144 retains many of the requirements of SFAS No. 121 and the basic
provisions of APB Opinion No. 30; however, it establishes a single accounting
model for long-lived assets to be disposed of by sale. The Company
adopted SFAS No. 144 on January 1, 2002; the adoption did not have any effect
on the Companys financial position or results of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections.
One of the major changes of this statement is to change the accounting for
the classification of gains and losses from the extinguishment of debt.
Upon adoption, the Company will follow APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring events and
Transactions in determining whether such extinguishment of debt may be
classified as extraordinary. The provisions of this statement related to
the rescission of FASB Statement 4 shall be applied in fiscal years
beginning after May 15, 2002 with early application encouraged. The
Company believes this Statement will not have any impact on its Financial
Statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements commitment to an exit
plan, which is generally before an actual liability has been incurred.
Adoption of this Statement is required with the beginning of fiscal year
2003. The Company is currently evaluating the impact of adopting this
Statement.

8.    EARN-OUT PAYMENT



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 8, 2000, the Company acquired UDS, which was accounted
for under the purchase method
of accounting. At December 31, 2001, the Company recorded an accrual for
approximately $15.3 million for payment to the sellers of UDS under the
terms of an earn-out provision contained in the December 8, 2000 Merger
Agreement. The earn-out accrual was recorded as additional purchase price
consideration. In February 2002, the payment was made consisting of $13.7
million of cash and 310,000 shares of the Companys common stock valued at
$1.6 million. As a result, goodwill related to UDS amounts to $18.8
million, net of accumulated amortization of $0.3 million as of June 30,
2002.

10



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##### Table of Contents






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 of our
contracts; reliance on the telecommunications industry; the impact of the
trend toward outsourcing; risks associated with changing technology; risks
associated with competition; and other factors discussed in more detail
under Business in our Annual Report on Form 10-K for the year ended
December 31, 2001.

Overview



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Innotrac provides customized, technology-based order fulfillment, call
center and total customer relationship management services to large
corporations that outsource these functions. The Company offers inventory
management, inbound call center, pick/pack/ship services, order tracking,
transaction processing and returns processing. The Company handles
telecommunications products that include Digital Subscriber Line and Cable
Modems (Modems), consumer phones and wireless pager equipment, for
clients such as BellSouth Corporation (BellSouth), Qwest International,
Inc. (Qwest), and Comcast Corporation (Comcast) and their customers.
The Company also provides these services for a significant number of
catalog, retail, direct marketing and consumer products companies such as
Coca-Cola, NAPA, Tactica, Nordstrom.com, Porsche, Wilsons Leather, Martha
Stewart Living Omnimedia and Thane International. During the three months
ended June 30, 2002, approximately 29.0% of the Companys revenues were
generated from its telecommunications clients, 24.7% from its Modems
clients and 46.3% from its retail, catalog and direct marketing clients.
During the six months ended June 30, 2002, approximately 30.4% of the
Companys revenues were generated from its telecommunications clients,
23.6% from its Modems clients and 46.0% from its retail, catalog and direct
marketing clients. The Company anticipates that the percentage of its
revenues attributable to telecommunications clients will continue to
decrease in 2002 due to the loss of SBC Communications Inc. (SBC) as a
client during the fourth quarter of 2001 and the addition of several new
retail and catalog fulfillment and call center clients during the second
half of 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With the Companys conversion of substantially all of its clients to a
fee-for-service model during 2000 and 2001, the Company no longer purchases
and sells Caller ID equipped phones, modems and other telecommunications
equipment from third party manufacturers for these clients. Instead, the
Company warehouses products on a consignment basis and fulfills these
products on behalf of its customers for a fee. The Company still purchases
and owns inventory for certain clients, but on a significantly reduced risk
basis as a result of client guarantees and contractual indemnifications.
The new model substantially reduces revenues as the pass through cost of
purchased equipment is no longer included in revenues. Gross margins have
improved since the Company no longer has inventory risk or cost of
equipment.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of April 16, 2001, Innotrac owned 60% of Return.com LLC, (Return.com)
a subsidiary that processed product returns for online and catalog
retailers. The Companys equity partner in this venture, Mail Boxes, Etc.
(MBE), owned the remaining 40% of Return.com. However, due to the
announcement in March 2001 that United Parcel Services, Inc. had entered
into a definitive agreement to
purchase MBE, the Company elected to acquire from MBE the remaining 40%
ownership interest in Return.com and terminate its arrangement with MBE as
its exclusive front-end solution. This became

