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

Overview

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

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

Our core service offerings include the following:

Fulfillment Services:
· sophisticated warehouse management technology
· automated shipping solutions
· real-time inventory tracking and order status
· purchasing and inventory management
· channel development
· zone skipping for shipment cost reduction
· product sourcing and procurement
· packaging solutions
· back-order management; and
· returns management.

Customer Support Services:
· inbound call center services
· technical support and order status
· returns and refunds processing
· call centers integrated into fulfillment platform
· cross-sell/up-sell services
· collaborative chat; and
· intuitive e-mail response.

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

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

Business Mix

                                           Three Months Ended          Nine months Ended
                                              September 30,              September 30,
      Business Line/Vertical               2008           2007         2008           2007
        eCommerce / Direct to Consumer        34.9 %        37.6 %        35.2 %       34.9 %
        Direct Marketing                      34.8          28.9          35.9         30.2


    Modems                            20.8        19.1        19.2        18.3
    Business-to-Business ("B2B")       5.6         9.8         6.0        11.3
    Telecommunications                 3.9         4.6         3.7         5.3

eCommerce / Direct-to-Consumer and Direct Marketing. The Company provides a variety of fulfillment and customer support services for a significant number of eCommerce, direct-to-consumer and direct marketing clients, including such companies as Target.com, a Division of Target Corporation, Ann Taylor Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc. and Thane International. We take orders for our eCommerce and direct marketing clients via the Internet, through customer service representatives at our Pueblo and Reno call centers or through direct electronic transmission from our clients. The orders are processed through one of our order management systems and then transmitted to one of our 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 eCommerce and direct marketing clients is held on a consignment basis, with minor exceptions, and includes items such as shoes, dresses, accessories, books, outdoor furniture, electronics, small appliances, home accessories, sporting goods and toys. Our revenues are sensitive to the number of orders and customer service calls received. Our client contracts do not guarantee volumes. We anticipate that the percentage of our total revenues attributable to our eCommerce and direct marketing clients will increase during the remainder of 2008 due to the projected growth rates of our clients' business in these verticals being greater than other verticals' projected rates of growth.

Telecommunications and Modems. The Company has historically been 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 and Digital Subscriber Line Modems ("Modems") for clients such as AT&T, Inc. and Qwest Communications International, Inc. and their customers. The consolidation in the telecommunications industry resulted in the acquisition of BellSouth by AT&T in December of 2006. On November 6, 2007, AT&T notified us that it intended to transition its fulfillment business in-house. The transition date was initially planned for the fourth quarter of 2008 but is now expected to occur in June 2009. After that transition is complete, we project that our telecommunications and modems customers may represent less than 5% of our annual revenues.

Business-to-Business. The Company also provides fulfillment and customer support services for business-to-business ("B2B") clients, including Books Are Fun, Ltd. (a subsidiary of Reader's Digest), NAPA and The Walt Disney Company.

Results of Operations

The following table sets forth unaudited summary operating data, expressed as a percentage of revenues, for the three and nine months ended September 30, 2008 and 2007. The data has been prepared on the same basis as the annual financial statements. In the opinion of management, it reflects normal and recurring adjustments necessary for a fair presentation of the information for the periods presented. Operating results for any period are not necessarily indicative of results for any future period.

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

                                                     Three Months Ended            Nine months Ended
                                                        September 30,                 September 30,
                                                     2008           2007           2008          2007

   Service revenues                                     78.6 %         80.9 %         78.6 %        80.3 %
   Freight revenues                                     21.4           19.1           21.4          19.7
     Total Revenues                                    100.0 %        100.0 %        100.0 %       100.0 %

   Cost of service revenues                             36.0           36.6           36.3          37.0
   Cost of freight expense                              21.1           19.1           21.2          19.5
   Selling, general and administrative expenses         35.7           36.1           35.1          38.1
   Depreciation and amortization                         3.5            4.1            3.4           4.5
     Operating income                                    3.7            4.1            4.0           0.9
   Other expense, net                                    1.1            0.5            1.1           0.6
     Income before income taxes                          2.6            3.6            2.9           0.3
   Income tax benefit                                      -              -              -             -
     Net income                                          2.6 %          3.6 %          2.9 %         0.3 %

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Service revenues. Net service revenues increased 6.8% to $25.1 million for the three months ended September 30, 2008 from $23.5 million for the three months ended September 30, 2007. This increase was primarily attributable to a $1.5 million increase in our direct marketing vertical resulting from the addition of several new clients and increased volume from existing clients and a $1.1 million increase in revenues from our DSL clients due to improved pricing from existing clients, offset by a $1.1 million decrease in revenues from our B2B vertical due to the loss of a customer.

