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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
 o þ
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Intelligent Systems Corporation
 Index
Form 10-QSB
 PagePart I Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets at March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    9Item 3. Controls and Procedures
    
    
    13Part II Other InformationItem 1. Legal Proceedings
    
    
    14Item 6. Exhibits
    
    
    14Signatures
    
    
    14Ex. 31.1 Section 302 Certification of Chief Executive OfficerEx. 31.2 Section 302 Certification of Chief Financial OfficerEx. 32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer
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Part I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash
    
    $
    703
    
    
    $
    554Accounts receivable, net
    
    
    2,556
    
    
    
    2,139Notes and interest receivable, current portion
    
    
    550
    
    
    
    540Inventories
    
    
    1,469
    
    
    
    1,424Other current assets
    
    
    2,607
    
    
    
    2,217Total current assets
    
    
    7,885
    
    
    
    6,874Long-term investments
    
    
    1,153
    
    
    
    1,127Notes and interest receivable, net of current portion
    
    
    221
    
    
    
    350Property and equipment, at cost less accumulated depreciation
    
    
    1,910
    
    
    
    1,894Goodwill, net
    
    
    2,047
    
    
    
    2,047Other intangibles, net
    
    
    302
    
    
    
    313Other assets, net
    
    
    17
    
    
    
    17Total assets
    
    $
    13,535
    
    
    $
    12,622LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    1,817
    
    
    $
    593Note payable, current portion
    
    
    93
    
    
    
    Accounts payable
    
    
    1,646
    
    
    
    1,482Deferred revenue
    
    
    2,763
    
    
    
    2,527Accrued payroll
    
    
    1,047
    
    
    
    1,162Accrued expenses and other current liabilities
    
    
    1,901
    
    
    
    1,235Total current liabilities
    
    
    9,267
    
    
    
    6,999Long-term liabilities
    
    
    229
    
    
    
    95Commitments and contingencies (Note 7)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 March 31, 2008 and December 31, 2007
    
    
    45
    
    
    
    45Additional paid-in capital
    
    
    18,440
    
    
    
    18,437Accumulated other comprehensive loss
    
    
    (132
    )
    
    
    (127
    )Accumulated deficit
    
    
    (15,830
    )
    
    
    (14,343
    )Total stockholders equity
    
    
    2,523
    
    
    
    4,012Total liabilities and stockholders equity
    
    $
    13,535
    
    
    $
    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 March 31,2008
    
    
    2007RevenueProducts
    
    $
    4,021
    
    
    $
    3,086Services
    
    
    683
    
    
    
    963Total revenue
    
    
    4,704
    
    
    
    4,049Cost of revenueProducts
    
    
    2,117
    
    
    
    1,070Services
    
    
    564
    
    
    
    572Total cost of revenue
    
    
    2,681
    
    
    
    1,642ExpensesMarketing
    
    
    843
    
    
    
    437General & administrative
    
    
    1,471
    
    
    
    980Research & development
    
    
    1,202
    
    
    
    1,264Loss from operations
    
    
    (1,493
    )
    
    
    (274
    )Other income (expense)Interest income (expense), net
    
    
    (5
    )
    
    
    63Investment loss
    
    
    
    
    
    
    (11
    )Equity in income of affiliate company
    
    
    25
    
    
    
    1Other expense
    
    
    (2
    )
    
    
    (9
    )Loss from continuing operations before income tax
    
    
    (1,475
    )
    
    
    (230
    )Income tax
    
    
    12
    
    
    
    Loss from continuing operations
    
    
    (1,487
    )
    
    
    (230
    )Gain on sale of discontinued operations, no tax effect
    
    
    
    
    
    
    97Net loss
    
    $
    (1,487
    )
    
    $
    (133
    )Loss per share from continuing operations: Basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.05
    )Income per share from discontinued operations: Basic and diluted
    
    
    
    
    
    
    0.02Net loss per share: Basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.03
    )Basic weighted average shares outstanding
    
    
    4,478,971
    
    
    
    4,478,971Diluted weighted average shares outstanding
    
    
    4,478,971
    
    
    
