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 March 31, 2007





OR




oTRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      ACT OF 1934





For
      the
      transition period from  _____
      to
      _____





Commission
      file number 000-23740


INNOTRAC
                      CORPORATION(Exact
                        name of registrant as specified in its
                        charter)


Georgia
                
                58-1592285(State
                    or other jurisdiction of
                
                (I.R.S.
                    Employerincorporation
                    or organization)
                
                Identification
                    Number)


6655
                      Sugarloaf ParkwayDuluth,
                      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 oNo  x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large accelerated filer o
              Accelerated filer o
              Non-accelerated filer x


Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-b-2 of the Act) Yes o No x





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





Outstanding
                  at May 10,
                  2007Common Stock $.10 par value per
                share
              12,280,610
                  Shares













**INNOTRAC
      CORPORATION**





**INDEX**




Part
                  I. Financial Information
              **Page**Item
                  1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets atMarch
                  31, 2007 (Unaudited) and December 31,
                  2006
              3Condensed
                  Consolidated Statements of Operations for theThree
                  Months Ended March 31, 2007 and 2006
                  (Unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for theThree
                  Months Ended March 31, 2007 and 2006
                  (Unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements
                  (Unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              19Item
                  4.
              Controls
                  and Procedures
              19Part
                  II. Other InformationItem
                  6.
              Exhibits
              20Signatures
              21




1


**Part
        I - Financial Information**
 
 Item
        1
        - Financial Statements
 The
        following condensed consolidated financial statements of Innotrac Corporation,
        a
        Georgia corporation (“Innotrac” or the “Company”), have been prepared in
        accordance with the instructions to Form 10-Q and, therefore, omit or condense
        certain footnotes and other information normally included in financial
        statements prepared in accordance with accounting principles generally accepted
        in the United States of America. In the opinion of management, all adjustments
        are of a normal and recurring nature, except those specified as otherwise,
        and
        include those necessary for a fair presentation of the financial information
        for
        the interim periods reported. Results of operations for the three months
        ended
        March 31, 2007 are not necessarily indicative of the results for the entire
        year
        ending December 31, 2007. These financial statements should be read in
        conjunction with the consolidated financial statements and notes thereto
        included in the Company’s 2006 Annual Report on Form 10-K, which is available on
        our website at www.innotrac.com.
  2


**INNOTRAC
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(in
      thousands, except share data)**




**March
                  31, 2007**
              
              **December
                  31, 2006****(unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              65
              
              $
              1,014Accounts
                  receivable (net of allowance for doubtful accounts of $209 atMarch
                  31, 2007 and $257 at December 31, 2006)
              
              
              18,547
              
              
              22,939Inventory
              
              
              1,585
              
              
              1,729Prepaid
                  expenses and other
              
              
              1,571
              
              
              1,088Total
                  current assets
              
              
              21,768
              
              
              26,770Property
                  and equipment:Rental
                  equipment
              
              
              327
              
              
              344Computer
                  software and equipment
              
              
              40,401
              
              
              39,769Furniture,
                  fixtures and leasehold improvements
              
              
              6,818
              
              
              6,81247,546
              
              
              46,925Less
                  accumulated depreciation and amortization
              
              
              (30,278
              )
              
              (29,089
              )17,268
              
              
              17,836Goodwill
              
              
              25,169
              
              
              25,169Other
                  assets, net
              
              
              1,694
              
              
              1,765Total
                  assets
              
              $
              65,899
              
              $
              71,540**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              9,965
              
              $
              14,363Line
                  of credit
              
              
              8,446
              
              
              8,586Accrued
                  expenses and other
              
              
              5,046
              
              
              4,981Total
                  current liabilities
              
              
              23,457
              
              
              27,930Noncurrent
                  liabilities:Other
                  noncurrent liabilities
              
              
              1,181
              
              
              1,576Total
                  noncurrent liabilities
              
              
              1,181
              
              
              1,576Commitments
                  and contingencies (see Note 5)Shareholders’
                  equity:Preferred
                  stock: 10,000,000 shares authorized, $0.10 par value,no
                  shares issued or outstanding
              
              
              —
              
              
              —Common
                  stock: 50,000,000 shares authorized, $0.10 par value,12,280,610
                  shares issued and outstanding
              
              
              1,228
              
              
              1,228Additional
                  paid-in capital
              
              
              66,036
              
              
              66,016Accumulated
                  deficit
              
              
              (26,003
              )
              
              (25,210
              )Total
                  shareholders’ equity
              
              
              41,261
              
              
              42,034Total
                  liabilities and shareholders’ equity
              
              $
              65,899
              
              $
              71,540




See
      notes
      to condensed consolidated financial statements.




3


Financial
      Statements-Continued





**INNOTRAC
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**For
      the Three Months Ended March 31, 2007 and 2006**


**(in
      thousands, except per share amounts)**




**Three
                  Months Ended March 31,****2007**
              
              **2006****(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              27,775
              
              $
              17,328Cost
                  of revenues
              
              
              15,952
              
              
              8,897Selling,
                  general and administrative expenses
              
              
              11,164
              
              
              8,821Depreciation
                  and amortization
              
              
              1,285
              
              
              821Total
                  operating expenses
              
              
              28,401
              
              
              18,539Operating
                  (loss)
              
              
              (626
              )
              
              (1,211
              )Other
                  expense:Interest
                  expense
              
              
              167
              
              
              67Total
                  other expense
              
              
              167
              
              
              67(Loss)
                  before income taxes
              
              
              (793
              )
              
              (1,278
              )Income
                  taxes
              
              
              —
              
              
              —Net
                  (loss)
              
              $
              (793
              )
              $
              (1,278
              )(Loss)
                  per share:Basic
              
              $
              (0.06
              )
              $
              (0.10
              )Diluted
              
              $
              (0.06
              )
              $
              (0.10
              )Weighted
                  average shares outstanding:Basic
              
              
              12,281
              
              
              12,281Diluted
              
              
              12,281
              
              
              12,281




See
      notes
      to condensed consolidated financial statements.




