SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 000-23741

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

GEORGIA 58-1592285
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6655 SUGARLOAF PARKWAY, DULUTH, GEORGIA 30097
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None.

Name of each exchange on which registered: The Nasdaq National Market.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.10 Per
Share.

Series A
Participating
Cumulative Preferred
Stock Purchase
Rights

Indicate by a check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by a check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [ ] No [X]

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by a 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.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

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

Yes [ ] No [X]

The aggregate market value of the voting stock held by nonaffiliates (which for
purposes hereof are all holders other than directors, executive officers and
holders of 10% or more of the Registrant's outstanding Common Stock, and their
affiliates) of the Registrant as of June 30, 2005, the last business day of the
Registrant's most recently completed second fiscal quarter was $18,776,845 based
on the closing sale price of the Common Stock as reported by the Nasdaq National
Market on such date. See Item 12.

At March 24, 2006, there were 12,280,610 shares of Common Stock, par value
$0.10 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2006 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission (the
"Commission" or the "SEC"), are incorporated by reference into Part III of this
Annual Report on Form 10-K for the year ended December 31, 2005.

INNOTRAC CORPORATION
TABLE OF CONTENTS

PAGE
----

PART I .................................................................. 3
ITEM 1. BUSINESS .................................................... 3
CERTAIN FACTORS AFFECTING FORWARD-LOOKING
STATEMENTS .................................................. 9
EXECUTIVE OFFICERS OF THE REGISTRANT ........................ 9
ITEM 1A. RISK FACTORS ................................................ 10
ITEM 1B. UNRESOLVED STAFF COMMENTS ................................... 14
ITEM 2. PROPERTIES .................................................. 15
ITEM 3. LEGAL PROCEEDINGS ........................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 16

PART II ................................................................. 16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES .................................................. 16
ITEM 6. SELECTED FINANCIAL DATA ..................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ........................................................ 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .................................... 44
ITEM 9A. CONTROLS AND PROCEDURES ..................................... 44
ITEM 9B. OTHER INFORMATION ........................................... 45

PART III ................................................................ 45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 45
ITEM 11. EXECUTIVE COMPENSATION ...................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS .................. 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................... 46

PART IV ................................................................. 46
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................. 46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ............. S-1

PART I

ITEM 1. BUSINESS

Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and
headquartered in Atlanta, Georgia, provides order processing, order fulfillment
and call center services to large corporations that outsource these functions.
In order to perform call center and fulfillment functions in-house, a company
may be required to develop expensive, labor-intensive infrastructures, which may
divert its resources and management's focus from its principal or core business.
By assuming responsibility for these tasks, Innotrac strives to improve the
quality of the non-core operations of our clients and to reduce their overall
operating costs.

Innotrac receives 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.

Innotrac's core competencies include:

- 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

- 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

- intuitive e-mail response

The Company is a major provider of fulfillment and customer support services to
the telecommunications industry. In spite of a significant contraction and
consolidation in this industry in the past several years, the Company continues
to provide customer support services and fulfillment of consumer telephones and
caller ID equipment ("Telecommunications products") and Digital Subscriber Line
Modems ("Modems") for clients such as BellSouth Corporation ("BellSouth"), Qwest
Communications International, Inc. ("Qwest") and their customers.

The Company also provides a variety of these services for a significant number
of retail, catalog and direct marketing companies such as The Coca-Cola Company,
Ann Taylor Retail, Inc., Smith & Hawken, Ltd.,

Porsche Cars North America, Inc., Nordstrom.com LLC, 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 transmissions from our clients. The orders
are processed through one of our order management systems and then transmitted
to one of our eight 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 is held on a
consignment basis, with certain exceptions, and includes items such as shoes,
clothing, accessories, books and outdoor furniture.

The Company also provides these services for business-to-business ("B2B")
clients including Books are Fun, Ltd. (a subsidiary of Readers' Digest), NAPA
and The Walt Disney Company.

The following table sets forth the percentage of revenues generated by the
Company's various business lines during 2005 and 2004:

2005 2004
----- -----

Telecommunications products 12.2% 18.7%
Modems 21.2 19.5
Retail/Catalog 32.2 30.7
Direct Marketing 23.2 20.5
B2B 11.2 10.6
----- -----
100.0% 100.0%
===== =====

In August 2004, we leased a 75,000 square foot fulfillment center in New Castle,
Delaware. This facility provides fulfillment services for a new direct marketing
client. Capital expenditures associated with this facility were approximately
$260,000 in 2004.

With facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada,
Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware, our national
footprint is virtually complete. We are committed to deeper penetration within
our existing business lines and continued diversification of our client base.
Our long-term goal is to have our business mix spread evenly across a higher
number of clients in diverse industries. We will continue to seek new clients
and may open additional facilities in other geographic locations to service
these needs.

FULFILLMENT SERVICES

Providing effective turnkey fulfillment solutions for our clients' products is
our primary business. Our capabilities in this area are described below:

FULFILLMENT. We are committed to delivering our clients' products to their
customers on a timely and accurate basis. Our personnel pick, pack, verify and
ship product orders and requests for promotional, technical and educational
literature, shoes, clothing, electronic equipment, accessories, books and
outdoor furniture for our clients. We use several custom-designed,
semi-automated packaging and labeling lines to pack and ship products as well as
highly automated, conveyorized systems utilizing RF scanning and pick-to-light
technologies. By utilizing these technologies, we are able to reduce labor costs
and provide more timely shipments to our clients' customers. We streamline and
customize the fulfillment procedures for each client based upon the client
request and the tracking, reporting and inventory controls necessary to
implement that client's marketing support program. We also offer comprehensive
product return services whereby our personnel receive, log, test, repackage and
dispose of products that are returned from end-users.

Our Atlanta operations earned ISO 9001:2000 certification in 2002, our Hebron,
Kentucky operations earned ISO 9001:2000 certification in 2003, our Pueblo
operations earned ISO 9001:2000 certification in 2004 and our Chicago and
Delaware operations earned ISO 9001:2000 certification in 2005. We are dedicated
to providing quality service to our clients at every step in the fulfillment
process. To ensure order accuracy, shipment inspection and system driven
validation are performed to prove the contents exactly match the order prior to
shipment. In addition, we have highly sensitive scales at the end of our
packaging lines that also assist in ensuring the accuracy of every order. Our
2005 order accuracy rate exceeded 99.5%.

INVENTORY MANAGEMENT. An integral part of our fulfillment services is the
monitoring and control of our clients' inventories. We provide automated
inventory management and reporting to assure real-time stock counts of our
client's products, literature and other items. Our inventory systems enable us
to provide management information to maintain consistent and timely reorder
levels and supply capabilities and also enable the client to quickly assess
stock balances, pricing information, reorder levels and inventory values. We
offer this information to the client on a real-time basis through our internet
gateway or direct system integration. Inventory management data is also utilized
in our reporting services. We utilize bar coding equipment in our inventory
management systems, which improves the efficiency of stock management and
selection. We also perform cycle counts throughout the year to check
system-maintained item balances against physical item balances. Our facilities
have several layers of security. When necessary, we dispose of clients' products
utilizing established guidelines. Disposal procedures vary depending on the
product and client business rules.

PURCHASING MANAGEMENT. For certain clients, we place orders for products we
fulfill with vendors chosen by those clients. Our purchasing management services
include assisting a client in negotiating product pricing with the vendor,
arranging returns and credits as well as forecasting product quantities required
for normal business programs or promotions.

PRODUCT CONSIGNMENT AND WAREHOUSING. For substantially all of our clients, we
warehouse products on a consignment basis and fulfill orders on behalf of our
customers for a fee. In certain cases (primarily BellSouth), we may purchase and
own inventory, but on a significantly reduced risk basis as a result of client
guarantees and contractual indemnifications.

CUSTOMER SUPPORT SERVICES

Another of our core competencies is providing customer support services. We
believe these services are critical to a comprehensive order processing and
order fulfillment solution. Our customer support services are described below.

INBOUND CALL CENTER SERVICES. Our customer service representatives take orders
for certain clients and resolve questions regarding shipping, billing and order
status as well as a variety of other questions. From time to time they may sell
equipment, other products and telephone company services to customers who call
us. To properly handle the call, Innotrac's automated call distributor
identifies each inbound call by the toll-free number dialed and immediately
routes the call to the interactive voice response ("IVR") system or an Innotrac
customer service representative. If the caller is placing an order they are
immediately transmitted to a customer service representative trained to take the
order and enter it into our systems for transmittal to the appropriate
fulfillment center. If the customer has a question, complaint or needs return
information, the IVR system attempts to resolve these issues by guiding the
customer through a series of interactive questions. If IVR automatic resolution
cannot solve the problem, the call is routed to one of our customer service
representatives who are specially trained in the applicable client's business
and products and answer using the client's name. Our customer service
representatives can enter customer information into our call-tracking system,
listen to a question and quickly access a proprietary network database using a
graphical interface to answer a customer's question. A senior representative is
available to provide additional assistance for complex or unique customer
questions. Customer service representatives are also trained to handle
introductory level technical support issues. Customer requests are generally
resolved with a single call, whether answered by a trained representative or our
automated systems.

RETURNS AND REFUNDS PROCESSING. The representatives respond to customer calls
about product returns and refunds and obtain information about customer service
problems. They facilitate a customer's return of a product by providing a
bar-coded label to the customer. When the returned item is processed and entered
into our system, it automatically triggers a pre-set action for reshipment of a
product or refund to the customer.

TECHNOLOGY

Our use of technology enables us to design and deliver services for each
client's fulfillment and customer support needs. Our information technology
group, or IT Group, has developed our database marketing support and management
systems. Innotrac has a technical integration platform written in Java over an
Oracle database, which contains a complete web interface and XML-based APIs that
allows clients to transact with us electronically. We deploy the solution
running on Sun Solaris and utilizing Veritas cluster server software, which
provides a high availability computing environment. Veritas backup software, DLT
tape libraries and Oracle Hot backup capabilities allow us to backup our
production Oracle databases online without interruption to the business unit.
Our burstable bandwidth allows us to quickly increase data capacity. Our EMC
storage solutions provide rapid access to data and the ability to scale quickly
depending on business demands. Network connectivity is achieved with Cisco
routers and local directors.

The open architecture of our computer system permits us to seamlessly interact
with many different types of client systems. Our IT Group uses this platform to
design and implement application software for each client's program, allowing
clients to review their programs' progress on-line to obtain real-time
comprehensive trend analysis, inventory levels and order status and to instantly
alter certain program parameters. As the needs of a client evolve, our IT Group
works with our client services team to modify the program on an ongoing basis.
Information can be exchanged via direct system integration, EDI, internet access
and direct-dial applications. We believe that our technology platform provides
us with the resources to continue to offer leading edge services to current and
new clients and to integrate our systems with theirs. We believe that the
integrity of client information is adequately protected by our data security
system and our off-site disaster back-up facilities.

We utilize three primary warehouse management systems depending on our business
line and our locations. In 2002, we completed the implementation of PKMS for
clients at our Pueblo, Atlanta and Chicago-Romeoville warehouses. PKMS is an
advanced fulfillment warehouse management system designed to support large
volumes of transactions and users, which enable the effective management of high
levels of throughput, from receiving through shipping. PKMS provides
efficiencies in inventory management, outbound distribution and task management.
Our Chicago-Bolingbrook and Cincinnati-Hebron facilities utilize an Optum
warehouse management system, which is a highly configurable fulfillment solution
for fast-moving, high volume, piece-pick operations suitable for our
multi-channel retailers and catalogers.

Our Reno and Delaware facilities utilize an internally-developed, customized
order management system ("OMS") that is fully integrated with a customized
warehouse management solution and includes front-end customer relationship
management capabilities, which we believe is suitable for direct marketing
clients.

We believe that our use of different systems for different types of clients and
products allow us to effectively and efficiently manage our warehouse operations
to secure a competitive advantage in the fulfillment industry.

Our Pueblo call center utilizes the Rockwell Spectrum Automatic Call
Distributor, or ACD, switch to handle call management functions. The ACD system
has the capacity to handle approximately 1,200 call center representatives and
as of December 31, 2005 was supporting approximately 221 representatives.
Additionally, the ACD system is integrated with software designed to enable
management to staff and supervise the call center based on call length and call
volume data compiled by the ACD system. Our call center in Reno employs an
Aspect ACD Enterprise System switch and is currently supporting approximately 56
representatives. Our integrated systems allow the customer service
representatives to enter orders received via telephone into their computer which
transmits the data over T1 lines to one of our

eight fulfillment centers' order management systems where it is processed.
Shortly thereafter the product is picked, packed, verified and shipped to the
customer.

PERSONNEL AND TRAINING

Our success in recruiting, hiring and training large numbers of employees and
obtaining large numbers of hourly employees during peak periods for fulfillment
and call center operations is critical to our ability to provide high quality
fulfillment and customer support services. Call center representatives and
fulfillment personnel receive feedback on their performance on a regular basis
and, as appropriate, are recognized for superior performance. Additional
training is provided to all fulfillment center employees quarterly and to our
call center representatives on an as-needed basis. To maintain good employee
relations and to minimize employee turnover, we offer competitive pay and hire
primarily full-time employees who are eligible to receive a full range of
employee benefits.

As of March 1, 2006, we had over 840 full-time employees supported by part-time
staff on an as-needed basis. Management believes that the demographics
surrounding our facilities and our reputation, stability, compensation and
benefit plans should allow us to continue to attract and retain qualified
employees. Currently, we are not a party to any collective bargaining
agreements. None of our employees are unionized.

