##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-9330
 INTELLIGENT SYSTEMS CORPORATION
  Georgia
    
    58-1964787(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4355 Shackleford Road, Norcross, Georgia
    
    30093(Address of principal executive offices)
    
    (Zip Code)
 (770) 381-2900
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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##### 



Intelligent Systems Corporation
 Index
Form 10-Q
 PagePart I Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets at June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4. Controls and Procedures
    
    
    15Part II Other InformationItem 1. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Stockholders
    
    
    16Item 6. Exhibits
    
    
    16Signatures
    
    
    16Exhibit 31.1Exhibit 31.2Exhibit 32.1
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Part I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash
    
    $
    1,162
    
    
    $
    554Accounts receivable, net
    
    
    2,117
    
    
    
    2,139Notes and interest receivable, current portion
    
    
    516
    
    
    
    540Inventories
    
    
    1,310
    
    
    
    1,424Other current assets
    
    
    630
    
    
    
    2,217Total current assets
    
    
    5,735
    
    
    
    6,874Long-term investments
    
    
    1,225
    
    
    
    1,127Notes and interest receivable, net of current portion
    
    
    1,366
    
    
    
    350Property and equipment, at cost less accumulated depreciation
    
    
    1,794
    
    
    
    1,894Goodwill, net
    
    
    369
    
    
    
    2,047Other intangibles, net
    
    
    291
    
    
    
    313Other assets, net
    
    
    
    
    
    
    17Total assets
    
    $
    10,780
    
    
    $
    12,622LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    
    
    
    $
    593Note payable, current portion
    
    
    93
    
    
    
    Accounts payable
    
    
    917
    
    
    
    1,482Deferred revenue
    
    
    1,989
    
    
    
    2,527Accrued payroll
    
    
    653
    
    
    
    1,162Accrued expenses and other current liabilities
    
    
    1,300
    
    
    
    1,235Total current liabilities
    
    
    4,952
    
    
    
    6,999Long-term liabilities
    
    
    301
    
    
    
    95Commitments and contingencies (Note 8)Minority interest
    
    
    1,516
    
    
    
    1,516Stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971 shares
issued and outstanding at June 30, 2008 and December 31, 2007
    
    
    45
    
    
    
    45Additional paid-in capital
    
    
    18,446
    
    
    
    18,437Accumulated other comprehensive loss
    
    
    (193
    )
    
    
    (127
    )Accumulated deficit
    
    
    (14,287
    )
    
    
    (14,343
    )Total stockholders equity
    
    
    4,011
    
    
    
    4,012Total liabilities and stockholders equity
    
    $
    10,780
    
    
    $
    12,622
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited; in thousands, except share and per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenueProducts
    
    $
    3,412
    
    
    $
    2,573
    
    
    $
    7,392
    
    
    $
    5,659Services
    
    
    307
    
    
    
    460
    
    
    
    403
    
    
    
    649Total revenue
    
    
    3,719
    
    
    
    3,033
    
    
    
    7,795
    
    
    
    6,308Cost of revenueProducts
    
    
    1,894
    
    
    
    1,496
    
    
    
    4,009
    
    
    
    2,566Services
    
    
    221
    
    
    
    359
    
    
    
    421
    
    
    
    480Total cost of revenue
    
    
    2,115
    
    
    
    1,855
    
    
    
    4,430
    
    
    
    3,046ExpensesMarketing
    
    
    769
    
    
    
    509
    
    
    
    1,538
    
    
    
    863General & administrative
    
    
    1,205
    
    
    
    793
    
    
    
    2,522
    
    
    
    1,672Research & development
    
    
    904
    
    
    
    731
    
    
    
    1,713
    
    
    
    1,612Loss from operations
    
    
    (1,274
    )
    
    
    (855
    )
    
    
    (2,408
    )
    
    
    (885
    )Other income (expense)Interest income (expense), net
    
    
    (4
    )
    
    
    45
    
    
    
    (9
    )
    
    
    111Investment income
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    81Equity in income of affiliate companies
    
    
    27
    
    
    
    41
    
    
    
    53
    
    
    
    42Other expense
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (6
    )Loss from continuing operations before income taxes
    
    
    (1,251
    )
    
    
    (681
    )
    
    
    (2,364
    )
    