11



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | effective April 17, 2001. During the fourth quarter of 2001, the Company
utilized its $2.8 million impairment reserve, which was recorded in the
first quarter of 2001, to write off its investment in Return.com. At
December 31, 2001, Return.com was no longer in operation.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the loss of the SBC contract in December 2001, the Company
elected to close its call center operations in Atlanta, Georgia in January
2002 and shifted the clients served from this facility to its call center
operations in Pueblo, Colorado. The Company terminated approximately 260
employees at the Atlanta and Pueblo call center facilities effective
January 2002. The Company incurred approximately $1.0 million in
severance, write-off of assets, and other expenses related to the closure
of the Atlanta call center operations during the fourth quarter of 2001.
Management does not anticipate incurring any additional costs associated
with this closure during 2002. The Company continues to operate its call
center facilities in Pueblo, Colorado and Reno, Nevada.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 1, 2002, the Company made an additional payment of $15.3
million to the sellers of Universal Distribution Services, Inc. (UDS) in
accordance with the earn-out provisions in the December 2000 Merger
Agreement with UDS (as discussed in Note 8 to the Notes to Condensed
Consolidated Financial Statements). The payment was funded from existing
working capital and borrowings under the Companys line of credit.

12



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2002 and
2001. The data has been prepared on the same basis as the annual consolidated
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 consolidated financial
statements.

|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |      |  
|------------------------------------------------ | ---------------- |  | -------------- | ---- | -------------- |  | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                                 |                  |  | Three Months   |      | Six Months    
|                                                 |                  |  | Ended June 30, |      | Ended June 30,
|                                                 |                  |  |                |      |               
|                                                 |                  |  | 2002           |      | 2001           |  | 2002  |      | 2001
|                                                 |                  |  |                |      |                |  |       |      |     
|Revenues                                         |                  |  | 100.0          | %    |                |  | 100.0 | %    |      |  | 100.0 | %    |   |  | 100.0 | %   
|Cost of revenues                                 |                  |  | 44.3           |      |                |  | 47.2  |      |      |  | 43.5  |      |   |  | 46.3  |     
|Special credit                                   |                  |  |               |      |                |  |      |      |      |  | (0.9  | )    |   |  |      |     
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     
|                                                 | Gross margin     |  |                | 55.7 |                |  |       | 52.8 |      |  |       | 57.4 |   |  |       | 53.7 |  
|Selling, general and administrative expenses     |                  |  | 46.5           |      |                |  | 41.4  |      |      |  | 47.1  |      |   |  | 47.1  |     
|Special credit                                   |                  |  | (2.2           | )    |                |  |      |      |      |  | (4.1  | )    |   |  |      |     
|Depreciation and amortization                    |                  |  | 7.8            |      |                |  | 4.6   |      |      |  | 7.6   |      |   |  | 4.7   |     
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     
|                                                 | Operating income |  |                | 3.6  |                |  |       | 6.8  |      |  |       | 6.7  |   |  |       | 1.9  |  
|Other (income) expense, net                      |                  |  | 0.3            |      |                |  | (0.8  | )    |      |  | 0.1   |      |   |  | (0.8  | )   
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     
|Income before income taxes
and minority interest |                  |  | 3.3            |      |                |  | 7.6   |      |      |  | 6.5   |      |   |  | 2.7   |     
|Income tax provision                             |                  |  | (1.4           | )    |                |  | (3.6  | )    |      |  | (2.6  | )    |   |  | (1.4  | )   
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     
|Net income before minority interest              |                  |  | 1.9            |      |                |  | 4.0   |      |      |  | 3.9   |      |   |  | 1.3   |     
|Minority interest                                |                  |  |               |      |                |  |      |      |      |  |      |      |   |  | 1.7   |     
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     
|                                                 | Net income       |  |                | 1.9  | %              |  |       | 4.0  | %    |  |       | 3.9  | % |  |       | 3.0  | %
|                                                 |                  |  |                |      |                |  |       |      |      |  |       |      |   |  |       |     

