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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB (Mark One)þ
    
    QUARTERLY REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005  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)
 Issuers telephone number, including area code: (770) 381-2900 Indicate by a check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þNo
o As of April 30, 2005, 4,478,971 shares of Common Stock were outstanding. Transitional Small Business
Disclosure Format (check one): YesoNo
þ




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TABLE OF CONTENTS  Item 1. Financial StatementsItem 2. Managements Discussion and Analysis or Plan of OperationsItem 3. Controls and ProceduresPart II. OTHER INFORMATIONItem 6. ExhibitsSIGNATURESEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO    Table of Contents  
 Item 1. Financial Statements Intelligent Systems Corporation
CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash
    
    $
    1,632
    
    
    $
    670Accounts receivable, net
    
    
    2,542
    
    
    
    2,931Inventories
    
    
    654
    
    
    
    653Other current assets
    
    
    387
    
    
    
    217Total current assets
    
    
    5,215
    
    
    
    4,471Long-term investments
    
    
    4,787
    
    
    
    4,879Property and equipment, at cost less accumulated depreciation
    
    
    721
    
    
    
    781Goodwill, net
    
    
    2,047
    
    
    
    2,049Other intangibles, net
    
    
    661
    
    
    
    699Other assets, net
    
    
    17
    
    
    
    25Total assets
    
    $
    13,448
    
    
    $
    12,904LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    131
    
    
    $
    267Accounts payable
    
    
    878
    
    
    
    867Deferred revenue
    
    
    5,746
    
    
    
    4,895Accrued payroll
    
    
    1,072
    
    
    
    928Accrued expenses and other current liabilities
    
    
    539
    
    
    
    552Total current liabilities
    
    
    8,366
    
    
    
    7,509Other long-term liabilities
    
    
    310
    
    
    
    310Commitments 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 March 31, 2005 and December 31, 2004
    
    
    45
    
    
    
    45Paid-in capital
    
    
    18,410
    
    
    
    18,410Accumulated other comprehensive loss
    
    
    (218
    )
    
    
    (124
    )Accumulated deficit
    
    
    (14,981
    )
    
    
    (14,762
    )Total stockholders equity
    
    
    3,256
    
    
    
    3,569Total liabilities and stockholders equity
    
    $
    13,448
    
    
    $
    12,904
 The accompanying notes are an integral part of these consolidated balance sheets. Page 2




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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited; in thousands, except share and per share amounts) Three Months Ended March 31,2005
    
    
    2004RevenueProducts
    
    $
    2,063
    
    
    $
    3,227Services
    
    
    1,516
    
    
    
    1,385Total revenue
    
    
    3,579
    
    
    
    4,612Cost of salesProducts
    
    
    863
    
    
    
    985Services
    
    
    869
    
    
    
    810Total cost of sales
    
    
    1,732
    
    
    
    1,795ExpensesMarketing
    
    
    541
    
    
    
    660General & administrative
    
    
    959
    
    
    
    894Research & development
    
    
    1,627
    
    
    
    2,100Loss from operations
    
    
    (1,280
    )
    
    
    (837
    )Other incomeInterest income (expense), net
    
    
    6
    
    
    
    (3
    )Investment income
    
    
    1,042
    
    
    
    Equity in income (losses) of affiliate companies
    
    
    17
    
    
    
    (38
    )Other income, net
    
    
    8
    
    
    
    59Loss before income tax provision
    
    
    (207
    )
    
    
    (819
    )Income tax provision
    
    
    12
    
    
    
    1Net loss
    
    $
    (219
    )
    
    $
    (820
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.18
    )Basic and diluted weighted average shares outstanding
    
    
    4,478,971
    
    
    
    4,478,971
 The accompanying notes are an integral part of these consolidated financial statements. Page 3




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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW(unaudited, in thousands) Three Months Ended March 31,CASH PROVIDED BY (USED FOR):
    
    2005
    
    
    2004OPERATIONS:Net loss
    
    $
    (219
    )
    
