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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 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
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 o
 þ o
 þ
 o þ
 State issuers revenue for its most recent fiscal year.
    

    $19,005,000
    o þ




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TABLE OF CONTENTS
 PAGEPart IItem 1. Description of Business
    
    
    32. Description of Property
    
    
    83. Legal Proceedings
    
    
    84. Submission of Matters to a Vote of Security Holders
    
    
    8Part II5. Market for Common Equity, Related Stockholder Matters, and Small Business Issuer Purchases of Equity Securities
    
    
    96. Managements Discussion and Analysis or Plan of Operation
    
    
    97. Financial Statements
    
    
    168. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    178A(T). Controls and Procedures
    
    
    178B. Other Information
    
    
    17Part III9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance: Compliance with
Section16(a) of the Exchange Act
    
    
    1810. Executive Compensation
    
    
    1811. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1812. Certain Relationships and Related Transactions, and Director Independence
    
    
    1913. Exhibits
    
    
    1914. Principal Accountant Fees and Services
    
    
    20Signatures
    
    
    21Exhibit 10.9Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
 Forward-Looking Statements
 In addition to historical information, this Form 10-KSB 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 in
Item 6 of this Form 10-KSB . 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.
 
 ITEM 1.
    
    DESCRIPTION OF BUSINESS
 Overview
 www.intelsys.com
  Financial Reporting
  Intelligent Systems Corporation
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Industry Segments Overview
     Industrial Products Segment
 ChemFree Corporation ® ® ® ® ®
 ®
 Intelligent Systems Corporation
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®
   Information Technology Products and Services Segment
 VISaer, Inc.
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.
 CoreCard Software, Inc.
  Intelligent Systems Corporation
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Incubator Program
  Minority-Owned Partner Companies
  Research and Development
  Patents, Trademarks and Trade Secrets
 ® ® ® ® ®
 Intelligent Systems Corporation
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Personnel
  Financial Information About Geographic Areas
  
 ITEM 2.
    
    DESCRIPTION OF PROPERTY
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
    
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Intelligent Systems Corporation
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PART II
 
 ITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
 Market Information
  2007
    
    
    2006Year Ended December 31,
    
    High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    4.48
    
    
    $
    3.05
    
    
    $
    2.76
    
    
    $
    2.122nd Quarter
    
    
    4.46
    
    
    
    3.42
    
    
    
    2.40
    
    
    
    1.953rd Quarter
    
    
    3.75
    
    
    
    3.25
    
    
    
    2.70
    
    
    
    1.924th Quarter
    
    
    3.75
    
    
    
    2.85
    
    
    
    3.30
    
    
    
    2.26
   Equity Compensation Plan Information
  Recent Sales of Unregistered Securities
  Repurchases of Securities
  
 ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Critical Accounting Policies and Estimates
  Intelligent Systems Corporation
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Revenue Recognition
     Valuation of Investments
 Valuation of Intangibles
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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.
    
    Our software subsidiaries do not have extensive experience in their marketplaces which
makes it difficult to identify and evaluate trends that may impact their business.
    
    Our software subsidiaries, CoreCard and VISaer, have been involved in major new product
development initiatives for at least the past five years and have limited experience
delivering and installing their current product releases at customer sites, making it
difficult to predict with certainty when they will recognize revenue on individual software
contracts.
    
    Our subsidiaries in the Information Technology Products and Services sector are relatively
small in size and software license revenue in a given period may consist of a relatively small
number of contracts. Consequently, even minor delays in a subsidiarys delivery under a
software contract (which may be out of their control) could have a significant and
unpredictable impact on the consolidated revenue that we can recognize in a given quarterly or
annual period.
    
    Acquisitions or sales of subsidiaries may affect our revenue and expense levels, as
occurred in 2006 with the sale of our QS business.
    
    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.
  Intelligent Systems Corporation
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Results of Operations
  2007 Compared to 2006
 Revenue
 Product revenue
 
    
    In 2007, our ChemFree subsidiary experienced record levels of revenue and profits,
attributed to an increased volume of products sold in both domestic and international markets.
ChemFrees revenue grew 74 percent and 44 percent in the domestic and international markets,
respectively, in 2007 as compared to 2006. As a result of this growth, ChemFrees
revenue represented 69 percent of consolidated revenue in 2007 as compared to 54 percent of
consolidated revenue in 2006. In the domestic U.S. market, most of the increase relates to a
single end-user customer that began a national roll-out of the SmartWasher® parts washer to its
installed base of customers. An increased volume of products sold in Europe was the major
factor in the year-to-year growth in the international markets. Management believes it is
unlikely that ChemFree will record the same year-to-year increase in domestic revenue in 2008.
ChemFrees fluid and filters sales increased approximately 21 percent in 2007 as compared to
2006, due to a larger installed base of customers that purchase such consumable supplies.
    