4


Financial
      Statements-Continued


**INNOTRAC
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
      the Three Months Ended March 31, 2007 and 2006**


**(in
      thousands)**


**Three
                    Months Ended March 31,****2007**
                
                **2006****(unaudited)**
                
                **(unaudited)**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (793
                )
                $
                (1,278
                )Adjustments
                    to reconcile net loss to net cash used inoperating
                    activities:Depreciation
                    and amortization
                
                
                1,285
                
                
                821Provision
                    for bad debts
                
                
                (46
                )
                
                (1
                )Stock
                    compensation expense
                
                
                19
                
                
                41Changes
                    in operating assets and liabilities:Decrease
                    (increase) in accounts receivable, gross
                
                
                4,440
                
                
                (917
                )Decrease
                    in inventory
                
                
                144
                
                
                555Increase
                    in prepaid expenses and other
                
                
                (440
                )
                
                (122
                )Decrease
                    in accounts payable
                
                
                (4,398
                )
                
                (2,529
                )(Decrease)
                    increase in accrued expenses and other
                
                
                (329
                )
                
                1,378Net
                    cash used in operating activities
                
                
                (118
                )
                
                (2,052
                )Cash
                    flows from investing activity:Capital
                    expenditures
                
                
                (691
                )
                
                (2,916
                )Net
                    cash used in investing activities
                
                
                (691
                )
                
                (2,916
                )Cash
                    flows from financing activities:Net
                    (repayments) borrowings under line of credit
                
                
                (140
                )
                
                4,071Net
                    cash (used in) provided by financing activities
                
                
                (140
                )
                
                4,071Net
                    decrease in cash and cash equivalents
                
                
                (949
                )
                
                (897
                )Cash
                    and cash equivalents, beginning of period
                
                
                1,014
                
                
                2,068Cash
                    and cash equivalents, end of period
                
                $
                65
                
                $
                1,171Supplemental
                    cash flow disclosures:Cash
                    paid for interest
                
                $
                177
                
                $
                54


See
      notes
      to condensed consolidated financial statements.




5




**INNOTRAC
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **March
        31, 2007 and 2006**
 **(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 Annual Report on Form 10-K filed with the Securities and Exchange
      Commission for the year ended December 31, 2006. Certain of the Company’s more
      significant accounting policies are as follows:





*Accounting
      Estimates.* The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosures of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





*Goodwill
      and Other Acquired Intangibles.* Goodwill
      represents the cost of an acquired enterprise in excess of the fair market
      value
      of the net tangible and identifiable intangible assets acquired. The Company
      tests goodwill annually for impairment as of January 1 or sooner if
      circumstances indicate.





*Impairment
      of Long-Lived Assets.* The
      Company reviews long-lived assets and certain intangible assets for impairment
      when events or changes in circumstances indicate that the carrying amount of
      an
      asset may not be recoverable. Impairment would be measured based on a projected
      cash flow model. If the projected undiscounted cash flows for the asset are
      not
      in excess of the carrying value of the related asset, the impairment would
      be
      determined based upon the excess of the carrying value of the asset over the
      projected discounted cash flows for the asset.





*Accounting
      for Income Taxes.* Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance was recorded against the net deferred tax asset as of
      December 31, 2006 and March 31, 2007 (see Note 4).




*Revenue
      Recognition.* Innotrac
      derives its revenue primarily from two sources: (1) fulfillment operations
      and
      (2) the delivery of call center services. Innotrac’s fulfillment services
      operations record revenue at the conclusion of the material selection, packaging
      and shipping process. Innotrac’s call center services business recognizes
      revenue according to written pricing agreements based on the number of calls,
      minutes or hourly rate basis. All other revenues are recognized as services
      are
      rendered.





*Stock-Based
      Compensation Plans* *.*  In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based
      Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation.”
SFAS No. 123(R) requires all share-based payments to employees, including grants
      of employee stock options, to be recognized as compensation expense in the
      consolidated financial statements based on their fair values. That expense
      will
      be recognized over the period during which an employee is required to provide
      services in exchange for the award, known as the requisite service period
      (usually the vesting period). The Company adopted SFAS No. 123(R) effective
      January 1, 2006 using the Modified Prospective Application Method. Under this
      method, SFAS 123(R) applies to new awards and to awards modified, repurchased
      or
      cancelled after the effective date. Additionally, compensation expense for
      the
      portion of awards for which the requisite service has not been rendered that
      are
      outstanding as of the required effective date shall be recognized as the
      requisite service is performed on or after the required effective date. The
      adoption of SFAS No. 123(R) resulted in recording $19,000 and $41,000 in
      compensation expense for the three months ended March 31, 2007 and 2006,
      respectively. As of March 31, 2007, approximately $66,000 of unrecognized
      compensation expense related to non-vested stock options is expected to be
      recognized over the following 33 months.




6




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **March
          31, 2007 and 2006**
 **(Unaudited)**


The
      fair
      value of each option was estimated on the date of grant using the Black-Scholes
      option-pricing model with the following weighted average
      assumptions:





**Three
                months ended****March
                31, 2007**
            
            **March
                31, 2006**Risk-free
                interest rate
            
            4.56%
            
            4.72%Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                lives
            
            
            2.0
                Years
            
            
            2.1
                YearsExpected
                volatility
            
            
            71.9
            %
            
            71.9
            %




2.
            **FINANCING
                OBLIGATIONS**





The
      Company has a revolving bank credit agreement with a maximum borrowing limit
      of
      $25.0 million, which will mature in March 2009. Although the maximum borrowing
      limit is $25.0 million, the credit facility limits borrowings to a specified
      percentage of eligible accounts receivable and inventory, which totaled $14.3
      million at March 31, 2007. At March 31, 2007, the Company had $8.4 million
      outstanding and $3.1 million of additional availability under the revolving
      credit agreement. The Company has granted a security interest in all of its
      assets to the lender as collateral under this revolving credit
      agreement.




The
      revolving credit agreement contains a restrictive fixed charge coverage ratio,
      change in ownership control and other covenants. The provisions of the revolving
      credit agreement require that the Company maintain a lockbox arrangement with
      the lender, and allows the lender to declare any outstanding borrowing amounts
      to be immediately due and payable as a result of noncompliance with any of
      the
      covenants. Accordingly, in the event of noncompliance, these amounts could
      be
      accelerated.





