##### 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 September 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                     |  | (I.R.S. Employer      
|incorporation or organization)                      |  | Identification Number)
|                                                    |  |                       
|6655 Sugarloaf Parkway     Duluth, Georgia          |  | 30097                 
|                                                   
|(Address of principal executive offices)            |  | (Zip Code)            
|                                                    |  |                       
|Registrants telephone number, including area code: |  | (678) 584-4000        
|                                                    | 

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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 November 12, 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                           
|                                             | Item 4  Controls and Procedures                                                              
|Part II  Other Information                 
|                                             | Item 6  Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                  
|CERTIFICATIONS                              
|EX-10.1 LEASE AGREEMENT                     
|EX-10.2 LOAN DOCUMENT MODIFICATION AGREEMENT
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO



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INNOTRAC CORPORATION

INDEX

|                                 |  |  |    |         |  |                                                                                       |                       |  |                                                                                                                    |  |      |   | 
|-------------------------------- |  |  | -- | ------- |  | ------------------------------------------------------------------------------------- | --------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---- | - | 
|                                 |  |  |    |         |  |                                                                                       |                       |  |                                                                                                                    |  | Page
|                                 |  |  |    |         |  |                                                                                       |                       |  |                                                                                                                    |  |     
|Part I.    Financial Information |  |  |    |        
|                                 |  |  |    | Item 1. |  |                                                                                       | Financial Statements: |  |                                                                                                                    |  |     
|                                 |  |  |    |         |  |                                                                                       |                       |  | Condensed Consolidated Balance Sheets 
September 30, 2002 and December 31, 2001 (Unaudited)                       |  |      | 3 | 
|                                 |  |  |    |         |  |                                                                                       |                       |  | Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2002 and 2001 (Unaudited) |  |      | 4 | 
|                                 |  |  |    |         |  |                                                                                       |                       |  | Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2002 and 2001 (Unaudited)  |  |      | 5 | 
|                                 |  |  |    |         |  |                                                                                       |                       |  | Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 |                       |  | 12                                                                                                                 | 
|                                 |  |  |    | Item 3. |  | Quantitative and Qualitative Disclosure About Market Risks                            |                       |  | 20                                                                                                                 | 
|                                 |  |  |    | Item 4. |  | Controls and Procedures                                                               |                       |  | 20                                                                                                                 | 
|Part II.  Other Information      |  |  |    |        
|                                 |  |  |    | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |                       |  | 21                                                                                                                 | 
|Signatures                       |  |  | 22 |        
|Certifications                   |  |  | 23 |        

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 United States of America. 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 nine months ended
September 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)


(unaudited)


|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |         |        |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | ------- | ------------------ | ------ | ----------------- | ------- | ------ | ------ | 
|                                     |                                                                                                      |                                            |                   |         | September 30, 2002 |        | December 31, 2001
|                                     |                                                                                                      |                                            |                   |         |                    |        |                  
|ASSETS                               |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Current assets:                      |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     | Cash and cash equivalents                                                                            |                                            | $                 | 198     |                    |        | $                 | 9,413   |       
|                                     | Accounts receivable, net                                                                             |                                            |                   | 16,677  |                    |        |                   | 13,662  |       
|                                     | Inventories, net                                                                                     |                                            |                   | 19,990  |                    |        |                   | 27,264  |       
|                                     | Deferred income taxes                                                                                |                                            |                   |        |                    |        |                   | 2,736   |       
|                                     | Prepaid expenses and other                                                                           |                                            |                   | 1,854   |                    |        |                   | 5,018   |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      | Total current assets                       |                   |         | 38,719             |        |                   |         | 58,093 |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Property and equipment:              |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     | Rental equipment                                                                                     |                                            |                   | 1,513   |                    |        |                   | 2,003   |       
|                                     | Computer software and equipment                                                                      |                                            |                   | 25,398  |                    |        |                   | 19,715  |       
|                                     | Furniture, fixtures and leasehold improvements                                                       |                                            |                   | 4,394   |                    |        |                   | 4,005   |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      |                                            | 31,305            |         |                    |        | 25,723            |        
|                                     | Less accumulated depreciation and amortization                                                       |                                            |                   | (12,116 | )                  |        |                   | (11,223 | )     
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      |                                            | 19,189            |         |                    |        | 14,500            |        
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Goodwill, net                        |                                                                                                      |                                            | 25,118            |         |                    |        | 25,213            |        
|Deferred income taxes                |                                                                                                      |                                            | 9,040             |         |                    |        | 438               |        
|Intangibles,
net                     |                                                                                                      |                                            | 640               |         |                    |        | 958               |        
|Other assets                         |                                                                                                      |                                            | 497               |         |                    |        | 191               |        
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      | Total assets                               |                   | $       | 93,499             |        |                   | $       | 99,393 |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Current liabilities:                 |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     | Accounts payable                                                                                     |                                            | $                 | 9,220   |                    |        | $                 | 8,581   |       
|                                     | Line of credit                                                                                       |                                            |                   | 13,407  |                    |        |                   |        |       
|                                     | Accrued earn-out payment                                                                             |                                            |                   |        |                    |        |                   | 15,275  |       
|                                     | Accrued expenses and other                                                                           |                                            |                   | 8,365   |                    |        |                   | 11,861  |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      | Total current liabilities                  |                   |         | 30,992             |        |                   |         | 35,717 |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Total noncurrent liabilities         |                                                                                                      |                                            | 2,276             |         |                    |        | 393               |        
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      |                                            | Total liabilities |         |                    | 33,268 |                   |         |        | 36,110 | 
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Commitments and contingencies        |                                                                                                      |                                            |                   |         |                    |        |                   |        
|Shareholders equity:                |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     | Common
stock, $.10 par value, 50,000,000 shares authorized, 11,674,595
shares issued and outstanding |                                            |                   | 1,167   |                    |        |                   | 1,136   |       
|                                     | Additional paid-in capital                                                                           |                                            |                   | 62,596  |                    |        |                   | 61,023  |       
|                                     | Retained earnings (accumulated deficit)                                                              |                                            |                   | (2,829  | )                  |        |                   | 1,201   |       
|                                     | Accumulated other comprehensive income                                                               |                                            |                   |        |                    |        |                   | 178     |       
|                                     | Less: Treasury stock                                                                                 |                                            |                   | (703    | )                  |        |                   | (255    | )     
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      | Total shareholders equity                 |                   |         | 60,231             |        |                   |         | 63,283 |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        
|                                     |                                                                                                      | Total liabilities and shareholders equity |                   | $       | 93,499             |        |                   | $       | 99,393 |       
|                                     |                                                                                                      |                                            |                   |         |                    |        |                   |        

