In September 2002, we entered into a lease for a new facility in Romeoville, Illinois with an initial term of five years and two months with two five-year renewal options. The facility provides approximately 204,307 square feet of fulfillment and warehouse space, of which approximately 175,000 is currently under lease. This facility is utilized exclusively by our client, Books Are Fun.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Our fulfillment and call centers employ a sizable amount of unskilled labor and generate a high turnover rate. Furthermore, due to the downturn in the economy and its adverse affects on our business, we have had to terminate employees from time to time. Our exposure to litigation as a result of employee matters has increased. Although, management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations, it is possible that such litigation and the related cost could become material in the future.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the symbol "INOC". The following table sets forth for the periods indicated the high and low sales prices of the Common Stock on the Nasdaq National Market.
 The approximate number of holders of record of Common Stock as of March 18, 2004 was 72. The approximate number of beneficial holders of our Common Stock as of that date was 1,235.
The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility.
Item 12 of Part III contains information concerning the Company's equity compensation plans.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Financial Data" in the Company's 2003 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2003 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 AGGREGATE CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual commitments by period. There are no additional purchase obligations or other long-term liabilities other than those reflected below. For additional information, see Note 7 to the consolidated financial statements (in 000's).
(1) The provisions of the revolving line of credit agreement requires that the Company maintain a lockbox arrangement with the lender and allows the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants. Accordingly, in the event of noncompliance, these amounts could be accelerated.
CRITICAL ACCOUNTING ESTIMATES OR ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 The Company makes estimates each reporting period associated with its reserve for uncollectible accounts. This estimate is based on the aging of the receivables. One direct marketing client, with a substantial past due balance at December 31, 2003, entered into a payment arrangement with Innotrac in February 2004 that would eliminate its past due amounts during the first half of 2004. Payments of approximately $1 million towards this past due amount were received during February and March, 2004. In spite of these arrangements and subsequent payments, and due primarily to the financial condition, payment history and aging of the receivables of this client, the Company still determined it prudent to establish a specific reserve of $1.1 million for this account at December 31, 2003. Management will continue to access the level of reserve needed against this account quarterly.
 The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. A valuation allowance has been recognized for the full amount of the $9.9 million deferred tax asset as losses in recent years create uncertainty about the realization of the tax benefits in future years. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. When, and if, the Company can return to consistent profitability and management determines that it will be able to utilize the deferred tax assets prior to their expiration, then the valuation allowance can be reduced or eliminated. Innotrac has a tax net operating loss carryforward of $31.5 million at December 31, 2003 that expires between 2020 and 2023.
With the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002, the Company tests goodwill annually for impairment at January 1 or sooner if circumstances indicate. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment in the first quarter of 2003 and again in the first quarter of 2004 in accordance with SFAS No. 142, no impairment was determined to exist at those times.
ITEM 7A.
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk" in the Company's 2003 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Report of Independent Auditors" and "Consolidated Financial Statements and Notes to the Consolidated Financial Statements" in the Company's 2003 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 22, 2002 the Board of Directors, upon the recommendation of the Audit Committee, dismissed its independent accountants, Arthur Andersen LLP, and appointed Deloitte & Touche LLP as its new independent accountants, effective April 22, 2002. This matter was previously reported on a Form 8-K filed April 24, 2002.
ITEM 9A.
 ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of the Chief Executive and Chief Financial Officers, evaluated our disclosure controls and procedures (as defined in federal securities rules) as of December 31, 2003. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met. Based on the evaluation discussed above, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of the date of that evaluation to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
There were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Innotrac's internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of Directors" and "Compliance With Section 16(a) of the Exchange Act" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report.
 The Company has a separately designated Audit Committee that consists of Mr. Martin Blank, Mr. Joel Marks and Mr. Bruce Benator. Both Mr. Marks and Mr. Benator are financial experts. Mr. Benator is not deemed to be independent under Item 7(d)(3)(iv). Mr. Marks is independent and will serve as the Company's Audit Committee financial expert commencing in 2004. Mr. Marks is a seasoned financial executive and previously served as the Chief Financial Officer of a Nasdaq-listed company and is a certified public accountant. Mr. Benator will no longer be a member of the Audit Committee in 2004. He will be replaced effective March 1, 2004 by Mr. Alston Gardner.
Effective March 1, 2004, the Company adopted a Code of Business Conduct and Ethics which includes rules of conduct for Senior Officers of the Company. This Code has been included herein as an exhibit, has been posted to the Company's website and has been distributed to all of our employees.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. The information contained in the Proxy Statement under the headings "Compensation Committee Report on Executive Compensation" and "Stock Performance Graph" shall not be deemed incorporated herein by such reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information contained under the headings "Voting Securities and Principal Shareholders" and "Equity Compensation Plans" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
 For purposes of determining the aggregate market value of the Company's voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Company and holders of 10% or more of the Company's Common Stock have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as defined by the Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Related Party Transactions" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
The information contained under the heading "Independent Auditors" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto are incorporated herein by reference in Item 8 of this Report.
 Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors' as to Schedules
Schedule II - Valuation and Qualifying Accounts
3. EXHIBITS
The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed as an exhibit.
(b) REPORTS ON FORM 8-K
On November 7, 2003, the Company furnished to the Commission pursuant to Items 7 and 12 of Form 8-K its press release announcing the Company's financial results for the third quarter of 2003.
On November 24, 2003, the Company filed and furnished its Form 8-K announcing the amendment of its Rights Agreement pursuant to Items 5, 7 and 9 of Form 8-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 2-02 OF REGULATION S-X, THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, WHICH HAS CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP REPORTED ON SUCH FINANCIAL STATEMENTS PRIOR TO THE RECLASSIFICATIONS AND REVISIONS DISCUSSED IN NOTE 2 AND NOTE 16 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of INNOTRAC CORPORATION AND SUBSIDIARY included in this Form 10-K and have issued our report thereon dated February 8, 2002. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP
Atlanta, Georgia February 8, 2002
S-1
INNOTRAC CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 2004.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman ------------------------------------------ Scott D. Dorfman Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 30th day of March 2004.
 Signature Title - --------- -----
/s/ Scott D. Dorfman Chairman of the Board, President and Chief Executive - ----------------------- Officer (Principal Executive Officer) Scott D. Dorfman
Senior Vice President, Chief Financial Officer, /s/ David L. Gamsey Treasurer and Secretary (Principal Financial and - ----------------------- David L. Gamsey Accounting Officer)
/s/ David L. Ellin Senior Vice President--Sales and Director - ----------------------- David L. Ellin
/s/ J. Alston Gardner Director - ----------------------- J. Alston Gardner
/s/ Bruce V. Benator Director - ----------------------- Bruce V. Benator
/s/ Martin J. Blank Director - ----------------------- Martin J. Blank
/s/ Joel E. Marks Director - ----------------------- Joel E. Marks.
