##### 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 September 30, 2010
 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
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



Intelligent Systems Corporation
 Index
Form 10-Q
 PagePart I Financial InformationItem 1 Financial StatementsConsolidated Balance Sheets at September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 4 Controls and Procedures
    
    
    14Part II Other InformationItem 1 Legal Proceedings
    
    
    14Item 6 Exhibits
    
    
    15Signatures
    
    
    15Ex. 31.1 Section 302 Certification of Chief Executive OfficerEx. 31.2 Section 302 Certification of Chief Financial OfficerEx. 32.1 906 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)
 September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash
    
    $
    2,332
    
    
    $
    2,795Accounts receivable, net
    
    
    2,652
    
    
    
    1,680Notes and interest receivable, current portion
    
    
    992
    
    
    
    492Inventories, net
    
    
    864
    
    
    
    964Other current assets
    
    
    458
    
    
    
    399Total current assets
    
    
    7,298
    
    
    
    6,330Long-term investments
    
    
    1,186
    
    
    
    1,219Notes and interest receivable, net of current portion
    
    
    560
    
    
    
    1,006Property and equipment, at cost less accumulated depreciation
    
    
    1,216
    
    
    
    1,256Patents, net
    
    
    189
    
    
    
    223Total assets
    
    $
    10,449
    
    
    $
    10,034LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    429
    
    
    $
    576Deferred revenue
    
    
    1,138
    
    
    
    1,355Accrued payroll
    
    
    523
    
    
    
    423Accrued expenses
    
    
    782
    
    
    
    565Other current liabilities
    
    
    347
    
    
    
    406Total current liabilities
    
    
    3,219
    
    
    
    3,325Long-term liabilities
    
    
    111
    
    
    
    100Commitments and contingencies (Note 8)Intelligent Systems Corporation stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028
shares issued and outstanding at September 30, 2010 and December 31, 2009
    
    
    90
    
    
    
    90Additional paid-in capital
    
    
    21,416
    
    
    
    21,410Accumulated other comprehensive income (loss)
    
    
    2
    
    
    
    (28
    )Accumulated deficit
    
    
    (15,905
    )
    
    
    (16,379
    )Total Intelligent Systems Corporation stockholders equity
    
    
    5,603
    
    
    
    5,093Non-controlling interest
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    
    7,119
    
    
    
    6,609Total liabilities and stockholders equity
    
    $
    10,449
    
    
    $
    10,034
 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 Sept. 30,
    
    
    Nine Months Ended Sept. 30,2010
    
    
    2009
    
    
    2010
    
    
    2009RevenueProducts
    
    $
    3,214
    
    
    $
    3,147
    
    
    $
    10,325
    
    
    $
    8,215Services
    
    
    602
    
    
    
    268
    
    
    
    1,796
    
    
    
    1,112Total revenue
    
    
    3,816
    
    
    
    3,415
    
    
    
    12,121
    
    
    
    9,327Cost of revenueProducts
    
    
    1,626
    
    
    
    1,616
    
    
    
    5,494
    
    
    
    4,285Services
    
    
    266
    
    
    
    202
    
    
    
    827
    
    
    
    743Total cost of revenue
    
    
    1,892
    
    
    
    1,818
    
    
    
    6,321
    
    
    
    5,028ExpensesMarketing
    
    
    527
    
    
    
    556
    
    
    
    1,646
    
    
    
    1,456General & administrative
    
    
    654
    
    
    
    972
    
    
    
    2,052
    
    
    
    2,662Research & development
    
    
    638
    
    
    
    620
    
    
    
    1,566
    
    
    
    1,630Income (loss) from operations
    
    
    105
    
    
    
    (551
    )
    
    
    536
    
    
    
    (1,449
    )Other income (expense)Interest income, net
    
    
    19
    
    
    
    26
    
    
    
    63
    
    
    
    57Equity in income (loss) of affiliate company
    
    
    (10
    )
    
    
    4
    
    
    
    (32
    )
    
    
    24Other income
    
    
    4
    
    
    
    6
    
    
    
    17
    
    
    
    18Income (loss) before income taxes
    
    
    118
    
    
    
    (515
    )
    
    
    584
    
    
    
    (1,350
    )Income taxes
    
    
    27
    
    
    
    6
    
    
    
    110
    
    
    
    10Net income (loss)
    
    $
    91
    
    
    $
    (521
    )
    
    $
    474
    
    
    $
    (1,360
    )Income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    (0.25
    )Diluted
    
