SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      Quarterly Period Ended June 30, 2007





OR




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


SECURITIES
      ACT OF 1934





For
      the
      transition period from ____ to ____





Commission
      file number 000-23740





INNOTRAC
      CORPORATION


(Exact
      name of registrant as specified in its charter)




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




6655
                  Sugarloaf Parkway, Duluth, Georgia
              30097(Address
                  of principal executive offices)
              (Zip
                  Code)


Registrant's
      telephone number, including area code: (678)
      584-4000








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





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





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-b-2 of the Act) Yes oNo x




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





Outstanding
                  at August 10, 2007Common
                  Stock $.10 par value per share
              12,319,803
                  Shares














**INNOTRAC
      CORPORATION**





**INDEX**




Part
                  I. Financial Information
              Page
 
 Item
                  1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets at June 30, 2007
                  (Unaudited) and December 31, 2006
              3Condensed
                  Consolidated Statements of Operations for the Three
                  Months Ended June 30, 2007 and 2006 (Unaudited)
              4Condensed
                  Consolidated Statements of Operations for the Six
                  Months Ended June 30, 2007 and 2006 (Unaudited)
              5Condensed
                  Consolidated Statements of Cash Flows for the
                  Six Months Ended June 30, 2007 and 2006 (Unaudited)
              6Notes
                  to Condensed Consolidated Financial Statements
                  (Unaudited)
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              13Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              23Item
                  4.
              Controls
                  and Procedures
              23
 
 Part
                  II. Other Information
 
 Item
                  1A.
              Risk
                  Factors
              24Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              24Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              25Item
                  5
              Other
                  Information
              25Item
                  6.
              Exhibits
              25
 
 Signatures
              26





1








**Part
      I - FinancialInformation**





Item
      1 - Financial Statements





The
      following condensed consolidated financial statements of Innotrac Corporation,
      a
      Georgia corporation (“Innotrac” or the “Company”), have been prepared in
      accordance with the instructions to Form 10-Q and, therefore, omit or condense
      certain footnotes and other information normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America. In the opinion of management, all adjustments
      are of a normal and recurring nature, except those specified as otherwise,
      and
      include those necessary for a fair presentation of the financial information
      for
      the interim periods reported. Results of operations for the three and six months
      ended June 30, 2007 are not necessarily indicative of the results for the entire
      year ending December 31, 2007. These financial statements should be read in
      conjunction with the consolidated financial statements and notes thereto
      included in the Company’s 2006 Annual Report on Form 10-K, which is available on
      our website at www.innotrac.com.



















2





**INNOTRAC
      CORPORATION**


**CONDENSEDCONSOLIDATED
      BALANCE SHEETS**


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




**ASSETS**
              
              **June
                  30, 2007**
              
              **December
                  31, 2006****(unaudited)**Current
                  assets:Cash
                  and cash equivalents
              
              $
              545
              
              $
              1,014Accounts
                  receivable (net of allowance for doubtful accounts of $230 atJune
                  30, 2007 and $257 at December 31, 2006)
              
              
              20,064
              
              
              22,939Inventory
              
              
              1,084
              
              
              1,729Prepaid
                  expenses and other
              
              
              1,449
              
              
              1,088Total
                  current assets
              
              
              23,142
              
              
              26,770Property
                  and equipment:Rental
                  equipment
              
              
              311
              
              
              344Computer
                  software and equipment
              
              
              41,210
              
              
              39,769Furniture,
                  fixtures and leasehold improvements
              
              
              8,044
              
              
              6,81249,565
              
              
              46,925Less
                  accumulated depreciation and amortization
              
              
              (31,541
              )
              
              (29,089
              )18,024
              
              
              17,836Goodwill
              
              
              25,169
              
              
              25,169Other
                  assets, net
              
              
              1,440
              
              
              1,765Total
                  assets
              
              $
              67,775
              
              $
              71,540**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              11,891
              
              $
              14,363Line
                  of credit
              
              
              9,004
              
              
              8,586Accrued
                  expenses and other
              
              
              4,205
              
              
              4,981Total
                  current liabilities
              
              
              25,100
              
              
              27,930Noncurrent
                  liabilities:Other
                  noncurrent liabilities
              
              
              1,229
              
              
              1,576Total
                  noncurrent liabilities
              
              
              1,229
              
              
              1,576Commitments
                  and contingencies (see Note 5)Shareholders’
                  equity:Preferred
                  stock: 10,000,000 shares authorized, $010 par value,no
                  shares issued or outstanding
              
              
              -
              
              
              -Common
                  stock: 50,000,000 shares authorized, $010 par value,12,319,803
                  and 12,280,610 shares issued and outstanding as ofJune
                  30, 2007 and December 31, 2006 respectively
              
              
              1,232
              
              
              1,228Additional
                  paid-in capital
              
              
              66,173
              
              
              66,016Accumulated
                  deficit
              
              
              (25,959
              )
              
              (25,210
              )Total
                  shareholders’ equity
              
              
              41,446
              
              
              42,034Total
                  liabilities and shareholders’ equity
              
              $
              67,775
              
              $
              71,540











See
      notes
      to condensed consolidated financial statements.





3





Financial
      Statements-Continued





**INNOTRAC
      CORPORATION**


**CONDENSEDCONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


**For
      the Three Months Ended June 30, 2007 and 2006**


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


**Three
                  Months Ended June
                  30,****2007**
              
              **2006****(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              28,054
              
              $
              16,577Cost
                  of revenues
              
              
              15,793
              
              
              7,980Selling,
                  general and administrative expenses
              
              
              10,737
              
              
              8,478Depreciation
                  and amortization
              
              
              1,317
              
              
              862Total
                  operating expenses
              
              
              27,847
              
              
              17,320Operating
                  income (loss)
              
              
              207
              
              
              (743
              )Other
                  expense:Interest
                  expense
              
              
              162
              
              
              91Total
                  other expense
              
              
              162
              
              
              91Income
                  (loss) before income taxes
              
              
              45
              
              
              (834
              )Income
                  taxes
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              45
              
              $
              (834
              )Income
                  (loss) per share:Basic
              
              $
              0.00
              
              $
              (0.07
              )Diluted
              
              $
              0.00
              
              $
              (0.07
              )Weighted
                  average shares outstanding:Basic
              
              
              12,282
              
              
              12,281Diluted
              
              
              12,283
              
              
              12,281






















See
      notes
      to condensed consolidated financial statements.