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

3



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##### Table of Contents



Financial Statements-Continued

INNOTRAC CORPORATION




CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended September 30, 2002 and 2001
(in thousands, except per share amounts)


|                                     |                                              |                          |              |                   |        |                                  |        |        |        |        |       | 
|------------------------------------ | -------------------------------------------- | ------------------------ | ------------ | ----------------- | ------ | -------------------------------- | ------ | ------ | ------ | ------ | ----- | 
|                                     |                                              |                          |              |                   |        | Three Months Ended September 30,
|                                     |                                              |                          |              |                   |        | 2002                             |        | 2001  
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Revenues, net                        |                                              | $                        | 17,292       |                   |        | $                                | 22,406 |       
|Reimbursable costs                   |                                              |                          | 2,772        |                   |        |                                  | 6,176  |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     | Total revenues                               |                          |              | 20,064            |        |                                  |        | 28,582 |       
|Cost of revenues                     |                                              |                          | 8,857        |                   |        |                                  | 9,592  |       
|Reimbursable costs                   |                                              |                          | 2,772        |                   |        |                                  | 6,176  |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     | Total cost of revenues                       |                          |              | 11,629            |        |                                  |        | 15,768 |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     |                                              |                          | Gross margin |                   |        | 8,435                            |        |        |        | 12,814 |      
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Operating expenses:                  |                                              |                          |              |                   |        |                                  |        |       
|                                     | Selling, general and administrative expenses |                          |              | 12,422            |        |                                  |        | 9,712  |       
|                                     | Impairment
and special charges, net          |                          |              | 3,123             |        |                                  |        |       |       
|                                     | Depreciation and amortization                |                          |              | 1,352             |        |                                  |        | 1,162  |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     |                                              | Total operating expenses |              |                   | 16,897 |                                  |        |        | 10,874 |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Operating income (loss)              |                                              |                          | (8,462       | )                 |        |                                  | 1,940  |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Other expense (income), net          |                                              |                          | 66           |                   |        |                                  | (126   | )     
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Income (loss) before income taxes    |                                              |                          | (8,528       | )                 |        |                                  | 2,066  |       
|Income tax provision (benefit)       |                                              |                          | (3,220       | )                 |        |                                  | 802    |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     |                                              |                          |              | Net income (loss) |        | $                                | (5,308 | )      |        | $      | 1,264 | 
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Earnings per share:                  |                                              |                          |              |                   |        |                                  |        |       
|                                     | Basic                                        |                          | $            | (0.46             | )      |                                  | $      | 0.11   |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     | Diluted                                      |                          | $            | (0.46             | )      |                                  | $      | 0.11   |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|Weighted average shares outstanding: |                                              |                          |              |                   |        |                                  |        |       
|                                     | Basic                                        |                          |              | 11,506            |        |                                  |        | 11,319 |       
|                                     |                                              |                          |              |                   |        |                                  |        |       
|                                     | Diluted                                      |                          |              | 11,506            |        |                                  |        | 11,828 |       
|                                     |                                              |                          |              |                   |        |                                  |        |       

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 Nine Months Ended September 30, 2002 and 2001
(in thousands, except per share amounts)


