##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO 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
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.01 par value
    
    NYSE Amex
 Securities registered pursuant to Section 12(g) of the Act:
 Yes
o No
þ
 Yes
o No
þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 Yes
o No
o
 Yes
o No
þ




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##### 



TABLE OF CONTENTS
 PAGEPart IItem1. Business
    
    
    12. Properties
    
    
    73. Legal Proceedings
    
    
    7Part II5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    87. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    98. Financial Statements
    
    
    159. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    169A(T). Controls and Procedures
    
    
    16Part III10. Directors, Executive Officers and Corporate Governance
    
    
    1711. Executive Compensation
    
    
    1712. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1713 Certain Relationships and Related Transactions, and Director Independence
    
    
    1814. Principal Accountant Fees and Services
    
    
    18Part IV15. Exhibits and Financial Statement Schedules
    
    
    18Signatures
    
    
    20EX-10.11EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
 Forward-Looking Statements
 In addition to historical information, this Form 10-K may contain forward-looking
statements relating to Intelligent Systems Corporation (ISC). All statements,
trend analyses and other information contained in the following discussion
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, likely 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. A number of the factors that we believe could impact
our future operations are discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this Form 10-K . ISC
undertakes no obligation to update or revise its forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes in
future operating results except as required by law.
 
 ITEM 1.
    
    BUSINESS
 Overview
 www.intelsys.com
 Financial Reporting
  Industry Segments Overview
      -1-




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Industrial Products Segment
 ChemFree Corporation  ® ® ® ® ® ® ®
 ®
   
    
    The SmartWasher system is available in a variety of model sizes and features to meet
specific customer needs and all models incorporate ChemFrees bio-remediating system,
employing a heater, recirculating pump, proprietary aqueous based de-greasing fluid and
microbe impregnated filter. Compared to solvent-based systems, these features make the
SmartWasher® system safer, non-flammable and non-caustic to users and do not require expensive
contracts to haul and dispose of regulated materials.
 
    
    ChemFrees products have a positive environmental impact because, unlike solvent-based
systems, they provide necessary cleaning functions to users without using or generating
hazardous chemicals or by-products. As noted above, recently ChemFree received approval by
the Environmental Protection Agency (EPA) for its OzzyJuice® degreasing fluid under the EPA
Design for Environment (DfE) program, the only bio-remediating parts washing fluid to be so
recognized to date.
 
    
    Unlike solvent-based systems, the SmartWasher® system does not expose workers to harmful,
irritating chemicals. ChemFrees fluid is non-flammable, non-caustic and produces no VOC
emissions, thus reducing the likelihood of fire and enhancing the safety and health of workers
and the workplaces in which parts washers are used.
 
    
    The SmartWasher® bio-remediation process uses microbes to break down grease, oil and other
harmful contaminants into harmless carbon dioxide and water. Since the SmartWasher® system
does not generate hazardous substances that are subject to strict environmental regulations,
users of the SmartWasher® system eliminate their cradle to grave liability and the costs
associated with solvent-based systems to comply with regulations for properly manifesting,
recordkeeping, hauling and disposing of hazardous substances.
 
    
    Customer feedback as well as market acceptance and repeat orders over a ten year period
indicate that the SmartWasher® system cleans as quickly and effectively as solvent-based
systems, while providing the additional advantages of positive environmental, health and
safety features.
   -2-




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Information Technology Products and Services Segment
 CoreCard
Software, Inc.  ®
    -3-




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®
 
    
    Credit/Debit Cards  involving revolving or non-revolving credit issued to consumer or
business accounts (with or without a physical card) that typically involve interest, fees,
settlement, collections, etc. Within this market, CoreCard offers software specifically
tailored to handle private label cards, network branded (i.e. MasterCard or VISA) bank cards,
fleet cards, short-term consumer loans and revolving accounts receivable.
 
    
    Prepaid Cards  involving pre-loaded funds drawn down for purchase or cash withdrawal
typically involving a variety of fees but no interest. Numerous examples exist including gift
cards, loyalty/reward cards, health benefit cards, payroll and benefits disbursement,
healthcare cards, government assistance payments, and transit cards.
 ® ®
  
    
    License  Typically CoreCard sells a software license to customers who then run
CoreCards software system, configured for their unique requirements, at a customer controlled
location.
 
    
    SaaS  Recently CoreCard has expanded the ways customers can access or deploy its
software and now offers processing services that allow customers to outsource their card
processing requirements to CoreCard. CoreCard manages all aspects of the processing functions
using its proprietary software configured for each processing customer in a Software as a
Service model.
 
    
    PaaS  For customers who prefer greater customization and control of the processing
environment, CoreCard offers its software, uniquely customized for the customer, hosted by
CoreCard on customer owned equipment at the CoreCard data center, in a Platform as a Service
offering.
     -4-




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®
  ®
  Incubator Program
    -5-




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Minority-Owned Partner Companies
  Research and Development
  Patents, Trademarks and Trade Secrets
 ® ® ® ® ®
 Personnel
  Financial Information About Geographic Areas
    -6-




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ITEM 2.
    