4








**INNOTRAC
      CORPORATION**


**CONDENSEDCONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


**For
      the Six Months Ended June 30, 2007 and 2006**


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




**Six
                  Months Ended June 30,****2007**
              
              **2006****(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              55,829
              
              $
              33,906Cost
                  of revenues
              
              
              31,746
              
              
              16,878Selling,
                  general and administrative expenses
              
              
              21,901
              
              
              17,299Depreciation
                  and amortization
              
              
              2,602
              
              
              1,683Total
                  operating expenses
              
              
              56,249
              
              
              35,860Operating
                  (loss)
              
              
              (420
              )
              
              (1,954
              )Other
                  expense:Interest
                  expense
              
              
              329
              
              
              158Total
                  other expense
              
              
              329
              
              
              158(Loss)
                  before income taxes
              
              
              (749
              )
              
              (2,112
              )Income
                  taxes
              
              
              -
              
              
              -Net
                  (loss)
              
              $
              (749
              )
              $
              (2,112
              )(Loss)
                  per share:Basic
              
              $
              (0.06
              )
              $
              (0.17
              )Diluted
              
              $
              (0.06
              )
              $
              (0.17
              )Weighted
                  average shares outstanding:Basic
              
              
              12,281
              
              
              12,281Diluted
              
              
              12,281
              
              
              12,281






























See
      notes
      to condensed consolidated financial statements.







5





Financial
      Statements-Continued








**INNOTRAC
      CORPORATION**


**CONDENSEDCONSOLIDATED
      STATEMENTS OF CASH
      FLOWS**


**For
      the Six Months Ended June 30, 2007 and 2006**


**(in
      thousands)**




**Six
                  Months Ended June 30,****2007**
              
              
              **2006****(unaudited)**
              
              
              **(unaudited)**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (749
              )
              $
              (2,112
              )Adjustments
                  to reconcile net loss to net cash provided by (used in)operating
                  activities:Depreciation
                  and amortization
              
              
              2,602
              
              
              1,683Provision
                  for bad debts
              
              
              (21
              )
              
              74Stock
                  issued to settle employee stock bonus
              
              
              111
              
              
              -Stock
                  compensation expense
              
              
              51
              
              
              63Changes
                  in operating assets and liabilities:Decrease
                  (increase) in accounts receivable, gross
              
              
              2,896
              
              
              (1,987
              )Decrease
                  in inventory
              
              
              645
              
              
              1,742Increase
                  in prepaid expenses and other
              
              
              (329
              )
              
              (200
              )Decrease
                  in accounts payable
              
              
              (1,422
              )
              
              (2,889
              )(Decrease)
                  increase in accrued expenses and other
              
              
              (1,124
              )
              
              605Net
                  cash provided by (used in) operating activities
              
              
              2,660
              
              
              (3,021
              )Cash
                  flows from investing activity:Capital
                  expenditures
              
              
              (2,737
              )
              
              (5,418
              )Installment
                  payment on previous acquisition of business
              
              
              (800
              )
              
              -Net
                  cash used in investing activities
              
              
              (3,537
              )
              
              (5,418
              )Cash
                  flows from financing activities:Net
                  borrowings under line of credit
              
              
              418
              
              
              7,398Loan
                  commitment fees
              
              
              (10
              )
              
              (20
              )Net
                  cash provided by financing activities
              
              
              408
              
              
              7,378Net
                  decrease in cash and cash equivalents
              
              
              (469
              )
              
              (1,061
              )Cash
                  and cash equivalents, beginning of period
              
              
              1,014
              
              
              2,068Cash
                  and cash equivalents, end of period
              
              $
              545
              
              $
              1,007Supplemental
                  cash flow disclosures:Cash
                  paid for interest
              
              $
              351
              
              $
              126

















See
      notes
      to condensed consolidated financial statements.





6




**INNOTRAC
        CORPORATION**
 **NOTESTO
        CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 **June
        30, 2007 and 2006**
 **(Unaudited)**







1.
              **SIGNIFICANT
                  ACCOUNTING POLICIES**





The
      accounting policies followed for quarterly financial reporting are the same
      as
      those disclosed in the Notes to Consolidated Financial Statements included
      in
      the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
      Commission for the year ended December 31, 2006. Certain of the Company’s more
      significant accounting policies are as follows:





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





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





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





*Accounting
      for Income Taxes.* Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance was recorded against the net deferred tax asset as of
      December 31, 2006 and June 30, 2007 (see Note 4).




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




*Stock-Based
      Compensation Plans* *.*  In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based
      Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation.”
SFAS No. 123(R) requires all share-based payments to employees, including grants
      of employee stock options, to be recognized as compensation expense in the
      consolidated financial statements based on their fair values. That expense
      will
      be recognized over the period during which an employee is required to provide
      services in exchange for the award, known as the requisite service period
      (usually the vesting period). The Company adopted SFAS No. 123(R) effective
      January 1, 2006 using the Modified Prospective Application Method. Under this
      method, SFAS 123(R) applies to new awards and to awards modified, repurchased
      or
      cancelled after the effective date. Additionally, compensation expense for
      the
      portion of awards for which the requisite service has not been rendered that
      are
      outstanding as of the required effective date shall be recognized as the
      requisite service is performed on or after the required effective date. The
      adoption of SFAS No. 123(R) resulted in recording $51,000 and $63,000 in
      compensation expense for the six months ended June 30, 2007 and 2006,
      respectively and $31,000 and $22,000 in compensation expense for the three
      months ended June 30, 2007 and 2006 respectively. As of June 30, 2007,
      approximately $455,000 of unrecognized compensation expense related to
      non-vested stock options is expected to be recognized over the following 118
      months.




7


**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
          30, 2007 and 2006**
 **(Unaudited)**





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





**Six
                months ended****June
                30, 2007**
            
            **June
                30, 2006**Risk-free
                interest rate
            
            
            5.1%
            
            
            5.1%Expected
                dividend yield
            
            
            0%
            
            
            0%Expected
                lives
            
            
            2.1
                Years
            
            
            2.1
                YearsExpected
                volatility
            
            
            71.7%
            
            
            71.8%





Additionally,
      on April, 16, 2007, the Compensation Committee approved a bonus in the form
      of a
      grant of $165,000 or 58,509 shares at the April 16, 2007 closing price for
      our
      stock to 4 executives of the Company. The shares vested immediately upon
      issuance. To remit income taxes on the bonus, 19,316 of the 58,509 shares were
      not issued and the cash value of those shares at date of grant, or $54,471
      was
      withheld for income taxes. The remaining value of the bonus, or 39,193 shares
      and $110,524 is presented as a non cash expense in cash flows from operations
      in
      the Condensed Consolidated Statement of Cash Flows for the Six months ended
      June
      30, 2007.








2.
            **FINANCING
                OBLIGATIONS**





The
      Company has a revolving bank credit agreement with a maximum borrowing limit
      of
      $25.0 million, which will mature in March 2009. Although the maximum borrowing
      limit is $25.0 million, the credit facility limits borrowings to specified
      percentages of the value of eligible accounts receivable, inventory and certain
      personal assets of the Company’s Chairman, President and CEO, which totaled
      $16.7 million at June 30, 2007. Additionally, the $16.7 million is reduced
      by
      certain reserves for letters of credit outstanding and general lending reserves,
      which totaled $1.5 million at June 30, 2007. The difference between the limits
      on borrowings and the amount borrowed and outstanding at any time is defined
      as
      unused availability. At June 30, 2007, the Company had $9.0 million outstanding
      borrowings under the revolving bank credit agreement and under the specific
      calculations defined in the credit agreement, $6.2 million of unused
      availability. The Company has granted a security interest in all of its assets
      to the lender as collateral under this revolving credit agreement.