|                                                        |                                              |              |                          |        |                                 |        |        |        |        |        | 
|------------------------------------------------------- | -------------------------------------------- | ------------ | ------------------------ | ------ | ------------------------------- | ------ | ------ | ------ | ------ | ------ | 
|                                                        |                                              |              |                          |        | Nine Months Ended September 30,
|                                                        |                                              |              |                          |        | 2002                            |        | 2001  
|                                                        |                                              |              |                          |        |                                 |        |       
|Revenues, net                                           |                                              | $            | 49,848                   |        |                                 | $      | 73,352 |       
|Reimbursable costs                                      |                                              |              | 10,616                   |        |                                 |        | 21,804 |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        | Total revenues                               |              |                          | 60,464 |                                 |        |        | 95,156 |       
|Cost of revenues                                        |                                              |              | 23,028                   |        |                                 |        | 33,182 |       
|Reimbursable costs                                      |                                              |              | 10,616                   |        |                                 |        | 21,804 |       
|Special charges                                         |                                              |              | (293                     | )      |                                 |        |       |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        | Total cost of revenues                       |              |                          | 33,351 |                                 |        |        | 54,986 |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        |                                              | Gross margin |                          |        | 27,113                          |        |        |        | 40,170 |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Operating expenses:                                     |                                              |              |                          |        |                                 |        |        |       
|                                                        | Selling, general and administrative expenses |              |                          | 27,760 |                                 |        |        | 33,722 |       
|                                                        | Impairment
and special charges, net          |              |                          | 1,802  |                                 |        |        |       |       
|                                                        | Depreciation and amortization                |              |                          | 3,841  |                                 |        |        | 3,550  |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        |                                              |              | Total operating expenses |        |                                 | 33,403 |        |        |        | 37,272 | 
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Operating income (loss)                                 |                                              |              | (6,290                   | )      |                                 |        | 2,898  |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Other expense (income), net                             |                                              |              | 110                      |        |                                 |        | (537   | )     
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Income (loss) before income taxes and minority interest |                                              |              | (6,400                   | )      |                                 |        | 3,435  |       
|Income tax provision (benefit)                          |                                              |              | (2,371                   | )      |                                 |        | 1,507  |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Net income (loss) before minority interest              |                                              |              | (4,029                   | )      |                                 |        | 1,928  |       
|Minority interest, net of income tax benefit            |                                              |              |                         |        |                                 |        | 871    |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        |                                              |              | Net income (loss)        |        | $                               | (4,029 | )      |        | $      | 2,799  | 
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Earnings per share:                                     |                                              |              |                          |        |                                 |        |        |       
|                                                        | Basic                                        |              | $                        | (0.35  | )                               |        | $      | 0.25   |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        | Diluted                                      |              | $                        | (0.35  | )                               |        | $      | 0.24   |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|Weighted average shares outstanding:                    |                                              |              |                          |        |                                 |        |        |       
|                                                        | Basic                                        |              |                          | 11,548 |                                 |        |        | 11,319 |       
|                                                        |                                              |              |                          |        |                                 |        |        |       
|                                                        | Diluted                                      |              |                          | 11,548 |                                 |        |        | 11,694 |       
|                                                        |                                              |              |                          |        |                                 |        |        |       

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 Nine Months Ended September 30, 2002 and 2001
(in thousands)


|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |        |         |         |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------------------------- | ------- | ------------------------------- | ------- | ------ | ------ | ------- | ------- | -
|                                               |                                                                                          |                                                              |                                                     |         | Nine Months Ended September 30,
|                                               |                                                                                          |                                                              |                                                     |         | 2002                            |         | 2001  
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |       
|Cash flows from operating activities:          |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Net income (loss)                                                                        |                                                              | $                                                   | (4,029  | )                               |         | $      | 2,799  |        
|                                               | Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                                              |                                                     |         |                                 |         |        |        |        
|                                               |                                                                                          | Depreciation and amortization                                |                                                     |         | 3,841                           |         |        |        | 3,550   |        
|                                               |                                                                                          | Loss on disposal of fixed assets                             |                                                     |         | 1,378                           |         |        |        | 206     |        
|                                               |                                                                                          | Impairment of long-lived assets                              |                                                     |         | 2,185                           |         |        |        |        |        
|                                               |                                                                                          | Deferred income taxes                                        |                                                     |         | (5,109                          | )       |        |        | 458     |        
|                                               |                                                                                          | Minority interest in subsidiary                              |                                                     |         |                                |         |        |        | (871    | )      
|                                               |                                                                                          | Amortization of deferred compensation                        |                                                     |         | 54                              |         |        |        | 100     |        
|Changes
in operating assets and liabilities:   |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               |                                                                                          | (Increase) decrease in accounts receivable                   |                                                     |         | (3,016                          | )       |        |        | 9,024   |        
|                                               |                                                                                          | (Increase) decrease in inventories                           |                                                     |         | 7,273                           |         |        |        | (17,230 | )      
|                                               |                                                                                          | Decrease in prepaid expenses and other                       |                                                     |         | 1,812                           |         |        |        | 1,042   |        
|                                               |                                                                                          | Increase (decrease) in accounts payable and accrued expenses |                                                     |         | (1,061                          | )       |        |        | 2,946   |        
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               |                                                                                          |                                                              | Net cash provided by operating activities           |         |                                 | 3,328   |        |        |         | 2,024   |  
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Cash flows from investing activities:          |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Capital expenditures                                                                     |                                                              |                                                     | (11,592 | )                               |         |        | (4,979 | )      
|                                               | Earn-out
payments                                                                        |                                                              |                                                     | (14,087 | )                               |         |        | (6,057 | )      
|                                               | Sale of marketable securities                                                            |                                                              |                                                     | 435     |                                 |         |        |       |        
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               |                                                                                          |                                                              | Net cash (used in) investing activities             |         |                                 | (25,244 | )      |        |         | (11,036 | )
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Cash flows from financing activities:          |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Borrowings under line of credit                                                          |                                                              |                                                     | 13,407  |                                 |         |        |       |        
|                                               | Repayment of capital lease obligations                                                   |                                                              |                                                     | (208    | )                               |         |        | (75    | )      
|                                               | Purchase of treasury stock                                                               |                                                              |                                                     | (448    | )                               |         |        | (46    | )      
|                                               | Loan fees paid                                                                           |                                                              |                                                     | (50     | )                               |         |        |       |        
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               |                                                                                          |                                                              | Net cash provided by (used in) financing activities |         |                                 | 12,701  |        |        |         | (121    | )
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Net decrease in cash and cash equivalents      |                                                                                          |                                                              | (9,215                                              | )       |                                 |         | (9,133 | )     
|Cash and cash equivalents, beginning of period |                                                                                          |                                                              | 9,413                                               |         |                                 |         | 18,334 |       
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Cash and cash equivalents, end of period       |                                                                                          | $                                                            | 198                                                 |         |                                 | $       | 9,201  |       
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Supplemental cash flow disclosures:            |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Cash paid for interest                                                                   |                                                              | $                                                   | 215     |                                 |         | $      | 64     |        
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Cash paid (refunds received) for income taxes, net                                       |                                                              | $                                                   | (18     | )                               |         | $      |       |        
|                                               |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|Noncash transactions:                          |                                                                                          |                                                              |                                                     |         |                                 |         |        |       
|                                               | Stock
issued for earn-out payment                                                        |                                                              | $                                                   | 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