Special Charges

At June 30, 2002 and December 31, 2001, the Company had approximately $2.0
million and $4.6 million, respectively, in accruals related to the special
charges incurred during the year ended December 31, 2000. The remaining
accruals at June 30, 2002 included $652,000 for the Companys shift to a
fee-for-service business model and $1.3 million for e-commerce costs. Cash
payments relating to these accruals for the three and six months ended June
30, 2002 were approximately $377,000 and $466,000, respectively. The Company
reversed to income approximately $359,000 and $1.6 million in special charge
accruals during the three and six months ended June 30, 2002, respectively as
these accruals were no longer required for certain accounts receivable and
inventory items related to the shift to a fee-for-service business model. The
majority of the remaining accruals, except for that associated with one
specific client which represents about 40% of the remaining accrual and is
classified as long-term, are expected to be utilized during the remainder of
the year ending December 31, 2002. Any unused accruals will be reversed to
income and reported as a special credit.

13



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Revenues.Net revenues decreased 37.7% to $16.2 million for the three months
ended June 30, 2002 from $26.0 million for the three months ended June 30,
2001. The decrease in revenues is primarily due to the loss of the SBC
contract at December 1, 2001 which represented approximately $4.5 million of
revenues during the second quarter of 2001; completion of an outbound consumer
premise equipment (CPE) sales program for BellSouth Corporation (BellSouth)
during 2001; completion of the fee-for-service transition; and a decrease in
product sales from Warranty Corporation of America (WACA) as a result of its
loss of a significant client. This decline in revenues was offset by the
re-initiation of fulfillment services of CPE during the third quarter
of 2001 and the expansion of services to
include wireless pager equipment with BellSouth during the fourth
quarter of 2001, as well as the initiation of the Martha Stewart Living
Omnimedia, Inc. contract which began in the first quarter of 2002.

Cost of Revenues.Cost of revenues decreased 41.5% to $7.2 million for the
three months ended June 30, 2002 compared to $12.3 million for the three
months ended June 30, 2001. Cost of revenues decreased primarily due to the
decrease in equipment units sold to WACA and from the completion of the CPE
outbound sales program for BellSouth during 2001. A reduction in call center
direct costs from the loss of the SBC contract in December 2001 and the
subsequent closure of the Atlanta call center in January 2002 also contributed
to the decrease in cost of revenues during the second quarter of 2002 as
compared to the same period in 2001.

Gross Margin.For the three months ended June 30, 2002, the Companys gross
margin decreased by $4.7 million to $9.0 million, or 55.7% of revenues,
compared to $13.7 million, or 52.8% of revenues, for the three months ended
June 30, 2001. This decrease was due primarily to the factors discussed
above.

Selling, General and Administrative Expenses.S,G&A expenses for the three
months ended June 30, 2002 decreased to $7.5 million, or 46.5% of revenues,
compared to $10.8 million, or 41.4% of revenues, for the same period in 2001.
The decrease in expenses was mainly attributable to a decrease in bad debt
expense, a 2001 impairment write-off for long-lived assets associated with
the termination of the SBC contract, and a reduction in other variable
expenditures. The decline in S,G&A costs was partially offset by increased
facility costs due to the iFulfillment acquisition and increased information
technology expenses associated with new customer start-ups which will continue
during the second half of 2002.