The
      revolving credit agreement contains requirements for periodic reporting of
      the
      value of assets underlying the borrowing limit, change in ownership control
      and
      other covenants. The provisions of the revolving credit agreement require that
      the Company maintain a lockbox arrangement with the lender, and allows the
      lender to declare any outstanding borrowing amounts to be immediately due and
      payable as a result of noncompliance with any of the covenants. Accordingly,
      in
      the event of noncompliance, these amounts could be accelerated.





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




8




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
          30, 2007 and 2006**
 **(Unaudited)**


On
      June
      29, 2007, the Company and the bank entered into the fourth amendment to its
      revolving bank credit facility entitled “Fourth Amendment Agreement” (the
“Fourth Amendment”) whereby the bank agreed to adjust the definition of the
      defined term availability reserve from $2.0 million to $0.5 million until
      December 31, 2007 at which time the availability reserve would revert back
      to
      $2.0 million. Under the new definition, the Company was able to obtain an
      additional $1.5 million of advanced funds under the revolving credit agreement’s
      existing collateral and borrowing base availability until December 31,
      2007. Additionally, the fixed charge ratio requirement included in the
      Third Amendment dated April 16, 2007 was removed as a requirement for a portion
      of the availability to borrow under the revolving credit agreement, but remains
      i) at the same 1.05 to 1.0 requirement to allow release of the bank’s security
      interest in the specified personal assets of the Company’s Chairman,
      President and CEO and ii) as a regulatory factor in the interest rate charged
      on
      borrowings under the line as decribed below.  The Company intends to use
      the additional availability to fund purchases of long term capital assets needed
      to support certain fulfillment operations and general working capital needs.
      Additionally, the Fourth Amendment provides that if there were a change in
      the
      officer occupying the office of Chief Financial Officer, the Chief Financial
      Officer position could remain unfilled for a maximum of 59 days and the new
      officer retained to hold the position would have to be suitable to the Bank
      or
      an Event of Default would occur.





Interest
      on borrowings is payable monthly at rates equal to the prime rate, or at the
      Company’s option, LIBOR plus up to 200 basis points; however so long as the
      fixed charge ratio is less than 1.00 to 1.00, the interest rate will be equal
      to
      the prime rate plus 1% or at the Company’s option, LIBOR plus 285 basis points.
      During the three months ended June 30, 2007 and 2006, the Company
      incurred  interest
      expense related to the line of credit of approximately  $152,000
      and $78,000, respectively, resulting in a weighted average interest rate of
      7.73% and 6.37%, respectively. During the six months ended June 30, 2007 and
      2006, the Company incurred interest expense related to the line of credit of
      approximately $310,000 and $120,000, respectively, resulting in a weighted
      average interest rate of 7.67% and 6.47%, respectively. The Company also
      incurred unused revolving credit facility fees of approximately $10,000 and
      $13,000 during the three months ended June 30, 2007 and 2006, respectively,
      and
      $20,000 and $27,000 during the six months ended June 30, 2007 and 2006,
      respectively.





9




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
          30, 2007 and 2006**
 **(Unaudited)**


3.
            **EARNINGS
                PER SHARE**





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





Three
                Months
              Ended
                June 30,
            
            Six
                Months
              Ended
                June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006Diluted
                earnings per share:Weighted
                average shares outstanding
            
            
            12,282
            
            
            12,281
            
            
            12,281
            
            
            12,281Employee
                and director stock options and unvested restricted shares
            
            
            1
            
            
            -
            
            
            -
            
            
            -Weighted
                average shares assumingdilution
            
            
            12,283
            
            
            12,281
            
            
            12,281
            
            
            12,281





Options
      outstanding to purchase 1.9 million shares of the Company’s common stock for
      both the three and six months ended June 30, 2007, and 1.7 million shares for
      both the three and six months ended June 30, 2006, were not included in the
      computation of diluted EPS because their effect was anti-dilutive.





4.
            **INCOME
                TAXES**




Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance is recorded against deferred tax assets if the Company
      considers it is more likely than not that deferred tax assets will not be
      realized. Innotrac’s gross deferred tax asset as of June 30, 2007 and December
      31, 2006 was approximately $19.0 million and $18.3 million, respectively. This
      deferred tax asset was generated primarily by net operating loss carryforwards
      created mainly by a special charge of $34.3 million recorded in 2000 and the
      net
      losses generated in 2002, 2003, 2005 and 2006. Innotrac has a net operating
      loss
      carryforward of $46.8 million at December 31, 2006 that expires between 2021
      and
      2026.





Innotrac’s
      ability to generate the expected amounts of taxable income from future
      operations is dependent upon general economic conditions, competitive pressures
      on sales and margins and other factors beyond management’s control. These
      factors, combined with losses in recent years, create uncertainty about the
      ultimate realization of the gross deferred tax asset in future years. Therefore,
      a valuation allowance of approximately $14.3 million and $14.0 million has
      been
      recorded as of June 30, 2007 and December 31, 2006, respectively. Income taxes
      associated with future earnings will be offset by the utilization of the net
      operating loss carryforward resulting in a reduction in the valuation allowance.
      For the six months ended June 30, 2007, the deferred tax benefit of $247,000
      was
      offset by a corresponding increase of the deferred tax asset valuation
      allowance. When, and if, the Company can return to consistent profitability,
      and
      management determines that it is likely it will be able to utilize the net
      operating losses prior to their expiration, then the valuation allowance can
      be
      reduced or eliminated.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109* (“FIN
      48”), which clarifies the accounting for uncertainty in ** tax
      positions and in May 2007 the FASB issued FASB Staff Position (FSP) 48-1 which
      amended FIN 48 to provide guidance on how an enterprise should determine whether
      a tax position is effectively settled for the purpose of recognizing previously
      unrecognized tax benefits. The
      combined effect of FIN 48 and FSP 48-1 requires that the Company determine
      whether it is more likely than not that a tax position will be sustained upon
      audit, based on the technical merits of the position. A tax position that meets
      the more likely than not recognition threshold is measured to determine the
      amount of benefit to recognize in the financial statements. The tax position
      is
      measured at the largest amount of benefit that is greater than 50 percent likely
      of being realized upon ultimate settlement. The Company adopted FIN 48 effective
      January 1, 2007. The Company has a gross deferred tax asset of approximately
      $18.3 million at December 31, 2006, which did not change significantly during
      the six months ended June 30, 2007. As discussed in Note 6 to the consolidated
      financial statements in the 2006 Form 10-K, the Company has a valuation
      allowance against the full amount of its deferred tax asset. The Company
      currently provides a valuation allowance against deferred tax assets when it
      is
      more likely than not that deferred tax assets will not be realized. The Company
      has recognized tax benefits from all tax positions we have taken, and there
      has
      been no adjustment to any net operating loss carryforwards as a result of FIN
      48
      and there are no unrecognized tax benefits and no related FIN 48 tax liabilities
      at June 30, 2007. In addition, future changes in the unrecognized tax benefits
      will likely have no impact on the effective tax rate due to the existence of
      the
      valuation allowance. Therefore, the application of FIN 48 and FSP 48-1 had
      no
      material impact on the financial statements.