September 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 Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2001,
except as discussed below. 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 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. Goodwill and other
acquired intangibles related to business combinations prior to July 1, 2001
were being amortized over 5-20 years on a straight-line basis, which
represented managements estimation of the related benefit to be derived
from the acquired business. However, goodwill and other acquired
intangibles from business combinations occurring after June 30, 2001 are
accounted for under the transition provisions for business combinations of
SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets which includes the iFulfillment acquisition. The
Company adopted SFAS No. 142 effective January 1, 2002, which changed the
accounting for goodwill and other indefinite life intangibles from an
amortization method to an impairment only approach. Under SFAS No. 142,
goodwill impairment is deemed to exist if the net book value of a reporting
unit exceeds its estimated fair value. Upon completion of its analysis for
impairment in the second quarter of 2002 in accordance with the adoption of
SFAS No. 142, no impairment was determined to exist.
|  
|   |  | Long-Lived Assets.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
impairment loss recorded for the three and nine months ended September 30,
2002 was accounted for in accordance with the provisions of SFAS No. 144
(see Note 2).                                                                                                                                                                                                                                                                                      
|  
|   |  | Deferred 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 bases
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents



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



|   |  | Revenue Recognition.Revenues are recognized on the accrual basis as
services are provided to customers or as units are shipped. As required by
the consensus reached in Emerging Issue Task Force (EITF) Issue No.
99-19, revenues have been recorded net of the cost of the equipment for all
fee-for-service clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During 2002, the Company began applying the consensus reached in Emerging
Issues Task Force (EITF) No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred which requires
the presentation of reimbursed out-of-pocket expenses on a gross basis as
revenues and expenses. As required, the Company reclassified the prior
periods presented herein to comply with the guidance in EITF 01-14.
Accordingly, freight and postage charges in the Companys fulfillment
business during the three months ended September 30, 2001
totaling $6.2 million and during the nine months ended
September 30, 2001 totaling $21.8 million have been reclassified and
presented as revenues and cost of revenues in the corresponding Consolidated
Statements of Operations. The reclassification had no impact on net
income.                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|2. |  | IMPAIRMENT AND SPECIAL
CHARGES, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | At September 30, 2002 and December 31, 2001, the Company had approximately
$1.5 million and $4.6 million, respectively, in accruals related to the
special charges recorded during the year ended December 31, 2000. The
remaining accruals at September 30, 2002 included $291,000 related to the
Companys shift to a fee-for-service business model and $1.2 million
related to exiting the front-end e-commerce and web hosting business.
Cash payments relating to these accruals for the three and nine months
ended September 30, 2002 were approximately $161,000 and $627,000,
respectively. The Company recognized approximately $50,000
and $1.7 million during the three and nine
months ended September 30, 2002 related to the gains realized on
sales of inventory items and cash collected for accounts receivable
that were written off as special charges in previous periods. These amounts were
recorded as a reduction in the special charge line item in the
Condensed Consolidated Statement of Operations for the periods
presented. Except for the accrual associated with
one specific client, which represents about 60% of the remaining accrual
and is classified as long-term, the remaining accrual is expected to be
utilized during the remainder of the year.
|  
|   |  | During the third quarter of 2002, the Company recognized an additional
$3.1 million in special charges. Approximately $2.4 million of these
charges were related to capitalized hardware and software costs for
systems purchased specifically for a potential new client which were
subsequently not utilized as originally planned. The loss of the
potential customer indicated that the carrying value of the asset group
was potentially not recoverable, and therefore, an impairment test under
the provisions of SFAS No. 144 was performed. As fair market value of the
asset group was not readily determinable, a discounted, probability
weighted cash flow model was utilized as a basis to determine fair value.
As a result of the cash flow analysis, a $2.4 million impairment charge
was recorded. Of the remaining charges, approximately $500,000 related to
the write-down to net realizable value of specified fixed assets obtained
as part of the December 2000 acquisition of UDS which was being utilized
for one specific customer who ceased conducting business with UDS. The
balance of approximately $200,000 was related to severance costs for
positions which have been eliminated.                                                                          

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##### Table of Contents



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



|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
until June 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 September 30,
2002, the Company had approximately $13.4 million outstanding in borrowings
under the line of credit. At December 31, 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
$31.1 million at September 30, 2002 and tightened several of the financial
covenants. At September 30, 2002, due to the special charge discussed in
Note 2 to the Notes to Condensed Consolidated Financial Statements, the
Company was not in compliance with all covenants under the credit agreement. However,
effective September 30, 2002, the Company has received a waiver from the
Bank for these covenant violations.
|  
|   |  | 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. On
September 6, 2002, the Company fixed $5.0 million of its $13.4 million of
borrowings at a 90-day LIBOR rate of 2.81%. The fixed borrowing reduced
the Companys availability under the revolving credit agreement. At
September 30, 2002, the Company had $17.7 million available under the
revolving credit agreement. During the three and nine months ended
September 30, 2002, the Company incurred interest expense related to the
line of credit of approximately $52,800 and $102,100, respectively,
resulting in a weighted average interest rate of 3.06% and 3.57%,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|4. |  | MINORITY INTERESTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Company had a majority ownership in Return.com Online, LLC
(Return.com). 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 a $2.8 million
impairment loss for 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 (SFAS) No.
128, Earnings Per Share and the effects on income and the weighted average number of shares of
potential diluted common stock. For the three and nine months ended
September 30, 2001, certain options outstanding to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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