On
      April
      16, 2007, the Company and the bank entered into a Second Waiver and Amendment
      Agreement (the “Second Waiver Agreement”) whereby the bank agreed to waive the
      Company’s then-existing defaults under the credit agreement, provided that the
      Company comply with the terms of the credit agreement, as amended, and the
      additional conditions of the Second Waiver Agreement. The defaults included
      failure to maintain the minimum fixed charge coverage ratio, failure to make
      a
      certain deferred purchase payment in a timely manner and failure to deliver
      certain financial information as required by the Credit Agreement. As amended
      by
      the Second Waiver Agreement, the fixed charge coverage ratio covenant requires
      the Company to maintain a minimum fixed charge coverage ratio of between 1.00
      and 1.05 to 1.00, depending on the particular fiscal month, for each month
      beginning December 2007 through May 2008, and a ratio of 1.15 to 1.00 for each
      month thereafter. In connection with the Second Waiver Agreement, Scott Dorfman,
      the Company’s Chairman, President and CEO agreed to grant the bank a security
      interest in certain personal assets which will be treated as additional
      collateral under the credit agreement. The bank has agreed to release that
      security interest, so long as no default exists and the fixed charge coverage
      ratio for the most recent period shall be equal or greater than 1.05 to 1.00,
      upon the earlier to occur of (x) April 30, 2008 and (y) the date all deferred
      payments in connection with the ClientLogic acquisition are paid in full. The
      Second Waiver Agreement also amends certain other sections of the credit
      agreement, including requiring payment of an early termination fee equal to
      (i)
      1.00% of the revolver commitment in the event of termination of the revolver
      commitment on or before November 14, 2007, and (ii) 0.25% of the revolver
      commitment in the event of termination of the revolver commitment after November
      14, 2007, but before November 14, 2008; revising the borrowing base calculation
      to take into account the additional collateral pledged by Mr. Dorfman, allowing
      loan proceeds to be used to make deferred payments required in connection with
      the ClientLogic acquisition; granting the bank increased inspection and field
      examination rights for certain periods; requiring certain financial information
      reporting on a weekly basis, increasing the amount of purchase money debt
      allowed and revising the calculation of the fixed charge coverage ratio.




7




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **March
          31, 2007 and 2006**
 **(Unaudited)**


Interest
      on borrowings is payable monthly at rates equal to the prime rate, or at the
      Company’s option, LIBOR plus up to 200 basis points; however so long as the
      fixed charge ratio is less than 1.00 to 1.00, the interest rate will be equal
      to
      the prime rate plus 1% or at the Company’s option, LIBOR plus 285 basis points.
      During the three months ended March 31, 2007 and 2006, the Company incurred
      interest expense related to the line of credit of approximately $158,000 and
      $41,000, respectively, resulting in a weighted average interest rate of 7.62%
      and 6.68%, respectively. The Company also incurred unused revolving credit
      facility fees of approximately $9,000 and $14,000 during the three months ended
      March 31, 2007 and 2006, respectively.





3.
            **EARNINGS
                PER SHARE**





The
      following table shows the shares (in thousands) used in computing diluted
      earnings per share (“EPS”) in accordance with Statement of Financial Accounting
      Standards No. 128, “Earnings per Share”:





**Three
                Months Ended March 31,**2007
            
            
            2006Diluted
                earnings per share:Weighted
                average shares outstanding
            
            
            12,281
            
            
            12,281Employee
                and director stock options and unvested restricted shares
            
            
            —
            
            
            —Weighted
                average shares assumingdilution
            
            
            12,281
            
            
            12,281





Options
      outstanding to purchase 1.6 million shares of the Company’s common stock for the
      three months ended March 31, 2007, and 1.7 million shares for the three months
      ended March 31, 2006, were not included in the computation of diluted EPS
      because their effect was anti-dilutive.





4.
            **INCOME
                TAXES**




Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance is recorded against deferred tax assets if the Company
      considers it is more likely than not that deferred tax assets will not be
      realized. Innotrac’s gross deferred tax asset as of March 31, 2007 and December
      31, 2006 was approximately $18.7 million and $18.3 million, respectively. This
      deferred tax asset was generated primarily by net operating loss carryforwards
      created mainly by a special charge of $34.3 million recorded in 2000 and the
      net
      losses generated in 2002, 2003, 2005 and 2006. Innotrac has a net operating
      loss
      carryforward of $46.8 million at December 31, 2006 that expires between 2021
      and
      2026.




8




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **March
          31, 2007 and 2006**
 **(Unaudited)**


Innotrac’s
      ability to generate the expected amounts of taxable income from future
      operations is dependent upon general economic conditions, competitive pressures
      on sales and margins and other factors beyond management’s control. These
      factors, combined with losses in recent years, create uncertainty about the
      ultimate realization of the gross deferred tax asset in future years. Therefore,
      a valuation allowance of approximately $14.3 million and $14.0 million has
      been
      recorded as of March 31, 2007 and December 31, 2006, respectively. Income taxes
      associated with future earnings will be offset by the utilization of the net
      operating loss carryforward resulting in a reduction in the valuation allowance.
      For the three months ended March 31, 2007, the deferred tax benefit of $276,000
      was offset by a corresponding increase of the deferred tax asset valuation
      allowance. When, and if, the Company can return to consistent profitability,
      and
      management determines that it is likely it will be able to utilize the net
      operating losses prior to their expiration, then the valuation allowance can
      be
      reduced or eliminated.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109* (“FIN
      48”), which clarifies the accounting for uncertainty in ** tax
      positions. This Interpretation requires that the Company determine whether
      it is
      more likely than not that a tax position will be sustained upon audit, based
      on
      the technical merits of the position. A tax position that meets the more likely
      than not recognition threshold is measured to determine the amount of benefit
      to
      recognize in the financial statements. The tax position is measured at the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement. The Company adopted FIN 48 effective January
      1, 2007. The Company has a gross deferred tax asset of approximately $18.3
      million at December 31, 2006, which did not change significantly during the
      three months ended March 31, 2007. As discussed in Note 6 to the consolidated
      financial statements in the 2006 Form 10-K, the Company has a valuation
      allowance against the full amount of its deferred tax asset. The Company
      currently provides a valuation allowance against deferred tax assets when it
      is
      more likely than not that deferred tax assets will not be realized. The Company
      has recognized tax benefits from all tax positions we have taken, and there
      has
      been no adjustment to any net operating loss carryforwards as a result of FIN
      48
      and there are no unrecognized tax benefits and no related FIN 48 tax liabilities
      at March 31, 2007. In addition, future changes in the unrecognized tax benefits
      will likely have no impact on the effective tax rate due to the existence of
      the
      valuation allowance. Therefore, the application of FIN 48 had no material impact
      on the financial statements.





The
      Company generally recognizes interest and/or penalties related to income tax
      matters in general and administrative expenses. As of March 31, 2007, we have
      no
      accrued interest or penalties related to uncertain tax positions.