    
    (657
    )Income taxes
    
    
    5
    
    
    
    
    
    
    
    17
    
    
    
    Loss from continuing operations
    
    
    (1,256
    )
    
    
    (681
    )
    
    
    (2,381
    )
    
    
    (657
    )Loss from discontinued operations
    
    
    (85
    )
    
    
    (241
    )
    
    
    (446
    )
    
    
    (495
    )Gain on sale of discontinued operations, no tax effect
    
    
    2,884
    
    
    
    
    
    
    
    2,884
    
    
    
    97Net income (loss)
    
    $
    1,543
    
    
    $
    (922
    )
    
    $
    58
    
    
    $
    (1,055
    )Loss per share from continuing operations:Basic
    
    $
    (0.28
    )
    
    $
    (0.15
    )
    
    $
    (0.53
    )
    
    $
    (0.15
    )Diluted
    
    $
    (0.28
    )
    
    $
    (0.15
    )
    
    $
    (0.52
    )
    
    $
    (0.15
    )Income (loss) per share from discontinued operations:Basic
    
    $
    0.62
    
    
    $
    (0.05
    )
    
    $
    0.54
    
    
    $
    (0.09
    )Diluted
    
    $
    0.62
    
    
    $
    (0.05
    )
    
    $
    0.54
    
    
    $
    (0.09
    )Income (loss) per share:Basic
    
    $
    0.34
    
    
    $
    (0.21
    )
    
    $
    0.01
    
    
    $
    (0.24
    )Diluted
    
    $
    0.34
    
    
    $
    (0.21
    )
    
    $
    0.01
    
    
    $
    (0.24
    )Basic weighted average common shares outstanding
    
    
    4,478,971
    
    
    
    4,478,971
    
    
    
    4,478,971
    
    
    
    4,478,971Diluted weighted average common shares outstanding
    
    
    4,546,365
    
    
    
    4,478,971
    
    
    
    4,545,727
    
    
    
    4,478,971
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 Six Months Ended June 30,CASH PROVIDED BY (USED FOR):
    
    2008
    
    
    2007OPERATIONS:Net income (loss)
    
    $
    58
    
    
    $
    (1,055
    )Adjustments to reconcile net income (loss) to net cash used for operating activities:Depreciation and amortization
    
    
    260
    
    
    
    232Stock-based compensation expense
    
    
    9
    
    
    
    4Gain on sale of VISaer business
    
    
    (2,884
    )
    
    
    (97
    )Non cash interest expense (income), net
    
    
    (15
    )
    
    
    Investment income
    
    
    
    
    
    
    (81
    )Equity in income of affiliate companies
    
    
    (53
    )
    
    
    (42
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    22
    
    
    
    (821
    )Accrued interest receivable
    
    
    5
    
    
    
    Inventories
    
    
    112
    
    
    
    (208
    )Other current assets
    
    
    892
    
    
    
    602Accounts payable
    
    
    (93
    )
    
    
    1Accrued payroll
    
    
    (251
    )
    
    
    (44
    )Deferred revenue
    
    
    46
    
    
    
    (1,042
    )Accrued expenses and other current liabilities
    
    
    6
    
    
    
    18Other liabilities
    
    
    (42
    )
    
    
    (29
    )Cash used for operating activities
    
    
    (1,928
    )
    
    
    (2,562
    )INVESTING ACTIVITIES:Proceeds from sale of discontinued operations
    
    
    3,025
    
    
    
    Investment in subsidiary
    
    
    (125
    )
    
    
    Sale of investment or marketable securities
    
    
    
    
    
    
    131Proceeds from notes and interest receivable
    
    
    285
    
    
    
    3,165Payments on notes payable
    
    
    (133
    )
    
    
    (70
    )Purchases of property and equipment
    
    
    (154
    )
    
    
    (668
    )Cash provided by investing activities
    
    
    2,898
    
    
    
    2,558FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    1,400
    
    
    
    Repayments made under line of credit
    
    
    (1,820
    )
    
    
    Borrowings under other short-term arrangements
    
    
    124
    
    
    
    221Cash provided by (used for) financing activities
    
    
    (296
    )
    
    
    221Effects of exchange rate changes on cash
    
    
    (66
    )
    
    
    (15
    )Net increase in cash
    
    
    608
    
    
    