    PROPERTIES
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
 ChemFree Patent Matter
 VISaer  IBS Claims
     -7-




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2010
    
    
    2009Year Ended December 31,
    
    High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    1.38
    
    
    $
    0.94
    
    
    $
    1.50
    
    
    $
    0.552nd Quarter
    
    
    1.33
    
    
    
    0.91
    
    
    
    0.95
    
    
    
    0.553rd Quarter
    
    
    1.35
    
    
    
    0.98
    
    
    
    1.51
    
    
    
    0.704th Quarter
    
    
    1.85
    
    
    
    0.98
    
    
    
    2.39
    
    
    
    0.90
   Equity Compensation Plan Information
  Recent Sales of Unregistered Securities
  Repurchases of Securities
    -8-




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Critical Accounting Policies and Estimates
  Revenue Recognition
   
    
    an initial contract with the customer to license certain software modules, to provide
services to get the customer live on the software (such as training and customization) and to
provide post contract support (PCS) for a specified period of time thereafter (typically
three months),
 
    
    purchase of additional licenses for new modules or for tier upgrades for a higher volume of
licensed accounts after the initial contract,
 
    
    other optional standalone contracts, usually performed after the customer is live on the
software, for services such as new interfaces or custom features requested by the customer,
additional training and problem resolution not covered in annual maintenance contracts, and
 
    
    contracts for certain software products and processing services that involve an initial fee
plus recurring monthly fees for software usage, maintenance and support, for which the total
fees are recognized ratably over the estimated term of the contract.
      -9-




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Valuation of Investments
 Valuation of Intangibles
     -10-




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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.
 
    
    Software license revenue in a given period may consist of a relatively small number of
contracts and contract values can vary considerably depending on the scope of the software
system sold. Consequently, even minor delays in delivery under a software contract (which may
be out of our control) could have a significant and unpredictable impact on the consolidated
revenue that we recognize in a given quarterly or annual period.
 
    
    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.
    Results of Operations
  2010 Compared to 2009
    -11-




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Revenue
 Product revenue ®
 
    
    In 2010, total product revenue was $13.3 million compared to $11.3 million in 2009. In
both 2010 and 2009, over 90 percent of total product revenue is derived from sales of products
in the Industrial Products segment and the balance is license revenue generated by the
Information Technology and Services segment. ChemFree experienced a 9 percent year-over-year
increase in domestic revenue due to an increase in the number of Smartwasher® units sold as
well as an increase in the volume of consumable supplies (fluid and filters) sold to its
installed base of new and existing users. In addition, revenue from customers that lease
SmartWasher® machines rose two percent in 2010 as compared to 2009.
 
    
    Product revenue from ChemFrees international sales increased by 69 percent in 2010
compared to 2009. The increase in the number of machines and consumables sold reflects
stronger demand in our European markets as well as a new initiative in Australia in which our
distributor network combines a regular service component with machines that their customers
lease from them. This is similar to a successful sales model employed by ChemFrees largest
domestic customer.
 
    
    License revenue generated by the Information Technology Products and Services segment grew
by approximately 52 percent in 2010, although it represents less than 10 percent of total
product revenue. Revenue recognized in a given period reflects both the number of new software
implementations completed as well as the contract value of completed contracts. Our contract
values range from $150,000 to over $1.0 million depending on the scope and type of software
licensed. In 2010, the number and value of the contracts completed was higher than in 2009.
As we have frequently cautioned, a number of factors, some of which may be outside of our
control, can cause delays in delivery of our software and implementation by the customer, thus
delaying license revenue recognition. With mission-critical, complex software systems such as
those sold by CoreCard, customer requirements, available resources and testing cycles may
increase the scope and length of time to complete the project beyond the original schedule.
 Service revenue
 Cost of Revenue
 
    
    Cost of productrevenue in 2010 was $7.0 million (53 percent of total product revenue) as
compared to $5.8 million (51 percent of total product revenue) in 2009. The change between
periods primarily reflects a change in product mix in the Industrial Products with a larger
percentage of revenue derived from SmartWasher machine in 2010 compared to 2009. Machines have
a relatively higher cost of material than do consumable supplies, resulting in the 2 percent
year-to-year increase in cost of product revenue as a percentage of product revenue.
 