9




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **March
          31, 2007 and 2006**
 **(Unaudited)**




5.
            **COMMITMENTS
                AND CONTINGENCIES**





*Shareholder
      Rights Plan* .
      In
      December 1997, the Company’s Board of Directors approved a Shareholder Rights
      Plan (the “Rights Plan”). The Rights Plan provides for the distribution of one
      right for each outstanding share of the Company’s common stock held of record as
      of the close of business on January 1, 1998 or that thereafter becomes
      outstanding prior to the earlier of the final expiration date of the rights
      or
      the first date upon which the rights become exercisable. Each right entitles
      the
      registered holder to purchase from the Company one one-hundredth of a share
      of
      Series A participating cumulative preferred stock, par value $.10 per share,
      at
      a price of $60.00 (the “Purchase Price”), subject to adjustment. The rights are
      not exercisable until ten calendar days after a person or group (an “Acquiring
      Person”) buys, or announces a tender offer for, 15% or more of the Company’s
      common stock. Such ownership level has been increased to 40% for a particular
      shareholder that owned approximately 34.0% of the shares outstanding on March
      31, 2007. In the event the rights become exercisable, each right will entitle
      the holder to receive that number of shares of common stock having a market
      value equal to the Purchase Price. If, after any person has become an Acquiring
      Person (other than through a tender offer approved by qualifying members of
      the
      Board of Directors), the Company is involved in a merger or other business
      combination where the Company is not the surviving corporation, or the Company
      sells 50% or more of its assets, operating income, or cash flow, then each
      right
      will entitle the holder to purchase, for the Purchase Price, that number of
      shares of common or other capital stock of the acquiring entity which at the
      time of such transaction have a market value of twice the Purchase Price. The
      rights will expire on January 1, 2008, unless extended, unless the rights
      are earlier exchanged, or unless the rights are earlier redeemed by the Company
      in whole, but not in part, at a price of $0.001 per right. No shares have been
      issued under the Rights Plan.





*Legal
      Proceedings.* The
      Company is subject to various legal proceedings and claims that arise in the
      ordinary course of business. There are no material pending legal proceedings
      to
      which the Company is a party.




*Employment
      Commitment* .
      In June
      1999, in conjunction with the opening of a new call center facility, the Company
      entered into an employment commitment agreement with the City of Pueblo,
      Colorado, whereby the Company received cash incentives of $968,000. These funds
      were accounted for as a reduction in the basis of the assets acquired. In return
      for this consideration, the Company is obligated to employ a minimum number
      of
      full-time employees at its Pueblo facility, measured on a quarterly basis.
      This
      obligation, which became effective June 2002, will continue through June 2009.
      In the event that the number of full-time employees fails to meet the minimum
      requirement, the Company will incur a quarterly penalty of $96.30 for each
      employee less than the minimum required amount. During the three months ended
      March 31, 2007 and 2006, the Company did not meet the minimum employee
      requirements of 359 full-time employees, as measured on a quarterly basis,
      incurring a penalty of approximately $4,000 and $9,000,
      respectively.





6.
            **RELATED
                PARTY TRANSACTION**





In
      early
      2004, the Company learned that certain trading activity of the IPOF Fund L.P.,
      an owner of more than 5% of the outstanding Common Stock, may have violated
      the
      short-swing profit rules under Section 16(b) of the Securities Exchange Act
      of
      1934. The Company promptly conducted an investigation of the matter. IPOF Fund
      L.P. and its affiliates entered into a settlement agreement with the Company
      on
      March 4, 2004 regarding the potential Section 16(b) liability issues that
      provided for the Company’s recovery of $301,957 no later than March 3, 2006. In
      December 2005, the United States District Court in Cleveland, Ohio appointed
      a
      receiver to identify and administer the assets of the IPOF Fund, L.P. and its
      general partner, David Dadante. The Company informed the IPOF receiver of such
      agreement, but the likelihood of recovering such amount from the receiver is
      doubtful. The Company has not recorded any estimated receivable from this
      settlement.




10


**Item
          2 -**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS**


The
      following discussion may contain certain forward-looking statements that are
      subject to conditions that are beyond the control of the Company. Actual results
      may differ materially from those expressed or implied by such forward-looking
      statements. Factors that could cause actual results to differ include, but
      are
      not limited to, the Company’s reliance on a small number of major clients; risks
      associated with the terms and pricing of our contracts; reliance on the
      telecommunications and direct marketing industries and the effect on the Company
      of the downturns, consolidation and changes in those industries in the past
      three years; risks associated with the fluctuations in volumes from our clients;
      risks associated with upgrading, customizing, migrating or supporting existing
      technology; risks associated with competition; and other factors discussed
      in
      more detail under “Item 1A - Risk Factors” in our Annual Report on Form 10-K. We
      undertake no obligation to update any forward-looking statements, whether as
      a
      result of new information, future events or otherwise.





**Overview**





Innotrac
      Corporation (“Innotrac” or the “Company”), founded in 1984 and headquartered in
      Atlanta, Georgia, is a full-service fulfillment and logistics provider serving
      enterprise clients and world-class brands. The Company employs sophisticated
      order processing and warehouse management technology and operates ten
      fulfillment centers and two call centers in seven cities spanning all time
      zones
      across the continental United States.





We
      receive most of our clients’ orders either through inbound call center services,
      electronic data interchange (“EDI”) or the Internet. On a same-day basis,
      depending on product availability, the Company picks, packs, verifies and ships
      the item, tracks inventory levels through an automated, integrated perpetual
      inventory system, warehouses data and handles customer support inquiries. Our
      fulfillment and customer support services interrelate and are sold as a package,
      however they are individually priced. Our clients may utilize our fulfillment
      services, our customer support services, or both, depending on their individual
      needs.





Our
      core
      service offerings include the following:





·
            Fulfillment
                Services:


·
              sophisticated
                  warehouse management
                  technology


·
              automated
                  shipping solutions


·
              real-time
                  inventory tracking and order
                  status


·
              purchasing
                  and inventory management


·
              channel
                  development


·
              zone
                  skipping for shipment cost
                  reduction


·
              product
                  sourcing and procurement


·
              packaging
                  solutions


·
              back-order
                  management; and ·
              returns
                management.





·
            Customer
                Support Services:


·
              inbound
                  call center services


·
              technical
                  support and order status


·
              returns
                  and refunds processing


·
              call
                  centers integrated into fulfillment
                  platform


·
              cross-sell/up-sell
                  services


·
              collaborative
                  chat; and


·
              intuitive
                  e-mail response.