    4,582,666
 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)
 Three Months Ended March 31,CASH PROVIDED BY (USED FOR):
    
    2008
    
    
    2007OPERATIONS:Net loss
    
    $
    (1,487
    )
    
    $
    (133
    )Adjustments to reconcile net loss to net cash used for operating activities:Depreciation and amortization
    
    
    126
    
    
    
    127Stock-based compensation expense
    
    
    3
    
    
    
    Gain on sale of QS business
    
    
    
    
    
    
    (97
    )Investment income
    
    
    
    
    
    
    11Equity in earnings of affiliate companies
    
    
    (25
    )
    
    
    (1
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (418
    )
    
    
    (235
    )Accrued interest receivable
    
    
    
    
    
    
    67Inventories
    
    
    (46
    )
    
    
    (79
    )Other current assets
    
    
    (390
    )
    
    
    127Accounts payable
    
    
    164
    
    
    
    (360
    )Accrued payroll
    
    
    (114
    )
    
    
    (21
    )Deferred revenue
    
    
    236
    
    
    
    (834
    )Accrued expenses and other current liabilities
    
    
    666
    
    
    
    248Other liabilities
    
    
    (23
    )
    
    
    (29
    )Cash used for operating activities
    
    
    (1,308
    )
    
    
    (1,209
    )INVESTING ACTIVITIES:Proceeds related to sales of investments or marketable securities
    
    
    
    
    
    
    39Proceeds from notes and interest receivable
    
    
    119
    
    
    
    2,907Purchases of property and equipment
    
    
    (131
    )
    
    
    (267
    )Cash provided by (used for) investing activities
    
    
    (12
    )
    
    
    2,679FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    1,400
    
    
    
    Borrowings under notes payable
    
    
    124
    
    
    
    Repayment under notes payable
    
    
    (50
    )
    
    
    (35
    )Cash provided by financing activities
    
    
    1,474
    
    
    
    (35
    )Effects of exchange rate changes on cash
    
    
    (5
    )
    
    
    5Net increase in cash
    
    
    149
    
    
    
    1,440Cash at beginning of period
    
    
    554
    
    
    
    2,136Cash at end of period
    
    $
    703
    
    
    $
    3,576SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    20
    
    
    $
    12Cash paid during the period for income taxes
    
    $
    12
    
    
    
    
 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 majority-owned subsidiaries.
 2.
    
    The unaudited consolidated financial statements presented in this Form 10-QSB 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 month periods ended March 31, 2008 and 2007.
The interim results for the three months ended March 31, 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.
    
    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 of Comprehensive Loss
    
    Three Months Ended March 31,(unaudited, in thousands)
    
    2008
    
    
    2007Net loss
    
    $
    (1,487
    )
    
    $
    (133
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (5
    )
    
    
    5Comprehensive loss
    
    $
    (1,492
    )
    
    $
    (128
    )
 4.
    
    Stock based Compensation At March 31, 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 123. We adopted SFAS 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 123R, we recorded $3,000 and $0 of stock based compensation expense for the
three months ended March 31, 2008 and 2007, respectively.The estimated fair value of options granted is calculated using the Black Scholes option pricing
model with assumptions as previously disclosed in our Form 10-KSB.As of March 31, 2008, there is no unrecognized compensation cost related to stock options. No
options were granted, exercised or forfeited during the quarter ended March 31, 2008. The
following table summarizes options as of March 31, 2008:
 Wgt Avg
    
    
    Wgt Avg
    
    
    AggregateExercise
    
    
    Remaining
    
    
    Intrinsic# of Shares
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding at March 31, 2008
    
    
    209,000
    
    
    $
    2.42
    
    
    
    4.9
    
    
    $
    187,982Vested and exercisable at
March 31, 2008
    
    
    197,000
    
    
    $
    2.33
    
    
    
    4.7
    
    
    $
    187,982
 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the companys closing stock price on the last trading day of the first
quarter of 2008 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders
exercised their options on March 31, 2008. The amount of aggregate intrinsic value will change
based on the fair market value of the companys stock.
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5.
    