    
    Cost of servicerevenue (which relates to the Information Technology Products and Services
segment only) was $1.1 million (51 percent of service revenue) in 2010 as compared to $984,000
(64 percent of service revenue) in 2009. 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.
   -12-




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Operating Expenses
 Operating Income (Loss)
 Interest Income (Expense), net 
 Equity
Earnings (Losses) of Affiliate Company
 Income Taxes  ,
 Discontinued Operations
 Loss on Sale of Discontinued Operations
 Liquidity and Capital Resources
  
    
    an increase in accounts receivable of $547,000 due mainly to higher balances at our
international distribution partners
 
    
    a reduction in inventory levels of $131,000 through improved inventory management
 
    
    an increase in deferred revenue of $318,000 representing the net effect of billings on new
in-process contracts offset in part by the recognition of revenue on contracts completed in
2010, on which milestone payments had been carried as deferred revenue at the end of December
31, 2009
 
    
    a decrease in accounts payable of $254,000 due to faster payment to take advantage of
discounts offered by certain vendors and lower inventory purchases
 
    
    an increase in accrued payroll of $127,000 representing mainly bonuses earned by the
ChemFree management team in 2010 that will be paid in the first quarter of 2011
   -13-




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Off-Balance Sheet Arrangements
  Factors That May Affect Future Operations
   
    
    Further weakness in the global financial markets could have a 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.
 
    
    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 out-sourced
processing services 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 approximately 32 percent of our consolidated
revenue in 2010 and any unplanned changes in the volume of orders or timeliness of payments
from such customer could potentially have a negative impact on inventory levels and cash, at
least in the near-term.
 
    
    It is unclear whether the activity in the ChemFree legal action described in Item 3 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 in the judges final ruling, 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. In addition, it
is possible that a negative ruling could affect managements estimate of future cash flows
related to the patents. This could result in a write down of some or all of the unamortized
carrying value of the patents, which was $177,000 as of December 31, 2010.
   -14-




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
    
    Delays in production or shortages of certain sole-sourced parts for our ChemFree products
could impact revenue and orders.
 
    
    Anticipated increases in prices of raw materials and sub-assemblies could reduce ChemFrees
gross profit if it is not able to offset such increased costs with higher selling prices for
its products or other reductions in production costs.
 
    
    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.
 
    
    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 and changing government regulations 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 which could increase our costs and could 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 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.
 
    
    Our future capital needs are uncertain and depend on a number of factors; additional
capital may not be available on acceptable terms, if at all.
 
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
  Recent Accounting Pronouncements
  
 ITEM 8.
    
    FINANCIAL STATEMENTS
  Report of Independent Registered Public Accounting Firm  Habif, Arogeti & Wynne, LLPConsolidated Balance Sheets at December 31, 2010 and 2009Consolidated Statements of Operations for the years ended December 31, 2010 and 2009Consolidated Statements of Stockholders Equity and Comprehensive Loss for the years ended December 31, 2010 and 2009Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009Notes to Consolidated Financial Statements
   -15-




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ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T).
    
    CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
   Changes in internal control over financial reporting
   Managements report on internal control over financial reporting
   Internal Control  Integrated Framework.
     -16-




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PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   www.intelsys.com
 
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Securities Authorized for Issuance Under Equity Compensation Plans
 (c) Number of securitiesremaining available for future(a) Number of securities to be
    
    
    (b) Weighted-average
    
    
    issuance under equityissued upon exercise of
    
    
    exercise price of
    
    
    compensation plansoutstanding options, warrants
    
    
    outstanding options,
    
    
    (excluding securitiesPlan category
    
    and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    80,000
    
    
    $
    1.51
    
    
    
    350,000Equity compensation
plans not approved
by security holders
    
    
    114,000
    
    
    $
    2.54
    
    
    
    60,000Total
    
    
    194,000
    
    
    $
    2.12
    
    
    
    410,000
   -17-




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ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  3(i)
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010
(Incorporated by reference to Exhibit 3(i) of the Registrants Form 10-K for the year ended
December 31, 2010.)3(ii)
    
    
    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.)10.1
    
    
    Lease Agreement dated June 1, 2004, between the Registrant and ISC Properties, LLC.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 10-K for the year ended
December 31, 2004.)10.2
    
    
    First Amendment to the Lease Agreement between the Registrant and ISC Properties, LLC dated
June 1, 2009. (Incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the
quarter ended June 30, 2009.)10.3
    
    
    Management Compensation Plans and Arrangements:(a) Intelligent Systems Corporation 2003 Stock Incentive Plan(b) Intelligent Systems Corporation Change in Control Plan for Officers(c) Intelligent Systems Corporation Outside Directors Retirement Plan
   -18-




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(d) Non-Employee Directors Stock Option PlanExhibit 10.3(a) is incorporated by reference to Exhibit 10.2(a) to the Registrants Form 10-K
for the year ended December 31, 2003.Exhibits 10.3(b) and (c) are incorporated by reference to Exhibit 10.4 to the Registrants
Form 10-K for the year ended December 31, 1993.Exhibit 10.3(d) is incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for
the year ended December 31, 2000.10.4
    
    
    Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October
1, 2003. (Incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for the
year ended December 31, 2003.)10.5
    
    
    Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of
October 1, 2003. (Incorporated by reference to Exhibit 10.4 to the Registrants Form 10-K for
the year ended December 31, 2003.)10.6
    