11




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**




The
      Company is primarily focused on five diverse lines of business, or industry
      verticals. This is a result of a significant effort made by the Company to
      diversify both its industry concentration and client base over the past several
      years.





**Business
      Mix**




**Three
                Months Ended**
              **March
                31,**Business
                Line/Vertical
            
            **2007**
            
            **2006**Retail/Catalog
            
            
            31.8
            %
            
            28.3
            %Direct
                Marketing
            
            
            31.7
            
            
            20.8Modems
            
            
            17.8
            
            
            26.7Business-to-Business
                (“B2B”)
            
            
            12.9
            
            
            15.5Telecommunications
            
            
            5.8
            
            
            8.7100.0
            %
            
            100.0
            %




Retail,
      Catalog and Direct Marketing. The
      Company provides a variety of fulfillment and customer support services for
      a
      significant number of retail, catalog and direct marketing clients, including
      such companies as Target.com, a Division of Target Corporation, Ann Taylor
      Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc. and
      Thane International. We take orders for our retail, catalog and direct marketing
      clients via the Internet, through customer service representatives at our Pueblo
      and Reno call centers or through direct electronic transmission from our
      clients. The orders are processed through one of our order management systems
      and then transmitted to one of our ten fulfillment centers located across the
      country and are shipped to the end consumer or retail store location, as
      applicable, typically within 24 hours of when the order is received. Inventory
      for our retail, catalog and direct marketing clients is held on a consignment
      basis, with minor exceptions, and includes items such as shoes, dresses,
      accessories, books, outdoor furniture, electronics, small appliances, home
      accessories, sporting goods and toys. Our revenues are sensitive to the number
      of orders and customer service calls received. Our client contracts do not
      guarantee volumes. We anticipate that the percentage of our revenues
      attributable to our retail and catalog clients will increase during the
      remainder of 2007 due to the additional revenue from seasonal clients, including
      Target.com, late in the third quarter and in the fourth quarter of 2007, while
      the revenues attributable to our direct marketing clients will decrease slightly
      as a percentage of overall revenue due to the increase in revenues related
      to
      retail and catalog clients.





On
      October 21, 2004, Tactica International, Inc. (“Tactica”), one of the Company’s
      direct response clients, filed a voluntary petition for relief under Chapter
      11
      in U.S. Bankruptcy Court. **** On
      October 25, 2004 the Bankruptcy Court approved, on an interim basis, a
      Stipulation and Consent Order (“Stipulation”) entered into between Tactica and
      Innotrac. This Stipulation allowed Tactica to continue to sell its inventory
      while reducing the receivables owed by Tactica to Innotrac. Tactica defaulted
      on
      the Stipulation and in March 2005, Innotrac and Tactica reached a verbal
      agreement that would permit Innotrac to liquidate the Tactica inventory in
      order
      to pay down the receivable balance, with any excess proceeds to be remitted
      to
      Tactica. On June 23, 2005, the bankruptcy court approved the agreement among
      Innotrac, Tactica and the Creditor’s Committee on the terms of the liquidation
      and an additional amount of the proceeds to be remitted to the unsecured
      creditors of Tactica. Based on this agreement and management’s estimate of the
      net realizable value of the inventory, the reserve associated with the Tactica
      receivable was reduced from $1.2 million to $775,000 at March 31, 2005. In
      the
      fourth quarter 2005, the reserve associated with the Tactica receivable was
      increased to $2.5 million. The additional reserve was based on management’s
      estimate of the net realizable value of the inventory, which was considerably
      reduced in the fourth quarter as a result of buyers not materializing as
      initially indicated by the third party independent appraiser and a continuing
      reduction in value of the merchandise. The liquidation was completed and the
      receivable written off against the reserve during the second quarter of 2006.




12


**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**


Telecommunications
      and Modems .
      The
      Company continues to be a major provider of fulfillment and customer support
      services to the telecommunications industry. Inventory for our
      telecommunications and DSL modem clients is held on a consignment basis, with
      the exception of certain AT&T inventory for which we are contractually
      indemnified, and includes items such as telephones, caller ID equipment, DSL
      modems and ancillary equipment. Due to a decline in our telecommunications
      business as a result of reduced volumes due to the maturity of the telephone
      and
      Caller ID equipment business and an increase in revenues generated from our
      Retail, Catalog and Direct marketing clients, we anticipate that the percentage
      of our revenues attributable to telecommunications and DSL modem clients will
      decline during the remainder of 2007, despite increased volumes from our DSL
      modem business, which we believe is still in a growth mode.





Business-to-Business. The
      Company also provides fulfillment and customer support services for
      business-to-business (“B2B”) clients, including Books Are Fun, Ltd. (a
      subsidiary of Reader’s Digest), NAPA and The Walt Disney Company. This is a
      relatively steady area of our business.





**Results
      of Operations**





The
      following table sets forth unaudited summary operating data, expressed as a
      percentage of revenues, for the three months ended March 31, 2007 and 2006.
      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 Ended**
              **March
                31,******
            ****
            **2007**
            ****
            **2006**Revenues
            
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            57.4
            
            
            51.4Selling,
                general and administrative expenses
            
            
            40.2
            
            
            50.9Depreciation
                and amortization
            
            
            4.7
            
            
            4.7Operating
                loss
            
            
            (2.3
            )
            
            (7.0
            )Other
                expense, net
            
            
            0.6
            
            
            0.4Loss
                before income taxes
            
            
            (2.9
            )
            
            (7.4
            )Income
                tax benefit
            
            
            —
            
            
            —Net
                loss
            
            
            (2.9
            )%
            
            (7.4
            )%




13




**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**


**Three
      Months Ended March 31, 2007 Compared to Three Months Ended March 31,
      2006**





*Revenues.* **  Net
      revenues  increased
      60.3% to $27.8 million for the three months ended March 31, 2007 from $17.3
      million for the three months ended March 31, 2006. This increase was primarily
      attributable to a $5.2 million increase in revenue from our direct marketing
      vertical resulting from the addition of several new clients, including those
      resulting from the ClientLogic acquisition, a $3.9 million increase in retail
      and catalog revenue due to the addition of several new clients, including
      Target.com, a $897,000 increase in revenues from our B2B vertical due to the
      addition of a client acquired in the ClientLogic acquisition and a $320,000
      increase in revenues from our DSL clients due to increased volumes.





