INNOTRAC CORP, 424B1, 1999-07-27

INNOTRAC CORP
424B1, 1999-07-27
BUSINESS SERVICES, NEC

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<PAGE> 1

PROSPECTUS
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION FILE NO. 333-79929

2,500,000 SHARES
(INNOTRAC LOGO)

INNOTRAC CORPORATION
COMMON STOCK
------------------------------
This is a public offering of 2,500,000 shares of common stock of Innotrac
Corporation. We are selling 2,100,000 shares and the selling shareholders named
in this prospectus are selling 400,000 shares. We will not receive any of the
proceeds from the sale of shares by the selling shareholders.

Our common stock is traded on the Nasdaq National Market under the symbol
"INOC." On July 26, 1999, the last reported sale price for our common stock was
$17.625 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

------------------------------

<TABLE>
<CAPTION>
PER
SHARE TOTAL
------- -----------
<S> <C> <C>
Public offering price....................................... $17.000 $42,500,000
Underwriting discount....................................... $ 0.935 $ 2,337,500
Proceeds, before expenses, to us............................ $16.065 $33,736,500
Proceeds, before expenses, to the selling shareholders...... $16.065 $ 6,426,000
</TABLE>

------------------------------

The underwriters may, under certain circumstances, purchase up to an additional
275,000 shares from the selling shareholders and 100,000 shares from us at the
public offering price less the underwriting discount.

The underwriters are severally underwriting the shares being offered in this
prospectus. The underwriters expect to deliver the shares against payment in New
York, New York on July 30, 1999.

------------------------------

BEAR, STEARNS & CO. INC.
THE ROBINSON-HUMPHREY COMPANY
J.C. BRADFORD & CO.
The date of this prospectus is July 26, 1999.
<PAGE> 2

[The graphic on this page is a flow chart depicting the four core competencies
provided by Innotrac Corporation. At the top left of the page, under the
caption, "clients," is a graphic containing the corporate logos for Ameritech,
Southwestern Bell, Siemens, NAPA, The Home Depot, Bell Atlantic, Pacific Bell,
TCI, BellSouth and US West. The flow chart moves to a picture of an individual
providing an overhead presentation to a group of business people next to the
caption "CONSULTATIVE SERVICES." The following bullet points are beneath this
caption: Channel Management, Marketing Strategy, Product Strategy, Customized
Billing Options, Promotions and Forecasting. The next picture in the flow chart
is of two individuals working at a computer terminal in a computer room above
the caption "TECHNOLOGY SERVICES." The following bullet points are beneath this
caption: EDI, IVR, Database Management and Internet Services. The next picture
in the flow chart is the Innotrac Corporation logo, which is in the center of
the page. The next picture in the flow chart is of an individual working in a
distribution center. Above the picture is the caption "DISTRIBUTION SERVICES,"
with the following bullet points beneath this caption: Product Ownership,
Fulfillment, Purchasing Management, and Inventory Management. The next picture
in the flow chart is of a customer support call center next to the caption
"CUSTOMER SUPPORT SERVICES." Beneath this caption are the following bullet
points: Call Center, Technical Support, Returns Management and Re-Ships and
Refunds. The last picture in the flow chart is of a customer on her telephone
ordering a product underneath the caption "end users."]
<PAGE> 3

PROSPECTUS SUMMARY

This summary contains basic information about us and the offering. Because
it is a summary, it does not contain all the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the related notes to those statements included in this prospectus. Except as
otherwise required by the context, references in this prospectus to "we," "our"
and "us" refer to Innotrac Corporation, or, where appropriate, to Innotrac and
the affiliated companies with which it conducted business prior to its May 1998
initial public offering. Unless otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.

INNOTRAC CORPORATION

Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions. We
target companies that have (1) a large customer base, (2) numerous and/or
geographically diverse subsidiary or affiliate operations, (3) extensive
marketing needs or (4) complex point-of-distribution requirements. Our
comprehensive services enable our clients to manage their sales channels
efficiently. Since 1994, we have focused on the telecommunications industry
because of its high growth characteristics and increasing marketing needs.
During that time, the majority of our growth has come from sales and
distribution services related to Caller ID equipment. We believe we have created
an outsourcing model that utilizes our core competencies, which include:

- consultative services
- channel management, marketing and product strategy
- customized and flexible billing options
- promotions
- sales and marketing information and forecasting
- technology services
- electronic data interface, or EDI, integration
- interactive voice response, or IVR
- database management
- distribution services
- product ownership, consignment and warehousing
- fulfillment
- purchasing management
- inventory management
- end user customer support services
- inbound call center services and technical support
- returns and refunds processing

In order to perform these 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 business. By assuming
responsibility for these tasks, we strive to create a "one stop approach" to
improve the quality of the non-core operations of our clients and to reduce
their operating costs.

Approximately 97% of our 1998 revenues and 98% of our revenues for the
three months ended March 31, 1999 came from sales of Caller ID equipment and
related services to BellSouth Telecommunications, Inc., Pacific Bell,
Southwestern Bell Telephone Co. and US West Communications Services, Inc. and
their customers. Caller ID equipment includes corded and cordless telephones
with built-in Caller ID and stand-alone devices.

We believe that the flexibility of our services allows us to attract
clients in many industries. We have provided literature and point-of-sale
distribution for a number of years to companies including Home Depot U.S.A.,
Inc., Siemens Energy & Automation Inc. and National Automotive Parts
Association, or NAPA. In 1999, we began to sell and distribute cable modems to
customers of Tele-Communications, Inc.,

1
<PAGE> 4

or TCI. In addition, we intend to apply our existing core competencies to help
businesses distribute their products through the internet. We are pursuing
relationships with companies that offer various e-commerce solutions but do not
have our distribution and end user support capabilities. For example, we
recently entered into a relationship with IBM to make our distribution and call
center services available to certain IBM e-commerce customers.

STRATEGY

- maximize marketing support and product distribution services to our
existing telecommunications clients,

- grow our telecommunications client base,

- expand customer distribution channels through e-commerce,

- build long-term client relationships and

- continue our investment in technology.

RECENT DEVELOPMENTS

Based on preliminary information, Innotrac's net revenues increased 58.2%
to $57.5 million for the three months ended June 30, 1999 compared to $36.3
million for the three months ended June 30, 1998. Because of our new business
model, gross margins decreased to 16.0% of net revenues from 27.0% of net
revenues. Under the new model, we bill our largest telecommunications clients
directly for products we sell to their customers, which reduces our credit risk.
Our net income increased 25.8% to $3.3 million, or $0.36 per diluted share, for
the three months ended June 30, 1999 from $2.6 million, or $0.33 per diluted
share, for the prior comparable period.

Our net revenues for the six months ended June 30, 1999 increased 111.9% to
$124.8 million compared to $58.9 million for the six months ended June 30, 1998.
Gross margins decreased to 14.3% of net revenues from 27.1% of net revenues.
Innotrac's net income increased 64.2% to $6.6 million, or $0.72 per diluted
share, for the six months ended June 30, 1999 from $4.0 million, or $0.54 per
diluted share, for the prior comparable period.

For the three months ended June 30, 1999, the total number of Caller ID
units distributed increased 114.3% to 1.4 million units compared to 672,000
units for the three months ended June 30, 1998. Sales of Caller ID units
increased 65.5% for the three months ended June 30, 1999 as compared to the
prior comparable period, and accounted for 59.5% of the total Caller ID units
distributed during the period. The number of units distributed under promotional
giveaway programs -- for which we receive a fee -- increased 278.2% for the
three months ended June 30, 1999 as compared to the prior comparable period, and
accounted for the remaining 40.5% of Caller ID units distributed.

For the six months ended June 30, 1999, 3.7 million Caller ID units were
distributed, an increase of 149.1% from the 1.5 million units distributed during
the six months ended June 30, 1998. Caller ID unit sales increased 138.0% and
distributions for a fee increased 161.9% for the six months ended June 30, 1999
from the prior comparable period. Sales represented 51.1% of total volume and
fee-based distributions represented 48.9% of total Caller ID units distributed
during the six months ended June 30, 1999.
------------------------------

We were incorporated in Georgia on August 8, 1984, and our initial public
offering was conducted on May 6, 1998. In conjunction with that offering, eight
affiliated companies were consolidated into Innotrac. Our principal executive
offices are located at 6655 Sugarloaf Parkway, Duluth, Georgia 30097. Our
telephone number is (678) 584-4000.
------------------------------

This prospectus contains trademarks and names of persons other than
Innotrac, which are the property of their respective owners.

2
<PAGE> 5

THE OFFERING

Common stock offered:

by us............................ 2,100,000 shares

by the selling shareholders...... 400,000 shares

Common stock to be outstanding after
the offering.......................... 11,109,995 shares(1)

Use of proceeds....................... - repayment of bank borrowings,

- establishment of a new call center,

- upgrade of computer and network
hardware and

- general corporate purposes,
including working capital needs.

See "Use of Proceeds."

Nasdaq National Market symbol......... INOC
- ---------------

(1) Excludes 472,150 shares of common stock issuable upon exercise of stock
options outstanding under our Stock Option and Incentive Award Plan as of
July 21, 1999. Options for 90,001 shares are currently exercisable.

3
<PAGE> 6

SUMMARY FINANCIAL DATA

The following table sets forth Innotrac's summary financial data. Except
for "Other Data," the following data was derived from our consolidated financial
statements and accompanying notes, some of which are included in this
prospectus. "Pro forma net income" and "Pro forma net income per share" reflect
the results of Innotrac and formerly affiliated companies as if they had been
one corporation taxable at the corporate level for all periods presented.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net............................. $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues.......................... 11,274 30,658 55,519 67,986 108,785 16,412 58,717
------- ------- ------- ------- -------- ------- -------
Gross profit.............................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 2,289 6,510 10,391 12,572 15,642 3,428 2,440
Depreciation and amortization........... 214 293 429 631 943 138 379
------- ------- ------- ------- -------- ------- -------
Total operating expenses................ 2,503 6,803 10,820 13,203 16,585 3,566 2,819
------- ------- ------- ------- -------- ------- -------
Operating income.......................... 3,603 7,425 4,958 6,789 14,303 2,587 5,784
------- ------- ------- ------- -------- ------- -------
Other (income) expense:
Interest expense........................ 622 1,090 1,457 1,788 956 315 373
Other................................... 67 (73) 94 118 35 6 (20)
------- ------- ------- ------- -------- ------- -------
Total other expense..................... 689 1,017 1,551 1,906 991 321 353
------- ------- ------- ------- -------- ------- -------
Income before income taxes................ 2,914 6,408 3,407 4,883 13,312 2,266 5,431
Income tax (provision) benefit............ (356) (793) (212) 77 (3,743) 61 (2,145)
------- ------- ------- ------- -------- ------- -------
Net income................................ $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income...................... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income per share:
Basic................................... $ 0.24 $ 0.61 $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37
Diluted................................. 0.24 0.61 0.32 0.46 1.00 0.21 0.36
Weighted average common shares
outstanding:
Basic................................... 6,500 6,500 6,500 6,500 8,096 6,500 9,000
Diluted................................. 6,500 6,500 6,500 6,500 8,155 6,500 9,127
OTHER DATA:
Total telecommunications products
shipped................................. 261 550 1,650 1,758 2,858 800 2,227
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
AS
AS OF DECEMBER 31, ADJUSTED
--------------------------------------------------- FOR THIS
1994 1995 1996 1997 1998 HISTORICAL OFFERING
----------- ------- ------- ------- ------- ---------- --------
(IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $30,380 $63,617
Property and equipment, net................... 5,059 9,099 10,939 7,609 7,463 7,224 7,224
Total assets.................................. 13,548 30,414 49,037 32,497 73,992 105,166 106,784
Total debt.................................... 5,874 8,642 22,580 13,187 15,811 31,694 75
Shareholders' equity.......................... 1,624 3,195 4,540 4,827 34,294 37,580 70,817
</TABLE>

4
<PAGE> 7

RISK FACTORS

You should carefully consider the following risk factors before investing
in our common stock. The risks and uncertainties described below are not the
only ones we face. The risks set forth below are in addition to risks that apply
to most businesses, which could also seriously harm the business of Innotrac.

If any of these risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. This could cause
the trading price of our common stock to decline, and you could lose all or part
of your investment.

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

Innotrac focuses on developing long-term relationships with large
corporations. In recent years, this focus has been on telecommunications
companies. A relatively small number of our clients account for a significant
portion of our revenues. Our three largest clients, BellSouth, Pacific Bell, and
Southwestern Bell, accounted for an aggregate of approximately 87%, 93%, 95% and
94% of net revenues for 1996, 1997, 1998 and the three months ended March 31,
1999. BellSouth accounted for approximately 82%, 85%, 59% and 35% of net
revenues for those same periods. If we lose one or more of our largest clients,
then our business, results of operations and financial condition could be
materially adversely affected. If one of these clients is lost, we cannot assure
you that we will be able to replace that client with others that generate
comparable revenues or profits.

WE DO NOT HAVE WRITTEN CONTRACTS WITH SOME OF OUR CLIENTS, INCLUDING SOME OF OUR
MAJOR TELECOMMUNICATIONS CLIENTS. EVEN OUR WRITTEN CONTRACTS GENERALLY DO NOT
GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE.

We do not have written agreements with some of our major telecommunications
clients. Some of our written agreements with telecommunications companies have
expired, including the contract with US West. We currently provide services to
those and other clients pursuant to oral agreements. These agreements can be
terminated by either party at any time. If these agreements are terminated, our
financial condition and results of operations could be materially adversely
affected. We are negotiating new written agreements with US West and some of our
other clients. We cannot assure you, however, that we will be able to obtain
those agreements on favorable terms, or at all.

We have written agreements with other telecommunications clients, including
BellSouth. Those agreements are generally terminable for cause. Some agreements
provide for termination without cause on short notice. Our agreement with
BellSouth, which does not expire until September 2003, may be terminated by
BellSouth for any reason after March 15, 2000 upon 120 days notice. BellSouth
commits to a minimum monthly Caller ID sales volume in its agreement with us.
However, most of our agreements do not assure specific volume or revenue levels.
In addition, our contracts generally do not provide that we will be the client's
exclusive service provider.

IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.

Our success depends upon our ability to distribute advanced
telecommunications equipment. We cannot assure you that we will be able to
continue to distribute state-of-the-art telecommunications equipment. Our
business, results of operations and financial condition could be materially
adversely affected if:

- the telecommunications products we distribute, and the related services
offered by our clients, do not gain or sustain marketplace acceptance,
- our telecommunications clients fail to adequately promote these products
and services or
- our telecommunications clients lose market share.

5
<PAGE> 8

Currently, we rely heavily upon the distribution of Caller ID equipment to
the end user customers of our telecommunications clients for our revenues. We
also depend upon these clients to promote Caller ID service. We plan our
operations partly based on estimates of "market penetration," which represents
the percentage of customers with telephone lines capable of receiving Caller ID
service that actually subscribe for the service. Our business, results of
operations and financial condition could be materially adversely affected if:

- actual Caller ID market penetration rates are lower than estimated,
- market saturation is reached or
- new technologies replace Caller ID.

WE ASSUME RISKS ASSOCIATED WITH BUYING, WAREHOUSING AND SELLING OR RENTING
PRODUCTS TO CUSTOMERS, AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE
MISMANAGE THESE RISKS.

We purchase Caller ID equipment and other telecommunications products from
third party vendors in connection with some of our distribution services.
Consequently, we assume the risks of inventory obsolescence, damage to units,
product returns and theft. If we cannot manage these risks, we may not be able
to resell the products we buy at a profit, or even recover their cost, and our
business, results of operations and financial condition could be materially
adversely affected. Our inventory risk could increase in the future because our
e-commerce strategy contemplates our owning products offered by e-commerce
clients. Moreover, inventory risks may be greater for products we may distribute
via e-commerce than for products we currently distribute.

THE NEW TELECOMMUNICATIONS PRODUCTS WE ARE DISTRIBUTING MAY NOT ACHIEVE MARKET
SUCCESS AND MAY COMPETE WITH PRODUCTS WE ALREADY DISTRIBUTE FOR OTHER CLIENTS.

We have begun to or are seeking to distribute orders for other
telecommunications products. These include cable modems and digital subscriber
line, or DSL, modems. Both products are relatively new technologies that
facilitate high-speed data transmission over the internet. We cannot assure you
that these products or other new products will achieve widespread acceptance or
market penetration. There is also a risk that competing technologies will
replace these products. The sale and distribution of these new products are
closely related to our established Caller ID equipment distribution services.
However, we cannot assure you that we will successfully integrate these new
distribution programs with our existing business.

Some of the products we distribute compete with each other. Many of these
technologies and services are offered by our current telecommunications clients.
Potential competing services and technologies include telephone company-related
wireline technologies like traditional analog modems and integrated services
digital network modems. We cannot assure you that we will be able to obtain, or
retain, distribution service business from telecommunications companies with
competing products and technologies.

IF OUR NEW E-COMMERCE INITIATIVE FAILS, OUR BUSINESS COULD BE NEGATIVELY
IMPACTED.

We are seeking to expand the range of distribution channels we offer by
developing the ability to sell services and products via the internet
(electronic, or e-commerce). We have very little experience in selling products
online. The success of this new initiative depends upon, among other things, our
ability to:

- recruit, hire and retain qualified personnel to assist in this new
service,
- integrate our new e-commerce service into our existing marketing support
services,
- develop relationships with clients who can cost effectively offer
products that are popular with internet shoppers and
- finance growth of our e-commerce service during its developmental stage.

Even if we successfully address these risks, we cannot assure you that our
new e-commerce initiative will succeed. Our e-commerce services, when fully
developed, may not be attractive to existing or new clients. If demand for them
does arise, they may not be quickly profitable, if at all. Because e-commerce is
a new business for us, we cannot predict the products or clients that may use
our e-commerce business or

6
<PAGE> 9

the other services we may offer. We may be affected by the pace at which
customers change their online shopping habits or preferences. If our e-commerce
initiative fails, our business, financial condition or results of operations
could be materially adversely affected, particularly if significant financing
costs are not recouped.

The decision to implement our e-commerce solutions presents a potential
e-commerce client with significant enterprise-wide implications and involves a
substantial commitment of its management's attention. Sales cycles for our
e-commerce services, therefore, could be longer than for our traditional
marketing support business as a result of lengthy client evaluation and approval
processes over which we have little or no control. Unpredictable sales cycles in
the developmental phase of our e-commerce business could hamper timely
evaluation of its success or failure. Unpredictable sales cycles could also
contribute to significant fluctuations in our operating results on a quarterly
basis.

OUR NEW E-COMMERCE BUSINESS WILL DEPEND ON CONTINUED GROWTH IN THE USE AND
COMMERCIAL VIABILITY OF THE INTERNET. IF THE INTERNET FAILS TO CONTINUE TO GROW,
OUR E-COMMERCE BUSINESS MAY NOT SUCCEED, AND OUR BUSINESS MAY BE HARMED.

Commercial use of the internet is relatively new. Internet and e-commerce
usage may be inhibited for a number of reasons, including:

- increased government regulation,
- insufficient availability, reliability or capacity of telecommunications
services,
- security and authentication concerns,
- difficulty of access and
- inconsistent service quality.