    License revenue generated by our Information Technology Products and Services segment was
$1.1 million higher in 2007 than in 2006 due to the recognition of a single license by our
CoreCard subsidiary. In 2006, most license revenue resulted from additional licenses sold to
VISaers existing customer base. 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 and VISaer, customer
requirements, available resources and testing cycles may increase the scope and length of time
to complete the project beyond our original estimates.
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Service revenue
 Cost of Revenue
 
    
    Cost of productrevenue in 2007 was $7.7 million (53 percent of total product revenue)
compared to $4.4 million (52 percent of total product revenue) in 2006. The difference
between 2007 and 2006 is due to the proportionately greater amount of product revenue
generated by our industrial products, which have a higher cost of sales than do our software
license products. In addition, in 2007 a greater proportion of industrial products revenue was
derived from SmartWasher® machine sales which have a higher material cost than do consumable
fluid and filter products. Furthermore, the company experienced an increase in the cost of
certain of its plastic components due to increases in the price of oil. These increased costs
are likely to continue in the foreseeable future. In 2007, the company implemented price
increases and re-engineered its SmartWasher® design to offset some of these costs.
    
    Cost of servicerevenue (which relates to the Information Technology subsidiaries only) was
$2.7 million (60 percent of service revenue) in 2007, as compared to $2.8 million (46 percent
of service revenue) in 2006. The decline in gross margin percentage between periods reflects
primarily a higher number of hours and average standard cost for CoreCards customer support
and professional services activities in 2007 than in 2006.
 Operating Expenses
 Operating Loss
 Interest Income, net -
 Investment Income, net
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Equity Earnings (Loss) of Affiliate Companies -
 Other Income (Expense), net -
 Income taxes -
 Discontinued Operations
 Net Income from Discontinued Operations -
 Gain on Sale of Discontinued Operations  -
 Liquidity and Capital Resources
    Intelligent Systems Corporation
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Off-Balance Sheet Arrangements
  Factors That May Affect Future Operations
   
    
    Delays in software development projects could cause our customers to delay implementations,
delay payments or cancel contracts, which would increase our costs and reduce our revenue.
    
    Our CoreCard subsidiary could fail to improve its ability to deliver software products
which meet the business and technology requirements of its target markets within a reasonable
time frame and at a price point that supports a profitable, sustainable business model.
    
    One of ChemFrees customers represented approximately 32 percent of our consolidated
revenue in 2007 and any unplanned changes in the volume of orders or timeliness of payments
from such customer could have a negative impact on inventory levels and cash, at least in the
near-term.
    
    Failure by our ChemFree subsidiary to protect its intellectual property assets could
increase competition in the marketplace and result in greater price pressure and lower
margins, thus potentially impacting sales, profits and projected cash flows.
    
    Software errors or poor quality control may delay product releases, increase our costs,
result in non-acceptance of our software by customers or delay revenue recognition.
    
    Compliance with the internal controls over financial reporting requirements of Section 404
of the Sarbanes-Oxley Act of 2002 could increase operating expenses and divert management and
staff resources.
    
    Water shortages in the State of Georgia, ChemFrees base of operations, could impact
availability and price of water that is used to manufacture certain of its consumable
products, resulting in reduced revenue and gross margins.
    
    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).
    
    In 2008, ChemFree will convert to a new accounting software system. We do not have
experience in such an activity and are relying on consultants to assist us in this process.
While we believe we have a good plan in place for the transition, unanticipated problems could
occur which may have a negative impact on operations or timely financial reporting.
    
    Our CoreCard or VISaer subsidiaries could fail to establish a base of reference 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
subsidiaries operations.
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
    
    In certain limited situations, ChemFree lease customers are permitted to terminate the
lease covering a SmartWasher® machine, requiring the unamortized balance of the original
machine cost to be written off which could reduce profits in that reporting period and result
in lower revenue in future periods.
    
    Our products specifications and features could fail to achieve market acceptance.
    
    Our software subsidiaries could fail to retain key software developers and managers who
have accumulated years of know-how in our target markets and company products, or fail to
attract and train a sufficient number of new software developers and testers to support our
product development plans and customer requirements at projected cost levels.
    
    Further increases in the price of oil could increase the cost of certain plastic components
used in ChemFrees products and could affect VISaers results if potential aviation customers
delay or cancel purchases of software or services in the face of declining industry trends or
poor financial condition.
    
    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.
    
    Negative trends affecting the commercial aviation industry worldwide could impact VISaers
customer purchases, thus increasing its losses and need for cash.
    
    Failure to meet the continued listing standards of The American Stock Exchange could result
in delisting of our common stock, with a potentially negative impact on market price and
liquidity of our common stock.
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
  Recent Accounting Pronouncements
   
 ITEM 7.
    