| |  | purchase shares
of the Companys common stock aggregating 576,000 and 1.1 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 nine months ended September 30, 2002 and 2001 are as follows (in
000s):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |                                           |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |        | 
|--------------------------- | ----------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                            |                                           |  | Three Months Ended |        | Nine Months Ended
|                            |                                           |  | September 30,      |        | September 30,    
|                            |                                           |  |                    |        |                  
|                            |                                           |  | 2002               |        | 2001              |  | 2002 |        | 2001
|                            |                                           |  |                    |        |                   |  |      |        |     
|Diluted earnings per share: |                                           |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |       
|                            | Weighted average shares outstanding       |  |                    | 11,506 |                   |  |      | 11,319 |      |  |  | 11,548 |  |  |  | 11,319 | 
|                            | Employee and director stock options       |  |                    | 0      |                   |  |      | 509    |      |  |  | 0      |  |  |  | 375    | 
|                            |                                           |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |       
|                            | Weighted average shares assuming dilution |  |                    | 11,506 |                   |  |      | 11,828 |      |  |  | 11,548 |  |  |  | 11,694 | 
|                            |                                           |  |                    |        |                   |  |      |        |      |  |  |        |  |  |  |       



|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 month period ended September
30, 2002 and 2001, comprehensive income was the same as net income.
For the nine month period ended September 30, 2002 and 2001, the
components of the Companys comprehensive income are as follows
(in thousands):



|                            |                                                                  |                   |        |        |   |   |       |       | 
|--------------------------- | ---------------------------------------------------------------- | ----------------- | ------ | ------ | - | - | ----- | ----- | 
|                            |                                                                  |                  
|                            |                                                                  | Nine Months Ended
|                            |                                                                  | September 30,    
|                            |                                                                  |                  
|                            |                                                                  | 2002              |        | 2001  
|                            |                                                                  |                   |        |       
|Other comprehensive income: |                                                                  |                   |        |        |   |   |       |      
|                           
|                           
|                           
|                           
|                            | Net Income                                                       |                   | $      | (4,029 | ) |   | $     | 2,799 | 
|                           
|                           
|                           
|                           
|                            | Reclassification adjustment for gains included in
    net income |                   |        | (178   | ) |   |       | 0     | 
|                            |                                                                  |                   |        |        |   |   |       |      
|Comprehensive income        |                                                                  | $                 | (4,207 | )      |   | $ | 2,799 |      
|                            |                                                                  |                   |        |        |   |   |       |      



|7. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS 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 these
statements effective January 1, 2002. In accordance with SFAS
No. 142, 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 nine months ended September 30,
2001, amortization expense associated with goodwill was approximately
$42,000 and $127,000, respectively. The Companys proforma consolidated
net income and earnings per share for the three and nine months ended
September 30, 2001, excluding goodwill amortization, would have been $1.3
million ($0.11 per share, basic and diluted) and $2.9 million ($0.25 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
amortized over a period of 1 to 5 years on a straight-line basis. At
September 30, 2002 and December 31, 2001, the Company had intangible assets, consisting primarily of customer contracts, of approximately
$640,000 and                                                                                                                                                                                                                                                                                                                                                               

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



|   |  | $958,000, net of accumulated
amortization of approximately $620,000 and $302,000,
respectively. Amortization expense of these intangible assets amounted to
approximately $51,000 during both of the three months ended September 30,
2002 and 2001, respectively, and approximately $318,000 and $152,000 during
the nine months ended September 30, 2002 and 2001, respectively. Expected
amortization expense for these intangible assets is $202,000 in 2003,
$202,000 in 2004 and $185,000 in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|   |  | 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 ARB 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. The impairment loss recorded for the three and
nine months ended September 30, 2002 was accounted for in accordance with
the provisions of SFAS No. 144 (see Note 2).
|  
|  
|   |  | 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 at the beginning of fiscal year
2003. The Company does not anticipate that the adoption of SFAS No. 146
will have a material impact on its consolidated financial position,
results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|8. |  | EARN-OUT PAYMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | 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 $18.5
million, net of accumulated amortization of $0.3 million as of September
30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | During the third quarter of 2002, the Company recorded additional goodwill
of $360,000 associated with contingent consideration paid to the owners of
certain leased equipment which was acquired as part of the July 2001
acquisition of iFulfillment, Inc. An additional payment of $180,000 may be
due in July 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

11



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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; reliance on information technology systems;
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 and call
center services to corporations that outsource these functions. The
Company offers inventory management, pick/pack/ship services, order
tracking, transaction processing, returns processing and inbound call
center services through its fulfillment and call centers located in various
cities spanning all time zones across the continental United States. 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 retail, catalog and direct marketing companies such
as Nordstrom, Inc., Ann Taylor Stores Corporation, Smith and Hawken,
Coca-Cola Company, Tactica, Porsche, Wilsons Leather, Martha Stewart Living
Omnimedia and Thane International. During the three months ended September
30, 2002, approximately 28.1% of the Companys revenues were generated from
its telecommunications clients, 18.1% from its Modems clients and 53.8%
from its retail, catalog and direct marketing clients. During the nine
months ended September 30, 2002, approximately 27.4% of the Companys
revenues were generated from its telecommunications clients, 20.6% from its
Modems clients and 52.0% 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 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
acquisition of MBE by United Parcel Services, Inc., 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

12



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##### Table of Contents



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



| |  | On February 1, 2002, the Company made an additional payment of $15.3
million consisting of cash and common stock to the sellers of 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. The
President of the Companys UDS Division, Patrick J. West, was a former
shareholder of UDS and consequently participated in these earn-out
payments.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In the quarter ended September 30, 2002, the Company incurred special
charges of $3.1 million. The majority of the charges were associated with
the impairment of capitalized hardware and software costs for systems not
being utilized as originally planned. The remainder of the charges was due
to a write-down of specified fixed assets to their net realizable value and
for severance costs related to positions that have been eliminated.                                                                                                                                  

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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 nine months ended September 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.

