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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

              Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                         Commission file number 1-9330

                        INTELLIGENT SYSTEMS CORPORATION
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             (Exact name of Registrant as specified in its charter)

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<S>                                                                                    <C>
                     GEORGIA                                                                        58-1964787
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(State or other jurisdiction of incorporation or organization)                         (I.R.S. Employer Identification No.)

       4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA                                                        30093
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        (Address of principal executive offices)                                                     (Zip Code)
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       Registrant's telephone number, including area code: (770) 381-2900

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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    TITLE OF EACH CLASS                                       NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S>                                                           <C>
COMMON STOCK, $.01 PAR VALUE                                           AMERICAN STOCK EXCHANGE
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

As of March 15, 2002, 4,495,530 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $3,494,558 (computed using the closing price of the Common Stock
on March 15, 2002 as reported by the American Stock Exchange).

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 23, 2002,
are incorporated by reference in Part III hereof.


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                               TABLE OF CONTENTS


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PART I

     Item   1.  Business...........................................................................................3
            2.  Properties.........................................................................................8
            3.  Legal proceedings..................................................................................8
            4.  Submission of matters to a vote of security holders................................................8

PART II

            5.  Market for the registrant's common equity and related stockholder matters..........................8
            6.  Selected financial data............................................................................9
            7.  Management's discussion and analysis of financial condition and results of operations..............9
            7A. Quantitative and qualitative disclosures about market risk........................................13
            8.  Financial statements and supplementary data.......................................................14
            9.  Changes in and disagreements with accountants on accounting and financial disclosure..............14

PART III

           10.  Directors and executive officers of the registrant................................................14
           11.  Executive compensation............................................................................14
           12.  Security ownership of certain beneficial owners and management....................................14
           13.  Certain relationships and related transactions....................................................14

PART IV

           14.  Exhibits, financial statement schedules and reports on Form 8-K...................................15
     Signatures ..................................................................................................18
</TABLE>


<PAGE>


                                     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 analysis 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. Among the
         important factors that could cause actual results to differ materially
         from those indicated by such forward-looking statements are delays in
         product development, undetected software errors, competitive
         pressures, technical difficulties, market acceptance, availability of
         technical personnel, changes in customer requirements, changes in
         financial markets, performance and financial condition of affiliate
         companies, and general economic conditions. 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.  BUSINESS

OVERVIEW

Intelligent Systems Corporation, a Georgia corporation, has operated either in
corporate or partnership form since 1973 and its securities have been publicly
traded since 1981. In this report, sometimes we use the terms "company", "we",
"ours" and similar words to refer to Intelligent Systems Corporation. We
operated as a master limited partnership from 1986 to 1991, when we merged into
the present corporation. Our executive offices are located at 4355 Shackleford
Road, Norcross, Georgia 30093 and our telephone number is (770) 381-2900.

Since the early 1980's, we have conducted our operations principally through
majority owned subsidiaries or minority owned affiliates to which we devote
extensive management resources. Frequent acquisitions of or investment in
promising early stage companies in the technology industry have long been
components of our overall strategy. Since most of our companies are early or
growth stage businesses, from time to time they may require funding, in excess
of what we can provide, from third parties or the public markets to support
their business plan. They may seek to be acquired or to merge with another
company in response to various market conditions or if circumstances indicate
that operating as a stand-alone company is not in their best interest. As a
result, our ownership position frequently changes from time to time. Moreover,
in the past several years, we have sold or discontinued several subsidiaries,
such as InterQuad Services and PsyCare America, generally in response to what
we believe to be unfavorable industry trends or prospects as stand-alone
companies. We anticipate that generally lower valuations for early stage
companies and our increased liquidity will allow us to increase the number of
companies we control and in which we are involved in day-to-day management of
their operations.

Our main focus is to help entrepreneurs build valuable companies by providing
operational and strategic management, practical business advice, early stage
equity capital, a network of business contacts and, in some cases, a proven
incubator program. Depending upon the needs of the partner company, we will
undertake a variety of roles which often include day-to-day management of
operations, board of director participation, financing, market planning,
strategic contract negotiations, personnel and administrative functions, etc.
Most of our partner companies are involved in the information technology
industry (principally software for business applications) although we are
involved in other industries as well (including industrial products,
biotechnology, and wireless).


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 3 -
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FINANCIAL REPORTING

We consolidate the results of operations of our partner companies in which we
own a majority interest or exert control. We account for investments in
affiliate companies in which we own 20 to 50 percent or in which we exert
significant influence by the equity method. In general, under the equity
method, we include our pro rata share of the income or loss generated by each
of these businesses as investment income (loss) on a quarterly basis. These
equity losses and income decrease or increase, respectively, our cost basis of
the investment. However, if there is no commitment for ISC to provide
additional funding to the company, to the extent losses exceed our cost, we do
not record a value below zero. Because of this equity method accounting
treatment, some of our affiliate companies may be recorded at zero on our
balance sheet but their estimated market value may be substantially higher.
Privately owned partner companies in which we own less than 20 percent of the
equity are carried at the lower of cost or market. We do not mark up the value
of privately-owned businesses even when they raise money at higher valuations.
We are often actively engaged in managing strategic and operational issues with
our non-consolidated companies and devote significant resources to the
development of the business.

RECENT ACQUISITION AND INDUSTRY SEGMENT OVERVIEW

On July 1, 2001, we increased our ownership in VISaer, Inc. from a 40 percent
interest to a 65 percent interest. The purchase was treated as a step
acquisition and we have consolidated the results of operations of VISaer, Inc.
since the date of the transaction. See Note 2 to the Consolidated Financial
Statements for details of the transaction and related purchase accounting. Our
consolidated companies operate in two industry segments: Information Technology
products and services, and Industrial Products. The Information Technology
segment includes our VISaer and QS Technologies subsidiaries and the Industrial
Products segment includes ChemFree. Prior to 2001, we reported information on
two segments: Technology and Health Care. In November 2000, we sold the
principal operating assets of our PsyCare subsidiary in response to unfavorable
market conditions in the managed health care environment. Therefore, we do not
have a Health Care industry segment in 2001. We also changed our segment
reporting to separate the ChemFree operations as our new Industrial Products
segment and renamed the Technology segment as the Information Technology
segment. We have restated segment data from prior reporting periods to
correspond to the current industry segments. All of our subsidiaries are
wholly-owned except for VISaer, in which our ownership is 65 percent.

Operations in the Information Technology segment are involved in the design,
development and marketing of application software products that are used by
business customers and government agencies to manage aspects of their
operations. Our software products are typically sold in competitive bids with
relatively long sales and implementation cycles. We receive software license
fees that vary depending upon the number of licensed users and the number of
software modules licensed with total contract revenue typically ranging from
$100,000 to more than a million dollars. We also derive service revenue from
implementation, customization, training and support services.

The Industrial Products segment includes the design, assembly and sale of
equipment and associated supplies that are used by commercial, industrial,
military and government agencies to maintain and service machinery or vehicles
used in their operations. Our assembled products are shipped to resellers or
direct to customer sites and do not require set-up or on-site support from us.
Unit pricing varies by model but typical end-user prices are less than $2,000.
Customers purchase replacement supplies from us after the sale.

Our individual operations in both segments are relatively small in size and are
subject to greater fluctuation in revenue and profitability than larger, more
established businesses. The business in our segments is not seasonal. In each
of the three years ended December 31, 2001, revenue related to ChemFree and QS
Technologies products have represented more than 15 percent each of
consolidated revenue. In 2001, revenue related to VISaer's products represented
more than 15 percent of consolidated revenue. For ease of comprehension, the
business discussion which follows contains information on products, markets,
competitors, research and development and manufacturing for our operating
subsidiaries, organized by industry segment and by company. For further
detailed financial information concerning our segments, see Notes 15 and 18 in
the accompanying Notes to the Consolidated Financial Statements.


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 4 -
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INDUSTRY SEGMENT: INFORMATION TECHNOLOGY PRODUCTS AND SERVICES

VISAER - VISaer develops, sells and supports software for the world-wide
commercial aviation industry. The VISaer software helps aviation customers
manage the extensive requirements and processes involved in their maintenance,
repair and overhaul (MRO) operations. Headquartered in Wilmington,
Massachusetts, VISaer also has operations in England and Ireland to support
product development and sales activities in Europe. VISaer is the successor
company of Visibility, Inc., a software company in the enterprise resource
planning market whose operations were sold in July 2000 to allow VISaer to
concentrate on the faster growing MRO software market. VISaer's current product
offering, VISaer 2.4, includes the following major components: technical
records planning and management, MRO operations, materials management,
production scheduling, commercial operations and financial management. Version
2.5, scheduled for release in the second half of 2002, will include additional
modules and features. VISaer expects to release Version 3.0, a fully Web-native
version of the complete MRO solution, in late 2002. In mid-2001, VISaer signed
a major contract with United Parcel Systems (UPS) for its Version 3.0 software
and has approximately $2.6 million in deferred revenue at December 31, 2001
associated with the contract. In addition, VISaer has a backlog of
approximately $3-4 million related mainly to this contract and annual support
contracts. Revenue related to the UPS contract will be recognized upon contract
completion which is anticipated in early 2003. The UPS contract has certain
non-competition and acceptance provisions that the company must comply with.

The general slow-down in the global economy and the terrorist attacks of
September 11, 2001 have had a significant negative impact on the commercial
aviation market. The company believes that some airlines have delayed or
canceled planned information technology projects and others may not have the
financial strength to weather the current downturn. However, regulatory
requirements dictate that airlines manage their MRO processes carefully and
there is increased pressure to improve and automate MRO record-keeping.
VISaer's software products provide a comprehensive, cost-effective way to do
so. VISaer expects that low-cost airlines, defense related aviation, MRO
service outsourcing companies, private airlines and emerging global markets
will provide additional sales opportunities beyond the larger commercial
airlines.

VISaer markets and sells its software products and related support and
maintenance services to customers in both domestic and foreign markets. In some
cases, it sells direct to the customer; in other cases, it sells through
re-sellers such as Unisys Corporation that represents the company on a
non-exclusive basis in several Pacific Rim markets. Sales through Unisys
represented 18 percent of consolidated revenue in 2001. In most cases, sales
are made in response to competitive bids and RFP's and have sales cycles of
6-18 months with implementation periods of 6-18 months. VISaer provides full
suite implementation services and post-sales support and maintenance activities
under annual contracts as well as ongoing professional services. VISaer has a
number of competitors, some of whom offer MRO software as part of an Enterprise
Resource Planning package and who have significantly more financial resources,
larger customer bases and greater market coverage than VISaer. Other
competitors are smaller players focused on MRO solutions with resources similar
to VISaer. The company competes on the basis of providing full product
functionality and integration, offering a complete software and service
solution, and providing software that runs on industry standard technology
platforms. VISaer expects that its Web-native software version will be a strong
competitive offering.

QS TECHNOLOGIES - QS Technologies operates from its Greenville, South Carolina
location, providing health and human services software products, maintenance
and support services to its installed customer base as well as new customers.
QS Technologies' products allow public health agencies to capture, analyze and
manage client information such as immunization, maternal health, and birth and
death records. The market includes local, state and federal public health
agencies nationwide as well as other government agencies, hospitals and
clinics. The market is fragmented and limited in size. QS Technologies competes
against a number of other software companies, many of which are small vendors
like itself and some of which are larger with access to greater resources. QS
Technologies competes on the basis of product functionality and value,
reputation for customer service and knowledge of market requirements acquired
through twenty years in the market. Sales are typically made in response to
competitive bids and may take six to twelve months to complete. Demand for
products and the timing of contract awards is impacted by general economic
conditions as well as customer-specific factors such as state and local budgets
and program priorities, over which QS has little control. Typically, QS
Technologies provides its customers with post-sales service and support under
annual contracts that often renew for multiple years after the initial software
license fee is earned. QS Technologies is engaged in new product


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 5 -
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development (including a web-based initiative) and enhanced sales activities to
expand its customer base and generate future revenue.

INDUSTRIAL PRODUCTS SEGMENT

CHEMFREE CORPORATION - Our only subsidiary in the Industrial Products segment
is ChemFree Corporation (ChemFree), one of our early incubator companies, that
designs, manufactures and markets a line of parts washers under the
SmartWasher(TM) trademark. SmartWashers use an advanced bio-remediation system
to clean automotive and machine parts without using hazardous, solvent-based
chemicals. SmartWashers consist of a molded plastic tub and sink, recirculating
pump, heater, control panel, filter with microorganisms, and aqueous based
degreasing solutions. Unlike traditional solvent-based systems, there are no
regulated, hazardous products used or produced in the process and the
SmartWasher system is completely self-cleaning. ChemFree sells replacement
fluid and filters to its customers on a regular basis after the initial parts
washer sale.

ChemFree's markets include the automotive, transportation, industrial and
military markets. The automotive market includes companies and governmental
agencies with fleets of vehicles to maintain; automobile manufacturers with
extensive service networks such as Chrysler, GM and BMW; and individual and
chains of auto repair shops and auto parts suppliers. The industrial market
includes customers with machinery that requires routine maintenance, such as in
the textile industry. Military applications include vehicle service depots in
all branches of the military. ChemFree sells its products directly to high
volume customers as well as through several distribution channels, including
international distributors in Europe and the Pacific Rim. ChemFree also sells
in competitive bid situations and under a GSA schedule to government agencies.
Because ChemFree sells in part through large national distributors such as NAPA
in the United States and exclusive distributors in certain international
markets, its results could be impacted negatively if one or more of such
customers discontinues distribution and sales of ChemFree products. One of
ChemFree's international distributors represented 10 percent of consolidated
revenue in each of the last two years. Part of ChemFree's revenue is derived
from multi-year contracts under which ChemFree provides SmartWashers and
supplies to large corporate customers, such as Firestone, at multiple corporate
sites.

ChemFree competes with larger, established companies that offer solvent-based
systems, other small companies using non-hazardous systems, and hazardous waste
hauling firms. Although smaller than the established solvent-based firms,
ChemFree believes it is competitive based on product features, positive
environmental impact, improved health and safety features, elimination of
regulatory compliance, and price.

Warranty service, typically covering a one-year period, is provided either by
ChemFree personnel or through its distributors and dealers. ChemFree
subcontracts the manufacturing of major sub-assemblies built to its
specifications to various vendors and performs final assembly and testing at
its own facility. While there are multiple sources available for subassemblies,
ChemFree frequently contracts with a single source for certain components in
order to benefit from lower prices and consistent quality.

INCUBATOR PROGRAM

For more than ten years, we have operated the Intelligent Systems Incubator at
our corporate facility in the suburbs of Atlanta, Georgia. We believe our
incubator program is one of the longest running and largest self-funded
incubator programs in the United States. In exchange for a monthly facility
fee, incubator companies have access to resources such as office space,
conference facilities, telecommunication and network infrastructure, business
advice and planning, a network of professional services, and, in some cases,
financial capital. Depending upon the experience and needs of the founding
entrepreneur, incubator companies will choose to use some or all of the
available resources. The incubator staff takes care of time-consuming
infrastructure issues so the entrepreneur can focus on driving business
development. Income from incubator companies reduces our total facility and
personnel costs. The incubator also provides us with the opportunity for
day-to-day involvement with emerging companies that may become partnership
companies, either as majority-owned subsidiaries or minority-owned affiliates.
In 1999, ChemFree Corporation, an incubator company and majority owned company,
was named Incubator Company of the Year (Manufacturing category) by the
National Business Incubation Association.


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 6 -
<PAGE>


We are equity partners in some but not all of the companies in our incubator
program. Because we have a large incubator facility, we can offer the benefits
of the incubator program to non-affiliate companies. Conversely, many of our
subsidiary and minority owned partner companies are not located in our
incubator. In attracting companies to our incubator program, we compete with
other sources of business assistance, facilities and financial capital that may
be available to the entrepreneur. These sources include other incubator
programs as well as angel and venture capital investors, corporate partner
relationships and merger/sale opportunities. We do not record revenue from
incubator lease income; rather such amounts are offset against the corporate
facility expenses.

AFFILIATED PARTNER COMPANIES

Part of our business strategy is to seek out and form relationships with
companies that we believe are involved in promising technologies or markets
with good growth potential. From time to time, we have acquired or invested in
such companies and expect to continue to do so as a regular part of our
strategy. When we become involved, these companies are privately held, early
stage companies in technology-related fields. We are often actively involved in
helping the companies develop and implement their business plans. Some examples
of our involvement are as follows:

-        Initially, we owned a 40 percent equity position in VISaer, Inc., a
         privately held company that designs, develops and markets software
         products addressing the global aircraft maintenance, repair and
         overhaul market. We increased our ownership in VISaer to 65 percent in
         2001 and now consolidate its results.

-        Initially we own a 27 percent interest in Delos Payment Systems, Inc.,
         a development stage software company spun off from former affiliate
         company, PaySys International, Inc. in April 2001. As of January 2002,
         due to a default by Delos on an outstanding loan, we acquired control
         of Delos, we are actively involved in managing the company at our
         incubator facility and we will consolidate its results of operations.
         Refer to Note 20 to the consolidated financial statements.

-        A 25 percent interest in affiliate company CoreXpand, a software
         company with an e-commerce application for promotional and incentive
         product distributors. CoreXpand is part of the Intelligent Systems
         Incubator program.

-        An 18 percent interest in Cirronet Inc., a privately held and former
         incubator company involved in wireless telecommunications products for
         industrial and commercial markets as well as residential and small
         business wireless Internet markets. Refer to Note 4 to the
         Consolidated Financial Statements.

-        A less than one percent position in Atherogenics, a pharmaceutical
         company involved in novel drugs which address inflammatory diseases
         such as cardiovascular disease and asthma. Atherogenics completed its
         initial public offering in August 2000. We were part of the original
         investor group of Georgia-based institutions supporting the company's
         efforts to commercialize technology developed at Emory University.

-        A three percent interest in RF Solutions, Inc., a start-up company
         that is developing proprietary radio frequency integrated chips used
         in broadband wireless products. The development stage company is
         building on the founding team's world-renowned research at Georgia
         Tech to develop commercial products.

RESEARCH AND DEVELOPMENT

The Company spent $3,371,000, $915,000 and $805,000 in the fiscal years ended
December 31, 2001, 2000 and 1999, respectively, on company sponsored research
and development. The Information Technology segment increased spending on
software development significantly in 2001 mainly due to an intensive effort
related to the VISaer 3.0 product line, which is expected to continue through
at least 2002.

PATENTS, TRADEMARKS AND TRADE SECRETS

The ChemFree subsidiary has several patents (both issued and pending) covering
certain aspects of its products and processes. It may be possible for
competitors to duplicate certain aspects of these products and processes even
though we regard such aspects as proprietary. We have registered with the US
Patent and Trademark Office


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 7 -
<PAGE>


and various foreign jurisdictions numerous trademarks and service marks for our
products. We believe that an active trademark and copyright protection program
is important in developing and maintaining brand recognition and protecting its
intellectual property. Our companies presently market their products under
trademarks and service marks such as SmartWasher, OzzyJuice, VISaer and others.

PERSONNEL

As of February 28, 2002, we had 145 full-time equivalent employees in our
majority-owned or controlled companies. Our employees are not represented by a
labor union, we have not had any work stoppages or strikes and we believe our
employee relations are good.

ITEM 2.  PROPERTIES

At February 28, 2002, we have leases covering approximately 137,500 square feet
in Atlanta, GA, 6,100 square feet in Greenville, SC, and 21,400 square feet in
Wilmington, MA, as well as small offices in Warrington, England and in Dublin,
Ireland to house our product development, manufacturing, sales, service and
administration operations. We believe our leased facilities are adequate for
our existing and foreseeable business operations. A portion of the Atlanta
corporate facility is subleased to businesses in our technology business
incubator.

ITEM 3.  LEGAL PROCEEDINGS

In 1999, a former consultant of the ChemFree subsidiary brought suit against
ChemFree and other third parties challenging the ownership of certain of
ChemFree's patents. ChemFree and other parties to the suit strongly deny the
allegations, have filed a counterclaim and are vigorously defending the suit,
which is pending in the Superior Court of Gwinnett County, Georgia. In 2001, we
were named as a co-defendant in a lawsuit filed by four former employees of
PaySys International, Inc. claiming certain rights to acquire shares of PaySys
stock that we acquired from PaySys founders in 1994. We strongly deny that any
valid claim exists and are vigorously defending the suit which is pending in
the Ninth Judicial Circuit in Orange County, Florida. In addition, we are party
to a small number of other legal matters arising in the ordinary course of
business. It is management's opinion that none of these other matters will have
a material adverse impact on our consolidated financial position or results of
operations. Refer to Note 10 to the consolidated financial statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matter to a vote of our shareholders during the fiscal
quarter ended December 31, 2001.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

Our common stock is listed and traded on The American Stock Exchange ("AMEX")
under the symbol "INS". The following table sets forth, for the periods
indicated, the range of high and low sales prices for our common stock as
reported by AMEX.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,            2001                              2000
                           HIGH            LOW              HIGH             LOW
---------------------------------------------------------------------------------
<S>                        <C>             <C>             <C>              <C>
    1ST QUARTER            4.00            3.02            14.50            3.625
    2ND QUARTER            4.92            3.30            10.25            3.50
    3RD QUARTER            4.60            3.10             6.25            3.75
    4TH QUARTER            3.35            2.95             6.00            2.875
</TABLE>

We had 438 shareholders of record as of February 28, 2002. This number does not
include beneficial owners of our common stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers and other
fiduciaries. We paid a special cash dividend of $0.52 per common share on April
20, 2000. The company


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 8 -
<PAGE>


may pay cash dividends from time to time on an irregular
basis but has not in the past paid regular dividends and does not expect to do
so in the future.

ITEM 6.  SELECTED FINANCIAL DATA

 (in thousands except share amounts)

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,             2001            2000             1999             1998              1997
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<S>                                       <C>             <C>             <C>               <C>               <C>
Net Sales                                 $    8,718      $    7,027      $     8,479       $    18,253       $    21,160
Net Income (Loss)                              9,113a          8,215b             249c           (1,548)d          (7,176)e
Net Income (Loss) Per Share (Basic)             1.78            1.47             0.05              (.30)            (1.41)
Total Assets                                  26,089          18,057           13,658            17,099            19,091
Working Capital                               10,206           3,294              (48)           (1,827)           (1,068)
Long-term Debt                                    --              --              363               900             1,000
Stockholders' Equity                          17,858          14,674           10,209             9,641            11,396
Cash Dividends Paid Per Common Share              --      $     0.52               --                --                --
Shares Outstanding at Year End             4,495,530       5,623,784        5,114,467         5,104,467         5,104,467
</TABLE>

a.       Includes investment gains of $19.9 million, $2.2 million in net losses
         in equity of affiliates and non-recurring charges totaling $6.4
         million related to acquisition.

b.       Includes investment gains of $9.7 million and $771,000 in net losses
         in equity of affiliates.

c.       Includes investment gains of $2.2 million and $948,000 in net losses
         in equity of affiliates.

d.       Includes $944,000 charge for purchased in-process R&D, $955,000 charge
         to discontinue product lines, $5.2 million gain on investments and
         $593,000 income in equity of investments.

e.       Includes $953,000 charge for purchased in-process R&D, $2.6 million
         gain on investments, $3.0 million write-off of note receivable and
         $2.3 million loss in equity of investments.

Please refer to Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations for a discussion of material acquisitions
or dispositions that may affect the comparability of this financial
information.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         In addition to historical information, this Form 10-K may contain
         forward-looking statements relating to Intelligent Systems Corporation
         (ISC). All statements, trend analysis 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 works such as "anticipate",
         "believe", "plan", "estimate", "expect", and "intend", and other
         similar expressions constitute forward-looking statements. Prospective
         investors are cautioned that any such forward-looking statements are
         not guarantees of future performance and involve risks and
         uncertainties, and that actual results may differ materially from
         those contemplated by such forward-looking statements. Among the
         important factors that could cause actual results to differ materially
         from those indicated by such forward-looking statements are delays in
         product development, undetected software errors, competitive
         pressures, technical difficulties, market acceptance, availability of
         technical personnel, changes in customer requirements, changes in
         financial markets, performance and financial condition of affiliate
         companies, and general economic conditions. ISC undertakes no
         obligation to update or revise forward-looking statements to reflect
         changed assumptions, the occurrence of unanticipated events or changes
         in future operating results.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements
presented in this annual report.

OVERVIEW - Our consolidated subsidiaries during 2001 operate in two industry
segments: Information Technology and Industrial Products. Included in the
Information Technology sector are QS Technologies, Inc. (software for health
and human services) and, since July 1, 2001, VISaer, Inc. (software for
maintenance, repair and overhaul


                        INTELLIGENT SYSTEMS CORPORATION
                                     - 9 -
<PAGE>


operations in the aerospace industry). The Industrial Products segment includes
ChemFree Corporation (bio-remediating parts washers). In prior years, we also
had a Health Care segment consisting of our PsyCare America subsidiary prior to
closing the operation in November 2000.

