1. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Financial Statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010. Certain of the Company's more significant accounting policies are as follows:

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its majority owned subsidiary. On April 11, 2011 the Company completed the formation of Innotrac Europe GmbH ("Innotrac Europe"), a joint venture between Innotrac and PVS Fulfillment-Service GmbH ("PVS") in Neckarsulm, Germany. Innotrac has a 50.1% ownership stake in the joint venture. All significant intercompany transactions and balances have been eliminated in consolidation.

Foreign Currency Translation. The financial statements of foreign subsidiaries have been translated into U.S. Dollars in accordance with Accounting Standards Codification ("ACS") topic No. 830-30 - Translation of Financial Statements. The financial position and results of operations of the Company's foreign subsidiary are measured using the foreign subsidiary's local currency as the functional currency. Revenue and expenses of the subsidiary have been translated into U.S. Dollars at the average exchange rate prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders' equity, unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments were immaterial during the three and nine month period ended September 30, 2011.

Gains and losses that result from foreign currency transactions are included in the "other expense (income)" line in the consolidated statements of operations. For the three and nine month period ended September 30, 2011, we incurred an immaterial amount of net foreign currency transaction gains and losses.

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

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

Accounting for Income Taxes. Innotrac utilizes the liability method of accounting for income taxes in accordance with ASC topic No. 740 – Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A full valuation allowance was recorded against the deferred tax asset as of December 31, 2010 and September 30, 2011 (see Note 4).

Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of call center services integrated with our fulfillment operations. Innotrac's fulfillment services operations record revenue at the conclusion of the material selection, packaging and upon completion of the shipping process. The shipping process is considered complete after transfer to an independent freight carrier and receipt of a bill of lading or shipping manifest from that carrier. Innotrac's call center service revenue is recognized according to written pricing agreements based on the number of calls, minutes or hourly rates when those calls and time rated services occur. All other revenues are recognized as services are rendered. As required by the consensus reached in ASC topic No. 605 – Revenue Recognition, 1) revenues have been recorded net of the cost of the goods for all fee-for-service clients and 2) the Company records reimbursements received from customers for out-of-pocket expenses, primarily freight and postage fees, as revenue and the associated expense as cost of revenue. For two clients we purchase their product from our client's vendor under agreements that require our clients to buy the product back from us at original cost when we ship the product to our client's end consumer or after a period of time if the product has not been shipped from our fulfillment centers. The value of these products is repaid to us at the same amount as we paid for them and no service fees are generated on the products. We net the value of the purchase against the reimbursement from our customer with a resulting zero value in our reported revenue and costs of revenue.

Stock-Based Compensation Plans. The Company records compensation expense in the financial statements based on the fair value of all share based grants to employees, including grants of employee stock options. The expense is recognized over the period during which an employee is required to provide services in exchange for the award, which is usually the vesting period. The Company recorded $0 and $1,000 in compensation expense (income) on stock options for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, the Company recorded $2,000 and ($2,000) in 2011 and 2010, respectively. In addition, the Company issued 265,956 restricted shares on April 16, 2007, 260,000 restricted shares on March 29, 2010 and 310,000 restricted shares on June 10, 2011. Forfeitures of issued unvested restricted shares as of September 30, 2011 have included 88,652 shares from the April 16, 2007 grant, 40,000 shares from the March 29, 2010 grant and 6,667 shares from the June 10, 2011 grant. Compensation expense of $108,000 was recognized on these forfeited shares between the dates of issuance and the dates of forfeiture, which amount was reversed in the period of forfeiture. As a result, the Company recorded $30,000 and $29,000 in compensation expense for restricted shares for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010, the Company recorded $4,000 and $78,000 of stock compensation expense respectively.

Fair Value Measurements. The Company accounts for all financial and non-financial assets and liabilities in accordance with ASC topic No. 820- Fair Value Measurements and Disclosures, measured at fair value on a recurring and non recurring basis. ASC topic No. 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements.

The Company determined the fair values of certain financial instruments based on the fair value hierarchy established in ASC topic No. 820. ASC topic No. 820 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value;

Level 1: quoted prices in active markets for identical securities

Level 2: other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

Level 3: significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments)

ASC topic No. 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

We had no amounts advanced or outstanding on our debt instrument at September 30, 2011 and December 31, 2010. Since our debt instrument consists of a revolving credit line, which under certain conditions can mature within one year of September 30, 2011, any amount outstanding would approximate fair value. The interest rate is equal to the market rate for such instruments of similar duration and credit quality.

The carrying value of our Deferred Compensation – Rabbi Trust is a fully funded and fully invested plan which is adjusted to the market value, as reported by the independent plan administrator, of the investments as of each financial statement date with the offsetting change in value adjusted to the value of the liability to the employees who participate in the plan.


	As of September 30, 2011 Fair Value Measurements Using (in 000's)
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total

As of September 30, 2011
Deferred Compensation – Rabbi Trust (1)	$ 681	$ -	$ -	$ 681

Total	$ 681	$ -	$ -	$ 681

As of December 31, 2010
Deferred Compensation – Rabbi Trust (1)	$ 758	$ -	$ -	$ 758

Total	$ 758	$ -	$ -	$ 758

(1) This is an executive deferred compensation plan for certain employees, as designated by the Company's Board of Directors. The Company invests contributions to this plan in employee-directed marketable equity securities which are recorded at quoted market prices. The contributions are fully invested in five different mutual funds having various growth, industry and geographic characteristics.

Recent Accounting Pronouncements Not Yet Adopted

In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2010-04 to Topic 820 – Fair Value Measurements and Disclosures. This update represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The amendments in this update have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The common requirements are expected to result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments are to be applied prospectively and are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt these provisions in the first quarter of 2012. Adoption of these provisions is not expected to have a material impact on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 to Topic 220 – Presentation of Comprehensive Income. The amendments in this update allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are to be applied retrospectively and are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt these provisions in the first quarter of 2012. Adoption of these provisions is not expected to have a material impact on the Company's consolidated financial statements, however it will impact the presentation of these statements.