During 2002, the Company began applying the consensus reached in Emerging
Issues Task Force (EITF) No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred which requires the
presentation of reimbursed out-of-pocket expenses on a gross basis as revenues
and expenses. As required, the Company reclassified the prior periods
presented herein to comply with the guidance in EITF 01-14. Accordingly,
freight and postage charges in the Companys fulfillment business during the
three months ended September 30, 2001 totaling $6.2 million
and during the nine months ended September 30, 2001 totaling $21.8 million
have been reclassified and presented as revenues and
cost of revenues in the corresponding Consolidated Statements of Operations. The
reclassification had no impact on net income.

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        |       | Nine Months        
|                                                        |                         |  | Ended September 30, |       | Ended September 30,
|                                                        |                         |  |                     |       |                    
|                                                        |                         |  | 2002                |       | 2001                |  | 2002  |      | 2001
|                                                        |                         |  |                     |       |                     |  |       |      |     
|Revenues                                                |                         |  | 100.0               | %     |                     |  | 100.0 | %    |      |  | 100.0 | %     |    |  | 100.0 | %   
|Cost of revenues                                        |                         |  | 58.0                |       |                     |  | 55.2  |      |      |  | 55.7  |       |    |  | 57.8  |     
|Special charges                                         |                         |  |                    |       |                     |  |      |      |      |  | (0.5  | )     |    |  |      |     
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     
|                                                        | Gross margin            |  |                     | 42.0  |                     |  |       | 44.8 |      |  |       | 44.8  |    |  |       | 42.2 |  
|Selling, general and administrative expenses            |                         |  | 61.9                |       |                     |  | 34.0  |      |      |  | 45.9  |       |    |  | 35.4  |     
|Impairments
and special charges, net                    |                         |  | 15.6                |       |                     |  |      |      |      |  | 3.0   |       |    |  |      |     
|Depreciation and amortization                           |                         |  | 6.7                 |       |                     |  | 4.0   |      |      |  | 6.3   |       |    |  | 3.8   |     
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     
|                                                        | Operating (loss) income |  |                     | (42.2 | )                   |  |       | 6.8  |      |  |       | (10.4 | )  |  |       | 3.0  |  
|Other (income) expense, net                             |                         |  | 0.3                 |       |                     |  | (0.4  | )    |      |  | 0.2   |       |    |  | (0.6  | )   
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     
|Income (loss) before income taxes
and minority interest |                         |  | (42.5               | )     |                     |  | 7.2   |      |      |  | (10.6 | )     |    |  | 3.6   |     
|Income tax provision (benefit)                          |                         |  | (16.0               | )     |                     |  | 2.8   |      |      |  | (3.9  | )     |    |  | 1.6   |     
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     
|Net income (loss) before minority interest              |                         |  | (26.5               | )     |                     |  | 4.4   |      |      |  | (6.7  | )     |    |  | 2.0   |     
|Minority interest                                       |                         |  |                    |       |                     |  |      |      |      |  |      |       |    |  | 0.9   |     
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     
|                                                        | Net income (loss)       |  |                     | (26.5 | )%                  |  |       | 4.4  | %    |  |       | (6.7  | )% |  |       | 2.9  | %
|                                                        |                         |  |                     |       |                     |  |       |      |      |  |       |       |    |  |       |     

Special Charges

At September 30, 2002 and December 31, 2001, the Company had approximately
$1.5 million and $4.6 million, respectively, in accruals related to the
special charges recorded during the year ended December 31, 2000. The
remaining accruals at September 30, 2002 included $291,000 related to the
Companys shift to a fee-for-service business model and $1.2 million related
to exiting the front-end e-commerce and web hosting business. Cash payments
relating to these accruals for the three and nine months ended September 30,
2002 were approximately $161,000 and $627,000, respectively. The Company
recognized approximately $50,000 and $1.7 million into

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

income during the three and nine months
ended September 30, 2002,
respectively, related to the gains realized on sales of inventory
items and cash collected for accounts receivable that were written
off as special charges in previous periods. Except for the accrual associated with one specific client
which represents about 60% of the remaining accrual and is classified as
long-term, the remaining accrual is expected to be utilized during the
remainder of the year.

During the third quarter of 2002, the Company recognized an additional $3.1
million in special charges. Approximately $2.4 million of these charges were
related to capitalized hardware and software costs for systems not being
utilized as originally planned. The Company determined the impairment value
of these systems by using the present value in accounting measurements as
defined by SFAS No. 144. Of the remaining charges, approximately $500,000
related to the write-down to net realizable value of specified fixed assets
and approximately $200,000 was related to severance for positions which have
been eliminated. This charge equated to a $0.17 loss per share for the
quarter. On a pro forma basis, for the three and nine months ended September
30, 2002, excluding all special charges and credits, the Companys earnings
per share were a loss of $0.29 and $0.26, respectively.