    FINANCIAL STATEMENTS
  Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2007 and 2006Consolidated Statements of Operations for the years ended December 31, 2007 and 2006Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
for the years ended December 31, 2007 and 2006Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006Notes to Consolidated Financial Statements
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ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A(T).
    
    CONTROLS AND PROCEDURES
    Internal Control  Integrated Framework.
   
 ITEM 8B.
    
    OTHER INFORMATION
  Intelligent Systems Corporation
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PART III
 
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
   www.intelsys.com
 
 ITEM 10.
    
    EXECUTIVE COMPENSATION
  
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 Securities Authorized for Issuance Under Equity Compensation Plans
 (c) Number of securities remaining(a) Number of securities to be
    
    
    (b) Weighted-average
    
    
    available for future issuance underissued upon exercise of
    
    
    exercise price of
    
    
    equity compensation plansoutstanding options, warrants
    
    
    outstanding options,
    
    
    (excluding securities reflected inPlan category
    
    and rights
    
    
    warrants and rights
    
    
    column (a))Equity compensation
plans approved by
security holders
    
    
    111,000
    
    
    $
    1.78
    
    
    
    350,000Equity compensation
plans not approved
by security holders
    
    
    98,000
    
    
    $
    3.14
    
    
    
    96,000Total
    
    
    209,000
    
    
    $
    2.42
    
    
    
    446,000
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ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   
 ITEM 13.
    
    EXHIBITS
  2.1
    
    Asset Purchase Agreement dated as of July 31, 2006 by and between QS Technologies, Inc. and
Intelligent Systems Corporation, as Sellers, and Netsmart Public Health, Inc. as Buyer and
Netsmart Technologies, Inc. (Incorporated by reference to Exhibit 2.1 of the Registrants Form
8-K dated July 31, 2006.)2.2
    
    Promissory Note of Netsmart Technologies, Inc. dated July 31, 2006. (Incorporated by
reference to Exhibit 2.2 to the Registrants Form 8-K dated July 31, 2006.)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 December 7, 2007. (Incorporated by reference to Exhibit 3.2
of the Registrants Form 8-K dated December 7, 2007.)4.1
    
    Rights Agreement dated as of November 25, 1997 between the Registrant and American Stock
Transfer & Trust Company as Rights Agent. (Incorporated by reference to Exhibit 4.1 of the
Registrants Report on Form 
8-K dated November 25, 1997 and filed on December 16, 1997.)4.2
    
    Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2 of the Registrants
Report on Form 8-K dated November 25, 1997 and filed on December 16, 1997.)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-KSB for the year ended
December 31, 2004.)10.2
    
    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(d)
    
    Non-Employee Directors Stock Option Plan
 Exhibit 10.2(a) is incorporated by reference to Exhibit 10.2(a) to the Registrants Form 10-K
for the year ended December 31, 2003.Exhibits 10.2(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 10.2(d) is incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for
the year ended December 31, 2000.
 10.3
    
    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.)
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10.4
    
    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.)
 10.5
    
    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.)
 10.6
    
    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.)
 10.7
    
    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.)
 10.8
    
    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.)
 10.9
    
    Sixth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated December 1, 2007.21.1
    
    List of subsidiaries of Registrant.23.1
    
    Consent of Tauber & Balser, P.C.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.
 
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
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SIGNATURES
  INTELLIGENT SYSTEMS CORPORATION
RegistrantDate:  March 31, 2008
    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 31, 2008/s/ Bonnie L. Herron
Bonnie L. Herron
    
    Chief Financial Officer
(Principal Accounting and Financial Officer)
    
    March 31, 2008/s/ James V. Napier
    
    Director
    
    March 31, 2008James V. Napier/s/ John B. Peatman
    
    Director
    
    March 31, 2008John B. Peatman/s/ Parker H. Petit
    
    Director
    
    March 31, 2008Parker H. Petit
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INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
  Financial Statements:
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets  December 31, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2007 and 2006
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) -
Years Ended December 31, 2007 and 2006
    
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31, 2007 and 2006
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/
Tauber & Balser, P.C.
 
  F-2




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Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
 As of December 31,
    
    2007
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    554
    
    
    $
    2,136Accounts receivable, net
    
    
    2,139
    
    
    
    2,006Notes and interest receivable, current portion
    
    
    540
    
    
    
    3,445Inventories
    
    
    1,424
    
    
    
    904Other current assets
    
    
    2,217
    
    
    
    1,072Total current assets
    
    
    6,874
    
    
    
    9,563Long-term investments
    
    
    1,127
    
    
    
    1,174Notes and interest receivable, net of current portion
    
    
    350
    
    
    
    841Property and equipment, at cost less accumulated depreciation
    
    
    1,894
    
    
    
    1,009Goodwill, net
    
    
    2,047
    
    
    
    2,047Other intangibles, net
    
    
    313
    
    
    
    359Other assets, net
    
    
    17
    
    
    