10




**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
          30, 2007 and 2006**
 **(Unaudited)**





The
      Company generally recognizes interest and/or penalties related to income tax
      matters in general and administrative expenses. As of June 30, 2007, we have
      no
      accrued interest or penalties related to uncertain tax positions.





5.
            **COMMITMENTS
                AND CONTINGENCIES**





*Shareholder
      Rights Plan* .
      In
      December 1997, the Company’s Board of Directors approved a Shareholder Rights
      Plan (the “Rights Plan”). The Rights Plan provides for the distribution of one
      right for each outstanding share of the Company’s common stock held of record as
      of the close of business on January 1, 1998 or that thereafter becomes
      outstanding prior to the earlier of the final expiration date of the rights
      or
      the first date upon which the rights become exercisable. Each right entitles
      the
      registered holder to purchase from the Company one one-hundredth of a share
      of
      Series A participating cumulative preferred stock, par value $.10 per share,
      at
      a price of $60.00 (the “Purchase Price”), subject to adjustment. The rights are
      not exercisable until ten calendar days after a person or group (an “Acquiring
      Person”) buys, or announces a tender offer for, 15% or more of the Company’s
      common stock. Such ownership level was increased on November 5, 2003 to 40%
      for
      IPOF Fund, LP that owned approximately 34.0% of the shares outstanding on June
      30, 2007. In the event the rights become exercisable, each right will entitle
      the holder to receive that number of shares of common stock having a market
      value equal to the Purchase Price. If, after any person has become an Acquiring
      Person (other than through a tender offer approved by qualifying members of
      the
      Board of Directors), the Company is involved in a merger or other business
      combination where the Company is not the surviving corporation, or the Company
      sells 50% or more of its assets, operating income, or cash flow, then each
      right
      will entitle the holder to purchase, for the Purchase Price, that number of
      shares of common or other capital stock of the acquiring entity which at the
      time of such transaction have a market value of twice the Purchase Price. The
      rights will expire on January 1, 2008, unless extended, unless the rights
      are earlier exchanged, or unless the rights are earlier redeemed by the Company
      in whole, but not in part, at a price of $0.001 per right. No shares have been
      issued under the Rights Plan.





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




11


**INNOTRAC
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
          30, 2007 and 2006**
 **(Unaudited)**


*Employment
      Commitment* .
      In June
      1999, in conjunction with the opening of a new call center facility, the Company
      entered into an employment commitment agreement with the City of Pueblo,
      Colorado, whereby the Company received cash incentives of $968,000. These funds
      were accounted for as a reduction in the basis of the assets acquired. In return
      for this consideration, the Company is obligated to employ a minimum number
      of
      full-time employees at its Pueblo facility, measured on a quarterly basis.
      This
      obligation, which became effective June 2002, will continue through June 2009.
      In the event that the number of full-time employees fails to meet the minimum
      requirement, the Company will incur a quarterly penalty of $96.30 for each
      employee less than the minimum required amount. During the three and six months
      ended June 30, 2007 and 2006, the Company did not meet the minimum employee
      requirements of 359 full-time employees, as measured on a quarterly basis,
      incurring a penalty of approximately $2,000 and $9,000 for the three months
      ended June 30, 2007 and 2006, respectively. The Company incurred a penalty
      of
      approximately $7,000 and $18,000 for the six months ended June 30, 2007 and
      2006
      respectively.




6.
            **RELATED
                PARTY TRANSACTION**





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





Pursuant
      to the Third Amendment to the Company’s revolving bank credit agreement, Scott
      Dorfman, the Company’s Chairman, President and CEO has granted the bank a
      security interest in certain personal assets which will be treated as additional
      collateral under the credit agreement until the earlier of (x) April 30, 2008
      (y) the date all deferred payments in connection with the ClientLogic
      acquisition are paid in full, so long as no default exists and the fixed charge
      coverage ratio for the most recent period is equal to or greater than 1.05
      to
      1.00.





7.
            **SUBSEQUENT
                EVENTS**





On
      July
      26, 2007, the United States District Court in Cleveland, Ohio  granted
      the court appointed receiver’s motion to extend the period during which
      financial institutions holding Company stock owned by the IPOF Fund, Mr. Dadante
      or Dadante-related entities are restricted from trading any of these shares
      as
      defined in the Court’s prior orders until November 2, 2007.  The
      Company continues to be engaged in discussions with the receiver to explore
      avenues for the disposition of the shares in a manner that causes as little
      disruption to the market for Company stock as possible, and which would
      reasonably assure that the shares held by the receiver would be fairly valued
      in
      any disposition





On
      August
      13, 2007, the Company and our Chairman, CEO and President Scott Dorfman reached
      an agreement in principle that Mr. Dorfman will provide availability of not
      more
      than $5.5 million in short term loans, guarantees or letters of credit (the
      “2007 Growth Loan”) to the Company as are necessary to allow the Company to fund
      its capital needs in advance of the 2007 holiday season. The specific terms
      for
      borrowing by the Company and ultimate repayment of any amounts borrowed under
      the Growth Loan are still under negotiation at the time of filing this Form
      10-Q.





12




Item2


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**






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





**Overview**





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





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





Our
      core
      service offerings include the following:





·  Fulfillment
      Services:


·
            sophisticated
                warehouse management technology


·
            automated
                shipping solutions


·
            real-time
                inventory tracking and order status


·
            purchasing
                and inventory management


·
            channel
                development


·
            zone
                skipping for shipment cost
                reduction


·
            product
                sourcing and procurement


·
            packaging
                solutions


·
            back-order
                management; and


·
            returns
                management.





·  Customer
      Support Services:


·
            inbound
                call center services


·
            technical
                support and order status


·
            returns
                and refunds processing


·
            call
                centers integrated into fulfillment
                platform


·
            cross-sell/up-sell
                services


·
            collaborative
                chat; and


·
            intuitive
                e-mail response.








13




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


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





**Business
      Mix**




Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,Business
                Line/Vertical
            
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Telecommunications
            
            
            5.6
            %
            
            7.6
            %
            
            5.7
            %
            
            8.1
            %Modems
            
            
            17.8
            
            
            25.6
            
            
            17.8
            
            
            26.2Retail/Catalog
            
            
            35.3
            
            
            34.4
            
            
            33.5
            
            
            31.3Direct
                Marketing
            
            
            30.2
            
            
            23.1
            
            
            31.0
            
            
            21.9Business-to-Business
                (“B2B”)
            
            
            11.1
            
            
            9.3
            
            
            12.0
            
            
            12.5100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %


****





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





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




14




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





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





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





**Results
      of Operations**





The
      following table sets forth unaudited summary operating data, expressed as a
      percentage of revenues, for the three and six months ended June 30, 2007 and
      2006. The data has been prepared on the same basis as the annual consolidated
      financial statements. In the opinion of management, it reflects normal and
      recurring adjustments necessary for a fair presentation of the information
      for
      the periods presented. Operating results for any period are not necessarily
      indicative of results for any future period.