    202Cash at beginning of period
    
    
    554
    
    
    
    2,136Cash at end of period
    
    $
    1,162
    
    
    $
    2,338SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    42
    
    
    $
    Cash paid during the period for income taxes
    
    $
    17
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited, in thousands)
 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 Sale of VISaer Business (Discontinued Operations):
  (unaudited, in $000s)Proceeds from sale:Cash
    
    $
    3,025Note receivable, net of discount
    
    
    1,261Liabilities assumed by (assets transferred to) buyer:Other current assets
    
    
    (695
    )Property, plant and equipment, net
    
    
    (15
    )Intangible assets
    
    
    (1,803
    )Other assets
    
    
    (17
    )Accrued payroll
    
    
    258Accounts payable
    
    
    472Deferred revenue
    
    
    584Other liability
    
    
    (126
    )Accrued transaction related expenses
    
    
    (60
    )Gain on sale of VISaer business
    
    $
    2,884
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.
    
    Throughout this report, the terms we, us, ours, ISC and company refer to
Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries.2.
    
    The unaudited consolidated financial statements presented in this Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the United States
applicable to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion of ISC
management, these consolidated financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial position and
results of operations as of and for the three and six month periods ended June 30, 2008 and
2007. The interim results for the three and six months ended June 30, 2008 are not
necessarily indicative of the results to be expected for the full year. These statements
should be read in conjunction with our consolidated financial statements and notes thereto for
the fiscal year ended December 31, 2007, as filed in our Annual Report on Form 10-KSB.3.
    
    Discontinued Operations Effective April 16, 2008, the company and two subsidiaries, VISaer,
Inc. and VISaer (U.K.) Limited (collectively, VISaer) completed the sale of substantially
all the assets related to VISaers business pursuant to the terms of an asset purchase
agreement (the Asset Purchase Agreement) between IBS Technics, Inc. (IBS Technics) and the
company and VISaer. IBS Technics is a subsidiary of IBS Software Services, Inc., a software
services company that had previously provided certain software development services to VISaer
as an independent third party contractor.The purchase price consisted of $3,025,000 paid in cash at closing plus future earn-out and
contingent payments to be paid over four years based on certain performance metrics of the
VISaer business following the sale, with guaranteed minimum payments aggregating $1.5 million in
cash (discounted to a net present value of $1,278,000), payable in three equal installments in
2010, 2011 and 2012. In addition, IBS Technics assumed approximately $258,000 in liabilities of
VISaer related to employee vacation benefits and $437,000 payable to IBS Technics for prior
services. IBS hired the VISaer employees as of the effective date of the transaction. IBS
Technics acquired assets, net of liabilities, of $48,000 related to customer contracts and
assumed the ongoing liabilities and obligations associated with such contracts. We retained the
remainder of the liabilities of the VISaer business along with cash and accounts receivable
aggregating approximately $465,000 as of the closing date. Based on the carrying value of the
assets and liabilities transferred to IBS Technics and the estimated costs and expenses incurred
in connection with the sale, the company reported a gain on the sale transaction of $2,884,000
in the quarter ended June 30, 2008.The transaction also provides for contingent payments which may be earned based on the
attainment by the acquired VISaer business of certain levels of revenue in each of the calendar
years 2008 through 2011. As the amount, if any, of such payments is not quantifiable at this
time, no amount has been recorded for such contingency payments.The following condensed financial information is provided for the VISaer discontinued operations
for the periods shown.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    133
    
    
    $
    824
    
    
    $
    761
    
    
    $
    1,599Operating loss
    
    
    (95
    )
    
    
    (237
    )
    
    
    (454
    )
    
    
    (479
    )Net loss from discontinued operations
    
    $
    (85
    )
    
    $
    (241
    )
    
    $
    (446
    )
    
    $
    (495
    )
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4.
    
    Comprehensive Income (Loss) In accordance with Financial Accounting Standards Board Statement
No. 130, Reporting Comprehensive Income, comprehensive income (loss) is the total of net
income (loss) and all other non-owner changes in equity in a period. A summary follows:
 Consolidated Statements ofComprehensive Loss
    
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    1,543
    
    
    $
    (922
    )
    
    $
    58
    
    
    $
    (1,055
    )Other
comprehensive income (loss)Foreign currency translation adjustment
    
    
    (61
    )
    
    
    5
    
    
    
    (66
    )
    
    
    (15
    )Comprehensive income (loss)
    
    $
    1,482
    
    
    $
    (917
    )
    
    $
    (8
    )
    
    $
    (1,070
    )
 5.
    