    $
    0.01
    
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    (0.25
    )Basic weighted average common shares
outstanding
    
    
    8,958,028
    
    
    
    7,465,023
    
    
    
    8,958,028
    
    
    
    5,474,350Diluted weighted average common shares
outstanding
    
    
    8,962,426
    
    
    
    7,465,023
    
    
    
    8,962,720
    
    
    
    5,474,350
 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)
 Nine Months Ended September 30,CASH PROVIDED BY (USED FOR):
    
    2010
    
    
    2009OPERATIONS:Net income (loss)
    
    $
    474
    
    
    $
    (1,360
    )Adjustments to reconcile net income (loss) to net cash used for operating activities:Depreciation and amortization
    
    
    371
    
    
    
    414Stock-based compensation expense
    
    
    7
    
    
    
    9Non-cash interest income, net
    
    
    (54
    )
    
    
    (54
    )Equity in (income) loss of affiliate company
    
    
    32
    
    
    
    (24
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (972
    )
    
    
    (435
    )Inventories
    
    
    101
    
    
    
    247Accrued interest
    
    
    (6
    )
    
    
    2Other current assets
    
    
    (60
    )
    
    
    (142
    )Accounts payable
    
    
    (147
    )
    
    
    209Deferred revenue
    
    
    (217
    )
    
    
    513Accrued payroll
    
    
    99
    
    
    
    (9
    )Accrued expenses and other current liabilities
    
    
    220
    
    
    
    (9
    )Other liabilities
    
    
    65
    
    
    
    (6
    )Net cash used for operating activities
    
    
    (87
    )
    
    
    (645
    )INVESTING ACTIVITIES:Proceeds from notes and interest receivable
    
    
    7
    
    
    
    352Purchases of property and equipment
    
    
    (297
    )
    
    
    (112
    )Net cash provided by (used for) investing activities
    
    
    (290
    )
    
    
    240FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    
    
    
    
    335Repayments made under line of credit
    
    
    
    
    
    
    (660
    )Payments on notes payable
    
    
    (116
    )
    
    
    (74
    )Proceeds from rights offering
    
    
    
    
    
    
    2,986Net cash provided by (used for) financing activities
    
    
    (116
    )
    
    
    2,587Effects of exchange rate changes on cash
    
    
    30
    
    
    
    15Net increase (decrease) in cash
    
    
    (463
    )
    
    
    2,197Cash at beginning of period
    
    
    2,795
    
    
    
    1,074Cash at end of period
    
    $
    2,332
    
    
    $
    3,271SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    3
    
    
    $
    26Cash paid during the period for income taxes
    
    $
    52
    
    
    $
    2
 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 nine month periods ended September 30, 2010
and 2009. The interim results for the three and nine months ended September 30, 2010 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, 2009, as filed in our Annual Report on Form 10-K.
 3.
    
    Comprehensive Income (Loss) 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
Income (Loss)
    
    Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited, in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    91
    
    
    $
    (521
    )
    
    $
    474
    
    
    $
    (1,360
    )Other comprehensive income:Foreign currency
translation adjustment
    
    
    10
    
    
    
    9
    
    
    
    30
    
    
    
    15Comprehensive income (loss)
    
    $
    101
    
    
    $
    (512
    )
    
    $
    504
    
    
    $
    (1,345
    )
 4.

    
    Stock-based Compensation At September 30, 2010, we have two stockbased compensation plans
in effect. We record compensation cost related to unvested stock-based awards by recognizing
the unamortized grant date fair value on a straight line basis over the service periods of
each award. We have estimated forfeiture rates based on our historical experience.
Stock-based compensation expense is recognized as a component of general and administrative
expenses in the accompanying Consolidated Financial Statements. We recorded $1,500 and $3,000
of stock-based compensation expense in the three months ended September 30, 2010 and 2009,
respectively and $6,000 and $9,000 for the nine month periods ended September 30, 2010 and
2009, 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-K.
  Wgt AvgRemaining
    
    
    Aggregate# of
    
    
    Wgt Avg
    
    
    Contractual Life
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    in Years
    
    
    ValueOutstanding at September 30, 2010
    
    
    214,000
    
    
    $
    2.06
    
    
    
    3.8
    
    
    $
    3,720Vested at September 30, 2010
    
    
    196,000
    
    
    $
    2.15
    
    
    
    3.3
    
    
    $
    1,860
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5.