Income Taxes.The Companys effective tax rate for the three months ended June 30,
2002 and 2001 was 42.1% and 47.7%, respectively.

14



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Revenues.Net revenues decreased 36.1% to $32.6 million for the six months
ended June 30, 2002 from $50.9 million for the six months ended June 30, 2001.
The decrease in revenues is primarily due to the loss of the SBC contract at
December 1, 2001 which represented approximately $9.4 million of revenues
during the first half of 2001; completion of the CPE outbound sales program for
BellSouth during 2001; completion of the fee-for-service transition; and a
decrease in product sales from WACA as a result of its loss of a significant
client. This decline in revenues was offset by the re-initiation of
fulfillment services of CPE during the third quarter of 2001 and the expansion of services
to include wireless
pager equipment with BellSouth during the fourth quarter of 2001, as
well as the initiation of the Martha Stewart Living Omnimedia, Inc. contract
which began in the first quarter of 2002.

Cost of Revenues.The companys cost of revenues decreased 39.9% to $14.2
million for the six months ended June 30, 2002 compared to $23.6 million for
the six months ended June 30, 2001. Cost of revenues decreased primarily due
to the decrease in equipment units sold to WACA and from the completion of the
CPE outbound sales program for BellSouth during 2001. A reduction in call
center direct costs from the loss of the SBC contract in December 2001 and the
subsequent closure of the Atlanta call center in January 2002 also contributed
to the decrease in cost of revenues during the first half of 2002 as compared
to the same period in 2001.

Gross Margin.For the six months ended June 30, 2002, the Companys gross
margin decreased by $8.7 million to $18.7 million, or 57.4% of revenues,
compared to $27.4 million, or 53.7% of revenues, for the six months ended June
30, 2001. This decrease was due primarily to the factors discussed above.

Selling, General and Administrative Expenses.S,G&A expenses for the six
months ended June 30, 2002 decreased to $15.3 million, or 47.1% of revenues,
compared to $24.0 million, or 47.1% of revenues, for the six months ended June
30, 2001. The decrease in expenses was mainly attributable to charges recorded
during the first quarter of 2001, primarily for the impairment of software
development costs, and severance costs related to Return.com and a significant
decrease in bad debt expense. The decline in S,G&A costs was partially offset
by increased costs from the acquisition of iFulfillment, Inc. in July 2001 and
increased information technology expenses associated with new customer
start-ups which will continue during the second half of 2002.

Income Taxes.The Companys effective tax rate for the six months ended June 30,
2002 and 2001 was 39.9% and 51.5%, respectively.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company funds its operations and capital expenditures primarily through
cash flow from operations and borrowings under a credit facility with a bank.
The Company had cash and cash equivalents of approximately $2.3 million at
June 30, 2002 as compared to $9.4 million at December 31, 2001. This decrease
in cash was primarily due to an earn-out payment of $15.3 million made by the
Company during the first quarter of 2002 to the sellers of UDS (see Note 8 to
the Condensed Consolidated Financial Statements).

On February 11, 2002, the Board of Directors authorized the repurchase of up
to $10 million of the Companys outstanding common stock through February
2003. During the six months ended June 30, 2002, the Company did not
repurchase any shares of common stock.

The Company has a revolving credit agreement with a bank for borrowings up to
$40 million. In May 2002, the Company extended its credit facility through
June 1, 2005 under similar terms and conditions as the previous revolving
credit agreement. The Company and its subsidiaries have pledged all of its
assets and provided guarantees to the lender as collateral under this revolving
credit agreement. At June 30, 2002 and 2001, the Company did not have any
outstanding borrowings under the line of credit. The revolving line of credit
agreement contains various restrictive financial and change of ownership
control covenants. The May 2002 amendment added provisions limiting borrowings
under the agreement to a margin or borrowing base, as defined, which totaled
$25.3 million at June 30, 2002 and tightened certain of the financial
covenants. At June 30, 2002, the Company was in compliance with all covenants
under the credit agreement.