Net profit in 2001 was $9,113,000 compared to $8,215,000 in 2000. Included in
the 2001 results is a pre-tax gain of $17,770,000 on the sale of our ownership
in PaySys International, Inc. in April 2001. The results for 2000 reflect a
gain of $8,622,000 from the sale of most of our ownership of Risk Laboratories,
LLC. Both of these events are described more fully in Note 3 to the
consolidated financial statements. Our net loss from operations in 2001 was
$10,420,000 compared to a net loss of $976,000 in 2000. The current year
operating results include non-recurring charges totaling $6.4 million in the
third quarter of 2001 related to the acquisition of a controlling interest in
VISaer in July 2001, as more fully explained in Note 2 to the consolidated
financial statements. In addition, VISaer is incurring significant current
expenses for software development while revenue for related software licenses
is being deferred until the completed software product is delivered to
customers in early 2003.

In the past several years, a significant portion of our income has been derived
from sales of holdings in affiliate and other minority-owned companies. We also
recognize on a regular basis our pro rata share of the income or losses of
affiliate companies accounted for by the equity method. The timing and amount
of gain or loss recognized as a result of a sale or the amount of equity in the
income or losses of affiliates generally are not under our control and are not
necessarily indicative of future results. Occasionally, as in the case of
VISaer, we acquire a controlling interest in a company previously accounted for
by the equity method and consolidate its results as of the acquisition date.
Therefore, period-to-period comparisons of results of operations may not be
meaningful or indicative of future results.

SALES - Total revenue in 2001 was $8,718,000, an increase of 24 percent
compared to revenue of $7,027,000 in 2000. Revenue from products, which
includes sales of equipment in our Industrial Products segment as well as
software license fees related to the Information Technology segment, increased
10 percent year-to-year whereas revenue from services billed by the Information
Technology segment increased 54 percent year-to-year. The growth in both
revenue categories reflects mainly the benefit of the mid-year acquisition of
VISaer. We did not record service revenue in the Health Care segment in 2001
since we closed the PsyCare operation in 2000.

Net sales in 2000 declined by 17 percent compared to 1999, principally due to
lower service revenue in the Health Care segment, reflecting fewer
hospital-based treatment programs and the close of the PsyCare operation in
November 2000. Revenue in the Information Technology segment was down slightly
year-to-year while sales in Industrial Products in both domestic and
international markets grew slightly in 2000 compared to the prior year.

COST OF SALES - In 2001, total cost of sales was 47 percent of revenue,
compared to 42 percent in 2000 and 47 percent in 1999. Cost of product sales as
a percentage of product revenue was essentially the same in 2001 and 2000. Cost
of service sales in the Information Technology segment increased in 2001
compared to 2000 mainly due to the inclusion of VISaer costs following the
VISaer acquisition. VISaer professional services have a higher labor component
and cost than do services provided by QS Technologies. The decline in 2000
compared to 1999 reflects reduced personnel costs in the Information Technology
and Health Care segment as we scaled back the PsyCare operation and lower
direct material costs in the Industrial Products segment. Cost of product sales
is likely to decrease as a percentage of sales in future periods as a greater
portion of anticipated product revenue is derived from software license fees.

OPERATING EXPENSES - In 2001, marketing expenses more than doubled compared to
2000, reflecting the inclusion of VISaer expenses for six months in 2001 as
well as increased expenditures in the Industrial Products segment to support
new sales and marketing initiatives. General and administrative expenses
increased over 200 percent in 2001 compared to 2000, reflecting non-recurring
charges totaling $6 million to write-down goodwill associated with the VISaer
acquisition, the inclusion of VISaer expenses for six months and management
bonuses related to the sale of PaySys. Research and development expense in 2001
increased by 268 percent compared to 2000 mainly due to significant new product
development expense in the Information Technology segment as well as a
non-recurring charge of $425,000 to record in-process research and development
projects related to the acquisition of VISaer.


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 10 -
<PAGE>


In 2000, marketing expenses were down eight percent compared to the prior year,
mainly because the prior year amounts included expenses for an operation that
was sold in 1999. Marketing expenses for Industrial Products increased during
2000 to generate and support higher revenue levels. General and administrative
expenses were lower by almost $300,000 in 2000 compared to 1999. The reduction
is related to reduced personnel and facility expenses as the Health Care
segment wound down its operations, offset in part by higher legal costs to
protect intellectual property assets in the Industrial Products segment.
Corporate expenses, which are part of general and administrative expenses, were
also higher in 2000 compared to 1999 mainly due to management bonuses. Research
and development expenses in both Industrial Products and Information Technology
sectors increased in 2000 as compared to 1999 to support development of new and
enhanced product offerings.

INTEREST INCOME - In 2001, we recorded $1.0 million in interest income compared
to interest income of $434,000 in 2000 and interest expense of $88,000 in 1999.
The increase in 2001 compared to 2000 is mainly related to interest earned on a
$3.5 million, high-interest note through April 2001 and significant cash
balances since then, both related to our PaySys affiliate sale. In 2000 as
compared to 1999, we earned interest on substantially higher levels of cash
during the first half of 2000 and also earned interest on a higher level of
notes at higher rates of interest in 2000.

INVESTMENT INCOME - Investment income related to sales of affiliate companies
has been a major source of our profits in each of the last two years. In 2001,
the main components of investment income of $19.9 million are $17.8 million
from the sale of our interest in PaySys and a gain of $1.9 million on sales
related to Risk Laboratories. For 2000, we recorded a gain of $8.6 million on
the sale of part of our ownership in Risk Laboratories as well as investment
gains totaling $1.0 million related to sales of shares of common stock of
Primus and S1. In 1999, we recorded net investment income of $1.2 million on
the sale of equity holdings in three private software companies and a gain of
$995,000 on the sale of our holdings in MediaMetrix stock. Refer to Note 3 for
details on the sale transactions described in this section.

EQUITY LOSSES OF AFFILIATES - On a quarterly basis, we recognize our pro rata
share of the earnings or losses of affiliate companies that we record on the
equity method. These companies are typically early stage companies that incur
losses during their development and early revenue stages. We recorded $2.2
million of net equity losses in 2001, compared to $771,000 and $948,000 in net
equity losses in 2000 and 1999, respectively. In 2001, the majority of the
equity loss relates to Delos Payment Systems whereas the majority of the equity
loss in 2000 and in 1999 relates to VISaer.

OTHER INCOME - Other income/expense in each of the last three years consists of
miscellaneous, non-recurring sources of income and expense. Included in 2001 is
$961,000 of deferred gain related to a VISaer product line sale in July 2000.
In 1999, this category includes a non-recurring charge of $141,500 related to a
former subsidiary bankruptcy case.

TAXES - In 2001, we incurred income tax expense of $173,000, representing a tax
liability of $384,000 for alternative minimum tax on the PaySys transaction
(tax loss carryforwards offset 90 percent of the gain) and a tax benefit of
$211,000 recorded at the VISaer subsidiary. We incurred income tax expense
totaling $203,000 in 2000 relating to operating income at the QS Technologies
subsidiary and a small amount of investment income related to the Risk
Laboratories sale that could not be sheltered by tax loss carryforwards. We had
no income tax expense in 1999 because investment gains were offset by capital
loss carryforwards.

COMMON SHARES - In 2001, we repurchased 1,132,000 shares of our common stock,
including one million shares in the self-tender offer completed July 12, 2001.
In 2000, executive officers exercised options to acquire a total of 635,986
shares of common stock and surrendered a total of 101,769 shares of common
stock in partial payment of the exercise price. We also repurchased and retired
24,900 shares during 2000 pursuant to a stock repurchase plan announced in
August 2000.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2001, our principal sources of cash were $17.8
million from the sale of our interest in PaySys, $4.3 million from repayment of
principal and interest related to a bridge loan to PaySys, $1.9 million from
the sale of our Risk units, $842,000 on sales of other investments and $195,000
in interest from other


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 11 -
<PAGE>


notes receivable and bank balances. During the year, our principal uses of cash
were $5.8 million to acquire and retire 1,132,000 shares of our common stock,
$1.5 million to retire our bank debt, $400,000 for bridge loans to investees,
$2.8 million for follow-on investments in technology companies and $2.0 million
for operations, principally to fund working capital needs at VISaer and the
corporate office.

Long-term investments decreased $3.0 million at December 31, 2001 compared to
the prior year-end. The main component of this amount is reclassification of
$2.9 million of the carrying value of VISaer when it was acquired in July 2001
and we began consolidating its results. The balance of the decline is a
combination of new investments in technology companies, equity losses of
affiliate companies, sales of investments and changes in market prices of
publicly held stocks. Increases year-to-year in the balances of accounts
receivable, accounts payable, other accrued liabilities, deferred revenue and
deferred gain are principally the result of consolidating the assets and
liabilities of VISaer since its acquisition. Inventories increased year-to-year
to support a higher level of sales at ChemFree.

As of December 31, 2001, we have cash of $12.0 million. We believe our cash
balances and available-for-sale securities will be adequate to support our
operations and plans for the foreseeable future. As we have in the past, we
expect to continue to identify opportunities for new and follow-on investments
or acquisitions and would expect to use some available cash for these purposes.
Since the terrorist attacks of September 11, 2001, our Information Technology
segment has experienced delays in contract awards and implementations which, if
they continue, may have a negative impact on results of operations and increase
the segment's cash requirements, which we intend to fund or arrange funding
for. However, we believe we have more than adequate cash reserves to meet any
such needs. We do not have off-balance sheet arrangements, relationships,
transactions or guarantees with third parties or related parties that would
affect our liquidity or results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets,
liabilities, revenues and expenses. We consider certain accounting policies
related to revenue recognition, valuation of acquired intangibles and
impairment of long-lived assets, and valuation of investments to be critical
policies due to the estimation processes involved in each. For a detailed
description on the application of these and other accounting policies, see Note
1 to the Consolidated Financial Statements beginning on page F-7.

Revenue Recognition. Our product revenue consists of fees from software
licenses and sales of equipment and supplies. Our service revenue consists of
fees for implementation, consulting, training, maintenance and support for
software products. A portion of our revenue is derived from software contracts
that contain significant production, modification and/or customization
requirements and license fees for such contracts are recognized using contract
accounting. We recognize revenue on a percentage of completion basis that
involves estimating our progress on the contract based on input measures. We
recognize revenue and the related costs in the same proportion that the amount
of labor hours incurred to date bears to the total estimated hours required for
contract completion. If reliable estimates cannot be determined or if there is
an acceptance clause in the contract, all revenue is deferred until the
customer has accepted the software and any refund rights have expired. If we do
not accurately estimate the resources required or the scope of work to be
performed, or we do not manage the contract properly, in future periods we may
need to restate revenues or to incur additional cost which would impact our
margins and reported results.

Valuation of Intangibles. Purchase accounting for an acquisition requires use
of accounting estimates and judgments to allocate the purchase price to the
fair market value of the assets and liabilities purchased. Our business
acquisitions typically result in goodwill and other intangible assets. The
determination of the value of such intangible assets requires management to
make estimates and assumptions that affect the amount of future period
amortization expenses and possible impairment expense that we will incur.
Periodically we review the values assigned to long-lived assets using an
estimate of the undiscounted cash flows of the entity over the remaining life
of the asset. Any resulting impairment could require a write-down that would
have a material adverse impact on our financial condition or results of
operations.


                        INTELLIGENT SYSTEMS CORPORATION
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<PAGE>


Valuation of Investments. We hold minority interests in non-publicly traded
companies whose values are difficult to determine and are based on management's
estimate of realizability of the carrying value of the investment. Future
adverse changes in market conditions, poor operating results or lack of
progress of the underlying investment could result in losses or an inability to
recover the current carrying value of the investment. Our policy is to record
an impairment charge when we believe an investment has experienced a decline in
value that is other than temporary. Such charges could have a material adverse
impact on our financial condition or results of operations. We also hold
minority interests in several publicly-traded companies whose shares experience
price volatility and are thinly traded. The carrying value of these investments
reflects the market value of the shares at the balance sheet date. Future
values could increase or decrease and we may not be able to realize the current
carrying value due to changes in the market price of the stock or limited
liquidity of the stock.

FACTORS THAT MAY AFFECT FUTURE OPERATIONS

Future operations in both the Information Technology and Industrial Products
segments are subject to risks and uncertainties that may negatively impact our
results or projected cash requirements. In addition, the value of our
investments are impacted by a number of factors beyond our control. Among the
factors that may affect our consolidated results of operations are delays in
product development, undetected software errors, competitive pressures,
technical difficulties, market acceptance of our products, availability of
technical personnel, changes in customer requirements, delays in customer
payments, changes in financial markets, performance and financial condition of
affiliate or investee companies, and general economic conditions.

In 2001, we loaned $1.5 million to an affiliate company, Delos Payment Systems,
Inc., a development stage software company, under a secured loan agreement. The
affiliate loan was recorded as an equity investment and we subsequently
recorded $1.42 million in equity losses related to Delos, reducing the carrying
value of our investment to $80,000 at December 31, 2001. In early January 2002,
Delos defaulted on repayment of the loan, we acquired control of the Delos
board of directors and, consequently, we are consolidating the Delos operations
and our 27 percent ownership of common stock of Delos in 2002. We are providing
additional borrowings of $1.5 million to Delos under the loan and are
considering investing funds to increase our ownership to a significant majority
position. It will incur operating losses that we will consolidate and it will
require cash to operate in 2002. While we have no contractual requirement to
provide additional funding, we are likely to use part of our available cash
balances to support the Delos operations in the near-term. If Delos is
unsuccessful or if we decide to suspend funding, we may not recover all of
these funds.

As a result of consolidating Delos, we will record intangible assets upon
consolidation in the first quarter of 2002 in accordance with SFAS 141. It is
possible that the intangibles will be mainly in-process research and
development and goodwill and the goodwill may be impaired for a number of
reasons. Some of the factors that may negatively impact the value of the
goodwill are significant non-competition restrictions related to the sale of
PaySys in April 2001 that limit who Delos can sell its products to for varying
time periods through 2006, risks associated with completing and testing the
initial software application, lack of a proven business model and customers, a
limited operating history, and unproven market acceptance of the Delos software
features and architecture. If the company determines that the intangibles are
impaired, it will need to write-down their value to net realizable value in the
first quarter of 2002 in accordance with SFAS 142, resulting in a charge to
earnings of approximately $1 million. Despite the possible impairment charge,
we made the additional loan of $1.5 million to Delos to protect our investment
and future alternatives.

We have certain lease commitments, legal matters and contingent liabilities
described in detail in Note 10 to the consolidated financial statements. We are
not aware presently of any facts or circumstances related to these that are
likely to have a material negative impact on our results of operations or
financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any material market risk because we have no long-term
borrowings.


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 13 -
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this report.
See page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

No independent public accountant of the company has resigned, indicated any
intent to resign or been dismissed as the independent public accountant of the
company during the two years ended December 31, 2001 or at any time afterward.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- Nominees" and "Proposal 1 - The Election of Directors - Executive Officers"
in our Proxy Statement for the Annual Meeting of Shareholders to be held on May
23, 2002 for information about those individuals nominated as directors and
about the executive officers of the company. This information is incorporated
into this Item 10 by reference. Information regarding compliance by directors
and executive officers of the company and owners of more than 10 percent of our
common stock with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, is contained under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement mentioned
above. This information is incorporated into this Item 10 by reference.

ITEM 11. EXECUTIVE COMPENSATION

Please refer to the subsection entitled "Proposal 1 - The Election of Directors
- Executive Compensation" in the Proxy Statement referred to in Item 10 for
information about management compensation. This information is incorporated
into this Item 11 by reference, except that we specifically do not incorporate
into this Item 11 the information in the subsections entitled "Proposal 1 - The
Election of Directors - Executive Compensation - Board Compensation Committee
Report on Executive Compensation" and "Performance Graph."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Please refer to the subsection entitled "Voting - Principal Shareholders,
Directors and Certain Executive Officers" in the Proxy Statement referred to in
Item 10 for information about the ownership of our $0.01 par value common stock
by certain persons. This information is incorporated into this Item 12 by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On January 5, 2000, three officers of the company exercised stock options and
issued to the company promissory notes bearing interest at the rate of seven
percent per annum in payment of the exercise price. J. Leland Strange,
President and Chief Executive Officer of the company and the beneficial owner
of greater than 5% of our common stock issued the company a promissory note for
$380,000 representing the total exercise price of his options. Bonnie L.
Herron, Vice President and Chief Financial Officer, and Francis A. Marks, Vice
President, each issued the company a promissory note for $258,750 representing
the total exercise price of their respective options. The loans were repaid at
various dates in 2000 and 2001 and no amounts are outstanding as of December
31, 2001.

In April 2001, J. Leland Strange, a director, and President and Chief Executive
Officer of the company, participated as a common stockholder in the sale of all
of the outstanding preferred and common stock of PaySys International, Inc., a
former affiliate company, to First Data Corporation ("FDC"). The company sold
its interest in PaySys to FDC for $17.8 million as part of the sale
transaction. Mr. Strange's shares, which he had owned since 1983 prior to the
company's investment in PaySys in 1994, represented less than one percent of
PaySys' outstanding shares. The proceeds from the sale of his PaySys stock were
$594,000, which was based on the same price per share paid to all common
shareholders of PaySys by FDC.


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 14 -
<PAGE>


Each of the named officers of the company participated on a pro rata basis with
other shareholders of the company pursuant to the company's tender offer on
July 12, 2001. In addition, each officer sold shares of common stock to the
company at $4.20 per share (which was the closing price of the company's common
stock on July 20, 2001, the sale date) to meet the requirements of Section 302
of the Internal Revenue Code for capital gains treatment of shares sold by the
officers in the tender offer. J. Leland Strange, a director, President and
Chief Executive Officer, and the beneficial owner of more than 5 percent of the
company's common stock, sold 47,619 shares for a total sales price of $200,000;
Bonnie L. Herron, Vice President and Chief Financial Officer, sold 47,619
shares for a total sales price of $200,000; and Francis A. Marks, Vice
President, sold 18,500 shares for a total sales price of $77,700. The officers
previously reported these sale transactions on Forms 4 filed with the
Securities and Exchange Commission.

On March 14, 2002, the shareholders of Risk Laboratories, a former affiliate of
the company, sold their remaining ownership interests to the same buyer that
had purchased majority control of Risk in March of 2000. The company and J.
William Goodhew, a vice president of the company and minority shareholder in
Risk, each sold their respective ownership interests along with all other
minority shareholders in the $6 million transaction. Mr. Goodhew's pro rata
share of the sale proceeds was $429,600 and the company's pro rata share was
$474,000. The company previously sold most of its ownership in Risk in several
transactions totaling $10.7 million in proceeds.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)      DOCUMENTS FILED AS PART OF THIS REPORT.

         1.       Financial Statements

         The following consolidated financial statements and related reports of
independent public accountants are included in this report and are incorporated
by reference in Part II, Item 8 hereof. See the Index to Financial Statements
and Supplemental Schedules on page F-1 hereof.

         Report of Independent Public Accountants
         Consolidated Balance Sheets at December 31, 2001 and 2000
         Consolidated Statements of Operations for the three years ended
         December 31, 2001
         Consolidated Statements of Changes in Stockholders' Equity and
         Comprehensive Income for the three years ended December 31, 2001
         Consolidated Statements of Cash Flow for the three years ended
         December 31, 2001
         Notes to Consolidated Financial Statements

         2.       Financial Statement Schedules

         We are including the financial statement schedules listed below in
this report. We omitted all other schedules required by certain applicable
accounting regulations of the Securities and Exchange Commission because the
omitted schedules are not required under the related instructions or do not
apply or because we have included the information required in the consolidated
financial statements or notes thereto. See the Index to Financial Statements
and Supplemental Schedules on page F-1 hereof.

         Schedule II - Valuation and Qualifying Accounts and Reserves

         Report of Independent Auditors for PaySys International, Inc.
         Consolidated Balance Sheets of PaySys at December 31, 2000 and 1999
         Consolidated Statements of Operations of PaySys for the three years
         ended December 31, 2000
         Consolidated Statements of Changes in Stockholders' Equity (Deficit)
         of PaySys for the three years ended December 31, 2000
         Consolidated Statements of Cash Flow of PaySys for the three years
         ended December 31, 2000
         Notes to Consolidated Financial Statements of PaySys


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 15 -
<PAGE>


         Report of Independent Public Accountants for VISaer, Inc.
         Consolidated Balance Sheet of VISaer, Inc. at December 31, 2000
         Consolidated Statement of Operations of VISaer, Inc. for the year
         ended December 31, 2000
         Consolidated Statement of Comprehensive Loss of VISaer, Inc. for the
         year ended December 31, 2000
         Consolidated Statement of Redeemable Convertible Preferred Stock and
         Stockholders' Deficit of VISaer, Inc. for the year ended December 31,
         2000
         Consolidated Statement of Cash Flow of VISaer, Inc. for the year ended
         December 31, 2000
         Notes to Consolidated Financial Statements of VISaer, Inc.

         Report of Independent Public Accountants for VISaer (UK) Limited
         Report of Independent Public Accountants for VISaer (IRL) Limited

         Report of Independent Public Accountants for Visibility, Inc.
         Consolidated Balance Sheets of Visibility at December 31, 1999
         Consolidated Statements of Operations of Visibility for the year ended
         December 31, 1999
         Consolidated Statements of Changes in Stockholders' Equity of
         Visibility for the year ended December 31, 1999
         Consolidated Statements of Cash Flow of Visibility for the year ended
         December 31, 1999
         Notes to Consolidated Financial Statements of Visibility, Inc.

         Report of Independent Public Accountants for Cirronet, Inc.
         Balance Sheet of Cirronet, Inc. at December 31, 2001 (unaudited) and
         December 31, 2000 (unaudited)
         Statement of Operations of Cirronet, Inc. for the two years ended
         December 31, 2001 (unaudited) and the year ended December 31, 1999
         (audited)
         Statement of Changes in Stockholders' Equity of Cirronet, Inc. for the
         two years ended December 31, 2001 (unaudited) and the year ended
         December 31, 1999 (audited)
         Statement of Cash Flow of Cirronet, Inc. for the two years ended
         December 31, 2001 (unaudited) and the year ended December 31, 1999
         (audited)
         Notes to Financial Statements of Cirronet, Inc.

         3.       Exhibits

         We are filing the following exhibits with this report or incorporating
them by reference to earlier filings. Shareholders may request a copy of any
exhibit by contacting Bonnie L. Herron, Secretary, Intelligent Systems
Corporation, 4355 Shackleford Road, Norcross, Georgia 30093; telephone (770)
381-2900. There is a charge of $.50 per page to cover expenses of copying and
mailing.

3(i)     Amended and Restated Articles of Incorporation of the Registrant dated
         November 14,1991, as amended November 25, 1997. (Incorporated by
         reference to Exhibit 3.1 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1991 and to Exhibit 3.1 to the
         Registrant's Report on Form 8-K dated November 25, 1997.)

3(ii)    Bylaws of the Registrant dated June 6, 1997. (Incorporated by
         reference to Exhibit 3(ii) of the Registrant's Form 10-K/A for the
         year ended December 31, 1997.)

4.1      Rights Agreement dated as of November 25, 1997 between the Registrant
         and American Stock Transfer & Trust Company as Rights Agent.
         (Incorporated by reference to Exhibit 4.1 of the Registrant's Report
         on Form 8-K dated November 25, 1997 and filed on December 16, 1997.)

4.2      Form of Rights Certificate. (Incorporated by reference to Exhibit 4.2
         of the Registrant's Report on Form 8-K dated November 25, 1997 and
         filed on December 16, 1997.)


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 16 -
<PAGE>


10.1     Lease Agreement dated March 11, 1985, between a subsidiary of the
         Registrant and A.R. Weeks. (Incorporated by reference to Exhibit 10.1
         to Intelligent Systems Corporation Annual Report on Form 10-K for the
         fiscal year ended March 31, 1986.)

10.2     Second Amendment to Lease Agreement dated June 19, 1997 between a
         subsidiary of the Registrant and A.R. Weeks. (Incorporated by
         reference to Exhibit 10.2 of the Registrant's Form 10-K for the year
         ended December 31, 1997.)

10.3     Management Compensation Plans and Arrangements:
         (a)      Intelligent Systems Corporation 1991 Stock Incentive Plan,
                  amended June 6, 1997.
         (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.

         Item 10.3 (a) is incorporated by reference to Exhibit 4.1 of the
         Registrant's Form S-8 dated July 25, 1997.

         Items 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.

         Item 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     Series A-1 Convertible Preferred Stock Purchase Agreement dated as of
         July 1, 2001 by and between VISaer, Inc., Intelligent Systems
         Corporation and other third parties.

10.5     7 X 24 Agreement dated as of June 26, 2001 between United Parcel
         General Services Co. and VISaer, Inc.

10.6     Warrant to Purchase Common Stock of VISaer, Inc. dated December 7,
         2001 issued to United Parcel General Services Co.