*Cost
      of Revenues.*  Cost
      of
      revenues increased 79.3% to $16.0 million for the three months ended March
      31,
      2007, compared to $8.9 million for the three months ended March 31, 2006. The
      cost of revenue increase was primarily due to an increase in labor and freight
      expense related to the increase in revenue from the addition of new clients,
      including Target.com and those acquired in the ClientLogic acquisition. The
      increase in cost of revenues as a percentage of revenue primarily relates to
      a
      change in the business mix to clients with lower margin revenue and the addition
      of several new clients whose margins have not yet reached the level of a mature
      client.





*Selling,
      General and Administrative Expenses.* S,G&A
      expenses for the three months ended March 31, 2007 increased to $11.2 million,
      or 40.2% of revenues, compared to $8.8 million, or 50.9% of revenues, for the
      same period in 2006. The increase in expenses in 2007 as compared to 2006 was
      primarily attributable to an increase in facility, equipment and management
      expense of approximately $2.2 million due to the addition of a new facility
      in
      the second quarter of 2006 for Target.com and the addition of the facility
      relating to the ClientLogic acquisition in the fourth quarter of 2006. SG&A
      expenses decreased as a percentage of revenue due to the increase in net
      revenues in 2007 as compared to 2006.




*Interest
      Expense.* Interest
      expense for the three months ended March 31, 2007 and March 31, 2006 was
      $167,000 and $67,000, respectively. The increase was related to an increase
      in
      the amount outstanding under the revolving credit agreement.





*Income
      Taxes.* The
      Company’s effective tax rate for the three months ended March 31, 2007 and 2006
      was 0%. At December 31, 2003, a valuation allowance was recorded against the
      Company’s net deferred tax assets as losses in recent years created uncertainty
      about the realization of tax benefits in future years. Income taxes associated
      with losses for the three months ended March 31, 2007 and 2006 were offset
      by a
      corresponding increase of this valuation allowance resulting in an effective
      tax
      rate of 0% for the three months ended March 31, 2007 and 2006.





**Liquidity
      and Capital Resources**





The
      Company funds its operations and capital expenditures primarily through cash
      flow from operations and borrowings under a revolving bank credit facility.
      The
      Company had cash and cash equivalents of approximately $65,000 at March 31,
      2007
      as compared to $1.0 million at December 31, 2006. Additionally, the Company
      reduced its borrowings under its revolving credit facility (discussed below)
      to
      $8.4 million at March 31, 2007, as compared to $8.6 million at December 31,
      2006. The Company had negative cash flow from operations of $118,000 during
      the
      three months ended March 31, 2007, as compared to negative cash flow from
      operations of $2.1 million in the same period in 2006.





The
      Company has a revolving bank credit agreement with a maximum borrowing limit
      of
      $25.0 million, which will mature in March 2009. Although the maximum borrowing
      limit is $25.0 million, the credit facility limits borrowings to a specified
      percentage of eligible accounts receivable and inventory, which totaled $14.3
      million at March 31, 2007. At March 31, 2007 the Company had $8.4 million
      outstanding and $3.1 million of additional availability under the revolving
      credit agreement.





14


**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**






The
      Company has granted a security interest in all of its assets to the lender
      as
      collateral under this revolving credit agreement. The revolving credit agreement
      contains fixed charge coverage ratio, change of ownership control and other
      covenants. The provisions of the revolving credit agreement require that the
      Company maintain a lockbox arrangement with the lender. Noncompliance with
      any
      of the covenants allows the lender to declare any outstanding borrowing amounts
      to be immediately due and payable.





On
      April
      16, 2007, the Company and the bank entered into a Second Waiver and Amendment
      Agreement (the “Second Waiver Agreement”) whereby the bank agreed to waive the
      Company’s then-existing defaults under the credit agreement, provided that the
      Company comply with the terms of the credit agreement, as amended, and the
      additional conditions of the Second Waiver Agreement. The defaults included
      failure to maintain the minimum fixed charge coverage ratio, failure to make
      a
      certain deferred purchase payment in a timely manner and failure to deliver
      certain financial information as required by the Credit Agreement. As amended
      by
      the Second Waiver Agreement, the fixed charge coverage ratio covenant requires
      the Company to maintain a minimum fixed charge coverage ratio of between 1.00
      and 1.05 to 1.00, depending on the particular fiscal month, for each month
      beginning December 2007 through May 2008, and a ratio of 1.15 to 1.00 for each
      month thereafter. In connection with the Second Waiver Agreement, Scott Dorfman,
      the Company’s Chairman, President and CEO agreed to grant the bank a security
      interest in certain personal assets which will be treated as additional
      collateral under the credit agreement. The bank has agreed to release that
      security interest, so long as no default exists and the fixed charge coverage
      ratio for the most recent period shall be equal or greater than 1.05 to 1.00,
      upon the earlier to occur of (x) April 30, 2008 and (y) the date all deferred
      payments in connection with the ClientLogic acquisition are paid in full. The
      Second Waiver Agreement also amends certain other sections of the credit
      agreement, including requiring payment of an early termination fee equal to
      (i)
      1.00% of the revolver commitment in the event of termination of the revolver
      commitment on or before November 14, 2007, and (ii) 0.25% of the revolver
      commitment in the event of termination of the revolver commitment after November
      14, 2007, but before November 14, 2008; revising the borrowing base calculation
      to take into account the additional collateral pledged by Mr. Dorfman, allowing
      loan proceeds to be used to make deferred payments required in connection with
      the ClientLogic acquisition; granting the bank increased inspection and field
      examination rights for certain periods; requiring certain financial information
      reporting on a weekly basis; increasing the amount of purchase money debt
      allowed and revising the calculation of the fixed charge coverage ratio.





Interest
      on borrowings is payable monthly at rates equal to the prime rate, or at the
      Company’s option, LIBOR plus up to 200 basis points; however so long as the
      fixed charge ratio is less than 1.00 to 1.00, the interest rate will be equal
      to
      the prime rate plus 1% or at the Company’s option, LIBOR plus 285 basis points.
      During the three months ended March 31, 2007 and 2006, the Company incurred
      interest expense related to the line of credit of approximately $158,000 and
      $41,000, respectively, resulting in a weighted average interest rate of 7.62%
      and 6.68%, respectively. The Company also incurred unused revolving credit
      facility fees of approximately $9,000 and $14,000 during the three months ended
      March 31, 2007 and 2006, respectively.