If the internet develops as a commercial medium more slowly than we expect,
it will adversely affect our e-commerce business. Alternatively, if internet and
e-commerce usage grows too quickly, the internet may not be able to support this
growth or its performance and reliability may decline. If internet outages or
delays occur frequently in the future, web usage -- including usage of our
clients' e-commerce web sites -- could grow more slowly or decline.

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

Our operations 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,
- continue to develop our sales infrastructure,
- attract, train, motivate and retain management and other personnel and
- maintain the high quality of our services.

We expect that our continued rapid growth will significantly strain our
management, operations, employees and resources. We cannot assure you that we
will be able to:

- maintain or accelerate our current growth,
- effectively manage our expanding operations or
- achieve planned growth on a timely or profitable basis.

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

We believe there has recently been a significant increase in businesses
outsourcing services not directly related to their principal business
activities. Our business, results of operations and financial condition could be
materially adversely affected if the outsourcing trend 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.
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<PAGE> 10

IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY
EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS
COULD SUFFER.

We may not be able to retain or employ qualified managers.

We depend in large part on the abilities and continuing efforts of our
executive officers and senior management. Our business and prospects could be
materially adversely affected if (1) current officers and managers do not
continue in their key roles and we cannot attract and retain qualified
replacements or (2) we cannot attract and retain additional qualified personnel
to sustain growth. We do not have employment agreements with our executive
officers. We cannot assure you that we will be able to retain them. We only
maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5
million. In order to support growth, we must effectively recruit, develop and
retain additional qualified management personnel. We cannot assure you that in
the future we will be able to recruit and retain additional qualified managers.

We may not be able to retain or employ other qualified employees.

Our success depends largely on our ability to recruit, hire, train and
retain qualified employees. If we cannot do so, our business, results of
operations or financial condition could be materially adversely affected. Our
industry is very labor-intensive and has experienced high personnel turnover. If
our employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating effectiveness and productivity could decline.

New clients or new large-scale marketing support programs may require
accelerated recruiting, hiring and training. We cannot assure you that we will
be able to continue to hire, train and retain sufficient qualified personnel to
adequately staff new marketing support programs.

Some of our operations, particularly our technical support and customer
service, require specially trained personnel. In addition, the unemployment rate
in the geographic area where our facilities are located is relatively low. Our
need for specially trained personnel and low unemployment rates may make it more
difficult and costly to hire and retain qualified personnel.

Currently, we are not a party to any collective bargaining agreements. None
of our employees is unionized. Although we consider our relationship with our
employees to be good, there have been occasional unionization initiatives at
Innotrac, particularly among our call center personnel. If our employees were to
join unions, we could incur increased wages, employee benefits and
employment-related administrative costs. We could also experience an increased
risk of work stoppages. A significant portion of our operating expenses relates
to labor costs. Therefore, an increase in wages or employee benefits could
materially adversely affect our business, results of operations or financial
condition.

IF OUR SYSTEMS OR EQUIPMENT FAIL OR IF OUR FACILITIES ARE DAMAGED, OUR BUSINESS
COULD BE INTERRUPTED. LIKEWISE, IF OUR CLIENTS OR SHIPPERS EXPERIENCE
INTERRUPTIONS IN THEIR OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.

Innotrac's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications equipment
and software systems against damage and failures. If our business is interrupted
either from accidents or the intentional acts of others, our results of
operations or financial condition could be materially adversely affected. Damage
or failures could result from fire, power loss, equipment malfunctions, system
failures related to the Year 2000 problem, natural disasters and other causes.
Because we currently have only one call center and one distribution facility, we
cannot rely on backup facilities in the event of widespread damage or failures
at these locations. Our property and business interruption insurance may not
adequately compensate us for these losses.

Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationship with these clients may
deteriorate, we may lose these clients, our ability to attract new clients may
be negatively affected and we could be exposed to liability. The risks from any
system failures we suffer to any e-commerce clients whose web sites we host on
our servers may be more

8
<PAGE> 11

acute than those our traditional clients face. Consequently, business
interruptions may pose a greater risk to our e-commerce business.

Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail, or proprietary information
could be misappropriated. Moreover, as we develop our e-commerce business, web
sites we host for clients could be subject to these same risks.

If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be negatively
affected. Our telecommunications clients' computer systems, for instance,
interface with our own. If they suffer interruptions in their systems, the link
to our systems could be severed and sales of telecommunications equipment could
be slowed or stopped.

We also rely on third-party carriers including United Parcel Service of
America, Inc. and Federal Express Corporation to ship products from our
distribution facility to purchasers. If our shippers experience
interruptions -- from labor strikes, for example -- our ability to distribute
products could be impaired.

COMPETITION MAY HURT OUR BUSINESS.

We operate in highly competitive markets and expect this environment to
persist and intensify in the future. Because our marketing support services
comprise marketing and product consultation, sales channel management,
distribution and back-end support, including our call center operations, 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.

In addition, our new e-commerce business is in a relatively new and highly
competitive industry. Our potential competitors could be located anywhere in the
world. They range in size and sophistication from the smallest niche companies,
and even individuals, to large corporations.

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 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."

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:

- enhance existing services,
- develop applications to focus on 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. We provide details about our technology in
"Business -- Technology."
9
<PAGE> 12

OUR SOFTWARE CONVERSION MAY NOT BE SUCCESSFUL OR IT MAY BE DELAYED, WHICH COULD
NEGATIVELY AFFECT OUR BUSINESS.

Our business is substantially dependent on our computer and
telecommunications equipment and software systems. We are upgrading some of our
computer hardware and software and converting some other existing programs to
our new software system. If we cannot successfully convert these programs, our
business, results of operations and financial condition could be materially
adversely affected. We have experienced delays and difficulties in converting
our software. We cannot assure you that we can effectively or efficiently
convert our programs to the new system.

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 marketing support services industry,
- changes in the timing and level of client-specific marketing programs,
including the timing and nature of promotions,
- unpredictable sales cycles for our e-commerce business,
- increased competition and
- changes in customer purchasing patterns for products we distribute.

Due to these and any 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. In view of our recent significant growth, we believe
that period-to-period comparisons of our financial results are not necessarily
meaningful or indicative of future performance.

BECAUSE PROFIT MARGINS HAVE NARROWED, OUR PROFITS MAY FLUCTUATE MORE IN THE
FUTURE THAN THEY HAVE IN THE PAST.

Our gross profit as a percentage of our gross revenues has declined
recently from historical levels, primarily because we are now billing our
largest telecommunications clients directly for products sold to their
customers, or end users, rather than billing their customers directly for the
products. Because we do not currently assume the credit risk of these clients'
customers, we charge lower unit prices for the products we distribute, resulting
in lower gross profit margins on these products. We expect these lower gross
profit margins to continue under our direct client billing model. With a
narrowed gross profit margin, we must rely on increased gross revenues to
maintain or increase our net profit. We also expect that our operating profits
in the future will be more sensitive to decreases in revenues and increases in
operating costs than in the past. We will have less capacity to absorb increased
operating expenses and still maintain profitability. Our gross profit as a
percentage of gross revenues for the three months ended March 31, 1999 was 13%
compared to 27% for the three months ended March 31, 1998. That percentage was
22%, 23% and 22% for the years ended December 31, 1998, 1997 and 1996.

Declining per-unit prices for the products we distribute also contribute to
narrowing gross margins. As competition and other factors force prices down for
Caller ID and other telecommunications equipment, there is a risk that our cost
of products sold will not decline at the same rate. For further information
about our results of operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

10
<PAGE> 13

WE MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF THE YEAR 2000 ISSUE.

Our efforts to address the Year 2000 issue may not be adequate.

The efficient operation of our business depends in part on our computer
software programs and operating systems. If these programs and systems are not
Year 2000 compliant and suffer failures from their inability to recognize dates
after December 31, 1999, our business, financial condition or results of
operations could be materially adversely affected. These programs and systems
are used in:

- inventory management,
- sales,
- financial reporting,
- pricing,
- shipping and
- administrative functions.

We believe that our information technology, or IT, systems, and other
non-IT systems are either Year 2000 compliant or substantially compliant. We
could experience business interruptions and systems failures that could
materially adversely affect our business if (1) any of these remedial efforts
fail to eliminate Year 2000 problems in our IT and non-IT systems or (2) we fail
to identify all systems that require attention. If unforeseen failures do occur,
emergency remediation expenses could also have a material adverse effect on our
business, results of operations or financial condition. We anticipate completing
testing of our Year 2000 efforts in September 1999. We cannot assure you,
however, that our Year 2000 efforts will be completed before December 31, 1999.
We also cannot assure you that these efforts, if completed, will successfully
remediate all Year 2000 problems.

Our suppliers, clients, financial institutions and others may not adequately
address the Year 2000 issue.

We also depend on the efficient operation of the computer systems of
suppliers, clients, financial institutions and others which interface with our
systems. Because third-party systems or software may not be Year 2000 compliant,
we may incur unanticipated expenses to remedy any problems caused by failures.
These problems could in turn materially adversely affect our business, results
of operations and financial condition. We are obtaining documentation from third
parties concerning their Year 2000 compliance programs and the possibility of
any Year 2000-related interface difficulties that may affect us. To date, no
significant concerns have been identified. We are developing contingency plans
to address potential Year 2000 failures of these entities. However, Year
2000-related operating problems or expenses may arise in connection with our
systems' interface with the computer systems and software of our suppliers,
clients, financial institutions and others.

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

In connection with any outbound telemarketing services that we may provide,
we must comply with federal and state regulations. These include the Federal
Communications Commission's rules under the Federal 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. If we initiate 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,
or 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

11
<PAGE> 14

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.

Our new e-commerce business may be subject to many of the same laws and
regulations. It is uncertain how these existing laws and regulations will be
applied to our e-commerce business, if at all. There is a risk that unfavorable
interpretations or applications of these existing laws, or the implementation of
new laws and regulations specifically addressing e-commerce, particularly with
respect to privacy issues, could impede our e-commerce business.

If unfavorable federal or state legislation or regulations affecting Caller
ID service, e-commerce or other technology or products we sell or distribute are
adopted, our business, financial condition and results of operations could be
materially adversely affected. See "Business -- Government Regulation" for
further information about government regulation of our business.

SCOTT D. DORFMAN WILL CONTINUE TO CONTROL INNOTRAC AFTER THIS OFFERING. HE MAY
MAKE DECISIONS WITH WHICH YOU WILL NOT AGREE.

Because he will own approximately half of the outstanding shares of common
stock after this offering, Scott D. Dorfman, who is our Chairman, President and
Chief Executive Officer, will likely control the composition of our board of
directors. Consequently, he will substantially influence our business, policies
and affairs. This voting concentration may have the effect of discouraging,
delaying or preventing a change in control of Innotrac, even one that you
believe is beneficial to you as a shareholder. Following the offering, Mr.
Dorfman will beneficially own approximately 52% of the outstanding common stock
or slightly less than 50% if the underwriters' over-allotment option is
exercised in full. See "Principal and Selling Shareholders" for information on
the ownership of Innotrac's common stock.

WE WILL USE A PORTION OF THE NET PROCEEDS FROM THIS OFFERING FOR GENERAL
CORPORATE PURPOSES. WE MAY USE THESE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE.

We intend to use a portion of the net proceeds of this offering for
unspecified general corporate purposes, including working capital needs. Our
management will have significant discretion in the use of these funds, and you
may disagree with the way these funds are spent. We cannot assure you that
proceeds dedicated to general corporate purposes will be invested to yield a
significant return, or any return at all.

SOME PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND OUR RIGHTS
AGREEMENT MAY DISCOURAGE TAKEOVERS THAT YOU BELIEVE ARE IN YOUR INTEREST.

Innotrac's articles of incorporation and bylaws contain some provisions
that may delay, discourage or prevent an attempted acquisition or change in
control of Innotrac. The articles and bylaws establish:

- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms,
- the board's authority to issue series of preferred stock with special
powers, preferences and rights,
- the board's authority to consider constituencies other than the
shareholders -- including employees, customers and the community -- in
making decisions, including decisions regarding control of Innotrac,
- removal of directors only for cause and
- noncumulative voting for directors.

In addition, we have adopted a rights agreement with Reliance Trust Company
as agent for the shareholders. The rights agreement provides that holders of
common stock will be entitled to purchase Innotrac preferred stock with special
voting, distribution and liquidation rights, or acquire shares of Innotrac
common stock, if a third party acquires beneficial ownership of 15% or more of
the common stock. In certain circumstances, shareholders are also entitled to
purchase the stock of (1) a company

12
<PAGE> 15

issuing shares in exchange for Innotrac shares in a merger or tender offer or
(2) a company acquiring most of Innotrac's assets.

These provisions of our articles of incorporation and bylaws and the rights
agreement could discourage tender offers or other transactions that might
otherwise result in your receiving a premium over the market price for your
common stock. See "Description of Capital Stock" for more information about our
articles of incorporation, bylaws and rights agreement.

THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO BE
VOLATILE AFTER THE OFFERING, AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.

The market price of our common stock has been volatile in the past and may
continue to be volatile after the offering. This volatility may cause
precipitous drops in the price of our common stock on the Nasdaq National
Market. These drops may cause your investment in our common stock to lose
significant value. The market price is affected by:

- variations in Innotrac's quarterly operating results,
- changes in financial estimates by securities analysts,
- changes in general conditions in the economy or the financial markets,
- other developments affecting Innotrac, its industry, clients or
competitors and
- the operating and stock price performance of companies that investors
deem comparable to Innotrac.

This volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to their operating
performance. Therefore, we cannot predict the market price for our common stock
after the offering.

FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET PRICE.

After the offering is completed, we will have approximately 11.1 million
shares of common stock outstanding. Of these shares, approximately 5.0 million
shares, including the 2.5 million shares offered by this prospectus, or
approximately 5.4 million shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable unless held by affiliates of
Innotrac, as defined under the Securities Act of 1933. All of the remaining
shares are "restricted securities" as that term is defined by Rule 144 under the
Securities Act and will be eligible for sale in compliance with Rule 144. We
have agreed, along with the selling shareholders and our executive officers and
directors, for a period of 90 days after the date of this prospectus, not to
sell or otherwise dispose of any of our shares of common stock without the prior
written consent of Bear, Stearns & Co. Inc. Consequently, approximately 6.2
million shares of common stock, including 90,001 shares subject to currently
exercisable options, or approximately 5.9 million shares if the over-allotment
option is exercised in full, will become eligible for sale by the selling
shareholders and our executive officers and directors in the public market after
the lock-up period expires on October 24, 1999, subject to the limitations of
Rule 144. In addition, we have filed a registration statement on Form S-8
registering for public sale 800,000 shares allocated to our Stock Option and
Incentive Award Plan. During the 90-day lock-up period, we may (1) issue shares
of common stock upon the exercise of currently outstanding options under this
plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period.

Following the offering and the lock-up period, sales of substantial amounts
of common stock in the public market, pursuant to Rule 144 or otherwise, or even
the potential of sales, could adversely affect the prevailing market price of
the common stock. Our ability to raise additional capital through equity
issuances could also be impaired. For information about the ability of certain
shareholders to sell their shares, see "Shares Eligible for Future Sale."

13
<PAGE> 16

WE DO NOT PLAN TO PAY DIVIDENDS ON OUR COMMON STOCK.

We presently intend to retain our earnings to finance our growth and
expansion and for general corporate purposes. Consequently, we do not plan to
pay any cash dividends to our shareholders in the foreseeable future. In
addition, our revolving credit facility contains limitations on the payment of
cash dividends and other distributions of assets.

COMPLETING AND INTEGRATING ACQUISITIONS MAY BE DIFFICULT. WE MAY NOT BE ABLE TO
COMPLETE THEM SUCCESSFULLY, AND WE MAY NEED ADDITIONAL FINANCING TO DO SO.

We have never acquired another company. In the future, however, we may
pursue acquisitions of companies whose businesses extend or complement ours. We
cannot, however, assure you that we will be able to successfully acquire
suitable target companies on favorable terms or integrate these companies with
our existing business, particularly in light of our inexperience with
acquisitions. If we complete an acquisition, we cannot assure you that the
acquisition will enhance our business, results of operations or financial
condition in the future. We could use a portion of our capital resources and
proceeds from this public offering for acquisitions. We may require additional
debt or equity financing for future acquisitions. Additional financing, however,
may not be available on favorable terms, or at all.

FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES

We have made forward-looking statements in this prospectus. These
statements are subject to risks and uncertainties, and there can be no
guarantees that these statements will prove to be correct. Forward-looking
statements include assumptions as to how we may perform in the future. When we
use words like "seek," "strive," "believe," "expect," "anticipate," "predict,"
"potential," "continue," "will," "may," "could," "intend," "plan" and "estimate"
or similar expressions, we are making forward-looking statements. For those
statements we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to those
discussed elsewhere in this prospectus, could affect our future results and
could cause those results to differ materially from those expressed in our
forward-looking statements. These factors include:

- our reliance on a small number of clients,
- trends in the market for our products and services,
- risks of buying, warehousing and selling or renting products to our
customers,
- trends in the marketing support service and telecommunications
industries,
- trends in e-commerce,
- whether we can continue and manage growth,
- changes in the trend toward outsourcing,
- increased competition,
- effects of changes in profit margins,
- the unknown effects of possible system failures and rapid changes in
technology,
- estimated increases in Caller ID penetration in various parts of the
United States,
- trends in government regulation and
- payment of dividends.

We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
those statements to actual results. In evaluating these statements, you should
consider various factors, including the risks outlined in the section entitled
"Risk Factors," beginning on page 5. You should also consider the cautionary
statements contained in the reports we have filed with the Securities and
Exchange Commission. These factors may cause our actual results to differ
materially from any forward-looking statements.

14
<PAGE> 17

USE OF PROCEEDS

Innotrac is offering for sale 2,100,000 shares of common stock by this
prospectus. Our net proceeds from the sale of these shares are estimated to be
approximately $33.2 million at the offering price of $17.00 per share, after
deducting the underwriting discount and estimated offering expenses. If the
underwriters exercise their option to purchase an additional 100,000 shares from
us to cover over-allotments, our estimated net proceeds will be approximately
$34.8 million.

We will not receive any proceeds from the sale of 400,000 shares of common
stock by the selling shareholders or any proceeds resulting from the
underwriters' exercise of their option to purchase an additional 275,000 shares
from the selling shareholders to cover over-allotments.

We expect to use our net proceeds for the following purposes:

- repayment of borrowings under our line of credit facility with a bank,
- the establishment of a new call center, including equipment and leasehold
improvements,
- upgrading our computer and network hardware and
- general corporate purposes, including working capital needs.

Our indebtedness under our line of credit bears interest, at our option, at
(1) our lender's base rate or (2) a rate equal to the London interbank rate, or
LIBOR, subject to adjustment in certain circumstances at the lender's option,
plus a variable number of basis points, from 100 to 200, determined by our ratio
of indebtedness to tangible net worth. As of March 31, 1999, the interest rate
on our indebtedness was 5.94%. If we do not prepay it, our indebtedness matures
in June 2002.