    
    Form of Security Agreement by and among majority owned subsidiary companies of Intelligent
Systems Corporation and Fidelity Bank as of October 1, 2003. (Incorporated by reference to
Exhibit 10.5 to the Registrants Form 10-K for the year ended December 31, 2003.)10.7
    
    
    Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank
dated October 1, 2003. (Incorporated by reference to Exhibit 10.6 to the Registrants Form
10-K for the year ended December 31, 2003.)10.8
    
    
    Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of
Fidelity Bank dated October 1, 2004. (Incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-K for the year ended December 31, 2003.)10.9
    
    
    Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor
of Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.3 to the
Registrants Form 10-K for the year ended December 31, 2003.)10.10
    
    
    Ninth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated June 28, 2010. (Incorporated by reference to Exhibit 10.1 to the
Registrants Form 10-Q for the quarter ended June 30, 2010.)10.11
    
    
    Settlement and
Mutual Release Agreement among IBS Technics, Inc., IBS Software
Services Americas, Inc., Intelligent Systems
Corporation, VISaer (UK) Limited and VISaer, Inc. dated
January 25, 2011.21.1
    
    
    List of subsidiaries of Registrant.23.1
    
    
    Consent of Habif, Arogeti & Wynne, LLP.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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
   -19-




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SIGNATURES
  INTELLIGENT SYSTEMS CORPORATION
RegistrantDate:  March 22, 2011
    By:
    /s/ J. Leland StrangeJ. Leland StrangeChairman of the Board, President
and Chief Executive Officer  Signature
    
    Capacity
    
    Date/s/ J. Leland Strange

J. Leland Strange
    
    Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 22, 2011/s/ Bonnie L. Herron

Bonnie L. Herron
    
    Chief Financial Officer
(Principal Accounting and Financial Officer)
    
    March 22, 2011/s/ James V. Napier

James V. Napier
    
    Director
    
    March 22, 2011/s/ John B. Peatman

John B. Peatman
    
    Director
    
    March 22, 2011/s/ Parker H. Petit

Parker H. Petit
    
    Director
    
    March 22, 2011
   -20-




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INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
  Financial Statements:
 Report of Independent Registered Public Accounting Firm  Habif, Arogeti, & Wynne, LLP
    
    
    F-2Consolidated Balance Sheets  December 31, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2010 and 2009
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Loss 
Years Ended December 31, 2010 and 2009
    
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31, 2010 and 2009
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ Habif, Arogeti & Wynne, LLP
 
  F-2




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Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
 As of December 31,
    
    2010
    
    
    2009ASSETSCurrent assets:Cash
    
    $
    2,942
    
    
    $
    2,795Accounts receivable, net
    
    
    2,227
    
    
    
    1,680Notes and interest receivable, current portion
    
    
    600
    
    
    
    492Inventories, net
    
    
    833
    
    
    
    964Other current assets
    
    
    404
    
    
    
    399Total current assets
    
    
    7,006
    
    
    
    6,330Investments
    
    
    1,286
    
    
    
    1,219Notes and interest receivable, net of current portion
    
    
    473
    
    
    
    1,006Property and equipment, at cost less accumulated depreciation
    
    
    1,149
    
    
    
    1,256Patents, net
    
    
    177
    
    
    
    223Total assets
    
    $
    10,091
    
    
    $
    10,034LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    322
    
    
    $
    576Deferred revenue, current portion
    
    
    1,604
    
    
    
    1,265Accrued payroll
    
    
    550
    
    
    
    423Accrued expenses
    
    
    640
    
    
    
    565Other current liabilities
    
    
    307
    
    
    
    406Total current liabilities
    
    
    3,423
    
    
    
    3,235Deferred revenue, net of current portion
    
    
    70
    
    
    
    90Other long-term liabilities
    
    
    137
    
    
    
    100Commitments and contingencies (Note 7)Intelligent Systems Corporation stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028
issued and outstanding at December 31, 2010 and 2009
    
    
    90
    
    
    
    90Additional paid-in capital
    
    
    21,418
    
    
    
    21,410Accumulated other comprehensive income (loss)
    
    
    3
    
    
    
    (28
    )Accumulated deficit
    
    
    (16,566
    )
    
    
    (16,379
    )Total Intelligent Systems Corporation stockholders equity
    
    
    4,945
    
    
    
    5,093Non-controlling interest
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    
    6,461
    
    
    
    6,609Total liabilities and stockholders equity
    
    $
    10,091
    
    
    $
    10,034
 The accompanying notes are an integral part of these consolidated financial statements.
  F-3




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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 Year Ended December 31,
    
    2010
    
    
    2009RevenueProducts
    
    $
    13,290
    
    
    $
    11,319Services
    
    
    2,153
    
    
    
    1,547Total net revenue
    
    
    15,443
    
    
    