COMPETITION

In tailoring services to client needs, we compete on the basis of quality,
reliability of service, scope of locations, efficiency, technical capabilities,
speed and price. We compete with many companies, some of which have greater
resources than us, with respect to various portions of our business. Those
companies include fulfillment businesses and call center operations. We believe
that our comprehensive and integrated services differentiate us from many of
those competitors. We continuously explore new outsourcing service
opportunities, typically in circumstances where clients are experiencing
inefficiencies in non-core areas of their businesses and management believes we
can develop a superior outsourced solution on a cost-effective basis. We
primarily compete with the in-house operations of our current and potential
clients and also compete with certain companies that provide similar services on
an outsourced basis.

GOVERNMENT REGULATION

The Caller ID services offered by our telecommunications clients are subject to
various federal and state regulations. The legality of Caller ID has been
challenged in cases decided under the Electronic Communications Privacy Act
(ECPA), and several state statutes. In 1994, the Federal Communications
Commission (FCC) preempted certain state regulation of interstate Caller ID or
other calling party number (CPN) based services, including state regulations
which (1) prohibit the offering of interstate CPN-based services; (2) require
blocking alternatives on intrastate calls different from those adopted by the
FCC; or (3) require blocking systems that interfere with the use of "*67" to
achieve blocking on interstate calls. This report further required certain
common carriers to transmit CPN and its associated privacy indicator (which
allows telephone callers to block the display of their phone numbers on Caller
ID display units) on an interstate call to connecting carriers without charge
(the "Free Passage" rule). In connection with this report, the Department of
Justice issued a memorandum which concluded that the installation or use of
interstate Caller ID service was not prohibited by any federal wiretap statute
and that in general, the FCC had authority to preempt state laws that would
hinder federal communications policy on Caller ID services. Court decisions
since the FCC issued its 1994 report have consistently held that Caller ID does
not violate any state or federal wiretap statute.

In 1995, the FCC narrowed its initial preemption of state public utilities
blocking regulations by permitting subscribers to choose per-line blocking or
per-call blocking on interstate calls, provided that all carriers were required
to adopt a uniform method of overriding blocking on any particular call. At the
same time, the FCC preempted a California Public Utilities Commission (CPUC)
per-line blocking default policy, which provided that subscribers with unlisted
telephone numbers who fail to communicate their choice

between per-call blocking and per-line blocking of calling party number-based
services, be served with a system that blocks disclosure of CPN on all calls
(i.e., per-line blocking).

The FCC's rules and regulations also require carriers to explain to their
subscribers (1) that their telephone numbers may be transmitted to the called
party, (2) that there is a privacy mechanism (i.e., the "blocking" feature)
available on interstate calls, and (3) how the mechanism can be activated. The
CPUC, seeking to protect the caller's privacy, has ruled that a carrier can
offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC
approval of its customer notification and education plan. Under separate FCC
rules (see below), telemarketers are required to transmit Caller ID information
and are prohibited from blocking such information.

Section 222 of the Telecommunications Act of 1996 introduced restrictions on
telecommunications carriers' usage of customer proprietary network information
(CPNI). CPNI includes information that is personal to customers, including
where, when and to whom a customer places a call, as well as the types of
telecommunications services to which the customer subscribes and the extent
these services are used. In a series of orders since 1998, the FCC has
interpreted the CPNI restrictions to permit telecommunications carriers,
including BellSouth and Qwest, to use CPNI without customer approval to market
services that are related to the customer's existing service relationship with
the carrier. Before carriers may use CPNI to market services outside a
customer's existing service relationships, the carrier must obtain express
customer permission. Because we are dependent upon the efforts of our clients to
promote and market their equipment and services, federal and state laws and
regulations inhibiting those clients' ability to market these equipment and
services to their existing customers could have a material adverse effect on our
business, results of operations and financial condition.

Telephone sales practices are regulated at both the federal and state level.
These regulations primarily relate to outbound teleservices, which, in most
cases, we outsource to another company. The few cases where we do conduct
outbound teleservices are related solely to the support of our clients with
catalog sales programs, and thus are exempt from the regulations most commonly
associated with outbound teleservices.

Outbound teleservices are regulated by the rules of the FCC and the FTC under
the Federal Telephone Consumer Protection Act of 1991, as amended (TCPA), the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, as
amended (FTCFAP), respectively, and by various state regulations regarding
telephone solicitations. In a July 2003 Report and Order, the FCC amended its
rules implementing the TCPA, providing for: (1) restrictions on calls made by
automatic dialing and announcing devises; (2) limitations on the use of
predictive dialers of outbound calls; (3) institution of a national
"do-not-call" registry in conjunction with the FTC; (4) guidelines on
maintaining an internal "do-not-call" list and honoring "do-not-call" requests;
and (5) requirements for telephone solicitors to transmit Caller ID information.
The FTC's Telemarketing Sales Rule (TSR) was issued pursuant to the FTCFAP to
prevent deceptive and abusive telemarketing acts and practices. Recent
amendments to the TSR include: (1) subjecting certain inbound calls to
additional disclosure requirements; (2) prohibiting the disclosure or receipt,
for consideration, of unencrypted consumer account numbers for use in
telemarketing; (3) application of the TSR to charitable solicitations; (4)
institution of a national "do-not-call" registry; and (4) limitations on the use
of predictive dialers for outbound calls. We believe that we are in compliance
with these federal statutes and the FCC and FTC rules thereunder and the various
state regulations, and that we would operate in compliance with those rules and
regulations if we were to engage in outbound teleservice operations in the
future.

We work closely with our clients, companies we outsource outbound teleservices
to and their respective advisors to ensure that we and our clients are in
compliance with these regulations. We cannot predict whether the status of the
regulation of Caller ID services or e-commerce will change and what affect, if
any, this change would have on us or our industry.

INTELLECTUAL PROPERTY

We have used the service mark "Innotrac" since 1985 and have registered it and
other marks used by us in our business through the US Patent and Trademark
Office. The "innotrac.com" domain name has been a registered domain name since
1995. We also own several other internet domain names. Due to the possible use
of identical or phonetically similar service marks by other companies in
different businesses, there can be no assurance that our service marks will not
be challenged by other users. Our operations frequently incorporate proprietary
and confidential information. We rely upon a combination of contract provisions
and trade secret laws to protect the proprietary technology we use and to deter
misappropriation of our proprietary rights and trade secrets.

CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements (as
such term is defined in the Private Securities Litigation Reform Act of 1995).
These statements concern the Company's operations, performance and financial
condition, including, in particular, the likelihood that Innotrac will succeed
in developing and expanding its business, among other things. They are based
upon a number of assumptions and estimates that are inherently subject to
significant uncertainties. Many of these uncertainties are beyond Innotrac's
control. Consequently, actual results may differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those set forth
below under Item 1A "Risk Factors." Those are representative of factors that
could affect the outcome of the forward-looking statements. These and the other
factors discussed elsewhere in this document are not necessarily all of the
important factors that could cause our results to differ materially from those
expressed in our forward-looking statements. Forward-looking statements speak
only as of the date they are made and we undertake no obligation to update them.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Innotrac are as follows:

NAME AGE POSITION
---- --- --------

Scott D. Dorfman.......... 48 Chairman of the Board, President and Chief
Executive Officer
David L. Ellin............ 47 Senior Vice President--Client Services
Larry C. Hanger........... 51 Senior Vice President--Client Services
Robert J. Toner........... 42 Senior Vice President--Logistics
James R. McMurphy......... 46 Senior Vice President--Information Technology

Mr. Dorfman founded Innotrac and has served as Chairman of the Board, President
and Chief Executive Officer since its inception in 1984. Prior to founding
Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc.
(Paymaster), an equipment distributor. At Paymaster, Mr. Dorfman gained
experience in distribution, tracking and inventory control by developing and
managing Paymaster's mail order catalog.

Mr. Ellin joined Innotrac in 1986 and currently serves as Senior Vice
President-Client Services. He served as a Director from December 1997 through
May 2004. He held the position of Senior Vice President and Chief Operating
Officer from November 1997 to December 2001 and served as Vice President from
1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta
branch of WHERE

Magazine, where he managed the sales and production departments. From 1980 to
1984, Mr. Ellin was employed by Paymaster, where he was responsible for
Paymaster's sales and collections.

Mr. Hanger joined Innotrac in 1994 and currently serves as Senior Vice
President-Client Services. He served as a Director from December 1997 through
February 2004. He served as Vice President--Business Development from November
1997 through April 1999. He served as Innotrac's Manager of Business Development
from 1994 to November 1997, and was responsible for the management of the
telecommunication equipment marketing and service business. From 1979 to 1994,
Mr. Hanger served as Project Manager--Third Party Marketing at BellSouth
Telecommunications, Inc., a regional telecommunications company, where he
managed the marketing program for BellSouth's network services and was involved
in implementing the billing options program for BellSouth with Innotrac.

Mr. Toner joined Innotrac in June 2001 and currently serves as Senior Vice
President--Logistics. He held the position of Vice President--Logistics from
June 2001 to March 2006. Prior to joining Innotrac, Mr. Toner developed 16 years
of distribution, logistics, and transportation experience; 14 of those years
were with McMaster-Carr Supply Company, a distributor of industrial supplies.
Subsequent to McMaster-Carr, Mr. Toner was the General Manager for East Coast
Operations for Webvan Group Inc., an Internet retailer.

Mr. McMurphy joined Innotrac in April 2003 as currently serves as Senior Vice
President--Information Technology and Chief Information Officer. He held the
position of Vice President--Information Technology and Chief Information Officer
from April 2003 to March 2006. Prior to joining Innotrac, Mr. McMurphy was with
Capital One Financial Corporation, a leading credit card issuer and consumer
lender, from March 2002 to April 2003, where he served as Chief Information
Officer for one of their divisions. Prior to Capital One, from December 1996
through December 2001, he was Chief Information Officer for Pleasant Company, a
division of Mattel Toys and makers of American Girl Dolls. In addition, prior to
Mattel Toys, he served as a consultant for Price Waterhouse LLP (now
PricewaterhouseCoopers LLP).

ITEM 1A. RISK FACTORS

WE RELY ON A SMALL NUMBER OF LARGE CLIENTS. IF WE LOSE ONE OR MORE OF OUR
LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.

Innotrac focuses on developing long-term contractual relationships with large
corporations. A relatively small number of our clients account for a significant
portion of our revenues. Our ten largest clients accounted for 81.4% of our
revenue in 2005. If we lose one or more of our largest clients, or if revenues
from our largest clients decline, our business, results of operations and
financial condition could be materially adversely affected. Additionally, if one
of these large clients is lost, or revenues from our largest clients decline, we
cannot assure you that we will be able to replace or supplement that client with
others that generate comparable revenues or profits. One of our largest clients,
BellSouth, recently announced that it plans to merge with AT&T. We cannot
predict what impact, if any, this merger will have on our business, if
consummated.

OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN
USUALLY BE TERMINATED ON LITTLE NOTICE.

Although we have written agreements with most of our clients, our agreements
generally do not assure specific volume or revenue levels. In addition, some
agreements provide for termination for any reason on short notice. Our current
agreement with BellSouth may be terminated by BellSouth for any reason upon 90
days notice. Furthermore, we are contractually bound to our facility leases
until their terms expire. If a client terminates its contract suddenly, we will
still have obligations under our leases.

A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE TELECOMMUNICATIONS
INDUSTRY, INCLUDING DSL MODEMS.

Approximately 33% of our revenues in 2005 and approximately 38% of our revenues
in 2004 were attributable to Telecommunications products and Modems clients.
Consequently, we are particularly susceptible to negative changes affecting
these industries in general. The telecommunications industry has suffered a
material downturn since mid-2000, which has had a significant negative impact on
our business. To ameliorate this risk, we have been diversifying our client base
across more industries and clients, including through selective acquisitions. We
cannot guarantee, however, that the telecommunications industry will strengthen
in 2006 or not deteriorate further, or that our diversification strategy will be
successful.

A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE DIRECT RESPONSE
INDUSTRY.

Approximately 23% of our revenues in 2005 and approximately 21% of our revenues
in 2004 were attributable primarily to clients in the direct response industry.
Consequently, we are particularly susceptible to negative changes that impact
this industry and our clients in particular, including potential false
advertising product claims and Federal Trade Commission regulation and
enforcement. The direct response industry has suffered a material downturn since
the third quarter of 2001, which has had a significant negative impact on our
business. This general downturn has significantly weakened the financial
strength and wherewithal of companies in this sector which increases our risk
pertaining to future business, growth and the collectibility of accounts
receivable from our existing clients. If any of our existing direct response
clients were to default on their amounts due Innotrac, this would result in a
material charge against earnings. A former client, Tactica, has a material past
due balance for which a reserve has been recorded.

COMPETITION MAY HURT OUR BUSINESS.

We operate in highly competitive and price sensitive markets and expect this
environment to persist and intensify in the future. Because our services
comprise marketing and product consultation, sales channel management,
fulfillment and back-end support, including our call center operations and
returns processing, we have many competitors who offer one or more of these
services. Our competitors include:

- in-house marketing support operations of our current and potential
clients;

- other firms offering specific services, like fulfillment and call
center operations; and

- large marketing support services firms.

A number of our competitors have developed or may develop financial and other
resources greater than ours. Additional competitors with greater name
recognition and resources may enter our markets. Our existing or potential
clients' in-house operations are also significant competitors. Our performance
and growth could be negatively impacted if:

- existing clients demand and receive pricing concessions;

- existing clients decide to provide, in-house, services they currently
outsource;

- potential clients retain or increase their in-house capabilities; or

- existing clients consolidate their outsourced services with other
companies.

In addition, competitive pressures from current or future competitors could
result in significant price erosion, which could in turn materially adversely
affect our business, financial condition and results of operations. For more
information about our competition, see "Business--Competition" in Item 1.

IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.