The
      financial information provided below has been rounded in order to simplify
      its
      presentation. However, the percentages below are calculated using the detailed
      information contained in the condensed consolidated financial
      statements.





Three
                Months
              Ended
                June 30,
            
            Six
                Months
              Ended
                June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            56.3
            
            
            48.1
            
            
            56.9
            
            
            49.8Selling,
                general and administrative expenses
            
            
            38.3
            
            
            51.2
            
            
            39.2
            
            
            51.0Depreciation
                and amortization
            
            
            4.7
            
            
            5.2
            
            
            4.6
            
            
            5.0Operating
                income (loss)
            
            
            0.7
            
            
            (4.5
            )
            
            (0.7
            )
            
            (5.8
            )Other
                expense, net
            
            
            (0.5
            )
            
            (0.5
            )
            
            (0.6
            )
            
            (0.4
            )Income
                (loss) before income taxes
            
            
            0.2
            
            
            (5.0
            )
            
            (1.3
            )
            
            (6.2
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income (loss)
            
            
            0.2
            %
            
            (5.0
            )%
            
            (1.3
            )%
            
            (6.2
            )%








15




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





**Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006**





*Revenues.* **  Net
      revenues  increased
      69.2% to $28.1 million for the three months ended June 30, 2007 from $16.6
      million for the three months ended June 30, 2006. This increase was primarily
      attributable to a $4.7 million increase in revenue from our direct marketing
      vertical resulting from the addition of several new clients, including those
      resulting from the ClientLogic acquisition, a $4.2 million increase in retail
      and catalog revenue due to the addition of several new clients, including
      Target.com, a $1.6 million increase in revenues from our B2B vertical due to
      the
      addition of a client acquired in the ClientLogic acquisition and increased
      volume from an existing client, a $762,000 increase in revenues from our DSL
      clients due to increased volumes and a $312,000 increase in revenues from our
      telecommunications clients related to the addition of a client from the
      ClientLogic acquisition offset by decreased volumes from our existing clients
      due to the maturity of the telephone and Caller ID equipment
      business.





*Cost
      of Revenues.*  Cost
      of
      revenues increased 97.9% to $15.8 million for the three months ended June 30,
      2007, compared to $8.0 million for the three months ended June 30, 2006. Cost
      of
      revenues as a percent of revenue increased to 56.3% from 48.1% for the three
      months ended June 30, 2007 and 2006 respectively. The increase in cost of
      revenue was primarily due to an increase in labor and freight expense related
      to
      the increase in revenue from the addition of new clients, including Target.com
      and those resulting from the ClientLogic acquisition. The increase in cost
      of
      revenues as a percentage of revenue primarily relates to a change in the
      business mix to clients with lower gross profit as a percent of revenue and
      the
      addition of several new clients whose margins have not yet reached the level
      of
      a mature client.





*Selling,
      General and Administrative Expenses.* S,G&A
      expenses for the three months ended June 30, 2007  increased
      to $10.7 million, or 38.3% of revenues, compared to $8.5 million, or 51.2%
      of
      revenues, for the same period in 2006. The increase in expenses in 2007 as
      compared to 2006 was primarily attributable to an increase in facility,
      equipment and management expense of approximately $1.6 million due to the
      addition of a new facility in the later part of the second quarter of 2006
      and
      the additional space taken in the second quarter of 2007 for Target.com and
      the
      addition of the facility relating to the ClientLogic acquisition in the fourth
      quarter of 2006. In addition, during the second quarter of 2007, the Company
      recorded an additional $423,000 of expense relating to worker’s compensation
      insurance which resulted from a revised estimate of the total projected cost
      which the Company may incur though final resolution of all worker’s compensation
      accident claims which have occurred through June 30, 2007 . Partially offsetting the $423,000 worker’s compensation expense was the reversal
      of approximately $125,000 of discretionary bonus expense accrued as of March
      31,
      2007, which expense was determined to be not payable since certain operating
      performance goals were not met as of June 30, 2007. SG&A expenses as a
      percentage of revenue have declined as a result of our growth in revenue
      requiring comparatively less additional administrative expenses to support
      and
      manage the organization.





*Interest
      Expense.* Interest
      expense for the three months ended June 30, 2007 and June 30, 2006 was $162,000
      and $91,000, respectively. The increase was related to an increase in the amount
      outstanding under the revolving credit agreement and an increase in the average
      LIBOR interest rate to 7.73% for the three months ended June 30, 2007 compared
      to 6.37% for the same period ended June 30, 2006.





*Income
      Taxes.* The
      Company’s effective tax rate for the three months ended June 30, 2007 and 2006
      was 0%. At December 31, 2003, a valuation allowance was recorded against the
      Company’s net deferred tax assets as losses in recent years created uncertainty
      about the realization of tax benefits in future years. Income taxes associated
      with losses for the three months ended June 30, 2007 and 2006 were offset by
      a
      corresponding increase of this valuation allowance resulting in an effective
      tax
      rate of 0% for the three months ended June 30, 2007 and 2006.




16




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





**Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006**





*Revenues.* **  Net
      revenues  increased
      64.7% to $55.8 million for the six months ended June 30, 2007 from $33.9 for
      the
      six months ended June 30, 2006. This increase was primarily attributable to
      a
      $9.9 million increase in revenue from our direct marketing vertical resulting
      from the addition of several new clients, including those resulting from the
      ClientLogic acquisition, a $8.1 million increase in retail and catalog revenue
      due to the addition of several new clients, including Target.com, a $2.5 million
      increase in revenues from our B2B vertical due to the addition of a client
      acquired in the ClientLogic acquisition, a $1.1 million increase in revenues
      from our DSL clients due to increased volumes and a $425,000 increase in
      revenues from our telecommunications clients related to the addition of a client
      from the ClientLogic acquisition offset by decreased volumes from our existing
      clients due to the maturity of the telephone and Caller ID equipment business.





*Cost
      of Revenues.*  Cost
      of
      revenues increased 88.1% to $31.7 million for the six months ended June 30,
      2007, compared to $16.9 million for the six months ended June 30, 2006. Cost
      of
      revenues as a percent of revenue increased to 56.9% from 49.8% for the six
      months ended June 30, 2007 and 2006 respectively. The cost of revenue increase
      was primarily due to an increase in labor and freight expense related to the
      increase in revenue from the addition of new clients, including Target.com
      and
      those resulting from the ClientLogic acquisition. The increase in cost of
      revenues as a percentage of revenue primarily relates to a change in the
      business mix to clients with lower gross profit as a percent of revenue and
      the
      addition of several new clients whose margins have not yet reached the level
      of
      a mature client.