Freight Revenues. The Company's freight revenues increased to $6.9 million for the three months ended September 30, 2008 from $5.6 million for the three months ended September 30, 2007. The increase in freight revenues of $1.3 million is primarily attributable to a $1.2 million increase in our direct marketing vertical resulting from the addition of new clients and increased volume from existing clients.

Cost of service revenues. Cost of service revenues increased 8.2% to $11.5 million for the three months ended September 30, 2008, compared to $10.7 million for the three months ended September 30, 2007. The cost of service revenue increase was primarily due to the increase in labor costs associated with the increase in service revenues.

Freight Expense. The Company's freight expense increased 21.6% to $6.8 million for the three months ended September 30, 2008 compared to $5.6 million for the three months ended September 30, 2007 due to the increase in freight revenue for the reasons listed above.

Selling, General and Administrative Expenses. S,G&A expenses for the three months ended September 30, 2008 increased to $11.4 million, or 35.7% of total revenues, compared to $10.5 million, or 36.1% of total revenues, for the same period in 2007. The increase in S,G&A expenses was primarily related to transaction costs incurred during the quarter for the Merger Agreement discussed in Note 7-Subsequent Events to the condensed financial statements in Item 1 and increases in administrative salaries, equipment expense and other corporate expenses, offset by a reduction in worker's compensation expense. The decrease in S,G&A expenses as a percentage of revenue in 2008 as compared to 2007 was primarily attributable to the overall increase in revenue and our ability to manage our business growth while increasing administrative overhead expense at a lesser rate.

Interest Expense. Interest expense for the three months ended September 30, 2008 and September 30, 2007 was $358,000 and $161,000, respectively. The increase was related to the interest and amortization of loan costs for the loans outstanding under the $5.0 million term loan, partially offset by a decrease in the amount outstanding under the revolving credit agreement and a reduction in the weighted average interest rate.

Income Taxes. The Company's effective tax rate for the three months ended September 30, 2008 and 2007 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 income for the three months ended September 30, 2008 were offset by a corresponding decrease of the valuation allowance resulting in an effective tax rate of 0% for the three months ended September 30, 2008. Income taxes associated with the profit for the three months ended September 30, 2007 were offset by a corresponding decrease of the valuation allowance resulting in an effective tax rate of 0% for the three months ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Service revenues. Net service revenues increased 8.6% to $74.0 million for the nine months ended September 30, 2008 from $68.2 million for the nine months ended September 30, 2007. This increase was primarily attributable to a $5.0 million increase in our direct marketing vertical resulting from the addition of several new clients and increased volume from existing clients, a $2.4 million increase in our eCommerce vertical resulting from increased volume and improved pricing from existing clients, a $2.6 million increase in revenues from our DSL clients due to increased volumes and improved pricing from existing clients, offset by a $3.8 million decrease in revenues from our B2B vertical due to the loss of a customer and a $1.1 million reduction in revenue from our Telecom vertical resulting from decreased volumes.

Freight Revenues. The Company's freight revenues increased to $20.2 million for the nine months ended September 30, 2008 from $16.7 million for the nine months ended September 30, 2007. The increase in freight revenues of $3.5 million is primarily attributable to a $3.1 million increase in our direct marketing vertical resulting from the addition of new clients and increased volume from existing clients and a $423,000 increase in revenue from our eCommerce / direct-to-consumer vertical due to increased volume from an existing client.

Cost of service revenues. Cost of service revenues increased to $34.2 million for the nine months ended September 30, 2008, compared to $31.4 million for the nine months ended September 30, 2007. The cost of service revenue increase was primarily due to the increase in labor costs associated with the increase in service revenues.

Freight Expense. The Company's freight expense increased 20.7% to $20.0 million for the nine months ended September 30, 2008 compared to $16.6 million for the nine months ended September 30, 2007 due to the increase in freight revenue for the reasons listed above.