    
    Fair Value of Financial Instruments- The carrying value of cash, accounts receivable,
accounts payable and certain other financial instruments (such as short-term borrowings,
accrued expenses, and other current liabilities) included in the accompanying consolidated
balance sheets approximates their fair value principally due to the short-term maturity of
these instruments. The carrying value of non-interest bearing notes receivable beyond one
year have been discounted at a rate of 6% which approximates rates offered in the market for
notes receivable with similar terms and conditions. The fair value of equity method and cost
method investments has not been determined as it was impracticable to do so.
  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 Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009ChemFree Customer A
    
    
    34
    %
    
    
    41
    %
    
    
    32
    %
    
    
    37
    %ChemFree Customer B
    
    
    
    
    
    
    12
    %
    
    
    12
    %
    
    
    13
    %ChemFree Customer C
    
    
    10
    %
    
    
    11
    %
    
    
    
    
    
    
    12
    %
 7.

    
    Short-term Borrowings On June 28, 2010, we renewed our working capital line of credit with
our bank. The revolving line of credit bears interest at the higher of the prime rate plus
one and one half percent and 6.5% (6.5% at September 30, 2010), is collateralized by all
assets of the company and expires June 30, 2011. We may borrow an aggregate of 80 percent of
qualified accounts receivable plus 50 percent of inventory, up to a maximum of $1,250,000. At
September 30, 2010, our borrowing base calculation resulted in availability of $1,250,000, of
which we had drawn down $0. The terms of the line of credit contain typical covenants not to
sell or transfer material assets, to create liens against assets, to merge with another
entity, to change corporate structure or the nature of our business, to declare or pay
dividends, or to redeem shares of common stock. The loan agreement also contains covenants
not to change the chief executive and chief financial officers of the company or to make loans
to or to make new investments in companies, without first obtaining the consent of our bank in
each case. Furthermore, the terms of the loan include a covenant requiring the company to
maintain a minimum tangible net worth as defined in the loan agreement at the end of each
calendar quarter during the loan term. We are in compliance with all loan covenants as of
September 30, 2010.
 8.

    
    Commitments and Contingencies Please refer to Note 7 in the Consolidated Financial
Statements included in our 2009 Form 10-K for a description of our commitments and
contingencies in addition to those disclosed here.
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9.


    
    Industry Segments Segment information is presented consistently with the basis described in
our 2009 Form 10-K. The following table contains segment information for continuing
operations for the three and nine months ended September 30, 2010 and 2009.
 Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited, in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Information TechnologyRevenue
    
    $
    696
    
    
    $
    412
    
    
    $
    2,634
    
    
    $
    1,322Operating loss
    
    
    (357
    )
    
    
    (603
    )
    
    
    (675
    )
    
    
    (1,449
    )Industrial ProductsRevenue
    
    
    3,120
    
    
    
    3,003
    
    
    
    9,487
    
    
    
    8,005Operating income
    
    
    662
    
    
    
    298
    
    
    
    1,974
    
    
    
    884Consolidated SegmentsRevenue
    
    
    3,816
    
    
    
    3,415
    
    
    
    12,121
    
    
    
    9,327Operating income
    
    
    305
    
    
    
    (305
    )
    
    
    1,299
    
    
    
    (565
    )Corporate expenses
    
    
    (200
    )
    
    
    (246
    )
    
    
    (763
    )
    
    
    (884
    )Consolidated operating income ( loss)
    
    $
    105
    
    
    $
    (551
    )
    
    $
    536
    
    
    $
    (1,449
    )Depreciation and AmortizationInformation Technology
    
    $
    39
    
    
    $
    28
    
    
    $
    64
    
    
    $
    57Industrial Products
    
    
    93
    
    
    
    111
    
    
    
    295
    
    
    
    343Consolidated segments
    
    
    132
    
    
    
    139
    
    
    
    359
    
    
    
    400Corporate
    
    
    4
    
    
    
    4
    
    
    
    12
    
    
    
    14Consolidated depreciation and
amortization
    
    $
    136
    
    
    $
    143
    
    
    $
    371
    
    
    $
    414Capital ExpendituresInformation Technology
    
    $
    36
    
    
    $
    18
    
    
    $
    194
    
    
    $
    65Industrial Products
    
    
    20
    
    
    
    28
    
    
    
    87
    
    
    
    41Consolidated segments
    
    
    56
    
    
    
    46
    
    
    
    281
    
    
    
    106Corporate
    
    
    15
    
    
    
    1
    
    
    
    16
    
    
    
    6Consolidated capital expenditures
    
    $
    71
    
    
    $
    47
    
    
    $
    297
    
    
    $
    112
 (unaudited, in thousands)
    
    Sept. 30, 2010
    
    
    Dec. 31, 2009Identifiable AssetsInformation Technology
    
    $
    2,001
    
    
    $
    2,693Industrial Products
    
    
    5,806
    
    
    
    3,824Consolidated segments
    
    
    7,807
    
    
    
    6,517Corporate
    
    
    2,642
    
    
    
    3,517Consolidated assets
    
    $
    10,449
    
    
    $
    10,034
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10.