Our success depends significantly upon our ability to:

- integrate new clients in a timely and cost efficient manner;

- enhance existing services;

- develop applications to meet our clients' needs; and

- introduce new services and products to respond to technological
developments.

If we fail to maintain our technological capabilities or respond effectively to
technological changes, our business, results of operations and financial
condition could be materially adversely affected. We cannot assure you that we
will select, invest in and develop new and enhanced technology on a timely basis
in the future in order to meet our clients' needs and maintain competitiveness.
Our Reno systems, which provide service to several of our largest clients, are
completely customized and therefore not supported by third party providers. We
are heavily reliant on a small number of developers. If these developers leave,
it could materially adversely affect our business. We provide details about our
technology in "Business--Technology" in Item 1.

OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE
MARKET PRICE FOR OUR COMMON STOCK.

Our operating results may fluctuate in the future based on many factors. These
factors include, among other things:

- changes in the telecommunications industry;

- changes in the retail industry;

- changes in the fulfillment and call center services industries;

- changes in the timing and level of client-specific marketing programs,
including the timing and nature of promotions;

- changes in our existing client base;

- pricing pressure or concessions;

- increased competition; and

- changes in customer purchasing patterns for products we fulfill.

Due to these and any other unforeseen factors, it is possible that in some
future quarter our operating results may be below the expectations of public
market analysts and investors. If that variance occurs, our common stock price
would likely decline materially.

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, 2005, Innotrac officers and directors owned approximately
47.3% of the outstanding common stock and an institutional shareholder, IPOF
Fund, L.P., and their affiliates held 34.0%. 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.

institutions holding Company stock owned by the IPOF Fund and Mr. Dadante in
margin accounts from selling any of these shares through at least July 14, 2006.
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. This concern is ameliorated to some degree by
the continuing prohibition by the Federal Court on sales of our shares by
financial institutions that hold the shares in margin accounts. The Federal
Court has extended this prohibition on several occasions, most recently to July
14, 2006, while we and the receiver pursue the sale of these shares in a manner
that would not disrupt the market for our common stock. If the Federal Court
were to not extend this prohibition before the shares have been sold in such a
transaction, then the financial institutions might foreclose on some or all of
these shares and sell them into the market, which could have an extremely
negative impact on the market price for our common stock.

IF OUR GOODWILL IS DEEMED IMPAIRED AS PART OF OUR ANNUAL (OR EARLIER) IMPAIRMENT
TEST, THE IMPAIRMENT CHARGE WOULD RESULT IN A DECREASE IN OUR EARNINGS AND NET
WORTH.

Current accounting rules require that goodwill no longer be amortized but be
tested for impairment at least annually. We have a significant amount of
goodwill which, based upon a negative outcome of any impairment test in the
future, could result in the write-down of all or a portion of goodwill and a
corresponding reduction in earnings and net worth.

NONCOMPLIANCE WITH ANY OF THE COVENANTS UNDER OUR REVOLVING CREDIT AGREEMENT
ALLOWS THE LENDER TO DECLARE ANY OUTSTANDING BORROWING AMOUNTS TO BE IMMEDIATELY
DUE AND PAYABLE.

Our revolving line of credit agreement contains a financial, change of ownership
control and other restrictive covenants. Noncompliance with any of the covenants
allows the lender to declare any outstanding borrowed amounts to be immediately
due and payable. From time to time in the past, we have violated various
restrictive covenants, and have been obligated to obtain waivers or amendments
from the lender. Although we have been able to obtain waivers and amendments in
the past, there is no guarantee that we will be able to do so for any future
covenant breaches. If the lender does not waiver a future covenant violation,
and accelerates the payment date for any amounts outstanding under the credit
facility, we might not be able to pay these amounts. Failure to comply with the
covenants, even if waived by our lenders, also could adversely affect our credit
ratings, which could increase our costs of debt financings and impair our
ability to obtain additional debt financing.

DUE TO THE NATURE OF OUR BUSINESS WE HAVE A SIGNIFICANT AMOUNT OF UNSKILLED
LABOR AND A HIGH TURNOVER RATE THEREBY INCREASING OUR EXPOSURE TO
EMPLOYEE-RELATED LITIGATION.

Our fulfillment and call centers employ a sizable amount of unskilled labor and
generate a high turnover rate. We may have to terminate employees from time to
time as our business mix changes and labor demands shift among our eight
facilities. High employee turnover could increase our exposure to
employee-related litigation.

IF WE ARE NOT ABLE TO CONTINUE TO MANAGE OUR INFRASTRUCTURE AND VOLUME GROWTH,
OUR BUSINESS COULD BE ADVERSELY AFFECTED.

Our operations, number of facilities and volume of packages shipped have grown
significantly in recent years. Our business, results of operations and financial
condition could be materially adversely affected if we cannot effectively manage
our growth. Our continued success depends upon our ability to:

- initiate, develop and maintain existing and new client relationships;

- respond to competitive developments;

- maintain pricing and margins;

- continue to develop our sales infrastructure;

- attract, train, motivate and retain management and other personnel;
and

- maintain the high quality of our services.

IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.

Our business, results of operations and financial condition could be materially
adversely affected if the trend of businesses outsourcing services not directly
related to their principal business activities declines or reverses, or if
corporations bring previously outsourced functions back in-house. Particularly
during general economic downturns, businesses may bring in-house previously
outsourced functions in order to avoid or delay layoffs.

OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES
OR INCREASE OUR COSTS.

In connection with the limited amount of outbound telemarketing services that we
provide, we must comply with federal and state regulations. These include the
Federal Communications Commission's rules under the Telephone Consumer
Protection Act of 1991 and the Federal Trade Commission's regulations under the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both
of which govern telephone solicitation. When we conduct outbound telemarketing
services, these rules and regulations would apply to that portion of our
business.

Furthermore, there may be additional federal and state legislation or changes in
regulatory implementation. These changes could include interpretations under the
Telecommunications Act of 1996 restricting the ability of telecommunications
companies to use consumer proprietary network information (CPNI) or imposing new
requirements on telecommunications companies to better ensure security and
privacy of CPNI. New legislation or regulatory implementation in the future may
significantly increase compliance costs or limit our activities, our clients'
activities or the activities of companies to which we outsource outbound
telemarketing functions. Additionally, we could be responsible for failing to
comply with regulations applicable to our clients or companies to which we
outsource telemarketing.

If unfavorable federal or state legislation or regulations affecting Caller ID
service, CPNI, internet service or other technology related to products we
fulfill and provide customer support for are adopted, our business, financial
condition and results of operations could be materially adversely affected. See
"Business -- Government Regulation" in Item 1 for further information about
government regulation of our business.

IF WE ARE UNABLE TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY AND REALIZE
ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER, OUR
PROFITABILITY MAY DECREASE.

If we are unable to integrate previous or potential business acquisitions
successfully, we may incur substantial costs and delays in increasing our
customer base. In addition, the failure to integrate acquisitions successfully
may divert management's attention from Innotrac's existing business and may
damage Innotrac's relationship with its key customers and suppliers. Integration
of an acquired business may be more difficult when we acquire a business in a
market in which we have little or no expertise, or with a corporate culture
different from Innotrac's.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Currently, the Company leases all of its facilities. Our headquarters and
fulfillment facilities are located in 250,000 square feet of leased space in
Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this
facility and the remaining 200,000 square feet are used as fulfillment space.
This site also includes approximately 3.5 acres that will be available for
Innotrac's expansion, if required. The lease for our Duluth facility commenced
in October 1998 and has a term of 10 years with two five-year renewal options.
The lease provides for an option to purchase the facility at the end of the
first five years of the term or at the end of the first 10 years of the term. We
have not yet determined whether we will exercise this purchase option.

In June 1999, we entered into a lease for a facility in Pueblo, Colorado with an
initial term of five years with two five-year renewal options. In June 2004, we
exercised the first renewal option to extend the lease for five years. The
facility provides approximately 87,000 square feet of floor space. Approximately
45,000 square feet are used as a call center, as well as quality assurance,
administrative, training and management space. This call center supports 370
workstations of which we utilized 221 at December 31, 2005. It currently
operates from 5:00am MST to 11:00pm MST seven days per week. The remaining
42,000 square feet are used for fulfillment services.

In October 1999, we entered into a lease for an additional fulfillment facility
in Duluth, Georgia with an initial term of five years with one three-year
renewal option. In August 2000, the Company entered into a lease extension and
modification that expanded the facility space from approximately 52,000 square
feet to 82,000 square feet. In July 2005, we entered into a lease extension and
modification that reduced the facility space to approximately 52,000 for a term
of two years.

We operate a facility in Reno, Nevada that consists of over 275,000 square feet
and includes administrative office space, a 250,000 square foot fulfillment
center and a call center that can support 200 workstations. We lease this
facility through two lease agreements, which were initiated in October 2002 and
October 2000. These agreements have lease terms of five years and seven years,
respectively. Currently, the call center is configured with approximately 120
workstations, of which 56 were being utilized at December 31, 2005. The call
center operates from 5:00 am PST to 9:00 pm PST seven days per week.

We operate a 354,000 square foot facility in Bolingbrook, Illinois. The lease
for this facility was initiated at the date of acquisition in July 2001, and we
renewed for an additional five years, at a lower monthly rental rate, commencing
January 1, 2003. This lease contains one additional five-year renewal option.
This facility is used exclusively for fulfillment services and contains
approximately 40,000 square feet of administrative office space.

In April 2002, we entered into a lease for a facility in Hebron, Kentucky for an
initial term of five years with two renewal options; the first for one year and
the second for three years. The facility provides approximately 396,000 square
feet of fulfillment and warehouse space. This facility is fully occupied by
inventory for our client, Smith & Hawken.

In September 2002, we entered into a lease for a facility in Romeoville,
Illinois for an initial term of five years and two months with two five-year
renewal options. In June 2005 we exercised an option to lease an additional
51,254 square feet for a total of approximately 255,561 square feet of
fulfillment and warehouse space.

In August 2004, we entered into a three year lease for a new facility in New
Castle, Delaware. In May 2005 we amended the lease to expand the leased premises
to 118,722 square feet of fulfillment and warehouse space. This facility is
currently being utilized by one of our direct marketing clients.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceeding. We are, from time to time,
a party to litigation arising in the normal course of our business. Although
management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position or
results of operations, it is possible that such litigation and the related cost
could become material in the future.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this Report.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's Common Stock trades on the Nasdaq National Market under the symbol
"INOC". The following table sets forth for the periods indicated the high and
low sales prices of the Common Stock on the Nasdaq National Market.

HIGH LOW
------ ------

2005
First Quarter......................... $ 9.00 $ 7.87
Second Quarter........................ $ 8.94 $ 7.33
Third Quarter......................... $ 8.84 $ 6.77
Fourth Quarter........................ $ 8.99 $ 3.57
Fiscal Year Ended December 31, 2005... $ 9.00 $ 3.57

2004
First Quarter......................... $12.00 $10.45
Second Quarter........................ $11.83 $ 6.80
Third Quarter......................... $ 9.55 $ 7.40
Fourth Quarter........................ $ 9.28 $ 7.63
Fiscal Year Ended December 31, 2004... $12.00 $ 6.80

The approximate number of holders of record of Common Stock as of March 30, 2006
was 63. The approximate number of beneficial holders of our Common Stock as of
that date was 950.

The Company has never declared cash dividends on the Common Stock. The Company
intends to retain its earnings to finance the expansion of its business and does
not anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend upon such factors
as earnings, capital requirements, the Company's financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors. The payment of dividends by the Company is restricted by its
revolving credit facility.

Item 12 of Part III contains information concerning the Company's equity
compensation plans.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the Company. The
selected historical statements of operations data for each of the years ended
December 31, 2005, 2004, 2003, 2002 and 2001 and the selected historical balance
sheet data for the periods then ended have been derived from the Company's
audited Consolidated Financial Statements for the years ended December 31, 2005,
2004, 2003, 2002 and 2001. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto included elsewhere in this Report.

RESULTS FOR YEAR ENDED DECEMBER 31: 2005 2004 2003 2002 2001
- ----------------------------------- ------- ------- -------- ------- --------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)

Revenues $73,892 $78,322 $ 74,740 $82,420 $121,859
Cost of revenues 37,656 37,925 35,157 46,444 68,153
Special (credits) charges -- -- -- (293) --
Selling, general and administrative 34,978 34,579 34,873 36,811 39,516
Bad debt expense 1,248 221 1,571 521 3,813
Special (credits) charges -- -- (30) 404 --
Depreciation and amortization 4,524 5,202 5,622 5,336 4,864
------- ------- -------- ------- --------
TOTAL OPERATING EXPENSES 78,406 77,927 77,193 89,223 116,346
------- ------- -------- ------- --------
Operating income (loss) (4,514) 395 (2,453) (6,803) 5,513
------- ------- -------- ------- --------
Interest expense (income), net 154 285 741 318 (532)
Other expense (income) -- -- 15 (124) (20)
------- ------- -------- ------- --------
TOTAL OTHER EXPENSE (INCOME) 154 285 756 194 (552)
------- ------- -------- ------- --------
Income (loss) before income taxes
and minority interest (4,668) 110 (3,209) (6,997) 6,065
Income tax (provision) benefit -- -- (8,772) 2,578 (2,573)
------- ------- -------- ------- --------
Net income (loss) before minority interest (4,668) 110 (11,981) (4,419) 3,492
Minority interest, net of income taxes -- -- -- -- (893)
------- ------- -------- ------- --------
NET INCOME (LOSS) $(4,668) $ 110 $(11,981) $(4,419) $ 4,385
======= ======= ======== ======= ========
Net income (loss) per share-basic $ (0.38) $ 0.01 $ (1.04) $ (0.38) $ 0.39
Net income (loss) per share-diluted $ (0.38) $ 0.01 $ (1.04) $ (0.38) $ 0.38

COMMON STOCK INFORMATION:
Average number of common shares
outstanding-basic 12,196 11,865 11,542 11,516 11,318
Book value per common share(1) $ 3.84 $ 4.23 $ 4.25 $ 5.13 $ 5.57

YEAR-END FINANCIAL POSITION:
Current assets $20,872 $24,430 $ 29,721 $41,619 $ 58,093
Current liabilities 9,743 11,716 20,117 20,143 35,717
Property and equipment, net 10,754 12,499 14,750 18,915 14,500
Total assets 57,972 63,373 70,962 95,499 99,393
Long-term obligations 1,038 1,098 1,083 15,497 393
Total liabilities 10,781 12,814 21,200 35,640 36,110
Total shareholders' equity $47,191 $50,559 $ 49,762 $59,859 $ 63,283

(1) Book value per common share is calculated by dividing total shareholders'
equity at year end by the number of common shares outstanding at year end.