    Stock-based Compensation At June 30, 2008, we have two stock-based compensation plans in
effect. In December 2004, the FASB issued FASB Statement No. 123R, Share-Based Payment (SFAS
No. 123R) which replaced APB No. 25 and SFAS No. 123. We adopted SFAS No.123R effective
January 1, 2006 using the modified prospective application method of adoption which requires
us to record compensation cost related to unvested stock awards by recognizing the unamortized
grant date fair value in accordance with provisions of SFAS 123R on a straight line basis over
the service periods of each award. We have estimated forfeiture rates based on our historical
experience. Stock option compensation expense is recognized as a component of general and
administrative expenses in the accompanying consolidated financial statements. As a result of
adopting SFAS No. 123R, we recorded $6,000 and $4,000 of stock based compensation expense for
the three months ended June 30, 2008 and 2007, respectively, and $9,000 and $4,000 of
stock-based compensation expense for the six months ended June 30, 2008 and 2007,
respectively.
   Wgt Avg
    
    
    AggregateWgt Avg
    
    
    Remaining Life
    
    
    Intrinsic# of Shares
    
    
    Exercise Price
    
    
    in Years
    
    
    ValueOutstanding at June 30, 2008
    
    
    221,000
    
    
    $
    2.46
    
    
    
    4.9
    
    
    $
    201,582Vested and exercisable at June 30, 2008
    
    
    203,000
    
    
    $
    2.37
    
    
    
    4.5
    
    
    $
    201,582
  6.
    
    Concentration of Revenue The following table indicates the percentage of consolidated
revenue represented by each customer for any period in which such customer represented more
than 10% of consolidated revenue.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007ChemFree Customer A
    
    
    46
    %
    
    
    27
    %
    
    
    45
    %
    
    
    15
    %ChemFree Customer B
    
    
    13
    %
    
    
    16
    %
    
    
    14
    %
    
    
    14
    %ChemFree Customer C
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    ChemFree Customer D
    
    
    
    
    
    
    
    
    
    
    11
    %
    
    
    CoreCard Customer E
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    %
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7.
    
    Industry Segments Segment information is presented consistently with the basis described in
the 2007 Form 10-KSB. The table following contains segment information for continuing
operations for the three and six month periods ended June 30, 2008 and 2007.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Information TechnologyRevenue
    
    $
    321
    
    
    $
    623
    
    
    $
    432
    
    
    $
    1,953Operating loss
    
    
    (945
    )
    
    
    (605
    )
    
    
    (2,022
    )
    
    
    (411
    )Industrial ProductsRevenue
    
    
    3,398
    
    
    
    2,410
    
    
    
    7,363
    
    
    
    4,355Operating income (loss)
    
    
    (146
    )
    
    
    21
    
    
    
    172
    
    
    
    180Consolidated SegmentsRevenue
    
    
    3,719
    
    
    
    3,033
    
    
    
    7,795
    
    
    
    6,308Operating loss
    
    
    (1,091
    )
    
    
    (584
    )
    
    
    (1,850
    )
    
    
    (231
    )Corporate expenses
    
    
    (183
    )
    
    
    (271
    )
    
    
    (558
    )
    
    
    (654
    )Consolidated operating loss from
continuing operations
    
    $
    (1,274
    )
    
    $
    (855
    )
    
    $
    (2,408
    )
    
    $
    (885
    )Depreciation and AmortizationInformation Technology
    
    $
    26
    
    
    $
    22
    
    
    $
    60
    
    
    $
    74Industrial Products
    
    
    106
    
    
    
    51
    
    
    
    187
    
    
    
    110Consolidated segments
    
    
    132
    
    
    
    73
    
    
    
    247
    
    
    
    184Corporate
    
    
    6
    
    
    
    5
    
    
    
    13
    
    
    
    11Consolidated depreciation and amortization
    
    $
    138
    
    
    $
    78
    
    
    $
    260
    
    
    $
    195Capital ExpendituresInformation Technology
    
    $
    (37
    )
    