    12,866Cost of revenueProducts
    
    
    6,961
    
    
    
    5,785Services
    
    
    1,116
    
    
    
    984Total cost of revenue
    
    
    8,077
    
    
    
    6,769ExpensesMarketing
    
    
    2,158
    
    
    
    1,923General and administrative
    
    
    2,801
    
    
    
    3,273Research and development
    
    
    2,181
    
    
    
    2,180Income (loss) from operations
    
    
    226
    
    
    
    (1,279
    )Other income (expense)Interest income, net
    
    
    80
    
    
    
    87Equity in income (loss) of affiliate company
    
    
    (41
    )
    
    
    9Other income, net
    
    
    23
    
    
    
    21Income (loss) from continuing operations before taxes
    
    
    288
    
    
    
    (1,162
    )Income taxes
    
    
    130
    
    
    
    9Income (loss) from continuing operations
    
    
    158
    
    
    
    (1,171
    )Loss on sale of discontinued operations, net of taxes
    
    
    (345
    )
    
    
    (42
    )Net loss
    
    $
    (187
    )
    
    $
    (1,213
    )Income (loss) per share from continuing operations:Basic
    
    $
    0.02
    
    
    $
    (0.18
    )Diluted
    
    
    0.02
    
    
    
    (0.18
    )Loss per share from discontinued operations:Basic and diluted
    
    
    (0.04
    )
    
    
    (0.01
    )Net loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.19
    )Basic weighted average common shares outstanding
    
    
    8,958,028
    
    
    
    6,345,270Diluted weighted average common shares outstanding
    
    
    8,958,028
    
    
    
    6,345,270
 The accompanying notes are an integral part of these consolidated financial statements.
  F-4




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##### Table of Contents



Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF
 STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 (in thousands, except share amounts)
 Year Ended December 31,2010
    
    
    2009STOCKHOLDERS
EQUITYCommon stock, number of shares,beginning of year
    
    
    8,958,028
    
    
    
    4,478,971Additions during year
    
    
    
    
    
    
    4,479,057End of year
    
    
    8,958,028
    
    
    
    8,958,028Common stock, amount,beginning of year
    
    $
    90
    
    
    $
    45Additions during year
    
    
    
    
    
    
    45End of year
    
    
    90
    
    
    
    90Additional paid-in capital,beginning of year
    
    
    21,410
    
    
    
    18,457Additions during year
    
    
    8
    
    
    
    2,953End of year
    
    
    21,418
    
    
    
    21,410Accumulated other comprehensive loss,beginning of year
    
    
    (28
    )
    
    
    (92
    )Foreign currency translation adjustment
    
    
    31
    
    
    
    64End of year
    
    
    3
    
    
    
    (28
    )Accumulated deficit,beginning of year
    
    
    (16,379
    )
    
    
    (15,166
    )Net loss
    
    
    (187
    )
    
    
    (1,213
    )End of year
    
    
    (16,566
    )
    
    
    (16,379
    )Non-controlling interest, beginning and end of year
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    $
    6,461
    
    
    $
    6,609COMPREHENSIVE LOSSNet loss
    
    $
    (187
    )
    
    $
    (1,213
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    31
    
    
    
    64Total comprehensive loss
    
    $
    (156
    )
    
    $
    (1,149
    )
 The accompanying notes are an integral part of these consolidated financial statements.
  F-5




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##### Table of Contents



Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2010
    
    
    2009OPERATING ACTIVITIES:Net loss
    
    $
    (187
    )
    
    $
    (1,213
    )Adjustments to reconcile net loss to net cash provided by (used by) operating activities:Depreciation and amortization
    
    
    502
    
    
    
    552Stock-based compensation expense
    
    
    8
    
    
    
    11Loss on sale of discontinued operations
    
    
    344
    
    
    
    42Non-cash interest income
    
    
    (63
    )
    
    
    (72
    )Equity in (income) loss of affiliate company
    
    
    41
    
    
    
    (9
    )Changes in operating assets and liabilities, net of effect of sale of discontinued operationsAccounts receivable, net
    
    
    (547
    )
    
    
    (110
    )Accrued interest receivable
    
    
    
    
    
    
    2Inventories, net
    
    
    131
    
    
    
    87Other current assets
    
    
    (5
    )
    
    
    (119
    )Accounts payable
    
    
    (254
    )
    
    
    (346
    )Accrued payroll
    
    
    127
    
    
    
    (75
    )Deferred revenue, current portion
    
    
    339
    
    
    
    282Accrued expenses
    
    
    75
    
    
    
    (56
    )Other current liabilities
    
    
    1
    
    
    
    (58
    )Deferred revenue, net of current portion
    
    
    (20
    )
    
    
    90Other long term liabilities
    
    
    89
    
    
    
    57Net cash provided by (used by) operating activities
    
    
    581
    
    
    
    (935
    )INVESTING ACTIVITIES:Proceeds from notes and interest receivable
    
    
    