ITEM 7. 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 in Item 1 of this Annual Report on Form 10-K, under
"Business--Certain Factors Affecting Forward-Looking Statements".

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
eight fulfillment centers and two call centers in six 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 offering includes 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

- 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

- intuitive e-mail response

Prior to 2000, the Company was primarily focused on the telecommunications
industry, with over 90% of its revenues being derived through this vertical.
Today, 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 and client base over the past several years.

BUSINESS MIX

Business Line/Vertical 2005 2004
- ---------------------- ----- -----

Telecommunications products 12.2% 18.7%
Modems 21.2 19.5
Retail/Catalog 32.2 30.7
Direct Marketing 23.2 20.5
B2B 11.2 10.6
----- -----
100.0% 100.0%
===== =====

Telecommunications and Modems. The Company continues to be a major provider of
fulfillment and customer support services to the telecommunications industry. In
spite of a significant contraction and consolidation in this industry in the
past several years, the Company continues to provide customer support services
and fulfillment of telephones, Caller ID equipment, Digital Subscriber Line
Modems ("DSL") and other telecommunications products to companies such as
BellSouth Corporation ("BellSouth") and Qwest Communications International, Inc.
("Qwest") and their customers. Inventory for our telecommunications and DSL
clients is held on a consignment basis, with the exception of certain BellSouth
inventory, for which we are contractually indemnified, and includes items such
as telephones, Caller ID equipment and DSL modems and ancillary equipment.
Despite a decline in our telecommunications business as a result of reduced
volumes due to the maturity of the telephone and Caller ID equipment business,
we anticipate that the percentage of our revenues attributable to
telecommunications and DSL clients will remain fairly constant during 2006 due
mainly to increased volumes from our DSL modem business, which is still in a
strong growth mode.

Retail, Catalog and Direct Marketing. The Company also provides a variety of
these services for a significant number of retail, catalog and direct marketing
clients which include such companies as The Coca-Cola Company, Ann Taylor
Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc.,
Nordstrom.com LLC, 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
transmissions from our clients. The orders are processed through one of our
order management systems and then transmitted to one of our eight 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 and outdoor furniture. Our revenues are sensitive to
the number of orders and customer service calls received. Our client contracts
do not guarantee volumes. The percentage of our revenues attributable to our
retail, catalog and direct marketing clients increased during 2005 as compared
to 2004 primarily due to increased volumes from these clients and the shift in
our business mix as volumes decreased for our telecommunications clients and
several new retail, catalog and direct marketing clients were added. We
anticipate that the percentage of our revenues attributable to our retail and
catalog clients will increase during 2006 due to the addition of several new
clients, including Target.com, late in the second quarter of 2006.

We anticipate that the percentage of our revenues attributable to our direct
marketing clients will remain fairly constant during 2006 as existing products
mature and new products are introduced. Revenues attributable to our direct
marketing clients increased in the first half of 2005 due to a highly successful
new product introduced by one of our newer direct marketing clients, but
weakened considerably in the second half as that product matured and the
client's advertising for that product was reduced.

On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the
Company's former 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, whereby
Tactica has acknowledged the validity of Innotrac's claim and Innotrac's first
priority security interest in and warehouseman's lien on Tactica's inventory
held by Innotrac. This Stipulation allowed Tactica to continue to sell its
inventory while reducing the receivables owed by Tactica to Innotrac. The
Stipulation required that the proceeds from the sale of such inventory be split
with Innotrac 55%/45% on the first $1.6 million in customer orders and 60%/40%
thereafter upon receipt of Tactica customer payments. Additionally, Tactica was
required to prepay Innotrac for any services prior to its inventory being
shipped. Tactica defaulted on the Stipulation and on January 18, 2005, Innotrac
issued a Notice of Default to Tactica. 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. Innotrac, Tactica and the Creditor's Committee in the
Tactica bankruptcy case reached an agreement on the terms of the liquidation and
an additional amount of the proceeds to be remitted to the unsecured creditors
of Tactica, which was approved by the bankruptcy court on June 23, 2005.

Based on the Stipulation and an appraisal performed by a third party independent
appraiser, the reserve associated with the Tactica receivable was decreased from
$2.1 million at June 30, 2004 to $1.5 million at September 30, 2004. The reserve
was further reduced to $1.2 million at December 31, 2004 based on the verbal
agreement reached with Tactica regarding the liquidation of its inventory. Based
on the approved agreement and management's estimate of the net realizable value
of the inventory, the reserve associated with the Tactica receivable was further
reduced from $1.2 million to $775,000 at March 31, 2005. In the fourth quarter
2005, the reserve associated with the Tactica receivable was increased to $2.5
million. The additional reserve was based on management's estimate of the net
realizable value of the inventory, which was considerably reduced in the fourth
quarter as a result of buyers not materializing as initially indicated by the
third party independent appraiser and a continuing reduction in value of the
merchandise. The actual results of the liquidation could vary from this
estimate. As of March 15, 2006, Tactica owed $2.8 million in principal to
Innotrac for past fulfillment and call center services.

Business-to-Business. The Company also provides these services for
business-to-business ("B2B") clients including Books Are Fun, Ltd. (a subsidiary
of Reader's Digest), NAPA and The Walt Disney Company. This is a small, but
growing area of our business.

FACILITIES

In August 2004 we leased a 75,000 square foot fulfillment center in New Castle,
Delaware. This new facility provides fulfillment and warehouse space for a new
direct marketing client. Capital expenditures associated with this facility were
approximately $260,000.

In December 2005, we entered into a five year lease for a new facility in
Hebron, Kentucky. This new facility is currently under construction and will
provide approximately 650,000 square feet of fulfillment and warehouse space for
our Target.com operations beginning in the second quarter of 2006. Capital
expenditures associated with this facility are estimated to be approximately
$5.3 million and will be funded through our bank line of credit.

RESULTS OF OPERATIONS

The following table sets forth summary operating data, expressed as a percentage
of revenues, for the years ended December 31, 2005, 2004 and 2003. 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 Consolidated Financial Statements and
notes thereto.

YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
----- ----- -----

Revenues, net 100.0% 100.0% 100.0%
Cost of revenues 51.0 48.4 47.0
Selling, general and administrative 47.3 44.1 46.7
Bad debt expense 1.7 0.3 2.1
Depreciation and amortization 6.1 6.7 7.5
----- ----- -----
Operating (loss) income (6.1) 0.5 (3.3)
Other expense (income) 0.2 0.4 1.0
----- ----- -----
(Loss) income before taxes and minority interest (6.3) 0.1 (4.3)
Income tax (provision) benefit -- -- (11.7)
----- ----- -----
Net (loss) income (6.3)% 0.1% (16.0)%
===== ===== =====

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Revenues. The Company's net revenues decreased 5.7% to $73.9 million for the
year ended December 31, 2005 from $78.3 million for the year ended December 31,
2004. The decrease in revenues is primarily attributable to a $5.6 million
reduction in revenue from our telecommunications vertical as a result of reduced
volumes and the conclusion of two programs for a major client offset by a net
increase of approximately $996,000 in revenues from our direct marketing and
retail/catalog verticals as a result of the addition of several new clients and
increased volumes, reduced by the termination of services for Tactica
International, Inc. and Martha Stewart Living Omnimedia.

Cost of Revenues. The Company's cost of revenues, which include labor costs for
the fulfillment and call centers, telephone minute fees and freight and
packaging material costs, decreased 0.7% to $37.7 million for the year ended
December 31, 2005 compared to $37.9 million for the year ended December 31,
2004. Cost of revenues decreased primarily due to a decrease in labor costs
related to the decrease in revenue. Cost of revenues increased as a percentage
of revenue in 2005 as compared to 2004 primarily due to a change in the business
mix to clients with lower margin revenue and the addition of several new clients
whose margins have not yet reached the level of a mature client.

Selling, General and Administrative Expenses. S,G&A expenses, which include
facility and equipment costs, account services and information technology costs,
management salaries and legal and accounting fees, increased 1.2% to $35.0
million or 47.3% of revenues for the year ended December 31, 2005 compared to
$34.6 million or 44.1% of revenues for the year ended December 31, 2004. The
increase in expenses in 2005 as compared to 2004 was primarily attributable to
an increase in other professional services of approximately $255,000 related to
work performed for internal control documentation and additional expense related
to property taxes for our Kentucky facility of approximately $279,000. In
addition, 2005 facility and equipment costs exceeded those in 2004 by
approximately $447,000, primarily related to the new facility opened in Delaware
in the second half of 2004. These increases were offset by a $390,000 reduction
in account services related costs in 2005 as compared to 2004 and a reduction of
corporate salary expense of $577,000 in 2005 as compared to 2004. The increase
in S,G&A expense as a percentage of revenues was primarily due to the overall
decrease in revenues.

Bad Debt Expense. Bad debt expense increased to $1.2 million or 1.7% of revenues
for the year ended December 31, 2005 compared to $221,000 or 0.3% of revenues
for the year ended December 31, 2004. The increase in bad debt expense in 2005
as compared to 2004 was primarily attributable to a $1.3 million increase in the
provision for bad debts for Tactica in 2005 compared to $78,000 recorded in
2004.

Income Taxes. The Company's effective tax rate for the year ended 2005 and 2004
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 taxable losses and earnings for the years ended December 31, 2005 and 2004
were offset by a corresponding increase or reduction of this valuation allowance
resulting in an effective tax rate of 0% for the years ended December 31, 2005
and 2004.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

Revenues. The Company's net revenues increased 4.8% to $78.3 million for the
year ended December 31, 2004 from $74.7 million for the year ended December 31,
2003. The increase in revenues is primarily due to the addition of four new
retail/catalog clients and three new direct marketing clients, primarily during
the fourth quarter of 2004, which contributed $3.3 million in revenue. In
addition, there was an increase of approximately $1.0 million from our existing
retail clients, an increase of $770,000 from DSL clients and an increase of $1.7
million from our direct marketing clients, offset by a decrease of $2.6 million
and $754,000 from our telecom and B2B businesses, respectively.

Cost of Revenues. The Company's cost of revenues, which include labor costs for
the fulfillment and call centers, telephone minute fees and freight and
packaging material costs, increased 7.9% to $37.9 million for the year ended
December 31, 2004 compared to $35.2 million for the year ended December 31,
2003. Cost of revenues increased in dollars and as a percentage of revenue
primarily due the overall increase in revenues, the implementation and start-up
costs associated with several new clients in the second half of 2004 and a
change in the business mix.

Selling, General and Administrative Expenses. S,G&A expenses, which include
facility and equipment costs, account services and information technology costs,
management salaries and legal and accounting fees, decreased 0.8% to $34.6
million or 44.1% of revenues for the year ended December 31, 2004 compared to
$34.9 million or 46.7% of revenues for the year ended December 31, 2003. The
decrease in expenses in 2004 as compared to 2003 was primarily attributable to a
reduction in costs from management's efforts to control expenses resulting in
$860,000 lower account services related costs, $294,000 lower equipment costs
and $285,000 lower information technology related costs, offset by $960,000
higher facility costs in 2004 as compared to 2003. There was also a reduction of
approximately $400,000 in general and administrative costs, including management
salaries and legal and accounting fees, during 2004 as compared to 2003.
Additionally, the twelve months ended December 31, 2003 included one-time
credits relating to contract penalty fee reversals, property tax refunds and
coupon accrual reversal, totaling approximately $485,000. The decrease in S,G&A
expense as a percentage of revenues was primarily due to the overall increase in
revenues.

Bad Debt Expense. Bad debt expense decreased to $221,000 or 0.3% of revenues for
the year ended December 31, 2004 compared to $1.6 million or 2.1% of revenues
for the year ended December 31, 2003. The decrease in bad debt expense in 2004
as compared to 2003 was primarily attributable to a $1.1 million provision for
bad debts recorded in the fourth quarter of 2003 for Tactica as compared to
$78,000 recorded in 2004.

Special (Credits)/Charges. There were no special charges or credits during 2004.
During 2003, the Company recorded a special credit of $30,000 associated with
the settlement of a severance claim at an amount lower then previously reserved
for in 2002.

Income Taxes. The Company's effective tax rate for the year ended December 31,
2004 and 2003 was 0% and 273%, respectively. At December 31, 2003, a valuation
allowance of approximately $9.9 million 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, resulting in an overall tax
provision of approximately $8.8 million. Income taxes associated with taxable
income for the year ended December 31, 2004 were offset by a reduction of this
valuation allowance resulting in an effective tax rate of 0% for the year ended
December 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

The Company funds its operations and capital expenditures primarily through cash
flow from operations and borrowings under a credit facility with a bank. The
Company had cash and cash equivalents of approximately $2.1 million at December
31, 2005 as compared to $1.4 million at December 31, 2004. Additionally, the
Company did not have any borrowings under its revolving credit facility
(discussed below) at December 31, 2005 as compared to $3.1 million at December
31, 2004. The Company generated positive cash flow from operations of $5.1
million during the year ended December 31, 2005. The Company also generated
positive cash flow from operations for 2004. We anticipate positive cash flows
from operations again in 2006.