    $
    255
    
    
    $
    (36
    )
    
    $
    481Industrial Products
    
    
    61
    
    
    
    146
    
    
    
    185
    
    
    
    181Consolidated segments
    
    
    24
    
    
    
    401
    
    
    
    149
    
    
    
    662Corporate
    
    
    3
    
    
    
    
    
    
    
    5
    
    
    
    6Consolidated capital expenditures
    
    $
    27
    
    
    $
    401
    
    
    $
    154
    
    
    $
    668
 (in thousands)
    
    June 30, 2008
    
    
    December 31, 2007Identifiable
AssetsInformation Technology
    
    $
    3,181
    
    
    $
    4,171Industrial Products
    
    
    4,903
    
    
    
    4,932Consolidated segments
    
    
    8,084
    
    
    
    9,103Corporate
    
    
    2,696
    
    
    
    3,519Consolidated assets
    
    $
    10,780
    
    
    $
    12,622
 8.
    
    Commitments and Contingencies Please refer to Note 9 to our Consolidated Financial
Statements included in our 2007 Form 10-KSB for a description of our commitments and
contingencies. As a result of the sale of the VISaer business as described in Note 3, the
VISaer property lease was assumed by the buyer. Accordingly, our future minimum lease
payments for 2008, 2009 and 2010 will be lower than previously reported by $108,000, $145,000
and $85,000, respectively.
 Legal Matters J. Walter,
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ISC Guarantees 
 VISaer Stock Purchase Transaction 
 9.
    
    Income Taxes Effective January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 448 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the financial
statements and provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition issues. We have
recognized tax benefits from all tax positions we have taken, and there has been no adjustment
to any carry forwards (net operating loss or research and development credits) as a result of
the implementation of FIN No. 48. The adoption of FIN No. 48 did not have a material effect on
our consolidated financial position or results of operations. As of June 30, 2008, we do not
have any unrecognized tax benefits and we do not anticipate any significant changes in the
balance of unrecognized tax benefits during the next twelve months.
   10.
    
    New Accounting
Pronouncements  In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (FASB No.157) to increase consistency and comparability in fair
value measurements. FASB No. 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements of certain assets,
liabilities and items in stockholders equity that are measured at fair value. FASB No. 157
is effective for financial statements issued for fiscal years beginning after November 15,
2007. Accordingly, we adopted FASB No. 157 effective January 1, 2008. The adoption of the
standard did not have a material impact on our consolidated financial statements.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 In addition to historical information, this Form 10-Q may contain forward-looking statements
relating to ISC. All statements, trend analyses and other information relative to markets for our
products and trends in revenue, gross margins and anticipated expense levels, as well as other
statements including words such as anticipate, believe, plan, estimate, expect, and
intend, and other similar expressions, constitute forward-looking statements. Prospective
investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties including those factors described below under
Factors That May Affect Future Performance, and that actual results may differ materially from
those contemplated by such
forward-looking statements. ISC undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results.
 For purposes of this discussion and analysis, we are assuming and relying upon the readers
familiarity with the information contained in Item 6 Managements Discussion and Analysis or Plan
of Operation, in the Form 10-KSB for the year ended December 31, 2007 as filed with the Securities
and Exchange Commission.
 Overview
   
    
    A change in revenue level at one of our subsidiaries may impact consolidated revenue or
be offset by an opposing change at another subsidiary.
    
    Economic and marketplace trends may impact our subsidiaries differently or not at all and
our software subsidiaries have limited experience in their marketplaces which makes it
difficult to identify and evaluate trends that may impact their business.
    
    CoreCard Software has been involved in major new product development initiatives for a
number of years and has limited experience delivering and installing products at customer
sites, making it difficult to predict with certainty when it may recognize revenue on
individual software contracts.
    