    $
    (820
    )Adjustments to reconcile net loss to net cash provided by (used for) operating
activities,
net of effects of acquisitions and dispositions:Depreciation and amortization
    
    
    124
    
    
    
    172Deferred gain recognized
    
    
    
    
    
    
    (33
    )Investment income
    
    
    (1,042
    )
    
    
    Equity in (earnings) losses of affiliate companies
    
    
    (17
    )
    
    
    38Changes in operating assets and liabilities, net of effects of acquisitionAccounts receivable
    
    
    389
    
    
    
    (579
    )Inventories
    
    
    (1
    )
    
    
    202Deferred revenue
    
    
    851
    
    
    
    680Other current assets
    
    
    (170
    )
    
    
    90Accounts payable
    
    
    11
    
    
    
    289Accrued payroll
    
    
    144
    
    
    
    (267
    )Other non-current assets
    
    
    10
    
    
    
    Accrued expenses and other current liabilities
    
    
    (13
    )
    
    
    (56
    )Cash provided by (used for) operating activities
    
    
    67
    
    
    
    (284
    )INVESTING ACTIVITIES:Proceeds related to sale of investments
    
    
    1,042
    
    
    
    Disposition of long-term investments
    
    
    
    
    
    
    28Repayments under notes receivable
    
    
    
    
    
    
    15Advances under notes receivable
    
    
    
    
    
    
    (13
    )Purchases of intangible assets
    
    
    (5
    )
    
    
    Purchases of property and equipment
    
    
    (21
    )
    
    
    (85
    )Cash provided by (used for) investing activities
    
    
    1,016
    
    
    
    (55
    )FINANCING ACTIVITIES:Borrowings under short-term borrowing arrangements
    
    
    405
    
    
    
    Repayments under short-term borrowing arrangements
    
    
    (541
    )
    
    
    Cash used for financing activities
    
    
    (136
    )
    
    
    Effects of exchange rate changes on cash
    
    
    15
    
    
    
    (24
    )Net increase (decrease) in cash
    
    
    962
    
    
    
    (363
    )Cash at beginning of period
    
    
    670
    
    
    
    1,133Cash at end of period
    
    $
    1,632
    
    
    $
    770SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    2
    
    
    $
    3Cash paid during the period for income taxes
    
    
    12
    
    
    
    1
 The accompanying notes are an integral part of these consolidated financial statements. Page 4




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Intelligent Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  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, 2005 and 2004.
The interim results for the three months ended March 31, 2005 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, 2004, 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)
    
    2005
    
    
    2004Net loss
    
    $
    (219
    )
    
    $
    (820
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    15
    
    
    
    (24
    )Unrealized loss on available-for-sale securities
    
    
    (109
    )
    
    
    Comprehensive loss
    
    $
    (313
    )
    
    $
    (844
    )
  4.
    Stock-Based Compensation  At March 31, 2005, we had two stock-based compensation plans. We
account for the plans under the intrinsic value recognition and measurement principles of
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The intrinsic value recognition is measured by the difference
between the exercise price and the market value of the underlying securities. Based on the
additional disclosure requirements of Statement of Financial Accounting Standards (SFAS) No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure  an Amendment to
SFAS No. 123, the following table illustrates the effect of net income and earnings (loss)
per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. Three Months Ended March 31,(in thousands, except per share data)
    
    2005
    
    
    2004Net loss, reported
    
    $
    (219
    )
    
    $
    (820
    )Add: stock-based employee compensation included
in reported net loss, net of related tax effect
    
    
    
    
    
    
    Deduct: stock-based compensation expense determined under fair
value based method for all awards, net of related tax effect
    
    
    (8
    )
    
    
    (9
    )Pro forma net loss
    
    $
    (227
    )
    