    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 March 31,(unaudited)
    
    2008
    
    
    2007CoreCard Customer A
    
    
    
    
    
    
    28
    %ChemFree Customer B
    
    
    13
    %
    
    
    10
    %ChemFree Customer C
    
    
    13
    %
    
    
    ChemFree Customer D
    
    
    39
    %
    
    
    
 6.
    
    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 month periods ended March 31, 2008 and 2007.
 Three Months Ended March 31,(unaudited, in thousands)
    
    2008
    
    
    2007Information TechnologyRevenue
    
    $
    738
    
    
    $
    2,104Operating loss
    
    
    (1,437
    )
    
    
    (48
    )Industrial ProductsRevenue
    
    
    3,966
    
    
    
    1,945Operating income
    
    
    318
    
    
    
    159Consolidated SegmentsRevenue
    
    
    4,704
    
    
    
    4,049Operating income (loss)
    
    
    (1,118
    )
    
    
    111Corporate expenses
    
    
    (375
    )
    
    
    (385
    )Consolidated operating loss from continuing operations
    
    $
    (1,493
    )
    
    $
    (274
    )Depreciation and amortizationInformation Technology
    
    $
    38
    
    
    $
    63Industrial Products
    
    
    82
    
    
    
    59Consolidated segments
    
    
    120
    
    
    
    122Corporate
    
    
    6
    
    
    
    5Consolidated depreciation and amortization
    
    $
    126
    
    
    $
    127Capital ExpendituresInformation Technology
    
    $
    2
    
    
    $
    227Industrial Products
    
    
    123
    
    
    
    35Consolidated segments
    
    
    125
    
    
    
    262Corporate
    
    
    6
    
    
    
    5Consolidated capital expenditures
    
    $
    131
    
    
    $
    267
 March 31,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Identifiable AssetsInformation Technology
    
    $
    4,555
    
    
    $
    4,171Industrial Products
    
    
    5,641
    
    
    
    4,932Consolidated segments
    
    
    10,196
    
    
    
    9,103Corporate
    
    
    3,339
    
    
    
    3,519Consolidated assets
    
    $
    13,535
    
    
    $
    12,622
 7.
    
    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. There has been no material change since December 31, 2007 in the commitments
described in such note.
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Legal Matters In December 2004, ChemFree filed a patent infringement action against J. Walter
Co. Ltd. and J. Walter, Inc. in the United States Court for the Northern District of Georgia.
The complaint alleges that certain of the defendants products infringe various U.S. patents
held by ChemFree and seeks a ruling to compel defendant to cease its infringing activities. The
defendant has asserted various defenses. The parties are in the discovery phase of the case and
no trial date has been set. While the resolution and timing of any legal action is not
predictable, ChemFree believes it has sufficient grounds to prevail in these actions, although
there can be no assurance that the disputes will be resolved in its favor.ISC Guarantees In conjunction with a Software License Agreement entered into on June 12, 2003
between our CoreCard subsidiary and a CoreCard customer, ISC entered into a letter of guarantee
with the CoreCard customer. Under the guarantee, in the event that the Software License is
terminated due to CoreCard discontinuing operations, ISC has guaranteed to make available at its
expense up to four employees to provide technical assistance to the customer during a transition
period of up to one year which is estimated to be approximately $400,000. The guarantee expires
in June 2008. As of March 31, 2008, it does not appear probable that the guarantee will be
paid; thus no amounts have been accrued with respect to this guarantee.8.
    
    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 48). FIN 48 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 48. The adoption of FIN 48 did not have a material effect on our
consolidated financial position or results of operations. As of March 31, 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.Our policy is to recognize accrued interest related to uncertain tax positions in interest
expense and related penalties, if applicable, in general and administrative expense. No interest
expense or penalties were recognized during the three months ended March 31, 2008 and 2007.We file a consolidated U.S. federal income tax return for all subsidiaries in which our
ownership exceeds 80 percent, as well as individual subsidiary returns in various states and
foreign jurisdictions. Our VISaer subsidiary files a separate U.S. federal income tax return.
With few exceptions we are no longer subject to U.S. federal, state and local or foreign income
tax examinations by taxing authorities for years before 2003.9.
    