10.7     Software License Agreement dated as of April 27, 2001 by and between
         PaySys International, Inc. and Delos Payment Systems, Inc.

10.8     Trade Secret License Agreement dated as of April 27, 2001 by and
         between PaySys International, Inc. and Delos Payment Systems, Inc.

10.9     Non-Competition Agreement made as of April 27, 2001 by and between
         First Data Corporation, J. Leland Strange and PaySys International,
         Inc.

10.10    Subscription Agreement dated August 23, 2001 between the Registrant
         and Delos Payment Systems, Inc.

21.1     List of subsidiaries of Registrant.

23.1     Consent of Arthur Andersen LLP.

23.2     Consent of Ernst and Young LLP.

23.3     Consent of Moody, Famiglietti and Andronico LLP.

23.4     Consent of Hacker Young.

23.5     Consent of Arthur Andersen.

23.6     Consent of Arthur Andersen LLP.


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 17 -
<PAGE>


(B)      REPORTS ON FORM 8-K.

We did not file any reports on Form 8-K during the quarter ended December 31,
2001.

(C)      SEE ITEM 14(A)(3) ABOVE.

(D)      SEE ITEM 14(A)(2) ABOVE.


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                             INTELLIGENT SYSTEMS CORPORATION
                                             Registrant

Date:  March 22, 2002                        By:  /s/ J. Leland Strange
                                                -------------------------------
                                                J. Leland Strange
                                                Chairman of the Board, President
                                                and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE                            CAPACITY                                         DATE
<S>                                  <C>                                              <C>
/s/ J. Leland Strange                Chairman of the Board, President,                March 22, 2002
---------------------                Chief Executive Officer and Director
    J. Leland Strange                (Principal Executive Officer)

/s/ Bonnie L. Herron                 Chief Financial Officer                          March 22, 2002
---------------------                (Principal Accounting
    Bonnie L. Herron                 and Financial Officer)

/s/ Donald A. McMahon                Director                                         March 22, 2002
---------------------
    Donald A. McMahon

/s/ James V. Napier                  Director                                         March 22, 2002
---------------------
    James V. Napier

/s/ John B. Peatman                  Director                                         March 22, 2002
---------------------
    John B. Peatman

/s/ Parker H. Petit                  Director                                         March 22, 2002
---------------------
    Parker H. Petit
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                    - 18 -
<PAGE>


                        INTELLIGENT SYSTEMS CORPORATION
            INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES

The following consolidated financial statements and schedules of the Registrant
and its subsidiaries are submitted herewith in response to Item 8:

FINANCIAL STATEMENTS:

<TABLE>
     <S>                                                                                                              <C>
     Report of Independent Public Accountants.........................................................................F-2
     Consolidated Balance Sheets - December 31, 2001 and 2000.........................................................F-3
     Consolidated Statements of Operations -
        Three Years Ended December 31, 2001...........................................................................F-4
     Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income -
        Three Years Ended December 31, 2001...........................................................................F-5
     Consolidated Statements of Cash Flow -
        Three Years Ended December 31, 2001...........................................................................F-6
     Notes to Consolidated Financial Statements.......................................................................F-7
</TABLE>

FINANCIAL STATEMENT SCHEDULES:

The following supplemental schedules of the Registrant and its subsidiaries are
submitted herewith in response to Item 14(a)(2):

<TABLE>
     <S>                                                                                                              <C>
     Schedule II - Valuation and Qualifying Accounts and Reserves.....................................................S-1
     Report of Independent Auditors for PaySys International, Inc.....................................................S-2
        Consolidated Balance Sheets of PaySys at December 31, 2000 and 1999...........................................S-3
        Consolidated Statements of Operations of PaySys for the three years ended December 31, 2000...................S-4
        Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys for the three years
          ended December 31, 2000.....................................................................................S-5
        Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 2000....................S-6
        Notes to Consolidated Financial Statements of PaySys..........................................................S-7
     Report of Independent Public Accountants for VISaer, Inc........................................................S-32
        Consolidated Balance Sheet of VISaer, Inc. at December 31, 2000..............................................S-33
        Consolidated Statement of Operations of VISaer, Inc. for the year ended December 31, 2000....................S-34
        Consolidated Statement of Comprehensive Loss of VISaer, Inc. for the year ended
          December 31, 2000..........................................................................................S-35
        Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit of
          VISaer, Inc. for the year ended December 31, 2000..........................................................S-36
        Consolidated Statement of Cash Flow of VISaer, Inc. for the year ended December 31, 2000.....................S-37
        Notes to Consolidated Financial Statements of VISaer, Inc. ..................................................S-38
     Report of Independent Public Accountants for VISaer (UK) Limited................................................S-48
     Report of Independent Public Accountants for VISaer (IRL) Limited...............................................S-49
     Report of Independent Public Accountants for Visibility, Inc....................................................S-50
        Consolidated Balance Sheets of Visibility at December 31, 1999...............................................S-51
        Consolidated Statements of Operations of Visibility for the year ended December 31, 1999.....................S-52
        Consolidated Statements of Changes in Stockholders' Equity of Visibility for the year ended
              December 31, 1999......................................................................................S-53
        Consolidated Statements of Cash Flow of Visibility for the year ended December 31, 1999......................S-54
        Notes to Consolidated Financial Statements of Visibility, Inc................................................S-55
     Report of Independent Public Accountants for Cirronet, Inc......................................................S-68
        Balance Sheet of Cirronet, Inc. at December 31, 2001 and 2000 (unaudited)....................................S-69
        Statement of Operations of Cirronet, Inc. for the two years ended December 31, 2001 (unaudited) and the
          year ended December 31, 1999 (audited).....................................................................S-70
        Statement of Changes in Shareholders' Equity of Cirronet, Inc. for the two years ended December 31, 2001
          (unaudited) and the year ended December 31, 1999 (audited).................................................S-71
        Statement of Cash Flow of Cirronet, Inc. for the two years ended December 31, 2001 (unaudited)
          and the year ended December 31, 1999 (audited).............................................................S-72
        Notes to Financial Statements of Cirronet, Inc...............................................................S-73
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO INTELLIGENT SYSTEMS CORPORATION:

We have audited the accompanying consolidated balance sheets of Intelligent
Systems Corporation (a Georgia corporation) and its subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive income, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The summarized financial
data for PaySys International, Inc. contained in Note 4 are based on the
financial statements of PaySys International, Inc. which were audited by other
auditors. Their report has been furnished to us and our opinion, insofar as it
relates to the data in Note 4, is based solely on the report of the other
auditors. We did not audit the December 31, 2000 financial statements of
VISaer, Inc., an investment which is reflected in the accompanying financial
statements using the equity method of accounting. The investment in VISaer,
Inc. represents 16 percent of total assets in 2000, and the equity in 2000 net
loss represents 9 percent of consolidated net income for 2000. The statements
of PaySys International, Inc. and VISaer, Inc. were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to the amounts included for PaySys International, Inc. and VISaer, Inc., is
based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Intelligent Systems Corporation and its
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II in Item
14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.


ARTHUR ANDERSEN LLP



Atlanta, Georgia
March 1, 2002


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-2
<PAGE>


                        INTELLIGENT SYSTEMS CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                      (in thousands except share amounts)

<TABLE>
<CAPTION>
AS OF DECEMBER 31,                                                                           2001                2000
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                <C>
ASSETS
-----------------------------------------------------------------------------------------------------------------------
Current assets:
  Cash                                                                                      $ 12,026           $    594
  Accounts receivable, net                                                                     2,297              1,253
  Notes and interest receivable                                                                  424              4,088
  Inventories                                                                                    547                475
  Other current assets                                                                           353                268
-----------------------------------------------------------------------------------------------------------------------
    Total current assets                                                                      15,647              6,678
-----------------------------------------------------------------------------------------------------------------------
Long-term investments                                                                          7,476             10,504
Long-term notes receivable                                                                        --                378
Property and equipment, at cost less accumulated depreciation                                    664                482
Intangibles, net                                                                               2,271                 --
Other assets, net                                                                                 31                 15
-----------------------------------------------------------------------------------------------------------------------
Total assets                                                                                $ 26,089           $ 18,057
=======================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------
Current liabilities:
  Short-term borrowings                                                                     $     --           $  1,504
  Accounts payable                                                                             1,013                357
  Deferred revenue                                                                             1,536                661
  Deferred gain                                                                                1,328                 --
  Accrued expenses and other current liabilities                                               1,564                861
-----------------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                                  5,441              3,383
-----------------------------------------------------------------------------------------------------------------------
Deferred revenue, net of current portion                                                       2,596                 --
Other long-term liabilities                                                                       80                 --
-----------------------------------------------------------------------------------------------------------------------
    Total long term liabilities                                                                2,676                 --
-----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 10)
Redeemable preferred stock of subsidiary                                                         114                 --
-----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
  Common stock, $.01 par value, 20,000,000 shares authorized, 4,495,530 and
      5,623,784 issued and outstanding at December 31, 2001 and 2000, respectively                45                 56
  Paid-in capital                                                                             18,438             24,216
  Accumulated other comprehensive loss                                                          (355)              (215)
  Accumulated deficit                                                                           (270)            (9,383)
-----------------------------------------------------------------------------------------------------------------------
    Total stockholders' equity                                                                17,858             14,674
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                  $ 26,089           $ 18,057
=======================================================================================================================
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-3
<PAGE>


                        INTELLIGENT SYSTEMS CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands except share amounts)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                2001                    2000                     1999
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                     <C>                     <C>
Revenue
   Products                                                         $     5,321             $     4,824             $     4,856
   Services                                                               3,397                   2,203                   3,623
-------------------------------------------------------------------------------------------------------------------------------
    Total revenue                                                         8,718                   7,027                   8,479
-------------------------------------------------------------------------------------------------------------------------------
Cost of sales
   Products                                                               2,633                   2,432                   2,410
   Services                                                               1,439                     542                   1,573
-------------------------------------------------------------------------------------------------------------------------------
    Total cost of sales                                                   4,072                   2,974                   3,983
-------------------------------------------------------------------------------------------------------------------------------
Gross profit                                                              4,646                   4,053                   4,496
Expenses
    Marketing                                                             2,090                     942                   1,021
    General & administrative                                              9,605                   3,172                   3,469
    Research & development                                                3,371                     915                     805
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations                                                    (10,420)                   (976)                   (799)
-------------------------------------------------------------------------------------------------------------------------------
Other income
    Interest income (expense), net                                        1,017                     434                     (88)
    Investment income, net                                               19,902                   9,665                   2,170
    Equity losses of affiliate companies                                 (2,173)                   (771)                   (948)
    Other income (loss), net                                                960                      66                     (76)
-------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision and minority interest                  9,286                   8,418                     259
-------------------------------------------------------------------------------------------------------------------------------
Income tax provision                                                        173                     203                      --
-------------------------------------------------------------------------------------------------------------------------------
Income before minority interest                                           9,113                   8,215                     259
-------------------------------------------------------------------------------------------------------------------------------
Minority interest                                                            --                      --                      10
-------------------------------------------------------------------------------------------------------------------------------
Net income                                                          $     9,113             $     8,215             $       249
===============================================================================================================================
Basic net income per share                                          $      1.78             $      1.47             $      0.05
Diluted net income per share                                        $      1.77             $      1.46             $      0.05
===============================================================================================================================
Basic weighted average shares outstanding                             5,108,413               5,606,715               5,106,134
Diluted weighted average shares outstanding                           5,145,691               5,632,484               5,336,776
===============================================================================================================================
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-4
<PAGE>


                        INTELLIGENT SYSTEMS CORPORATION
                     CONSOLIDATED STATEMENTS OF CHANGES IN
                 STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                      (in thousands except share amounts)

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31,
                                                                             2001                  2000                   1999
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                   <C>                   <C>
STOCKHOLDERS' EQUITY
COMMON STOCK, NUMBER OF SHARES, beginning of year                           5,623,784             5,114,467             5,104,467
Exercise of options during year                                                 3,334               635,986                10,000
Purchase and retirement of stock                                           (1,131,588)             (126,669)                   --
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                               4,495,530             5,623,784             5,114,467
---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year                                   $        56           $        51           $        51
Exercise of options during year                                                    --                     6                    --
Purchase and retirement of stock                                                  (11)                   (1)                   --
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                                      45                    56                    51
---------------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year                                             24,216                24,069                24,046
Proceeds from options exercised                                                    14                 1,085                    23
Purchase and retirement of stock                                               (5,792)                 (938)                   --
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                                  18,438                24,216                24,069
---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of year                 (215)                  731                   436
Foreign currency translation adjustment during year                                 4                    --                   197
Change in accumulated other comprehensive income (loss)                          (144)                 (946)                   98
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                                    (355)                 (215)                  731
---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year                                         (9,383)              (14,642)              (14,891)
Dividends paid                                                                     --                (2,956)                   --
Net income                                                                      9,113                 8,215                   249
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                                    (270)               (9,383)              (14,642)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                $    17,858           $    14,674           $    10,209
=================================================================================================================================

COMPREHENSIVE INCOME
Net income                                                                $     9,113           $     8,215           $       249
Other comprehensive income:
   Foreign currency translation adjustments                                         4                    --                    --
   Unrealized gain (loss)                                                        (144)                 (946)                  731
---------------------------------------------------------------------------------------------------------------------------------
 Comprehensive income                                                     $     8,973           $     7,269           $       980
=================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-5
<PAGE>


                        INTELLIGENT SYSTEMS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                        2001               2000              1999
-------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                <C>                <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS:
   Net income                                                         $  9,113           $  8,215           $   249
   Adjustments to reconcile net income to net cash
      used for operating activities, net of
      effects of acquisitions and dispositions:
         Depreciation and amortization                                   6,595                314               347
         Investment income, net                                        (19,902)            (9,665)           (2,170)
         Equity loss of affiliate companies                              2,173                771               948
         Changes in operating assets and liabilities, net of
            effects of acquisition
            Accounts receivable                                            (33)               249                19
            Inventories                                                    (72)              (149)              279
            Other current assets                                           126                 66               290
            Accounts payable                                              (166)               (87)             (459)
            Accrued expenses and other current liabilities                 149               (124)              315
-------------------------------------------------------------------------------------------------------------------
Cash used for continuing operations                                     (2,017)              (410)             (182)
===================================================================================================================

INVESTING ACTIVITIES:
   Proceeds from sales of investments                                   20,540             10,291             2,365
   Acquisition of company, net of cash acquired                             81                 --                --
   Increase (decrease) in minority interests                                --                  5              (190)
   Acquisitions of long-term investments                                (2,806)            (3,628)             (788)
   Repayments under notes and interest receivable                        5,105                377                38
   Advances under notes and interest receivable                         (2,087)            (4,533)              (95)
   Purchases of property and equipment, net                                (95)              (111)              (13)
-------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities                                   20,738              2,401             1,317
===================================================================================================================

FINANCING ACTIVITIES:
   Borrowings under short-term borrowing arrangements                      889              1,503               262
   Repayments under short-term borrowings arrangements                  (2,393)              (763)           (1,237)
   Payment of dividends to stockholders                                     --             (2,956)               --
   Purchase and retirement of stock                                     (5,803)              (112)               --
   Exercise of stock options                                                14                194                23
   Foreign currency translation adjustment                                   4                 --                93
-------------------------------------------------------------------------------------------------------------------
Cash used for financing activities                                      (7,289)            (2,134)             (859)
===================================================================================================================

Net increase (decrease) in cash                                         11,432               (143)              276
Cash at beginning of year                                                  594                737               461
Cash at end of year                                                   $ 12,026           $    594           $   737
===================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year for interest                             $     52           $     59           $   159
   Cash paid during the year for taxes                                     577                 --                --
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-6
<PAGE>

NOTE 1

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Intelligent Systems Corporation, a Georgia corporation, was
formed in November 1991 to acquire through merger the business, net assets and
operations of Intelligent Systems Master, L.P. In this document, terms such as
the company, we, us, and ISC refer to Intelligent Systems Corporation.

Nature of Operations - Our business is to create, operate and invest in
businesses which we believe have promising growth potential. Consolidated
companies (in which we have majority ownership and control) are principally
engaged in two industries: information technology products and services and
industrial products. Operations in information technology products and
services, which include our VISaer and QS Technologies subsidiaries, include
development and sales of software licenses and related professional services
and software maintenance contracts. Operations in the industrial product
segment include the manufacture and sale of bio-remediating parts washers by
our ChemFree subsidiary. In prior periods, through November 2000, we also were
involved in health care services. These operations are explained in further
detail in Note 18. Our affiliate companies (in which we have a minority
ownership) are mainly involved in the information technology industry.

Use of Estimates - In preparing the financial statements in conformity with
accounting principles generally accepted in the United States, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.

Consolidation - The financial statements include the accounts of Intelligent
Systems Corporation and its majority owned and controlled U.S. and non-U.S.
subsidiary companies after elimination of material accounts and transactions
between our subsidiaries.

Investments - For entities in which we have 20 to 50 percent ownership interest
and do not exert control, we account for these investments by the equity
method. We account for investments of less than 20 percent in non-marketable
equity securities at the lower of cost or market. When calculating gain or loss
on the sale of an investment, we use the average cost basis of the securities.
Marketable securities are accounted for in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). At December 31, 2001, the aggregate
fair market value of our available-for-sale securities consisted of equity
securities and totaled $2.0 million. At December 31, 2000, the aggregate fair
market value of our available-for-sale securities consisted of equity
securities and totaled $2.3 million. These amounts include net unrealized
holding losses of $359,000 and $215,000 as of December 31, 2001 and 2000,
respectively. These amounts are reflected as a separate component of
stockholders' equity.

Translation of Foreign Currencies - We consider that local currencies are the
functional currencies for foreign operations. We translate assets and
liabilities to U.S. dollars at period-end exchange rates. We translate income
and expense items at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of
stockholders' equity. Gains and losses that result from foreign currency
transactions are recorded in the consolidated statement of operations.

Cash - We consider all highly liquid instruments with maturities of less than
90 days to be cash.

Inventories - We state the value of inventories at the lower of cost or market
determined on a first-in first-out basis. Cost includes labor, materials and
production overhead. Market is defined as net realizable value.

Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation. The cost of each major class of property and
equipment at December 31, 2001 and 2000 is as follows:

<TABLE>
(in thousands)                              2001      2000
-----------------------------------------------------------
<S>                                       <C>         <C>
Operating equipment                       $1,397      $974
Furniture and fixtures                       199       117
Leasehold improvements                       241        33
-----------------------------------------------------------
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-7
<PAGE>


For financial reporting purposes, with the exception of the VISaer subsidiary
which uses the straight-line method, we depreciate these assets using the 150
percent declining balance method over the estimated lives of the assets, as
follows:


<TABLE>
<CAPTION>
CLASSIFICATION                     USEFUL LIFE IN YEARS
--------------------------------------------------------
<S>                                <C>
Operating equipment                       3-5
Furniture & fixtures                      5-7
Leasehold improvements                    1-7
--------------------------------------------------------
</TABLE>

Accumulated depreciation and amortization was $1.2 million and $642,000 at
December 31, 2001 and 2000, respectively. Depreciation expense was $307,000,
$316,000 and $332,000 in 2001, 2000 and 1999, respectively. These expenses are
included in general and administrative expenses.

Leased Equipment - In the Industrial Products segment, certain equipment is
leased to customers. At December 31, 2002, the cost and carrying value of
equipment leased to customers is $488,000 and $101,000, respectively, and
accumulated depreciation associated with leased equipment is $387,000. The
minimum future lease revenue under non-cancelable contracts is $1.25 million at
December 31, 2001. There is no contingent rental income under the leases.

Other Assets - Other assets are carried at cost net of related amortization.
Effective July 1, 2001, we account for acquisitions in accordance with
Statement of Financial Accounting Standards No. 141, "Accounting for Business
Combinations" (SFAS 141) and Statement of Financial Accounting Standards No.
142, "Accounting for Intangible Assets" (SFAS 142). Our policy is to write off
the asset and accumulated amortization for fully amortized intangibles.
Periodically we review the values assigned to long-lived assets to determine
whether they have been permanently impaired. To measure whether long-lived
assets are recoverable, we use an estimate of the undiscounted cash flows of
the applicable entity over the remaining life of the asset. At September 30,
2001, we determined the long-lived assets associated with our VISaer subsidiary
were impaired under SFAS 121 (see Note 2). Accordingly we expensed $6.0 million
related to goodwill in general and administrative expense which is reflected in
the statements of operations for the year ended December 30, 2001. The carrying
value of intangibles at December 31, 2001 is $2.3 million, of which $1.9
million is goodwill. Also in the year ended December 31, 2001, we expensed
$425,000 of purchased research and development related to the acquisition of
VISaer (see Note 2). In 2001, 2000 and 1999, we recorded total intangible
amortization expense of approximately $92,000, $29,000 and $15,000,
respectively. Accumulated amortization of intangibles totaled $92,000 and $0 at
December 31, 2001 and 2000, respectively.

Accrued Expenses and Other Liabilities - Accrued expenses and other liabilities
at December 31, 2001 and 2000 consist of the following:

<TABLE>
<CAPTION>
(in thousands)                             2001     2000
---------------------------------------------------------
<S>                                        <C>     <C>
Income taxes payable                       $ --    $ 203
Accrued payroll                             761      242
Other accrued expenses                      803      416
---------------------------------------------------------
</TABLE>

Warranty Costs - We accrue the estimated costs associated with product
warranties as an expense in the period the related sales are recognized.

Revenue Recognition - Product revenue consists of fees from software licenses
and sales or leases of industrial products. Service revenue consists of fees
for implementation, consulting, training, maintenance and support for software
products and health care services.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues. The Company has reviewed
its revenue recognition policies and determined that they are in compliance
with SAB 101.

We recognize revenue for industrial products when products are shipped, at
which time title transfers to the customer. There are no remaining future
obligations and delivery occurs upon shipment. We provide for estimated sales
returns in the period in which the sales are recorded. For leased equipment, we
recognize revenue monthly at the contracted monthly rate during the term of the
lease.

We recognize software fees in accordance with Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position No. 98-9, "Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). Under SOP 97-2, we recognize software license fees
when the following criteria are met: (1) a signed contract is obtained; (2)
delivery of the product has occurred; (3) the license fee is fixed or
determinable; and (4) collectibility is


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-8
<PAGE>


probable. SOP 98-9 requires recognition of revenue using the "residual method"
when (1) there is vendor-specific objective evidence of the fair values of all
undelivered elements in a multiple-element arrangement that is not accounted
for using long-term contract accounting; (2) vendor-specific objective evidence
of fair value does not exist for one or more of the delivered elements in the
arrangement; and (3) all revenue-recognition criteria in SOP 97-2 other than
the requirement for vendor-specific objective evidence of the fair value of
each delivered element of the arrangement are satisfied. Under the residual
method, the fair value of the undelivered elements is deferred and the
remaining portion of the license fee is recognized as revenue. SOP 98-9 was
effective for transactions entered into after March 15, 1999, and we adopted
the residual method for such arrangements at that time. For those contracts
that contain significant production, modification and/or customization,
software license fees are recognized utilizing contract accounting (ARB No.
45), using the relevant guidance in SOP 81-1.

For percentage of completion contracts we measure the progress toward
completion and recognize the software license fees based upon input measures
(i.e. in the same proportion that the amount of labor hours incurred to date
bears to the total estimated labor hours required for the contract). If
reliable estimates cannot be determined, we follow the completed contract
method. Under the completed contract method, all revenue is deferred until the
customer has accepted the software and any refund rights have expired.

Service revenue related to implementation, consulting, training and healthcare
services is recognized when the services are performed. Service revenue related
to software maintenance and support contracts is recognized on a straight-line
basis over the life of the contract (typically one year).

Deferred Revenue - Deferred revenue, net of current portion, consists of
advance payments from one customer and is being accounted for on a
completed-contract basis. As of December 31, 2001, the Company had an
outstanding balance of $2,596,000. The Company does not anticipate any loss
under this contract.

Fair Value of Financial Instruments - The carrying value of cash, accounts
receivable, accounts payable and other financial instruments included in the
accompanying consolidated balance sheets approximates their fair value
principally due to the short-term maturity of these instruments.

Cost of Sales - Cost of sales for product revenue includes direct material,
direct labor, production overhead and third party license fees. Cost of sales
for service revenue includes direct cost of services rendered.

Software Development Expense - We have evaluated the establishment of
technological feasibility of our products in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed. We sell products in markets that are subject to rapid technological
change, new product development and changing customer needs; accordingly, we
have concluded that technological feasibility is not established until the
development stage of the product is nearly complete. We define technological
feasibility as the completion of a working model. The time period during which
cost could be capitalized, from the point of reaching technological feasibility
until the time of general product release, is very short and, consequently, the
amounts that could be capitalized are not material to our financial position or
results of operations. Therefore, we have charged all such costs to research
and development in the period incurred.