    $
    (829
    )Pro forma net loss per common share basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.19
    )
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5.
    Industry Segments Our consolidated subsidiaries are involved in two industry segments:
Information Technology products and services, and Industrial Products. Operations in
Information Technology products and services include development and sales of software
licenses and related professional services and software maintenance contracts provided through
three subsidiaries: QS Technologies, Inc., VISaer, Inc., and CoreCard Software, Inc.
Operations in the Industrial Products segment include the manufacture and sale of
bio-remediating parts washing systems by our ChemFree Corporation subsidiary. Total revenue
by industry segment includes sales to unaffiliated customers. Sales between our industry
segments are not material. Operating profit (loss) is total revenue less operating expenses.
None of the corporate overhead expense is allocated to the individual industry segments.
Identifiable assets by industry segment are those assets that are used in our subsidiaries in
each industry segment. Corporate assets are principally cash, notes receivable and
investments. The table following contains segment information for the quarters ended March 31,
2005 and 2004. Quarter ended March 31,(unaudited, in thousands)
    
    2005
    
    
    2004Information TechnologyRevenue
    
    $
    1,876
    
    
    $
    2,954Operating loss
    
    
    (1,308
    )
    
    
    (678
    )Industrial ProductsRevenue
    
    
    1,703
    
    
    
    1,658Operating income
    
    
    288
    
    
    
    84Consolidated SegmentsRevenue
    
    $
    3,579
    
    
    $
    4,612Operating loss
    
    
    (1,020
    )
    
    
    (594
    )A reconciliation of consolidated segment data above to consolidated loss follows:Consolidated segments operating loss
    
    $
    (1,020
    )
    
    $
    (594
    )Corporate expenses
    
    
    (260
    )
    
    
    (243
    )Consolidated operating loss
    
    
    (1,280
    )
    
    
    (837
    )Interest income (expense)
    
    
    6
    
    
    
    (3
    )Investment income
    
    
    1,042
    
    
    
    Equity of affiliates
    
    
    17
    
    
    
    (38
    )Other income
    
    
    8
    
    
    
    59Loss before taxes
    
    
    (207
    )
    
    
    (819
    )Income tax provision
    
    
    12
    
    
    
    1Net loss
    
    $
    (219
    )
    
    $
    (820
    )Depreciation and AmortizationInformation Technology
    
    $
    64
    
    
    $
    123Industrial Products
    
    
    54
    
    
    
    42Consolidated segments
    
    
    118
    
    
    
    165Corporate
    
    
    6
    
    
    
    7Consolidated depreciation and amortization
    
    $
    124
    
    
    $
    172Capital ExpendituresInformation Technology
    
    $
    14
    
    
    $
    16Industrial Products
    
    
    12
    
    
    
    69Consolidated segments
    
    
    26
    
    
    
    85Corporate
    
    
    
    
    
    
    Consolidated capital expenditures
    
    $
    26
    
    
    $
    85
 March 31, 2005
    
    
    December 31, 2004(unaudited)
    
    
    (audited)Identifiable AssetsInformation Technology
    
    $
    4,651
    
    
    $
    4,777Industrial Products
    
    
    3,329
    
    
    
    3,013Consolidated segments
    
    
    7,980
    
    
    
    7,790Corporate
    
    
    5,468
    
    
    
    5,114Consolidated assets
    
    $
    13,448
    
    
    $
    12,904
 Page 6




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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 EndedMarch 31,(unaudited, in thousands)
    
    2005
    
    
    2004VISaer Customer A
    
    
    13
    %
    
    
    CoreCard Customer B
    
    
    
    
    
    
    29
    %ChemFree Customer C
    
    
    10
    %
    
    
    ChemFree Customer D
    
    
    13
    %
    
    
    