We may from time to time consider possible acquisitions of related
businesses and the use of net proceeds from this offering to finance those
acquisitions. We do not have any present agreements or commitments for, and are
not presently engaged in active negotiations with respect to, any particular
acquisition prospects.

Pending application of the net proceeds as described above, we will invest
the net proceeds in short-term, interest-bearing investment grade or government
securities.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently intend
to retain our earnings to finance the expansion of our business and do not
anticipate paying cash dividends in the foreseeable future. Any future
determination regarding cash dividend payments will be made by our board of
directors and depends upon the following factors:

- earnings,
- capital requirements,
- our financial condition,
- restrictions in financing agreements and
- other factors deemed relevant by the board of directors.

Dividend payments are restricted by our revolving credit facility. If we
are not in default on our credit facility, we can pay dividends of up to 40% of
our net income in any fiscal period.

15
<PAGE> 18

PRICE RANGE OF COMMON STOCK

Our common stock began trading on the Nasdaq National Market under the
symbol "INOC" on May 7, 1998. Prior to that time, there was no trading market
for our common stock. The following table sets forth for the periods indicated
the high and low sales prices of our common stock on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
Second Quarter (beginning May 7).......................... $13.250 $ 8.875
Third Quarter............................................. $13.500 $ 6.750
Fourth Quarter............................................ $24.375 $ 5.750
1999
First Quarter............................................. $19.000 $10.000
Second Quarter............................................ $21.000 $12.500
Third Quarter (through July 26)........................... $26.750 $17.500
</TABLE>

The market price for our common stock is volatile and fluctuates in
response to a wide variety of factors. See "Risk Factors -- The market price of
our common stock has been volatile and may continue to be volatile after the
offering, and the value of your investment may decline."

The approximate number of holders of record of our common stock as of July
20, 1999 was 31. The approximate number of beneficial holders of our common
stock as of March 26, 1999 was 1,550.

16
<PAGE> 19

CAPITALIZATION

The following table sets forth, as of March 31, 1999,

- Innotrac's actual cash and cash equivalents and capitalization and
- Innotrac's pro forma cash and cash equivalents and capitalization as
adjusted to reflect the application of the net proceeds from this
offering at the offering price of $17.00 per share.

You should read the data set forth below in conjunction with the more
detailed information found in "Use of Proceeds," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and accompanying notes and
the other financial data included elsewhere in this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS
EXCEPT SHARE DATA;
UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 274 $ 1,892
======= =======
Debt:
Line of credit facility................................... 31,619 --
Long-term debt(1)......................................... 75 75
------- -------
Total debt........................................ 31,694 75
------- -------
Shareholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $0.10 par value; 50,000,000 shares
authorized;
8,999,995 shares issued and outstanding actual;
11,099,995 shares issued and outstanding, as
adjusted(2)............................................ 900 1,110
Additional paid-in capital(2)............................. 24,838 57,865
Retained earnings......................................... 11,842 11,842
------- -------
Total shareholders' equity........................ 37,580 70,817
------- -------
Total capitalization....................... $69,274 $70,892
======= =======
</TABLE>

- ---------------

(1) Includes current portion of related indebtedness.
(2) Excludes 472,150 shares of common stock reserved for issuance pursuant to
stock options granted under our Stock Option and Incentive Award Plan as of
July 21, 1999. Options for 90,001 shares are currently exercisable. For a
description of the Plan, see Note 10 of notes to consolidated financial
statements.

17
<PAGE> 20

SELECTED FINANCIAL DATA

The following table sets forth selected financial data for Innotrac. The
selected historical statement of operations data for each of the years ended
December 31, 1995, 1996, 1997 and 1998 and the selected historical balance sheet
data as of December 31, 1995, 1996, 1997 and 1998 have been derived from
Innotrac's consolidated financial statements, some of which are included in this
prospectus. These consolidated financial statements and notes have been audited
by Arthur Andersen LLP, independent public accountants. The selected historical
statement of operations data for the year ended December 31, 1994 and the three
months ended March 31, 1998 and 1999 and the selected historical balance sheet
data as of December 31, 1994, March 31, 1998 and March 31, 1999 have been
derived from our unaudited consolidated financial statements. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the data for those periods. Operating results for interim periods
are not necessarily indicative of results for the full fiscal year. You should
read the selected historical financial data in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and accompanying
notes and other financial data included elsewhere in this prospectus.

"Pro forma net income" and "Pro forma net income per share" reflect the
results of Innotrac and formerly affiliated companies as if they had been one
corporation taxable at the corporate level for all periods presented.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................ $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues............. 11,274 30,658 55,519 67,986 108,785 16,412 58,717
------- ------- ------- ------- -------- ------- -------
Gross profit................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses................ 2,289 6,510 10,391 12,572 15,642 3,428 2,440
Depreciation and
amortization............ 214 293 429 631 943 138 379
------- ------- ------- ------- -------- ------- -------
Total operating expenses... 2,503 6,803 10,820 13,203 16,585 3,566 2,819
------- ------- ------- ------- -------- ------- -------
Operating income............. 3,603 7,425 4,958 6,789 14,303 2,587 5,784
------- ------- ------- ------- -------- ------- -------
Other (income) expense:
Interest expense........... 622 1,090 1,457 1,788 956 315 373
Other...................... 67 (73) 94 118 35 6 (20)
------- ------- ------- ------- -------- ------- -------
Total other expense........ 689 1,017 1,551 1,906 991 321 353
------- ------- ------- ------- -------- ------- -------
Income before income taxes... 2,914 6,408 3,407 4,883 13,312 2,266 5,431
Income tax (provision)
benefit.................... (356) (793) (212) 77 (3,743) 61 (2,145)
------- ------- ------- ------- -------- ------- -------
Net income................... $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income......... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======= ======= ======== ======= =======
</TABLE>

18
<PAGE> 21

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $ 2,174 $ 30,380
Property and equipment, net.... 5,059 9,099 10,939 7,609 7,463 7,931 7,224
Total assets................... 13,548 30,414 49,037 32,497 73,992 38,993 105,166
Total debt..................... 5,874 8,642 22,580 13,187 15,811 13,385 31,694
Shareholders' equity........... 1,624 3,195 4,540 4,827 34,294 5,967 37,580
</TABLE>

19
<PAGE> 22

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

The following discussion of Innotrac's results of operations and financial
condition should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this prospectus. This
discussion may contain certain forward-looking statements that are beyond our
control. Actual results may differ materially from those expressed or implied by
these forward-looking statements. Factors that could cause actual results to
differ include, but are not limited to, those discussed under "Risk Factors"
beginning on page 5.

OVERVIEW

Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions.
Since 1994, we have focused on the telecommunications industry because of its
high growth characteristics and increasing marketing needs. We provide marketing
support services and distribution of Caller ID units, Caller ID telephones and
other telecommunications products to BellSouth, Pacific Bell, Southwestern Bell
and US West and their customers. Recently, we began providing services to
customers of Ameritech Services Inc., Cincinnati Bell Inc. and Bell Atlantic
Corporation.

In 1991, we initiated a fulfillment program to sell or rent Caller ID
stand-alone devices to BellSouth customers. Customers paid us for these products
by check or credit card. In 1993, we began billing the charges on BellSouth
customers' telephone bills in interest-free installments. As part of that
program, we acquired Caller ID and other telecommunications equipment from third
party manufacturers, while assuming collections risk on customer payments. In
November 1998, we entered into a new contract with BellSouth pursuant to which
we continue to provide Caller ID hardware and other equipment, including corded
and cordless telephones with built-in Caller ID, to BellSouth customers. We now
bill BellSouth, rather than BellSouth customers, for these products.

Upon receipt of an order, we ship the product, track inventory levels and
sales and marketing data and maintain call center operations to handle customer
service and technical support. From time to time, rather than acquiring units
and selling or leasing them to BellSouth customers, we distribute, for a fee,
Caller ID hardware that BellSouth has purchased from various third-party
manufacturers.

Under our programs with Southwestern Bell and Pacific Bell, like our new
contract with BellSouth, we bill the respective telecommunications clients
directly for the telecommunications units that are sold to their end users. The
clients are then responsible for billing and collecting from their customers. As
a result of this change in our payment model, unit prices and our gross margin
are lower than historical levels. We generally experience lower bad debt
expenses, which are included in selling, general and administrative expenses,
because telecommunications clients, rather than their end user customers, pay us
for the equipment. These lower expenses substantially offset the decline in
gross margin. The change in our payment model has had little effect on our
operating margin to date.

We have experienced significant growth in revenue in recent years. This
growth stems primarily from growth in Caller ID market penetration and
Innotrac's consultative selling with respect to product-based marketing support
services. According to industry sources, market penetration of Caller ID
services in the United States as of December 31, 1998 was approximately 30% and
is expected to reach approximately 75% by 2007. BellSouth indicates that through
the end of first quarter 1999 its Caller ID penetration was 38%. We believe that
opportunities exist, for example, in the market areas served by Pacific Bell,
where market penetration for Caller ID lags behind the national average because
regulatory issues delayed the release of Caller ID. Caller ID equipment sales
may eventually level off as the Caller ID market matures. We believe that by
distributing other telecommunications products for existing customers, growing
our telecommunications company client base and expanding customer distribution
channels through e-commerce, we will be able to offset any eventual maturity in
our Caller ID business.

20
<PAGE> 23

The following table sets forth the percentage of total net revenues derived
from services provided to each of the following clients for the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and
1999. Percentages may not sum due to rounding.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
BellSouth........................................... 82% 85% 59% 70% 35%
Southwestern Bell................................... -- -- 11 -- 31
Pacific Bell........................................ 5 8 25 23 28
US West............................................. 2 2 2 2 4
-- -- -- -- --
Total..................................... 90% 95% 97% 95% 98%
== == == == ==
</TABLE>

Net revenues from services rendered to BellSouth for the three months ended
March 31, 1998 compared to the three months ended March 31, 1999 increased 48%.
The decline in revenues from BellSouth customers as a percentage of total
revenues for the three months ended March 31, 1999 results from the
diversification of our client base.

Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped (including installment sales). Revenues are
reduced for estimated product returns and allowances, which are based on our
historical experience.

The largest component of our expenses is our cost of revenues, which
includes:

- the product costs of telecommunications equipment,
- depreciation on Caller ID rental equipment,
- the costs of labor associated with marketing support services for a
particular client,
- telecommunications services costs,
- information technology support,
- materials and freight charges and
- directly allocable facilities costs.

Most of these costs are variable in nature.

A second component of our expenses includes selling, general and
administrative, or SG&A, expenses. This expense item is comprised of (1)
financial, human resources, administrative and marketing functions that are not
allocable to specific client services and (2) bad debt expense.

Bad debt expense represents a provision for installments and rentals that
will be deemed uncollectible based on Innotrac's historical experience, as well
as billing adjustments from telecommunications providers. SG&A expenses tend to
be fixed in nature, with the exception of bad debt expense, which is related to
revenues.

RECENT DEVELOPMENTS

Based on preliminary information, Innotrac's net revenues increased 58.2%
to $57.5 million for the three months ended June 30, 1999 compared to $36.3
million for the three months ended June 30, 1998. Because of our new business
model, gross margins decreased to 16.0% of net revenues from 27.0% of net
revenues. Our net income increased 25.8% to $3.3 million, or $0.36 per diluted
share, for the three months ended June 30, 1999 from $2.6 million, or $0.33 per
diluted share, for the prior comparable period.

21
<PAGE> 24

RESULTS OF OPERATIONS

The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1996, 1997 and 1998 and
the three-month periods ended March 31, 1998 and 1999. Operating results for any
period are not necessarily indicative of results for any future period. The
rounded percentages below are calculated using the detailed information
contained in the consolidated financial statements and accompanying notes
included in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cost of revenues..................................... 77.9% 77.3% 77.9% 72.7% 87.2%
Gross profit......................................... 22.1 22.7 22.1 27.3 12.8
Selling, general and administrative expenses......... 14.6 14.3 11.2 15.2 3.6
Operating income..................................... 7.0 7.7 10.2 11.5 8.6
Interest expense..................................... 2.0 2.0 0.7 1.4 0.5
Income before income taxes........................... 4.8 5.6 9.5 10.0 8.1
</TABLE>

Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998

Revenues. Innotrac's net revenues increased 198.3% to $67.3 million for
the three months ended March 31, 1999 from $22.6 million for the three months
ended March 31, 1998. Revenues increased primarily due to (1) a 171.4% increase
in Caller ID units distributed to 2.2 million units and (2) an increase in the
percentage of units sold to 46.9% of total unit volume versus 33.8% for the
three months ended March 31, 1998. This was partially offset by a decrease in
average per unit prices of Caller ID units. Our reserve for returns and
allowances increased slightly in terms of dollars, but decreased as a percentage
of revenues. The reserve was $2.1 million (3.2% of net revenues) for the three
months ended March 31, 1999 compared to $2.0 million (8.7% of net revenues) for
the three months ended March 31, 1998.

Cost of Revenues. Innotrac's cost of revenues increased 257.8% to $58.7
million for the three months ended March 31, 1999 compared to $16.4 million for
the three months ended March 31, 1998. Cost of revenues increased primarily due
to an increase in cost of equipment associated with the increase in units we
sold.

Gross Profit. For the three months ended March 31, 1999, Innotrac's gross
profit increased 39.8% to $8.6 million as compared to $6.2 million for the three
months ended March 31, 1998. The increase in gross profit was due primarily to
the increase in revenue. Gross margins decreased to 12.8% of revenues from 27.3%
of revenues. Gross margins declined for several reasons. First, for strategic
reasons, we conducted a promotional program that resulted in $11.0 million in
revenues and $11.0 million in cost of sales. Innotrac chose to conduct the
program in order to strengthen its relationship with a client. In addition,
gross margins were impacted by the broadening of our client base and the shift
to the direct
22
<PAGE> 25

client billing model. For these clients we were able to charge lower unit prices
and, as a result, we experienced lower gross margins. This decline was
substantially offset by lower bad debt expenses, which are included in selling,
general and administrative expenses.

Selling, General and Administrative Expenses. SG&A expenses for the three
months ended March 31, 1999 decreased 28.8% to $2.4 million, or 3.6% of
revenues, compared to $3.4 million, or 15.2% of revenues, for the three months
ended March 31, 1998. Our bad debt expense was $417,000 (0.6% of net revenues)
for the three months ended March 31, 1999 as compared to $1.7 million (7.6% of
net revenues) for the three months ended March 31, 1998. The decrease in bad
debt expense was due primarily to the shift to the direct client billing model.
The increase in other SG&A expenses was due to increased sales and marketing
efforts and increased administrative costs to support our growth.

Income Taxes. Our effective tax rates for the three months ended March 31,
1999 and 1998 were 39.5% and (2.6)%, respectively. The effective tax rates were
lower than statutory rates for the three months ended March 31, 1998 due to the
amount of income attributable to the pass-through entities involved in the
combination of Innotrac and related pass-through entities (the "Consolidation")
at the same time as consummation of our initial public offering in May 1998. For
more information concerning the Consolidation, see Note 1 of notes to
consolidated financial statements. We expect our effective tax rate in future
periods to approximate the level for the three months ended March 31, 1999.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues. Innotrac's net revenues increased 58.8% to $139.7 million for the
year ended December 31, 1998 from $88.0 million for the year ended December 31,
1997. The increase in revenues during 1998 was primarily due to a 61.3% increase
in Caller ID units sold in 1998. During 1998, we distributed 2.9 million units
as we increased our percentage of units sold (as opposed to distributed for a
fee) to 62.3% of total unit volume. During 1997, we distributed 1.8 million
units, or 56.9% of total unit volume. The 1998 increase was partially offset by
a decrease in average per unit prices of Caller ID units. Our reserve for
returns and allowances increased to $11.1 million (7.9% of net revenues) for the
year ended December 31, 1998 from $6.3 million (7.2% of net revenues) for the
year ended December 31, 1997.

Cost of Revenues. Our cost of revenues increased 60.0% to $108.8 million
for the year ended December 31, 1998 compared to $68.0 million for the year
ended December 31, 1997. This increase was primarily due to an increase in cost
of equipment associated with the increase in units we sold as described above.
This increase was partially offset by a $1.3 million decrease from 1997 in
rental equipment losses to $3.2 million and a $1.6 million write-down on Caller
ID equipment in the year ended December 31, 1997. The write-down resulted from
obsolescence problems related to the delayed start-up of the Pacific Bell Caller
ID program because of California regulatory issues.

Gross Profit. For the year ended December 31, 1998, our gross profit
increased 54.5% to $30.9 million, or 22.1% of revenues, as compared to $20.0
million, or 22.7% of revenues, for the year ended December 31, 1997. The
increase in gross profit was primarily due to the increase in revenues. The
decrease in gross margin was due primarily to the increasing percentage of
business derived from Southwestern Bell and Pacific Bell, clients for which
Innotrac does not assume the bad debt risk, as described above. We were
therefore able to charge lower unit prices to Southwestern Bell and Pacific
Bell. As a result, we experienced lower gross margins. This was substantially
offset by lower bad debt expenses. During the fourth quarter of 1998, BellSouth
sales were converted to a similar program.

Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1998 were $15.6 million, or 11.2% of revenues, compared to
$12.6 million, or 14.3% of revenues, for the year ended December 31, 1997. Our
bad debt expense, most of which was associated with sales of Caller ID and other
telecommunications equipment to BellSouth and Pacific Bell customers, was $8.2
million (5.9% of net revenue) for the year ended December 31, 1998 as compared
to $7.8 million (8.8% of net revenue) for the year ended December 31, 1997. The
decrease in bad debt expense as a percentage of revenue was primarily due to the
new direct client billing model in which the client assumes the bad debt risk of
its customers in exchange for a lower sales price. Other SG&A expenses increased
over the prior
23
<PAGE> 26

year due to increased sales and marketing efforts, increased insurance and
benefits expenses and administrative costs to support our growth.

Interest Expense. Interest expense decreased to $1.0 million for the year
ended December 31, 1998 from $1.8 million for the year ended December 31, 1997.
The decrease is primarily due to repayment of a note payable from a bank and a
subordinated note payable to a shareholder from the proceeds received from our
May 1998 initial public offering and lower bank borrowings under our line of
credit from the previous year end.

Income Taxes. Our effective tax rates for the years ended December 31,
1998 and 1997 were 28.1% and (1.6)%, respectively. The change from 1997 to 1998
was primarily the result of a lower level of income attributable to certain
pass-through entities prior to the Consolidation.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues. Our net revenues increased 23.4% to $88.0 million for the year
ended December 31, 1997 from $71.3 million for the year ended December 31, 1996,
primarily due to increased sales of Caller ID units to BellSouth and Pacific
Bell customers. The growth was partially offset by a decrease in net revenues
during the year ended December 31, 1997 resulting from the conclusion of a
distribution program performed in connection with the 1996 Olympic Games and an
increase in our reserve for returns and allowances to $6.3 million (7.2% of net
revenues) for the year ended December 31, 1997 from $3.5 million (4.9% of net
revenues) for the year ended December 31, 1996. In addition, our sales to
Pacific Bell customers during 1997 and 1996 were less than expected due to
regulatory issues that delayed the rollout of Caller ID services by Pacific Bell
and a low level of promotion of Caller ID services by Pacific Bell. See
"Business -- Government Regulation."