In accordance with AICPA SOP No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, we have expensed all cost
incurred in the preliminary project stage for software developed for internal
use. We capitalize all direct costs of materials and services consumed in
developing or obtaining internal use software. All costs incurred for upgrades,
maintenance and enhancements that do not result in additional functionality are
expensed. During the three years ended December 31, 2001, we did not capitalize
any internal use software costs.

New Accounting Pronouncements - In September 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - a Replacement of FASB Statement No. 125." This Statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The adoption of this Statement did not have a significant
impact on our financial statements.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-9
<PAGE>


In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, "Business Combinations" (SFAS 141). This
Statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. See Note 2 for the impact related to the
acquisition of VISaer, Inc. Also in July 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). This Statement requires that goodwill and certain intangible
assets, including those recorded in past business combinations, no longer be
amortized to earnings, but instead be tested for impairment at least annually.
The adoption of SFAS No. 142 by the Company did not have a significant impact
on our financial statements. For acquisitions completed after June 30, 2001,
the Statement requires that goodwill not be amortized to earnings beginning
immediately. Related to the acquisition of VISaer, Inc. (Note 2), we recorded
$1.86 million of goodwill, after related charges, of which no amortization
expense is reflected in the statement of operations.

In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. We have
determined that the adoption of this Statement will not have an impact on our
financial statements.

NOTE 2

ACQUISITION

VISaer, Inc. - As of June 30, 2001, we owned 40% of VISaer, Inc. ("VISaer") and
accounted for our investment under the equity method of accounting. At that
date, we had a carrying value for VISaer of $2.86 million in long-term
investments and $1.68 million in principal and interest outstanding under
affiliate notes receivable from VISaer. VISaer, a software company that designs
and sells software that automates the maintenance, repair and overhaul (MRO)
operations of airlines, is the successor company of Visibility, Inc., an
enterprise resource planning (ERP) company whose operations were spun off a
year ago in June 2000. Effective July 1, 2001, in an unplanned restructuring
transaction involving all preferred shareholders of VISaer, we converted
$956,000 of our VISaer note receivable into a new series of preferred stock of
VISaer. In addition, VISaer repaid the balance of $725,000 owed to us shortly
after the restructuring was completed.

The debt to equity conversion in July resulted in ISC taking control of VISaer.
Our ownership of VISaer increased from 40% to 65%, and we account for the
transaction as a "step" acquisition. For financial reporting periods after July
1, 2001, we account for VISaer under the consolidation method. The accounting
treatment for the "step" acquisition and related purchase accounting of VISaer
had the result of immediately creating $8.8 million in intangible assets for
financial reporting purposes. In accordance with SFAS 141, based on third party
valuations, we identified and valued the following intangible assets: existing
software technology ($2.0 million), in-process research and development ($1.7
million) and a favorable lease contract ($200,000). At the time of the
acquisition we recorded 25% of such amounts to reflect the amount associated
with our acquisition of an additional 25% "step" of VISaer. The recorded amount
for existing software technology ($500,000) is being amortized over its
estimated useful life of three years and the recorded amount for the favorable
lease contract ($50,000) is being amortized over the remaining term of the
lease (through July 2004). We immediately expensed $425,000 (representing 4.8%
of the $8.8 million of total intangibles) related to purchased research and
development projects that had not reached technological feasibility and that
did not have an alternative future use. This amount is included in research and
development expense in the accompanying financial statements. The remaining
excess intangible value in the amount of $7.83 million was booked as goodwill
at July 1, 2001.

Post-acquisition Write-down of Goodwill - At September 30, 2001, as a result of
the terrorist attacks on September 11, 2001 which have directly impacted the
aerospace industry into which VISaer sells its software products, we evaluated
the extent to which the VISaer reporting unit might be impaired. An analysis by
a third party based on an undiscounted cash flow model determined that under
SFAS 121, the long-lived assets associated with VISaer were impaired. Based upon
this appraisal, we assessed the total fair value of VISaer at September 30, 2001
to be $3.7 million. Based on our 65% ownership, the value of our


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-10
<PAGE>


ownership was $2.4 million. We expensed $6.0 million related to goodwill. The
one-time charge is included in general and administrative expense in the
consolidated financial statements for the year ended December 31, 2001. Despite
the write-down, we are committed to the VISaer business plan and have agreed to
assist VISaer with working capital needs, if any, during 2002.

NOTE 3

SALES OF ASSETS

PaySys International, Inc. - On April 27, 2001, we sold our 32 percent
ownership interest in PaySys, an affiliate company, to First Data Corporation.
In exchange for the sale of all of our shares of PaySys common stock, we
received cash proceeds of $17.8 million and recorded a pretax gain of $17.8
million. In addition, PaySys repaid $4.3 million in principal and interest
related to short-term bridge loans. In addition, an escrow fund totaling $20.0
million was set aside for potential liabilities that may arise after the
closing of the sale. The balance of the fund, after payment of any and all
claims, will be distributed pro rata to PaySys shareholders, including us, as
additional sale proceeds at various time periods over the next four years.

Immediately prior to the sale to First Data Corporation, PaySys spun off two
subsidiaries to its shareholders. Accordingly, we own approximately 27 percent
of Delos Payment Systems, Inc. and 31 percent of dbbAPPS, Inc., both
development stage companies that are continuing to develop and market a
proprietary software operating platform and application software that had been
under development by PaySys. We did not record a gain on the distribution to us
of an interest in these two companies. Rather, due to uncertainty regarding the
two early stage companies, we booked a valuation reserve equal to the net asset
value and goodwill associated with our pro rata share of the value of our
interest in Delos Payment Systems and dbbAPPS. In the fourth quarter of 2001,
in accordance with APB18, we classified a secured loan in the amount of $1.5
million to Delos Payment Systems as additional investment. At the same time, we
recaptured $1.42 million in losses related to our pro rata share of cumulative
unrecorded losses. This loss is recorded in equity loss in affiliates in the
consolidated statements of operations. The carrying value of Delos at year-end
is $80,000 and of dbbAPPS is zero.

HeadHunter.net - In the third quarter ended September 30, 2001, we sold 90,228
shares of common stock (representing all of our interest) of HeadHunter.net. We
originally acquired the shares in exchange for our holdings in privately held
MiracleWorker.net in August 2000. We received $821,000 cash and recognized a
gain of $471,000 on an original cost basis of $350,000.

PsyCare America, LLC - On November 1, 2000, we sold certain operating assets of
our subsidiary PsyCare America, LLC, consisting mainly of contracts and
intellectual property, and closed the remaining operations. We sold the assets
to iExalt, Inc. in exchange for 200,000 shares of common stock of iExalt, a
publicly traded company, and may receive additional shares based on the trading
price of the iExalt stock on the second anniversary of the transaction.

Risk Laboratories, LLC - On March 21, 2000, we sold part of our interest in
Risk Laboratories, LLC in a private transaction. We sold 2,310,000 units for
$8.8 million in cash and a gain of $8.6 million. On January 18, 2001, we sold
214,273 units of Risk to the same buyer for a total of $900,000 cash and
recorded a gain of $893,000 based on a cost basis of $7,000. At the same time,
we acquired 107,137 common units from Risk for a total acquisition price of
$450,000. Concurrent with the purchase of these units, we recaptured $450,000
in losses related to our pro rata share of cumulative unrecorded losses. This
loss is recorded in equity loss in affiliates in the accompanying consolidated
statement of operations for 2001. On May 3, 2001, we sold an additional 257,127
common units of Risk to the same buyer. We received $1.0 million cash and
recorded a second quarter gain of $1.0 million on a cost basis of zero. At
December 31, 2001, we retain 259,253 common units, representing approximately
2.7% of Risk.

Primus Knowledge System, Inc. - In January 2000, a company in which we held a
minority equity position was acquired by Primus Knowledge Solutions, Inc., a
publicly traded company. We received 66,431 shares of Primus common stock in
exchange for our interest in the acquired company. The shares were sold at
various times during 2000, resulting in a net gain of $775,000 and cash of $1.3
million.

S1 Corporation - At various times during 2000, we sold a total of 9,515 shares
of S1 Corporation common stock, which had been received as consideration for
our shares of stock in VerticalOne


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-11
<PAGE>


Corporation upon the merger of the two companies in 1999. We realized net gains
of $249,000 and cash of $296,000 on the sales of S1 stock.

MediaMetrix, Inc. - As a result of a merger between Relevant Knowledge (a
company in which we were a minority investor) and MediaMetrix in 1998, we
acquired shares of MediaMetrix stock. We sold the shares in the public market
on November 6, 1999, realizing a gain of $995,000 on the sale.

Novient, Inc. - In the first quarter of 1999, we sold 66,500 shares of
preferred stock of Novient, Inc., in a private transaction, recognizing a gain
of $233,000 and netting $286,000 in cash. At December 31, 2001 we hold 227,250
shares of preferred stock in the private company.

InterQuad Services - Effective February 1, 1999, we sold our ownership in the
InterQuad Services subsidiary. We sold our interest in return for a 19 percent
interest in a privately held U.K. company whose principal asset is a 49 percent
ownership in InterQuad Group. InterQuad Group is a privately held U.K. based
company that provides computer hardware, software, training and consulting
services to businesses.

Information Advantage, Inc. - In January 1999, we sold 95,449 shares of common
stock of Information Advantage (formerly IQ Software, an affiliate company
acquired by Information Advantage in 1998). We recorded a gain on the sale of
$814,000.

NOTE 4

INVESTMENTS IN AFFILIATES

PaySys International, Inc. - Prior to the sale of PaySys on April 27, 2001
(refer to Note 3), we owned a 32.6 percent interest in PaySys International,
Inc., a software company accounted for using the equity method of accounting.
In 1997, in accordance with the equity method of accounting, we recorded $3.0
million representing our pro rata share of PaySys losses, thus reducing the
carrying value of our $3.0 million investment to zero. In subsequent periods,
we did not record any additional losses or income related to PaySys operations.
No cash dividends were received from the affiliate during 2001 and 2000.

The following table contains the summarized financial information of PaySys.

<TABLE>
<CAPTION>
-------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
(in thousands)                      2000        1999
-------------------------------------------------------
<S>                               <C>          <C>
Current assets                    $  8,747     $18,929
Current liabilities                 31,992      18,947
Noncurrent assets                    4,978       4,960
Noncurrent liabilities              12,730      16,370

Net sales                         $ 40,477     $50,068
Operating income (loss)            (20,653)        902
Net loss                           (24,527)     (1,706)
-------------------------------------------------------
</TABLE>

*        There is no data provided for 2001 because we sold our PaySys stock in
         April 2001. See Note 3.

VISaer, Inc. - Prior to the acquisition of VISaer, Inc. (see Note 2), we owned
a 40.2 percent interest in VISaer, Inc. The investment was classified as an
affiliate and accounted for using the equity method of accounting because we
did not exert control over the company prior to the acquisition. Since the
acquisition, we have consolidated the results of VISaer. Our pro rata share of
VISaer loss was $(116,000) for the six months ended June 30, 2001 and
$(720,000) and $(1,418,000) for fiscal years 2000 and 1999, respectively. No
cash dividends were received from the affiliate in 2001 or 2000.

The following table contains the summarized financial information of VISaer.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(in thousands)                2001*      2000**     1999**
-----------------------------------------------------------
<S>                        <C>        <C>        <C>
Current assets             $ 1,465    $ 1,036    $ 9,177
Current liabilities          5,184      7,794     16,862
Noncurrent assets              335        257      1,108
Noncurrent liabilities       2,677      2,632      1,972

Net sales                  $ 4,821    $11,752    $24,210
Operating loss              (3,558)    (2,757)    (3,636)
Net loss                      (184)      (583)    (4,225)
-----------------------------------------------------------
</TABLE>

*        We have consolidated VISaer since July 1, 2001.

**       Includes results of business line sold in July 2000.

Cirronet, Inc. - At December 31, 2001, we owned an 18.2 percent interest in
Cirronet, Inc. (formerly Digital Wireless Corporation), a private company
involved in wireless telecommunication products that is accounted for using the
cost method of accounting.

During 2000, we lost the ability to exert significant influence and therefore
converted from the equity to the cost method of accounting. Our pro rata share
of Cirronet's income (loss) in 2000 and 1999 was


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-12
<PAGE>


($28,000) and $184,000, respectively. No dividends were received from the
affiliate in 2001 or 2000.

The following table contains the summarized financial information of Cirronet.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
                         2001          2000          1999
(in thousands)        (unaudited)   (unaudited)   (audited)
-----------------------------------------------------------
<S>                    <C>             <C>         <C>
Current assets         $ 3,121         $3,279      $2,785
Current liabilities        576            911         439
Noncurrent assets          490            364         115
Noncurrent                 166             84         103
   liabilities
Net sales               $8,821         $6,241      $4,471
Operating income           111           (117)      1,006
(loss)
Net income (loss)          199            (38)        794
-----------------------------------------------------------
</TABLE>

NOTE 5

INVESTMENTS

The following summarizes our ownership interest in certain non-significant
companies included in our long-term investments. At December 31, 2001, our
ownership interest in each of the named companies was as follows: Alliance
Technology Ventures (<3%), NKD Enterprises (25%), Delos Payment Systems (27%),
Cirronet (18%) and Atherogenics (<1%). The ownership interests are classified
according to applicable accounting methods at December 31, 2001.

<TABLE>
<CAPTION>
                                                 COST
                                                 BASIS
                                                 LESS
                                     CARRYING    DISTRI-
(in thousands)                        VALUE     BUTIONS
---------------------------------------------------------
EQUITY METHOD
---------------------------------------------------------
<S>                                  <C>        <C>
Alliance Technology Ventures          $595      $  836
NKD Enterprises                        949       1,250
Delos Payment Systems                   80          80

COST METHOD
---------------------------------------------------------
   Cirronet                            740         525
---------------------------------------------------------
</TABLE>


MARKETABLE SECURITIES - The carrying and estimated fair values of
available-for-sale securities at December 31, 2001 and 2000 are summarized as
follows:

<TABLE>
<CAPTION>
(in thousands)                         2001          2000
------------------------------------------------------------
<S>                                 <C>           <C>
Amortized cost                      $ 2,398       $ 2,469
Gross unrealized gains                  792           795
Gross unrealized losses              (1,151)       (1,010)
------------------------------------------------------------
Estimated fair values               $ 2,039       $ 2,254
------------------------------------------------------------
</TABLE>

Of the estimated fair values above, Atherogenics represents $1.85 million and
$1.2 million at December 31, 2001 and 2000, respectively.

Our aggregate share of the undistributed earnings (losses) of 50 percent or
less owned companies accounted for by the equity method was $(432,000) at
December 31, 2001, the majority of which is related to Delos Payment Systems.

NOTE 6

ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

At December 31, 2001 and 2000, our allowance for doubtful accounts and sales
returns amounted to $45,000 and $46,000, respectively. Provisions for doubtful
accounts and sales returns were $8,500, $12,000 and $24,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

Our accounts receivable are subject to potential credit risk. Our subsidiaries
sell products direct to end-user customers and through channel resellers and
partners. If the financial condition of a significant channel reseller
deteriorates, it could have an adverse impact on the subsidiary and
consolidated operating results. One reseller customer of VISaer represents
approximately 23 percent of consolidated revenue in 2001 and 2 customers
represent 29 percent of accounts receivable as of December 31, 2001. One
customer of ChemFree represents approximately 10 percent of consolidated
revenue in 2001 and 10 percent of year-end accounts receivable. In 2000, one
reseller customer of ChemFree represented 10.4 percent of consolidated revenue
and 20 percent of accounts receivable at December 31, 2000.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-13
<PAGE>


NOTE 7

BORROWINGS AND LONG-TERM DEBT

Terms and borrowings under our credit facilities are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands)                              2001      2000
------------------------------------------------------------
<S>                                        <C>       <C>
Maximum outstanding (month-end)            $1,933    $1,504
Outstanding at year end                        --    $1,504
Average interest rate at year end              --       9.5%
Average borrowings during the year         $  509    $  197
Average interest rate                         8.2%      9.2%
------------------------------------------------------------
</TABLE>

Our credit facility expired in May 2001 at which time we paid the outstanding
balance in full.

Interest paid on debt during 2001, 2000 and 1999 amounted to $52,000, $59,000
and $159,000, respectively.

NOTE 8

DEFERRED GAIN

In connection with the sale of our VISaer subsidiary's product line in July
2000, the buyer assumed the liabilities of the purchased line of business.
VISaer did not obtain releases from creditors for a portion of these
liabilities and contracts and, accordingly, remains contingently liable for
these obligations. VISaer recorded these liabilities as deferred gain. As of
December 31, 2001, the balance of deferred gain consisted of $562,000 in
accounts payable and accrued expenses, $711,000 related to a bank line of
credit and $55,000 in capital lease obligations. In accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", VISaer recognizes the deferred gain when the
liability is paid and the company is relieved of its obligation. Since our
acquisition of VISaer on July 1, 2001, approximately $961,000 of the deferred
gain has been recognized in the component of other income/expense in the
consolidated statements of operations for the year ended December 31, 2001. In
January 2002, the buyer paid the bank line of credit in full.

NOTE 9

INCOME TAXES

The income tax provision consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(in thousands)                 2001        2000     1999
---------------------------------------------------------
<S>                            <C>         <C>      <C>
Current                        $173        $203     $ --
=========================================================
</TABLE>

Following is a reconciliation of estimated income taxes at the blended
statutory rate to estimated tax expense as reported:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
                              2001       2000       1999
-----------------------------------------------------------
<S>                           <C>        <C>        <C>
Statutory rate, blended        34%        34%        34%
Change in valuation
   allowance                  (32%)      (32%)      (34%)
-----------------------------------------------------------
Effective rate                  2%         2%         0%
===========================================================
</TABLE>

At December 31, 2001, our subsidiaries had net operating loss carryforwards
totaling $7.2 million. The net operating loss carryforwards, if unused as
offsets to future taxable income, will expire by 2021. At December 31, 2001, we
had federal and state tax credit carryforwards of approximately $1.1 million
and $940,000, respectively. We may not be able to use these carryforwards
because, in some cases, they are limited to taxable income of a particular
subsidiary or may be subject to annual limitation under the Internal Revenue
Code if there is a greater than 50 percent change in ownership as defined under
Section 382.

We account for income taxes using SFAS 109, "Accounting for Income Taxes". We
have a deferred tax benefit of approximately $9.3 million at December 31, 2001
and $8.0 million at December 31, 2000. Since our ability to realize the
deferred tax asset is uncertain, the amount is offset in both 2001 and 2000 by
a valuation allowance of an equal amount. The deferred tax benefit at December
31, 2001 and 2000 relates primarily to net operating loss carryforwards.

Income taxes paid during 2001 were $577,000. No income taxes were paid in 2000
and 1999.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-14
<PAGE>


NOTE 10

COMMITMENTS AND CONTINGENCIES

Leases - We have noncancellable operating leases expiring at various dates
through June 2004. Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
(in thousands)
-------------------------------------------------------
<S>                                        <C>
      2002                                 $1,049
      2003                                    297
      2004                                    153
-------------------------------------------------------
Total minimum lease payments               $1,499
=======================================================
</TABLE>

Rental expense for leased facilities and equipment related to operations
amounted to $1.0 million, $948,000 and $995,000, for the years ended December
31, 2001, 2000 and 1999, respectively.

Legal Matters - In 1999, a suit was brought against our ChemFree subsidiary and
two other parties by a former consultant of ChemFree. The suit challenges the
ownership of various intellectual property assets of ChemFree. ChemFree and the
other parties to the litigation strongly deny the allegations, have filed cross
claims against another entity and intend to vigorously defend the suit. The
case is pending in the Superior Court of Gwinnett County, Georgia. While the
company believes ChemFree has sufficient evidence to refute the claims made,
there can be no assurance that the case will be resolved in favor of ChemFree.

In 2001, Intelligent Systems was named as co-defendant in a lawsuit filed in
the Circuit Court of the Ninth Judicial Circuit in Orange County, Florida by
four former employees of PaySys International, Inc. The suit alleges that the
former employees hold warrants to purchase up to 142,500 shares of common stock
of PaySys owned by us. The plaintiffs allege the warrants were issued to them
by a former officer of PaySys, from whom we acquired shares in 1994. We filed
an initial response to the suit and deny that any valid warrants exist. While
we believe the initial discovery process supports our position and there exist
sufficient evidence and legal grounds to refute the claims made, the ultimate
outcome of this claim cannot be determined currently.

In addition, we are party to a small number of legal matters arising in the
ordinary course of business. It is management's opinion that none of these
matters will have a material adverse impact on our consolidated financial
position or results of operations.

Investment Company Act - The Investment Company Act of 1940 broadly defines an
investment company generally as any issuer that is primarily engaged in, or
proposes to engage in, the business of investing, reinvesting, owning, holding
or trading in securities and owns or proposes to acquire investment securities
having a value exceeding 40% of the issuer's total assets. We do not intend to
be and do not consider that we are an investment company and have relied on
Rule 3a-1 of the 1940 Act which provides that a company is not deemed to be an
investment company if not more than 45 percent of the value of its assets and
no more that 45 percent of its net income in the last four quarters is derived
from securities of companies it does not control. In the quarter ended March
31, 2001, we may technically have triggered the definition related to net
income because of gains generated from the sale of non-control securities in
the past four quarters. However, at that time and to the extent necessary to do
so, we elected to rely on safe harbor from the definition of an investment
company for transient investment companies contained in Rule 3a-2 under the
Investment Company Act. Rule 3a-2 provides a conditional one year exclusion
from the investment company definition for an issuer that, among other things,
has a bona fide intent not to be an investment company as soon as reasonably
practical. At December 31, 2001, we were in compliance with the requirements of
Rule 3a-1 of the 1940 Act within the one-year exemption period. We believe we
will continue to be in compliance but if we fail to do so within the next two
years, we may not be able to rely on the safe harbor provision of Rule 3a-2.

NOTE 11

POST-RETIREMENT BENEFITS

Effective January 1, 1992, we adopted the Outside Directors' Retirement Plan
which provides that each nonemployee director, upon resignation from the Board
after reaching the age of 65, will receive a lump sum cash payment equal to
$5,000 for each full year of service as a director of the company (and its
predecessors and successors) up to $50,000. We have accrued $100,000 to date
for anticipated future payments under the plan.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-15
<PAGE>


NOTE 12

REDEEMABLE PREFERRED STOCK OF SUBSIDIARY

This amount relates to our VISaer subsidiary's obligation to a minority
shareholder of VISaer pursuant to the redemption provision of the preferred
stock of VISaer. The amount related to the VISaer obligation to Intelligent
Systems pursuant to the redemption provision is eliminated in consolidation.
Intelligent Systems has not guaranteed payment of this obligation.

NOTE 13

STOCKHOLDERS' EQUITY

We have authorized 20,000,000 shares of Common Stock, $.01 par value per share,
and 2,000,000 shares of Series A Preferred Stock, $.10 par value per share. No
shares of Preferred Stock have been issued; however, we adopted a Rights
Agreement on November 25, 1997, which provides that, under certain
circumstances, shareholders may redeem the Rights to purchase shares of
Preferred Stock. The Rights have certain anti-takeover effects. The Board of
Directors has authorized stock repurchases at various times in the past. On
July 17, 2001, we repurchased and retired one million shares of our common
stock at $5.25 per share pursuant to a self-tender offer. We repurchased and
retired an additional 132,000 shares at fair market value during the year ended
December 31, 2001. In the year ended December 31, 2000, we repurchased and
retired 126,669 shares of common stock at fair market value but made no
repurchases during 1999.