Interest on borrowings is payable monthly at rates equal to the prime rate, or
at the Companys option, LIBOR plus up to 225 basis points. During the three
and six months ended June 30, 2002, the Company incurred interest expense
related to the line of credit of approximately $15,400 and $49,400,
respectively, resulting in a weighted average interest rate of 4.22% and 4.33%,
respectively.

During the six months ended June 30, 2002, the Company generated approximately
$14.4 million in cash flows from operating activities compared to $7.4 million
in cash flows from operating activities in the same period in 2001. The company anticipates a
significant increase in BellSouth inventory purchases along with increases in information technology
spending and new customer start-up costs which will result in negative cash flows from operating
activities during the second half of 2002.

During the six months ended June 30, 2002, net cash used in investing
activities was $21.3 million as compared to $3.5 million in 2001. This
difference was primarily due to the earn-out payment of $13.7 million in cash
made in February 2002, $8.0 million in capital expenditures primarily in
conjunction with the Companys new facility in Hebron, Kentucky and
capitalized software costs. As a result of significant negative developments
in the telecommunications industry in July 2002, which affected several of the
Companys customers, the Company will undertake a review of its business
strategy with respect to its customers within this industry in the third
quarter. As part of this review, the Company will also evaluate associated
capitalized software and equipment costs for any potential impairment and
further assess the collectibility of its accounts receivable from these
customers.

During the six months ended June 30, 2002, net cash used in financing
activities was $195,000 compared to $22,000 used in financing activities in
the same period in 2001.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company estimates that its cash needs through 2002 will be met by cash
flows from operations and borrowings under its line of credit facility. The
Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of
complementary businesses. There can be no assurance that the Company will be
able to raise any such capital on terms acceptable to the Company or at all.

Critical Accounting Policies

Innotracs significant accounting policies are described in Note 1 to the
Condensed Consolidated Financial Statements and are included in the Companys
2001 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and FASB No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prohibits the use of pooling-of-interest for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. There are also transition provisions that apply to business
combinations completed after July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 changes the accounting for goodwill and other
indefinite life intangible assets from an amortization method to an impairment
only approach.

The Company adopted this statement effective January 1, 2002, and in accordance
with the statement, the Company no longer amortizes goodwill. The Company
completed its impairment analysis required upon the adoption of SFAS
No. 142 during
the second quarter of 2002 and determined that no impairment existed. During
the three and six months ended June 30, 2001, amortization expense associated
with goodwill was approximately $42,000 and $85,000, respectively. The
Companys proforma consolidated net income and earnings per share for the three
and six months ended June 30, 2001, excluding goodwill amortization, would have
been $1,057,000 ($0.09 per share, basic and diluted) and $1,576,000 ($0.14 per
share, basic and diluted), respectively.

The Company has intangible assets that continue to be subject to amortization
under the provisions of SFAS No. 142. The intangible assets consist of acquired
customer contracts and warrants, which are included in other assets in the
Companys condensed consolidated balance sheet and which are amortized over a
period of 1 to 5 years on a straight-line basis. At June 30, 2002 and 2001,
the Company had intangible assets of approximately $690,000 and $892,000, net
of accumulated amortization of $570,000 and $118,000, respectively.
Amortization expense of these intangible assets amounted to approximately
$134,000 and $51,000 during the three months ended June 30, 2002 and 2001,
respectively, and approximately $247,000 and $101,000 during the six months
ended June 30, 2002 and 2001, respectively

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets
to be Disposed of, and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of OperationsReporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, and amends APB Opinion No. 51, Consolidated
Financial Statements. SFAS No. 144 retains many of the
requirements of SFAS No. 121
and the basic provisions of APB Opinion No. 30; however, it establishes a single
accounting model for long-lived assets to be