    
    
    
    352Advances under note receivable
    
    
    
    
    
    
    (100
    )Purchases of property and equipment
    
    
    (349
    )
    
    
    (179
    )Net cash provided by (used by) investing activities
    
    
    (349
    )
    
    
    73FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    
    
    
    
    335Repayments made on line of credit
    
    
    
    
    
    
    (660
    )Payments on notes payable
    
    
    (116
    )
    
    
    (99
    )Proceeds from rights offering
    
    
    
    
    
    
    2,986Net cash provided by (used by) financing activities
    
    
    (116
    )
    
    
    2,562Effects of exchange rate changes on cash
    
    
    31
    
    
    
    21Net increase in cash
    
    
    147
    
    
    
    1,721Cash at beginning of year
    
    
    2,795
    
    
    
    1,074Cash at end of year
    
    $
    2,942
    
    
    $
    2,795NON-CASH INVESTING ACTIVITIES:Conversion of note receivable to investment
    
    $
    108
    
    
    
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    3
    
    
    $
    29Cash paid for income taxes
    
    $
    52
    
    
    $
    8
 The accompanying notes are an integral part of these consolidated financial statements.
  F-6




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##### Table of Contents



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization
 Consolidation
 Nature of Operations
 Use of Estimates
 Translation of Foreign Currencies
 Accounts Receivable and Allowance for Doubtful Accounts
   F-7




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Inventories
 (in thousands)
    
    2010
    
    
    2009Raw materials
    
    $
    720
    
    
    $
    814Finished goods
    
    
    113
    
    
    
    150Total inventories
    
    $
    833
    
    
    $
    964
 Property and Equipment
 Classification
    
    Useful life in yearsMachinery and equipment
    
    
    3  5Furniture and fixtures
    
    
    5  7Leasehold improvements
    
    
    1  5Building
    
    
    39
  (in thousands)
    
    2010
    
    
    2009Machinery and equipment
    
    $
    3,275
    
    
    $
    3,113Furniture and fixtures
    
    
    155
    
    
    
    155Leasehold improvements
    
    
    277
    
    
    
    262Building
    
    
    605
    
    
    
    475Subtotal
    
    
    4,312
    
    
    
    4,006Accumulated depreciation
    
    
    (3,163
    )
    
    
    (2,750
    )Property and equipment, net
    
    $
    1,149
    
    
    $
    1,256
   F-8




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Leased Equipment
 (in thousands)
    
    2010
    
    
    2009Cost of leased equipment
    
    $
    924
    
    
    $
    887Accumulated depreciation
    
    
    (746
    )
    
    
    (623
    )Carrying value of leased equipment
    
    $
    178
    
    
    $
    264
  Investments
 Patents 
  (in thousands)
    
    2010
    
    
    2009Patents
    
    $
    464
    
    
    $
    464Accumulated amortization
    
    
    (287
    )
    
    
    (241
    )Patents, net
    
    $
    177
    
    
    $
    223
  (in thousands)2011
    
    $
    452012
    
    
    452013
    
    
    452014
    
    
    42Total amortization expense
    
    $
    177
  F-9




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##### Table of Contents



Fair Value of Financial Instruments
   
  Revenue Recognition
   
    
    an initial contract with the customer to license certain software modules, to provide
services to get the customer live on the software (such as training and customization) and to
provide post contract support (PCS) for a specified period of time thereafter (typically
three months),
 
    
    purchase of additional licenses for new modules or for tier upgrades for a higher volume of
licensed accounts after the initial contract,
 
    
    other optional standalone contracts, usually performed after the customer is live on the
software, for services such as new interfaces or custom features requested by the customer,
additional training and problem resolution not covered in annual maintenance contracts, and
    
    contracts for certain software products and processing services that involve an initial fee
plus recurring monthly fees for software usage, maintenance and support, for which the total
fees are recognized ratably over the estimated term of the contract.
  F-10




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##### Table of Contents



Deferred Revenue 
 Cost of Revenue
 Software Development Expense
 Warranty Costs
 Legal Expense
  F-11




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##### Table of Contents



Research and Development
 Stock Based Compensation
  Year ended December 31,
    
    2010
    
    
    2009Risk free interest rate
    
    
    0.3
    %
    
    
    0.5
    %Expected life of option in years
    
    
    10
    
    
    
    10Expected dividend yield rate
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    68
    %
    
    
    56
    %
  Income Taxes 
  Comprehensive Loss
 Recent Accounting Pronouncements 
 2. DISCONTINUED OPERATIONS
 Sale of VISaer Business
  F-12




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##### Table of Contents



3. INVESTMENTS
  At December 31,
    
    Carrying Value(in thousands)
    
    2010
    
    
    2009NKD Enterprises, LLC
    
    $
    903
    
    
    $
    944
  As of and for the year ended December 31,(in thousands)
    