    
    Income Taxes As of September 30, 2010, the company has recorded a liability of $65,000 in
connection with unrecognized tax benefits related to uncertain tax positions. The liability
includes $8,622 of interest and penalties. As of September 30, 2010, management expects some
incremental but not significant changes in the balance of unrecognized tax benefits over the
next twelve months.
   11.

    
    On July 17, 2009, we completed a rights offering of common stock to our shareholders.  We
distributed one right for each share of common stock owned by such holder on the record date
of June 17, 2009.  The company sold 4,479,014 new shares of common stock and received gross
proceeds of $3,135,310, less expenses related to the transaction of $149,000, from the rights
offering. Giving effect to the rights offering, we have 8,958,028 shares of common stock
outstanding as of September 30, 2009 and 2010.
 12.

    
    Recent Accounting Pronouncements In October 2009, the Financial Accounting Standards Board
(FASB) issued accounting guidance which amends the criteria for allocating a contracts
consideration to individual services or products in multiple-deliverable arrangements. The
guidance establishes a selling price hierarchy for determining the selling price of a
deliverable, which includes: (1) vendor-specific objective evidence if available, (2)
third-party evidence if vendor-specific evidence is not available, and (3) estimated selling
price if neither vendor-specific nor third-party evidence is available. This guidance is
effective for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 (January 1, 2011 for us), and we are currently evaluating
the potential impact, if any, on our Consolidated Financial Statements.
  13.
    
    Subsequent Events We evaluated subsequent events through the date when these financial
statements were issued. Except as otherwise disclosed in this report, we are not aware of any
significant events that occurred subsequent to the balance sheet date but prior to the filing
of this report that would 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 Operations, 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 of
Financial Condition and Results of Operations, in the Form 10-K for the year ended December 31,
2009 as filed with the Securities and Exchange Commission.
 Overview
   
    
    A change in revenue level at one of our subsidiaries may be offset by an opposing change
at another subsidiary.
    
    Customers may decide to postpone or cancel a planned implementation of our software for
any number of reasons, which may be unrelated to our software features or contract
performance, but which may affect the amount, timing and characterization of our deferred
and/or recognized revenue.
    
    In the Information Technology sector, license 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 an unpredictable impact on
consolidated revenue that is recognized in a given quarterly or annual period.
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Results of Operations
  Revenue
 
    
    Revenue from products, which includes sales and leases of equipment and supplies in our
Industrial Products segment as well as software license fees related to the Information
Technology segment, was $3.2 million in the three month period ended September 30, 2010, a 2
percent increase compared to the three month period ended September 30, 2009. Product revenue
increased by 26 percent to $10.3 million in the nine month period ended September 30, 2010
compared to the first nine months of 2009. The third quarter increase in product revenue
reflects primarily stronger sales of ChemFrees SmartWasher® parts washer in international
markets, offset in part by a period-to-period decline in machines sales in the domestic
market. For the year-to-date period of 2010, revenue from SmartWasher® sales increased
significantly in both domestic and international markets compared to the same period in 2009.
Sales of SmartWasher® fluid and filter consumables increased in both the three and nine month
periods ended September 30, 2010 compared to the same periods in 2009, driven by strong
international sales and an increasing base of new and existing users of the SmartWasher® part
washers in both domestic and international markets. Software license revenue associated with
the Information Technology segment was lower in the three month period ended September 20,
2010 but significantly higher in the nine month period ended September 30, 2010 compared to
the respective periods in 2009. We recognize software license revenue generally upon
completion of each contract and acceptance by customers, which tends to result in considerable
fluctuation between quarterly periods. Year-to-date software license revenue in 2010 was
bolstered by the completion and recognition of a software contract that contributed almost
$500,000 in revenue.
 