During
      the three months ended March 31, 2007, the Company had negative $118,000 in
      cash
      flow from operating activities compared to negative cash flow from operations
      of
      $2.1 million in the same period in 2006. The decrease in cash used in operating
      activities was primarily the result of a $4.4 million decrease in net accounts
      receivable in 2007 compared to a $917,000 net increase in accounts receivable
      in
      2006 and a net loss of $793,000 in 2007 compared to a net loss of $1.3 million
      in 2006, offset by a $4.4 million decrease in accounts payable in 2007 compared
      to a $2.5 million decrease in 2006 and a $329,000 decrease in accrued expenses
      and other in 2007 compared to a $1.4 million increase in 2006.




15


**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**






During
      the three months ended March 31, 2007, net cash used in investing activities
      for
      capital additions was $691,000 as compared to $2.9 million in the same period
      in
      2006. The decrease in capital expenditures is primarily attributable to
      purchases made in 2006 associated with the opening of a new fulfillment center
      in Hebron, Kentucky for Target.com. All of these expenditures were funded
      through existing cash on hand and borrowings under the Company’s credit
      facility.





During
      the three months ended March 31, 2007, cash used in financing activities was
      $140,000 compared to $4.1 million net cash provided by financing activities
      in
      the same period in 2006. The difference between periods is attributable to
      a
      reduction in outstanding borrowings of $140,000 in 2007 compared to an increase
      in borrowings of $4.1 million in 2006.




The
      Company estimates that its cash and financing needs through 2007 will be met
      by
      cash flows from operations and its credit facility. The Company has generated
      positive cash flows from operations in 2005, 2004 and 2003, however we had
      negative cash flows from operations in 2006. The Company also had negative
      cash
      flows from operations during the three months ended March 31, 2007, but
      anticipates positive cash flows from operations during the remainder of 2007.
      The Company may need to raise additional funds in order to take advantage of
      unanticipated opportunities, such as acquisitions of complementary businesses,
      or the opening of new facilities. 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**





Critical
      accounting policies are those policies that can have a significant impact on
      the
      presentation of our financial position and results of operations and demand
      the
      most significant use of subjective estimates and management judgment. Because
      of
      the uncertainty inherent in such estimates, actual results may differ from
      these
      estimates. Specific risks inherent in our application of these critical policies
      are described below. For all of these policies, we caution that future events
      rarely develop exactly as forecasted, and the best estimates routinely require
      adjustment. These policies often require difficult judgments on complex matters
      that are often subject to multiple sources of authoritative guidance. Additional
      information concerning our accounting policies can be found in Note 1 to the
      condensed consolidated financial statements in this Form 10-Q and Note 2 to
      the
      consolidated financial statements appearing in our Annual Report on Form 10-K
      for the year ended December 31, 2006. The policies that we believe are most
      critical to an investor’s understanding of our financial results and condition
      and require complex management judgment are discussed below.





*Goodwill
      and Other Acquired Intangibles.* The
      Company accounts for goodwill and other intangible assets in accordance with
      SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142,
      goodwill impairment is deemed to exist if the net book value of a reporting
      unit
      exceeds its estimated fair value.





Innotrac’s
      goodwill carrying amount as of March 31, 2007 was $25.2 million. This asset
      relates to the goodwill associated with the Company’s acquisition of Universal
      Distribution Services (“UDS”) in December 2000 (including an earnout payment
      made to the former UDS shareholders in February 2002), and the acquisition
      of
      iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142, the Company
      performed a goodwill valuation in the first quarter of 2007. The valuation
      supported that the fair value of the reporting unit at January 1, 2007 exceeded
      the carrying amount of the net assets, including goodwill, and thus no
      impairment was determined to exist. The Company performs this impairment test
      annually as of January 1 or sooner if circumstances indicate.





*Accounting
      for Income Taxes.* Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance is recorded against deferred tax assets if the Company
      considers it more likely than not that deferred tax assets will not be realized.
      Innotrac’s gross deferred tax asset as of March 31, 2007 and December 31, 2006
      was approximately $18.7 million and $18.3 million, respectively. This deferred
      tax asset was generated primarily by net operating loss carryforwards created
      primarily by the special charge of $34.3 million recorded in 2000 and the net
      losses generated in 2002, 2003, 2005 and 2006. Innotrac has a net operating
      loss
      carryforward of $46.8 million at December 31, 2006 that expires between 2021
      and
      2026.




16




**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**






Innotrac’s
      ability to generate the expected amounts of taxable income from future
      operations is dependent upon general economic conditions, competitive pressures
      on sales and margins and other factors beyond management’s control. These
      factors, combined with losses in recent years, create uncertainty about the
      ultimate realization of the gross deferred tax asset in future years. Therefore,
      a valuation allowance of approximately $14.3 million and $14.0 million has
      been
      recorded as of March 31, 2007 and December 31, 2006, respectively. Income taxes
      associated with future earnings will be offset by the utilization of the net
      operating loss carryforward resulting in a reduction in the valuation allowance.
      For the three months ended March 31, 2007, an income tax benefit of $276,000
      was
      offset by a corresponding increase of the deferred tax asset valuation
      allowance. When, and if, the Company can return to consistent profitability,
      and
      management determines that it will be able to utilize net operating losses
      prior
      to their expiration, then the valuation allowance can be reduced or
      eliminated.





*Accounting
      Estimates.* The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosures of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those estimates.





**Recent
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based
      Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation.”
The revised Statement clarifies and expands SFAS No. 123’s guidance in several
      areas, including measuring fair value, classifying an award as equity or as
      a
      liability, and attributing compensation cost to reporting periods. The revised
      statement supercedes Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees” (“APB 25”), and its related implementation guidance.
      Under the provisions of SFAS No. 123(R), the alternative to use APB 25’s
      intrinsic value method of accounting that was provided in SFAS No. 123, as
      originally issued, is eliminated, and entities are required to measure
      liabilities incurred to employees in share-based payment transactions at fair
      value. The Company adopted SFAS No. 123(R) effective January 1, 2006 using
      the
      Modified Prospective Application Method. Under this method, SFAS 123(R) applies
      to new awards and to awards modified, repurchased or cancelled after the
      effective date. Additionally, compensation expense for the portion of awards
      for
      which the requisite service has not been rendered that are outstanding as of
      the
      required effective date shall be recognized as the requisite service is
      performed on or after the required effective date. The adoption of SFAS No.
      123(R) had no material impact on the financial statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109* (“FIN
      48”), which clarifies the accounting for uncertainty in ** tax
      positions. This Interpretation requires that the Company determine whether
      it is
      more likely than not that a tax position will be sustained upon audit, based
      on
      the technical merits of the position. A tax position that meets the more likely
      than not recognition threshold is measured to determine the amount of benefit
      to
      recognize in the financial statements. The tax position is measured at the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement. The Company adopted FIN 48 effective January
      1, 2007. The Company has a gross deferred tax asset of approximately $18.3
      million at December 31, 2006, which did not change significantly during the
      three months ended March 31, 2007. As discussed in Note 6 to the consolidated
      financial statements in the 2006 Form 10-K, the Company has a valuation
      allowance against the full amount of its deferred tax asset. The Company
      currently provides a valuation allowance against deferred tax assets when it
      is
      more likely than not that deferred tax assets will not be realized. The Company
      has recognized tax benefits from all tax positions we have taken, and there
      has
      been no adjustment to any net operating loss carryforwards as a result of FIN
      48
      and there are no unrecognized tax benefits and no related FIN 48 tax liabilities
      at March 31, 2007. In addition, future changes in the unrecognized tax benefits
      will likely have no impact on the effective tax rate due to the existence of
      the
      valuation allowance. Therefore, the application of FIN 48 had no material impact
      on the financial statements.