    Our subsidiaries are relatively small in revenue size and, in the Information Technology
sector, revenue in a given period may consist of a relatively small number of contracts.
Consequently, even small delays in a delivery under a software contract (which may be out of
our control) could have a significant and unpredictable impact on consolidated revenue that
we can recognize in a given quarterly or annual period.
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Results of Operations
  Revenue
 
    
    Revenue from products, which includes sales of equipment in our Industrial Products segment
as well as software license fees related to the Information Technology segment, was $3.4
million in the three month period ended June 30, 2008, a 33 percent increase compared to $2.6
million in the three months ended June 30, 2007. For the six month period ended June 30,
2008, revenue from products increased by 31 percent to $7.4 million compared to $5.7 million
in the same period in 2007. Product revenue associated with the ChemFree products (our
Industrial Products segment) grew by 41 percent and 69 percent, respectively, in the three and
six months ended June 30, 2008, compared to the same periods in 2007 and represented over 99
percent of product revenue in the three and six month periods ended June 30, 2008. ChemFree
sales in the domestic market increased 41 percent and 74 percent in the three and six month
periods of 2008 compared to the respective periods in 2007, principally due to increased
volume of products sold to a single end-user customer that began purchasing ChemFree products
in mid-2007. ChemFree also experienced an increase in revenue in international markets of 37
percent and 42 percent, respectively, in the three and six month periods of 2008 compared to
the same periods in 2007 due mainly to an increase in quantity of goods sold in the European
markets, offset in part by lower revenue levels at certain domestic US resellers. ChemFree
does not expect the same period-to-period growth in the second half of 2008 as was reported in
the first half of 2008. Software license revenue associated with the Information Technology
segment was minimal in the three and six month periods ended June 30, 2008 compared to
approximately $1.3 million in license revenue in the six months ended June 30, 2007, which
reflected primarily a single software license contract recognized by our CoreCard Software
subsidiary in the first quarter of 2007. The company recognizes software license revenue only
upon completion of each contract and acceptance by customers. At June 30, 2008, CoreCard
Software had approximately $1.8 million in deferred revenue associated with in-process
customer contracts that it expects to recognize upon contract completion within the next six
months or so.
    
    Service revenue associated with the Information Technology segment decreased by 34 percent
and 39 percent, respectively, in the three and six month periods ended June 30, 2008 as
compared to the same periods last year. The change is attributed mainly to a decline in
professional services billings for software services. More resources were involved in product
development activities and in-process contracts rather than billable services in the first six
months of 2008.
 Cost of Revenue
 
    
    Cost of product revenue was approximately the same, averaging 55 percent of product
revenue, in the three and six month periods of 2008 compared to 58 percent and 45 percent
of product revenue in the same periods in 2007. The principal reason for the difference in
product cost as a percent of product revenue is that almost all of the product revenue in
the first half of 2008 is from sales of ChemFrees parts washers and consumables which have
a higher cost of revenue than do software licenses. By comparison, in the first half of
2007, product revenue included $1.1 million in software licenses which have a low cost of
revenue.
    
    Cost of service revenue (which relates to the software subsidiaries only) was 72 percent
and 105 percent of service revenue in the three and six month periods ended June 30, 2008
compared to 78 percent and 74 percent of service revenue in the respective periods in 2007.
The change between periods reflects primarily the fact that costs associated with
CoreCards customer support activities were significantly higher in the first three months
of 2008 than in the same period in 2007. CoreCard is providing a high level of support to
its initial customers to ensure it builds a solid base of reference customers and puts in place an infrastructure for future
growth. Cost of services as a percentage of service revenue is expected to decrease as the
installed base of CoreCard customers increases.
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Operating Expenses
 Interest Income (Expense)
 Investment Income (Loss)
 Equity Earnings of Affiliate Companies
 Income Taxes
 Discontinued Operations
 Net loss from Discontinued Operations
 Gain on Sale of Discontinued Operations
 Liquidity and Capital Resources
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non-consolidated
 Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
 Form 10-KSB
 Factors That May Affect Future Operations
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
    
    Delays in CoreCards software development projects could cause customers to delay
implementations, delay payments or cancel contracts, which would increase our costs and reduce
our revenue.
    
    Our CoreCard subsidiary could fail to deliver software products which meet the business and
technology requirements of its target markets within a reasonable time frame and at a price
point that supports a profitable, sustainable business model.
    
    One of ChemFrees customers represented approximately 45 percent of consolidated revenue in
the first six months of 2008; any unplanned changes in the volume of orders or timeliness of
payments from such customer could have a negative impact on inventory levels and cash, at
least in the near-term.
    
    Failure by our ChemFree subsidiary to protect its intellectual property assets could
increase competition in the marketplace and result in greater price pressure and lower
margins, thus potentially impacting sales, profits and projected cash flows.
    