    
    Service revenue associated with the Information Technology segment was $603,000 and
$1,796,000 in the three and nine month periods ended September 30, 2010, representing
increases of 125 percent and 62 percent compared to the respective periods in 2009. The
change is attributed to increased professional services projects that were completed for
CoreCard customers as well as an increase in the installed base of customers that pay for
maintenance and technical support.
 Cost of Revenue
 
    
    Cost of product revenue was 51 percent of product revenue in the three months ended
September 30, 2010 and 2009. Cost of product revenue was 53 percent and 52 percent of
product revenue in the nine month periods ended September 30, 2010 and 2009, respectively.
The slight change between year-to-date periods reflects primarily changes in product mix
between periods.
 
    
    Cost of service revenue (which relates to our CoreCard business only) was 44 percent and
46 percent of service revenue in the three and nine month periods ended September 30, 2010
as compared to 75 percent and 67 percent of service revenue in the respective periods last
year. The mix of service revenue in a given period, as well as the number of customers and
new products being supported, impacts the cost of service revenue. The cost to provide
annual maintenance and support services as a percentage of service revenue has declined as
CoreCards installed base of customers with maintenance contracts has increased, since
certain costs are spread across a larger maintenance revenue base. The cost and gross
margins on professional services revenue are tied to specific projects and vary depending
on the specific project requirements and complexity as well as the mix of U.S. and offshore
employees working on the project. In 2010, our cost of delivering professional services
benefited from a larger percentage of offshore employees being assigned to such projects.
 Operating Expenses
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Interest Income, net
 Equity in Income (Loss) of Affiliate Company
 Income Taxes
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Factors That May Affect Future Operations
   
    
    Weakness in the global financial markets could have a serious negative impact on CoreCard
due to potential customers (most of whom are financial institutions or services firms)
delaying purchase or implementation decisions.
 
    
    Stricter regulations and reluctance by financial institutions to act as sponsor banks for
prospective customers (such as issuers and processors of credit and prepaid cards) could
increase CoreCards losses and cash requirements.
 
    
    Delays in software development projects could cause our customers to delay implementations
or delay payments, which would increase our costs and reduce our revenue.
 
    
    It is unclear whether the recent activity in the ChemFree legal action described in Note 8
to the Consolidated Financial Statements will have any impact on our ChemFree subsidiary in
the foreseeable future but if the finding of invalidity of certain of ChemFrees patents is
sustained, it could result in increased competition in the marketplace and greater price
pressure and lower margins, thus potentially impacting sales, profits and projected cash
flows.
 
    
    If we do not prevail in the arbitration matter described in Note 8, the amount of the
receivable owed to us by IBS Technics could be reduced or we could be required to pay some or
all of the claimed damages of approximately $2.6 million, thus impacting the availability of
cash for future operations.
 
    
    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.
 
    
    As an alternative to licensing its software, CoreCard is now offering processing services
to customers running on the CoreCard software system. There are numerous risks associated
with entering any new line of business and if CoreCard fails to manage the risks associated
with its processing operations, it could have a negative impact on our business.
 
    
    One of ChemFrees customers represented 32 percent of our consolidated revenue in the first
nine months of 2010 and 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.
 
    
    Delays in production or shortages of certain sole-sourced parts for our ChemFree products
could impact revenue and orders. The company has experienced some ongoing difficulty securing
acceptable quality of one plastic part that impacts one of its international product models
and expects it will take a number of months to improve the situation.
 
    
    Software errors or poor quality control may delay product releases, increase our costs or
delay of revenue recognition.
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
    
    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).
 
    
    Increasing government regulation in the United States and foreign countries related to such
issues as data privacy, financial and credit transactions could require changes to our
products and services, increase our costs and affect our existing customer relationships or
prevent us from getting new customers.
 
    
    CoreCard could fail to expand its base of customers as quickly as anticipated, resulting in
lower revenue and profits (or increased losses) and increased cash needs.
 
    
    In certain 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s 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.
 
    
    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 NYSE Amex could result in delisting of
our common stock, with a potentially negative impact on the market price and liquidity of our
common stock.
 
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
 
 Item 4. Controls and Procedures
  
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 6. Exhibits
  3.1
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010.
(Incorporated by reference to Exhibit 3.(1) to the Registrants Annual Report on Form 10-K
for the year ended December 31, 2009.)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.)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:  November 12, 2010
    By:
    /s/ J. Leland StrangeJ. Leland StrangeChief Executive Officer, PresidentDate:  November 12, 2010
    By:
    /s/Bonnie L. HerronBonnie L. HerronChief Financial Officer  Page 15




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EXHIBIT INDEX
 ExhibitNo.
    
    Descriptions3.1
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010.
(Incorporated by reference to Exhibit 3.(1) to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2009.)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.)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 16