    17Total assets
    
    $
    12,622
    
    
    $
    15,010LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    593
    
    
    $
    Accounts payable
    
    
    1,482
    
    
    
    1,558Deferred revenue
    
    
    2,527
    
    
    
    3,094Accrued payroll
    
    
    1,162
    
    
    
    974Accrued expenses and other current liabilities
    
    
    1,235
    
    
    
    1,088Total current liabilities
    
    
    6,999
    
    
    
    6,714Long-term liabilities
    
    
    95
    
    
    
    356Commitments and contingencies (Note 9)Minority interest
    
    
    1,516
    
    
    
    1,516Stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971
issued and outstanding at December 31, 2007 and 2006
    
    
    45
    
    
    
    45Additional paid-in capital
    
    
    18,437
    
    
    
    18,425Accumulated other comprehensive loss
    
    
    (127
    )
    
    
    (127
    )Accumulated deficit
    
    
    (14,343
    )
    
    
    (11,919
    )Total stockholders equity
    
    
    4,012
    
    
    
    6,424Total liabilities and stockholders equity
    
    $
    12,622
    
    
    $
    15,010
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 Year Ended December 31,
    
    2007
    
    
    2006RevenueProducts
    
    
    
    $
    14,555
    
    
    $
    8,401Services
    
    
    
    
    4,450
    
    
    
    6,059Total revenue
    
    
    
    
    19,005
    
    
    
    14,460Cost of revenueProducts
    
    
    
    
    7,748
    
    
    
    4,355Services
    
    
    
    
    2,655
    
    
    
    2,812Total cost of revenue
    
    
    
    
    10,403
    
    
    
    7,167ExpensesMarketing
    
    
    
    
    3,075
    
    
    
    2,059General & administrative
    
    
    
    
    4,358
    
    
    
    3,519Research & development
    
    
    
    
    5,032
    
    
    
    5,696Loss from operations
    
    
    
    
    (3,863
    )
    
    
    (3,981
    )Other income (expense)Interest income, net
    
    
    
    
    136
    
    
    
    57Investment income, net
    
    
    
    
    82
    
    
    
    2,547Equity in income (loss) of affiliate companies, net
    
    
    
    
    (13
    )
    
    
    374Other expense, net
    
    
    
    
    (49
    )
    
    
    (1
    )Loss from continuing operations before income tax provision
    
    
    
    
    (3,707
    )
    
    
    (1,004
    )Income tax
    
    
    
    
    17
    
    
    
    Loss from continuing operations
    
    
    
    
    (3,724
    )
    
    
    (1,004
    )Income from discontinued operations, no tax effect
    
    
    
    
    
    
    
    
    600Gain on sale of discontinued operations, no tax effect
    
    
    
    
    1,300
    
    
    
    4,873Net income (loss)
    
    
    
    $
    (2,424
    )
    
    $
    4,469Loss per
share from continuing operations:
 Basic
    
    
    
    $
    (0.83
    )
    
    $
    (0.22
    )Diluted
    
    
    
    $
    (0.83
    )
    
    $
    (0.22
    )Income per
share from discontinued operations:  Basic
    
    
    
    $
    0.29
    
    
    $
    1.22Diluted
    
    
    
    $
    0.29
    
    
    $
    1.20Income
(loss) per share:  Basic
    
    
    
    $
    (0.54
    )
    
    $
    1.00Diluted
    
    
    
    $
    (0.54
    )
    
    $
    0.98Basic weighted average common shares outstanding
    
    
    
    
    4,478,971
    
    
    
    4,478,971Diluted weighted average common shares outstanding
    
    
    
    
    4,478,971
    
    
    
    4,571,261
 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 INCOME (LOSS)
 (in thousands, except share amounts)
 Year Ended December 31,2007
    
    
    2006STOCKHOLDERS EQUITYCommon stock, number of shares,beginning and end of year
    
    
    4,478,971
    
    
    
    4,478,971Common stock, amount,beginning and end of year
    
    $
    45
    
    
    $
    45Additional Paid-in capital,beginning of year
    
    
    18,425
    
    
    
    18,410Additions during year
    
    
    12
    
    
    
    15End of year
    
    
    18,437
    
    
    
    18,425Accumulated other comprehensive loss,beginning of year
    
    
    (127
    )
    
    
    (61
    )Foreign currency translation adjustment
    
    
    (12
    )
    
    
    (55
    )Change in unrealized loss on marketable securities
    
    
    12
    
    
    
    (11
    )End of year
    
    
    (127
    )
    
    
    (127
    )Accumulated deficit,beginning of year
    
    
    (11,919
    )
    
    
    (16,388
    )Net income (loss)
    
    
    (2,424
    )
    
    
    4,469End of year
    
    
    (14,343
    )
    