17




**MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**






The
      Company generally recognizes interest and/or penalties related to income tax
      matters in general and administrative expenses. As of March 31, 2007, we have
      no
      accrued interest or penalties related to uncertain tax positions.





In
      September 2006, the SEC staff issued Staff Accounting
      Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
      (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of
      practice in how public companies quantify misstatements of financial statements,
      including misstatements that were not material to prior years’ financial
      statements. The Company adopted the provisions of SAB 108 effective
      December 31, 2006, as required. The adoption of such provisions did not
      impact the financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* ”
(“SFAS
      No. 159”). This standard permits an entity to choose to measure certain
      financial assets and liabilities at fair value. SFAS No. 159 also revises
      provisions of SFAS No. 115 that apply to available-for-sale and trading
      securities. This statement is effective for fiscal years beginning after
      November 15, 2007. The Company is currently evaluating the effect, if any,
      that
      the adoption of this pronouncement will have on its financial
      statements.




18




**Item
      3 - Quantitative and Qualitative Disclosures About Market
      Risks**





Management
      believes the Company’s exposure to market risks (investments, interest rates and
      foreign currency) is immaterial. Innotrac holds no market risk sensitive
      instruments for trading purposes. At present, the Company does not employ any
      derivative financial instruments, other financial instruments or derivative
      commodity instruments to hedge any market risks and does not currently plan
      to
      employ them in the future. The Company does not transact any sales in foreign
      currency. To the extent that the Company has borrowings outstanding under its
      credit facility, the Company will have market risk relating to the amount of
      borrowings due to variable interest rates under the credit facility. The Company
      believes this 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 Note 5 to the Consolidated Financial Statements contained
      in our Annual Report on Form 10-K for the year ended December 31, 2006 and
      other
      filings on file with the Securities and Exchange Commission, and the Company
      has
      no long-term purchases commitments.





**Item
      4 - Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




Our
      management, with the participation of the Chief Executive Officer and principal
      financial officer, evaluated the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in federal securities rules)
      as of March 31, 2007.




Disclosure
      controls and procedures are controls and procedures that are designed to ensure
      that information required to be disclosed in our reports filed or submitted
      under the federal securities laws is recorded, processed, summarized and
      reported within the time periods specified in the SEC rules and forms.
      Management recognizes that a control system, no matter how well conceived and
      operated, can provide only reasonable assurance that the objectives of the
      control system are met. Further, the design of a control system must reflect
      the
      fact that there are resource constraints, and the benefits of controls must
      be
      considered relative to their costs. Because of the inherent limitations in
      all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues within the company have been detected. Therefore, assessing
      the costs and benefits of such controls and procedures necessarily involves
      the
      exercise of judgment by management. Our disclosure controls and procedures
      are
      designed to provide reasonable assurance of achieving the objective of ensuring
      that information required to be disclosed in our reports filed or submitted
      under the federal securities laws is recorded, processed, summarized and
      reported within the time periods specified in the SEC rules and forms. In
      addition, our disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that the information required to
      be
      disclosed by us in the reports we file or submit under the federal securities
      laws is accumulated and communicated to management, including our principal
      executive and principal financial officers or persons performing similar
      functions, as appropriate, to allow timely decisions regarding required
      disclosure.




Our
      Chief
      Executive Officer and principal financial officer have concluded, based on
      our
      evaluation of our disclosure controls and procedures that our disclosure
      controls and procedures were ineffective as March 31, 2007, due to the
      conditions that led to the identification of the material weakness in internal
      control over financial reporting discussed below.





In
      the
      course of conducting the audit of our 2006 Consolidated Financial Statements,
      our independent auditors identified a material weakness, as defined in standards
      established by the Public Company Accounting Oversight Board (United States).
      A
      material weakness is a significant deficiency, or combination of significant
      deficiencies, in internal control over financial reporting that results in
      more
      than a remote likelihood that a material misstatement of the financial
      statements will not be prevented or detected by the internal control. The
      identified material weakness consists of an understaffed financial and
      accounting function, and current personnel that lack certain technical
      accounting skills necessary to prepare financial statements that properly
      reflect our current level and scope of activities.





19




**Changes
      in Internal Control Over Financial Reporting**





There
      was
      no material change in our internal control over financial reporting during
      the
      quarter ended March 31, 2007. However, the material weakness discussed above
      has
      not been corrected and could have affected, or is likely to materially affect,
      our internal control over financial reporting. To address such material
      weakness, we are in the process of implementing remediation plans, including
      recruiting a Chief Financial Officer and additional accounting personnel, whom
      we are attempting to have in place at the earliest possible time.




**Part
      II - Other Information**





**Item
      6 - Exhibits**





Exhibits:





31.1
              Certification
                  of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d -
                  14(a).


31.2
              Certification
                  of principal financial officer Pursuant to Rule 13a-14(a)/15d -
                  14(a).


32.1
              Certification
                  of Chief Executive Officer Pursuant to 18 U.S.C. §
                  1350.


32.2
              Certification
                  of principal financial officer Pursuant to 18 U.S.C. §
                  1350.





20





**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:
              May 15, 2007
            By:
            /s/ Scott
              D.
              DorfmanScott
                D. Dorfman
              President,
                Chief Executive Officer and Chairman
              of
                the Board (Principal Executive Officer)




Date:
              May 15, 2007
            
            /s/ Christine
              A. HerrenChristine
                  A. Herren
                Senior
                  Director and Controller (Principal
                Financial
                  Officer and Principal Accounting
                Officer)  21