The Company recently renewed its revolving credit agreement to extend the
facility for an additional three years, until March 2009. Although the facility
has a maximum borrowing limit of $25.0 million, the credit facility limits
borrowings to a specified percentage of eligible accounts receivable and
inventory, which totaled $11.9 million at December 31, 2005. The maximum
borrowing amount of this facility was reduced from $40.0 million to $25.0
million in the third quarter of 2004 as the Company does not anticipate a need
for the larger amount. 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 restrictive fixed charge coverage ratio,
change in ownership control and other covenants. The provisions of the revolving
credit agreement require that the Company maintain a lockbox arrangement with
the lender, and allows the lender to declare any outstanding borrowing amounts
to be immediately due and payable as a result of noncompliance with any of the
covenants. Accordingly, in the event of noncompliance, these amounts could be
accelerated.

As renewed, the facility requires the Company to maintain a minimum fixed charge
coverage ratio of between 0.70 and 1.00 to 1.00, depending on the particular
fiscal quarter, for each of the Company's quarters through the end of its fiscal
year 2006, and a ratio of 1.15 to 1.00 thereafter. Although, at December 31,
2005 the Company was not in compliance with the then-current fixed charge
coverage ratio requirement of 1.30 to 1.00, or with a then-existing tangible net
worth requirement (which has been eliminated from the new facility), the Company
received a waiver of such noncompliance from the bank. The Company's fixed
charge ratio at December 31, 2005 was 1.18 to 1.00.

Interest on borrowings is payable monthly at rates equal to the prime rate, or
at the Company's option, LIBOR plus up to 200 basis points. During the years
ended December 31, 2005, 2004 and 2003 the Company incurred interest expense
related to the line of credit of approximately $87,000, $111,000 and $704,000,
respectively, resulting in a weighted average interest rate of 5.01%, 3.48% and
3.80%, respectively. At December 31, 2005, the Company had $11.9 million of
additional availability under the revolving credit agreement.

During the year ended December 31, 2005, the Company generated $5.1 million in
cash flow from operating activities compared to $9.9 million in cash flow from
operating activities in the same period in 2004. One of the primary contributors
to generating cash in 2004 was the further reduction in inventory of
approximately $8.2 million, of which $5.5 million related to the liquidation of
wireless pager inventory as a result of our client exiting this business. This
contributed to reductions in borrowings under our revolving credit facility of
approximately $8.7 million. The decrease in cash provided from operating
activities was primarily the result of net income in 2004 compared to a net loss
in 2005 and the reduction of $8.2 million in inventory in 2004 as described in
the preceding sentence compared to a $2.0 million increase in inventory in 2005.
These effects were partially offset by an increase in net accounts receivable of
$2.7 million in 2004 compared to a decrease of $5.7 million in 2005. In
addition, there was a $499,000 reduction in prepaid and other assets in 2005
compared to a $1.3 million increase in 2004.

During the year ended December 31, 2005, net cash used in investing activities
was $2.6 million as compared to $2.8 million in 2004. These expenditures were
funded through existing cash on hand, cash flow from operations and borrowings
under the Company's credit facility.

During the year ended December 31, 2005, the net cash used in financing
activities was $1.8 million compared to $8.0 million in the same period in 2004.
The primary difference between years is attributable to a reduction in
outstanding borrowings of $3.1 million in 2005 compared to a reduction in
outstanding borrowings of $8.7 million in 2004. Additionally, during 2005, the
Company generated cash of $1.3 million through the exercise of previously
granted employee stock options, compared to $1.1 million generated in 2004.

Capital expenditures were $2.6 million and $2.8 million for the years ended
December 31, 2005 and 2004, respectively. We anticipate capital expenditures of
approximately $5.6 million in 2006. The increase in spending for 2006 over 2004
and 2005 is primarily related to the new facility currently under construction
for Target.com. This estimate is subject to various contingencies, including the
possible need to incur additional capital expenditures related to new clients or
significant new initiatives by existing clients.

The Company estimates that its cash and financing needs through 2006 will be met
by cash flows from operations and its credit facility. The Company has generated
positive cash flows from operations in each of the last three years and
anticipates doing so again in 2006. The Company may need to raise additional
funds in order to take advantage of unanticipated opportunities or the opening
of new facilities. There can be no assurance that the Company will be able to
raise any such capital on terms acceptable to the Company or at all.

The Company's primary long-term contractual commitments consist of operating
leases. As of December 31, 2005, the Company did not have any off balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources. In addition, as of December 31, 2005 the Company did not participate
in any guarantees of other entities' obligations, structured finance
arrangements, synthetic leases, repurchase obligations or similar commercial or
financing commitments. Additionally, the Company does not trade in commodity
contracts.

The following table sets forth the Company's contractual commitments by period.
For additional information, see Note 5 to the Consolidated Financial Statements
(in 000's).

Payments Due by Period
------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
------- ---------------- --------- --------- -------------

Operating leases $30,716 $9,672 $14,932 $5,319 $793
Line of credit (1) -- -- -- -- --

(1) The provisions of the revolving line of credit agreement require that the
Company maintain a lockbox arrangement with the lender and allow 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.

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 forecast, 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 2 to our Consolidated Financial Statements. The
policies that we believe are critical to an investor's understanding of our
financial results and condition and require complex management judgment are
discussed below:

Reserve for Uncollectible Accounts. The Company makes estimates each reporting
period associated with its reserve for uncollectible accounts. These estimates
are based on the aging of the receivables and known specific facts and
circumstances.

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 adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002, which changed
the accounting for goodwill and other indefinite life intangibles from an
amortization method to an impairment only approach. Under SFAS No. 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value.

Innotrac's goodwill carrying amount as of December 31, 2005 and 2004 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 the 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 contracted with an independent third party
valuation firm to perform a valuation in the first quarter of 2006. The third
party valuation supported that the fair value of the reporting unit at January
1, 2006 exceeds the carrying amount of the net assets, including goodwill, and
thus no impairment currently exists. Management has reviewed and concurs with
the major assumptions used in the third party's valuation at January 1, 2006.
The Company will perform this impairment test annually as of January 1 or sooner
if circumstances dictate.

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 is more likely than not that
deferred tax assets will not be realized. Innotrac's net deferred tax asset as
of December 31, 2005 is $12.2 million. 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
and 2003 and 2005. Innotrac has a tax net operating loss carryforward of $37.5
million at December 31, 2005 that expires between 2020 and 2025.

Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, collection of
existing outstanding accounts receivable, competitive pressures on sales and
margins and other factors beyond management's control. These factors, combined
with losses in recent years, create uncertainty about the ultimate realization
of the gross deferred tax asset in future years. Therefore, a valuation
allowance of approximately $12.2 million and $9.7 million has been recorded as
of December 31, 2005 and 2004, respectively. Income taxes associated with future
earnings will be offset by a reduction in the valuation allowance. For the year
ended December 31, 2005, the deferred income tax benefit of $2.5 million 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 the deferred tax assets
prior to their expiration, the valuation allowance can be reduced or eliminated.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based
Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation."
The revised Statement clarifies and expands SFAS No. 123's guidance in several
areas, including measuring fair value, classifying an award as equity or as a

liability, and attributing compensation cost to reporting periods. The revised
statement supercedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and its related implementation guidance.
Under the provisions of SFAS No. 123(R), the alternative to use APB 25's
intrinsic value method of accounting that was provided in SFAS No. 123, as
originally issued, is eliminated, and entities are required to measure
liabilities incurred to employees in share-based payment transactions at fair
value. The Company currently accounts for its stock-based compensation plans
under APB 25. Since the exercise price for all options granted under those plans
was equal to the market value of the underlying common stock on the date of
grant, no compensation cost is recognized. SFAS No. 123(R) will be effective for
the Company beginning January 1, 2006.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 noted in Note 5 to the Consolidated Financial
Statements, and the Company has no long-term purchase commitments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Innotrac Corporation

We have audited the accompanying consolidated balance sheets of Innotrac
Corporation and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. We have also audited the schedule listed in the Index at
Item 15 as Schedule II as of and for the years ended December 31, 2005 and 2004.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innotrac Corporation
and subsidiaries at December 31, 2005 and 2004, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related schedule presents fairly, in all material respects,
the information set forth therein as of and for the years ended December 31,
2005 and 2004.

/s/ BDO Seidman, LLP

Atlanta, Georgia
March 28, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Innotrac Corporation:

We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Innotrac Corporation and its
subsidiaries (the "Company") for the year ended December 31, 2003. Our audit
also included the 2003 financial statement schedule listed in the Index at Item
15 as Schedule II. The consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the Company's consolidated results of operations and cash
flows for the year ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
March 30, 2004

INNOTRAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN 000'S)

DECEMBER 31,
-------------------
ASSETS 2005 2004
------ -------- --------

CURRENT ASSETS:
Cash and cash equivalents $ 2,068 $ 1,377
Accounts receivable, net of allowance of
$2,791 (2005) and $1,624 (2004) 12,745 18,405
Inventories, net 4,676 2,662
Prepaid expenses and other 1,383 1,986
-------- --------
TOTAL CURRENT ASSETS 20,872 24,430
-------- --------

PROPERTY AND EQUIPMENT:
Rental equipment 427 556
Computers, machinery and equipment 30,514 29,034
Furniture, fixtures and leasehold improvements 5,133 4,957
-------- --------
36,074 34,547
Less accumulated depreciation and amortization (25,320) (22,048)
-------- --------
10,754 12,499
-------- --------
Goodwill 25,169 25,169
Other assets, net 1,177 1,275
-------- --------
TOTAL ASSETS $ 57,972 $ 63,373
======== ========

DECEMBER 31,
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
------------------------------------ -------- --------

CURRENT LIABILITIES:
Accounts payable $ 6,707 $ 6,023
Line of credit -- 3,063
Accrued salaries 871 930
Accrued expenses and other 2,165 1,700
-------- --------
TOTAL CURRENT LIABILITIES 9,743 11,716
-------- --------

NONCURRENT LIABILITIES:
Deferred compensation 885 875
Other noncurrent liabilities 153 223
-------- --------
TOTAL NONCURRENT LIABILITIES 1,038 1,098
-------- --------

Commitments and contingencies (see Note 5) -- --

SHAREHOLDERS' EQUITY:
Preferred stock: 10,000,000 shares authorized,
$0.10 par value, no shares outstanding -- --
Common stock: 50,000,000 shares authorized,
$0.10 par value, 12,280,610 (2005) and
11,948,743 (2004) shares issued and
outstanding 1,228 1,195
Additional paid-in capital 65,911 64,644
Accumulated deficit (19,948) (15,280)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 47,191 50,559
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,972 $ 63,373
======== ========

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

INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- ------- --------

Revenues, net $73,892 $78,322 $ 74,740
Cost of revenues 37,656 37,925 35,157
Selling, general and administrative 34,978 34,579 34,873
Bad debt expense 1,248 221 1,571
Special (credits) charges, net -- -- (30)
Depreciation and amortization 4,524 5,202 5,622
------- ------- --------
Total operating expenses 78,406 77,927 77,193
------- ------- --------
OPERATING (LOSS) INCOME (4,514) 395 (2,453)
------- ------- --------

OTHER EXPENSE:
Interest expense 154 285 741
Other -- -- 15
------- ------- --------
TOTAL OTHER EXPENSE 154 285 756
------- ------- --------
(LOSS) INCOME BEFORE INCOME TAXES (4,668) 110 (3,209)
INCOME TAX (PROVISION) BENEFIT -- -- (8,772)
------- ------- --------
NET (LOSS) INCOME $(4,668) $ 110 $(11,981)
======= ======= ========

(LOSS) EARNINGS PER SHARE:
Basic $ (0.38) $ 0.01 $ (1.04)
======= ======= ========
Diluted $ (0.38) $ 0.01 $ (1.04)
======= ======= ========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 12,196 11,865 11,542
======= ======= ========
Diluted 12,196 12,522 11,542
======= ======= ========

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

INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(IN 000'S)

Retained
Common Stock Earnings
--------------- Paid-in (Accumulated Treasury
Shares Amount Capital Deficit) Stock Total
------ ------ ------- ------------ -------- --------

BALANCE AT DECEMBER 31, 2002 11,675 $1,167 $62,614 $ (3,219) $(703) $ 59,859
Issuance of common stock from
option exercises 40 4 264 -- -- 268
Restricted stock grant, net -- -- 328 -- -- 328
Issuance of treasury stock -- -- 304 -- 703 1,007
Tax benefit for stock options
exercised -- -- 281 -- -- 281
Net loss -- -- -- (11,981) -- (11,981)
------ ------ ------- -------- ----- --------
BALANCE AT DECEMBER 31, 2003 11,715 $1,171 $63,791 $(15,200) $ -- $ 49,762
Issuance of common stock from
option exercises 258 26 1,133 -- -- 1,159
Restricted stock grant, net -- -- (186) -- -- (186)
Shares retired (24) (2) (94) (190) -- (286)
Net income -- -- -- 110 -- 110
------ ------ ------- -------- ----- --------
BALANCE AT DECEMBER 31, 2004 11,949 $1,195 $64,644 $(15,280) $ -- $ 50,559
Issuance of common stock from
option exercises 332 33 1,267 -- -- 1,300
Net loss -- -- -- (4,668) -- (4,668)
------ ------ ------- -------- ----- --------
BALANCE AT DECEMBER 31, 2005 12,281 $1,228 $65,911 $(19,948) $ -- $ 47,191
====== ====== ======= ======== ===== ========