    Software errors or poor quality control may delay product releases, increase our costs,
result in non-acceptance of our software by customers or delay revenue recognition.
    
    Compliance with the internal controls over financial reporting requirements of Section 404
of the Sarbanes-Oxley Act of 2002 could increase operating expenses and divert management and
staff resources.
    
    Competitive pressures (including pricing, changes in customer requirements and preferences,
and competitor product offerings) may cause prospective customers to choose an alternative
product solution, resulting in lower revenue and profits (or increased losses).
    
    CoreCard could fail to establish a base of reference customers for its product offerings,
resulting in lower revenue and profits (or increased losses) and increased cash needs.
    
    In certain limited situations, ChemFrees lease customers are permitted to terminate the
lease covering a SmartWasher® machine, requiring the unamortized balance of the original
machine cost to be written off which could reduce profits in that reporting period and result
in lower revenue in future periods.
    
    CoreCard could fail to retain key software developers and managers who have accumulated
years of know-how in our target markets and company products, or fail to attract and train a
sufficient number of new software developers and testers to support our product development
plans and customer requirements at projected cost levels.
    
    Further increases in the price of oil could increase the cost of certain plastic components
used in ChemFrees products.
    
    Delays in anticipated customer payments for any reason would increase our cash requirements
and possibly our losses.
    
    Declines in performance, financial condition or valuation of minority-owned companies could
cause us to write-down the carrying value of our investment or postpone an anticipated
liquidity event, which could negatively impact our earnings and cash.
    
    Failure to meet the continued listing standards of The American Stock Exchange could result
in delisting of our common stock, with a potentially negative impact on market price and
liquidity of our common stock.
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
 Form
10-Q,
 
 Item 4. Controls and Procedures
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Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
 
 
 Item 6. Exhibits
  2.1
    
    Asset Purchase Agreement among IBS Technics, Inc., Intelligent Systems Corporation, VISaer
(UK) Limited and VISaer, Inc. dated April 4, 2008. (Incorporated by reference to Exhibit 2.1
of the Registrants Form 8-K dated April 16, 2008.)3.1
    
    Amended and Restated Articles of Incorporation of the Registrant dated November 14, 1991, as
amended November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1991 and to Exhibit 3.1 to the
Registrants Report on Form 8-K dated November 25, 1997.)3.2
    
    Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of
the Registrants Form
8-K dated December 7, 2007).4.1
    
    Rights Agreement dated as of November 25, 1997 between the Registrant and American Stock
Transfer & Trust Company as Rights Agent. (Incorporated by reference to Exhibit 4.1 of the
Registrants Report on Form
8-K dated November 25, 1997 and filed on December 16, 1997.)4.2
    
    Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2 of the Registrants
Report on Form 8-K dated November 25, 1997 and filed on December 16, 1997.)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  INTELLIGENT SYSTEMS CORPORATION
RegistrantDate:  August 14, 2008
    By:
    /s/ J. Leland StrangeJ. Leland StrangeChief Executive Officer, PresidentDate:  August 14, 2008
    By:
    /s/ Bonnie L. HerronBonnie L. HerronChief Financial Officer  Page 16




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EXHIBIT INDEX
 ExhibitNo.
    
    Descriptions2.1
    
    
    Asset Purchase Agreement among IBS Technics, Inc., Intelligent Systems Corporation, VISaer (UK)
Limited and VISaer, Inc. dated April 4, 2008. (Incorporated by reference to Exhibit 2.1 of the
Registrants Form 8-K dated April 16, 2008.)3 .1
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated November 14, 1991, as
amended November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1991 and to Exhibit 3.1 to the Registrants
Report on Form 8-K dated November 25, 1997.)3.2
    
    
    Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the
Registrants Form 8-K dated December 7, 2007).4.1
    
    
    Rights Agreement dated as of November 25, 1997 between the Registrant and American Stock Transfer &
Trust Company as Rights Agent. (Incorporated by reference to Exhibit 4.1 of the Registrants Report
on Form 8-K dated November 25, 1997 and filed on December 16, 1997.)4.2
    
    
    Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2 of the Registrants Report on
Form 8-K dated November 25, 1997 and filed on December 16, 1997.)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
  Page 17