NOTE 14

STOCK OPTION PLAN

We instituted the 1991 Incentive Stock Plan (the "Plan") in December 1991 and
amended it in 1997 to increase the number of shares authorized under the Plan
to 925,000. The Plan expired in December 2001, with 148,000 shares ungranted.
The Plan provides shares of common stock that may be sold to officers and key
employees. In August 2000, we instituted a Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") that authorizes the issuance of up to 200,000
shares of common stock to non-employee directors. Upon adoption of the
Directors' Plan, each non-employee director was granted an option to acquire
5,000 shares. At each annual meeting, each director receives a grant of 4,000
shares. Stock options under both plans are granted at fair market value on the
date of grant. As of December 31, 2001, a total of 813,000 options under both
plans have been granted, 724,320 have been exercised and 38,014 options are
fully vested and exercisable at a weighted average price per share of $3.53.
All options expire ten years from their respective dates of grant. At December
31, 2001, the weighted average remaining contractual life of the outstanding
options is 7.86 years. Stock option transactions during the three years ended
December 31, 2001 were as follows:

<TABLE>
<CAPTION>
                                                     2001             2000            1999
--------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C>
Options outstanding
  at Jan. 1                                         76,014          655,000          665,000
Options granted                                     16,000           57,000               --
Options exercised                                    3,334          635,986           10,000
Options canceled                                        --               --               --
Options outstanding
  at Dec. 31                                        88,680           76,014          655,000

Options available for
  grant at Dec. 31                                 164,000          328,000          185,000

Option price ranges per share:
  Granted                                         $   4.26          $4.00 -               --
                                                                       4.25
  Exercised                                       $   4.25          $.875 -          $  2.25
                                                                     2.9375
  Canceled                                              --               --               --

Weighted average option price per share:
  Granted                                         $   4.26          $  4.16               --
  Exercised                                       $   4.25          $  1.72          $  2.25
  Canceled                                              --               --               --
  Outstanding at
    Dec. 31                                       $   3.91          $  3.86          $  1.75
--------------------------------------------------------------------------------------------
</TABLE>

We account for the Plan under the provisions of Accounting Principles Board
Opinion No. 25. The following pro forma information is based on estimating the
fair value of grants under the Plan based upon the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". The fair value of each option
granted in 2001 and 2000 has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-16
<PAGE>


-        risk free interest rate of 4 percent

-        expected life of the option of 7.86 years

-        expected dividend yield rate of 0 percent

-        expected volatility of 51 percent

Under these assumptions, the weighted average fair value of options granted in
2001 and 2000 was $1.71 and $3.15 per share, respectively. There were no awards
under the Plan in 1999. The fair value of the grants would be amortized over
the vesting period for the options. Accordingly, our pro forma net income and
net income per common share assuming compensation cost as determined under SFAS
No. 123 would have been the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(in thousands except
  per share data)             2001      2000      1999
--------------------------------------------------------
<S>                           <C>       <C>        <C>
Net income                    $9,086    $8,215     $ 249
Net income per
  common share basic          $ 1.78    $ 1.47     $0.05
--------------------------------------------------------
Net income per
  common share diluted          $1.77    $1.46     $0.05
--------------------------------------------------------
</TABLE>

NOTE 15

FOREIGN SALES AND OPERATIONS

Aggregate export and foreign sales were $2.87 million, $805,000 and $1.3
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Export and foreign sales were made principally in Europe and the Pacific Rim.
Sales in these geographic areas are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(in thousands)               2001         2000        1999
-----------------------------------------------------------
<S>                         <C>           <C>       <C>
Europe                      $2,499        $733      $1,317
Pacific Rim                    258          72          22
South America                  118          --          --
-----------------------------------------------------------
</TABLE>

With the acquisition of VISaer on July 1, 2001, we acquired foreign
subsidiaries in the United Kingdom and Ireland. Previously, in February 1999,
we had sold our only foreign subsidiary, InterQuad. For the years ended
December 31, 2001, 2000 and 1999, income (loss) before provision for income
taxes derived from foreign subsidiaries approximated $63,000, $0 and
$(109,000), respectively.

At December 31, 2001 and 2000, foreign subsidiaries had assets of $595,000 and
$0 respectively, and total liabilities of $498,000 and $0, respectively.

There are no currency exchange restrictions related to our foreign subsidiaries
that would affect our financial position or results of operations.

Refer to Note 1 for a discussion regarding how we account for translation of
non-US currency amounts.

NOTE 16

EARNINGS PER SHARE

For the years ended December 31, 2001, 2000 and 1999, our diluted weighted
average shares outstanding include the assumed conversion of stock options.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
(in thousands except
  per share data)                2001       2000       1999
-------------------------------------------------------------
<S>                             <C>        <C>        <C>
Net income                      $9,113     $8,215     $  249
Basic earnings
  per share                      $1.78      $1.47      $0.05
Basic weighted
  average shares                 5,108      5,607      5,106
Diluted earnings
  per share                      $1.77      $1.46      $0.05
Diluted weighted
  average shares                 5,146      5,632      5,337
</TABLE>

NOTE 17

HUMANSOFT SUBSIDIARY REORGANIZATION UNDER CHAPTER 11

On November 18, 1999, the United States Bankruptcy Court for the Northern
District of Georgia confirmed a Plan of Reorganization for a former subsidiary.
The plan provided for payment of a fixed percent of the allowed claims for
certain trade creditors and customers as well as payment of the administrative
expenses. The first payments were made immediately following the confirmation,
a second payment was made in November 2000 and the final payment was made in
November 2001.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-17
<PAGE>


NOTE 18

INDUSTRY SEGMENTS

Our consolidated subsidiaries were involved in three industry segments:
information technology products and services, industrial products and health
care services. Operations in information technology products and services,
which include our VISaer and QS Technologies subsidiaries, include development
and sales of software licenses and related professional services and software
maintenance contracts. Operations in the industrial product segment include the
manufacture and sale of bio-remediating parts washers by our ChemFree
subsidiary. Operations in health care services, which consisted of the PsyCare
subsidiary prior to its sale in November 2000, involved mental health and
substance abuse treatment programs. Total revenue by industry segment includes
sales to unaffiliated customers. Sales between our industry segments are not
material. Operating profit (loss) is total revenue less operating expenses.
None of the corporate overhead expense is allocated to the individual industry
segments. Identifiable assets by industry segment are those assets that are
used in our subsidiaries in each industry segment. Corporate assets are
principally cash, notes receivable and investments. The table following
contains segment information for the years ended December 31, 2001, 2000 and
1999.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
(in thousands)                    2001          2000         1999
-------------------------------------------------------------------
<S>                            <C>           <C>           <C>
Information Technology
  Revenue                      $ 4,353       $ 1,828       $ 2,601
  Operating Income (loss)       (4,754)          219          (102)
  Depreciation and
    amortization                 2,527            51            61
  Capital expenditures             189            32            23
  Identifiable assets            4,792           528           950
Industrial Products
  Revenue                        4,365         4,269         4,092
  Operating Income (loss)         (227)           85           138
  Depreciation and
    amortization                   157           176           152
  Capital expenditures              83           145           165
  Identifiable assets            1,730         1,792         1,841
Healthcare Services
  Revenue                           --           930         1,786
  Operating Income (loss)           --           (17)           64
  Depreciation and
    amortization                    --            42            76
  Capital expenditures              --            --             7
  Identifiable assets               --            61           497
Consolidated Segments
  Revenue                      $ 8,718       $ 7,027       $ 8,479
  Operating Income (loss)       (4,981)          287           100
  Depreciation and
    amortization                 2,684           270           289
  Capital expenditures             272           177           195
 Identifiable assets             6,522         2,381         3,288
</TABLE>

A reconciliation of consolidated segment data above to consolidated income
(loss), depreciation and amortization, capital expenditures and assets follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands)                  2001       2000       1999
------------------------------------------------------------
<S>                          <C>        <C>         <C>
Consolidated segments
  operating income (loss)    $(4,981)   $   287     $  100
Corporate expenses            (5,439)    (1,264)      (899)
------------------------------------------------------------
Consolidated operating
  loss                       (10,420)      (976)      (799)
Interest income (expense)      1,017        434        (88)
Investment income             19,902      9,665      2,170
Equity of affiliates          (2,173)       771       (948)
Other income (expense)           960         66        (76)
------------------------------------------------------------
Income before taxes            9,286      8,418        259
Income taxes                     173        203         --
Minority interest                 --         --         10
------------------------------------------------------------
Net income                   $ 9,113    $ 8,215     $   249
============================================================
Depreciation and
  amortization
Consolidated segments        $ 2,684    $   270     $   289
Corporate                      3,911         44          58
------------------------------------------------------------
Consolidated                 $ 6,595    $   314     $   347
============================================================
Capital Expenditures
Consolidated segments        $   272    $   177     $   195
Corporate                         25         26          43
------------------------------------------------------------
Consolidated                 $    297   $   203     $   238
============================================================
Assets
Consolidated segments
  identifiable assets        $ 6,522    $ 2,381     $ 3,288
Corporate                     19,567     17,634      10,370
------------------------------------------------------------
Consolidated                 $26,089    $18,057     $13,658
============================================================
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-18
<PAGE>


NOTE 19

QUARTERLY FINANCIAL DATA (unaudited)

The table following contains a summary of selected quarterly data for the years
ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                         FOR QUARTERS ENDED
(in thousands except
   per share data)             MAR. 31         JUNE 30        SEPT. 30        DEC.31
--------------------------------------------------------------------------------------
<S>                           <C>             <C>            <C>             <C>
2001
Net sales                     $1,694          $ 1,519        $ 2,257         $ 3,249
Operating (loss)                (234)            (588)        (8,350)c        (1,248)
Net income (loss)                749a          17,931b        (7,672)         (1,895)d
Basic income (loss)
  per  share                    0.13             3.19          (1.63)          (0.42)
Diluted income (loss)
  per share                     0.13             3.19          (1.63)          (0.42)

2000
Net sales                     $2,007          $ 1,988        $ 1,630         $ 1,402
Operating income
  (loss)                        (309)              50           (275)           (442)
Net income (loss)              8,384e            (132)f          145g           (182)h
Basic income (loss)
  per share                     1.48            (0.02)          0.03           (0.03)
Diluted income (loss)
  per share                     1.48            (0.02)          0.03           (0.03)
</TABLE>

a.       Includes gains of $845,000 and $306,000 loss in equity of affiliates.

b.       Includes gains of $18.8 million and $183,000 loss in equity of
         affiliates.

c.       Includes non-recurring charges of $6.4 million.

d.       Includes $1.6 million loss in equity of affiliates and recognition of
         deferred gain of $673,000.

e.       Includes gains of $8.8 million on investments and $195,000 loss in
         equity of affiliates.

f.       Includes $284,000 loss in equity of affiliates.

g.       Includes gains of $826,000 on investments and $247,000 loss in equity
         of affiliates.

h.       Includes $44,000 loss in equity of affiliates.

NOTE 20

SUBSEQUENT EVENT

In 2001, we loaned $1.5 million to Delos Payment Systems, Inc. ("Delos"), an
affiliate company accounted for under the equity method. We acquired our 27
percent interest in Delos as a result of the spin-off of Delos to the
shareholders of PaySys prior to its sale, as explained in Note 3 to the
consolidated financial statements. The carrying value of the loan on our
balance sheet at December 31, 2001 was $80,000 due to recording our pro rata
share of Delos losses during 2001 under equity accounting. As a result of the
loan default in January 2002, we acquired control of the Delos board of
directors and we will consolidate the Delos operations in 2002. We are
providing additional borrowings of $1.5 million to Delos under the loan and are
performing due diligence to decide whether to make an investment in Delos to
increase our ownership to a significant majority position. The loan eliminates
in consolidation.

As a result of consolidating Delos, we expect to record an intangible asset
upon consolidation in the first quarter of 2002 in accordance with SFAS 141. It
is possible that the intangible will be mainly in-process research and
development and goodwill and that the goodwill may be impaired for a number of
reasons. If we determine that the intangibles are impaired, we will need to
write-down the value to net realizable value in the first quarter of 2002 in
accordance with SFAS 141, resulting in a charge to earnings, which is estimated
to be approximately $1 million. Some of the factors that may negatively impact
the value of the goodwill are significant non-competition restrictions related
to the sale of PaySys in April 2001 that limit who Delos can sell its products
to for varying time periods through 2006, risks associated with completing and
testing the initial software application, lack of a proven business model and
customers, a limited operating history, and unproven market acceptance of the
Delos software features and architecture.

Despite the possible impairment charge, we have made the additional loan to
Delos to protect our investment and future alternatives.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-19
<PAGE>
                                                                     SCHEDULE II


                         INTELLIGENT SYSTEMS CORPORATION
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                         BALANCE AT    CHARGED TO                                            BALANCE AT
                                          BEGINNING    COSTS AND                                               END OF
DESCRIPTION                               OF PERIOD     EXPENSES      DEDUCTIONS(a)    RECLASSIFICATION(c)     PERIOD
-------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>              <C>                   <C>
ALLOWANCE FOR
  DOUBTFUL ACCOUNTS(b)
  Year Ended December 31, 1999            $1,187,568       $23,375    $1,156,523             $3,238            $57,658
  Year Ended December 31, 2000                57,658        11,594        23,348                 --             45,904
  Year Ended December 31, 2001                45,904         8,591        (9,511)                --             44,984
</TABLE>


(a)      Write-offs of accounts receivable against allowance accounts.

(b)      This includes the combination of the Allowance for Sales Returns with
         the Allowance for Doubtful Accounts.

(c)      Reclassification of unearned revenue to Allowance for Doubtful
         Accounts.


                                      S-1
<PAGE>

                         Report of Independent Auditors

Board of Directors
PaySys International, Inc.

We have audited the accompanying consolidated balance sheets of PaySys
International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PaySys
International, Inc. and subsidiaries at December 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Company has $8,000,000 of Short Term Notes Payable
that become due on demand on or after February 28, 2001 that have not been
renegotiated. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.



                                          /s/ Ernst and Young LLP


February 16, 2001
 except for the third paragraph of Note 11,
 which is dated March 17, 2001
Atlanta, Georgia


                                      S-2
<PAGE>

                   PaySys International, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31
                                                                           2000                   1999
                                                                   --------------------------------------------
                                                                         (In thousands, except share data)
<S>                                                                       <C>                   <C>
ASSETS
Current assets:
Cash and cash equivalents                                                 $     881             $   3,974
Accounts receivable, less allowance for bad debts of $1,000 and               4,824
   $2,266 at December 31, 2000 and 1999, respectively                                               9,450
Unbilled receivables                                                          2,439                 4,837
Prepaid expenses and other current assets                                       603                   668
                                                                   --------------------------------------------
Total current assets                                                          8,747                18,929

Furniture and equipment, net                                                  3,304                 2,936
Computer software costs, net of accumulated amortization of $1,616            1,273
   and $1,204 at December 31, 2000 and 1999, respectively
                                                                                                    1,685
Deposits and other assets                                                       401                   339
                                                                   --------------------------------------------
                                                                          $  13,725             $  23,889
                                                                   ============================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable                                                          $   2,746             $   1,821
Accrued employee compensation                                                 1,943                 2,415
Deferred revenues                                                            17,102                10,728
Current portion of long-term debt and capital lease obligations                 100                   733
Short Term Notes Payable                                                      8,000                    --
Accrued interest                                                                923                    --
Other current liabilities                                                     1,178                 3,250
                                                                   --------------------------------------------
Total current liabilities                                                    31,992                18,947

Other liabilities                                                                --                   226
Long-term debt and capital lease obligations, less current portion           12,719                12,378
Deferred rent expense                                                            11                   183
                                                                   --------------------------------------------
                                                                             44,722                31,734

Redeemable stock purchase warrants                                               --                 3,583

Shareholders' equity (deficit):
Preferred stock, $.01 par value; 10,000,000 shares authorized;                   28
   2,779,689 shares issued and outstanding; liquidation preference
   of $15,900 at December 31, 2000 and 1999                                                            28
Common stock, $.01 par value; 30,000,000 shares authorized;                      84
   8,371,254 and 6,976,644 shares issued and outstanding at
   December 31, 2000 and 1999, respectively                                                            70
Additional paid-in capital                                                   21,112                16,282
Notes receivable - officers                                                  (3,423)               (3,423)
Deferred stock compensation                                                      --                    (3)
Accumulated deficit                                                         (48,380)              (24,123)
Cumulative translation adjustments                                             (418)                 (259)
                                                                   --------------------------------------------
                                                                            (30,997)              (11,428)
                                                                   --------------------------------------------
                                                                          $  13,725             $  23,889
                                                                   ============================================
</TABLE>

See accompanying notes.


                                      S-3
<PAGE>

                   PaySys International, Inc. and Subsidiaries

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31
                                                         2000               1999                1998
                                                   ----------------------------------------------------------
                                                                        (In thousands)
<S>                                                    <C>                   <C>                <C>
Revenues:
   License fees                                        $   12,215            $19,789            $18,385
   Services                                                28,262             30,279             27,520
                                                   ----------------------------------------------------------
Total revenues                                             40,477             50,068             45,905

Cost of revenues:
   License fees                                               649                998              1,934
   Services                                                22,391             21,552             20,608
                                                   ----------------------------------------------------------
Total cost of revenues                                     23,040             22,550             22,542

Gross margin                                               17,437             27,518             23,363

Operating expenses:
   Sales and marketing                                     11,239              7,691              6,240
   Research and development                                17,994             12,424             11,804
   General and administrative                               8,857              6,501              4,793
   Royalty termination settlement                              --                 --              4,340
                                                   ----------------------------------------------------------
Total operating expenses                                   38,090             26,616             27,177

(Loss) income from operations                             (20,653)               902             (3,814)
Interest income (expense):
   Interest income                                            369                217                118
   Interest expense                                        (3,978)            (2,555)            (1,279)
                                                   ----------------------------------------------------------
                                                           (3,609)            (2,338)            (1,161)
                                                   ----------------------------------------------------------
Loss before income taxes                                  (24,262)            (1,436)            (4,975)
Income tax (benefit) expense                                   (5)               270                188
                                                   ----------------------------------------------------------
Net loss                                                 $(24,257)           $(1,706)        $   (5,163)
                                                   ==========================================================
</TABLE>


See accompanying notes.


                                      S-4

<PAGE>

                   PaySys International, Inc. and Subsidiaries

      Consolidated Statements of Changes in Shareholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                            PREFERRED STOCK                COMMON STOCK
                                                  -------------------------------------------------------------       ADDITIONAL
                                                           NUMBER                     NUMBER                           PAID-IN
                                                          OF SHARES    AMOUNT        OF SHARES          AMOUNT         CAPITAL
                                                  -------------------------------------------------------------------------------
<S>                                                    <C>             <C>           <C>                <C>            <C>
Balance at December 31, 1997                                 --         $--          7,131,825           $  71         $ 5,398
  Comprehensive loss:
    Net loss                                                 --          --                 --              --              --
    Foreign currency translation adjustment                  --          --                 --              --              --
  Comprehensive loss
  Noncash compensation from stock purchase
     warrants and stock options                              --          --                 --              --              --
  Exercise of stock options                                  --          --              8,335              --              26
  Issuance of preferred stock and
    repurchase and retirement of
    common stock                                      2,779,689          28         (1,342,626)            (13)          7,358
                                                  -------------------------------------------------------------------------------
Balance at December 31, 1998                          2,779,689          28          5,797,534              58          12,782
  Comprehensive loss:
    Net loss                                                 --          --                 --              --              --
    Foreign currency translation adjustment                  --          --                 --              --              --
  Comprehensive loss
  Noncash compensation from stock
    purchase warrants and stock options                      --          --                 --              --              --
  Exercise of stock options                                  --          --             75,000               1              88
  Issuance of common stock for notes
    receivable from officers                          2,779,689          28          1,104,110              11           3,412
                                                  -------------------------------------------------------------------------------
Balance at December 31, 1999                          2,779,689          28          6,976,644              70          16,282
  Comprehensive loss:
    Net loss                                                 --          --                 --              --              --
    Foreign currency translation                             --          --                 --              --              --
      adjustment
  Comprehensive loss                                    (24,416)
  Exercise of stock purchase warrants                        --          --          1,091,058              11           3,572
  Exercise of stock purchase warrants --
    officers                                                 --          --             52,675              --              31
  Beneficial conversion feature of
    convertible Short Term Notes Payable                     --          --                 --              --             890
  Noncash compensation from stock
    purchase warrants and stock options                      --          --                 --              --              --
  Exercise of stock options                                  --          --            250,877               3             337
  Balance at December 31, 2000                        2,779,689         $28          8,371,254            $ 84         $21,112
                                                  ===============================================================================


<CAPTION>
                                                        NOTES        DEFERRED                     CUMULATIVE
                                                     RECEIVABLE -     STOCK       ACCUMULATED     TRANSLATION
                                                       OFFICERS    COMPENSATION     DEFICIT       ADJUSTMENTS        TOTAL
                                                   -------------------------------------------------------------------------------
<S>                                                  <C>              <C>          <C>               <C>           <C>
Balance at December 31, 1997                         $     --         $(67)        $ (17,254)        $ (71)        $ (11,923)
  Comprehensive loss:
    Net loss                                               --           --            (5,163)           --            (5,163)
    Foreign currency translation adjustment                --           --                --           (92)              (92)
                                                                                                                   ---------
  Comprehensive loss                                                                                                  (5,255)
  Noncash compensation from stock
    purchase warrants and stock options                    --           26                --            --                26
  Exercise of stock options                                --           --                --            --                26
  Issuance of preferred stock and
    repurchase and retirement of
    common stock                                           --           --                --            --             7,373
                                                   -------------------------------------------------------------------------------
Balance at December 31, 1998                               --          (41)          (22,417)         (163)           (9,753)
  Comprehensive loss:
    Net loss                                               --           --            (1,706)           --            (1,706)
    Foreign currency translation adjustment                --           --                --           (96)              (96)
                                                                                                                   ---------
  Comprehensive loss                                                                                                   (1,802)
  Noncash compensation from stock
    purchase warrants and stock options                    --           38                --            --                38
  Exercise of stock options                                --           --                --            --                89
  Issuance of common stock for notes
    receivable from officers                           (3,423)          --                --            --                --
                                                   -------------------------------------------------------------------------------
Balance at December 31, 1999                           (3,423)          (3)          (24,123)         (259)          (11,428)
  Comprehensive loss:
    Net loss                                               --           --           (24,257)           --           (24,257)
    Foreign currency translation adjustment                --           --                            (159)             (159)
                                                                                                                   ---------
  Comprehensive loss                                                                                                 (24,416)
  Exercise of stock purchase warrants                      --           --                --            --             3,583
  Exercise of stock purchase warrants
    - officers                                             --           --                --            --                31
  Beneficial conversion feature of
    convertible Short Term Notes                           --           --                --            --               890
    Payable
  Noncash compensation from stock
    purchase warrants and stock options                    --            3                --            --                 3
  Exercise of stock options                                --           --                --            --               340
  Balance at December 31, 2000                       $ (3,423)        $ --         $ (48,380)        $(418)        $ (30,997)
                                                   ===============================================================================
</TABLE>


See accompanying notes.


                                      S-5
<PAGE>

                   PaySys International, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31
                                                                    2000             1999            1998
                                                              -------------------------------------------------
                                                                                (In thousands)
<S>                                                                <C>              <C>            <C>
OPERATING ACTIVITIES
Net loss                                                           $ (24,257)       $  (1,706)      $  (5,163)
Add (deduct) adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
     Revised joint venture agreement                                    (550)              --              --
     Depreciation                                                      1,525            1,294           1,480
     Amortization of computer software costs                             412              434             391
     Amortization of discounts on debt                                   443              353             118
     Interest expense associated with beneficial conversion
       feature of convertible Short Term Notes Payable                   890               --              --
     Provision for doubtful accounts and concession                   (1,266)           1,915           1,940
     Accrued rent expense                                               (172)            (337)           (308)
     Noncash compensation                                                  3               38              26
     Changes in operating assets and liabilities:
       Accounts receivable and unbilled receivables                    8,290           (3,482)         (5,361)
       Deposits and other assets                                           3             (528)            (48)
       Accounts payable                                                  925               87          (1,321)
       Accrued employee compensation                                    (472)             415            (483)
       Deferred revenues                                               6,374            1,142             199
       Other liabilities                                              (1,375)           1,468          (3,639)
                                                              -------------------------------------------------
Net cash (used in) provided by operating activities                   (9,227)           1,093         (12,169)

INVESTING ACTIVITIES
Purchases of furniture and equipment                                  (1,893)          (1,721)         (1,224)
Purchased computer software rights                                        --           (1,818)             --
                                                              -------------------------------------------------
Net cash used in investing activities                                 (1,893)          (3,539)         (1,224)

FINANCING ACTIVITIES
Proceeds from issuance of preferred stock                                 --               --           7,373
Exercise of options and warrants                                         371               89             172
Proceeds from short-term notes payable                                 8,000           15,016           9,735
Principal payments on long-term debt, capital lease
   obligations                                                          (185)         (10,435)         (3,023)
                                                              -------------------------------------------------
Net cash provided by financing activities                              8,186            4,670          14,257
                                                              -------------------------------------------------

Effect of foreign currency translation on cash and cash
   equivalents                                                          (159)             (96)            (92)
                                                              -------------------------------------------------

(Decrease) increase in cash and cash equivalents                      (3,093)           2,128             772
Cash and cash equivalents at beginning of period                       3,974            1,846           1,074
                                                              -------------------------------------------------
Cash and cash equivalents at end of period                         $     881        $   3,974        $  1,846
                                                              =================================================
</TABLE>


See accompanying notes.



                                      S-6
<PAGE>

                   PaySys International, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                December 31, 2000

1. SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

PaySys International, Inc. (the Company) is a global provider of credit card
transaction processing software to banks, retailers and third party processors.
PaySys' flagship software product, VisionPLUS(R), is a customizable software
system consisting of a range of integrated application modules for processing
both bank and retail credit card transactions. Additionally, the Company has
developed a new transaction payment software engine that is an internet-enabled,
diversified billing and customer management system that serves
business-to-business e-commerce. This new engine will enable commercial users to
integrate a highly flexible payment system into their e-commerce systems.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances,
transactions, and profits and losses have been eliminated.