  7.
    Distribution from ISC Guernsey, Ltd. During the first quarter of 2005, we received an
additional cash distribution from ISC Guernsey, Ltd in the amount of $1,042,000, which is
reflected in investment income for the three months ended March 31, 2005. For further
information on the ISC Guernsey transaction, please refer to Note 2 to our Consolidated
Financial Statements included in our 2004 Form 10-KSB.  8.
    Commitments and Contingencies Please refer to Note 8 to our Consolidated Financial
Statements included in our 2004 Form 10-KSB for a description of our commitments and
contingencies. 
 Item 2. Managements Discussion and Analysis or Plan of Operations 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, and that actual results may differ materially from
those contemplated by such forward-looking statements included those factors described below under
Factors That May Affect Future Performance. 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, 2004 as filed with the Securities
and Exchange Commission. Overview Our consolidated subsidiaries operate in two industry segments: Information Technology Products and
Services and Industrial Products. Included in the Information Technology sector are QS
Technologies, Inc. (software for public health and human services), VISaer, Inc. (software for
maintenance, repair and overhaul operations in the commercial aviation industry) and CoreCard
Software, Inc. (software for managing credit and debit cards). The Industrial Products segment
includes ChemFree Corporation (bio-remediating parts washers). We derive our product revenue from sales of software licenses in our Information Technology sector
and sales and leases of equipment and supplies in our Industrial Products sector. Our service
revenue consists of fees for implementation, consulting, training, maintenance and support for
software products in our Information Technology sector. Our consolidated revenue is the aggregate
of the revenue generated at our four subsidiary companies. Our revenue fluctuates from period to
period and our results are not necessarily indicative of the results to be expected in future
periods. Period-to-period comparisons may not be meaningful and it is difficult to predict the
level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the
following:  
    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
two of our software subsidiaries have very limited experience in their marketplaces which
makes it difficult to identify and evaluate trends that may impact their business. Page 7




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
    Two of our software subsidiaries, CoreCard Software and VISaer, have been involved in
major new product development initiatives for the past four years and have limited
experience delivering and installing their new products at customer sites, making it
difficult to predict with certainty when they will recognize revenue on individual software
contracts.  
    Our subsidiaries are relatively small in revenue size and, in the Information Technology
sector, license revenue at a subsidiary in a given period may consist of a relatively small
number of contracts. Consequently, even small delays in a subsidiarys delivery under a
software contract (which may be out of its control) could have a significant and
unpredictable impact on consolidated revenue that we can recognize in a given quarterly or
annual period. Frequently we recognize consolidated operating losses on a quarterly and annual basis and are
likely to do so in the future from time to time. Our operating expenses consist of the aggregate
of our four subsidiaries expenses and the corporate office expenses. Our ChemFree and QS
Technologies subsidiaries usually generate an operating profit on an annual basis but our early
stage subsidiaries, VISaer and CoreCard, are not consistently profitable, mainly due to significant
research and development expense that is invested to complete their new product offerings and the
deferral of revenue recognition until such products are delivered to customers. Depending upon the
size and number of software licenses recognized in a particular period and the level of expenses
incurred to support development and sales activities, our subsidiaries may report operating profits
on an irregular basis as they build their customer base. A significant portion of our
subsidiaries expense is related to personnel which is relatively fixed in the short-term and we
continually evaluate and strive to balance our financial resources with the resources required to
complete products under development and support our subsidiaries customers. For these and other
reasons, our operating profits or losses may vary from quarter to quarter and at the present time
are generally not predictable with any degree of certainty. We also frequently generate income or losses from non-operating sources and we may do so from time
to time in the future. Occasionally we derive income from sales of holdings in affiliate and other
minority-owned companies or we record a charge if we believe the value of a non-consolidated
company is impaired. We also recognize on a quarterly basis our pro rata share of the income or
losses of affiliate companies accounted for by the equity method. The timing and amount of gain or
loss recognized as a result of a sale or the amount of equity in the income or losses of affiliates
generally are not under our control and are not necessarily indicative of future results, either on
a quarterly or annual basis. In recent years, the majority of our cash has been generated on an irregular basis from sales of
our investments in early stage technology companies. We have used a significant amount of the cash
received from these sales to support the operations of our CoreCard Software and VISaer
subsidiaries. We presently believe that customer payments on existing and pending software
contracts will be sufficient to fund most of the expenses of VISaers operations for the
foreseeable future and a growing portion of CoreCards expenses, although any delays in developing
or delivering on software and services may increase their need for cash. Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements
and the Notes to Consolidated Financial Statements presented in this quarterly report. Revenue- Total revenue in the three month period ended March 31, 2005 was $3,579,000, a 22 percent
decrease compared to the first quarter of 2004. 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, declined by 36 percent from $3,227,000 in the three months ended
March 31, 2004 to $2,063,000 in the three months ended March 31, 2005. Product revenue from sales
of software licenses represented 17 percent of total product revenue in the three months ended
March 31, 2005 compared to 49 percent of total product revenue in the three months ended March 31,
2004. The decrease in product revenue is due mainly to fact that in the first quarter of last
year, our CoreCard subsidiary recognized $1,377,000 in software license revenue due to completion
of its first major customer installation in early 2004. There was no such installation completed
in the first quarter of 2005. The decline in software license revenue period-to-period was offset
in part by a three percent overall increase in product revenue at ChemFree, reflecting continued
growth in Europe in sales of ChemFrees machines and supplies, a slight decline in domestic sales
of machines and an increase in domestic revenue from leased machines and fluid supplies. Service
revenue increased period-to-period by nine percent, or $131,000, reflecting more maintenance and
professional services delivered by each of our three software subsidiaries. The increase in
service revenue is due to a larger base of installed customers at each of our software subsidiaries
that pay annual maintenance fees and that require other billable professional services. Page 8