    2010
    
    
    2009Revenues
    
    $
    1,764
    
    
    $
    1,857Operating income (loss)
    
    
    (160
    )
    
    
    22Net income (loss)
    
    
    (160
    )
    
    
    36
 As of and for the year ended December 31,(in thousands)
    
    2010
    
    
    2009Current assets
    
    $
    146
    
    
    $
    274Non-current assets
    
    
    3,025
    
    
    
    3,024Current liabilities
    
    
    270
    
    
    
    238Stockholders equity
    
    
    2,901
    
    
    
    3,060
  F-13




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##### Table of Contents



4. ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND CUSTOMER CONCENTRATIONS
   Revenue
    
    
    Accounts Receivable2010
    
    
    2009
    
    
    2010
    
    
    2009ChemFreeCustomer A
    
    
    12
    %
    
    
    13
    %
    
    
    12
    %
    
    
    18
    %Customer B
    
    
    7
    %
    
    
    6
    %
    
    
    26
    %
    
    
    6
    %Customer C
    
    
    32
    %
    
    
    35
    %
    
    
    13
    %
    
    
    18
    %Customer D
    
    
    10
    %
    
    
    12
    %
    
    
    14
    %
    
    
    20
    %CoreCardCustomer E
    
    
    
    
    
    
    2
    %
    
    
    
    
    
    
    18
    %
 5. SHORT-TERM BORROWINGS
  Year ended December 31,(in thousands)
    
    2010
    
    
    2009Maximum outstanding (month-end)
    
    $
    
    
    
    $
    437Outstanding at year end
    
    
    
    
    
    
    Interest rate at year end
    
    
    6.5
    %
    
    
    6.75
    %Average interest rate
    
    
    6.5
    %
    
    
    6.75
    %
   F-14




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##### Table of Contents



6. INCOME TAXES
  Year ended December 31,(in thousands)
    
    2010
    
    
    2009Current
    
    $
    54
    
    
    $
    9Provision for uncertain tax positions
    
    
    76
    
    
    
    Total
    
    $
    130
    
    
    $
    9
  Year ended December 31,
    
    2010
    
    
    2009Statutory rate
    
    
    35
    %
    
    
    (35
    %)Change in valuation allowance
    
    
    (35
    %)
    
    
    35
    %Other  state
    
    
    45
    %
    
    
    1
    %Effective rate
    
    
    45
    %
    
    
    1
    %
  (in thousands)
    
    2010
    
    
    2009Deferred tax assets:Federal, state and foreign loss carryforwards
    
    $
    6,736
    
    
    $
    6,364Capitalized research and development
    
    
    1,870
    
    
    
    2,428Deferred revenue
    
    
    (375
    )
    
    
    (461
    )Federal and state tax credits
    
    
    2,135
    
    
    
    2,135Other
    
    
    292
    
    
    
    281Total deferred tax asset
    
    
    10,658
    
    
    
    10,747Less valuation allowance
    
    
    (10,658
    )
    
    
    (10,747
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    F-15




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##### Table of Contents



(in thousands)
    
    2010
    
    
    20092012
    
    $
    1,038
    
    
    $
    1,0382019
    
    
    2,901
    
    
    
    2,9012021
    
    
    1,184
    
    
    
    1,1842022
    
    
    1,083
    
    
    
    1,0832023
    
    
    1,778
    
    
    
    1,778Thereafter
    
    
    11,264
    
    
    
    10,198Total
    
    $
    19,248
    
    
    $
    18,182
     7. COMMITMENTS AND CONTINGENCIES
 Leases 
 Year ended December 31,(in thousands)2011
    
    $
    4652012
    
    
    194Total minimum lease payments
    
    $
    659
    F-16




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##### Table of Contents



Legal Matters ChemFree Patent Matter
  8. POST-RETIREMENT BENEFITS
  9. DEFINED CONTRIBUTION PLANS
  10. RELATED PARTY TRANSACTION
  11. STOCKHOLDERS EQUITY
   F-17




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##### Table of Contents



12. STOCK OPTION PLANS
    2010
    
    
    2009Options outstanding at January 1
    
    
    233,000
    
    
    
    221,000Options cancelled
    
    
    (51,000
    )
    
    
    Options granted
    
    
    12,000
    
    
    
    12,000Options outstanding at December 31
    
    
    194,000
    
    
    
    233,000Options available for grant at December 31
    
    
    410,000
    
    
    
    422,000Options exercisable at December 31
    
    
    176,000
    
    
    
    215,000Exercise price ranges per share:Granted
    
    $
    1.19
    
    
    $
    0.69Outstanding
    
    $
    0.69  $4.26
    
    
    $
    0.69  $4.26Weighted average exercise price per share:Granted
    
    $
    1.19
    
    
    $
    0.69Outstanding at December 31
    
    $
    2.12
    
    
    $
    2.37Exercisable at December 31
    
    $
    2.23
    
    
    $
    2.44
  F-18




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##### Table of Contents



Options Outstanding:
 Range of
    
    Number
    
    
    Wgt. Avg. Contractual
    
    
    Wgt. Avg.
    