*Selling,
      General and Administrative Expenses.* S,G&A
      expenses for the six months ended June 30, 2007 increased to $21.9 million
      or
      39.2% of revenues, compared to $17.3, or 51.0% of revenues, for the same period
      in 2006. The increase in expenses in 2007 as compared to 2006 was primarily
      attributable to an increase in facility, equipment and management expense of
      approximately $3.8 million due to the addition of a new facility in the latter
      part of the second quarter of 2006 and the additional space take in the second
      quarter 2007 for Target.com and the addition of the facility relating to the
      ClientLogic acquisition in the fourth quarter of 2006. In addition, during
      the
      second quarter of 2007, the Company recorded an additional $423,000 of expense
      relating to worker’s compensation insurance which resulted from a revised
      estimate of the total projected cost which the Company may incur though final
      resolution of all worker’s compensation accident claims which have occurred
      through June 30, 2007. S,G & A expense as a percentage of revenue have
      declined as a result of our growth in revenue requiring comparatively less
      additional administrative expenses to support and manage the
      organization.




*Interest
      Expense.* Interest
      expense for the six months ended June 30, 2007 and 2006 was $329,000 and
      $158,000, respectively. The increase was related to an increase in the amount
      outstanding under the revolving credit agreement and an increase in the average
      LIBOR interest rate to 7.67% for the six months ended June 30, 2007 compared
      to
      6.47% for the same period ended June 30, 2006.





*Income
      Taxes.* The
      Company’s effective tax rate for the six months ended June 30, 2007 and 2006 was
      0%. At December 31, 2003, a valuation allowance was recorded against the
      Company’s net deferred tax assets as losses in recent years created uncertainty
      about the realization of tax benefits in future years. Income taxes associated
      with losses for the six months ended June 30, 2007 and 2006 were offset by
      a
      corresponding increase of this valuation allowance resulting in an effective
      tax
      rate of 0% for the six months ended June 30, 2007 and 2006.





**Liquidity
      and Capital Resources**





The
      Company funds its operations and capital expenditures primarily through cash
      flow from operations and borrowings under a revolving bank credit facility.
      The
      Company had cash and cash equivalents of approximately $545,000 at June 30,
      2007
      as compared to $1.0 million at December 31, 2006. Additionally, the Company
      increased its borrowings outstanding under its revolving credit facility
      (discussed below) to $ 9.0 million at June 30, 2007, as compared to $8.6 million
      at December 31, 2006. The Company generated positive cash flow from operations
      of $2.7 million during the six months ended June 30, 2007, as compared to
      negative cash flow from operations of $3.0 million in the same period in 2006.






17




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


The
      Company has a revolving bank credit agreement with a maximum borrowing limit
      of
      $25.0 million, which will mature in March 2009. Although the maximum borrowing
      limit is $25.0 million, the credit facility limits borrowings to specified
      percentages of the value of eligible accounts receivable, inventory and certain
      personal assets of the Company’s Chairman, President and CEO. The difference
      between the limits on borrowings and the amount borrowed and outstanding at
      any
      time is defined as unused availability. Under the specific calculations defined
      in the credit agreement, the Company had $6.2 million of unused availability
      at
      June 30, 2007. The Company has granted a security interest in all of its assets
      to the lender as collateral under this revolving credit agreement. The revolving
      credit agreement contains requirements for periodic reporting of the value
      of
      the assets underlying the borrowing limit, change of ownership control and
      other
      covenants. The provisions of the revolving credit agreement require that the
      Company maintain a lockbox arrangement with the lender. Noncompliance with
      any
      of the covenants allows the lender to declare any outstanding borrowing amounts
      to be immediately due and payable.





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





On
      June
      29, 2007, the Company and the bank entered into the fourth amendment to its
      revolving bank credit facility entitled “Fourth Amendment Agreement” (the
“Fourth Amendment”) whereby the bank agreed to adjust the definition of the
      defined term availability reserve from $2.0 million to $0.5 million until
      December 31, 2007 at which time the availability reserve would revert back
      to
      $2.0 million. Under the new definition, the Company was able to obtain an
      additional $1.5 million of advanced funds under the revolving credit agreement’s
      existing collateral and borrowing base availability until December 31,
      2007. Additionally, the fixed charge ratio
      requirement included in the Third Amendment dated April 16, 2007 was removed
      as
      a requirement for a portion of the availability to borrow under the revolving
      credit agreement, but remains i) at the same 1.05 to 1.0 requirement
      to allow release of the bank’s security
      interest in the specified personal assets of the Company’s Chairman,
      President and CEO and (ii) as a regulatory factor in the interest rate charged
      on borrowings under the line as decribed below. The
      Company intends to use the additional availability to fund purchases of long
      term capital assets needed to support certain fulfillment operations and general
      working capital needs. Additionally, the Fourth Amendment provides that if
      there
      were a change in the officer occupying the office of Chief Financial Officer,
      the Chief Financial Officer position could remain unfilled for a maximum of
      59
      days and the new officer retained to hold the position would have to be suitable
      to the Bank or an Event of Default would occur.




18




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


Interest
      on borrowings is payable monthly at rates equal to the prime rate, or at the
      Company’s option, LIBOR plus up to 200 basis points; however so long as the
      fixed charge ratio is less than 1.00 to 1.00, the interest rate will be equal
      to
      the prime rate plus 1% or at the Company’s option, LIBOR plus 285 basis points.
      During the six months ended June 30, 2007 and 2006, the Company incurred
      interest expense related to the line of credit of approximately $310,000 and
      $120,000, respectively, resulting in a weighted average interest rate of 7.67%
      and 6.47%, respectively. The Company also incurred unused revolving credit
      facility fees of approximately $20,000 and $27,000 during the six months ended
      June 30, 2007 and 2006, respectively. For the three months ended June 30 2007,
      the Company incurred interest expense and unused revolving credit fees of
      $152,000 and $11,000 respectively compared to the three months ended June 30,
      2006 of $79,000 in interest expense and $13,000 of unused revolving credit
      fees.
      The weighted average interest rate for the three months ended June 30, was
      7.73%
      and 6.37% in 2007 and 2006 respectively.




For
      the
      six months ended June 30, 2007, compared to June 30, 2006, the Company had
      an
      improvement in cash generated from operating activities of $5.7 million
      resulting from positive cash flow from operations of $2.7 million in 2007
      compared to a negative cash flow from operations in 2006 of $3.0 million. The
      $5.7 improvement for the six months ended June 30, 2007 from the same period
      ended 2006 was due to the combination of a $1.4 million reduction in our net
      loss to a loss of $749,000 in 2007 from a loss of $2.1 million in 2006, non
      cash
      expenses for depreciation, which are included in the net loss, in 2007 of $2.6
      million compared to $1.7 million in 2006 and the net effect of changes in the
      balances of all other working capital accounts mainly consisting of accounts
      receivable, accounts payable, accrued expenses and inventories providing $3.3
      million.





During
      the six months ended June 30, 2007, net cash used in investing activities for
      capital additions was $2.7 million as compared to $5.4 million in the same
      period in 2006. The decrease in capital expenditures is primarily attributable
      to purchases made in 2006 associated with the opening of a new fulfillment
      center in Hebron, Kentucky for Target.com. In addition, $800,000 was used for
      an
      installment payment relating to the ClientLogic acquisition which was completed
      in the fourth quarter of 2006. All of these expenditures were funded through
      existing cash on hand and borrowings under the Company’s credit
      facility.