Selling, General and Administrative Expenses. S,G&A expenses for the nine months ended September 30, 2008 increased slightly to $33.1 million, or 35.1% of total revenues, compared to $32.4 million, or 38.1% of total revenues, for the same period in 2007. The increase in S,G&A expenses was primarily related to transaction costs incurred during the quarter for the Merger Agreement discussed in Note 7-Subsequent Events to the condensed financial statements in Item 1 and increases in administrative salaries and other corporate expenses, offset by a reduction in worker's compensation expense and reduced facility costs. The decrease in S,G&A expenses as a percentage of revenue in 2008 as compared to 2007 was primarily attributable to the overall increase in revenue and our ability to manage our business growth while increasing administrative overhead expense at a lesser rate.

Interest Expense. Interest expense for the nine months ended September 30, 2008 and September 30, 2007 was $1.1 million and $490,000, respectively. The increase was related to the interest and amortization of loan costs for the loans outstanding under the $5.0 million term loan which was not outstanding in the first, second or third quarters of 2007, partially offset by a decrease in the amount outstanding under the revolving credit agreement and a reduction in the weighted average interest rate.

Income Taxes. The Company's effective tax rate for the nine months ended September 30, 2008 and 2007 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 income for the nine months ended September 30, 2008 were offset by a corresponding decrease of the valuation allowance resulting in an effective tax rate of 0% for the nine months ended September 30, 2008. Income taxes associated with the loss for the nine months ended September 30, 2007 were offset by a corresponding increase of the valuation allowance resulting in an effective tax rate of 0% for the nine months ended September 30, 2007.

Liquidity and Capital Resources

The Company has a revolving credit facility with Wachovia Bank, which had a maximum borrowing limit of $15.0 million as of September 30, 2008. As explained in Note 7 Subsequent Events to the condensed financial statements in Item 1, the Company entered into the Sixth Amendment to the revolving credit facility which among other changes increased the limit of borrowing to a maximum of $18.0 million. The revolving credit facility is used to fund the Company's capital expenditures, operational working capital and seasonal working capital needs. The $3.0 million increase in the borrowing limit provided for by the Sixth Amendment is projected to be used to support fourth quarter 2008 seasonal working capital needs.

The Company had cash and cash equivalents of approximately $620,000 at September 30, 2008 as compared to $1.1 million at December 31, 2007. The reduced amount of cash and cash equivalents at September 30, 2008 as compared to December 31, 2007 is the result of our consolidation of cash accounts under our revolving credit line at September 30, 2008 thereby lowering our loan outstanding and increasing our availability under the credit line.

Additionally, the Company increased its borrowings outstanding under its revolving credit facility (discussed below) to $9.1 million at September 30, 2008, as compared to $6.2 million at December 31, 2007. This increase was made to repay the $5.0 million Second Lien Credit Agreement on September 26, 2008. The combination of a reduction in Accounts Receivable of $3.2 million during the nine months ended September 30, 2008, which reduction is mostly due to seasonally adjusted levels of Accounts Receivable, and positive cash flow from operations allowed for the repayment of the Second Lien Credit Agreement through borrowings within the borrowing limit of the revolving credit facility. The Company generated positive cash flow from operations of $3.9 million during the nine months ended September 30, 2008, as compared to $4.2 million in the same period in 2007.

The revolving credit facility matures in March 2009 and, prior to the Sixth Amendment, had a maximum borrowing limit of $15.0 million as of September 30, 2008. Additionally, the credit facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $20.2 million at September 30, 2008. As provided for in the second waiver agreement dated April 16, 2007, our Chairman and Chief Executive Officer, Scott Dorfman, has granted to the bank a security interest in $2.0 million of his personal securities, which after application of a 75% factor results in $1.3 million of additional collateral to support the borrowing limit of $15.0 million under the credit facility. Additionally, the terms of the credit facility provide that the amount borrowed and outstanding at any time combined with letters of credit outstanding be subtracted from the total collateral adjusted for certain reserves to arrive at an amount of unused availability to borrow under the line of credit. The total collateral under the credit facility at September 30, 2008 amounted to $21.5 million. The amount borrowed and outstanding including letters of credit outstanding at September 30, 2008 amounted to $10.4 million. As a result, the Company had $4.6 million of borrowing availability under the $15.0 million revolving credit line at September 30, 2008.

The Company has granted a security interest in all of its assets to the lender as collateral under this revolving credit agreement. The revolving credit agreement contains a restrictive fixed charge coverage ratio. The provisions of the revolving 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. The fixed charge coverage ratio required the Company to maintain a minimum twelve month trailing fixed charge coverage ratio of 1.05 to 1.0 from June through September 2008 and requires a ratio of 1.1 to 1.0 from October 2008 through the maturity of the facility in March 2009. The Company was in compliance with the terms and conditions of the revolving credit agreement, as amended as of September 30, 2008.