    
    (11,919
    )Total stockholders equity
    
    $
    4,012
    
    
    $
    6,424COMPREHENSIVE INCOME (LOSS)Net income (loss)
    
    $
    (2,424
    )
    
    $
    4,469Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (12
    )
    
    
    (55
    )Change in unrealized loss on marketable securities
    
    
    12
    
    
    
    (11
    )Total comprehensive income (loss)
    
    $
    (2,424
    )
    
    $
    4,403
 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 31,2007
    
    
    2006OPERATIONS:Net income (loss)
    
    $
    (2,424
    )
    
    $
    4,469Adjustments to reconcile net income (loss) to net cash used for operating activities:Depreciation and amortization
    
    
    485
    
    
    
    546Loss on disposal of property and equipment
    
    
    30
    
    
    
    40Stock-based compensation expense
    
    
    13
    
    
    
    12Gain on sale of QS business
    
    
    (1,300
    )
    
    
    (4,873
    )Investment income, net
    
    
    (81
    )
    
    
    (2,547
    )Equity in (earnings) loss of affiliate companies
    
    
    13
    
    
    
    (374
    )Changes in operating assets and liabilities, net of effect of sale of QS businessAccounts receivable
    
    
    (133
    )
    
    
    (179
    )Accrued interest receivable
    
    
    94
    
    
    
    (103
    )Inventories
    
    
    (519
    )
    
    
    (134
    )Other current assets
    
    
    79
    
    
    
    (568
    )Accounts payable
    
    
    (76
    )
    
    
    759Accrued payroll
    
    
    188
    
    
    
    2Deferred revenue
    
    
    (567
    )
    
    
    45Accrued expenses and other current liabilities
    
    
    116
    
    
    
    (232
    )Other liabilities
    
    
    (93
    )
    
    
    209Cash used for operating activities
    
    
    (4,175
    )
    
    
    (2,928
    )INVESTING ACTIVITIES:Proceeds related to sales of investments
    
    
    39
    
    
    
    3,033Proceeds from sale of QS business
    
    
    
    
    
    
    1,900Distributions from long-term investments
    
    
    92
    
    
    
    385Proceeds from notes receivable
    
    
    3,396
    
    
    
    143Payments on notes payable
    
    
    (145
    )
    
    
    (100
    )Purchases of property and equipment
    
    
    (1,355
    )
    
    
    (523
    )Cash provided by investing activities
    
    
    2,027
    
    
    
    4,838FINANCING ACTIVITIES:Borrowings under short-term borrowing arrangements
    
    
    928
    
    
    
    2,335Repayments under short-term borrowing arrangements
    
    
    (350
    )
    
    
    (2,435
    )Proceeds from exercise of stock option in subsidiary
    
    
    
    
    
    
    3Cash provided by (used for) financing activities
    
    
    578
    
    
    
    (97
    )Effects of exchange rate changes on cash
    
    
    (12
    )
    
    
    (55
    )Net increase (decrease) in cash
    
    
    (1,582
    )
    
    
    1,758Cash at beginning of year
    
    
    2,136
    
    
    
    378Cash at end of year
    
    $
    554
    
    
    $
    2,136
 The accompanying notes are an integral part of these consolidated financial statements.
  F-6




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##### Table of Contents



Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)  (in thousands)
 2007
    
    
    2006SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for interest
    
    $
    13
    
    
    $
    105Cash paid during the year for income taxes
    
    
    19
    
    
    
    
 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES IN 2006:
 Sale of Horizon Software Investment:
  ale of QS Technologies Business (Discontinued Operations):
  (in thousands)Proceeds from sale of QS Technologies Business:Cash
    
    $
    1,900Note receivable
    
    
    1,435Other receivables
    
    
    305Liabilities assumed by (assets transferred to) buyer:Other current assets
    
    
    (167
    )Property, plant and equipment, net
    
    
    (28
    )Accrued payroll
    
    
    120Accounts payable
    
    
    49Deferred revenue
    
    
    1,730Other current liabilities
    
    
    44Accrued transaction related expenses
    
    
    (515
    )Gain on sale of QS Technologies business
    
    $
    4,873
 The
accompanying notes are an integral part of these consolidated
financial statements.
  F-7




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##### Table of Contents



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization
 Nature of Operations
 Use of Estimates
 Consolidation
 Translation of Foreign Currencies
 Accounts Receivable and Allowance for Doubtful Accounts
   F-8




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##### Table of Contents



Inventories
 (in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    1,323
    
    
    $
    768Finished goods
    
    
    101
    
    
    
    136Total inventories
    
    $
    1,424
    
    
    $
    904
 Property and Equipment
 Classification
    
    Useful life in yearsMachinery and equipment
    
    
    3  5Furniture & fixtures
    
    
    5  7Leasehold improvements
    
    
    1  5Building
    
    
    39
  (in thousands)
    