BASIS OF PRESENTATION

The Company's financial statements are prepared and presented on a basis
assuming it will continue as a going concern. At December 31, 2000, the Company
had an accumulated deficit of $48,380,000 and negative working capital of
$24,245,000 and incurred a net loss of $24,257,000 for the year ended December
31, 2000. The Company has total cash and cash equivalents of $881,000 at
December 31, 2000, which are not sufficient for the Company to fund operations
through December 31, 2001. Management believes that sufficient funds will be
available from either the sale of the Company's operations or obtaining
additional financing to support planned operations through December 31, 2001.
The Company intends to raise additional funds through the sale of a portion of
the operations to outside investors (see Note 11). There can be no assurance
that the Company will be able to raise additional funds on terms favorable to
the Company, or at all. These conditions raise substantial doubt about the
Company's ability to continue as a going concern through at least December 31,
2001. These financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.


                                      S-7

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

REVENUE RECOGNITION

Revenues are derived from sales of software licenses and related services.

The Company recognizes revenue in accordance with Statement of Position (SOP)
97-2, "Software Revenue Recognition". Under SOP 97-2, license and professional
service fee revenues from contracts that require significant production or
modification are recognized under contract accounting on a percentage of
completion basis as services are performed. For contracts which do not require
significant production or modification, fees are allocated to the various
contract elements based on the fair value of each element and are recognized as
follows; software license revenue upon delivery of the software and related
documentation when the fees are fixed and determinable and collectibility is
assessed as probable; professional services revenue as the services are
performed; and post-contract customer support over the term of the arrangement.
Revenue related to research and development agreements is recognized as services
are performed over the related funding period for each contract. Such revenue is
included in license revenue. Service fees received from the sales of software
maintenance and support contracts and sales of other professional services were
recognized over the period the services were provided or as the services were
performed.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provided guidance on revenue recognition matters. The Company
adopted the provisions of SAB 101 effective January 1, 2000. The adoption of SAB
101 did not have a material impact on the Company's revenue recognition
policies, financial condition or results of operations.


                                      S-8

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The Company's revenues consist primarily of license and service revenues from
large companies in the United States, Canada, South America, Europe, Australia,
China and South Africa. The Company does not obtain collateral against its
outstanding receivables. The Company maintains reserves for potential credit
losses for both billed and unbilled receivables. Bad debt expense was $363,000,
$240,000, and $240,000 during the years ended 2000, 1999 and 1998, respectively.
During 2000, revenues from one customer accounted for 11% of the Company's
revenue. During 1999 and 1998, no individual customer exceeded 10% of revenues.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintains
deposits with a bank and invests its excess cash in overnight funds.

FURNITURE AND EQUIPMENT

Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives (generally 3 to 5 years). Amortization of computer equipment under
capital lease is recorded over the term of the lease and is included in
depreciation expense. Expenditures for repairs and maintenance are charged to
operations as incurred.

INTERNAL USE SOFTWARE

Under the provisions of SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", the Company capitalizes costs incurred
in developing or obtaining internal use software. No software has been developed
internally for internal use. At December 31, 2000 unamortized software costs
from purchased software totaled $600,000, net of accumulated amortization of
$253,000, which is included in furniture and equipment (see Note 2).


                                      S-9

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE COMPUTER COSTS

The Company conforms with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed", which requires capitalization of costs
incurred in developing new software products once technological feasibility, as
defined, has been achieved. Costs of maintaining existing software and research
and development costs are otherwise expensed as incurred. No software
development costs were capitalized in 2000, 1999 or 1998. The Company records
amortization of capitalized software development costs using the greater of 1)
the ratio of current sales to total expected sales for a product or 2) the
straight-line method over the estimated economic life of the related product
(currently three years). Amortization of software development costs totaled
$48,000, $252,000, and $357,000 for the years ended December 31, 2000, 1999 and
1998, respectively.

SFAS No. 86 also allows for the capitalization of purchased software. In 1999,
the Company entered into an agreement to terminate a previously existing royalty
agreement. The original agreement provided for royalty payments based on the
sale of a particular component of the Company's product. The termination
agreement assigns all rights to that component to the Company. The net amount of
the agreement, $1,818,000, is included in computer software costs and is being
amortized over five years, the estimated economic life of the product.
Amortization of such costs totaled $364,000 and $182,000 for the years ended
December 31, 2000 and 1999, respectively, and is included in Cost of License
Fees.

INCOME TAXES

The Company follows the liability method of accounting for income taxes.
Deferred income taxes relate to the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.


                                      S-10

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation", provides an alternative
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), in accounting for stock-based compensation issued to
employees. The Company accounts for stock option grants in accordance with APB
25 and has elected the pro forma disclosure alternative of the effect of SFAS
No. 123.

ADVERTISING COSTS

During 2000, 1999, 1998 the Company expensed advertising costs of $359,000,
$143,000, and $143,000, respectively. Advertising costs are expensed as
incurred.

RECLASSIFICATION

Certain amounts reported in the 1998 and 1999 financial statements have been
reclassified to conform to the 2000 financial statement presentation.

2. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31
                                                                   2000                 1999
                                                           ------------------------------------------
                                                                        (In thousands)
      <S>                                                        <C>                  <C>
      Furniture and equipment:
        Office furniture and equipment                           $   1,974            $   1,313
        Computer equipment and software                              5,983                4,808
        Computer equipment under capital lease                       1,560                1,565
                                                           ------------------------------------------
                                                                     9,517                7,686
        Less allowances for depreciation and
          amortization                                              (6,213)              (4,750)
                                                           ------------------------------------------
                                                                 $   3,304            $   2,936
                                                           ==========================================
</TABLE>


                                      S-11
<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company considers its cash and cash equivalents, accounts receivable,
short-term and long-term debt and capital lease obligations to be its only
significant financial instruments and believes that the carrying amounts of
these instruments approximate their fair value. The carrying amount of long-term
debt approximates fair value based on current interest rates available to the
Company for debt instruments with similar terms, degree of risk and remaining
maturities. The remaining financial instruments approximate fair value based on
their short-term nature.

4. LONG-TERM DEBT AND LEASES

Long-term debt and capital lease obligations consist of the following:

<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                       2000             1999
                                                                 -----------------------------------
                                                                           (In thousands)
<S>                                                                    <C>              <C>
12.5% Note payable due May 15, 2006 (1)                                $15,000          $15,000
Less discount                                                           (2,342)          (2,785)
                                                                 -----------------------------------
                                                                        12,658           12,215

Loan from product development joint venture due
   August 31, 2002, no interest (2)                                         --              550

Other debt                                                                  --               52

Capital lease obligations, various imputed interest rates and
   monthly payments                                                        161              294
                                                                 -----------------------------------
                                                                        12,819           13,111
Less current portion                                                      (100)            (733)
                                                                 -----------------------------------
                                                                       $12,719          $12,378
                                                                 ===================================
</TABLE>


                                      S-12

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

4. LONG-TERM DEBT AND LEASES (CONTINUED)

(1)  This note is secured by a lien on equipment, accounts receivable and
     software and related material. The lender was granted warrants to purchase
     999,563 shares of the Company's common stock, exercisable at $.01 per share
     (see Note 7). The stated interest rate combined with the amortization of
     discount allocated to the fair value of the warrants results in a 15.5%
     effective interest rate. Beginning in June 2003 and continuing each quarter
     through March 2006, the Company must redeem $1,250,000 in aggregate
     principal plus accrued and unpaid interest. Redemption of the outstanding
     principal amount of the note, including accrued and unpaid interest, is
     required upon the closing of an initial public offering resulting in at
     least $25 million in proceeds, a change in control or a qualified
     disposition, as defined by the note. In January of 2000 the lender
     exercised the referenced warrants and received 996,338 shares of the
     Company's common stock (net of exercise costs settled in shares).

(2)  In 1999, the Company entered into a software development joint venture
     agreement for a specific project, whereby the Company could borrow fifty
     percent of the associated development cost, up to $600,000, from the
     co-developer. The loan was non-interest bearing and repayment was due by
     the earlier of August 31, 2002 or as future revenue was recognized from the
     sales of the jointly developed product. In December 2000, this agreement
     was modified whereby the third party provided for 100% funding for all
     development costs up to $1,200,000, thus relieving this loan obligation.
     The modification requires the Company to be responsible for all additional
     development costs. In addition, revised revenue sharing methodology was
     established concurrently. As of December 31, 2000, approximately $3,400,000
     has been incurred on this project. The $600,000 and $600,000 received from
     the third-party in the years ended 2000 and 1999, respectively, is
     reflected in the statement of operations as license revenue.


                                      S-13

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

4. LONG-TERM DEBT AND LEASES (CONTINUED)

The Company's notes payable and long-term debt agreements contain covenants
restricting additional borrowings, the incurrence of liens on assets, the
acquisition and disposition of assets, capital expenditures, distributions to
shareholders and certain financial restrictions.

Under a sublease agreement, the Company leases office space from Quadram
Corporation ("Quadram"), a wholly owned subsidiary of Intelligent Systems
Corporation (ISC). ISC and the chairman of ISC are shareholders of the Company.
The lease began in 1996 and ends November 2002 (subject to earlier termination
if Quadram's lease is terminated). Rental expense under this agreement was
$460,000, $342,000, and $310,000 for 2000, 1999, and 1998, respectively.

Total rental expense was $3,214,000, $2,861,000, and $2,784,000 for 2000, 1999,
and 1998, respectively.

Required payments by year for long-term debt, capital leases and non-cancelable
operating leases with initial or remaining terms in excess of one year at
December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                     LONG-TERM          CAPITAL         OPERATING
YEAR ENDING DECEMBER 31,                               DEBT             LEASES            LEASES
------------------------------------------------------------------------------------------------------
                                                                    (In thousands)
<S>                                                   <C>                  <C>              <C>
2001                                                  $      --            $112             $2,429
2002                                                         --              62              1,502
2003                                                      3,750              --                133
2004                                                      5,000              --                112
2005 and beyond                                           6,250              --                159
                                                 -----------------------------------------------------
                                                         15,000             174              4,335
Less amounts representing interest and discounts
                                                         (2,342)            (13)                --
                                                 -----------------------------------------------------
                                                        $12,658            $161             $4,335
                                                 =====================================================
</TABLE>


                                      S-14

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

5. COMMITMENTS AND CONTINGENCIES

LINE OF CREDIT

On October 19, 1999, the Company entered into a $5 million revolving line of
credit facility with a financial institution. Borrowings under the facility at
December 31, 1999 were $1,067,000 and are included in other current liabilities
due to the revolving nature of repayment. In December 2000, the revolving line
of credit facility was cancelled and the outstanding amount on the line of
credit was repaid in full through proceeds from the $1,500,000 promissory note
from existing investors as described under Short Term Notes Payable.

SHORT TERM NOTES PAYABLE

In July 2000, the Company issued convertible subordinated notes ("Notes") to a
group of existing investors for a total of $4,500,000 in cash. The Notes bear
interest at 8% per annum. Interest and principal were due on the earlier of
December 31, 2000, the closing date of Maker's first Triggering Financing (as
defined in the Notes), or the occurrence of an Event of Default (as defined in
the Notes). The Notes were convertible into the Company's Series A-2 preferred
stock upon a Triggering Event (as defined in the Note Purchase Agreement) on or
before December 31, 2000 in an amount equal to the Conversion Amount divided by
the Alternative Per Share Price (as defined in the Note Purchase Agreement), or
if A-2 preferred shares are not available or designated at the conversion date,
the Notes may be converted into notes bearing interest of 12% beginning
January 1, 2001. The stated interest rate combined with the amortization of
discount allocated to fair value of the beneficial conversion feature (see
Note 7) results in a 50% effective interest rate.

In January 2001, the Company cancelled the Note Purchase Agreement and the Notes
and issued revised notes and a revised Note Purchase Agreement effective July
2000 ("New Notes"), whereby the interest rate was retroactively increased to 50%
per annum from the effective date of the original convertible subordinate notes
and the conversion feature of the Notes was cancelled (see Note 11). Principal
and interest on the New Notes are due on demand on or after February 28, 2001,
subject to the terms in the amended Note Purchase Agreement.


                                      S-15

<PAGE>


                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

SHORT TERM NOTES PAYABLE (CONTINUED)

In September 2000, the Company issued a promissory note to an existing investor
("the Investor") in exchange for $2,000,000 in cash. Interest is accrued at 12%
per annum and accrued interest and principal are due on demand on or after
October 31, 2000. In December 2000, the Company issued an additional promissory
note to the Investor in exchange for $1,500,000 in cash. Interest is accrued at
50% per annum and accrued interest and principal are due on demand on or after
January 12, 2001. In January 2001, the Company cancelled the two promissory
notes and reissued revised promissory notes effective on the original promissory
notes respective issuance dates, whereby interest is accrued at 50% and
principal and accrued interest are due on demand on or after February 28, 2001
(see Note 11).

ROYALTY AGREEMENT

In 1998, the Company executed an agreement to terminate a royalty agreement that
had previously been in place as a result of a software development agreement
entered into by the Company and a customer.

The Company had been required in the initial period of the original agreement to
pay 10% of any sale, license or other grant of right to use the product that
totaled less than $1,000,000 and 15% of any sale, license or other grant of
right to use the product that totaled more than $1,000,000. The fees were to
increase incrementally each year until paid in full. The entire amount that
would have been owed was capped at $6,027,000. In settlement, the Company issued
a note payable of $4,694,000 and incurred a one-time expense in 1998 of $4.3
million. The outstanding balance at December 31, 1998 of $4,444,000 was repaid
in 1999.


                                      S-16


<PAGE>
                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

SOFTWARE LICENSE AGREEMENT

In 1999, the Company entered into a software license agreement whereby the
Company purchased approximately $675,000 of software for internal use. The terms
of the agreement require the Company to pay for the license in equal monthly
installments through August 31, 2001. As of December 31, 2000 the remaining
balance of $196,000 is included in the balance sheet in other current
liabilities.

DEVELOPMENT AND DISTRIBUTION AGREEMENT

In 2000, the Company entered into a development and distribution agreement
whereby the Company purchased approximately $93,000 of software for internal
use. The terms of the agreement require the Company to pay an annual
distribution fee of $30,000 annually for four year effective March 31, 2001.

LEGAL MATTERS

The Company is a party to various legal proceedings and is involved in various
unasserted claims and assessments that have arisen in the normal course of its
business. In the opinion of management, these actions will not have a material
adverse effect on the Company's consolidated financial statements.


                                      S-17
<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES

The provisions for income taxes for 2000, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31
                                        2000         1999        1998
                                       -------------------------------
                                                (In thousands)
<S>                                    <C>           <C>         <C>
Current tax expense:
   Federal                             $  --         $ --        $ --
   Foreign                                (5)         270         188
   State                                  --           --          --
                                       -------------------------------
Total current                             (5)         270         188

Deferred tax expense (benefit):
   Federal                                --           --          --
   Foreign                                --           --          --
   State                                  --           --          --
                                       -------------------------------
Total deferred                            --           --          --
                                       -------------------------------
                                       $  (5)        $270        $188
                                       ===============================
</TABLE>

Income tax expense for the year ended December 31, 2000 relates to a foreign tax
credit. No additional income tax expense has been recorded for the year ended
December 31, 2000 due to the Company's loss for the period and the related net
operating loss carryforward position.


                                      S-18
<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES (CONTINUED)

A reconciliation of the statutory U.S. income tax rate to the effective income
tax rate is as follows:

<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31
                                                   2000         1999         1998
                                                ---------------------------------
                                                          (In thousands)
<S>                                             <C>            <C>        <C>
Tax (benefit) at statutory federal rate         $(8,234)      $ (488)     $(1,692)
State taxes, net of federal benefit                (264)         (38)        (131)
Foreign tax credits                                 (23)        (270)        (274)
Foreign withholding taxes                            17          190          188
Foreign operations not subject to U.S. tax           69           80           50
Meals and entertainment                             112           40           74
Increase in other tax credits                      (530)        (423)          --
Other-net                                            63         (144)        (189)
Change in valuation allowance                     8,785        1,323        2,162
                                                ---------------------------------
Total income tax (benefit) expense              $    (5)      $  270         $188
                                                =================================
</TABLE>


                                      S-19

<PAGE>

                   PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES (CONTINUED)

Components of U.S. deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31
                                                  2000          1999        1998
                                               -----------------------------------
                                                          (In thousands)
<S>                                            <C>          <C>          <C>

Deferred tax assets:
   Net operating loss carryforwards            $ 14,859     $  6,217     $  5,591
   Accruals not deductible for tax purposes       2,254        2,532        2,629
   General business credit carryforwards          2,578        2,070        1,567
   Foreign tax credit carryforwards                 491          506          316
   Minimum tax credit carryforwards                 213          213          213
   Property and equipment, principally due to
     depreciation                                    --           15            9
                                                ---------------------------------
Total gross deferred tax assets                  20,395       11,553       10,325

Deferred tax liability:
   Property and equipment, principally due to
     depreciation                                   (75)          --           --
   Amortization of intangibles                       --          (18)        (113)
                                                ---------------------------------
Total gross deferred tax liabilities                (75)         (18)        (113)

Less valuation allowance                        (20,320)     (11,535)     (10,212)
                                                ---------------------------------
Net deferred tax asset                          $    --     $     --     $    --
                                                =================================
</TABLE>


At December 31, 2000, the Company had general business and foreign tax
carryforwards which expire in 2001 through 2015 and AMT credit carryforwards
available to offset future federal income tax liabilities totaling approximately
$213,000. The Company has net federal loss carryforwards of $37,477,000
generated through December 31, 2000 for federal income tax purposes that expire
at various dates between 2012 through 2020.


                                      S-20
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES (CONTINUED)

In addition, the Company's foreign subsidiaries had cumulative losses of
$3,350,000 at December 31, 2000. The tax benefits of these credit carryforwards
and net operating loss carryforwards can be realized only through their
application to taxable income arising from future successful operations of the
Company. These credit and net operating loss carryforwards may be subject to
certain limitations under Section 382 in the event of an ownership change. Due
to the uncertainty of the Company's ability to fully realize the benefits of the
credit and net operating loss carryforwards, a valuation allowance has been
recorded against net deferred tax assets. When recognized, the tax benefit of
those items will be applied to reduce future income tax amounts.

7. SHAREHOLDERS' EQUITY

WARRANTS

In connection with a financing agreement entered into with Capital Resource
Partners IV, L.P. and CRP Investment Partners IV, L.L.C. on April 15, 1999, the
Company issued warrants to purchase an aggregate of 999,563 shares of the
Company's common stock at an exercise price of $.01 per share. In the event of a
change in control or an event of default, as defined, or within one year of the
redemption of all outstanding shares of Series A-1 Preferred Stock, the holder
or holders of the warrants have the right to put the warrants to the Company at
the then current fair market value of the shares underlying the warrants. The
warrants were valued at approximately $3.1 million, which has been recorded as a
discount to the related debt and redeemable stock purchase warrants. The
discount is amortized to interest expense over eighty-four months, the term of
the debt. The related interest expense in 2000 and 1999 was approximately
$445,000 and $300,000, respectively. Warrants issued under the agreement expire
on the earlier of (a) a qualified IPO or (b) the later of April 15, 2006 or such
time as all principal and interest on the notes is paid in full. The warrants
may either be exercised in full, partially, or through a net issue election, as
defined. Warrant holders have certain rights to purchase future subordinated
debt issued by the Company, according to their pro-rata holdings of warrants and
warrant shares to total stock outstanding. In January 2000, these warrants were
exercised and 994,346 shares of common stock were issued (net of exercise price
settled in shares).


                                      S-21
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

WARRANTS (CONTINUED)

In connection with a financing agreement entered into with Sirrom Capital, L.P.
(Sirrom) on September 26, 1997, the Company issued warrants to purchase 37,660
shares of the Company's common stock at an exercise price of $.002 per share
which were fully exercisable and outstanding at December 31, 1997. The warrant
was valued at approximately $307,000. If the debt remained outstanding for
certain periods during the term of the financing arrangement the Company was
required to issue warrants to purchase additional shares of common stock. During
1999 and 1998, the Company issued warrants to purchase 9,560 and 47,500,
respectively additional shares at $0.002 per share and valued these additional
warrants at approximately $30,000 and $147,000, respectively. Of the additional
warrants 57,060 were fully exercisable and outstanding during 2000 and 1999,
respectively. Warrants issued under this financing agreement provide the holder
of the warrant the right and option to sell to the Company the warrants for a
period of thirty days immediately prior to the expiration of the warrant, at a
purchase price equal to the fair market value of the shares of common stock that
would be issued upon exercise of the warrant. In December 2000, 94,720 warrants
were exercised by Sirrom in exchange for an equal amount of shares of the
Company's common stock.

BENEFICIAL CONVERSION FEATURE OF SHORT TERM NOTES PAYABLE

The Notes described in Note 4 included a beneficial conversion feature for
conversion into capital stock. The $890,000 value of the beneficial conversion
feature has been recorded as a discount on the Notes and was amortized to
interest expense over the terms of the notes payable.

STOCK-BASED AWARDS TO EMPLOYEES

The Company has elected to follow APB 25 and related interpretations in
accounting for its stock-based awards to employees because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing
stock-based awards to employees. Under APB 25, no compensation expense is
recognized for stock-based awards with an exercise price equal to the fair value
of the underlying stock on the date of grant.


                                      S-22
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED) (CONTINUED)

STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)

Pro forma information regarding net income (loss) is required by SFAS No. 123,
which also requires that the information be determined as if the Company has
accounted for its stock-based awards to employees granted subsequent to December
31, 1994 under the fair value method prescribed by that statement. The fair
value for these awards were estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 2000, 1999 and
1998: risk-free interest rate of 5.5% for 1998, 6.0% for 1999; and 6.4% for
2000, no dividend yield; and a weighted-average expected life of the awards of 7
years. The weighted average fair value of awards granted during 2000, 1999 and
1998 was $.67, $1.10, and $.93 per share, respectively.

The option valuation models require the input of highly subjective assumptions.
Because the Company's stock-based awards to employees have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee awards.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

<TABLE>
<CAPTION>

                                            DECEMBER 31
                            2000               1999              1998
                          --------------------------------------------
                          <S>               <C>                <C>
                                          (In thousands)
Net loss                  $24,387           $(1,824)           $(5,255)
</TABLE>


                                      S-23
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED) (CONTINUED)

STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)

The 1995 Stock Incentive Plan (the "1995 Plan") allows for the granting of
options for up to 1,088,750 shares of common stock to employees and directors.
Stock options granted under the Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted with exercise
prices of no less than the fair market value. The options expire 10 years from
the date of grant. Options may be granted with different vesting terms but
generally provide for vesting equally over a four-year period.

In October 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan allowed for the granting of options for up to 411,250
shares of common stock to employees, non-employee directors, consultants and
other vendors. In 1999, the 1997 Plan was amended to increase the number of
options by 932,835, or a total of 1,344,085. Stock options granted under the
Plan may be either incentive stock options or nonqualified stock options.
Incentive stock options may be granted with exercise prices of no less than the
fair market value. The options expire 10 years from the date of grant. Options
may be granted with different vesting terms but generally provide for vesting
equally over a four-year period.


                                      S-24
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)

The following table summarizes option activity for 2000, 1999 and 1998 under the
Company's stock option plans.

<TABLE>
<CAPTION>

                                                                                  WEIGHTED
                                                            EXERCISE PRICE         AVERAGE
                                                 SHARES         RANGE          EXERCISE PRICE
                                                ---------------------------------------------
<S>                                             <C>           <C>              <C>
Outstanding at December 31, 1997                1,058,085     $0.80-3.10           $1.30
   Granted                                        339,000        3.10               3.10
   Exercised                                       (8,335)       3.10               3.10
   Expired                                        (81,250)       3.10               3.10
                                                ---------------------------------------------
Outstanding at December 31, 1998                1,307,500     $0.80-3.10           $1.64
   Granted                                        193,500        3.10               3.10
   Exercised                                      (75,000)     0.80-3.10            1.11
   Expired                                       (153,938)       3.10               3.10
                                                ---------------------------------------------
Outstanding at December 31, 1999                1,272,062     $0.80-3.10           $1.72
   Granted                                        889,000        3.10               3.10
   Exercised                                     (250,877)       3.10               3.10
   Expired                                       (233,727)       3.10               3.10
                                                ---------------------------------------------
Outstanding at December 31, 2000                1,676,458     $0.80-3.10           $2.48
                                                =============================================

Exercisable at December 31, 1998                  796,581     $0.80-$3.10          $1.24
Exercisable at December 31, 1999                  844,859     $0.80-$3.10          $1.47
Exercisable at December 31, 2000                  775,185     $0.80-$3.10          $1.88
</TABLE>

Options outstanding at $.80 per share totaled 572,020 of which 410,080 were
exercisable at December 31, 2000. The weighted average remaining contractual
life of options exercisable at $.80 per share was five years at December 31,
2000. Options outstanding at $3.10 per share totaled 1,104,438 of which 365,105
were exercisable at December 31, 2000. The weighted average remaining
contractual life of options exercisable at $3.10 per share was nine years at
December 31, 2000.