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

Revenues.Total revenues decreased 29.7% to $20.1 million for the three months
ended September 30, 2002 from $28.6 million for the three months ended
September 30, 2001. The decrease in revenues is primarily due to the loss of
the SBC contract at December 1, 2001 which represented approximately $3.3
million of revenues during the third quarter of 2001; completion of the
fee-for-service transition; and a decrease in product sales for Warranty
Corporation of America (WACA). This decline in revenues was offset by the
expansion of services to include wireless pager equipment with BellSouth during
the fourth quarter of 2001, as well as the commencement of the Martha Stewart
Living Omnimedia, Inc. contract in the first quarter of 2002 and the Smith and
Hawken, Ann Taylor and Books Are Fun contracts in the third quarter of 2002.

Cost of Revenues.Cost of revenues decreased 26.6% to $11.6 million for the
three months ended September 30, 2002 compared to $15.8 million for the three
months ended September 30, 2001. Cost of revenues decreased primarily due to
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. The decrease in equipment units sold to WACA also contributed to the
decrease in cost of revenues during the third quarter of 2002 as compared to
the same period in 2001. This decline in cost of revenues was offset by
expenses incurred in the third quarter of 2002 relating to additional
fulfillment labor required to handle the start-up of several new clients at
our Chicago and Cincinnati fulfillment centers.

Gross Margin.For the three months ended September 30, 2002, the Companys
gross margin decreased by $4.4 million to $8.4 million, or 42.0% of revenues,
compared to $12.8 million, or 44.8% of revenues, for the three months ended
September 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 September 30, 2002 increased to $12.4 million, or 61.9% of
revenues, compared to $9.7 million, or 34.0% of revenues, for the same period
in 2001. The increase in expenses primarily relates to start-up and associated
technology costs for new client implementations. The Company anticipates that
its S,G&A expenses as a percentage of revenues will decrease in 2003 as these
new client implementations are completed.

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

Special Charges.The Company recorded special charges of $3.1 million
primarily related to the impairment of capitalized hardware and software costs
for systems not being utilized as originally planned, the write-down to net
realizable value of specified fixed assets and severance costs.

Income Taxes.The Companys effective tax rate for the three months ended
September 30, 2002 and 2001 was 37.8% and 38.8%, respectively.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001

Revenues.Total revenues decreased 36.4% to $60.5 million for the nine months
ended September 30, 2002 from $95.2 million for the nine months ended September
30, 2001. The decrease in revenues is primarily due to the loss of the SBC
contract at December 1, 2001 which represented approximately $12.8 million of
revenues during the first nine months of 2001; completion of the Consumer
Premise Equipment (CPE) outbound sales program for BellSouth during 2001;
completion of the fee-for-service transition; and a decrease in product sales
for WACA. 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 commencement of the Martha Stewart
Living Omnimedia, Inc. contract in the first quarter of 2002 and the Smith and
Hawken, Ann Taylor and Books Are Fun contracts in the third quarter of 2002.

Cost of Revenues.The Companys cost of
revenues decreased 39.3% to $33.4
million for the nine months ended September 30, 2002 compared to $55.0 million
for the nine months ended September 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. This decline in cost of
revenues was offset by expenses incurred in the third quarter of 2002 relating
to additional fulfillment labor required to handle the start-up of several new
clients at our Chicago and Cincinnati fulfillment centers.

Gross Margin.For the nine months ended September 30, 2002, the Companys
gross margin decreased by $13.1 million to $27.1 million, or 44.8% of
revenues, compared to $40.2 million, or 42.2% of revenues, for the nine months
ended September 30, 2001. This decrease was due primarily to the factors
discussed above.

Selling, General and Administrative Expenses.S,G&A expenses for the nine
months ended September 30, 2002 decreased to $27.8 million, or 45.9% of
revenues, compared to $33.7 million, or 35.4% of revenues, for the nine months
ended September 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 and
start-up expenses associated with new client implementations during the first
nine months of 2002.

Special Charges.The Company recorded special charges of $3.1 million in
the third quarter of 2002 primarily related to the impairment of
capitalized hardware and software costs for systems not being utilized as
originally planned. This was offset by the reversal of a portion of the
2000 special charges totaling approximately $1.7 million related to
the gains realized on sales of inventory
items and cash collected for accounts receivable that were written
off as special charges in previous periods.

Income Taxes.The Companys effective tax rate for the nine months ended
September 30, 2002 and 2001 was 37.1% and 43.9%, 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 $198,000 at
September 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 $13.7 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). The
Companys management does not anticipate any future earn-out payments to be
made.

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 nine months ended September 30, 2002, the Company
repurchased 205,400 shares of common stock with a purchase price of $448,000.
All purchases took place during the third quarter of 2002.

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 until June
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 September 30, 2002, the Company had approximately $13.4 million
outstanding in borrowings under the line of credit. At
December 31, 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 $31.1 million at September 30, 2002 and tightened
certain of the financial covenants. At September 30, 2002, due to the special
charge discussed in Note 2 to the Notes to Condensed Consolidated Financial
Statements, the Company was not in compliance with all covenants under the
credit agreement. However, effective September 30, 2002, the Company has
received a waiver from the Bank for these covenant violations.

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. On September 6,
2002, the Company locked $5 million of its borrowings into a 90-day LIBOR rate
at 2.81%. During the three and nine months ended September 30, 2002, the
Company incurred interest expense related to the line of credit of
approximately $52,800 and $102,100, respectively, resulting in a weighted
average interest rate of 3.06% and 3.57%, respectively

During the nine months ended September 30, 2002, the Company generated
approximately $3.3 million in cash flows from operating activities compared to
$2.0 million in cash flows from operating activities in the same period in
2001.