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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

disposed of by sale. The Company adopted SFAS No. 144 on January 1, 2002; the
adoption did not have any effect on the Companys financial position or
results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4,
44 and 64, Amendment to FASB Statement 13, and Technical Corrections. One of
the major changes of this statement is to change the accounting for the
classification of gains and losses from the extinguishment of debt. Upon
adoption, the Company will follow APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring events and Transactions in
determining whether such extinguishment of debt may be classified as
extraordinary. The provisions of this statement related to the rescission of
FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002
with early application encouraged. The Company believes this Statement will
not have any impact on its Financial Statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which is generally
before an actual liability has been incurred. Adoption of this Statement is
required with the beginning of fiscal year 2003. The Company is currently
evaluating the impact of adopting this Statement.

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Item 3  Quantitative and Qualitative Disclosure About Market Risks

Management believes the Companys exposure to market risks is immaterial.
Innotrac holds no market risk sensitive instruments for trading purposes. At
present, the Company does not employ any derivative financial instruments,
other financial instruments or derivative commodity instruments to hedge any
market risks and does not currently plan to employ them in the future. To the
extent that the Company has borrowings outstanding under its credit facility,
the Company will have market risk relating to the amount of borrowings due to
variable interest rates under the credit facility. The Companys exposure is
immaterial due to the short-term nature of these borrowings. Additionally,
all of the Companys lease obligations are fixed in nature as discussed in
Innotracs 2001 Annual Report on Form 10-K and other filings on file with the
Securities and Exchange Commission, and the Company has no long-term purchase
commitments.

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Part II  Other Information




Item 4  Submission of Matters to a Vote of Securities Holders

The annual meeting of shareholders was held in Atlanta, Georgia on May 20,
2002. In total, 11,073,773 shares of common stock, 94.9% of outstanding shares,
were represented at the meeting either in person or by proxy.
The purpose of the meeting was to re-elect the following two directors whose
terms expired in 2002 to another three year term, which expires in 2005:

|                 |  |                  |            |          |  |  |         | 
|---------------- |  | ---------------- | ---------- | -------- |  |  | ------- | 
|                 |  | Number of Shares
|                 |  | For              |            | Withheld
|                 |  |                  |            |         
|Larry C. Hanger  |  |                  | 10,416,802 |          |  |  | 656,971 | 
|Bruce V. Benator |  |                  | 10,472,202 |          |  |  | 601,571 | 

The number of abstentions and broker non-votes was zero.




Item 6  Exhibits and Reports on Form 8-K

(a)  Exhibits:



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1    Loan Documents Modification Agreement between Innotrac
Corporation and Southtrust Bank entered into                as of May 31, 2002.



| |                                                                               
| | ------------------------------------------------------------------------------
| | 99.1    Certification of Chief Executive Officer Pursuant to 18
U.S.C. § 1350.



| |                                                                               
| | ------------------------------------------------------------------------------
| | 99.2    Certification of Chief Financial Officer Pursuant to 18
U.S.C. § 1350.

(b)  Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Innotrac Corporation filed a current report on Form 8-K on April
24, 2002 regarding a dismissal of the Companys independent
accountants. Arthur Andersen LLP was dismissed, and the Company
appointed Deloitte and Touche LLP as its new independent
accountants effective immediately.

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SIGNATURES

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



|                      |                                    |                                                                                                                                
|--------------------- | ---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------
|                      | INNOTRAC CORPORATION

(Registrant)
|                     
|Date: August 13, 2002 | By:                                | /s/ Scott D. Dorfman

Scott D. Dorfman
President, Chief Executive Officer and Chairman
of the Board                            
|                     
|Date:
August 13, 2002 | By:                                | /s/ David L. Gamsey

David L. Gamsey
Senior Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)

21