                                      S-25
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)

In addition to the stock option plans described above, the Company has issued
warrants to purchase common stock to employees. During 1995, the Company issued
to each of two individuals warrants to purchase 52,675 shares of common stock at
an exercise price of $.60 per share. These warrants, which expire in December
2005, become exercisable equally over a two-year and three-year vesting period.
In April and June 1997, 35,000 shares of common stock were issued pursuant to
the partial exercise of one of these warrants and the remainder of the warrant
to purchase 17,675 shares of common stock was canceled in September 1997. In
March 2000, the remaining warrants were exercised and 52,675 shares of common
stock were issued.

In 1996, the Company issued warrants to two employees to purchase 1,104,110
shares of common stock exercisable at a price per share based on $50,000,000
divided by the number of shares outstanding at the exercise date. These warrants
were exercisable upon achievement of certain milestones and expire in February
2003. Effective August 5, 1997, the Company amended these warrants. The
amendment fixed the exercise price of the warrants at $4.80 per share, and the
warrants became fully exercisable as of the amendment date. As a result of
amending the warrants, the Company recorded compensation expense of $3,708,000
in 1997 for the difference between the exercise price and estimated fair value
per share at the amendment date. In 1999, these warrants were canceled in
exchange for full recourse notes receivable, totaling $3,423,000, and the
issuance of 1,104,110 shares of common stock. The notes bear interest at 5% per
annum payable on April 30, 2001 and annually thereafter. The notes are due on
the earlier of (a) September 30, 2004 or (b) one year after the date of an
initial public offering or any other sale or transfer of securities of the
Company, as defined in the agreement. The December 31, 2000 notes receivable
balance is included in shareholders' equity.

At December 31, 2000, a total of 4,878,311 shares of the Company's common stock
were reserved for the exercise of outstanding stock options and conversion of
convertible preferred stock.


                                      S-26
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7. SHAREHOLDERS' EQUITY (CONTINUED)

PREFERRED STOCK

In 1998 the Company amended and restated its Articles of Incorporation to
authorize 10,000,000 shares of preferred stock and designate 2,779,689 shares as
Series A-1 Convertible Participating Preferred Stock. Each share of Series A-1
Preferred Stock is convertible at any time after the date of issuance into a
number of shares of common stock, determined by dividing the Series A-1 original
cost by the Series A-1 conversion price that is currently in effect. Upon
issuance, the conversion price is deemed to be the original price. Each share of
Series A-1 Preferred Stock entitles it's holder to voting rights equivalent to
those that would exist if the holder were to convert to common stock and to
receive $5.72 per share plus accrued dividends in the event of involuntary or
voluntary liquidation, adjusted for any combinations, consolidations, stock
splits, or stock distributions or dividends. The collective Series A-1 Preferred
Stock shareholders have the right to appoint and remove, at their discretion,
one member of the Company's Board of Directors. In 1998 the Company issued
2,779,689 shares of Series A-1 Preferred Stock in exchange for $7.5 million in
cash (less issuance costs) and 1,342,626 shares of previously outstanding shares
of common stock that were retired.

8. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Profit Sharing Plan (the "Plan") for the benefit of
eligible employees and their beneficiaries. All employees are eligible to
participate in the Plan on the first day of the month following hire. Effective
July 1, 1998 the Company amended the plan to provide for an employer matching
contribution equal to 20% of up to 6% of eligible compensation deferred by the
employee. Prior to this amendment, employer contributions were discretionary.
Effective January 1, 2000 the Company amended the plan to provide for an
employer matching contribution equal to 100% of up to 3% of the eligible
compensation deferred by the employee. The Company's contribution vests in even
increments over a five-year period. Contribution expense related to the Plan
during 2000, 1999 and 1998 was $480,000, $219,000 and $194,000 respectively.


                                      S-27
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

9. SEGMENTS AND GEOGRAPHICAL INFORMATION

The Company is organized around two geographic areas; the United States and
foreign operations. Foreign operations primarily consist of Australia, Ireland,
Singapore, and South Africa.

The foreign locations principally function as service providers for the products
developed by the Company in the United States. The accounting policies as
described in the summary of significant accounting policies are applied
consistently across the two segments. Foreign revenues are based on intercompany
transfer prices to provide a reasonable margin upon distribution.


                                      S-28
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)

Information about the Company's operations by geographic area is as follows:

<TABLE>
<CAPTION>

                                             2000            1999           1998
                                          ----------------------------------------
                                                        (In thousands)
<S>                                       <C>             <C>             <C>
UNITED STATES

Revenues:
  License fees                            $ 12,215        $ 19,789        $ 18,385
  Service                                   21,542          25,144          23,443
                                          ----------------------------------------
Total revenues                              33,757          44,933          41,828

Interest income                                361             211             108
Interest expense                            (3,978)         (2,554)         (1,279)
Depreciation and amortization               (1,870)         (1,577)         (1,783)
Income tax expense                             (17)             --        $     --
Income (loss) before income taxes          (24,441)         (1,150)       $ (4,826)
Long-lived assets                            4,423           4,593        $  2,571
Total segment assets                        12,637          22,702        $ 17,148
Expenditures for long-lived assets           1,536           3,371        $    757

FOREIGN OPERATIONS
Revenues:
  License fees                                  --              --        $     --
  Service                                    6,720           5,135           4,077
                                          ----------------------------------------
Total revenues                               6,720           5,135        $  4,077

Interest income                                  8               8        $     10
Interest expense                                --              (1)       $     --
Depreciation and amortization                  (67)           (151)       $    (88)
Income tax benefit (expense)                    22            (270)       $   (188)
Income (loss) before income taxes              179            (286)       $   (149)
Long-lived assets                              555             367        $    434
Total segment assets                         1,088           1,187        $    709
Expenditures for long-lived assets             357             168        $    467
</TABLE>


                                      S-29
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)

Export sales were $28.3 million, $30.6 million, and $27.6 million in 2000, 1999,
and 1998, respectively. Such revenues were derived principally from Australia,
New Zealand, Canada, Europe, West Indies, South Africa and South America.
Accounts receivable (billed and unbilled) arising from foreign revenues total
$7.2 million and $8.1 million as of December 31, 2000 and 1999, respectively.

10. SUPPLEMENTAL CASH FLOW INFORMATION

The following is a summary of non-cash transactions and additional cash flow
information:

<TABLE>
<CAPTION>

                                                      FOR THE YEAR ENDED DECEMBER 31
                                                    2000          1999           1998
                                                   ----------------------------------
                                                             (In thousands)
<S>                                                <C>           <C>           <C>
Furniture and equipment acquired under
  capital lease obligations                        $   --        $   46        $  382
                                                   ==================================
Relief of loan from negotiated cost-sharing
 agreement
                                                   $  550        $   --        $   --
                                                   ==================================
Cash paid for interest                             $1,723        $2,010        $1,303
                                                   ==================================
Cash paid for income taxes                         $   17        $  247        $  188
                                                   ==================================
</TABLE>

11. SUBSEQUENT EVENTS

On January 11, 2001 the existing $4,500,000 of convertible notes and Note
Purchase Agreement and $3,500,000 of demand notes described in Note 5 under the
subheading Short Term Financing were cancelled and exchanged for unsubordinated,
non-convertible demand notes with an interest rate of 50%. The notes described
above have the same principal amount and issuance date of the originally issued
notes. Principal and accrued interest are due on demand on or after February 28,
2001.

As part of the revised Note Purchase Agreement dated January 11, 2001, an
additional $4,000,000 of notes were issued on January 11, 2001. Interest accrues
at 50%. Principal and accrued interest are due on demand on or after February
28, 2001.


                                      S-30
<PAGE>

                  PaySys International, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

11. SUBSEQUENT EVENTS (CONTINUED)

On March 17, 2001 the Company signed a definitive agreement to be acquired in a
cash transaction for $135 million including payment of debt. Certain proprietary
technology will be spun out to shareholders immediately prior to the
acquisition. Several contractual modifications, assignments, and dispute
resolutions need to be completed as conditions to closing. In addition, certain
governmental approvals, corporate governance transactions, personnel and
shareholder-related actions are required.


                                      S-31
<PAGE>
To the Board of Directors
VISaer, Inc. and Subsidiaries
100 Fordham Road
Wilmington, Massachusetts  01887

                          INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated balance sheet of VISaer, Inc. and
Subsidiaries (the Company) as of December 31, 2000 and the related consolidated
statements of operations, comprehensive loss, redeemable convertible preferred
stock and stockholders' deficiency, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of VISaer (UK) Ltd. and VISaer (IRL) Ltd., wholly owned subsidiaries,
which statements reflect total assets of $817,198 and $6,198 as of December 31,
2000, respectively, and total revenues of $488,841 and $249,360, for the five
months and year then ended, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for VISaer (UK) Ltd. and VISaer (IRL) Ltd.,
which have been reconciled by us to accounting principles generally accepted in
the United States of America in the accompanying consolidated financial
statements, is based solely on the reports of the other auditors.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of VISaer, Inc. and Subsidiaries as of
December 31, 2000, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.




Moody, Famiglietti & Andronico, LLP
March 20, 2002


                                      S-32
<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET                                                                    VISAER, INC. AND SUBSIDIARIES
==================================================================================================================================

DECEMBER 31                                                                                                                  2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                    <C>
ASSETS
Current Assets:
     Cash                                                                                                              $  168,926
     Accounts Receivable, Net of Allowance for Doubtful Accounts of $15,000                                               837,927
     Prepaid Expenses and Other Current Assets                                                                             29,314
----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets                                                                                                    1,036,167

Property and Equipment, Net of Accumulated Depreciation (Note 2)                                                          206,647
Other Assets                                                                                                               50,577
----------------------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                                                          $ 1,293,391
                                                                                                                      ============


LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
     Notes Payable - Stockholders (Note 12)                                                                           $   263,750
     Accounts Payable                                                                                                     824,189
     Accrued Expenses                                                                                                   1,067,183
     Deferred Revenues                                                                                                  1,017,601
     Deferred Gain (Note 7)                                                                                             4,564,325
     Current Maturities of Capital Lease Obligations (Note 3)                                                              57,137
----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                                                               7,794,185

Notes Payable - Stockholders (Note 12)                                                                                  2,267,856
Capital Lease Obligations, Net of Current Maturities (Note 3)                                                              44,606
Deferred Rent                                                                                                             108,231
Deferred Income Taxes (Note 4)                                                                                            211,525
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities                                                                                                      10,426,403
----------------------------------------------------------------------------------------------------------------------------------

Redeemable Convertible Preferred Stock:
     Series A Redeemable Convertible Preferred Stock:  $0.001 Par Value;
       1,881,721 Shares Authorized; 1,523,298 Shares Issued and Outstanding
       at Redemption Value; Liquidation Preference of $4,250,000 (Note 10)                                              4,250,000
     Series B Redeemable Convertible Preferred Stock:  $0.001 Par Value;
       1,628,700 Shares Authorized, Issued and Outstanding at Redemption
       Value; Liquidation Preference of $879,500 (Note 10)                                                                879,500
     Series C Redeemable Convertible Preferred Stock:  $0.001 Par Value;
       337,331 Shares Authorized, No Shares Issued and Outstanding (Note 10)                                                    -
     Series D Redeemable Convertible Preferred Stock:  $0.001 Par Value;
       369,125 Shares Authorized; 33,556 Shares Issued and Outstanding at Redemption
       Value, Net of Unaccreted Discount of $20,294; Liquidation Preference
       of $49,327 (Note 10)                                                                                                29,033
----------------------------------------------------------------------------------------------------------------------------------
Total Redeemable Convertible Preferred Stock                                                                            5,158,533
----------------------------------------------------------------------------------------------------------------------------------

Stockholders' Deficiency:
     Common Stock:  $0.001 Par Value; 15,000,000 Shares Authorized;
        965,189 Shares Issued and Outstanding                                                                                 965
     Additional Paid-in Capital                                                                                         4,689,522
     Accumulated Deficit                                                                                              (18,934,603)
     Accumulated Other Comprehensive Deficit                                                                              (47,429)
----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency                                                                                        (14,291,545)
----------------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIENCY                                $ 1,293,391
                                                                                                                      ============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-33
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS                                                          VISAER, INC. AND SUBSIDIARIES
==================================================================================================================================

FOR THE YEAR ENDED DECEMBER 31                                                                                              2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                  <C>
Revenues:
     Software Licenses                                                                                               $ 3,113,159
     Maintenance and Support Services                                                                                  8,094,870
     Hardware Equipment Sales                                                                                            544,118
----------------------------------------------------------------------------------------------------------------------------------
Total Revenues                                                                                                        11,752,147
----------------------------------------------------------------------------------------------------------------------------------

Cost of Revenues:
     Software Licenses                                                                                                   680,477
     Maintenance and Support Services                                                                                  4,619,525
     Hardware Equipment Sales                                                                                            445,975
----------------------------------------------------------------------------------------------------------------------------------
Total Cost of Revenues                                                                                                 5,745,977
----------------------------------------------------------------------------------------------------------------------------------

Gross Profit                                                                                                           6,006,170
----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
     Research and Development                                                                                          3,415,907
     Selling and Marketing                                                                                             3,206,936
     General and Administrative                                                                                        2,140,493
----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                                                                               8,763,336
----------------------------------------------------------------------------------------------------------------------------------

Loss from Operations                                                                                                  (2,757,166)
----------------------------------------------------------------------------------------------------------------------------------

Other Income (Expense):
     Gain on Sale of Product Line (Note 7)                                                                             2,926,114
     Interest Expense                                                                                                   (708,504)
     Other Expense                                                                                                       (69,297)
     Other Income                                                                                                         26,154
----------------------------------------------------------------------------------------------------------------------------------
Total Other Income                                                                                                     2,174,467
----------------------------------------------------------------------------------------------------------------------------------

Net Loss                                                                                                             $  (582,699)
                                                                                                                     ==============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS                                                  VISAER, INC. AND SUBSIDIARIES
==================================================================================================================================

FOR THE YEAR ENDED DECEMBER 31                                                                                              2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                  <C>
Net Loss                                                                                                             $  (582,699)

Other Comprehensive Loss:
     Foreign Currency Translation Adjustment                                                                             (52,778)
----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Loss                                                                                             $  (635,477)
                                                                                                                     =============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-35
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIENCY        VISAER, INC. AND SUBSIDIARIES
===================================================================================================================================

                                                                  REDEEMABLE CONVERTIBLE PREFERRED STOCK
                              -----------------------------------------------------------------------------------------------
                               CONVERTIBLE PREFERRED   CONVERTIBLE PREFERRED   CONVERTIBLE PREFERRED   CONVERTIBLE PREFERRED
                                     SERIES A                SERIES B                SERIES C                SERIES D
                               ----------------------- ----------------------- ----------------------- -----------------------
                                 NUMBER     $.001 PAR    NUMBER    $.001 PAR    NUMBER    $.001 PAR     NUMBER    $.001 PAR
                               OF SHARES     VALUE     OF SHARES     VALUE     OF SHARES    VALUE      OF SHARES    VALUE
                               ----------   ---------- ----------  ----------- ---------  ------------ ---------  ------------
<S>                            <C>          <C>         <C>        <C>         <C>        <C>           <C>       <C>
Balance as of December 31, 1999 1,881,721   $5,250,000  1,628,700  $  879,500    337,331   $2,250,000    369,125   $  790,768

Exercise of Stock Options               -            -          -           -          -            -          -            -
Accretion of Series D
     Convertible Preferred Stock        -            -          -           -          -            -          -      287,250
Repurchase of Convertible
     Preferred Stock             (358,423)  (1,000,000)         -           -   (337,331)  (2,250,000)  (335,569)  (1,048,985)
Issuance of Common Stock
     Warrants                           -            -          -           -          -            -          -            -
Net Loss                                -            -          -           -          -            -          -            -
Foreign Currency Translation
     Adjustment                         -            -          -           -          -            -          -            -
                               ----------   ---------- ----------  ----------- ---------  ------------ ---------  ------------
Balance as of December 31, 2000 1,523,298   $4,250,000  1,628,700  $  879,500          -       $    -     33,556    $  29,033
                               ==========   ========== ==========  =========== =========  ============ =========  ============


<Caption>
                                                        STOCKHOLDERS' DEFICIENCY
                                -------------------------------------------------------------------------------
                                     COMMON STOCK                      FOREIGN
                                ----------------------  ADDITIONAL    CURRENCY                      TOTAL
                                  NUMBER    $.001 PAR     PAID-IN    TRANSLATION   ACCUMULATED   STOCKHOLDERS'
                                OF SHARES     VALUE       CAPITAL    ADJUSTMENT      DEFICIT      DEFICIENCY
                                ----------  ----------  -----------  ------------  ------------  ------------
<S>                             <C>         <C>         <C>          <C>           <C>           <C>
Balance as of December 31, 1999    958,146    $    958   $  318,677    $   5,349   $(18,064,654) $(17,739,670)

Exercise of Stock Options            7,043           7        2,218            -              -         2,225
Accretion of Series D
     Convertible Preferred Stock         -           -            -            -       (287,250)     (287,250)
Repurchase of Convertible
     Preferred Stock                     -           -    4,298,984            -              -     4,298,984
Issuance of Common Stock
     Warrants                            -           -       69,643            -              -        69,643
Net Loss                                 -           -            -            -       (582,699)     (582,699)
Foreign Currency Translation
     Adjustment                          -           -            -      (52,778)             -       (52,778)
                                ----------  ----------  -----------  ------------  ------------  ------------

Balance as of December 31, 2000    965,189    $    965   $4,689,522    $ (47,429)  $(18,934,603) $(14,291,545)
                                ==========  ==========  ===========  ============  ============  ============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-36
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS                                                          VISAER, INC. AND SUBSIDIARIES
===================================================================================================================================

FOR THE YEAR ENDED DECEMBER 31                                                                                               2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Cash Flows from Operating Activities:
     Net Loss                                                                                                     $      (582,699)
     Adjustments to Reconcile Net Loss to Net Cash Used in
        Operating Activities:
            Depreciation and Amortization                                                                                 399,319
            Gain of Sale of Product Line                                                                               (2,926,114)
            Deferred Income Taxes                                                                                        (106,000)
            Interest Expense Capitalized to Debt                                                                          205,070
            Non-Cash Amortization of Debt Discount                                                                        191,803
            Decrease in Accounts Receivable                                                                             4,342,214
            Increase in Prepaid Expenses and Other Current Assets                                                        (226,323)
            Increase in Other Assets                                                                                      (50,577)
            Increase in Accounts Payable                                                                                1,145,298
            Decrease in Accrued Expenses                                                                                 (539,585)
            Decrease in Deferred Revenues                                                                              (2,854,414)
            Decrease in Deferred Rent                                                                                     (15,854)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities                                                                                  (1,017,862)
----------------------------------------------------------------------------------------------------------------------------------

Cash Flows Used in Investing Activities:
     Acquisition of Property and Equipment                                                                                (76,978)
----------------------------------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities:
     Proceeds from Issuance of Notes Payable - Stockholders                                                               905,000
     Repayments Under Line of Credit                                                                                     (356,831)
     Principal Repayments of Capital Lease Obligations                                                                    (49,356)
     Proceeds from Issuance of Common Stock                                                                                 2,225
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities                                                                                 501,038
----------------------------------------------------------------------------------------------------------------------------------

Effect of Foreign Currency Exchange Rate Changes on Cash                                                                   24,657
----------------------------------------------------------------------------------------------------------------------------------

Net Decrease in Cash                                                                                                     (569,145)
                                                                                                                  ----------------

Cash, Beginning                                                                                                           738,071
                                                                                                                  ----------------

Cash, Ending                                                                                                      $       168,926
                                                                                                                  ================

Supplemental Disclosures of Cash Flow Information:

     Cash Paid During the Year for:
        Interest                                                                                                  $       289,251

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
</TABLE>

         During the year ended December 31, 2000, the Company financed the
         acquisition of certain property and equipment with capital lease
         obligations in the amount of $48,735.

See Notes 7 and 12 for additional disclosure of non-cash investing and financing
activities.


The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS          VISAER INC. AND SUBSIDIARIES
===============================================================================


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation: The consolidated financial statements include the
accounts of VISaer, Inc. (the Parent) and its wholly owned subsidiaries, VISaer
(UK) Ltd., VISaer (IRL) Ltd., Visibility, Ltd. and Visibility Europe Ltd. (the
Subsidiaries). On July 28, 2000, under the terms of a share purchase agreement
(the Share Purchase Agreement) with a third party, the Parent effectively sold
its net assets, operations and contracts relating to its Engineer-to-Order (ETO)
product line of business, which included the sale of Visibility Europe, Ltd.
(Note 7). Accordingly, the consolidated financial statements include the
activity of Visibility Europe Ltd. and the Parents' ETO product line of business
operations only through July 28, 2000. Under the terms of the Share Purchase
Agreement, the Parent also sold its rights to the "Visibility" name and, as
such, the Parent's name was changed from Visibility, Inc. to VISaer, Inc.,
effective on August 1, 2000. All significant inter-company balances and
transactions of the Parent and Subsidiaries (the Company) have been eliminated
in consolidation.

Reporting Entity: VISaer Inc. was originally incorporated in 1979 as a
Massachusetts corporation and, effective October 25, 1996, became incorporated
as a Delaware corporation. VISaer (UK), Ltd. was incorporated on June 27, 2000,
as an English corporation. VISaer (IRL) Ltd. was incorporated on August 16,
1994, as an Irish corporation. Visibility, Ltd. was incorporated on May 15,
1985, as a Canadian corporation. Visibility Europe Ltd. was incorporated on
September 18, 1996, as an English corporation. Through July 28, 2000, the
principal business activities of the Company included the development,
marketing, sale and support of an integrated line of business application
software for manufacturers and aviation maintenance, repair and overhaul
companies. Subsequent to the Parent's sale of its ETO product line of business
on July 28, 2000 (Note 7), the Company's business activities are focused
primarily toward the development, marketing, sale and support of the "VISaer",
an integrated, enterprise resource planning (ERP) system suited to the specific
"Service-to-Order" needs of aerospace maintenance, repair and overhaul (MRO)
companies, as well as various technical records management and other consulting
services. The Company's customers are located worldwide.

The Company is subject to a number of risks similar to those of other companies
in a similar stage of development, such as the need to obtain adequate
financing, dependence on key individuals, the need for products, and competition
from other companies.

The Company has experienced losses from operations, reduction in liquidity and
is in an accumulated deficit and negative working capital position. The Company
also remains primary obligor as of December 31, 2000 on certain liabilities in
the amount of approximately $4,500,000 assumed by a third party (the Buyer)
under the Share Purchase Agreement, including certain liabilities in litigation
as of December 31, 2000 (Note 7). Included in the liabilities assumed by the
Buyer was the Parent's line of credit arrangement with a financial institution
with a balance outstanding as of December 31, 2000 in the amount of
approximately $1,600,000. This line of credit is currently in default and has
been terminated by the financial institution effective March 30, 2001, at which
time all outstanding obligations under the line of credit are to become due and
payable (Note 8).

In regard to these conditions, the Buyer and the Company are working toward
arranging a renegotiated payment plan with the financial institution for the
Buyer to repay the balance outstanding under the line of credit. Also, the
Company may attempt to seek a new relationship with a bank to provide the
Company with additional working capital. However, there can be no assurance that
the Company and the Buyer will be successful in renegotiating the terms of the
line of credit, or that additional bank financing will be available or on terms
favorable to the Company. Management estimates the Company's backlog as of
February 27, 2001, to be approximately $2,000,000 (unaudited), which represents
contracts for full systems implementations, including licensed software,
services and software maintenance. The Company has developed an operating plan
designed to control operating costs, increase revenues, sustain gross margins
and provide for additional procedures to monitor and manage the payment of
liabilities assumed by the Buyer. Through December 31, 2000, the Company's
largest investors have provided funding to the Company under various equity and
debt financings and have stated that they have the positive ability, intent and
commitment to continue to fund or arrange sufficient funding for cash
requirements that the Company may have through at least December 31, 2001.

Property and Equipment: Property and equipment are recorded at cost.
Depreciation is calculated using straight-line and accelerated methods for both
financial and income tax reporting purposes over the estimated useful and
statutory lives of the related assets, respectively.


                                      S-38
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Software Development Costs: The Company capitalizes software development costs
after technological feasibility of the product has been established. Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expense. The Company did not capitalize software
development costs during the year ended December 31, 2000, as the costs incurred
after reaching technological feasibility was established were immaterial.

Deferred Rent: The Company records rent expense related to non-cancelable lease
agreements based on a constant periodic rent over the term of the lease. The
excess of the cumulative rent expense incurred over the cumulative amounts due
under the lease agreement is deferred and recognized over the term of the
non-cancelable lease.