    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 financial statements.On February 15, 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities: Including an amendment of FASB Statement No. 115 (FASB
No.159). FASB No. 159, which builds on other Statements related to fair value such as FASB No.
157 above, permits entities to elect to measure many financial instruments and certain other
items at fair value with changes in value reported in earnings. It is designed to mitigate
earnings volatility that arises when assets and liabilities are measured differently. FASB No.
159 is effective for financial statements issued for fiscal years beginning after November 15,
2007. Accordingly, we adopted FASB 159 effective January 1, 2008. The adoption of the standard
did not have a material impact on our financial statements.10.
    
    Subsequent Event 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.
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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, payable in three equal installments in 2010, 2011 and 2012. In addition, IBS Technics
assumed approximately $700,000 in liabilities of VISaer related to employee vacation benefits
and amounts payable to IBS for prior services. IBS hired the VISaer employees as of the
effective date of the transaction and assumed all customer contracts, including 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 $400,000 as of the closing date. The company expects to report a gain on the sale
transaction of approximately $3.4 million in the quarter ended June 30, 2008 and will classify
the VISaer operation as discontinued operations in all future reporting periods.
 
 Item 2. Managements Discussion and Analysis or Plan of Operation
 In addition to historical information, this Form 10-QSB may contain forward-looking statements
relating to ISC. All statements, trend analysis 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 $4.0
million in the three month period ended March 31, 2008, a 30 percent increase compared to $3.1
million in the three months ended March 31, 2007. Product revenue associated with the
ChemFree products (our Industrial Products segment) grew by 104 percent compared to the prior
year period and represented almost 99 percent of product revenue in the quarter ended March
31, 2008. The increase is attributed mainly to 121 percent increase in ChemFree products sold
in the domestic market and a 45 percent increase in ChemFree products sold internationally.
Software license revenue associated with the Information Technology segment was minimal in the
current quarter compared to approximately $1.0 million license revenue in the three months
ended March 31, 2007 which reflected a single software license contract recognized by our
CoreCard Software subsidiary. The company recognizes software license revenue only upon
completion of each contract and acceptance by customers.
    
    Service revenue decreased by 29 percent, or $280,000, in the first quarter of 2008 compared
to the same period last year. The change is attributed mainly to a decline in professional
services billings at both the VISaer and CoreCard subsidiaries. More resources were involved
in product development activities rather than billable services in the first quarter of 2008.
 Cost of Revenue
 
    
    Cost of product revenue was 53 percent of product revenue in the first quarter of 2008
compared to 35 percent of product revenue in the same period 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 quarter of 2008 is from sales of ChemFrees parts washers
and consumables which have a higher cost of sales than do software licenses. By
comparison, in the first quarter of 2007, product revenue included $1.1 million in software
licenses which have a low cost of sales. Cost of sales of industrial products averaged 53
percent and 55 percent of product revenue from the sale of industrial products in the three
months ended March 31, 2008 and 2007, respectively.
    
    Cost of service revenue (which relates to the software subsidiaries only) was 83 percent
and 59 percent of service revenue in the three months ended March 31, 2008 and 2007,
respectively. The change between periods reflects primarily the fact that costs associated
with CoreCards customer support activities were 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.
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Operating Expenses
 Interest Income (Expense)
 Investment Income (Loss)
 Equity Earnings of Affiliate Companies
 Other Income (Expense), Net
 Income Taxes
 Discontinued Operations
 Gain on Sale of Discontinued Operations
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Factors That May Affect Future Operations
   Page 12




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
    
    Delays in 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 39 percent of consolidated revenue in
the first quarter 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.
 
    
    Our products specifications and features could fail to achieve market acceptance.
 
    
    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.
  
 Item 3. Controls and Procedures
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Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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:  May 15, 2008
    By:
    
    /s/ J. Leland StrangeJ. Leland StrangeChief Executive Officer, PresidentDate:  May 15, 2008

    By:
    
    /s/ Bonnie L. HerronBonnie L. HerronChief Financial Officer  Page 14