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Cost of Sales- In the three month period ended March 31, 2005, total cost of sales was 48 percent
of total revenue compared with 39 percent of total revenue in the same three month period in 2004.
Cost of product revenue was 42 percent of product revenue in the first quarter of 2005 compared to
31 percent of product revenue in the same period in 2004. The principal reason for the difference
is due to a change in product mix between periods. Software license revenue, which has a low cost
of sales compared to the ChemFree industrial products, represented 49 percent of product revenue in
the three month period ended March 31, 2004 compared to 17 percent of product revenue in the
corresponding period in 2005. The cost of product sales for ChemFree products was lower in the
first quarter of 2005 as compared to the first quarter of last year reflecting reductions in the
cost of direct materials and lower payroll costs. Cost of service revenue (which relates to the
software subsidiaries only) was 57 percent and 58 percent in the three month periods ending March
31, 2005 and 2004, respectively. Operating Expenses- In the three month period ended March 31, 2005, total consolidated operating
expenses decreased by 14 percent compared to the corresponding period in 2004. Consolidated
marketing expenses were 18 percent ($119,000) lower in the first quarter of 2005 as compared to
last year, the majority of which reflects reduced sales personnel and travel expenses at our VISaer
subsidiary. Consolidated general and administrative expenses increased by seven percent ($65,000)
in the three month period ended March 31, 2005 as compared to the corresponding period in 2004 due
to a combination of minor miscellaneous items. Consolidated research and development expenses were
23 percent ($473,000) lower in the first quarter of 2005 compared to the first quarter of 2004.
Three quarters of the decline reflects lower expenses at VISaer due mainly to the allocation of
more personnel cost to billable professional services and the use of fewer third party contractors.
The balance of the reduction in R&D expense represents mainly a reduction in the number of domestic
employees at CoreCard and increased allocation of personnel expense to the cost of professional
services at QS Technologies. Interest Income (Expense)- In the three months ended March 31, 2005, we recorded $6,000 in net
interest income compared to $3,000 in interest expense in the corresponding period in 2003. The
net interest income in 2005 includes interest income recorded at a subsidiary reflecting a finance
charge on a customer contract, offset in part by approximately $3,000 in interest expense related
to the companys borrowings under its bank line of credit. Investment Income- We recorded investment income of $1,042,000 in the first quarter of 2005
compared to no investment gain or loss in the three months ended March 31, 2004. The investment
income in 2005 reflects a third cash distribution received in the first quarter of 2005 related to
the ISC Guernsey asset sale completed in June 2004, as explained more fully in Note 2 to our 2004
Form 10-KSB. Equity Earnings (Losses) of Affiliate Companies-On a quarterly basis, we recognize our pro rata
share of the earnings or losses of affiliate companies that we record on the equity method. We
recorded $17,000 in net equity in income of affiliate companies in the first quarter of 2005
compared to $38,000 in net equity in losses of affiliate companies in the three months ended March
31, 2004. These results include our pro rata share of the net earnings and losses reported by two
affiliate companies (CoreXpand and Horizon Software) in 2005 and five affiliate companies
(CoreXpand, Horizon Software, Alliance Technology Ventures, Riverside Software and Cirronet) in
2004. The change between periods reflects mainly an improvement in the financial results of
affiliate company, Horizon Software. Other Income, Net- Other income was $8,000 and $59,000 in the three months ended March 31, 2005
and 2004, respectively. The 2005 amount reflects foreign currency exchange gains and in 2004, the
amount includes recognition of deferred gain of $34,000 related to a prior period sale of a VISaer
product line and $25,000 in other miscellaneous income, mainly foreign currency exchange gains. Income Taxes- In the three months ended March 31, 2005, the tax liability recorded reflects $4,000
in state tax liability at a subsidiary and $8,000 in estimated alternative minimum tax. We did not
accrue for any other income tax liability year-to-date in 2005 and we believe our deferred tax
assets should be fully reserved given their character and our historical losses. Liquidity and Capital Resources Our cash balance at March 31, 2005 was $1,632,000, an increase of $962,000 compared to our cash
balance at December 31, 2004. Our principal sources of cash during the three month period ended
March 31, 2005 were a $1,042,000 cash distribution related to the previously reported ISC Guernsey
transaction, a decrease of $389,000 in accounts receivable mainly related to collections at the QS
Technologies subsidiary on an unusually high balance of accounts receivable at year-end 2004, and
an increase in deferred revenue of $851,000 representing primarily customer payments at VISaer in
advance of revenue recognition. Our principal uses of cash during the three months ended March 31,
2005 were approximately Page 9