    
    AggregateExercise Price
    
    Outstanding
    
    
    Life Remaining
    
    
    Exercise Price
    
    
    Intrinsic Value$0.69  $2.08
    
    
    140,000
    
    
    3.7 yrs

    
    
    $
    1.52
    
    
    $
    8,400$2.96  $4.26
    
    
    54,000
    
    
    3.6 yrs
    
    
    $
    3.67
    
    
    
    3,600$0.69  $4.26
    
    
    194,000
    
    
    3.7 yrs
    
    
    $
    2.12
    
    
    $
    12,000
 Options Exercisable:
 Range of
    
    Number
    
    
    Wgt. Avg. Contractual
    
    
    Wgt. Avg.Exercise Price
    
    Exercisable
    
    
    Life Remaining
    
    
    Exercise Price$0.69  $2.08
    
    
    122,000
    
    
    2.9 yrs
    
    
    $
    1.59$2.96  $4.26
    
    
    54,000
    
    
    3.6 yrs
    
    
    $
    3.67$1.51  $4.26
    
    
    176,000
    
    
    3.1 yrs
    
    
    $
    2.23
  13. FOREIGN REVENUES AND OPERATIONS
   Year ended December 31,(in thousands)
    
    2010
    
    
    2009Foreign Countries:United Kingdom
    
    $
    1,346
    
    
    $
    736Pacific Rim *
    
    
    494
    
    
    
    112Canada
    
    
    460
    
    
    
    269Other
    
    
    58
    
    
    
    39Subtotal
    
    
    2,358
    
    
    
    1,156United States
    
    
    13,085
    
    
    
    11,710Total
    
    $
    15,443
    
    
    $
    12,866
 *
    
    Includes Australia, New Zealand, Japan and Singapore
    F-19




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##### Table of Contents



14. INDUSTRY SEGMENTS
   Year
ended December 31,(in thousands)
    
    2010
    
    
    2009Information TechnologyRevenue
    
    $
    3,086
    
    
    $
    2,160Operating loss
    
    
    (1,289
    )
    
    
    (1,682
    )Depreciation and amortization
    
    
    103
    
    
    
    82Capital expenditures
    
    
    205
    
    
    
    109Identifiable assets
    
    
    2,618
    
    
    
    2,693Industrial ProductsRevenue
    
    $
    12,357
    
    
    $
    10,706Operating income
    
    
    2,516
    
    
    
    1,479Depreciation and amortization
    
    
    387
    
    
    
    453Capital expenditures
    
    
    122
    
    
    
    64Identifiable assets
    
    
    6,016
    
    
    
    3,824Consolidated SegmentsRevenue
    
    $
    15,443
    
    
    $
    12,866Operating income (loss)
    
    
    1,227
    
    
    
    (203
    )Depreciation and amortization
    
    
    490
    
    
    
    535Capital expenditures
    
    
    327
    
    
    
    173Identifiable assets
    
    
    8,634
    
    
    
    6,517
  Year
ended December 31,(in thousands)
    
    2010
    
    
    2009Consolidated segments operating income (loss)
    
    $
    1,227
    
    
    $
    (203
    )Corporate expenses
    
    
    (1,001
    )
    
    
    (1,076
    )Consolidated income (loss) from continuing operations
    
    $
    226
    
    
    $
    (1,279
    )Depreciation and amortizationConsolidated segments
    
    $
    490
    
    
    $
    535Corporate
    
    
    12
    
    
    
    17Consolidated
    
    $
    502
    
    
    $
    552Capital expendituresConsolidated segments
    
    $
    327
    
    
    $
    173Corporate
    
    
    22
    
    
    
    6Consolidated
    
    $
    349
    
    
    $
    179
  F-20




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##### Table of Contents



As
of December 31,(in thousands)
    
    2010
    
    
    2009AssetsConsolidated segments identifiable assets
    
    $
    8,634
    
    
    $
    6,517Corporate
    
    
    1,457
    
    
    
    3,517Consolidated
    
    $
    10,091
    
    
    $
    10,034
 15. NET LOSS PER SHARE
   Year ended December 31,(in thousands, except per share data)
    
    2010
    
    
    2009BasicNet loss
    
    $
    (187
    )
    
    $
    (1,213
    )Weighted average common shares outstanding
    
    
    8,958
    
    
    
    6,345Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.19
    )DilutedNet loss
    
    $
    (187
    )
    
    $
    (1,213
    )Weighted average common shares outstanding
    
    
    8,958
    
    
    
    6,345Effect of dilutive potential common shares: stock options
    
    
    
    
    
    
    Total
    
    
    8,958
    
    
    
    6,345Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.19
    )
  16. SUBSEQUENT EVENTS
   F-21