Cost of Revenues. Our cost of revenues increased 22.5% to $68.0 million
for the year ended December 31, 1997 compared to $55.5 million for the year
ended December 31, 1996. This increase was due to increased revenue volume,
including a $1.9 million increase from 1996 in rental equipment losses to $4.5
million, and a $1.6 million write-down on Caller ID equipment purchased for the
start-up of the Pacific Bell program. That equipment could not be sold above its
cost due to Pacific Bell's regulatory delays that resulted in product
obsolescence issues. The increase in cost of revenues was also associated with
the establishment of our Duluth, Georgia call center.

Gross Profit. For the year ended December 31, 1997, our gross profit
increased 26.6% to $20.0 million, or 22.7% of revenues, as compared to $15.8
million, or 22.1% of revenues, for the year ended December 31, 1996. The
increase in gross margin was due to increased sales along with the impact of a
price increase for Caller ID units with enhanced features. This was partially
offset by the $1.6 million inventory write-down and the costs associated with
the Duluth call center, along with the impact of introductory promotional prices
on certain Caller ID units, which were lower than regular prices.

Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1997 were $12.6 million, or 14.3% of revenues, compared to
$10.4 million, or 14.6% of revenues, for the year ended December 31, 1996. The
decrease in SG&A expenses as a percentage of revenues was due to improved
economies of scale. This was slightly offset by an increase in our bad debt
expense, most of which was associated with sales of Caller ID and other
telecommunications equipment to BellSouth and Pacific Bell customers. Bad debt
expense was $7.8 million (8.8% of net revenues) for the year ended December 31,
1997 as compared to $5.8 million (8.1% of net revenues) for the year ended
December 31, 1996. The increase in bad debt expense and the allowance for
doubtful accounts (inclusive of the reserve for returns and allowances) (22.1%
of gross accounts receivable) was primarily due to our higher revenue volume and
higher Caller ID market penetration. We believe that increased Caller ID market
penetration results in an increase in sales of Caller ID units to consumers
having higher credit risks. We believe that higher credit risk customers result
in larger write-offs for nonpayment due to increased chargebacks by
telecommunications companies to suppliers of nonregulated services when
customers do not pay for these services.

24
<PAGE> 27

Interest Expense. Interest expense increased to $1.8 million for the year
ended December 31, 1997 from $1.5 million for the year ended December 31, 1996.
The increase was primarily due to increased borrowings under our line of credit
to fund working capital, consisting primarily of accounts receivable and
inventory necessary to support increases in revenues. This increase was slightly
offset by lower interest on our subordinated debt in 1997 compared to 1996 due
to a repayment of this debt by Innotrac in September 1996.

Income Taxes. Our effective tax rates for the years ended December 31,
1997 and 1996 were (1.6%) and 6.2%, respectively. The change from 1996 to 1997
was primarily the result of a higher level of income attributable to certain
pass-through entities prior to the Consolidation.

LIQUIDITY AND CAPITAL RESOURCES

We fund our operations and capital expenditures primarily through cash flow
from operations and borrowings from banks. We had cash and cash equivalents of
approximately $274,000, $3.4 million and $554,000 at March 31, 1999, December
31, 1998 and December 31, 1997, respectively. We maintain a $40.0 million
revolving line of credit with a bank, maturing in June 2002, which was increased
from $35.0 million in April 1999. Borrowings under the line of credit bear
interest at our option at the bank's base rate, as adjusted from time to time,
or LIBOR, subject to adjustment in certain circumstances at the lender's option,
plus up to 200 basis points. At March 31, 1999, our interest rate was 5.94%. In
May 1998, we repaid a term loan with a bank that would have matured in July 1999
and bore interest at 8.95% per annum. We also repaid a subordinated note payable
to a shareholder, which would have matured in April 1999 and bore interest at a
particular bank's prime rate, as adjusted from time to time, plus 8.0% per
annum. Both were repaid with proceeds received from our May 1998 initial public
offering. At March 31, 1999, $31.6 million was outstanding under our line of
credit. In June 1999, we entered into a lease for a new call center and
distribution facility. As a result of that lease, rental expense will increase
approximately $550,000 a year through 2004.

During the three months ended March 31, 1999, we used $18.1 million in cash
flow from operating activities compared to the generation of $2.3 million in the
same period in 1998. We used $9.1 million in cash flow from operating activities
during the year ended December 31, 1998, compared to the generation of $18.9
million and $88,000 in cash flow from operating activities for the years ended
December 31, 1997 and 1996, respectively. The decrease in cash flow from
operating activities in the three months ended March 31, 1999 and the year ended
December 31, 1998 as compared to the comparable prior periods was due to higher
working capital requirements resulting from increases in accounts receivable
(principally installment receivables and receivables from Pacific Bell,
Southwestern Bell and BellSouth) and inventory due to increased sales volume.
The increase in cash flow from operating activities in 1997 was due to lower
working capital requirements resulting from decreased accounts receivable due to
shorter installment periods and reduced inventory. The shorter installment
periods were due to the change in length of installment sales from generally one
year to four to six months. The inventory reduction was due to the utilization
of inventory purchased in 1996 as part of the build-up for the rollout of the
Pacific Bell program, which was delayed for regulatory reasons.

During the three months ended March 31, 1999, net cash used in investing
activities was $880,000 as compared to $1.8 million in the same period of 1998.
This decrease was primarily due to a decrease in the number of purchases of
Caller ID units for rent plus reductions in the level of expenditures associated
with Innotrac's computer and software additions to handle growth in business.
During the years ended December 31, 1998, 1997 and 1996, net cash used in
investing activities was $5.7 million, $6.9 million and $8.0 million,
respectively. The decrease in 1998 was primarily due to a decrease in the number
of purchases of Caller ID units for rent. This was partially offset by
expenditures associated with our software upgrade, the purchase of new furniture
and equipment for our new corporate headquarters and distribution facility and
the expansion of our Duluth call center to service new clients. The decrease in
1997 was primarily due to a decrease in the number of purchases of
telecommunications equipment for rent.

25
<PAGE> 28

During the three months ended March 31, 1999, net cash provided by
financing activities was $15.9 million compared to $453,000 used in financing
activities in the same period in 1998. This increase was primarily due to
increased borrowings on our line of credit. The increased borrowings supported
working capital requirements resulting from increases in accounts receivable due
to the increased sales volume during the first three months of 1999 as compared
to the same period in 1998. During the year ended December 31, 1998, the net
cash provided by financing activities was $17.7 million compared to $13.4
million used in financing activities in the same period in 1997. During the year
ended December 31, 1996, the net cash provided by financing activities was $9.8
million. During the year ended December 31, 1998, we received $26.7 million in
the initial public offering completed on May 11, 1998, net of fees and expenses
associated with the initial public offering. We used a portion of the proceeds
to repay $4.6 million of long-term debt, $7.5 million in distributions of
undistributed earnings to shareholders of affiliated flow-through entities that
were consolidated with Innotrac in connection with the initial public offering,
and reduced our borrowings under the line of credit by $13.8 million. After the
initial public offering, we made periodic borrowings against the line of credit
to fund short term working capital needs, resulting in a net increase in
borrowings on the line of credit of $7.2 million for the year ended December 31,
1998. The use of cash for financing activities for the year ended December 31,
1997 reflects repayments under the line of credit and term loan.

We estimate that our cash and financing needs through 1999 will be met by
cash flows from operations and our line of credit facility, as well as from the
proceeds of this offering if it is consummated. However, any increase in our
growth rate, shortfalls in anticipated revenues, increases in anticipated
expenses or significant acquisitions could have a material adverse effect on our
liquidity and capital resources. These events would require us to raise
additional capital from public or private equity or debt sources in order to
finance operating losses, anticipated growth and contemplated capital
expenditures. If these sources of financing are insufficient or unavailable we
will be required to modify our growth and operating plans in accordance with the
extent of available funding. There can be no assurance that we will be able to
raise any capital on acceptable terms or at all.

YEAR 2000 COMPLIANCE

The efficient operation of our business is dependent in part on our
computer software programs and operating systems. These programs and systems are
used in inventory management, pricing, sales, shipping and financial reporting,
as well as in various administrative functions. Management believes that our
information technology, or IT, systems, and other non-IT systems are either Year
2000 compliant or substantially compliant. The cost of the upgrades is expected
to be approximately $120,000, approximately $70,000 of which has been incurred
through April 1999. We do not anticipate additional material expenditures for
Year 2000 compliance issues.

Our Year 2000 compliance efforts for both IT and non-IT systems include
three major phases: (1) inventory all systems, assess whether there are any Year
2000 issues and develop a compliance plan for all systems; (2) remediate any
Year 2000 problems and (3) test systems subsequent to remediation. The chart
below shows the estimated completion status of each of these phases expressed as
a percentage of completion as of March 31, 1999:

<TABLE>
<CAPTION>
PHASE: I II III
- ------ --- --- ---
<S> <C> <C> <C>
IT Systems........................................... 97% 75% 50%
Non-IT Systems....................................... 100% 95% 95%
</TABLE>

The assessment phase is complete and the remediation phase is substantially
complete, and testing will continue into the third quarter of 1999.

We are in the process of obtaining documentation from our suppliers,
clients, financial institutions and others as to the status of their Year 2000
compliance programs and the possibility of any interface

26
<PAGE> 29

difficulties relating to Year 2000 compliance that may affect us. To date, no
significant concerns have been identified; however, there is a risk that Year
2000-related operating problems or expenses will arise with our computer systems
and software or in connection with our interface with the computer systems and
software of our suppliers, clients, financial institutions and others. Because
these third-party systems or software may not be Year 2000 compliant, we are in
the process of developing contingency plans to address Year 2000 failures of
these entities with which we interface. Our contingency plans are being
developed to address issues like: (1) the inability to receive customer order
information electronically from our major clients and (2) the inability of one
or more of the manufacturers of the Caller ID products we sell to produce
products due to that company's Year 2000 failure. If the first scenario were to
happen, we would be required to receive and enter this information manually into
our order processing system, which could increase our labor costs. If the second
scenario were to occur, we would be required to find alternate vendors and
potentially incur additional costs to do so. We could be required to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, results of operations and financial condition.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

We believe our exposure to market risks is immaterial. We hold no market
risk sensitive instruments for trading purposes. At present, we do not employ
any derivative financial instruments, other financial instruments or derivative
commodity instruments to hedge any market risks and we do not currently plan to
employ them in the future. To the extent that we have borrowings outstanding
under our credit facility, we have market risk relating to the amounts of our
borrowings because interest rates under the credit facility are variable. Our
exposure is immaterial due to the short-term nature of these borrowings.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which must be
adopted by the year 2000. This statement establishes accounting and reporting
standards for derivative instruments -- including certain derivative instruments
embedded in other contracts -- and for hedging activities. Adoption of this
statement is not expected to have a material impact on our financial statements.

In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires
capitalization of certain costs of internal-use software. Innotrac adopted this
statement in January 1999, and it did not have a material impact on the
financial statements.

27
<PAGE> 30

BUSINESS

Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions. We
target companies that have (1) a large customer base, (2) numerous and/or
geographically diverse subsidiary or affiliate operations, (3) extensive
marketing needs or (4) complex point-of-distribution requirements. Our
integrated services provide clients a more efficient and comprehensive means of
delivering products and information to their end user customers. We enable our
clients to manage their sales channels efficiently by utilizing our core
competencies, which include:

- consultative services

- channel management, marketing and product strategy
- customized and flexible billing options
- promotions
- sales and marketing information and forecasting

- technology services

- electronic data interface, or EDI, integration
- interactive voice response, or IVR
- database management

- distribution services

- product ownership, consignment and warehousing
- fulfillment
- purchasing management
- inventory management

- end user customer support services

- inbound call center services and technical support
- returns and refunds processing

Since 1994, we have focused on the telecommunications industry because of
its high growth characteristics and increasing marketing needs. The majority of
our growth during this time period has come from sales and services related to
telecommunications products, specifically Caller ID equipment, including corded
and cordless telephones with built-in Caller ID and stand-alone devices.
Approximately 97% of our 1998 revenues and 98% of our revenues for the three
months ended March 31, 1999 came from sales to BellSouth, Pacific Bell,
Southwestern Bell and US West and their customers.

We intend to apply our existing core competencies to help our clients sell
their products through the internet. We expect our e-commerce solution to
provide our clients with an additional distribution channel for offering their
products and services to their end user customers. We believe that our "one stop
shop" approach appeals to large corporations that seek to reduce the expense and
management of outsourcing to numerous service providers.

In order to perform marketing support and distribution 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
business. By assuming responsibility for these tasks, we strive to improve the
quality of the non-core operations of our clients and to reduce their operating
costs.

We believe that the flexibility of our services allows us to attract
clients in many industries. We have provided technical literature and
point-of-sale distribution for a number of years to companies in other
industries, including Home Depot, Siemens and NAPA. In 1999, we began to sell
and distribute cable modems to customers of TCI.

28
<PAGE> 31

STRATEGY

Our strategy is to take advantage of trends towards outsourcing marketing
support and distribution services by utilizing our comprehensive services,
reputation for quality service and strong client relationships. We believe that
there are meaningful opportunities to grow our business with existing clients
and other large corporations increasingly seeking outsourcing solutions. The
following are key elements of this strategy.

- MAXIMIZE MARKETING SUPPORT AND PRODUCT DISTRIBUTION SERVICES TO EXISTING
TELECOMMUNICATIONS CLIENTS. We integrate ourselves into our telecommunications
clients' distribution channels so that we can help them increase the sales of
their products and services. We provide marketing support services and
distribution of Caller ID units, Caller ID telephones and other
telecommunications equipment for BellSouth, Pacific Bell, Southwestern Bell and
US West. According to industry sources, market penetration of Caller ID services
in the U.S. as of December 31, 1998 was approximately 30% and is expected to
reach approximately 75% by 2007. Management believes that there are significant
growth opportunities to provide Caller ID related products as the market
penetration of Caller ID increases. We expect other opportunities to arise as
consumer demand grows for advanced telecommunications products to support
network services, including DSL, e-mail, web-based technology, voice mail and
call waiting. We believe that we are well situated to market the next generation
of telecommunications products these clients provide to their customers.

- GROW TELECOMMUNICATIONS CLIENT BASE. We intend to expand our client base
in the telecommunications area by utilizing the industry expertise we have
developed to date. We believe we are well positioned to build relationships with
other clients in this industry, including independent local exchange carriers
and cable companies, by capitalizing on our long-standing relationships with
several leading clients in the telecommunications industry. In pursuit of this
strategy, we have recently begun to provide services to Bell Atlantic,
Ameritech, Cincinnati Bell and TCI.

- EXPAND CUSTOMER DISTRIBUTION CHANNELS THROUGH E-COMMERCE. We believe
that our marketing support and distribution services can be applied to
telecommunications companies and other businesses seeking to enter e-commerce by
outsourcing product distribution. When we focused on the telecommunications
business, we hired experienced industry personnel to provide consultative
support for various accounts. Likewise, in the e-commerce area we have hired the
personnel to help our clients sell their products through the internet. We
recently launched e-commerce distribution services for one client and are
soliciting other e-commerce distribution clients. Our strategy is to develop
relationships with companies that offer e-commerce solutions such as web
development, systems integration and similar services. Our goal is to complement
these companies' services with our distribution and end user support
capabilities. For example, we recently entered into a relationship with IBM to
make our distribution and call center support services available to certain IBM
e-commerce customers. Under this arrangement, IBM, at its option, will provide
information about our services to its e-commerce customers and will identify
these customers to us. As we apply our core competencies to the e-commerce
channel, we intend to become a "one-stop" distributor for manufacturers and
large corporations planning to use the internet as an additional sales channel.
Our goal is to offer solutions to product distribution via the internet that
will encompass:

- internet marketing and product strategy consultation,
- web concept and design,
- product ownership or consignment and warehousing of products,
- inventory and sales reporting,
- end user fulfillment,
- online order tracking,
- online secure payment processing,
- e-mail verification of orders,
- complete end user customer support,
- returns and refund processing and
- technical support.

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- BUILD LONG-TERM CLIENT RELATIONSHIPS. By assessing a client's industry,
products, services, processes and culture, we strive to develop solutions that
reduce the costs and investment required to deliver that client's marketing
support programs. Our services are designed to be an extension of our clients'
marketing and distribution efforts. We believe that this consultative
partnership, combined with extensive integration between our processes and
systems and those of our clients and our complete range of services, cultivates
long-term client relationships. We believe that this approach also creates
substantial opportunities to expand relationships with existing clients by
cross-selling the full range of our services. For example, we have provided
services to NAPA since 1994, Home Depot since 1993 and Siemens and BellSouth
since 1987 and have, in each case, expanded the scope of services provided to
these clients.

- CONTINUE INVESTMENT IN TECHNOLOGY. Historically, we have maintained a
commitment to the use of technology. We intend to continue to upgrade and
enhance our computer hardware and software applications. We expect that these
investments in our technology will permit us to continue to provide high
quality, flexible and powerful services to our clients. This commitment has
enabled us to provide value-added services like flexible end user billing for
telecommunications products. We are also able to establish automated interfaces
between our system and clients' systems. For example, we recently developed a
method to allow a client that did not have EDI links to transmit its product
order files to us using a customized internet web page to simulate an EDI
transmission. For other clients, we establish EDI links to allow them to deliver
information to us. Likewise, we transmit billing information for our
telecommunication clients' customers' phone bills by EDI. We believe that our
use of technology to connect clients to us provides a competitive advantage and
results in closer client relationships and reduced labor costs. We also believe
that continued technological advances, particularly those utilizing the
internet, will provide new opportunities for us to customize our services
further. We intend to use part of the proceeds of this offering to continue to
upgrade our computer and network hardware.

MARKETING SUPPORT SERVICES

We design customized, technology-based marketing support solutions for our
clients. We act as an extension of our clients in reaching their end user
customers. Our full range of services are described below and can be offered to
clients who sell products and services through the traditional sales channels or
the e-commerce channel.

CONSULTATIVE SERVICES

We offer consultative services to our clients regarding their sales,
marketing and distribution channels, which include:

Channel Management, Marketing and Product Strategy. We strive to create
strategic relationships with our clients. We assist our clients in managing
their sales channels by assigning a client services team to each client to
understand the client's operations, customer service processes, culture,
requirements and goals. We are often in the field to train our clients' sales
staffs and promote product sales. To the extent requested by a client, we will
assist in formulating its marketing strategy and address product forecasting,
pricing, sourcing and promotional opportunities. We also consult with clients
about the products they sell to their customers. In addition, we seek new
revenue sources for our clients and address process and product improvements.
For clients who seek e-commerce solutions, we can provide internet marketing and
product strategy. We believe our value-added channel management and strategy
services integrate us into our clients' sales channels and increase our value to
our clients.