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$900,000 to support the operations of our VISaer and CoreCard subsidiaries, approximately $260,000
in corporate office expense and $136,000 to reduce the principal amount of bank debt outstanding. During the quarter, the carrying value of unrealized investment losses, a component of accumulated
other comprehensive loss in stockholders equity, changed by $109,000 due to a decline in the
trading price of our holdings of common stock in Anadigics, Inc. [ANAD:NASDAQ]. We have several potential near-term sources of cash to support any negative cash flow from
consolidated operations, including periodic draws against our bank line of credit and a potential
additional cash distribution of as much as $1 million related to the ISC Guernsey transaction,
although the amount and timing of any distribution will be based on the business needs and
opportunities available to ISC Guernsey, over which we do not exert control. We believe there is
sufficient availability under our line of credit if needed to support any short-term timing
differences in consolidated cash flows which may occur from time to time and to provide for our
cash requirements for at least the next twelve months. Beyond 2005, we expect that our liquidity will continue to improve and consolidated operations will
generate sufficient cash to fund their requirements, with the use of our credit facility to
accommodate short-term needs. Other long-term sources of liquidity include potential sales of
investments, subsidiaries or assets, although the timing and amounts of any such transactions are
uncertain and generally not predictable far in advance. We do not currently have any off balance
sheet arrangements that are reasonably likely to have a current or future material effect on our
financial condition, liquidity or results of operations. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amount of assets, liabilities, revenues
and expenses. We consider certain accounting policies related to revenue recognition, valuation of
acquired intangibles and impairment of long-lived assets, and valuation of investments to be
critical policies due to the estimation processes involved in each. Management discusses its
estimates and judgments with the Audit Committee of the Board of Directors. For a detailed
description on the application of these and other accounting policies, see Note 1 to the
Consolidated Financial Statements contained in our annual report on Form 10-KSB for the fiscal year
ended December 31, 2004. Reference is also made to the discussion of the application of these
critical accounting policies and estimates contained in Managements Discussion and Analysis in our
annual report on Form 10-KSB for 2004. During the quarter ended March 31, 2005, there were no
significant or material changes in the application of critical accounting policies that would
require an update to the information provided in the Form 10-KSB for 2004. Factors That May Affect Future Operations Future operations are subject to risks and uncertainties that may negatively impact our future
results of operations or projected cash requirements. It is difficult to predict future quarterly
and annual results with any certainty mainly because several of our subsidiaries are early stage
companies with limited revenue and experience in their respective markets, all are relatively small
in size and, particularly for our software subsidiaries, revenue tends to be associated with fewer
and larger sales than for our industrial products subsidiary. Thus any trend or delay that affects
even one of our subsidiaries could have a negative impact on the companys consolidated results of
operations or cash requirements on a quarterly or annual basis. In addition, the carrying value of
our investments is impacted by a number of factors which are generally beyond our control since we
are typically a non-control shareholder in a private company with limited liquidity. Among the
numerous factors that may affect our consolidated results of operations or financial condition are
the following:  
    Delays in software development projects which could cause our customers to delay
implementations, delay payments or cancel contracts, which would increase our costs, reduce
our revenue and increase our cash requirements.
    Undetected software errors which may delay product releases, increase our costs, result
in non-acceptance of our software by customers or delay revenue recognition.
    Competitive pressures (including pricing, changes in customer requirements and
preferences, and competitor product offerings) which may cause prospective customers to
choose an alternative product solution, resulting in lower revenue and profits (or increased
losses). Page 10