    2007
    
    
    2006Machinery and equipment
    
    $
    4,716
    
    
    $
    3,894Furniture and fixtures
    
    
    232
    
    
    
    201Leasehold improvements
    
    
    300
    
    
    
    273Building
    
    
    413
    
    
    
    Subtotal
    
    
    5,661
    
    
    
    4,368Accumulated depreciation
    
    
    (3,767
    )
    
    
    (3,359
    )Property and equipment, net
    
    $
    1,894
    
    
    $
    1,009
  Leased Equipment
 (in thousands)
    
    2007
    
    
    2006Cost of equipment
    
    $
    1,263
    
    
    $
    1,112Accumulated depreciation
    
    
    (809
    )
    
    
    (706
    )Carrying value of equipment
    
    $
    454
    
    
    $
    406
  F-9




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##### Table of Contents



(in thousands)2008
    
    $
    2072009
    
    
    207Total minimum future lease revenue
    
    $
    414
  Investments
  Other Intangibles and Goodwill
  (in thousands)
    
    2007
    
    
    2006Patents
    
    $
    464
    
    
    $
    464Accumulated amortization
    
    
    (151
    )
    
    
    (105
    )Intangible assets, net
    
    $
    313
    
    
    $
    359
  (in thousands)2008
    
    $
    452009
    
    
    452010
    
    
    452011
    
    
    452012
    
    
    45Thereafter
    
    
    88Total amortization expense
    
    $
    313
  F-10




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##### Table of Contents



Deferred
Revenue -
 Fair Value of Financial Instruments
  ChemFree:
    
    Industrial services companies, automotive parts distributors and equipment rental depotsVISaer:
    
    Aviation
  Revenue Recognition
     F-11




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##### Table of Contents



Cost of Revenue
 Software Development Expense .
   Warranty Costs
 Legal expense
 Research and Development
 Stock Based Compensation
  F-12




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##### Table of Contents



Year ended December 31,
    
    2007
    
    
    2006Risk free interest rate
    
    
    4
    %
    
    
    N/AExpected life of option in years
    
    
    6.6
    
    
    
    N/AExpected dividend yield rate
    
    
    0
    %
    
    
    N/AExpected volatility
    
    
    49
    %
    
    
    N/A
  Income
Taxes -
 Comprehensive Income (Loss)
 New
Accounting Pronouncements -
   F-13




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##### Table of Contents



2. DISCONTINUED OPERATIONS
     Year Ended December 31,(in thousands)
    
    2007
    
    
    2006 *Net sales
    
    
    
    
    
    $
    1,934Operating income
    
    
    
    
    
    
    602Net income before tax
    
    
    
    
    
    
    600Income tax
    
    
    
    
    
    
    Net income from discontinued operations
    
    
    
    
    
    
    600
 *
    
    Includes results for 7 months ended July 31, 2006, the date of the sale of the QS business 3. SALES AND WRITE-DOWNS OF ASSETS
  Aderis Pharmaceuticals, Inc.
 Horizon
Software Interest -
  F-14




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##### Table of Contents



Paymetric.
Inc. -
 4. INVESTMENTS
  At December 31,
    
    Carrying Value
    
    
    Original(in thousands)
    
    2007
    
    
    2006
    
    
    InvestmentNKD Enterprises
    
    $
    897
    
    
    $
    891
    
    
    $
    1,286
  As of and for the year ended December 31,(in thousands)
    
    2007
    
    
    2006 *Revenues
    
    $
    1,906
    
    
    $
    16,708Operating income
    
    
    24
    
    
    
    2,673Net income
    
    
    24
    
    
    
    2,762Current assets
    
    $
    338
    
    
    $
    6,154Non-current assets
    
    
    3,041
    
    
    
    7,938Current liabilities
    
    
    474
    
    
    
    2,049Non-current liabilities
    
    
    
    
    
    
    4,512Stockholders equity
    
    
    2,905
    
    
    
    7,530
 *
    
    Includes data for Horizon Software through date of sale, August 31, 2006. Marketable
Securities -
 (in thousands)
    
    2007
    
    
    2006Cost
    
    
    
    
    
    $
    49Gross unrealized loss
    
    
    
    
    
    
    (11
    )Estimated fair values
    
    
    
    
    
    $
    38
  5. ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
   F-15




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##### Table of Contents



Revenue
    
    
    
    Accounts Receivable2007
    
    
    2006
    
    
    
    2007
    
    
    2006ChemFreeCustomer A
    
    
    10
    %
    
    
    11
    %
    
    
    
    18
    %
    
    
    11
    %Customer B
    
    
    
    
    
    
    
    
    
    
    
    20
    %
    
    
    14
    %Customer C
    
    
    32
    %
    
    
    
    
    
    
    
    18
    %
    
    
    Customer D
    
    
    
    
    
    
    
    
    
    
    