During
      the six months ended June 30, 2007, net cash provided by financing activities
      was $408,000 compared to $7.4 million net cash provided by financing activities
      in the same period in 2006. The difference between periods is mainly
      attributable to higher borrowings under the line of credit in 2006 for capital
      expenditures supporting the 2006 opening of the second Hebron, Kentucky
      fulfillment center.




The
      Company has generated positive cash flows from operations for the six months
      ended June 30, 2007 and for the calendar years 2005, 2004 and 2003; however
      we
      had negative cash flows from operations in 2006. Also in 2006, the Company
      borrowed a significant portion of the availability on its line of credit to
      provide funds for capital expenditures to build the Hebron, Kentucky fulfillment
      center, acquire the fulfillment center assets and client accounts of ClientLogic
      and fund the $2.7 million fourth quarter 2006 net loss. The acquisition of
      the
      Client-Logic accounts and the addition of the Hebron, Kentucky fulfillment
      center have generated a growth in revenues of 64.7% when comparing revenues
      of
      $55.8 million and $33.9 million for the six months ended June 30, 2007 and
      2006
      respectively. We anticipate both net income and positive cash flows from
      operations for the remainder of 2007; however portions of our client base have
      a
      seasonal peak in the fourth quarter of the year which requires additional
      working capital to support our service delivery which is billed in arrears.
      The
      64.7% growth rate through the six months ended June 30, 2007 combined with
      the
      limited availability under our revolving credit line has resulted in our
      forecasting the need for additional access to short term liquidity in the second
      half of 2007. To meet that liquidity need, the Company and our Chairman, CEO
      and
      President Scott Dorfman have reached an agreement in principle such that Mr.
      Dorfman will provide availability of not more than $5.5 million in short term
      loans, guarantees or letters of credit (the “2007 Growth Loan”) to the Company
      as are necessary to allow the Company to fund its capital needs in advance
      of
      the 2007 holiday season. The specific terms for borrowing by the Company and
      ultimate repayment of any amounts borrowed under the Growth Loan are still
      under
      negotiation at the time of filing this Form 10-Q.






19




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





The
      Company estimates that its cash and financing needs through 2007 will be met
      by
      cash flows from operations, its credit facility and the Growth
      Loan.





**Critical
      Accounting Policies**





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





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





Innotrac’s
      goodwill carrying amount as of June 30, 2007 was $25.2 million. This asset
      relates to the goodwill associated with the Company’s acquisition of Universal
      Distribution Services (“UDS”) in December 2000 (including an earnout payment
      made to the former UDS shareholders in February 2002), and the acquisition
      of
      iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142, the Company
      performed a goodwill valuation in the first quarter of 2007. The valuation
      supported that the fair value of the reporting unit at January 1, 2007 exceeded
      the carrying amount of the net assets, including goodwill, and thus no
      impairment was determined to exist. The Company performs this impairment test
      annually as of January 1 or sooner if circumstances indicate.





*Accounting
      for Income Taxes.* Innotrac
      utilizes the liability method of accounting for income taxes. Under the
      liability method, deferred taxes are determined based on the difference between
      the financial and tax basis of assets and liabilities using enacted tax rates
      in
      effect in the years in which the differences are expected to reverse. A
      valuation allowance is recorded against deferred tax assets if the Company
      considers it more likely than not that deferred tax assets will not be realized.
      Innotrac’s gross deferred tax asset as of June 30, 2007 and December 31, 2006
      was approximately $19.0 million and $18.3 million, respectively. This deferred
      tax asset was generated primarily by net operating loss carryforwards created
      primarily by the special charge of $34.3 million recorded in 2000 and the net
      losses generated in 2002, 2003, 2005 and 2006. Innotrac has a net operating
      loss
      carryforward of $46.8 million at December 31, 2006 that expires between 2021
      and
      2026.




20




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


Innotrac’s
      ability to generate the expected amounts of taxable income from future
      operations is dependent upon general economic conditions, competitive pressures
      on sales and margins and other factors beyond management’s control. These
      factors, combined with losses in recent years, create uncertainty about the
      ultimate realization of the gross deferred tax asset in future years. Therefore,
      a valuation allowance of approximately $14.3 million and $14.0 million has
      been
      recorded as of June 30, 2007 and December 31, 2006, respectively. Income taxes
      associated with future earnings will be offset by the utilization of the net
      operating loss carryforward resulting in a reduction in the valuation allowance.
      For the six months ended June 30, 2007, an income tax benefit of $247,000 was
      offset by a corresponding increase of the deferred tax asset valuation
      allowance. When, and if, the Company can return to consistent profitability,
      and
      management determines that it will be able to utilize net operating losses
      prior
      to their expiration, then the valuation allowance can be reduced or
      eliminated.





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





**Recent
      Accounting Pronouncements**





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





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109* (“FIN
      48”), which clarifies the accounting for uncertainty in ** tax
      positions. Additionally, in May 2007, the FASB issued FASB Staff Position No.
      FIN 48-1 which provides further guidance on how an enterprise should determine
      whether a tax position is effectively settled for the purpose of recognizing
      previously unrecognized tax benefits. The combined effect of FIN 48 and FIN
      48-1
      is a requirement that the Company determine whether it is more likely than
      not
      that a tax position will be sustained upon audit, based on the technical merits
      of the position. A tax position that meets the more likely than not recognition
      threshold is measured to determine the amount of benefit to recognize in the
      financial statements. The tax position is measured at the largest amount of
      benefit that is greater than 50 percent likely of being realized upon ultimate
      settlement. The Company adopted FIN 48 effective January 1, 2007. The Company
      has a gross deferred tax asset of approximately $18.3 million at December 31,
      2006, which did not change significantly during the six months ended June 30,
      2007. As discussed in Note 6 to the consolidated financial statements in the
      2006 Form 10-K, the Company has a valuation allowance against the full amount
      of
      its deferred tax asset. The Company currently provides a valuation allowance
      against deferred tax assets when it is more likely than not that deferred tax
      assets will not be realized. The Company has recognized tax benefits from all
      tax positions we have taken, and there has been no adjustment to any net
      operating loss carryforwards as a result of FIN 48 and FIN 48-1 and there are
      no
      unrecognized tax benefits and no related FIN 48 tax liabilities at June 30,
      2007. In addition, future changes in the unrecognized tax benefits will likely
      have no impact on the effective tax rate due to the existence of the valuation
      allowance. Therefore, the application of FIN 48 had no material impact on the
      financial statements.




21




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


The
      Company generally recognizes interest and/or penalties related to income tax
      matters in general and administrative expenses. As of June 30, 2007, we have
      no
      accrued interest or penalties related to uncertain tax positions.





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





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














22











**Item
      3 - Quantitativeand Qualitative Disclosures About
      Market Risks**





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





**Item
      4 - Controlsand Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




Our
      management, with the participation of the Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in federal securities rules)
      as of June 30, 2007.




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




Our
      Chief
      Executive Officer and Chief Financial Officer have concluded, based on our
      evaluation of our disclosure controls and procedures that our disclosure
      controls and procedures were ineffective as June 30, 2007, due to the conditions
      that led to the identification of the material weakness in internal control
      over
      financial reporting discussed below.