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
    The inability of our CoreCard or VISaer subsidiaries to establish a base of referenceable
customers for their new product offerings, resulting in lower revenue and profits (or
increased losses), increased cash needs and possibly leading to restructuring or cutting
back of the subsidiarys operations.
    Failure of our products specifications and features to achieve market acceptance.
    Delays in anticipated customer payments for any reason which would increase our cash
requirements and possibly our losses.
    Declines in performance, financial condition or valuation of minority-owned companies
which 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.
    A reversal of the improving trend in the commercial aviation industry worldwide which
could impact VISaers near-term customer purchases, thus increasing its losses and need for
cash.
    The relatively limited sales and marketing experience of our VISaer and CoreCard
subsidiaries in their respective markets could cause them to misinterpret or fail to
interpret or adjust to a trend in the market or to underestimate the sales cycle time frame.
    In the Industrial Products market, failure by ChemFree to achieve anticipated growth in
the European market or to reverse the recent decline in sales through its domestic
distributor network cause lower than anticipated sales and profits.
    An insufficient number of potential CoreCard customers decide to purchase and run an
in-house software system and instead choose to outsource their account transaction
processing which could result in lower revenue, increased costs and greater cash
requirements.
    Budget reductions by state and local governments for information technology products that
delay award of contracts or implementations for our QS Technologies subsidiary.
    Other general economic and political conditions, particularly those which may cause
international business and domestic government customers to delay or cancel software
purchase decisions. 
 Item 3. Controls and Procedures As of the end of the period covered by this report, the company carried out an evaluation, under
the supervision and with the participation of the companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the companys disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the companys disclosure controls and procedures are effective. There were no
changes in the companys internal controls over financial reporting or in other factors identified
in connection with this evaluation that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the companys internal control
over financial reporting. Page 11




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Part II. OTHER INFORMATION 
 Item 6. Exhibits The following exhibits are filed or furnished with this report:  3(i)
    
    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(ii)
    
    Bylaws of the Registrant dated June 6, 1997. (Incorporated by reference to Exhibit 3(ii) of
the Registrants Form 10-K/A for the year ended December 31, 1997.)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 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, hereunto duly authorized. INTELLIGENT SYSTEMS CORPORATIONRegistrantDate: May 13, 2005
    
    By:
    
    /s/J. Leland StrangeJ. Leland StrangeChief Executive Officer, PresidentDate: May 13, 2005
    
    By:
    
    /s/Bonnie L. HerronBonnie L. HerronChief Financial Officer
 Page 12