Customized and Flexible Billing Options. We believe that one of the key
services we offer is convenient payment options for end users to pay for
products. For example, we offer our clients product billing solutions, like the
billing option program we pioneered for BellSouth in 1993 in which customers
could pay for Caller ID equipment and telephones through interest-free
installments on their phone bill. We can implement payment alternatives for
clients, like billing in installments on credit cards. As part of our e-commerce
strategy, we offer universal payment processing software in conjunction with
shopping cart

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software for sales through the e-commerce channel. We design the payment method
to fit the needs of our client, its customers and the distribution channel.

Promotions. We design and manage targeted promotional activities for our
clients. We consult with clients to determine which products to promote and how
to increase sales through coupons, rebate and other programs. We work with our
clients to determine how much rebate or discount will be given to the end user
and the manner in which an end user can access a program. Once established, we
implement and manage the promotion, providing such services as creative design,
verification, database management, results tracking, check printing and
disbursement and the program's back-end customer support.

Sales and Marketing Information and Forecasting. As a supplement to our
services, we provide sales reports and inventory analysis, program results and
detailed order processing information. We have developed flexible technologies
and reporting procedures that convert raw data gathered during the course of a
marketing support program into useful, customized reports. These reports provide
a basis for our client's responses to customer needs and inquiries. For example,
information obtained during a customer telephone call is captured by our
database marketing and management systems and is then incorporated into
customized reports. We use this information to help our clients prepare and
update forecasted sales information. These reports also are used by us and our
clients to monitor performance of various marketing programs. On-line functions
allow clients to monitor their programs in real-time to obtain comprehensive
trend analyses and modify program parameters as necessary. We provide clients
with customized reports via computer-to-computer transmission, disk, magnetic
tape and the internet. We also provide cost-center based accounting reports for
clients who utilize our services for subsidiary and intra-company fulfillment
transactions.

TECHNOLOGY SERVICES

Our technology helps us provide marketing support services to our clients.
We provide the following technology-based services:

Electronic Data Interface Integration. We use EDI to link our systems to
our clients' systems, which permits the automatic exchange of information. Our
telecommunications clients generally transmit sales orders for Caller ID
equipment and other products to us via EDI. We can also provide sales, billing
and individual customer order status updates to our clients through EDI links.
The open architecture of our systems facilitates adapting our EDI capabilities
to new clients and new marketing programs. We also develop methods to allow
clients without EDI capabilities to transmit their order files to us through
other methods.

Interactive Voice Response. In many cases, our call center services are
offered through IVR systems. These menu driven systems allow customers to route
their calls by selecting from several offerings. Our IVR systems include text to
speech capabilities, which allow the IVR systems to "read" specific, real-time
data from the client's databases and convert it into speech based on cues from a
caller. These systems generally reduce personnel and physical plant expenses
associated with a call center while expanding the operating capabilities of the
center. Technical support is also integrated into our IVR systems, so that an
end user can obtain answers to technical questions, from an automated system
rather than a call center representative, regarding the products they purchased.

Database Management. We can manage client databases independently or in
conjunction with other marketing support programs. Independent database
management begins with the client providing the information to establish the
database or our obtaining the data from information generated through a client's
web site. We then customize and manage this data to provide client reports. In
addition, our integrated marketing support programs generate information about
customers, demographics, recurring technical problems and other useful marketing
data. We are then able to create customized databases that evolve with our
ongoing marketing support and customer service programs. This data is a source
of valuable information as we evaluate ongoing programs and plan and design
future programs with our clients.

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DISTRIBUTION SERVICES

Effective distribution of our clients' products and services is another of
our core competencies and has been a key component in our revenue growth. Our
capabilities in this area are described below.

Product Ownership, Consignment and Warehousing. As a part of our
comprehensive approach, we often acquire products that our clients offer and
warehouse them in our distribution facility. At a client's option, we can also
hold its inventory on consignment, in which case we distribute consigned client
products to the client's end user customers for a per-unit fee. We believe that
our flexibility in product ownership models gives us a competitive advantage in
maintaining and building client relationships.

Fulfillment. We are committed to offering our clients' products and
services to their customers on a timely and accurate basis. Our personnel
process, pack and ship product orders and requests for promotional, technical
and educational literature, signage and point of sale materials for clients. We
use several custom-designed semi-automated packaging and labeling lines to pack
and ship products. By utilizing this technology, we are able to reduce labor
costs and provide more timely shipments to our clients' customers. We streamline
and customize the distribution procedures for each client based upon the product
request and the tracking, reporting and inventory controls necessary to
implement that client's marketing support program.

Purchasing Management. We place orders for products we distribute with
vendors selected by us or our clients. Our purchasing management services
include assisting a client in negotiating product pricing with the vendor, as
well as forecasting product quantities required for normal business programs or
promotions. By managing the timing of purchases, we are better able to control
the inventory risk that we incur when we own the products our clients offer,
while providing a value-added service to our clients.

Inventory Management. An integral part of our marketing support services
is the on-line monitoring and control of a client's inventory. We provide
automated inventory management to assure real-time stock counts of a client's
products, literature, signage and other items. These inventory systems enable us
to provide management information to maintain consistent and timely reorder
levels and supply capabilities and also enable the client to assess quickly
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 dial-up. 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.

END USER CUSTOMER SUPPORT SERVICES

Our fourth core competency relates to support services we provide to our
clients' customers. We believe this is critical to a comprehensive marketing
solution. These customer support services are described below.

Inbound Call Center Services and Technical Support. Our call center
representatives resolve questions regarding shipping, billing and technical
support as well as a variety of other questions. From time to time they may sell
advanced equipment and extended warranties to customers who call us.

Inquiries generally relate to a customer's purchase of a product or a
customer's need for ongoing assistance. These end users dial a support number
printed on the product or in the documentation accompanying the product. To
handle the call properly, Innotrac's automated call distributor identifies each
inbound call by the toll-free number dialed and immediately routes the call to
the IVR system or an Innotrac representative. The IVR system attempts to resolve
support 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 service representatives who is specially trained in the
applicable client's business and products. Our call center 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

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unique customer questions. Customer requests are generally resolved with a
single call, whether answered by a trained representative or our automated
systems.

As additional product information becomes available over the course of a
marketing program, we promptly integrate this information into our database to
ensure that IVR and representatives' answers are based upon the latest product
information.

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 for return of a product. 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 marketing support needs. Our information technology group, or IT Group,
has developed our database marketing support and management systems, which
utilize a UNIX-based open architecture comprised of multiple networked computers
and anchored by two Hewlett-Packard HP9000 K460 multiprocessing systems. We are
in the process of deploying an Oracle-based enterprise resource planning
software system, which features a fourth generation language technology that
will allow for quick and efficient changes to programs, systems and reports.
This system will standardize our computer services and allow for even greater
flexibility and capacity.

The open architecture of our computer system permits us to seamlessly
interact with many different types of client systems. The 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 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 storage facilities.

Our call center utilizes a sophisticated Rockwell Spectrum Automatic Call
Distributor, or ACD, switch to handle call management functions. This ACD system
has the capacity to handle 2,400 call center representatives simultaneously, and
is currently supporting over 450 representatives simultaneously. Additionally,
the ACD system is integrated with software designed to enable management to
automatically staff and supervise the call center based on call length and call
volume data compiled by the ACD system.

PERSONNEL AND TRAINING

Our success in recruiting, hiring and training large numbers of skilled
employees and obtaining large numbers of hourly employees during peak periods
for distribution and call center operations is critical to our ability to
provide high quality marketing 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 or given additional
training. To maintain good employee relations and to minimize employee turnover,
we offer competitive pay, hire primarily full-time employees who are eligible to
receive a full range of employee benefits, and provide employees with clear,
visible career paths.

As of April 30, 1999, we had 838 employees, of which approximately 98% were
full-time and 2% were part-time. 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.

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Currently, we are not a party to any collective bargaining agreements. None
of our employees is unionized. Although we consider our relationship with our
employees to be good, we have experienced occasional unionization initiatives,
particularly among our call center personnel.

COMPETITION

In tailoring services to client needs, we compete on the basis of quality,
reliability of service, efficiency, technical superiority, speed, flexibility
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, call center operations, database management
firms, web developers and e-commerce service providers. 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, many of whom have greater resources than Innotrac.

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, or the ECPA, and several state statutes. In March 1994, a Federal
Communications Commission, or FCC, report preempted certain state regulation of
interstate calling party number parameter, or CPN, based services, the
technology underlying Caller ID. This report requires 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 is not prohibited by any federal wiretap statute and that, in general,
the FCC has authority to preempt state laws that the FCC finds would hinder
federal communications policy on Caller ID services. Court decisions since the
FCC issued its March 1994 report have consistently held that Caller ID does not
violate any state or federal wiretap statute.

In May 1995, the FCC narrowed its March 1994 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 specifically preempted a California Public
Utilities Commission, or CPUC, per-line blocking default policy, which required
that all emergency service organizations and subscribers with nonpublished
numbers, who failed to communicate their choice between per-call blocking and
per-line blocking, be served with a per-line blocking.

The FCC's revised rules and regulations also require carriers to explain to
their subscribers that their telephone numbers may be transmitted to the called
party and that there is a privacy mechanism (i.e., the "blocking" feature)
available on interstate calls, and explain 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. The CPUC has approved
the education plan of Pacific Bell, whose Caller ID market includes California.

The Telecommunications Act of 1996 introduced restrictions on
telecommunications carriers' usage of customer proprietary network information,
or 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. The FCC interprets the CPNI restrictions to permit
telecommunications carriers, including BellSouth, Pacific Bell and US West, to
use CPNI without customer approval to market services that are related to the

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customer's existing service relationship with his or her 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, 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 we
currently outsource to another company. Outbound teleservices are regulated by
the rules of the FCC under the Federal Telephone Consumer Protection Act of
1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 and various state regulations regarding telephone solicitations. We believe
that we are in compliance with these federal statutes and the FCC 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.

Our new e-commerce business may be subject to many of the same laws and
regulations. It is uncertain how some of these existing laws and regulations
will be applied to our e-commerce business, if at all. Unfavorable
interpretations or applications of these laws in the e-commerce context,
particularly with respect to privacy issues, could impede our e-commerce
business. New laws and regulations specifically addressing e-commerce could also
affect us.

We work closely with our clients, companies to which we outsource outbound
teleservices and their respective advisors to ensure that we and our client 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 effect,
if any, this change would have on us or our industry.

INTELLECTUAL PROPERTY

We have used the service mark "Innotrac" since 1985. We have obtained
Georgia state registrations and have filed applications for federal and European
Community registration of this service mark and other marks used by us in our
business. The "innotrac.com" domain name has been a registered domain name since
1995. Due to the possible use of identical or phonetically similar service marks
by other companies in different businesses, there can be no assurance that the
United States Patent and Trademark Office will grant our registration of our
service mark "Innotrac" or the other marks we are seeking to register, or that
our service marks will not be challenged by other users. Our operations
frequently incorporate proprietary and confidential information. In accordance
with industry practice, 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.

PROPERTIES

Our headquarters and distribution 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 is
distribution space. This site also includes approximately 3.5 acres that will be
available for Innotrac's expansion requirements. 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 to exercise this purchase
option.

We provide teleservices through our call center located in Duluth, Georgia.
We currently lease the center on a month-to-month basis and are in the process
of negotiating a new lease agreement. The call center is currently configured
with approximately 460 workstations and has room to expand to approximately 700
workstations. It currently operates from 8:00 a.m. until midnight Monday through
Friday and from 9:00 a.m. to 6:00 p.m. on Saturday.

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In June 1999, we entered into a lease for a new facility in Pueblo,
Colorado with an initial term of five years with two five year renewal options.
The facility provides approximately 87,000 square feet of floor space. We plan
to use approximately 45,000 square feet for a second call center, which will
include quality assurance, administrative, training and management space. The
call center will eventually support about 350 workstations. We anticipate
opening the new call center in the third quarter of 1999. The remaining 42,000
square feet is available for future development as distribution space.

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.
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.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors are as follows:

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION TERM EXPIRES
- ---- --- -------- ------------
<S> <C> <C> <C>
Scott D. Dorfman(1)(3)............. 41 President, Chief Executive Officer, 2001
and Chairman of the Board
David L. Ellin(1).................. 40 Senior Vice President, Chief 2001
Operating Officer, and Director
Larry C. Hanger.................... 44 Senior Vice President -- Business 2002
Development and Director
John H. Nichols, III............... 45 Senior Vice President, Chief --
Financial Officer and Secretary
Don L. Colter, Jr.................. 38 Vice President -- Operations --
Stephen J. Walden.................. 55 Vice President -- Electronic --
Commerce
Will Hendrick...................... 42 Vice --
President -- Telecommunications
Bruce V. Benator(1)(2)............. 41 Director 2002
Martin J. Blank(2)(3).............. 52 Director 2000
William H. Scott, III(2)(3)........ 52 Director 2000
</TABLE>

- ---------------

(1) Member of executive committee
(2) Member of audit committee
(3) Member of compensation committee

Mr. Dorfman founded Innotrac and has served as President, Chief Executive
Officer and Chairman of the Board since its inception in 1984. Prior to founding
Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., 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 us in 1986 and has served as Senior Vice President and
Chief Operating Officer since November 1997 and as a director since December
1997. He 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 has served as Vice
President -- Business Development since November 1997 and as a director since
December 1997. He was promoted to Senior Vice President in April 1999. He served
as Innotrac's Department 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, 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. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer. He was appointed Secretary in July 1998 and was promoted to
Senior Vice President in April 1999. From 1993 until November 1997 he served as
Vice President and Chief Financial Officer for Storehouse, Inc., a furniture
retailer. From 1982 until 1993, Mr. Nichols was employed by Contel Corporation
and GTE Corporation in various senior financial management positions in both the
telephone and cellular telephone business units. Mr. Nichols is a certified
public accountant.

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Mr. Colter joined Innotrac in 1995 and has served as Vice
President -- Operations since November 1997. He served as Innotrac's Chief
Financial Officer from 1995 to November 1997. Prior to joining Innotrac, from
1993 to 1995, Mr. Colter was the corporate controller of Gay & Taylor/Thomas
Howell Group, an international insurance adjusting company. From 1991 to 1993,
Mr. Colter was corporate controller of Outdoor West, Inc., an outdoor
advertising company. Mr. Colter is a certified public accountant and has over 15
years of experience in the financial and accounting industry.

Mr. Walden joined Innotrac in January 1999 as Vice President -- Electronic
Commerce. From 1998 to 1999, he served as Senior Vice President for Internet
Strategy at Premiere Technologies, Inc., responsible for managing a new,
internet-based product line integrating telephony services with internet
technology. Prior to that, from 1996 to 1998, he was Vice President of Content
and Commerce for BellSouth.net, a BellSouth subsidiary. Mr. Walden was President
of Walden Associates, a media and technology consulting group, from 1995 to
1996. From 1988 to 1995, he held positions with Prodigy Services Company.
Earlier in his career, he was employed with Grey Advertising, Warner Amex Cable
Communications, Time Inc.'s Manhattan Cable TV, and Home Box Office.

Mr. Hendrick joined Innotrac in April 1999 as Vice President --
Telecommunications. Prior to joining Innotrac, from November 1997 to February
1999 he served as Vice President and General Manager for the former
telecommunications division of InteliData Technologies Corp., which designed and
distributed consumer telephone products. He also served as Vice President --
Sales at InteliData and its predecessor from August 1995 to November 1997. He
held the position of Senior Director -- Product Management with BellSouth from
January 1993 to July 1995, and has also served as Director -- Product
Development for that company. Mr. Hendrick has 20 years experience in the
telecommunications industry.

Mr. Benator is the Managing Partner of Williams Benator & Libby, LLP,
certified public accountants, and has been a director since December 1997. He
has been affiliated with the firm since 1984 and is the firm's Director of
Accounting and Auditing Services. From 1979 to 1984, Mr. Benator was employed by
Ernst & Young, LLP.

Mr. Blank has been a director since December 1997 and is a co-founder of
Automobile Protection Corporation, or APCO, a publicly held corporation engaged
in the marketing of extended vehicle service contracts and warranty programs.
Mr. Blank has served as Secretary and Director of APCO since its inception in
1984 and as Chairman of the Board and Chief Operating Officer since 1988. Mr.
Blank's experiences prior to co-founding APCO include the practice of law and
the representation of and financial management for professional athletes. Mr.
Blank is admitted to the bar in the States of Georgia and California.

Mr. Scott has been a director since December 1997 and has served as
President and Chief Operating Officer of ITC Holding Company, Inc., the parent
company of ITC Service Company, since 1991. He has been a director of ITC
Holding Company since 1989, and served as its Executive Vice President from 1989
to 1991. Mr. Scott is a director of nFront, Inc., a software and outsourcing
company providing internet banking solutions to small and mid-sized banks;
Powertel, Inc., a wireless telecommunications services company operating in the
southeastern United States; KNOLOGY Holdings, Inc., a broadband
telecommunications services company currently operating in Alabama, Florida,
Georgia and South Carolina; ITC DeltaCom, Inc., a full service
telecommunications provider to business customers in the southeastern United
States; and MindSpring Enterprises, Inc., an internet service provider.

MEETINGS AND COMMITTEES OF THE BOARD

The board of directors meets on a regular basis to supervise, review, and
direct Innotrac's business and affairs. The board of directors has established
an executive committee, an audit committee and a compensation committee to which
it has assigned certain responsibilities in connection with the governance and
management of our affairs. We have no standing nominating committee or other
committee performing similar functions.

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<PAGE> 41

Executive Committee. The executive committee, pursuant to authority
delegated by the board, from time to time considers certain matters in lieu of
convening a meeting of the full board, subject to any restrictions in applicable
law related to the delegation of certain powers to a committee of the board.
Messrs. Dorfman, Ellin and Benator comprise the members of the executive
committee.

Audit Committee. The audit committee recommends the appointment of
independent public accountants, reviews the scope of audits proposed by the
independent public accountants, reviews internal audit reports on various
aspects of corporate operations and periodically consults with the independent
public accountants on matters relating to internal financial controls and
procedures. Messrs. Benator, Blank and Scott comprise the members of the audit
committee.

Compensation Committee. The compensation committee is responsible for the
review and approval of compensation of employees above a certain salary level,
the review of management recommendations relating to incentive compensation
plans, the administration of Innotrac's stock option and senior executive
compensation plans, the review of compensation of directors and consultation
with management and the board on senior executive continuity and organizational
matters. Messrs. Dorfman, Blank and Scott comprise the members of the
compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid or accrued by
Innotrac for services rendered during the fiscal years ended December 31, 1998
and 1997, to or for Innotrac's chief executive officer and each of its four
other most highly compensated executive officers (the "Named Executive
Officers"). The total amount of perquisites, personal benefits and other annual
compensation paid to the Named Executive Officers do not in any case exceed the
lesser of $50,000 or ten percent of an officer's total salary and bonus. None of
the executive officers has an employment agreement with Innotrac.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
FISCAL ------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- ------------------------------ ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Scott D. Dorfman,.......................... 1998 $356,855 $250,000 -- $26,218(1)
President, Chairman of the Board and 1997 226,179 25,000 -- 9,526
Chief Executive Officer
David L. Ellin............................. 1998 145,000 87,000 -- 10,241(2)
Senior Vice President and Chief Operating 1997 137,692 70,000 155,000 --
Officer
Larry C. Hanger............................ 1998 100,000 100,000 -- 500(2)
Senior Vice President 1997 89,343 35,000 25,000 --
John H. Nichols, III....................... 1998 125,000 75,000 -- 1,502(2)
Senior Vice President, Chief Financial 1997 10,576 4,807 20,000 --
Officer and Secretary(3)
Don L. Colter.............................. 1998 92,606 46,300 -- 3,457(2)
Vice President 1997 78,832 40,000 25,000 --
</TABLE>

- ---------------

(1) Includes (a) Innotrac's matching contribution to deferred compensation plan
in the approximate amount of $24,232 and (b) the full dollar amount of
premiums, $1,986, paid by Innotrac with respect to split-dollar life
insurance on the life of Mr. Dorfman.
(2) Represents Innotrac's matching contribution to deferred compensation plan.
(3) Mr. Nichols's employment by Innotrac commenced November 1997.