On September 28, 2007 the Company and the bank entered into the fifth amendment to its revolving bank credit facility entitled "Fifth Amendment Agreement" (the "Fifth Amendment") whereby the bank agreed to the Company's entering into a debt obligation described as the "Second Lien Credit Agreement" which was subordinated to the bank's position as senior lender to the Company. The Second Lien Credit Agreement was entered into with Chatham Credit Management III, LLC, as agent for Chatham Investment Fund III, LLC, Chatham Investment Fund QP III, LLC, and certain other lenders party thereto from time to time, and Chatham Credit Management III, LLC, as administrative agent (Chatham Credit Management III, LLC, Chatham Investment Fund III, LLC, Chatham Investment Fund QP III, LLC, and Chatham Credit Management III, LLC are collectively referred to as "Chatham"). On September 26, 2008, the Company repaid all amounts borrowed including accrued interest owed under the Second Lien Credit Agreement.

Prior to the Sixth Amendment on October 22, 2008, interest on borrowings under the revolving credit agreement was payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 200 basis points; however so long as the fixed charge ratio was less than 1.00 to 1.00, the interest rate would be equal to the prime rate plus 1% or at the Company's option, LIBOR plus 285 basis points. During the nine month period ended September 30, 2008, the Company maintained a fixed charge ratio above 1.0 to 1.0. For the nine months ended September 30, 2008 and 2007, the Company incurred interest expense related to the revolving credit agreement of approximately $187,000 and $453,000, respectively. The Company also incurred unused revolving credit facility fees of approximately $14,000 and $31,000 during the nine months ended September 30, 2008 and 2007, respectively.

Prior to repayment on September 26, 2008, interest on borrowings under the Second Lien Credit Agreement accrued on a monthly basis equal to the greater of
(a) LIBOR or (b) 5.75% plus 9.25% for a rate of 15% of the principal balance plus accrued interest payable outstanding on the $5.0 million loan. For the nine months ended September 30, 2008 and 2007, the Company incurred interest expense related to the Second Lien Credit Agreement of approximately $574,000 and $6,000 respectively.

For the nine months ended September 30, 2008, we recorded interest expense of $187,000 on the revolving credit agreement at a weighted average interest rate of 4.51% and $574,000 of interest expense on the Second Lien Credit Agreement at a constant rate of 15.0%. Our weighted average interest rate for the nine months ended September 30, 2008, including amounts borrowed under both the revolving credit agreement and the Second Lien Credit Agreement, was 9.39%. At September 30, 2008, the rate of interest being charged on the revolving credit agreement was 5.43%.

For the nine months ended September 30, 2008, compared to the same nine month period in 2007, the Company generated positive cash flow from operations of $3.9 million and $4.2 million respectively. The $290,000 decrease for the nine months ended September 30, 2008 from the same period ended 2007 was mostly due to the combined result of generating a net profit of $2.7 million compared to a net profit of $287,000, offset by the net effect of all working capital accounts using $2.0 million of cash during the nine months ended September 30, 2008 compared with the net effect of all working capital accounts using $32,000 of cash during the nine months ended September 30, 2007. The $2.0 million use of cash in 2008 working capital accounts for the nine months ended September 30, 2008 resulted from a $6.5 million reduction in accounts payable and a $0.6 million increase in inventory offset by a $3.2 million increase in accounts receivable and $1.7 million increase in accrued liabilities. The $6.5 million reduction in accounts payable included a $2.2 million liability amount related to the Client Logic acquisition which was settled by reduction of an offsetting equal amount receivable from Client Logic. The $1.7 million increase in accrued liabilities was mainly due to the timing of payroll expenditures at September 30, 2008 and not higher costs. Additionally, non cash expenses for depreciation, which are included in net profit, were $3.2 million compared to $3.8 million for the nine months ended September 30, 2008 and 2007, respectively.

During the nine months ended September 30, 2008, net cash used in investing activities was $2.4 million as compared to $4.6 million in the same period in 2007. The decrease of $2.3 million was mainly due to expenditures made in 2007 relating to the Target facility that did not reoccur in 2008. Expenditures have been made in the second and third quarters of 2008 to improve certain work flow and accommodate increases in volume at certain facilities.

During the nine months ended September 30, 2008, net cash used in financing activities was $2.0 million compared to net cash used in financing activities of $6,000 in the same period of 2007. The $2.0 million increase in cash used in . . .