During the nine months ended September 30, 2002, net cash used in investing
activities was $25.2 million as compared to $11.0 million in 2001. This
difference was due to an $8.0 million increase in cash payments made resulting
from prior acquisitions (including the earn-out payment of $13.7 million made
in February 2002), $11.6 million in capital expenditures, primarily in
conjunction with the Companys new facility in Cincinnati and capitalized
technology costs.

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

During the nine months ended September 30, 2002, net cash provided by
financing activities was $12.7 million compared to $121,000 used in financing
activities in the same period in 2001. The $12.8 million increase was
primarily due to borrowings of $13.4 million under the credit facility less
the buyback of treasury shares in the amount of $448,000.

The Company estimates that its cash needs through the next twelve months 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

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 of the financial statements of this
Form 10-Q and in Note 2 of the
financial statements included in the Companys Annual Report on 10-K for the year ended December 31, 2001. Those that we
believe that are most critical to an investors understanding of our financial
results and condition and require complex management judgment are discussed
below:

Deferred Tax Asset  At September 30, 2002 the Company has recorded a deferred
tax asset of $9.0 million primarily related to net operating loss carry
forwards. The realization of this asset is dependent on generating sufficient
taxable income in the future periods. Management considers projected future
taxable income and tax planning strategies in making this assessment. Based on
the historical profitability and projections of future taxable income,
management believes that it is more likely than not that the deferred tax asset
will be realized.

Goodwill and Other Long-Lived
Assets  In 2002, the Company adopted SFAS
Nos. 141, 142, and 144 and these new standards, among other
things, change the accounting model for evaluating the carrying value
of the assets held for use and held for sale, as well as the carrying
value of goodwill and other intangible assets. These new
pronouncements require projections of future cash flows that require
significant management judgment and subjective estimates in applying
these new pronouncements. Any significant adverse changes to these
estimates may have a material impact on the carrying value of
goodwill and other long-lived assets.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS 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 these statements effective
January 1, 2002. In accordance with SFAS No. 142, 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 nine months ended September 30, 2001, amortization
expense associated with goodwill was approximately $42,000 and $127,000,
respectively. The Companys proforma consolidated net income and earnings per
share for the three and nine months ended September 30, 2001, excluding
goodwill amortization, would have been $1.3 million ($0.11 per share, basic and diluted) and $2.9
million ($0.25 per share, basic and diluted), respectively.

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

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 sheets and which are amortized over a
period of 1 to 5 years on a straight-line basis. At September 30, 2002 and
2001, the Company had intangible assets, consisting primarily of customer
contracts, of approximately $640,000 and $842,000, net of accumulated
amortization of approximately $620,000 and $168,000, respectively.
Amortization expense of these intangible assets amounted to approximately
$51,000 during both of the three months ended September 30, 2002 and 2001,
respectively, and approximately $318,000 and $152,000 during the nine months
ended September 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 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. The impairment loss recorded for
the three and nine months ended September 30, 2002 was accounted for in accordance with the provisions of SFAS No. 144 (see Note 2).

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 at 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.




Item 4  Controls and Procedures

Our management, including the chief executive and chief financial officers,
supervised and participated in an evaluation of our disclosure controls and
procedures (as defined in federal securities rules) within the 90 days before
we filed this report. Based on that evaluation, our CEO and CFO have concluded
that our disclosure controls and procedures were effective as of the date of
that evaluation as defined in Exchange Act Rules 13a-14(c) and
15d-14(c).

There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.

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Part II  Other Information




Item 6  Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

|     |  |                                                                                        
|---- |  | ---------------------------------------------------------------------------------------
|10.1 |  | Hebron, KY (Cincinnati) facility Lease Agreement.                                      
|     |  |                                                                                        
|10.2 |  | Loan Documents Modification Agreement between Innotrac Corporation
and SouthTrust Bank.
|     |  |                                                                                        
|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: There were no Form 8-K filings during the
quarter ended September 30, 2002.
| | --- |  | ------------------------------------------------------------------------------------------------

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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: November 19, 2002 |  | By: /s/ Scott D. Dorfman                                                                                   
|                        |  |                                                                                                            
|                        |  | Scott D. Dorfman
President, Chief Executive Officer and Chairman
of the Board                              
|                        |  |                                                                                                            
|Date: November 19, 2002 |  | By: /s/ David L. Gamsey                                                                                    
|                        |  |                                                                                                            
|                        |  | David L. Gamsey
Senior Vice President , Chief Financial Officer
and Secretary (Principal Financial Officer)

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CERTIFICATIONS

I, Scott D. Dorfman, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Innotrac
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date);
and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing
the equivalent function):



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

|                        |  |                                                                              
|----------------------- |  | -----------------------------------------------------------------------------
|Date: November 19, 2002 |  | /s/ Scott D. Dorfman                                                         
|                        |  |                                                                              
|                        |  | Scott D. Dorfman
President, Chief Executive Officer and Chairman
of the Board

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##### Table of Contents



CERTIFICATIONS

I, David L. Gamsey, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Innotrac
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date);
and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing
the equivalent function):



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

|                        |  |                                                                                                            
|----------------------- |  | -----------------------------------------------------------------------------------------------------------
|Date: November 19, 2002 |  | /s/ David L. Gamsey                                                                                        
|                        |  |                                                                                                            
|                        |  | David L. Gamsey
Senior Vice President , Chief Financial Officer
and Secretary (Principal Financial Officer)

24