    12
    %
    
    
    CoreCardCustomer E
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    %VISaerCustomer F
    
    
    
    
    
    
    12
    %
    
    
    
    
    
    
    
    
   6. SHORT-TERM BORROWINGS
  Year ended December 31,(in thousands)
    
    2007
    
    
    2006Maximum outstanding (month-end)
    
    $
    415
    
    
    $
    2,145Outstanding at year end
    
    
    415
    
    
    
    Interest rate at year end
    
    
    8.75
    %
    
    
    9.75
    %Average interest rate
    
    
    9.25
    %
    
    
    9.5
    %
   F-16




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##### Table of Contents



7. NOTE PAYABLE
  8. INCOME TAXES
  Year ended December 31,(in thousands)
    
    2007
    
    
    2006Current
    
    $
    
    
    
    $
    
  Year ended December 31,
    
    2007
    
    
    2006Statutory rate, blended
    
    
    38
    %
    
    
    38
    %Change in valuation allowance
    
    
    (38
    %)
    
    
    (38
    %)Other
    
    
    0
    %
    
    
    0
    %Effective rate
    
    
    0
    %
    
    
    0
    %
  F-17




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##### Table of Contents



(in thousands)
    
    2007
    
    
    20062017
    
    $
    1,038
    
    
    $
    1,0382019
    
    
    2,901
    
    
    
    2,9012021
    
    
    495
    
    
    
    4952022
    
    
    234
    
    
    
    2342023
    
    
    1,778
    
    
    
    1,778Thereafter
    
    
    6,550
    
    
    
    4,212Total
    
    $
    12,996
    
    
    $
    10,660
  (in thousands)
    
    2007
    
    
    2006Deferred tax assets:Federal, state and foreign loss carryforward
    
    $
    5,052
    
    
    $
    6,376Capitalized research and development
    
    
    3,711
    
    
    
    4,054Accrued interest
    
    
    1,758
    
    
    
    1,680Deferred revenue
    
    
    (203
    )
    
    
    (138
    )Federal and state tax credits
    
    
    3,109
    
    
    
    1,238Long-term investments
    
    
    (521
    )
    
    
    (722
    )Other
    
    
    438
    
    
    
    342Total deferred tax asset
    
    
    13,344
    
    
    
    12,830Less valuation allowance
    
    
    (13,344
    )
    
    
    (12,830
    )Net deferred tax asset
    
    $
    
    
    
    $
    
      F-18




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##### Table of Contents



9. COMMITMENTS AND CONTINGENCIES
 Leases
 Year ended December 31,(in thousands)2008
    
    $
    6262009
    
    
    3392010
    
    
    84Total minimum lease payments
    
    $
    1,049
   Legal
Matters -
 ISC
Guarantees -
 10. POST-RETIREMENT BENEFITS
   F-19




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##### Table of Contents



11. DEFINED CONTRIBUTION PLANS
  12. RELATED PARTY TRANSACTION
  13. STOCKHOLDERS EQUITY
  14. STOCK OPTION PLANS
    F-20




---



##### Table of Contents



2007
    
    
    2006Options outstanding at January 1
    
    
    203,666
    
    
    
    238,680Options granted
    
    
    12,000
    
    
    
    Options exercised
    
    
    
    
    
    
    Options canceled
    
    
    6,666
    
    
    
    35,014Options outstanding at December 31
    
    
    209,000
    
    
    
    203,666Options available for grant at December 31
    
    
    446,000
    
    
    
    458,000Options exercisable at December 31
    
    
    197,000
    
    
    
    197,666Exercise price ranges per share:Granted
    
    $
    3.84
    
    
    
    Canceled
    
    $
    4.25
    
    
    $
    2.96-$4.25Outstanding
    
    $
    1.51-$4.26
    
    
    $
    1.51-$4.26Weighted average exercise price per share:Granted
    
    $
    3.84
    
    
    
    Canceled
    
    $
    4.25
    
    
    $
    3.35Outstanding at December 31
    
    $
    2.42
    
    
    $
    2.39Exercisable at December 31
    
    $
    2.33
    
    
    $
    2.40
  Options Outstanding:
 Wgt. Avg.Number
    
    
    Contractual
    
    
    Wgt. Avg.Range of Exercise Price
    
    Outstanding
    
    

Life Remaining
    
    

Exercise Price$1.51 - $2.08
    
    
    136,000
    
    
    5.6 yrs
    
    
    $
    1.62$3.15 - $4.26
    
    
    73,000
    
    
    4.3 yrs
    
    
    $
    3.91209,000
    
    
    5.1 yrs
    
    
    $
    2.42Options Exercisable:Number
    
    
    Wgt. Avg.
    