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<PAGE> 42

Innotrac did not grant any options to its Named Executive Officers during
fiscal 1998, nor were any company-granted options exercised by any Named
Executive Officers. The following table sets forth the year-end value of
unexercised options held by the Named Executive Officers.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NO. OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Scott D. Dorfman,............................... -- -- -- --
President, Chairman of the Board
and Chief Executive Officer
David L. Ellin.................................. 55,000 100,000(2) $456,325 $902,500
Senior Vice President and Chief
Operating Officer
Larry C. Hanger................................. -- 25,000(2) -- 225,625
Senior Vice President
John H. Nichols, III............................ -- 20,000(2) -- 180,500
Senior Vice President, Chief
Financial Officer and Secretary
Don L. Colter................................... -- 25,000(2) -- 225,625
Vice President
</TABLE>

- ---------------

(1) As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is calculated based on the closing
sale price of Innotrac's common stock on the Nasdaq National Market as of
the last business day of its fiscal year, December 31, 1998, which was
$18.125 per share.
(2) The option becomes exercisable with respect to 50% of the underlying shares
on November 24, 1999; with respect to an additional 25% of the underlying
shares on November 24, 2000; and with respect to the remaining 25% of the
underlying shares on November 24, 2001.

DIRECTORS' COMPENSATION

We pay our outside directors an annual fee of $10,000, and additional fees
of $250 and $100, respectively, for each board meeting and committee meeting
attended. We also reimburse all directors for their travel and other expenses
incurred in connection with attending board or committee meetings.

We intend to grant additional options for 5,000 shares annually to each of
our outside directors, on the day we hold our annual meeting of shareholders.
The exercise price will be the closing price of our common stock reported on the
Nasdaq National Market on the date of grant. One-third of the options will be
immediately exercisable, the next third will vest on the first anniversary of
the date of grant, and the last third, on the second anniversary. On May 11,
1999, we granted options for 5,000 shares -- 1,667 of which are presently
exercisable -- to each of Messrs. Benator, Blank and Scott under this plan.
These options are exercisable at $17.688 per share.

In addition, on May 6, 1998 we granted each of Messrs. Benator, Blank and
Scott, and Mr. Campbell B. Lanier, III, a former director, immediately
exercisable options to purchase 10,000 shares of common stock at an exercise
price of $12.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Dorfman, Blank and Scott comprised the members of the compensation
committee during fiscal 1998. While Mr. Dorfman is our President and Chief
Executive Officer, neither Mr. Blank nor Mr. Scott is a current officer or
former officer of Innotrac. We have entered into some transactions with Mr.
Dorfman as described in "Related Party Transactions."

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<PAGE> 43

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information concerning the beneficial
ownership of common stock, which is the only class of voting stock of Innotrac,
by:

- each person known to Innotrac to beneficially own more than 5% of the
common stock,
- each director and Named Executive Officer,
- all of Innotrac's directors and executive officers as a group and
- the selling shareholders.

Unless otherwise indicated below, at July 21, 1999, the persons named below
had sole voting and investment power with respect to all shares of the common
stock shown as beneficially owned by them:

<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) PRIOR TO OFFERING AFTER OFFERING(2)
- ---------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Scott D. Dorfman................. 6,074,162(3)(4) 67.4% 52.0%(5)
SAFECO Corporation............... 917,600(6)(7) 10.2 8.3
SAFECO Asset Management
Company........................ 808,100(6)(8) 9.0 7.3
SAFECO Common Stock Trust........ 676,000(6)(9) 7.5 6.1
ITC Service Company.............. 383,333 4.3 2.6(10)
David L. Ellin................... 87,500(11) 1.0 *
John H. Nichols, III............. 2,000 * *
Don L. Colter.................... 1,000 * *
Bruce V. Benator................. 11,667(12) * *
Martin J. Blank.................. 13,667(12) * *
William H. Scott, III............ 398,000(12)(13) 4.4 2.7(14)
All directors and executive
officers as a group (10
persons)....................... 6,587,996 72.4% 55.2%(15)
</TABLE>

- ---------------

* Denotes less than 1%

(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares that the person or group has the right
to acquire within 60 days or with respect to which the person has or shares
voting or investment power. For purposes of computing the percentages of
outstanding shares held by each person or group of persons, shares which
the person or group has the right to acquire within 60 days after such date
are deemed to be outstanding for purposes of computing the percentage for
the person or group but are not deemed to be outstanding for the purpose of
computing the percentage of any other person or group. As of July 21, 1999,
there were 9,009,995 shares of common stock outstanding.
(2) Assumes no exercise of the over-allotment options Innotrac and the selling
shareholders have granted to the underwriters.
(3) Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097.
(4) Includes an aggregate of 148,033 shares owned by Mr. Dorfman's wife
individually, as custodian for the benefit of his children and through
trusts for the benefit of Mr. Dorfman's children.
(5) If the over-allotment option is exercised in full, Mr. Dorfman will own
49.7% of the outstanding shares of common stock.
(6) Information given at February 11, 1999.
(7) The address of SAFECO Corporation ("SAFECO") is SAFECO Plaza, Seattle,
Washington 98185. According to a joint Schedule 13G filed February 11,
1999, SAFECO is the parent holding company of SAFECO Asset Management
Company ("SAFECO AMC") and disclaims beneficial ownership of the reported
shares, which include the shares reported by SAFECO AMC and SAFECO Common
Stock Trust ("SAFECO CST"). The reported shares are beneficially owned by
(a) registered investment companies for which SAFECO AMC serves as
investment adviser and (b) employee benefit plans for which SAFECO serves
as plan sponsor.
(8) The address of SAFECO AMC is 601 Union Street, Suite 2500, Seattle,
Washington 98101. SAFECO AMC is an investment adviser and disclaims
beneficial ownership of the reported shares, which are beneficially owned
by registered investment companies for which SAFECO AMC serves as
investment adviser, and include the shares reported by SAFECO CST.
(9) The address of SAFECO CST is 10865 Willows Road NE, Redmond, Washington
98052. SAFECO CST is an investment company for which SAFECO AMC serves as
investment adviser.
(10) If the over-allotment option is exercised in full, ITC Service Company will
own 1.9% of the outstanding shares of common stock.
(11) Includes 55,000 shares subject to presently exercisable stock options.
(12) Includes 11,667 shares subject to presently exercisable stock options.

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<PAGE> 44

(13) Includes 383,333 shares owned of record by ITC Service Company, with
respect to which Mr. Scott is an officer and director. Mr. Scott disclaims
beneficial ownership of these shares.
(14) If the over-allotment option is exercised in full, Mr. Scott may be deemed
to beneficially own 2.0% of the outstanding shares of common stock.
(15) If the over-allotment option is exercised in full, the directors and
executive officers as a group may be deemed to beneficially own 52.3% of
the outstanding shares of common stock.

Scott D. Dorfman is the founder, Chairman of the Board, President and Chief
Executive Officer of Innotrac. He is one of the selling shareholders in this
offering. Mr. Dorfman is offering 300,000 of his shares of common stock and has
granted the underwriters an option to purchase 200,000 shares at the public
offering price to cover any over-allotments. Mr. Dorfman will beneficially own
5,774,162 shares of Innotrac's common stock after the offering or 5,574,162
shares if the over-allotment option is exercised in full.

ITC Service Company, or ITC, is the other selling shareholder in this
offering. Mr. Scott, one of our directors, is also a director and officer of
ITC. ITC is offering 100,000 shares of common stock and has granted the
underwriters an option to purchase 75,000 shares at the public offering price to
cover over-allotments. ITC will beneficially own 283,333 shares after the
offering, or 208,333 shares if the over-allotment option is exercised in full.

Both Mr. Dorfman and ITC have engaged in some transactions with us. See
"Related Party Transactions" for a description of these matters. We will not
receive any of the proceeds of any sales of the shares by the selling
shareholders. We will bear substantially all expenses of the offering.

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<PAGE> 45

RELATED PARTY TRANSACTIONS

FORMATION AND CONSOLIDATION RELATED MATTERS

Scott D. Dorfman, our President, Chairman of the Board and Chief Executive
Officer and one of the selling shareholders in this offering, guaranteed our
obligations under our previous credit facility with a bank, which consisted of a
$25 million revolving line of credit and a $2 million term loan. He also
guaranteed a subordinated note in the principal amount of $3.5 million which
bore interest at the prime rate plus 8.0% per annum payable to ITC, the other
selling shareholder in this offering. The bank guarantee terminated upon the
completion of our initial public offering in May 1998 and the subordinated note
was repaid with a portion of the proceeds from the initial public offering.

In connection with the Consolidation, Mr. Dorfman, together with his
children, and ITC received distributions of $7.1 million and $400,000,
respectively, from certain pass-through entities that were parties to the
Consolidation. The distributions represented a portion of these entities'
accumulated earnings. In addition, each of the entities reimbursed Mr. Dorfman
and ITC for estimated tax payments with respect to their earnings for 1997 and
1998. Mr. Scott, who has been an Innotrac director since December 1997, and Mr.
Campbell B. Lanier, III, an Innotrac director from December 1997 until May 1999,
are officers and directors of ITC. They are also officers, directors and
principal shareholders of ITC Holding Company, the parent company of ITC.

As a result of the Consolidation, and as consideration for their respective
interests in the affiliated entities that were parties to the Consolidation,
immediately after the Consolidation shares of Innotrac common stock were owned
as follows: Mr. Dorfman -- 6,116,662 shares (including 148,033 shares owned
individually by his wife, as custodian for the children and through trusts for
the benefit of his children and taking into account some subsequent
dispositions) and ITC -- 383,333 shares.

In February 1998, we redeemed for approximately $390,000 from Arnold
Dorfman, the father of Scott D. Dorfman, all of his shares in one of the
entities that was a party to the Consolidation. In December 1998, we redeemed
for approximately $590,000 from Arnold Dorfman all of his shares in a second
affiliated entity that was a party to the Consolidation.

We lease a single engine aircraft from a company wholly-owned by Scott D.
Dorfman pursuant to a three-year lease that provides for annual rent of $72,000.
We are responsible for maintenance, insurance, taxes, fuel and other expenses
associated with the aircraft.

During 1997, we paid $145,914 in fees to Williams Benator & Libby, LLP,
certified public accountants, for accounting and consulting services. In 1998,
we paid them $94,000 in fees. Bruce V. Benator, one of our directors, is
Managing Partner of Williams Benator & Libby, LLP.

POLICY RESPECTING RELATED PARTY TRANSACTIONS

On December 11, 1997, the board of directors adopted a policy that any
transactions between Innotrac and any of its officers, directors, or principal
shareholders or affiliates must be on terms no less favorable than those that
could be obtained from unaffiliated parties in comparable situations and must be
approved by the audit committee of the board of directors.

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<PAGE> 46

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock and could impair our ability to raise
capital through the sale of equity securities. Upon completion of this offering,
we will have 11,109,995 shares of common stock outstanding (11,209,995 shares if
the underwriters' over-allotment option is exercised in full). Of these shares,
approximately 5 million shares (including the 2.5 million sold in this
offering), or 5.4 million shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable without restrictions or further
registration under the Securities Act, unless held by "affiliates" of Innotrac
as that term is defined in Rule 144 under the Securities Act. Any shares sold to
affiliates may not be sold without registration under the Securities Act, or an
applicable exemption such as Rule 144.

The outstanding shares of common stock that will not be freely tradeable
after this offering (estimated to be 6.1 million shares, or 5.8 million shares
if the underwriters' over-allotment option is fully exercised) were issued and
sold by Innotrac in private transactions in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act and are restricted
securities under Rule 144. These shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including the exemption pursuant to Rule 144.

In general, under Rule 144 as currently in effect, a person who has
beneficially owned any of our restricted shares for at least one year would be
entitled to sell in broker's transactions or to market makers within any
three-month period a number of shares that does not exceed (1) the greater of
one percent of the then outstanding shares of our common stock (estimated to be
about 111,000 shares after completion of this offering) or (2) the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the SEC. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current public
information concerning Innotrac.

A person (or persons whose shares are aggregated) who is not an affiliate
of Innotrac at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
those shares under Rule 144(k) without regard to the availability of current
public information, volume limitations, manner of sale provisions, or notice
requirements. The above is a summary of Rule 144 and is not intended to be a
complete description thereof.

We have agreed that we will not, for a period of 90 days after the date of
this prospectus, without the prior written consent of Bear, Stearns & Co. Inc.,
issue, sell, offer or agree to sell, grant any option to purchase, or otherwise
dispose of any shares of our common stock or any securities convertible,
exchangeable or exercisable for such shares, except that, during the 90-day
lock-up period, we may (1) issue common stock pursuant to the exercise of
currently outstanding stock options under our Stock Option and Incentive Award
Plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period. The selling shareholders and our
executive officers and directors have agreed that they will not, for a period of
90 days after the date of this prospectus, without the prior written consent of
Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option
to purchase, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934 or otherwise dispose of any shares of our common stock or any securities
convertible, exchangeable or exercisable for such shares. Upon completion of
this 90-day period, the shares owned by the selling shareholders and our
executive officers and directors will become eligible for immediate public
resale, subject to the limitations of Rule 144.

We have filed a registration statement on Form S-8 under the Securities Act
to register a total of 800,000 shares of common stock issuable under the
Innotrac Corporation Stock Option and Incentive Award Plan. Shares issued upon
the exercise of stock options or other rights thereunder will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates of Innotrac. Options for 472,150 shares of common stock
were outstanding as of July 21, 1999, 90,001 of which are currently exercisable.
44
<PAGE> 47

No prediction can be made as to the effect, if any, that sales of common
stock by existing shareholders in reliance upon Rule 144 or otherwise will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of common stock in the public market, or the perception that
such sales could occur, could adversely affect the prevailing market price.
These sales may also make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that we deem
appropriate.

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<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

Innotrac's authorized capital stock consists of 50,000,000 shares of common
stock, $0.10 par value per share, and 10,000,000 shares of preferred stock,
$0.10 par value per share, having the rights and privileges as the board of
directors may from time to time determine. Immediately prior to this offering,
9,009,995 shares of common stock and no shares of preferred stock were issued
and outstanding.

The following summary of our capital stock does not purport to be complete.
It is qualified in its entirety by reference to Innotrac's amended and restated
articles of incorporation, its amended and restated bylaws and the rights
agreement between Innotrac and Reliance Trust Company as rights agent, filed as
exhibits to the registration statement of which this prospectus forms a part,
and the applicable provisions of the Georgia Business Corporation Code.

COMMON STOCK

Holders of common stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting rights
in the election of directors. Accordingly, the holders of a majority of the
outstanding shares of common stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so. All
shares of common stock are entitled to share equally in any dividends Innotrac's
board of directors may, in its discretion, declare out of sources legally
available therefor. See "Dividend Policy." If Innotrac dissolves, liquidates or
winds up, holders of common stock are entitled to receive on a ratable basis all
of our assets available for distribution, in cash or in kind, after payment or
provision for payment of all of our debts and liabilities and any preferential
amount due to holders of preferred stock. Holders of common shares do not have
preemptive or other subscription rights, conversion or redemption rights, or any
rights to share in any sinking fund. All currently outstanding common stock
shares are, and the shares offered hereby (when sold in the manner contemplated
by this prospectus) will be, fully paid and nonassessable.

PREFERRED STOCK

Our articles of incorporation authorize the board of directors, from time
to time, to issue shares of preferred stock in one or more series. They may
establish the number of shares to be included in any such series, and may fix
the designations, powers, preferences and rights (including voting rights) of
the shares of each such series and any qualifications, limitations, or
restrictions on preferred shares. No shareholder authorization is required for
the issuance of these shares of preferred stock unless imposed by then
applicable law. Shares of preferred stock may be issued for any general
corporate purposes, including acquisitions. The board of directors may issue one
or more series of preferred stock with rights more favorable with regard to
voting, dividends and liquidation than the rights of holders of common stock.
Issuance of a series of preferred stock also could be used for the purpose of
preventing a hostile takeover of Innotrac, even if the takeover is considered to
be desirable by the holders of the common stock. Issuance of a series of
preferred stock could otherwise adversely affect the voting power of the holders
of common stock, and could serve to perpetuate the board of directors' control
of Innotrac under certain circumstances. Other than the issuance of the series
of preferred stock previously authorized by the board of directors in connection
with the shareholder rights plan described below, Innotrac has no current plans
that would result in the issuance of any shares of preferred stock.

CERTAIN ANTI-TAKEOVER PROVISIONS OF INNOTRAC'S ARTICLES OF INCORPORATION AND
BYLAWS

Staggered Board of Directors; Removal; Filling Vacancies. The articles of
incorporation provide that the board of directors will consist of between five
and eleven directors. The board currently consists of six directors, three of
whom are not Innotrac employees. The board of directors is divided into three
classes of directors serving staggered three-year terms. The classification of
directors makes it more difficult for shareholders to change the composition of
the board of directors. Innotrac believes, however, that the longer time
required to elect a majority of a classified board of directors will help to
ensure the continuity and stability of Innotrac's management and policies. The
classification provisions could also have the effect

46
<PAGE> 49

of discouraging a third party from accumulating large blocks of Innotrac's stock
or attempting to obtain control of Innotrac, even though such an attempt might
be beneficial to Innotrac and its shareholders. Accordingly, shareholders could
be deprived of certain opportunities to sell their shares of common stock at a
higher price than might otherwise be the case. The shareholders will be entitled
to vote on the election or removal of directors, with each share entitled to one
vote.

The bylaws generally provide that, unless the board of directors otherwise
determines, any vacancies will be filled by the affirmative vote of a majority
of the remaining directors, even if less than a quorum. A director may be
removed only with cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a meeting of the shareholders
called for the purpose of removing such director. A vacancy resulting from an
increase in the number of directors may be filled by action of the board of
directors.

Shareholder Rights Plan. On December 11, 1997, our board of directors
declared a dividend of one preferred share purchase right for each share of
Innotrac common stock. Each share purchase right entitles the registered holder
to purchase from Innotrac one one-hundredth (1/100) of a share of Innotrac
Series A Participating Cumulative Preferred Stock, par value $0.10 per share, at
a price of $60.00 per one one-hundredth of a Series A preferred share. The
exercise price and the number of Series A preferred shares issuable upon
exercise are subject to adjustments from time to time to prevent dilution. The
share purchase rights are not exercisable until the earlier to occur of (1) 10
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") have acquired beneficial ownership of
15% or more of the outstanding common stock or (2) 10 business days following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
common stock.