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

INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)

YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- ------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(4,668) $ 110 $(11,981)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 4,524 5,202 5,622
Provision for bad debts 1,247 (72) 737
Loss on disposal of fixed assets 40 106 22
Deferred income taxes -- -- 8,492
Amortization of deferred compensation -- 84 72
Changes in working capital, net of effect of businesses acquired:
Decrease (increase) in accounts receivable, gross 4,412 (2,651) (2,216)
(Increase) decrease in inventories (2,014) 8,234 13,202
Decrease (increase) in prepaid expenses and other assets 499 (1,304) 1,338
Increase (decrease) in accounts payable 684 285 (7,780)
Increase (decrease) in accrued expenses and other 405 (93) (3,714)
------- ------- --------
Net cash provided by operating activities 5,129 9,901 3,794
------- ------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,615) (2,762) (1,182)
Acquisition of businesses, net of cash acquired -- -- (181)
------- ------- --------
Net cash used in investing activities (2,615) (2,762) (1,363)
------- ------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit (3,063) (8,740) (2,570)
Repayment of capital lease and other obligations (58) (82) (119)
Exercise of employee stock options 1,300 1,133 1,556
Stock reacquired to settle employee stock bonus withholding tax obligation -- (286) --
Loan fees paid (2) (15) (31)
------- ------- --------
Net cash used in financing activities (1,823) (7,990) (1,164)
------- ------- --------
Net increase (decrease) in cash and cash equivalents 691 (851) 1,267
Cash and cash equivalents, beginning of period 1,377 2,228 961
------- ------- --------
Cash and cash equivalents, end of period $ 2,068 $ 1,377 $ 2,228
======= ======= ========
Supplemental cash flow disclosures:
Cash paid for interest $ 161 $ 321 $ 794
======= ======= ========
Cash income tax refunds received, net of taxes paid $ -- $ -- $ (1,565)
======= ======= ========

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

1. ORGANIZATION

Innotrac Corporation ("Innotrac" or the "Company"), a Georgia corporation,
provides order processing, order fulfillment and call center services. The
Company offers inventory management, inbound call center, pick/pack/ship
services, order tracking, transaction processing and returns handling from its
leased facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada,
Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation. The consolidated financial statements
include the accounts of the Company and its subsidiary (which was merged into
the Company effective January 1, 2005). The financial statements have been
prepared on the accrual basis of accounting in conformity with accounting
principles generally accepted in the United States of America. All significant
intercompany transactions and balances have been eliminated in consolidation.
Reclassifications have been made to prior year consolidated statements of
operations to conform to the 2005 presentation.

Concentration of Revenues. Revenues earned under the Company's contracts with
its telecommunication clients to provide fulfillment of telecommunications
equipment and related order processing and call center support services,
including DSL modems and wireless pagers, accounted for approximately 33%, 38%
and 42% of total revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. Revenues generated from the fulfillment of DSL and cable modem
equipment accounted for 21%, 20%, and 19% of the aforementioned totals.

The following table sets forth the percentage of total revenues derived from
each of the Company's largest clients for the years ended December 31, 2005,
2004 and 2003. Except for the major clients noted in the following table, no
other single customer provided more than 10% of consolidated revenues during
these years.

YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- ----

BELLSOUTH - TELECOM EQUIPMENT 8.8% 14.5% 18.5%
- DSL EQUIPMENT 14.7 12.5 13.0
SMITH & HAWKEN 12.3 12.9 13.2
THANE 11.3 7.0 3.9
TACTICA 0.0 3.0 10.2

Cash and Cash Equivalents. The Company considers all short-term, highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Fair Value of Financial Instruments. The carrying value of the Company's
revolving credit facility approximates fair value given that interest rates
under the facility are based on prevailing market rates. The book value of the
Company's accounts receivable and accounts payable approximate fair value.

Inventories. Inventories, consisting primarily of telephones and Caller ID
equipment are stated at the lower of cost or market, with cost determined by the
first-in, first-out method. Substantially all inventory at December 31, 2005 and
2004 is for the account of one client who has indemnified the Company from
substantially all risk associated with such inventory.

Property and Equipment. Property and equipment are stated at cost. Depreciation
is determined using straight-line methods over the following estimated useful
lives:

Rental equipment 3 years
Computers and software 3-5 years
Machinery and equipment 5-7 years
Furniture and fixtures 7 years

Leasehold improvements are amortized using the straight-line method over the
shorter of the service lives of the improvements or the remaining term of the
lease. Depreciation expense for the years ended December 31, 2005, 2004 and 2003
were $4.3 million, $4.9 million and $5.3 million, respectively. Maintenance and
repairs are expensed as incurred.

Goodwill and Other Acquired Intangibles. Goodwill represents the cost of
acquired enterprises in excess of the fair market value of the net tangible and
identifiable intangible assets acquired. The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002, which changed
the accounting for goodwill and other indefinite life intangibles from an
amortization method to an impairment only approach. The Company tests goodwill
annually for impairment at January 1 or sooner if circumstances indicate.

Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value
of a reporting unit exceeds its estimated fair value. Upon completion of its
analysis for impairment as of January 1, 2006 in accordance with SFAS No. 142,
no impairment was determined to exist at that time. Innotrac's goodwill carrying
amount as of December 31, 2005 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 the earnout payment made to the
former UDS shareholders in February 2002, and the acquisition of iFulfillment,
Inc. in July 2001.

The Company has intangible assets that were subject to amortization under the
provisions of SFAS No. 142. The intangible assets consist of acquired customer
contracts, which are included in other assets in the Company's Consolidated
Balance Sheets and which are amortized over a period of 1 to 5 years on a
straight-line basis. At December 31, 2005 and 2004, the Company had intangible
assets, consisting primarily of customer contracts, of approximately $0 and
$185,000, net of accumulated amortization of approximately $1.3 million and $1.1
million, respectively. Amortization expense of these intangible assets amounted
to approximately $185,000, $202,000 and $202,000 during the years ended December
31, 2005, 2004 and 2003, respectively.

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.

Revenue Recognition. Innotrac derives its revenue primarily from two sources:
(1) fulfillment operations and (2) the delivery of business 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
number of calls, minutes or hourly rate basis. All other revenues are recognized
as services are rendered. As required by the consensus reached in Emerging Issue
Task Force ("EITF") Issue No. 99-19, revenues have been recorded net of the cost
of the equipment for all fee-for-service clients. As required by the consensus
reached in EITF No. 01-14, "Income Statement Characterization of Reimbursements
Received for Out-of Pocket Expenses Incurred," the Company records
reimbursements received from customers for out-of pocket expenses, primarily
freight and postage fees, as revenue and the associated expense as cost of
revenue.

Cost of Revenues. The primary components of cost of revenues include labor costs
for the fulfillment and call centers, telephone minute fees, and freight and
packaging material costs. Costs related to facilities, equipment, account
services and information technology are included in selling, general and
administrative expense along with other operating costs. As a result of the
Company's policy to include facility, account services and information
technology costs in selling, general and administrative expense, our gross
margins may not be comparable to other fulfillment companies.

Stock-Based Compensation Plans. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Since the exercise price for all
options granted under those plans was equal to the market value of the
underlying common stock on the date of grant, no compensation cost is recognized
in the accompanying consolidated statements of operations. Had compensation cost
for stock options been determined under a fair value based method, in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," as amended by Statement of Financial Accounting
Standards No. 148, the Company's net loss and net loss per share would have been
the following pro forma amounts (in 000's, except per share data):

YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------ --------

Net (loss) income as reported $(4,668) $ 110 $(11,981)
Pro forma net loss $(8,025) $ (677) $(12,699)
Basic net (loss) income per share as reported $ (0.38) $ 0.01 $ (1.04)
Diluted net (loss) income per share as reported $ (0.38) $ 0.01 $ (1.04)
Pro forma net loss per share $ (0.66) $(0.06) $ (1.10)

Under the fair value based method, compensation cost, net of tax is $3.4
million, $787,000 and $718,000 for the years ended December 31, 2005, 2004 and
2003, respectively.

On December 31, 2005, in anticipation of the adoption of SFAS No. 123(R) on
January 1, 2006, the Board of Directors amended the terms of certain outstanding
options to purchase the Company's common stock that the Company previously had
granted. The amendments included accelerating the vesting date of 172,250
outstanding options to a vesting date of December 31, 2005 and re-pricing
834,450 out-of-the-money outstanding options to an exercise price of $4.56, the
market value of the company's common stock on December 31, 2005, to better
incentivize the holders of those options. Since the amended exercise price for
the options was equal to the market value of the underlying common stock on the
date of amendment, no compensation cost was recognized as a result of these
amendments.

The Company has computed for pro forma disclosure purposes the value of all
options granted using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following weighted average assumptions:

2005 2004 2003
--------- --------- ---------

Risk-free interest rate 4.47% 4.23% 4.27%
Expected dividend yield 0% 0% 0%
Expected lives 2.1 Years 2.3 Years 2.6 Years
Expected volatility 72.4% 75.1% 80.4%

The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the above weighted average assumptions.
The weighted average fair value of options granted was as follows:

2005 2004 2003
-------- ---------- --------

Per share option value $ 1.96 $ 4.78 $ 2.22
Aggregate total $849,200 $1,017,803 $266,028
======== ========== ========

Earnings Per Share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding. In the computation
of diluted earnings per share, the weighted average number of common shares
outstanding is adjusted for the effect of all dilutive potential common stock
equivalent shares.

Recent Accounting Pronouncements. In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 123(R), "Share-Based Payment," which revises SFAS No. 123,
"Accounting for Stock-Based Compensation." The revised statement clarifies and
expands SFAS No. 123's guidance in several areas, including measuring fair
value, classifying an award as equity or as a liability, and attributing
compensation cost to reporting periods. The revised statement supercedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and its related implementation guidance. Under the
provisions of SFAS No. 123(R), the alternative to use APB 25's intrinsic value
method of accounting that was provided in SFAS No. 123, as originally issued, is
eliminated, and entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value. The Company
currently accounts for its stock-based compensation plans under APB 25. Since
the exercise price for all options granted under those plans was equal to the
market value of the underlying common stock on the date of grant, no
compensation cost is recognized. SFAS No. 123(R) will be effective for the
Company beginning January 1, 2006.

3. ACCOUNTS RECEIVABLE

Accounts receivable were composed of the following at December 31, 2005 and 2004
(in 000's):

2005 2004
------- -------

Billed receivables $15,201 $19,449
Unbilled receivables 336 580
------- -------
15,537 20,029
Less: Allowance for doubtful accounts (2,791) (1,624)
------- -------
$12,745 $18,405
======= =======

4. FINANCING OBLIGATIONS

totaled $11.9 million at December 31, 2005. The maximum borrowing amount of this
facility was reduced from $40.0 million to $25.0 million in the third quarter of
2004 as the Company does not anticipate a need for the larger amount. The
Company has granted a security interest in all of its assets to the lender as
collateral under this revolving credit agreement.

5. COMMITMENTS AND CONTINGENCIES

Operating Leases. Innotrac leases office and warehouse space and equipment under
various operating leases. The primary office and warehouse operating leases
provide for escalating payments over the lease term. Innotrac recognizes rent
expense on a straight-line basis over the lease term.

Aggregate future minimum lease payments under noncancellable operating leases
with original periods in excess of one year as of December 31, 2005 are as
follows (in 000's):

OPERATING
LEASES
---------

2006 .......................... $ 9,672
2007 .......................... 9,914
2008 .......................... 5,018
2009 .......................... 2,957
2010 .......................... 2,362
Thereafter .................... 793
-------
Total minimum lease payments .. $30,716
=======

Rent expense under all operating leases totaled approximately $8.7 million, $8.6
million and $8.1 million during the years ended December 31, 2005, 2004 and
2003, respectively.

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.

Shareholder Rights Plan. In December of 1997, the Company's Board of Directors
approved a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan provides
for the distribution of one Right for each outstanding share of the Company's
Common Stock held of record as of the close of business on January 1, 1998 or
that thereafter becomes outstanding prior to the earlier of the final expiration
date of the Rights or

the first date upon which the Rights become exercisable. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Participating Cumulative Preferred Stock, par value $.10 per share, at
a price of $60.00 (the "Purchase Price"), subject to adjustment. The Rights are
not exercisable until ten calendar days after a person or group (an "Acquiring
Person") buys, or announces a tender offer for, 15% or more of the Company's
Common Stock. Such ownership level has been increased to 40% for a particular
shareholder that owned approximately 34.0% of the shares outstanding on December
31, 2005. 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.

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 2005, 2004 and 2003, 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 $11,000, $17,000 and
$11,000, respectively.

6. INCOME TAXES

Details of the income tax benefit (provision) for the years ended December 31,
2005, 2004 and 2003 are as follows (in 000's):

2005 2004 2003
---- ---- -------

Current $-- $-- $ (232)
Deferred -- -- (8,540)
--- --- -------
$-- $-- $(8,772)
=== === =======

Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 2005 and 2004 are as follows (in 000's):

2005 2004
-------- -------

Deferred tax assets:
Net operating loss carryforwards $ 14,317 $12,120
Allowance for doubtful accounts 1,019 619
Reserves 215 2
Other 58 9
-------- -------
Total deferred tax assets 15,609 12,750
Valuation allowance (12,187) (9,680)
-------- -------
Net deferred tax assets 3,422 3,070
Deferred tax liabilities:
Goodwill (2,318) (1,749)
Depreciation (1,104) (1,321)
-------- -------
Net deferred taxes -- --

Net deferred taxes:
Current deferred tax assets -- --
Noncurrent deferred tax assets -- --
-------- -------
$ -- $ --
======== =======

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 December 31, 2005 is
approximately $15.6 million. 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 and 2003 and
2005. Innotrac has a tax net operating loss carryforward of $37.5 million at
December 31, 2005 that expires between 2020 and 2025.

Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, collection of
existing outstanding accounts receivable, competitive pressures on sales and
margins and other factors beyond management's control. These factors, combined
with losses in recent years, creates uncertainty about the ultimate realization
of the gross deferred tax asset in future years. Therefore, a valuation
allowance of approximately $12.2 million and $9.7 million has been recorded as
of December 31, 2005 and 2004, respectively. Income taxes associated with future
earnings will be offset by a reduction in the valuation allowance. For the year
ended December 31, 2005, the deferred income tax benefit of $2.5 million 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 the deferred tax assets
prior to their expiration, the valuation allowance can be reduced or eliminated.

The difference between the provision for income taxes (benefit) and the amount
computed by applying the U.S. federal income tax rate for the years ended
December 31, 2005, 2004 and 2003 is as follows:

2005 2004 2003
------- ----- -------

Statutory federal income tax (benefit) $(1,624) $ 37 $(1,091)
State income taxes, net of federal effect (125) 4 (106)
Permanent book-tax differences (179) 69 109
Valuation allowance for deferred tax assets 1,928 (110) 9,882
Other -- -- (22)
------- ----- -------
Income tax provision (benefit) $ -- $ -- $ 8,772
======= ===== =======

7. EARNINGS PER SHARE

The following table shows the shares used in computing diluted earnings per
share ("EPS") in accordance with Statement of Financial Accounting Standards No.
128 (in 000's):

2005 2004 2003
------ ------ ------

Diluted earnings per share:
Weighted average shares outstanding 12,196 11,865 11,542
Employee and director stock options -- 657 --
------ ------ ------
Weighted average shares
assuming dilution 12,196 12,522 11,542
====== ====== ======

Options and warrants outstanding to purchase shares of the Company's common
stock aggregating 1.7 million, 87,500 and 1.9 million were not included in the
computation of diluted EPS for the years ended December 31, 2005, 2004 and 2003,
respectively, because their effect was anti-dilutive. This includes a warrant
with registration rights issued to Thane International in December 2000 to
purchase 150,000 shares of Innotrac common stock at the exercise price of $6.50,
which vests 20% annually, which expires December 8, 2010.

8. OTHER COMPREHENSIVE LOSS

SFAS No. 130, "Reporting Comprehensive Income," established standards for
reporting and display of comprehensive income and its components in financial
statements. For the years ended December 31, 2005, 2004 and 2003, the components
of the Company's comprehensive loss are as follows (in 000's):

Year Ended
December 31,
-------------------------
2005 2004 2003
------- ---- --------

Other comprehensive loss:
Net (loss) income $(4,668) $110 $(11,981)
Unrealized gain -- -- --
Reclassification adjustment for realized gains
included in consolidated statement of operations -- -- --
------- ---- --------
Comprehensive (loss) income $(4,668) $110 $(11,981)
======= ==== ========

9. SHAREHOLDERS' EQUITY

In June 2000, the Company's Board of Directors authorized the repurchase, at the
direction of senior management, of up to $5.0 million of the Company's common
stock. The stock repurchase program was extended for an additional twelve months
by the Board of Directors in February 2002. During the years ended December 31,
2005 and 2004 the Company did not repurchase shares.

At December 31, 2003, all treasury shares previously repurchased had been
reissued for stock options exercised during 2003, and accordingly no treasury
stock remains.

10. EMPLOYEE RETIREMENT PLANS

Innotrac employees may participate in a 401(k) defined contribution plan. The
plan covers all employees who have at least six months of service and are 18
years of age or older. Participants may elect to defer up to 15% of compensation
up to a maximum amount determined annually pursuant to IRS regulations. Prior to
July 1, 2004, Innotrac's policy was to provide matching employer contributions
equal to 15% of contributions for less than five years of service, 25% of
contributions for five to nine years of service, and 35% of contributions for
over nine years of service. However, this match was suspended from January 1,
2002 through June 30, 2002, reinstituted from July 1, 2002 through December 31,
2002 and was temporarily suspended thereafter. Effective July 1, 2004 and
through December 31, 2004, Innotrac reinstituted a matching employer
contribution equal to 5% of contributions for less than five years of service,
10% of contributions for five to nine years of service and 15% of contributions
for over nine years of service. These rates were adjusted effective January 1,
2005 to 5% of contributions for less than four years of service and 10% of
contributions for over four years of service. Total matching contributions made
to the plan and charged to expense by Innotrac for the years ended December 31,
2005, 2004 and 2003 were approximately $42,000, $16,000 and $0, respectively.

The Company has an executive deferred compensation plan for certain employees,
as designated by the Company's Board of Directors. Participants may elect to
defer up to 30% of compensation. Innotrac's policy is to provide matching
employer contributions ranging from 20% to 100% of employee contributions based
on years of service. However, this match was suspended for 2005, 2004 and 2003.
The Company invests these contributions in employee-directed marketable equity
securities which are recorded as trading securities at fair-market value on the
accompanying consolidated balance sheet (in other assets) and aggregated
$884,889 and $874,865 at December 31, 2005 and 2004, respectively. The monies
held by the plan are subject to general creditors of the Company in the event of
a Company bankruptcy filing.

11. STOCK BASED COMPENSATION

The Company has adopted two stock option plans: the 1997 and 2000 Stock Option
and Incentive Award Plans ("The Plans"). The Plans provide key employees,
officers, directors, contractors and consultants an opportunity to own shares of
common stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under The Plans may be
structured in a variety of ways, including as "incentive stock options," as
defined in Section 422 of the Internal Revenue Code, as amended, non-qualified
stock options, restricted stock awards, and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees (including
officers) of the Company. Non-qualified options, restricted stock awards, SARs,
and other permitted forms of awards may be granted to any person employed by or
performing services for the Company, including directors, contractors and
consultants. The 1997 Stock Option Plan and 2000 Stock Option Plan, as amended,
provide for the issuance of options to purchase up to an aggregate of 800,000
shares and 2,800,000 shares of common stock, respectively. At December 31, 2005,
there were 1,237,850 shares available to be issued under The Plans.

Incentive stock options are also subject to certain limitations prescribed by
the Code, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the common stock subject to the option. The Board of
Directors of the Company (or a committee designated by the Board) otherwise
generally has discretion to set the terms and conditions of options and other
awards, including the term, exercise price and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret and
administer The Plans.

A summary of the options outstanding and exercisable by price range as of
December 31, 2005 is as follows (shares in 000's):

Options Outstanding Options Exercisable
------------------------------------ ----------------------------------
Weighted Average Weighted
Range of As of Remaining Weighted Average As of Average
Exercise Prices December 31, 2005 Contractual Life Exercise Price December 31, 2005 Exercise Price
- --------------- ----------------- ---------------- ---------------- ----------------- --------------

$1.77 - $3.54 283 6.0 $ 3.37 283 $ 3.37
$3.54 - $5.31 972 7.7 4.53 918 4.53
$5.31 - $7.07 0 0.0 0.00 0 0.00
$7.07 - $8.84 8 6.0 7.57 8 7.57
$8.84 - $10.61 227 1.9 9.11 227 9.11
$10.61 - $12.38 20 2.3 12.00 20 12.00
$12.38 - $14.15 0 0.0 0.00 0 0.00
$14.15 - $15.92 0 0.0 0.00 0 0.00
$15.92 - $17.68 20 3.2 16.87 20 16.87
----- --- ------ ----- ------
1,530 6.4 $ 5.27 1,476 $ 5.29
===== === ====== ===== ======

A summary of activity in the Company's two stock option plans is as follows
(shares in 000's):

Weighted Average
Shares Price
------ ----------------

Outstanding at December 31, 2002 2,037 5.50
Granted 120 4.31
Exercised (306) 4.35
Forfeited (209) 5.79
----- -----
Outstanding at December 31, 2003 1,642 5.59
Granted 213 10.45
Exercised (186) 4.53
Forfeited (154) 6.63
----- -----
Outstanding at December 31, 2004 1,515 6.30
Granted 433 5.52
Exercised (328) 4.54
Forfeited (90) 7.57
----- -----
Outstanding at December 31, 2005 1,530 5.27
===== =====

Options exercisable at December 31, 2005, 2004 and 2003 were 1,476,000, 995,000
and 764,000 respectively, with a weighted average price of $5.29, $6.46 and
$7.07, respectively.

12. RELATED PARTY TRANSACTIONS

The Company leases a single engine aircraft from a company wholly-owned by our
Chairman and Chief Executive Officer, pursuant to an agreement that provides for
Innotrac to pay for 86% of all expenses associated with this aircraft. This
allocation is determined annually based on actual business usage. The Company
paid approximately $187,000 during 2005. For the years ended December 31, 2004
and 2003, the Company paid $205,000 and $134,000, respectively.

The Company paid approximately $29,000, $29,000 and $83,000 during 2005, 2004
and 2003, respectively, in fees to an accounting firm for tax and consulting
services. One of the directors of the Company is the Managing Partner and part
owner of that firm.

The Company paid approximately $239,000, $527,000 and $863,000 during 2005, 2004
and 2003, respectively, in fees to a print broker for services related to the
printing of marketing, client, inter-company and other materials. The broker is
owned by the brother of the Company's Chairman and Chief Executive Officer.

In 2003, the Company and the IPOF Group (consisting of IPOF Fund, LP and its
general partner, David Dadante), which as of December 31, 2005 beneficially
owned approximately 4.2 million shares of Common Stock, entered into an amended
Agreement to permit the IPOF Group to acquire up to 40% of the Common Stock on
the terms set forth in that Agreement without becoming an "Acquiring Person"
under the Company's Rights Agreement with SunTrust Bank. The Agreement with the
IPOF Group contains various restrictions on the IPOF's Group right to vote and
take certain other shareholder actions. Among these restrictions, the IPOF Group
agreed to vote all shares in excess of 15% proportionately with vote(s) cast by
the other shareholders of the Company and not seek to place a representative on
the Company's Board or seek to remove any member of the Board. The IPOF Group
further acknowledged that it is an "affiliate," as defined under applicable
federal securities law.

During 2004, the Company became aware of possible IPOF Group violations of the
short-swing profit rules under Section 16(b) of the Securities and Exchange Act
of 1934. Upon conclusion of the investigation of this matter, the Company and
IPOF Group, on March 3, 2004, entered into a Settlement Agreement regarding the
potential Section 16(b) liability issues that provides for the Company's
recovery in 2006 of $301,957.

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 the Fund and Mr. Dadante own 4,176,725 shares of common stock
of the Company, representing approximately 34.0% 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 July 14, 2006. 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.

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(000's, except per share data) First Second Third Fourth (1)
------- ------- ------- ----------

2005 Quarters:
Revenues, net $19,239 $18,942 $17,543 $18,168
Operating loss (221) (577) (778) (2,938)
Net loss (288) (619) (796) (2,965)
Net loss per share-basic (0.02) (0.05) (0.07) (0.24)
Net loss per share-diluted $ (0.02) $ (0.05) $ (0.07) $ (0.24)

2004 Quarters:
Revenues, net $19,994 $19,808 $17,631 $20,889
Operating income (loss) 320 302 (339) 112
Net income 227 225 (402) 60
Net income per share-basic 0.02 0.02 (0.03) 0.00
Net income per share-diluted $ 0.02 $ 0.02 $ (0.03) $ 0.00

(1) Results for the fourth quarter of 2005 include a provision for bad debts
for one specific account receivable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
explanation.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Our management, with the participation of the Chief Executive Officer and
principal financial officer, evaluated our disclosure controls and procedures
(as defined in federal securities rules) as of December 31, 2005. No system of
controls, no matter how well designed and operated, can provide absolute
assurance that the objectives of the system of controls are met, and no
evaluation of controls can provide absolute assurance that the system of
controls has operated effectively in all cases. Our disclosure controls and
procedures however are designed to provide reasonable assurance that the
objectives of disclosure controls and procedures are met. Based on the
evaluation discussed above, our CEO and principal financial officer have
concluded that our disclosure controls and procedures were effective as of the
date of that evaluation to provide reasonable assurance that the objectives of
disclosure controls and procedures are met.

There were no changes in our internal control over financial reporting during
the quarter ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, Innotrac's internal control over
financial reporting.

ITEM 9B. OTHER INFORMATION

On March 13, 2006, the Compensation Committee approved bonuses with respect to
service during 2005 for the following executive officers for the following
amounts:

Larry C. Hanger .... $30,000
Robert J. Toner .... $50,000
James R. McMurphy .. $50,000

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 contained under the headings "Board
Matters," "Election of Directors" and "Voting Securities and Principal
Shareholders--Section 16(a) Beneficial Ownership Reporting Compliance" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2006 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference. Pursuant to Instruction
3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 contained under the heading "Executive
Compensation" and "Board Matters--Directors' Compensation" in the definitive
Proxy Statement used in connection with the solicitation of proxies for the
Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission,
is hereby incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item 12 contained under the headings "Voting
Securities and Principal Shareholders" and "Equity Compensation Plans" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2006 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference.

For purposes of determining the aggregate market value of the Company's voting
stock held by nonaffiliates, shares held by all current directors and executive
officers of the Company and holders of 10% or more of the Company's Common Stock
have been excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be
"affiliates" of the Company as defined by the Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 contained under the heading "Related
Party Transactions" in the definitive Proxy Statement used in connection with
the solicitation of proxies for the Company's 2006 Annual Meeting of
Shareholders, to be filed with the Commission, is hereby incorporated herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 contained under the heading
"Independent Registered Public Accounting Firm" in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company's
2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

1. FINANCIAL STATEMENTS

The following financial statements and notes thereto are included in
Item 8 of this Report.