    
    AggregateRange of Exercise Price
    
    Exercisable
    
    
    Exercise Price
    
    
    Intrinsic Value$1.51 - $2.08
    
    
    136,000
    
    
    $
    1.62
    
    
    $
    235,582$3.15 - $4.26
    
    
    61,000
    
    
    $
    3.92
    
    
    
    2,800$1.51 - $4.26
    
    
    197,000
    
    
    $
    2.33
    
    
    $
    238,382
   F-21




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##### Table of Contents



15. FOREIGN REVENUES AND OPERATIONS
  Year ended December 31,(in thousands)
    
    2007
    
    
    2006Foreign Countries:United Kingdom
    
    $
    2,249
    
    
    $
    1,596Chile
    
    
    490
    
    
    
    940Pacific Rim *
    
    
    1,253
    
    
    
    759Panama
    
    
    149
    
    
    
    277Ireland
    
    
    68
    
    
    
    138China
    
    
    36
    
    
    
    27Other
    
    
    115
    
    
    
    197Subtotal
    
    
    4,359
    
    
    
    3,934United States
    
    
    14,646
    
    
    
    10,526Total
    
    $
    19,005
    
    
    $
    14,460
 *
    
    Includes Australia, New Zealand, Japan and Singapore.    16. INDUSTRY SEGMENTS
   F-22




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##### Table of Contents



Year ended December 31,(in thousands)
    
    2007
    
    
    2006Information TechnologyRevenue
    
    $
    5,817
    
    
    $
    6,690Operating loss
    
    
    (3,296
    )
    
    
    (3,256
    )Depreciation and amortization
    
    
    192
    
    
    
    266Capital expenditures
    
    
    569
    
    
    
    123Identifiable assets
    
    
    4,171
    
    
    
    3,624Goodwill
    
    
    2,047
    
    
    
    2,047Industrial ProductsRevenue
    
    $
    13,188
    
    
    $
    7,769Operating income
    
    
    533
    
    
    
    446Depreciation and amortization
    
    
    271
    
    
    
    256Capital expenditures
    
    
    776
    
    
    
    368Identifiable assets
    
    
    4,932
    
    
    
    3,849Goodwill
    
    
    
    
    
    
    Consolidated SegmentsRevenue
    
    $
    19,005
    
    
    $
    14,460Operating income (loss)
    
    
    (2,762
    )
    
    
    (2,810
    )Depreciation and amortization
    
    
    463
    
    
    
    522Capital expenditures
    
    
    1,345
    
    
    
    491Identifiable assets
    
    
    9,103
    
    
    
    7,373Goodwill
    
    
    2,047
    
    
    
    2,047
  Year ended December 31,(in thousands)
    
    2007
    
    
    2006Consolidated segments operating loss
    
    $
    (2,762
    )
    
    $
    (2,810
    )Corporate expenses
    
    
    (1,101
    )
    
    
    (1,171
    )Consolidated loss from continuing operations
    
    $
    (3,863
    )
    
    $
    (3,981
    )
 Year ended December 31,(in thousands)
    
    2007
    
    
    2006Depreciation and amortizationConsolidated segments
    
    $
    463
    
    
    $
    522Corporate
    
    
    22
    
    
    
    24Consolidated
    
    $
    485
    
    
    $
    546Capital expendituresConsolidated segments
    
    $
    1,345
    
    
    $
    491Corporate
    
    
    10
    
    
    
    32Consolidated
    
    $
    1,355
    
    
    $
    523
 As of December 31,(in thousands)
    
    2007
    
    
    2006AssetsConsolidated segments identifiable assets
    
    $
    9,103
    
    
    $
    7,473Corporate
    
    
    3,519
    
    
    
    7,537Consolidated
    
    $
    12,622
    
    
    $
    15,010
  F-23




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##### Table of Contents



17. EARNINGS (LOSS) PER SHARE
   Year ended December 31,(in thousands except per share data)
    
    2007
    
    
    2006BasicNet earnings (loss)
    
    $
    (2,424
    )
    
    $
    4,469Weighted average common shares outstanding
    
    
    4,479
    
    
    
    4,479Net earnings (loss) per share
    
    $
    (0.54
    )
    
    $
    1.00DilutedNet earnings (loss)
    
    $
    (2,424
    )
    
    $
    4,469Weighted average common shares outstanding
    
    
    4,479
    
    
    
    4,479Effect of dilutive potential common shares: stock options
    
    
    
    
    
    
    92Total
    
    $
    4,479
    
    
    $
    4,571Net earnings (loss) per share
    
    $
    (0.54
    )
    
    $
    0.98
   F-24




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##### Table of Contents



Exhibit Index
 Exhibit Number
    
    Description10.9
    
    Sixth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated December 1, 2007.21.1
    
    List of subsidiaries of Registrant.23.1
    
    Consent of Tauber and Balser, P.C.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 9056 of the
Sarbanes-Oxley Act of 2002.
 Intelligent Systems Corporation
  -22-