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




23




**Changes
      in Internal Control Over Financial Reporting**





On
      May
      16, 2007 the Board of Directors of Innotrac
      Corporation (the “Company”) appointed George M. Hare as the Company’s new Chief
      Financial Officer. As reported in the Company’s Current Report on Form 8-K on
      May 17, 2007, Mr. Hare has served as the Chief Financial and principal financial
      officer of other publicly traded companies prior to joining Innotrac. As of
      June
      30, 2007 and the date of filing this Form 10-Q, the Chief Executive Officer
      and
      Chief Financial Officer were developing a specific plan for enhancing the
      Company’s internal controls over financial reporting. Although the addition of
      an experienced Chief Financial Officer is a significant improvement in the
      Company’s internal controls over financial reporting, additional time to develop
      and enhance specific control procedures and processes is needed. Accordingly,
      the material weakness in our internal control over financial reporting discussed
      above has not been fully corrected and there
      is
      a reasonable possibility that a material misstatement in our financial
      statements will not be prevented or detected on a timely basis.








**PartII
      - Other Information**








**Item
      1A. Risk Factors**





**Our
      common stock lacks liquidity and is held by a small number of investors, one
      of
      which is in receivership where its creditors would like to sell our shares
      as
      soon as possible.**





As
      of
      December 31, 2006, Innotrac officers and directors owned approximately 48.8%
      of
      the outstanding common stock and an institutional shareholder, IPOF Fund, L.P.,
      and their affiliates held 34%. These ownership positions have resulted in a
      lack
      of liquidity in our common stock. Additionally, if any of Innotrac’s significant
      shareholders decided to liquidate its or their position, our common stock price
      would likely decline materially.





The
      United States District Court in Cleveland, Ohio has appointed a receiver to
      identify and administer the assets of the IPOF Fund, L.P. and its general
      partner, Mr. David Dadante. Based on information from the receiver, the Company
      understands that as of April 3, 2007, the date of record for the 2007 Annual
      Meeting of Shareholders held on June 8, 2007, the Fund and Mr. Dadante owned
      4,176,725 shares of common stock of the Company, representing approximately
      34%
      of the total shares outstanding, all of which are held as collateral in margin
      accounts maintained at several financial institutions. The Company has been
      engaged in discussions with the receiver in an effort to cause the shares to
      be
      sold in a manner that causes as little disruption to the market for Company
      stock as possible. The Federal Court has prohibited the financial institutions
      holding Company stock owned by the IPOF Fund and Mr. Dadante in margin accounts
      from selling any of these shares through at least November 2, 2007. The court
      has permitted open market sales by the receiver as he may in his sole discretion
      determine to be consistent with his duty to maximize the value of the assets
      of
      IPOF Fund, and as warranted by market conditions. The receiver has indicated
      to
      the Company that he does not intend to direct any open market sales during
      this
      period except in circumstances in which he believes that there would be no
      material adverse impact on the market price for the Company’s shares.
      Nevertheless, as long as these shares are held in margin accounts where the
      lenders desire to liquidate the positions, there will be significant downward
      pressure on the market price of our common stock because the market is concerned
      that these shares may be sold in a manner that causes the price of our common
      stock to decline precipitously.




24




There
      were no other material changes except as disclosed above from risk factors
      previously disclosed in our 2006 Annual Report on Form 10-K, as filed with
      the SEC.





**Item
      2 - UnregisteredSales of Equity Securities and
      Use of Proceeds**





We
      have
      made no sales of unregistered securities during the period covered by this
      report.





Issuer
      Purchases of Equity Securities





The
      following table contains information about purchases by us of our equity
      securities during the period covered by this report.





**Period**
            
            **Total Number**
              **of
                Shares**
              **Purchased**
            
            **Average Price**
              **Paid per Share**
            
            **Total Number**
              **of**
              **Shares**
              **Purchased
                as**
              **Part
                of Publicly**
              **Announced**
              **Plans
                or**
              **Programs**
            
            **Maximum**
              **Number
                of**
              **Shares that May**
              **Yet
                Be**
              **Purchased**
              **Under
                the Plans**
              **or
                Programs**April 1-30,
                2007(a)
            
            19,316
            
            $2.82
            
            N/A
            
            N/ATotal
            
            19,316
            
            $2.82
            
            N/A
            
            N/A





(a)
            Upon
                vesting of restricted stock awards madepursuant
                to our2000
                Stock Option and Incentive Award Plan, employees are permitted to
                return
                to us a portion of the newly vested shares to satisfy the tax withholding
                obligations that arise in connection with such vesting. All repurchases
                of
                our common stock during the second quarter of fiscal 2007 shown in
                the
                “Total Number of Shares Purchased” columnrepresent shares returned to satisfy tax withholding
                obligations.











**Item
      4 - Submissionof Matters to a Vote of Security
      Holders**





On
      June
      8, 2007, the Company held its annual meeting of shareholders in Duluth, Georgia.
      As of the record date, April 3, 2007, there were 12,280,610 shares of Common
      Stock issued, outstanding and entitled to vote at the annual meeting.
      Represented at the meeting in person or by proxy were 11,891,314 shares
      representing 96.83 % of the total shares of Common Stock entitled to vote at
      the
      meeting.





The
      purpose of the meeting was to re-elect the following directors to a three-year
      term expiring in 2010. The following table sets forth the number of votes cast
      “for” reelection and the number of votes “withheld” for the director. The shares
      previously voted by various brokerages in accounts in the name of IPOF, L.P.;
      IPOF Fund; David Dadante, David Dadante, Trustee; or D&D Publishing were
      considered null and void as directed by the Order of Judge O’Malley of the U.S.
      District Court (ND Ohio) and the court appointed receiver for such shares was
      in
      attendance at the meeting and voted these shares by casting a “withheld” ballot
      for such shares for the election of these directors.





25








**Number
                of Votes****For**
            
            **Withheld**Scott
                D. Dorfman
            7,534,593
            
            4,356,654Thomas
                J. Marano
            7,529,144
            
            4,362,103





The
      directors whose terms continued after the meeting are Bruce V. Benator, Martin
      J. Blank and Joel E. Marks.





**Item
      5 - OtherInformation**





None








**Item
      6 - Exhibits**





Exhibits:


31.1
              Certification
                  of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d -
                  14(a).31.2
              Certification
                  of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d -
                  14(a).32.1
              Certification
                  of Chief Executive Officer Pursuant to 18 U.S.C. §
1350.32.2
              Certification
                  of Chief Financial Officer Pursuant to 18 U.S.C. §
                  1350.







26





**SIGNATURES**





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








**INNOTRAC
      CORPORATION**


(Registrant)








Date: August 20,
              2007
            By:/s/ Scott D. Dorfman
              Scott
                D. Dorfman
              President,
                Chief Executive Officer and Chairman
              of
                the Board (Principal Executive Officer)Date: August 20, 2007
            By:/s/ George M. Hare
              George
                M. Hare
              Chief
                Financial Officer (Principal Financial Officer
              and
                Principal AccountingOfficer)












27