In the event that Innotrac is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a share purchase right, other than
share purchase rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the share purchase right,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the exercise price of
the share purchase right. In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, proper provision shall be made
so that each holder of a share purchase right, other than share purchase rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise, without payment of the
exercise price, that number of shares of Innotrac common stock having a market
value of the exercise price of the share purchase right.

Series A preferred shares purchasable upon exercise of the share purchase
rights will not be redeemable. Each Series A preferred share will be entitled to
a minimum preferential quarterly dividend payment of $1.00 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of common stock. In the event Innotrac liquidates, the holders of the Series A
preferred shares will be entitled to a minimum preferential liquidation payment
of $100.00 per share but will be entitled to an aggregate payment of 100 times
the payment made per share of common stock. Each Series A preferred share will
have 100 votes, voting together with the shares of common stock. Finally, in the
event of any merger, consolidation or other transaction in which shares of
common stock are exchanged, each Series A preferred share will be entitled to
receive 100 times the amount received per share of common stock. These rights
are protected by customary antidilution provisions.

Prior to the date the share purchase rights are exercisable, the share
purchase rights may not be detached or transferred separately from the common
stock. The share purchase rights will expire on January 1, 2008, unless that
expiration date is extended or unless the share purchase rights are earlier
redeemed or exchanged by Innotrac, in each case, as described below. At any time
prior to the acquisition by a person or group of affiliated or associated
persons of beneficial ownership of 15% or more of the outstanding common stock,
Innotrac's board of directors may redeem the share purchase rights in whole,

47
<PAGE> 50

but not in part, at a price of $0.001 per share purchase right. Immediately upon
any redemption of the share purchase rights, the right to exercise the share
purchase rights will terminate and the only right of the holders of share
purchase rights will be to receive the redemption price. A more detailed
description and terms of the share purchase rights are set forth in a rights
agreement between Innotrac and Reliance Trust Company as rights agent. This
rights agreement could have the effect of discouraging tender offers or other
transactions that might otherwise result in Innotrac shareholders receiving a
premium over the market price for their common stock.

Ability to Consider Other Constituencies. The articles of incorporation
permit the board of directors, in determining what is believed to be in the best
interest of Innotrac, to consider the interests of its employees, customers,
suppliers and creditors, the communities in which offices or other
establishments of Innotrac are located and all other factors the directors may
consider pertinent, in addition to considering the effects of any actions on
Innotrac and its shareholders. Pursuant to this provision, the board of
directors may consider numerous judgmental or subjective factors affecting a
proposal, including certain non-financial matters. On the basis of these
considerations, the board may oppose a business combination or other transaction
which, viewed exclusively from a financial perspective, might be attractive to
some, or even a majority, of our shareholders.

INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS

Our bylaws provide for indemnification of directors to the fullest extent
permitted by Georgia law. The articles of incorporation, to the extent permitted
by Georgia law, eliminate or limit the personal liability of directors to
Innotrac and its shareholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this offering. To the extent that
limitation of liability or indemnification for liabilities under the Securities
Act may be permitted to directors, officers or persons controlling Innotrac
under the foregoing provisions, Innotrac has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Our bylaws also allow us to
indemnify our officers, employees, agents and other persons to the fullest
extent permitted by Georgia law. Our bylaws obligate us, under certain
circumstances, to advance expenses to our directors and officers in defending an
action, suit or proceeding for which indemnification may be sought. We have
entered into indemnification agreements with our directors and executive
officers.

Our bylaws also provide that we have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents against any liability asserted against that person or
incurred by that person in these capacities, where we would have the power to
indemnify that person against these liabilities under Georgia law. We can also
indemnify someone serving in one of these capacities for us who is or was
serving as a director, officer, trustee, general partner, employee or agent of
one of our subsidiaries or, at our request, of any other organization, against
these liabilities. We maintain insurance on behalf of all of our directors and
executive officers.

OTHER MATTERS

Innotrac's common stock has traded on the Nasdaq National Market under the
symbol "INOC" since May 7, 1998.

The transfer agent and registrar for Innotrac's common stock is Reliance
Trust Company, Atlanta, Georgia.

48
<PAGE> 51

UNDERWRITING

Innotrac, the selling shareholders and the underwriters for the offering
named below, for whom Bear, Stearns & Co. Inc., The Robinson-Humphrey Company,
LLC and J.C. Bradford & Co. are acting as representatives, have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions set forth in the underwriting agreement, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc..................................... 1,035,000
The Robinson-Humphrey Company, LLC.......................... 345,000
J.C. Bradford & Co.......................................... 345,000
Banc of America Securities LLC.............................. 50,000
BancBoston Robertson Stephens Inc........................... 50,000
Deutsche Bank Securities Inc................................ 50,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 50,000
A.G. Edwards & Sons, Inc.................................... 50,000
ING Baring Furman Selz LLC.................................. 50,000
Lehman Brothers Inc......................................... 50,000
PaineWebber Incorporated.................................... 50,000
Prudential Securities Incorporated.......................... 50,000
Salomon Smith Barney Inc.................................... 50,000
JWGenesis Securities, Inc................................... 50,000
Aegis Capital Corp.......................................... 25,000
Robert W. Baird & Co. Incorporated.......................... 25,000
George K. Baum & Company.................................... 25,000
Brean Murray & Co., Inc..................................... 25,000
Wachovia Securities, Inc.................................... 25,000
U.S. Bancorp Piper Jaffray Inc.............................. 25,000
Raymond James & Associates, Inc............................. 25,000
Redwine & Company, Inc...................................... 25,000
B.C. Ziegler and Company.................................... 25,000
---------
Total............................................. 2,500,000
=========
</TABLE>

If the underwriters sell more than the total number set forth in the table
above, they have an option to buy up to an additional (1) 275,000 shares from
the selling shareholders and (2) 100,000 shares from Innotrac to cover such
sales. They may exercise that option, in whole or in part, at any time within 30
days after the date of this prospectus. If any shares are purchased pursuant to
this option, the underwriters will purchase the shares in approximately the same
proportion as set forth in the table above.

The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Innotrac and the selling
shareholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares from the
selling shareholders and Innotrac.

<TABLE>
<CAPTION>
PAID BY THE SELLING
PAID BY INNOTRAC SHAREHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share............................... $ 0.935 $ 0.935 $ 0.935 $ 0.935
Total......................... $1,963,500 $2,057,000 $374,000 $631,125
</TABLE>

49
<PAGE> 52

Shares the underwriters sell to the public will initially be offered at the
public offering price on the cover of this prospectus. Any shares the
underwriters sell to securities dealers may be sold at a discount of up to $0.56
per share from the public offering price. Any securities dealers the
underwriters sell to may resell those shares to certain other brokers or dealers
at a discount of up to $0.10 per share from the public offering price.

The selling shareholders and our executive officers and directors have
agreed, for a period of 90 days after the date of this prospectus, not to issue,
sell, offer or agree to sell, grant any option to purchase, pledge, make any
short sale, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act or otherwise dispose of any
shares of Innotrac common stock or any securities convertible, exchangeable or
exercisable for such shares without the prior written consent of Bear, Stearns &
Co. Inc. Innotrac has entered into a similar agreement, except that, during the
90-day lock-up period, we may (1) issue common stock pursuant to the exercise of
currently outstanding stock options under our Stock Option and Incentive Award
Plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period.

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the underwriters selling a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made to prevent or retard a
decline in the market price of the common stock while the offering is in
progress.

The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters' representatives have
repurchased shares sold by or for the account of the penalized underwriter in
stabilizing or short covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, the underwriters
may discontinue them at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.

In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market-makers on the Nasdaq National Market
may engage in passive market making transactions in the common stock on the
Nasdaq National Market. Any market-making activities will be conducted in
accordance with Rule 103 of Regulation M under the Securities Exchange Act and
will occur on the business day prior to the pricing of the offering before the
commencement of offers or sales of the common stock. Passive market-makers must
comply with applicable volume and price limitations and must be identified as
passive market-makers. In general, a passive market-maker must display its bid
at a price not in excess of the highest independent bid for the security. If all
independent bids are lowered below the passive market-makers' bid, however, the
passive market-maker must lower its bid when certain purchase limits are
exceeded.

Innotrac estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$500,000.

Innotrac and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments which the underwriters are
required to make as a result of such liabilities.

50
<PAGE> 53

LEGAL MATTERS

Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for Innotrac by Kilpatrick Stockton
LLP, Atlanta, Georgia. Some legal matters in connection with this offering will
be passed upon for the underwriters by Troutman Sanders LLP, Atlanta, Georgia.

EXPERTS

Innotrac's financial statements and schedules at December 31, 1996, 1997
and 1998, included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon such reports and upon the authority of said
firms as experts in accounting and auditing.

ADDITIONAL INFORMATION

This prospectus is part of a registration statement on Form S-1 Innotrac
has filed with the SEC covering the shares of common stock Innotrac and the
selling shareholders are offering.

We file annual, quarterly, and current reports, proxy statements, and other
information with the SEC. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. For information on the operation of the Public Reference Room, call
the SEC at 1-800-SEC-0330. You can also obtain reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC from the SEC's internet site. The address of that site is
http://www.sec.gov.

51
<PAGE> 54

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 55

INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION

<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (Unaudited)............................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................. F-4
Consolidated Statements of Partners', Members' and
Shareholders' Equity for the Years Ended December 31,
1996, 1997 and 1998....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 56

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Innotrac Corporation:

We have audited the accompanying consolidated balance sheet of INNOTRAC
CORPORATION (a Georgia corporation) as of December 31, 1998 and the combined
balance sheet of INNOTRAC CORPORATION, IELC, INC. (a Georgia corporation),
RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia
corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL PROVIDERS,
INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited liability
company), SELLTEL #2, LLC (a Georgia limited liability company) and HOMETEL
PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) (collectively referred
to as the "Companies") as of December 31, 1997 and the related combined
statements of operations, partners', members' and shareholders' equity and cash
flows for the years ended December 31, 1996, 1997 and 1998. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Innotrac
Corporation as of December 31, 1998 and the financial position of Innotrac
Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems,
Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel
Providers Partners, L.P. as of December 31, 1997 and the results of their
operations and their cash flows for the years ended December 31, 1996, 1997 and
1998 in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Atlanta, Georgia
January 31, 1999

F-2
<PAGE> 57

INNOTRAC CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 554 $ 3,379 $ 274
Accounts receivable, net (Note 3)......................... 20,081 44,354 73,013
Inventories............................................... 2,936 14,381 19,834
Deferred tax assets (Note 6).............................. 386 2,866 2,845
Prepaid expenses and other current assets................. 373 1,436 1,871
------- ------- --------
Total current assets.............................. 24,330 66,416 97,837
------- ------- --------
Property and equipment:
Rental equipment.......................................... 10,433 6,891 6,289
Computer, machinery and transportation equipment.......... 1,558 1,390 1,614
Furniture, fixtures and leasehold improvements............ 720 4,949 5,547
------- ------- --------
12,711 13,230 13,450
Less accumulated depreciation and amortization............ 5,102 5,767 6,226
------- ------- --------
7,609 7,463 7,224
------- ------- --------
Other assets, net........................................... 558 113 105
------- ------- --------
Total assets...................................... $32,497 $73,992 $105,166
======= ======= ========

LIABILITIES AND PARTNERS', MEMBERS', AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4)................ $ 738 $ 68 $ 68
Line of credit (Note 4)................................... 8,545 15,736 31,619
Accounts payable.......................................... 4,766 9,387 23,265
Distributions payable (Note 2)............................ 1,007 70 70
Accrued expenses.......................................... 7,435 12,336 10,813
Other..................................................... 318 1,966 1,622
------- ------- --------
Total current liabilities......................... 22,809 39,563 67,457
------- ------- --------
Noncurrent liabilities:
Subordinated debt (Note 4)................................ 3,500 -- --
Long-term debt (Note 4)................................... 404 7 7
Deferred tax liabilities (Note 6)......................... 40 106 88
Other..................................................... -- 22 34
------- ------- --------
Total noncurrent liabilities...................... 3,944 135 129
------- ------- --------
Total liabilities................................. 26,753 39,698 67,586
------- ------- --------
Commitments and contingencies (Note 5)......................
Redeemable capital stock (Note 7)........................... 917 -- --
------- ------- --------
Partners', members' and shareholders' equity (Note 8):
Partners' capital......................................... 1,759 -- --
Members' deficit.......................................... (490) -- --
Common stock.............................................. 5 900 900
Additional paid-in capital................................ 14 24,838 24,838
Retained earnings......................................... 3,539 8,556 11,842
------- ------- --------
Total partners', members' and shareholders'
equity.......................................... 4,827 34,294 37,580
------- ------- --------
Total liabilities and partners', members' and
shareholders' equity............................ $32,497 $73,992 $105,166
======= ======= ========
</TABLE>

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

F-3
<PAGE> 58

INNOTRAC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues, net................................... $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues................................ 55,519 67,986 108,785 16,412 58,717
------- ------- -------- ------- -------
Gross profit.......................... 15,778 19,992 30,888 6,153 8,603
------- ------- -------- ------- -------
Operating expenses:
Selling, general and administrative
expenses................................... 10,391 12,572 15,642 3,428 2,440
Depreciation and amortization................. 429 631 943 138 379
------- ------- -------- ------- -------
Total operating expenses.............. 10,820 13,203 16,585 3,566 2,819
------- ------- -------- ------- -------
Operating income................................ 4,958 6,789 14,303 2,587 5,784
------- ------- -------- ------- -------
Other (income) expense:
Interest expense.............................. 1,457 1,788 956 315 373
Other......................................... 94 118 35 6 (20)
------- ------- -------- ------- -------
Total other expense................... 1,551 1,906 991 321 353
------- ------- -------- ------- -------
Income before income taxes...................... 3,407 4,883 13,312 2,266 5,431
Income tax (provision) benefit.................. (212) 77 (3,743) 61 (2,145)
------- ------- -------- ------- -------
Net income............................ $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======== ======= =======
Unaudited pro forma data:
Pro forma net income.......................... $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======== ======= =======
Pro forma net income per share -- basic....... $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37
======= ======= ======== ======= =======
Pro forma net income per share -- diluted..... $ 0.32 $ 0.46 $ 1.00 $ 0.21 $ 0.36
======= ======= ======== ======= =======
Weighted average common shares outstanding
Basic......................................... 6,500 6,500 8,096 6,500 9,000
Diluted....................................... 6,500 6,500 8,155 6,500 9,127
</TABLE>

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

F-4
<PAGE> 59

INNOTRAC CORPORATION

CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS'
AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED
CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL
--------- -------- ------ ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............... $ 1,108 $ -- $ 5 $ 14 $ 2,068 $ 3,195
Member contributions..................... -- 2 -- -- -- 2
Net income............................... 1,323 (39) -- -- 1,911 3,195
Distributions to shareholders, members
and partners........................... (529) (235) -- -- (977) (1,741)
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (111) (111)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1996............... 1,902 (272) 5 14 2,891 4,540
Net income (loss)........................ 3,541 (233) -- -- 1,652 4,960
Distributions to shareholders, members
and partners........................... (3,684) 15 -- -- (917) (4,586)
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (87) (87)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1997............... 1,759 (490) 5 14 3,539 4,827
Distributions to shareholders, members
and partners........................... (4,836) (209) -- -- (4,747) (9,792)
Merger of companies...................... (461) 288 645 (1,667) 1,195 --
Record deferred taxes associated with
merger................................. -- -- -- -- 3,016 3,016
Proceeds from sale of common stock,
net.................................... -- -- 250 26,491 -- 26,741
Net income (loss)........................ 3,538 411 -- -- 5,620 9,569
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (67) (67)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1998............... $ -- $ -- $900 $24,838 $ 8,556 $34,294
======= ===== ==== ======= ======= =======
</TABLE>

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

F-5
<PAGE> 60

INNOTRAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 429 631 943 138 379
Depreciation -- rental equipment......... 3,005 3,711 2,900 829 536
Loss on disposal of rental equipment..... 2,538 4,479 2,158 542 220
Subordinated debt accretion.............. 164 -- -- -- --
Deferred income taxes.................... (107) (537) 602 33 3
Decrease (increase) in accounts
receivable............................. (6,753) 5,379 (24,273) (5,966) (28,659)
Decrease (increase) in inventories....... (7,683) 7,085 (11,445) (378) (5,453)
Decrease in prepaid expenses and other
assets................................. (327) (485) (734) 128 (443)
(Decrease) increase in accounts
payable................................ 3,611 (8,960) 4,621 4,362 13,878
(Decrease) increase in accrued
expenses............................... 2,016 2,619 6,571 284 (1,855)
Other.................................... (468) (369) (1,670) -- --
------- -------- -------- ------- --------
Net cash provided by (used in)
operating activities.............. 88 18,882 (9,088) 2,299 (18,108)
------- -------- -------- ------- --------
Cash flows from investing activities:
Accrued equipment purchases................. (272) (1,595) -- -- --
Purchases of property and equipment......... (7,700) (5,342) (5,739) (1,807) (880)
------- -------- -------- ------- --------
Net cash used in investing
activities........................ (7,972) (6,937) (5,739) (1,807) (880)
------- -------- -------- ------- --------
Cash flows from financing activities:
Net (repayments) borrowings under lines of
credit................................... 13,169 (8,685) 7,191 370 15,883
Proceeds from long-term debt................ 2,096 -- -- -- --
Repayment of long-term debt................. (328) (702) (1,067) (172) --
Repayment of subordinated debt.............. (1,000) -- (3,500) -- --
Loan commitment fees........................ (200) (125) -- -- --
Proceeds from members' contributions........ 2 -- -- -- --
Proceeds from initial public offering,
net...................................... -- -- 26,741 -- --
Redemption of redeemable capital stock...... -- -- (984) (388) --
Distributions to shareholders, members and
partners................................. (3,890) (3,884) (10,729) (263) --
------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities.............. 9,849 (13,396) 17,652 (453) 15,883
------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 1,965 (1,451) 2,825 39 (3,105)
Cash and cash equivalents, beginning of
period...................................... 40 2,005 554 554 3,379
------- -------- -------- ------- --------
Cash and cash equivalents, end of period...... $ 2,005 $ 554 $ 3,379 $ 593 $ 274
======= ======== ======== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest...................... $ 1,207 $ 1,788 $ 1,006 $ 366 $ 325
======= ======== ======== ======= ========
Cash paid for income taxes, net of refunds
received................................. $ 892 $ 86 $ 1,493 $ 380 $ 2,486
======= ======== ======== ======= ========
Non cash transactions:
Accreted dividends on redeemable capital
stock.................................... $ 111 $ 87 $ 67 $ 17 $ --
======= ======== ======== ======= ========
</TABLE>

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

F-6
<PAGE> 61

INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Innotrac Corporation ("Innotrac" or the "Company") is a full service
provider of customized technology based marketing support services. The majority
of the Company's operation is directly related to the sale and distribution of
caller identification display devices (Caller ID units). Prior to May 6, 1998,
Innotrac operated as eight separate affiliates: Innotrac, IELC, Inc., RenTel #1,
Inc. ("RenTel"), SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel
Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners,
L.P. ("Providers L.P.") (collectively referred to herein as the "Companies").
The Companies were all owned 100% by one shareholder or his immediate family
except for RenTel, SellTel, and Providers L.P. (which each had a 10% minority
interest owned by one party). The minority interests of RenTel and SellTel were
owned by a related party of the shareholder.