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2005 and 2004

Consolidated Statements of Operations for the years ended December 31,
2005, 2004 and 2003

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003

2. FINANCIAL STATEMENT SCHEDULES

Reports of Independent Registered Public Accounting Firms as to
Schedules

Schedule II - Valuation and Qualifying Accounts

3. EXHIBITS

The following exhibits are required to be filed with this Report by
Item 601 of Regulation S-K:

EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------

2.1 Agreement and Plan of Merger dated December 8, 2000, by and
among the Registrant, UDS, Patrick West, Daniel Reeves and The
Estate of John R. West (incorporated by reference to Exhibit
10.24 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001 (Commission File No. 000-23741),
filed with the commission on March 28, 2002)

3.1 Amended and Restated Articles of Incorporation of the
Registrant, (incorporated by reference to Exhibit 3.1 to the
Registrant's Amendment No. 1 to Registration Statement on Form
S-1 (Commission File No. 333-42373), filed with the Commission
on February 11, 1998)

3.2 Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1/A (Commission File No. 333-79929), filed
with the Commission on July 22, 1999)

4.1 Form of Common Stock Certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to the Registrant's
Amendment No. 1 to Registration Statement on Form S-1
(Commission File No. 333-42373), filed with the Commission on
February 11, 1998)

4.2(a) Rights Agreement between Company and Reliance Trust Company as
Rights

Agent, dated as of December 31, 1997 (incorporated by reference
to Exhibit 4.2 to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on February 11, 1998)

(b) First Amendment to the Rights Agreement dated as of November
30, 2000 between the Company, Reliance Trust Company and
SunTrust Bank (incorporated by reference to Exhibit 4.2(b) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 000-23741), filed with
the Commission on March 30, 2001)

(c) Second Amendment to the Rights Agreement dated as of August 14,
2003 between the Company and SunTrust Bank (incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q/A for the quarterly period ended
June 30, 2003 (Commission File No. 000-23741), filed with the
Commission on August 20, 2003)

(d) Third Amendment to the Rights Agreement dated as of November
24, 2003 between the Company and SunTrust Bank (incorporated by
reference to Exhibit 4.2(d) to Amendment No. 2 to the
Registrant's Registration of Securities on Form 8-A/A
(Commission File No. 000-23741), filed with the Commission on
November 25, 2003)

10.1+ 2000 Stock Option and Incentive Award Plan and amendment
thereto (incorporated by reference to Exhibit 4.3 and 4.4 to
the Registrant's Form S-8 (Commission File No. 333-54970) filed
with the Commission on February 5, 2001)

10.2(a) Sublease Agreement, dated May 26, 1999, by and between HSN
Realty LLC and Universal Distribution Services, Inc.
(incorporated by reference to Exhibit 10.8 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000
(Commission File No. 000-23741), filed with the Commission on
March 30, 2001)

(b) Lease, dated March 23, 2000 by and between Dermody Industrial
Group and Universal Distribution Services, Inc. (incorporated
by reference to Exhibit 10.2(b) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002
(Commission File No. 000-23741), filed with the Commission on
March 31, 2003)

10.4(a) Amended and Restated Loan and Security Agreement between the
Registrant and SouthTrust Bank, N.A., dated January 25, 1999
(incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998
(Commission File No. 0-23741), filed with the Commission on
March 26, 1999)

(b) First Amendment to Amended and Restated Loan and Security
Agreement by and between the Registrant and SouthTrust Bank,
N.A., dated April 29, 1999 (incorporated by reference to
Exhibit 10.14(b) to the Registrant's Registration Statement on
Form S-1 (Commission File No. 333-79929), filed with the
Commission on June 3, 1999)

(c) Letter Modification/Waiver to Amended and Restated Loan and
Security Agreement, as amended, effective August 14, 2000
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 (Commission File No. 0-23741), filed with
the

Commission on November 13, 2000)

(d) Letter of Amendment to Amended and Restated Loan and Security
Agreement by and between the Registrant and SouthTrust Bank,
N.A. effective September 10, 2001 (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2001 (Commission
File No. 0-23741) filed with the Commission on November 13,
2001)

(e) Letter Modification/Waiver to Amended and Restated Loan and
Security Agreement, as amended, effective May 31, 2002
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2002 (Commission File No. 000-23740) filed with the
Commission on August 13, 2002)

(f) Letter Modification/Waiver to Amended and Restated Loan and
Security Agreement, as amended, effective November 13, 2002
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 (Commission File No. 000-23740) filed with
the Commission on November 19, 2002)

(g) Letter Modification to Amended and Restated Loan and Security
Agreement, dated February 18, 2003, as amended, effective
January 1, 2003 (incorporated by reference to Exhibit 10.4(g)
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002 (Commission File No. 000-23741), filed
with the Commission on March 31, 2003)

(h) Second Amended and Restated Loan and Security Agreement by and
between the Registrant and SouthTrust Bank, N.A., dated April
3, 2003 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003 (Commission File No. 000-23740),
filed with the Commission on May 14, 2003)

(i) Letter Modification/Waiver to Second Amended and Restated Loan
and Security Agreement, as amended, effective February 6, 2004
(incorporated by reference to Exhibit 10.4(i) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003 (Commission File No. 000-23741), filed with
the Commission on March 30, 2004)

(j) Letter Modification to Second Amended and Restated Loan and
Security Agreement, as amended, effective February 26, 2004
(incorporated by reference to Exhibit 10.4(j) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003 (Commission File No. 000-23741), filed with
the Commission on March 30, 2004)

(k) Letter Modification/Wavier to Second Amended and Restated Loan
and Security Agreement, as amended, effective March 26, 2004
(incorporated by reference to Exhibit 10.4(k) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003 (Commission File No. 000-23741), filed with
the Commission on March 30, 2004)

(l) Loan Documents Modification Agreement between the Registrant
and SouthTrust Bank, dated May 10, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2004
(Commission File No. 000-23740), filed with the Commission on
May 14, 2004)

(m) Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated May 20, 2005 (incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2005 (Commission
File No. 000-23740), filed with the Commission on August 12,
2005)

(n) Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated August 19, 2005 (incorporated by
reference to Exhibit 10.4(n) to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2005 (Commission File No. 000-23740), filed with the
Commission on November 14, 2005)

(o) Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated October 24, 2005 (incorporated by
reference to Exhibit 10.4(o) to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2005 (Commission File No. 000-23740), filed with the
Commission on November 14, 2005)

(p) Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated November 7, 2005 (incorporated by
reference to Exhibit 10.4(p) to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2005 (Commission File No. 000-23740), filed with the
Commission on November 14, 2005)

(q)* Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated November 28, 2005

(r)* Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated December 29, 2005

(s)* Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated January 20, 2006

(t)* Loan Documents Modification Agreement between the Registrant
and Wachovia Bank, National Association, Successor by merger to
SouthTrust Bank, dated February 21, 2006

(u)* Waiver Agreement by and between the Registrant and Wachovia
Bank, National Association, Successor by merger to SouthTrust
Bank, dated March 13, 2006

(v)* Third Amended and Restated Loan and Security Agreement by and
between the Registrant and Wachovia Bank, National Association,
Successor by merger to SouthTrust Bank, dated March 28, 2006

10.5+ 2002 Senior Executive Incentive Compensation Plan (incorporated
by reference to Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001 (Commission
File No. 000-23741), filed with the Commission on March 28,
2002)

10.7+ Employment Agreement dated August 31, 2000, by and between
Scott D. Dorfman and the Registrant (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000
(Commission File No. 0-23741), filed with the Commission on
November 13, 2000)

10.8+ Employment Agreement dated August 31, 2000, by and between
David L. Ellin and the Registrant (incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000 (Commission
File No. 0-23741), filed with the Commission on November 13,
2000)

10.9+ Employment Agreement dated August 31, 2000, by and between
Larry C. Hanger and the Registrant (incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000
(Commission File No. 0-23741), filed with the Commission on
November 13, 2000)

10.13(a) Lease, dated July 23, 2001, by and between The Lincoln
National Life Insurance Company and iFulfillment, Inc.
(incorporated by reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001
(Commission File No. 000-23741), filed with the Commission on
March 28, 2002)

(b) Lease, dated August 5, 2002, by and between The Lincoln
National Life Insurance Company and the Registrant
(incorporated by reference to Exhibit 10.13(b) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002 (Commission File No. 000-23741), filed with
the Commission on March 31, 2003)

10.14+ Employment Agreement dated December 31, 2001, by and between
Robert J. Toner, Jr. and the Registrant (incorporated by
reference to Exhibit 10.24 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001 (Commission File
No. 000-23741), filed with the Commission on March 28, 2002)

10.16(a) Lease, dated April 23, 2002, by and between ProLogis
Development Services Incorporated and the Registrant
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 (Commission File No. 000-23740) filed with
the Commission on November 19, 2002)

(b) First Amendment to Lease Agreement dated October 15, 2002 by
and between ProLogis Development Services Incorporated and the
Registrant (incorporated by reference to Exhibit 10.16(b) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002 (Commission File No. 000-23741), filed with
the Commission on March 31, 2003)

(c) Second Amendment to Lease Agreement dated March 5, 2003 by and
between ProLogis-Macquarie Kentucky I LLC and the Registrant
(incorporated by reference to Exhibit 10.16 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2005 (Commission File No. 000-23740), filed with the
Commission on August 12, 2005)

10.17(a) Lease, dated September 17, 2002, by and between The Prudential
Insurance Company of America and the Registrant (incorporated
by reference to Exhibit

10.17 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (Commission File No. 000-23741),
filed with the Commission on March 31, 2003)

(b) First Amendment to Lease Agreement dated April 4, 2003 by and
between The Prudential Insurance Company of America and the
Registrant (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003 (Commission File No. 000-23740),
filed with the Commission on May 14, 2003)

(c) Second Amendment to Lease Agreement dated June 23, 2005 by and
between The Prudential Insurance Company of America and the
Registrant (incorporated by reference to Exhibit 10.17 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2005 (Commission File No. 000-23740),
filed with the Commission on August 12, 2005)

10.18+ Employment Agreement dated April 7, 2003, by and between James
McMurphy and the Registrant (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003 (Commission File
No. 000-23741), filed with the Commission on August 14, 2003)

10.19(a) Agreement dated August 14, 2003 by and between IPOF Fund, LP,
an Ohio limited partnership ("IPOF"), David Dadante, an
individual resident of Ohio and the general partner of IPOF and
the Registrant (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2003 (Commission File No.
000-23740), filed with the Commission on August 20, 2003)

(b) First Amendment dated November 24, 2003 to the Agreement by and
between IPOF Fund, LP, an Ohio limited partnership ("IPOF"),
David Dadante, an individual resident of Ohio and the general
partner of IPOF and the Registrant (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
(Commission File No. 000-23740), filed with the Commission on
November 24, 2003)

10.20(a) Lease, dated August 16, 2004, by and between Centerpoint 800
LLC and the Registrant (incorporated by reference to Exhibit
10.20 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004 (Commission File No.
000-23740), filed with the Commission on November 12, 2004)

(b)* First Amendment to Lease Agreement, dated May 1, 2004, by and
between Centerpoint 800 LLC and the Registrant

10.21 Fourth Lease Extension and Modification Agreement dated July 8,
2005 by and between Teachers Insurance and Annuity Association
of America, for the Benefit of its Separate Real Estate Account
and the Registrant (incorporated by reference to Exhibit 10.21
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005 (Commission File No.
000-23740), filed with the Commission on August 12, 2005)

10.22* Lease dated December 28, 2005 by and between Duke Realty
Limited Partnership and the Registrant

21.1* List of Subsidiaries

23.1* Consent of BDO Seidman, LLP

23.2* Consent of Deloitte & Touche LLP

24.1* Power of Attorney (included on signature page)

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

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

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

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

* Filed herewith.

+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.

INNOTRAC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Expenses Accounts Deductions Period
- ----------- ------------ ---------- ---------- ---------- ----------
(in 000's)

Provision for uncollectible accounts
Year ended December 31,
2005 .......................... $1,624 $1,248 $-- $ (81) $2,791
2004 .......................... $1,696 $ 221 $-- $(293) $1,624
2003 .......................... $ 959 $1,571 $-- $(834) $1,696

Provisions for returns and allowances
Year ended December 31,
2005 .......................... $ 5 $ 12 $-- $ (12) $ 5
2004 .......................... $ 12 $ 5 $-- $ (12) $ 5
2003 .......................... $ 10 $ 29 $-- $ (27) $ 12

Provisions for restructuring charge
Year ended December 31,
2005 .......................... $ -- $ -- $-- $ -- $ --
2004 .......................... $ -- $ -- $-- $ -- $ --
2003 .......................... $ 277 $ -- $-- $(277) $ --

S-1

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of March,
2006.

INNOTRAC CORPORATION

/s/ Scott D. Dorfman
----------------------------------------
Scott D. Dorfman
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities indicated on the 31st day of March
2006.

Know all men by these presents, that each person whose signature appears below
constitutes and appoints Scott D. Dorfman and Christine A. Herren, or either of
them, as attorneys-in-fact, with power of substitution, for him in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact may do or cause to be done by virtue
hereof.

Signature Title
- --------- -----

/s/ Scott D. Dorfman Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
Scott D. Dorfman Executive Officer)

/s/ Christine A. Herren Senior Director and Controller
- ------------------------------------- (Principal Financial Officer and
Christine A. Herren Principal Accounting Officer)

/s/ Thomas J. Marano Director
- -------------------------------------
Thomas J. Marano

/s/ Bruce V. Benator Director
- -------------------------------------
Bruce V. Benator

/s/ Martin J. Blank Director
- -------------------------------------
Martin J. Blank

/s/ Joel E. Marks Director
- -------------------------------------
Joel E. Marks