On May 6, 1998, Innotrac consolidated these eight entities (the
"Consolidation"), effective simultaneously with, and as a condition to, the
Company's initial public offering (the "Offering") of 2.5 million shares, at an
initial public offering price of $12.00 per share (See Footnote 8).

For accounting purposes, Providers L.P. was deemed to be the acquiring
entity and its balance sheet carried over at historical cost. Since the other
entities that were parties to the Consolidation were wholly-owned by either the
majority shareholder of Providers L.P. or his direct relatives, those entities
were considered to be under common control, and the balance sheets of such
entities also carried over at historical cost.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination and Consolidation

Prior to the Consolidation, the accompanying combined financial statements
include the accounts of the Companies and were prepared on the accrual basis of
accounting. Significant intercompany accounts and transactions have been
eliminated in the combination. Combined financial statements were presented
since the Companies have similar ownership and interrelated activities. The
financial information included herein may not necessarily reflect the financial
position, results of operations, or cash flows of the Companies in the future or
what the financial position, results of operations, or cash flows of the
Companies would have been if they were combined as a separate, stand-alone
company during the periods presented.

Subsequent to the Consolidation, the accompanying financial statements
include the consolidated accounts of Innotrac. Significant intercompany accounts
and transactions have been eliminated in the consolidation.

Quarterly Information

The accompanying condensed financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, management believes that the disclosures herein are
adequate to make the information presented not misleading.

In the opinion of management, the accompanying condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial position as of
March 31, 1999 and the results of operations and cash flows for the three months
ended March 31, 1998 and 1999. The results of operations for the three months
ended March 31, 1998 and 1999 are not necessarily indicative of the operating
results for the full years.

F-7
<PAGE> 62
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pro Forma Net Income and Net Income per Share

In conjunction with the Consolidation, HomeTel Providers, Inc., Providers
LP, RenTel #1, RenTel #2, and SellTel #2 lost their non C corporation status for
tax purposes. Accordingly, the pro forma income taxes reflect income taxes at
statutory rates applied to pro forma earnings. In addition, the pro forma
earnings per share reflect the Consolidation as if it had occurred at the
beginning of each period presented.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

Sources of Supplies

In accordance with their agreements with certain telecommunications
companies, the Companies primarily use three providers for the supply of
telecommunications equipment. However, if these vendors were unable to meet the
Companies' needs, management believes that other sources for this equipment
exist on commensurate terms and that operating results would not be adversely
affected.

Concentration of Revenues

Revenues earned under the Companies' agreement with a major
telecommunications company to sell and rent certain telecommunications equipment
to the customers of this company accounted for approximately 82%, 85% and 59% of
total revenues for the years ended December 31, 1996, 1997 and 1998,
respectively. If this agreement were terminated, it could have a material
adverse affect on the future operating results and liquidity of the Companies
(Note 5).

Cash and Cash Equivalents

The Companies consider all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents.

Inventories

Inventories, consisting primarily of telecommunications equipment, are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.

Property and Equipment

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

<TABLE>
<S> <C>
Rental equipment............................................ 3-4 years
Computers................................................... 3 years
Machinery and transportation equipment...................... 5-7 years
Furniture and fixtures...................................... 7 years
</TABLE>

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.

F-8
<PAGE> 63
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rental equipment is written off at its net book value when it is no longer
generating revenues or is not returned by the customer. Provisions are made for
estimated equipment losses that have not yet been reported. Equipment rental
losses were approximately $2,538,000, $4,479,000 and $2,158,000 for the years
ended December 31, 1996, 1997 and 1998 respectively, and are included in "Cost
of revenues" in the accompanying statements of operations.

Long-Lived Assets

The Companies periodically review the values assigned to long-lived assets
such as property and equipment to determine if any impairments are other than
temporary. Management believes that the long-lived assets on the accompanying
balance sheets are appropriately valued.

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"). The Company has adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this statement
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are required
with respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.

Income Taxes

Innotrac, as a C corporation, utilizes the liability method of accounting
for income taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.

Prior to the Consolidation, the shareholders of certain affiliated
companies had elected to have the Companies treated as S corporations. The
Internal Revenue Code of 1986, as amended (the "Code") and certain applicable
state statutes provide that the income and expenses of an S corporation are not
taxable separately to the corporation but rather accrue directly to the
shareholders. In addition, other entities were limited liability companies which
are not subject to federal and state income taxes. Accordingly, no provisions
for federal and certain state income taxes related to these entities have been
made in the accompanying financial statements.

Prior to the Consolidation, it was the policy of management to pay and
accrue distributions primarily for income taxes that are required to be paid by
the shareholders, members and partners due to the flow through of income of
these entities. During the years ended December 31, 1996, 1997 and 1998,
distributions of approximately $1,741,000, $4,586,000 and $2,292,000,
respectively, were recorded, of which approximately $1,007,000 and $70,000 were
accrued and unpaid as of December 31, 1997 and 1998, respectively. Additionally,
in conjunction with the Consolidation (Note 1), the Company distributed
$7,500,000 of the undistributed earnings of approximately $9,000,000 to the
owners of certain pass-thru entities.

Revenue Recognition

Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. Revenues are reduced
for an estimate of product returns and allowances (Note 3).

F-9
<PAGE> 64
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair Value of Financial Instruments

The carrying values of the Company's financial instruments approximate
their fair values.

Advertising Costs

The Company expenses all advertising costs as incurred.

Recent Accounting Pronouncements

In 1998, the Company was subject to the provisions of Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". These statements had no impact on the Company's financial
statements as it has no comprehensive income elements other than distributions
to owners and returns on equity and its financial statements reflect how the
"key operating decisions maker" views the business. The Company will continue to
review these statements over time to determine if any additional disclosures are
necessary based on evolving circumstances.

3. ACCOUNTS RECEIVABLE

The Companies' accounts receivable include amounts that are billed in
installments over a five to seven month period. Accounts receivable were
composed of the following at December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Billed receivables.......................................... $15,812 $32,081
Unbilled installment receivables............................ 9,976 17,208
------- -------
Total receivables................................. 25,788 49,289
Less allowances............................................. (5,707) (4,935)
------- -------
$20,081 $44,354
======= =======
</TABLE>

Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.

F-10
<PAGE> 65
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. FINANCING OBLIGATIONS

Financing obligations as of December 31, 1997 and 1998 consisted of the
following:

<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under revolving credit agreement (up to
$25,000,000); the revolving advances owing by any one
borrower cannot exceed an amount equal to the sum of 80%
of the eligible accounts receivable plus 70% of the
eligible installment receivables); interest payable
monthly at rates equal to the prime rate (8.5% and 7.75%
at December 31, 1997 and 1998, respectively), or at the
Company's option, LIBOR plus a margin (6.75% at December
31, 1998), expires on November 15, 1999, secured by all
assets of the Company..................................... $ 8,545 $15,736
Subordinated note payable to the limited partner of
Providers, L.P., due April 1999; interest payable monthly
at a variable rate of prime plus 8% (16.5% as of December
31, 1997) and a fixed rate of 14% as of December 31, 1996;
secured by accounts receivable, inventories, rental
equipment and the personal guarantee of the sole
shareholder of the general partner of Providers, L.P.;
subordinated to the line of credit; note was paid in full
in May 1998............................................... 3,500 --
Note payable, due in monthly installments of principal of
$55,556, plus interest at 8.95%, through July 1999;
secured by accounts receivable, inventories, equipment and
the personal guarantee of Innotrac's sole shareholder;
note was paid in full in May 1998......................... 1,056 --
Other....................................................... 86 75
------- -------
13,187 15,811
Current portion............................................. 9,283 15,804
------- -------
$ 3,904 $ 7
======= =======
</TABLE>

Scheduled maturities of financing obligations are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ 15,804
2000........................................................ 7
-------
Total............................................. $15,811
=======
</TABLE>

The weighted average interest rate on the revolving line of credit
agreement was 8.6% and 7.6% for the years ending December 31, 1997 and 1998,
respectively.

The revolving line of credit agreement and the term note contain various
restrictive financial and change of ownership control covenants. The Companies
were in compliance with all covenants as of December 31, 1998.

In January 1999, the revolving credit agreement was increased to
$35,000,000 and the expiration date extended to May 1, 2000. Subsequent to March
31, 1999, the revolving credit agreement was increased from $35,000,000 to
$40,000,000 and the expiration date extended to June 1, 2002.

F-11
<PAGE> 66
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 and accrues the differences each month
between the amount expensed and the amount actually paid.

Aggregate future minimum lease payments under noncancellable operating
leases with original periods in excess of one year as of December 31, 1998 are
as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $1,433
2000........................................................ 904
2001........................................................ 903
2002........................................................ 903
2003........................................................ 924
Thereafter.................................................. 4,818
------
Total minimum lease payments...................... $9,885
======
</TABLE>

Rent expense under all operating leases totaled approximately $770,000,
$1,121,000 and $1,231,000 during the years ended December 31, 1996, 1997 and
1998, respectively.

Marketing Support Agreement

The Company has an agreement, which expires in September 2003, with a major
telecommunications company to sell and rent certain telecommunications equipment
to the customers of this company. The telecommunications company has agreed to
provide billing, collection and referral services for the Companies. This
agreement can be terminated (a) after March 15, 2000 by the telecommunications
company without cause upon 120 days notice or (b) by the telecommunications
company for cause upon 10 days notice; however, in the event of termination, the
telecommunications company must continue to provide billing and collections
services for existing customers for four years after the termination of the
agreements.

Legal Proceedings

The Company is subject to 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.

6. INCOME TAXES

Details of the income tax (provision) benefit for the years ended December
31, 1996, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $(319) $(460) $(3,141)
Deferred.................................................... 107 537 (602)
----- ----- -------
$(212) $ 77 $(3,743)
===== ===== =======
</TABLE>

F-12
<PAGE> 67
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Companies' deferred tax assets and liabilities as of December
31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
1997 1998
----- ------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences.............. $ 43 $ (114)
Conversion from cash to accrual taxpayer method -- long
term................................................... (83) --
Other..................................................... -- 8
----- ------
(40) (106)
----- ------
Current deferred tax assets (liabilities):
Reserves for uncollectable accounts....................... 524 2,372
Reserve for returns and equipment losses.................. 0 526
Conversion from cash to accrual taxpayer
method -- current...................................... (143) (36)
Other..................................................... 5 4
----- ------
386 2,866
----- ------
Net deferred tax asset............................ $ 346 $2,760
===== ======
</TABLE>

Innotrac converted from the cash basis to the accrual basis for income tax
purposes effective August 1995, with the accumulated difference to be added back
to taxable income over a four-year period.

Effective with the Consolidation, the Company converted all of its entities
that were non-C-corporations status for income tax reporting purposes to
C-corporation status and recorded a one-time benefit of approximately $3 million
related to certain temporary differences at these entities.

A reconciliation of the income tax (benefit) provision computed at
statutory rates to the income tax provision for the years ended December 31,
1996, 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 35.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit................ 3.6 1.4 6.0
Income taxable directly to shareholders, partners and
members (Note 2)....................................... (31.8) (37.9) (13.3)
Other....................................................... 0.4 0.9 0.5
----- ----- -----
6.2% (1.6)% 28.2%
===== ===== =====
</TABLE>

7. REDEEMABLE CAPITAL STOCK

In September 1993, the Company obtained $1,000,000 of financing from a
related party in the form of subordinated debt, in two entities that were
involved in the Consolidation. The subordinated debt required monthly payments
of interest, with principal maturing at 36 months. The subordinated debt was
repaid in full in September 1996. Additionally, the related party received
callable common stock representing 10% of the common stock of these entities.
The terms of the callable common stock provided each of these entities the
option to call the common stock at predetermined amounts on or before September
30, 1998 beginning in September, 1996. If the Company did not call the common
stock

F-13
<PAGE> 68
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interests, the Company was obligated to issue the related party an additional
10% common stock interest to redeem the common stock. Due to the related party
nature of the transaction, the Company accounted for the callable common stock
as redeemable equity.

The Company allocated the capital raised between "Subordinated Debt" and
"Redeemable Capital Stock" on the accompanying balance sheets at the respective
fair market values based on discounted cash flow analyses (approximately
$500,000 each to "Subordinated Debt" and "Redeemable Capital Stock") and then
accreted to their redemption values over 36 months using the effective interest
rate method (an approximate 30% return on both the subordinated debt and the
callable common stock). The portion of the accretion attributable to
Subordinated Debt is reflected as interest expense in the accompanying
statements of operations. For the equity portion, the Companies have accreted
through the recording of dividends to the estimated redemption amounts at each
balance sheet date and reflected such redemption amounts as "Redeemable Capital
Stock" on the accompanying balance sheets. These dividends represent a 16%
effective rate through September 1996 (the first trigger date as defined) and
10% thereafter. In conjunction with the Offering (see Note 1), the Company
redeemed the shares of one entity in February 1998 for $390,000 and the shares
of the other entity for $594,000 in December 1998.

8. SHAREHOLDERS' EQUITY

Innotrac has authorized 50,000,000 shares of common stock, $0.10 par value,
and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12, 1997,
Innotrac effected a 70.58823-for-1 stock split resulting in 1,080,000 shares
outstanding. Additionally, in exchange for their previous ownership interests,
5,420,000 shares of $0.10 par value common stock were issued to the remaining
entity owners pari-passu based on their relative value to the consolidated group
except for the minority stockholder of one of the affiliated entities, whose
ownership interests was repurchased as scheduled in the fourth quarter of 1998.
After the Consolidation, there were an aggregate of 6,500,000 shares
outstanding. As discussed in Note 1, on May 6, 1998 the Company completed an
initial public offering of 2.5 million shares at a price of $12.00 per share for
net proceeds of approximately $26,741,000. As of December 31, 1998, there were
9,000,000 shares of common stock outstanding.

9. EMPLOYEE RETIREMENT PLAN

Employees of Innotrac may participate in an employee retirement defined
contribution plan. The plan covers all employees of the participating entities
who have at least one year of service (six months if hired before January 1,
1997) 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. Innotrac has elected 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. Total matching contributions made to the plan and
charged to expense by Innotrac for the years ended December 31, 1996, 1997 and
1998 were not material.

10. STOCK BASED COMPENSATION

In November 1997, the Company adopted a stock option plan (the "Stock
Option Plan") to provide key employees, officers, directors, contractors, and
consultants an opportunity to own common stock of the Company and to provide
incentives for such persons to promote the financial success of the Company.
Awards under the Stock Option Plan 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 and its
subsidiaries. Non-qualified options, restricted stock awards, SARs, and other
permitted forms of awards may be granted to any person

F-14
<PAGE> 69
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employed by or performing services for the Company, including directors,
contractors, and consultants. The Stock Option Plan provides for the issuance of
options to purchase up to an aggregate of 800,000 shares of common stock.

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 Stock Option Plan.

As of December 31, 1998, stock options to purchase an aggregate of 343,000
shares at $9.10 per share of common stock had been granted under the Stock
Option Plan. 55,000 of these options vested immediately at the date of grant;
the remaining options vest 50%, 25% and 25% at two, three and four years,
respectively, after the grant date and expire 10 years from the grant date. At
December 31, 1998, 323,475 options were outstanding with a weighted average
contractual life of 8.9 years. 55,000 options were exercisable at December 31,
1998 at $9.10 per share.

Additionally, the Company granted stock options to purchase an aggregate of
40,000 shares on the effective date of the Offering to four non-employee members
of the Board of Directors at $12 (the initial public offering price) which
vested immediately upon grant. 40,000 options were exercisable at December 31,
1998 at $12.00 per share.

A summary of the status of the Company's Stock Option Plan and other
options at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE PRICE
------ ----------------------
(IN THOUSANDS)
<S> <C> <C>
Outstanding at December 31, 1996........................... -- $0.00
Granted.................................................... 343 9.10
---
Outstanding at December 31, 1997........................... 343 9.10
Granted.................................................... 40 12.00
Forfeited.................................................. (20) 9.10
---
Outstanding at December 31, 1998........................... 363 9.42
===
</TABLE>

The remaining weighted average contractual life of the options outstanding
at December 31, 1998 is 8.9 years and the weighted average price of the 95,000
exercisable options at December 31, 1998 is $10.32.

The total value of options granted during 1997 and 1998 was computed as
approximately $2,172,000 and $3,013,000 which would be amortized on a pro forma
basis over the vesting period of the options. Had compensation cost for stock
options been determined under SFAS No. 123, the Company's net income and net
income per share would have been the following pro forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Net income Pro forma
Pro forma................................................. $3,003 $8,186
Pro forma adjusted for the Impact of SFAS 123............. $2,686 $7,402
Diluted net income per share
Pro forma................................................. $ 0.46 $ 1.00
Pro forma adjusted for the Impact of SFAS 123............. $ 0.41 $ 0.91
</TABLE>

F-15
<PAGE> 70
INNOTRAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has elected to account for its option plans under APB 25;
however, 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 123 using the following weighted average assumptions:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Risk-free interest rate..................................... 5.17% 5.17%
Expected dividend yield..................................... 0% 0%
Expected lives.............................................. 2.7 Years 2.7 Years
Expected volatility......................................... 106.0% 86.0%
</TABLE>

F-16
<PAGE> 71

- ------------------------------------------------------
- ------------------------------------------------------

Prospective investors may rely only on the information contained in this
prospectus. Neither Innotrac, the selling shareholders nor any underwriter has
authorized anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.

No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States and Canada are
required to inform themselves about and to observe the restrictions of that
jurisdiction related to this offering and the distribution of this prospectus.

---------------------------------

TABLE OF CONTENTS
---------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 5
Forward-Looking Statements Are Not
Guarantees....................... 14
Use of Proceeds.................... 15
Dividend Policy.................... 15
Price Range of Common Stock........ 16
Capitalization..................... 17
Selected Financial Data............ 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
Business........................... 28
Management......................... 37
Principal and Selling
Shareholders..................... 41
Related Party Transactions......... 43
Shares Eligible for Future Sale.... 44
Description of Capital Stock....... 46
Underwriting....................... 49
Legal Matters...................... 51
Experts............................ 51
Additional Information............. 51
Index to Financial Statements...... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

2,500,000 SHARES

(INNOTRAC LOGO)

INNOTRAC
CORPORATION

COMMON STOCK
--------------------

PROSPECTUS
--------------------

BEAR, STEARNS & CO. INC.

THE ROBINSON-HUMPHREY COMPANY

J.C. BRADFORD & CO.

JULY 26, 1999

- ------------------------------------------------------
- ------------------------------------------------------