Revenue Recognition: The Company reports under the provisions of Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition". In accordance with SOP
No. 97-2, the Company recognizes revenue from non-cancelable software licenses
upon delivery, provided evidence of an arrangement exists, the fee is fixed and
determinable, collection is probable and no further significant obligations
remain at the time of delivery. Post contract maintenance and support service
fees are typically billed separately and are recognized on a straight-line basis
over the life of the applicable agreement. Revenues from consulting services are
recognized upon performance of the services. Revenues from equipment sales are
recognized when the products are shipped. Revenues from long-term service and
development contracts are recognized on the percentage of completion method.

Income Taxes: The Company reports under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
require an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.

Research and Development: The Company expenses all research and development
expenses as incurred.

Foreign Currency Translation: The financial statements of VISaer, (UK) Ltd. and
Visibility Europe, Ltd. are translated into United States dollars in accordance
with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at the current exchange rates in effect as of the balance sheet date.
Common stock and additional paid-in capital are translated at historical
exchange rates. Income statement accounts are translated at the average exchange
rates for the related periods. Translation adjustments arising from differences
in exchange rates are recorded as a separate component of stockholders'
deficiency. Transaction gains and losses are recorded in the consolidated
statement of operations. The functional currency of the Parent's other foreign
subsidiaries, VISaer (IRL) Ltd. and Visibility, Ltd., is the U.S. dollar. Gains
and losses for these subsidiaries resulting from the remeasurement of foreign
currencies into U.S. dollars are recorded in the consolidated statement of
operations and such amounts are immaterial.

Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense incurred by the Company during the year ended December 31,
2000, amounted to $99,798.

Comprehensive Loss: Comprehensive loss consists of changes in stockholders'
deficiency not related to transactions with stockholders. They include net loss
and certain other comprehensive loss items that are not presented in the
consolidated statement of operations, but which are recorded as a separate
component of stockholders' deficiency, net of the related tax effect. As of
December 31, 2000, these items of other comprehensive loss include foreign
currency translation adjustments.

Use of Estimates: Management has used estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities in its preparation of the consolidated financial statements in
accordance with generally accepted accounting principles. Actual results
experienced by the Company may differ from those estimates.


                                      S-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


2.  PROPERTY AND EQUIPMENT:

As of December 31, 2000, property and equipment consists of the following:

<TABLE>
<S>                                           <C>
Computer Equipment                            $     248,620
Leasehold Improvements                              176,104
Telephone System                                    159,021
Purchased Software                                  100,293
Furniture and Fixtures                               29,281
                                                -----------
                                                    713,319
Less:  Accumulated
    Depreciation                                    506,672
                                                -----------

                                              $     206,647
                                              =============
</TABLE>


3.  CAPITAL LEASE OBLIGATIONS:

The Parent is a party to various non-cancelable capital lease agreements, which
expire at various dates through October, 2003. As of December 31, 2000, the
total future minimum and present value lease payments due under these agreements
are as follows:

<TABLE>
<CAPTION>
 YEAR ENDED
DECEMBER 31,
------------
<S>                                          <C>
     2001                                    $       67,008
     2002                                            35,061
     2003                                            13,616
                                             --------------
                                                    115,685

Less:  Amount Representing Interest                  13,942
                                             --------------

Present Value of Net Minimum Lease
    Payments                                        101,743

Current Maturities of Capital Lease
    Obligations                                      57,137
                                             --------------

Capital Lease Obligations, Net of
    Current Maturities                       $       44,606
                                             ==============
</TABLE>

4.  INCOME TAXES:

The provision for income taxes during the year ended December 31, 2000, consists
of the following:

<TABLE>
    <S>                                       <C>
    Current                                   $     106,000
    Deferred                                       (106,000)
                                              -------------

                                              $           -
                                              =============
</TABLE>

As discussed in Note 1, the Company reports under the provisions of SFAS 109.
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The temporary differences, which give rise to a
significant portion of the Company's deferred income taxes as of December 31,
2000, are as follows:

<TABLE>
<S>                                           <C>
Deferred Tax Liabilities                      $     211,525
                                              =============

Deferred Gain                                 $   1,845,000
Net Operating Loss Carryforwards                  2,331,000
Tax Credits                                       1,494,000
Deferred Rent                                        44,000
Other Deferred Tax Assets                            34,000
                                              -------------
                                                  5,748,000
Less:  Valuation Allowance                       (5,748,000)
                                              -------------

Total Deferred Tax Assets                     $           -
                                              =============
</TABLE>

The valuation allowance as of December 31, 2000, relates to the uncertainty of
realizing the tax benefits of the deferred tax assets. Nonetheless, some, if not
all, of these deferred tax assets may be available to offset any deferred tax
liabilities as they become otherwise payable.

As of December 31, 2000, the Company has federal and foreign net operating loss
carryforwards of approximately $4,300,000 and $2,700,000, respectively. The
Parent also has federal and state tax credit carryforwards of approximately
$949,000 and $825,000, respectively. Section 382 of the Internal Revenue Code
and the tax laws of certain foreign jurisdictions contain provisions that could
place limitations on the utilization of these net operating loss carryforwards
and tax credits in the event of a change in ownership, as defined.


                                      S-40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


5.  RETIREMENT PLAN:

The Parent maintains a 401(k) retirement plan covering substantially all of its
employees. The plan allows each employee participant an election to defer a
percentage of their compensation up to the maximum allowed for federal income
tax purposes. The Parent contributes 25% of the employee's contribution, up to a
maximum of 6% of each participant's salary. Contributions may be suspended at
the option of the Parent's Board of Directors. During the year ended December
31, 2000, the Parent contributed approximately $64,000 into the plan.


6.  OPERATING LEASE COMMITMENTS:

The Company leases certain facilities, vehicles and equipment under
non-cancelable lease agreements expiring through July 2004, as well as certain
facilities under tenant-at-will agreements. The Parent subleases certain space
in its Wilmington, Massachusetts facility under a tenant-at-will agreement.
During the year ended December 31, 2000, lease expense incurred by the Company
under these lease agreements, net of sublease rental income, amounted to
$391,638.

Future minimum lease payments due under these non-cancelable lease agreements as
of December 31, 2000, are as follows:

<TABLE>
<CAPTION>
 YEAR ENDED
DECEMBER 31,
------------
<S>                                           <C>
     2001                                     $     332,953
     2002                                           320,569
     2003                                           313,465
     2004                                           153,182
                                              -------------

                                              $  1,120,169
</TABLE>


7.  SALE OF PRODUCT LINE:

On July 27, 2000, the Parent formed a new wholly owned subsidiary, ETO, Inc. and
on June 27, 2000, it's former wholly owned subsidiary, Visibility Europe, Ltd.
also formed a new subsidiary, Tribonium, Inc. In connection with the formation
of ETO, Inc., the Parent contributed, at book value, all of its operational
assets and liabilities relating to its ETO product line of business into ETO,
Inc. In connection with the formation by Visibility Europe, Ltd. of Tribonium,
Inc., Visibility Europe, Ltd. contributed, at book value, all of its non-ETO
product line of business operational assets and liabilities into Tribonium, Inc.
Subsequent to such transfer of assets and liabilities, 100% of the stock of
Tribonium, Inc. was spun off from Visibility Europe, Ltd. to the Parent. On July
27, 2000, the name of Tribonium, Inc. was changed to VISaer (UK) Ltd.

On July 28, 2000, under the Share Purchase Agreement, the Parent sold 100% of
its shares in ETO, Inc. and Visibility Europe, Ltd. (the Sold Subsidiaries),
containing all of its net assets, operations and contracts relating to its ETO
product line of business, to the Buyer. The consideration received by the Parent
under this sale transaction consisted solely of the assumption by the buyer of
all of the liabilities contained in the Sold Subsidiaries.

The book value of net assets included in the Sold Subsidiaries on July 28, 2000
consisted of the following:

<TABLE>
<S>                                           <C>
Accounts Receivable                           $   2,642,518
Other Current Assets                                637,247
Property and Equipment, Net                         621,703
Accounts Payable and Accrued Expenses            (4,706,874)
Line of Credit, Plus Accrued Interest            (1,580,239)
Note Payable, Plus Accrued Interest              (1,270,628)
Deferred Revenues                                (3,953,247)
Capital Lease Obligations                          (254,448)
                                               ------------

Excess of Liabilities over Book Value of
   Net Assets Included in Sold Subsidiaries   $  (7,863,968)
                                              =============
</TABLE>

The Parent did not obtain releases from creditors for a substantial portion of
the liabilities and contracts assumed by the Buyer and, consequently, remains
the primary obligor for any such obligations outstanding as of December 31,
2000. Accordingly, the Parent has not derecognized liabilities assumed by the
Buyer for which the Parent continues to be the primary obligor as of December
31, 2000 and has classified them on the accompanying consolidated balance sheet
as "deferred gain." As of December 31, 2000, the balance of deferred gain
consisted of the following liabilities:

<TABLE>
<S>                                           <C>
Accounts Payable and Accrued
   Expenses                                   $   2,020,966
Line of Credit, Plus Accrued
   Interest (Note 8)                              1,618,505
Note Payable, Plus Accrued
   Interest                                         595,626
Deferred Revenues                                   124,976
Capital Lease Obligations                           204,252
                                              -------------

Total Deferred Gain as of
   December 31, 2000                          $   4,564,325
                                              =============
</TABLE>


                                      S-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


7.  SALE OF PRODUCT LINE (CONTINUED):

During the year ended December 31, 2000, the gain recognized by the Parent on
the sale of the ETO product line of business consisted of the following:


<TABLE>
<S>                                           <C>
Excess of Liabilities over Book Value of
   Net Assets Included in Sold Subsidiaries   $   7,863,968

Less:   Deferred Gain as of
             December 31, 2000                   (4,564,325)
        Transaction Costs                          (373,529)
                                              -------------

Gain on Sale of Product Line                  $   2,926,114
                                              =============
</TABLE>

In connection with the Share Purchase Agreement, the Buyer assumed a
subordinated, unsecured note payable agreement between the Parent and Mentec
Limited (Mentec), at which time the outstanding balance, plus accrued interest,
amounted to 1,270,628. The note bears interest at 8% per annum. In connection
with the issuance of this note, the Parent issued 50,000 common stock warrants
at an exercise price of $6.67 per share. The fair value of the warrants was
immaterial. The warrants expire upon the repayment of the note. As of December
31, 2000, the remaining balance outstanding under the note, including accrued
interest and certain expenses, amounted to $595,626. This balance has been
included as deferred gain in the accompanying consolidated balance sheet. During
January 2001, the Parent and the Buyer entered into a settlement agreement with
Mentec, such that the outstanding balance due as of December 31, 2000 would be
repaid by the Buyer in two $200,000 installments on January 25, 2001 and
February 22, 2001, with a third and final installment due on March 22, 2001, for
the remaining balance due. During January and February 2001, the Buyer made
payments in accordance with the terms of the January, 2001 settlement agreement.

During July 2000, a vendor of the Parent filed a lawsuit in the U.S. District
Court, District of Massachusetts for a claim in the amount of $291,567, plus
certain damages and expenses. The lawsuit claims that payment had not been made
for certain invoices provided to the Parent for services performed by the vendor
during 1999. This liability was assumed by the Buyer under the Share Purchase
Agreement and remains outstanding as of December 31, 2000. The outstanding
balance of this liability as of December 31, 2000 in the amount of $291,567 has
been included in the deferred gain - accounts payable in the accompanying
consolidated balance sheet.

8.  DEFERRED GAIN - LINE OF CREDIT:

During March 2000, the Parent entered into a line of credit agreement with a
financial institution, the initial proceeds from which were used to repay and
terminate the Parent's then existing line of credit agreement. The Parent
continues to have 71,685 common stock warrants outstanding with the financial
institution that provided the previous line of credit, which warrants have an
exercise price of $2.79 per share and expire during June 2004. Under the terms
of the new line of credit agreement, borrowings were limited to the lesser of
85% of worldwide eligible accounts receivable or $4,000,000. The line of credit
is collateralized by a first security interest in substantially all assets of
the Parent. Interest on the outstanding balance was calculated at the prime rate
in effect during the borrowing term plus 2%, with a minimum monthly interest
charge of $4,150.

In connection with this line of credit agreement, the Parent issued to the
financial institution 55,363 common stock warrants with an exercise price of
$5.78 per share and an expiration date of March 30, 2007. The fair value of
these warrants was not material.

In connection with the Parent's sale of its ETO product line operations during
July 2000 (Note 7), the Buyer assumed the line of credit, at which time the
outstanding balance, plus accrued interest, amounted to $1,580,239. The Parent
did not obtain a release from the financial institution for the assumption of
this obligation by the Buyer and, accordingly, it remains the primary obligor
under the original agreement. As of December 31, 2000, the outstanding balance
under the line of credit, plus accrued interest, amounted to $1,618,505, and has
been included as deferred gain in the accompanying consolidated balance sheet
(Note 7). As of December 31, 2000, the Parent, as primary obligor, was in
default of its obligations to the financial institution for, among other things,
changes in the nature of its business and the sale of assets under the Share
Purchase Agreement. The default interest rate under the line of credit is prime
plus 4%. Based on the defaults under the line of credit agreement, during
January 2001, the financial institution terminated the line of credit agreement
effective on its maturity date of March 30, 2001, at which time all outstanding
obligations under the line of credit are to become due and payable. The Buyer
and the Company are working toward arranging a renegotiated payment plan for the
Buyer to repay the balance outstanding under the line of credit. However, there
can be no assurance that the Company and the Buyer will be successful in
renegotiating the terms of the line of credit.


                                      S-42
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


9.  CROSS LICENSE, NON-COMPETITION AND NON-DISCLOSURE AGREEMENT:

In connection with the closing of the Share Purchase Agreement (Note 7), the
Parent entered into a cross license, non-competition and non-disclosure
agreement with the Buyer. Both, the software products under the ETO line of
business sold under the Share Purchase Agreement and the software products under
the MRO line of business retained by the Parent, generally share much of the
same source code contained in the ETO software products. Accordingly, the Buyer
granted the Parent an exclusive, royalty-free, worldwide, perpetual right to
license the ETO software for use solely in connection with the MRO line of
business, which provides that the Buyer and the Parent do not license products
to distributors that are in direct competition with each other. The Parent
retained exclusive ownership and all rights to the MRO software products. This
agreement also provides for, among other things, the licensing of certain
additional products and potential royalties thereon based on which parties are
involved in the future development of such products, as defined. In addition,
this agreement provides that, among other matters, the Buyer and the Parent will
generally not compete within each other's lines of businesses for a period of
five years.


10.  PREFERRED STOCK:

SERIES A, B, C AND D REDEEMABLE CONVERTIBLE PREFERRED STOCK:

Series D: Series D preferred stock consists of 335,569, 16,778 and 16,778
authorized shares of Series D-1, D-2 and D-3 redeemable convertible preferred
stock, respectively. As of December 31, 2000, 16,778 shares of each of Series
D-2 and D-3 redeemable convertible preferred stock are outstanding.

Dividends: All classes of preferred stockholders are entitled to receive
dividends or other distributions equal to the dividend or distributions that
would be received had the preferred stockholders converted their shares into
common stock.

Voting: All classes of preferred stockholders are entitled to vote on an
as-converted basis together with common stockholders as one class.

Conversion: All classes of preferred stockholders are entitled to convert, at
the option of the holder, each share of preferred stock into one share of common
stock, adjusted for certain dilutive events, as defined. In the event of an
initial public offering with a per share price of less than $15.00, each holder
of the preferred stock will receive a cash payment equal to the liquidation
preference (the IPO Preference Amount) and all shares will then convert
automatically into common stock. In the event of a qualified offering with a per
share price greater than or equal to $15.00, the preferred shares automatically
convert into common stock without any IPO Preference Amount.

Liquidation: In the event of a voluntary or involuntary liquidation, dissolution
or winding up of the Parent, the holders of Series A, B and C redeemable
convertible preferred stock are entitled to receive a $2.79, $.54 and $6.67 per
share liquidation preference, respectively, plus accrued and unpaid dividends.
The holders of Series D-1, D-2 and D-3 redeemable convertible preferred stock
are entitled to receive a $5.78, $.54 and $2.40 per share liquidation
preference, respectively, plus accrued and unpaid dividends. If the assets
available for distribution are insufficient to permit payment of the liquidation
preference amount, then the holders of the preferred stock shall share ratably
in any distributions, as defined. After distribution to the preferred
stockholders of the full liquidation preference amount, any remaining assets
available for distribution are distributed both to holders of common stock and
preferred stock on a pro rata basis, with the exception of holders of Series D
redeemable convertible preferred stock, assuming the preferred stock is
converted into common stock. Any dissolution or liquidation resulting from an
event of sale, as defined, with proceeds of greater than or equal to $15.00 per
share on an as-converted basis, will not result in distributions in accordance
with the foregoing; rather, all preferred stock will be converted into common
stock and shareholders will participate in the proceeds on a pro rata basis.

Redemption: As of March 31, 2003, the preferred stockholders may require the
Parent, with written notice of at least 30 days, to redeem the outstanding
preferred stock. The redemption price equals the liquidation preference of the
series held, plus all accrued but unpaid dividends.


                                      S-43
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


10.  PREFERRED STOCK (CONTINUED):

Other Restrictions: The Parent is restricted, without the approval of 51% of the
holders of preferred stock, from issuing additional shares of preferred stock,
common stock or convertible debt, altering the terms of outstanding preferred
stock, amending its articles of incorporation, selling or otherwise disposing of
all or substantially all of its assets, or voluntarily dissolving or otherwise
liquidating the Company.

Accretion: In connection with the issuance of notes payable to certain
stockholders of the Parent in the aggregate amount of $1,100,000 (Note 12), the
Parent allowed such stockholders to convert 369,125 shares of common stock held
by them into 335,569, 16,778 and 16,778 shares of Series D-1, D-2 and D-3
redeemable convertible preferred stock, respectively, and issued 415,847 common
stock warrants to those stockholders. The warrants expire during September 2002,
have an exercise price of $.60 and were valued using the Black-Scholes option
pricing model. The value of the consideration was allocated to the debt and
equity securities based on their relative fair values. The discount on preferred
stock is being accreted over the term of the securities. The unaccreted discount
on Series D-2 and D-3 redeemable convertible preferred stock outstanding as of
December 31, 2000, amounted to $20,294.

Repurchase of Preferred Stock: During September 2000, the Parent repurchased
358,423, 337,331 and 335,569 shares of its Series A, C and D-1 redeemable
convertible preferred stock, respectively, and 654,952 of its common stock
warrants, all of which had an exercise price of $.60, for aggregate
consideration in the amount of $1. In connection with this transaction, the
Parent reduced the balance of its redeemable convertible preferred stock, net of
unaccreted discount, with a corresponding increase to additional paid-in capital
in the aggregate amount of $4,298,984.


11.  CONTINGENCIES:

During January 2001, a vendor filed a lawsuit against the Parent and the Buyer
for a claim in the amount of $137,397, plus certain damages and expenses.
Obligations under the Parent's contract with this vendor were assumed by the
Buyer under the Share Purchase Agreement. The lawsuit claims that the Parent
breached its contract with the vendor for failing to make license fee payments
due under the terms of the Parent's contract with the vendor in the amount of
$137,397 and that the Parent wrongfully transferred its rights and obligations
under that contract to the Buyer under the Share Purchase Agreement. The Parent
and the Buyer are defending this lawsuit and the management of the Parent is of
the opinion that the outcome of this litigation will not have a material adverse
effect on the accompanying consolidated balance sheet.


                                      S-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


12.  NOTES PAYABLE - STOCKHOLDERS:

As of December 31, 2000, notes payable - stockholders consists of the following:

Seven, prime plus 2% unsecured notes payable to certain stockholders in the
amount of $1,100,000, plus aggregate accrued interest in the amount of $152,206.
During May 2000, maturities were extended from January 2001 to May 2003. In
connection with the issuance of these notes and the conversion of 369,125 shares
of common stock held by such stockholders into 335,569, 16,778 and 16,778 shares
of Series D-1, D-2 and D-3 redeemable convertible preferred stock, respectively,
during 1999, the Parent issued 415,847 common stock warrants to such
stockholders. The warrants, which expire during September 2002, have an exercise
price of $.60, and were valued using the Black-Scholes option pricing model. The
value of the consideration received was allocated to the debt and equity
instruments based on their relative fair values. The original debt discount on
these notes in the amount of $478,907 is being amortized over the extended term
of the notes to interest expense. Amortization of the debt discount on these
notes during the year ended December 31, 2000 amounted to $177,875. The
aggregate balance outstanding under these notes as of December 31, 2000, is net
of unamortized debt discount of $174,861. During September 2000, the Parent
repurchased 277,231 of the common stock warrants originally issued with these
notes (Note 10). $ 1,077,345

Nine, prime plus 2% unsecured notes payable to certain stockholders in the
amount of $650,000, plus aggregate accrued interest in the amount of $42,712,
mature in May 2003. In connection with the issuance of these notes, the Parent
issued 818,396 common stock warrants. The warrants, which expire during May
2003, have an exercise price of $.60, and were valued using the Black-Scholes
option pricing model. The value of the consideration received was allocated to
the debt and equity instruments based on their relative fair values. The
original debt discount on these notes in the amount of $69,643 is being
amortized over the term of the notes to interest expense. Amortization of the
debt discount on these notes during the year ended December 31, 2000 amounted to
$13,928. The aggregate balance outstanding under these notes as of December 31,
2000, is net of unamortized debt discount in the amount of $55,715. During
September 2000, the Parent repurchased 377,721 of the common stock warrants
originally issued with these notes (Note 10). 636,997

Two, 10% notes payable to certain stockholders, in the amount of $402,555, plus
aggregate accrued interest in the amount of $150,959. During May 2000,
maturities were extended from January 2001 to May 2003. The notes are
collateralized by the Parent's accounts receivable. 553,514


                                      S-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


12.  NOTES PAYABLE - STOCKHOLDERS (CONTINUED):

<TABLE>
<S>                                                                             <C>
Five, 12% unsecured notes payable to certain stockholders in the amount of
$255,000, plus aggregate accrued interest in the amount of $8,750, due upon
demand.                                                                                 263,750
                                                                                ---------------

Total Notes Payable - Stockholders                                                    2,531,606

Less:  Current Portion                                                                  263,750
                                                                                ---------------

Long-Term Portion of Notes Payable - Stockholders                               $     2,267,856
                                                                                ===============
</TABLE>

Maturities of notes payable - stockholders as of December 31, 2000, consist of
the following:

<TABLE>
<CAPTION>
             YEAR ENDED
            DECEMBER 31,
            ------------
            <S>                         <C>
                2001                    $       263,750
                2002                                  -
                2003                          2,498,432
                                        ---------------
                                        $     2,762,182
                                        ===============
</TABLE>

13.  FOREIGN OPERATIONS:

Condensed audited information of the Parent's European Subsidiaries as of and
for the year ended December 31, 2000, is summarized as follows:
<TABLE>
  <S>                                   <C>
  Revenues                              $ 2,981,758

  Net Loss                              $(1,390,119)

  Total Assets                          $   823,396

  Stockholders' Deficiency              $(2,883,649)
</TABLE>

Activity in the Canadian subsidiary, Visibility, Ltd., was not material during
the year ended December 31, 2000.


                                      S-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
                                                    VISAER INC. AND SUBSIDIARIES
================================================================================


14.  STOCK OPTION PLANS:

As of December 31, 2000, 1,252,500 shares of the Parent's common stock are
reserved for issuance or grant under the Parent's 1996 and 1994 stock option
plans. The options may be granted to certain employees and directors of the
Parent and Subsidiaries at exercise prices not less than the fair market value
of the stock on the date of grant. The fair market value, rate of exercisability
and expiration dates of the options granted are determined by the Board of
Directors at the time of the grant. Options generally vest over a period
determined by the Board of Directors and expire ten years from the date of
grant.

Stock option activity during the year ended December 31, 2000, is as follows:

<TABLE>
<CAPTION>
                                                                                                  Weighted
                                                                                Exercise          Average
                                                              Number of       Price Range     Exercise Price      Expiration
                                                               Shares          Per Share         Per Share           Dates
------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                <C>              <C>                 <C>
Outstanding as of December 31, 1999                            895,001       $0.20 - $1.67         $0.46           2004-2009

Stock Options Granted                                           55,800           $0.60             $0.60             2010
Stock Options Exercised                                         (7,043)      $0.20 - $0.60         $0.48           2007-2008
                                                          --------------------------------------------------------------------

Outstanding as of December 31, 2000                            943,758       $0.20 - $1.67         $0.47           2002-2010
                                                          ====================================================================

Exercisable as of December 31, 2000                            463,529       $0.20 - $1.67         $0.47           2002-2010
                                                          ====================================================================
</TABLE>

During the year ended December 31, 2000, the employment of certain employees of
the Parent was terminated as a result of the transaction under the Share
Purchase Agreement discussed in Note 7. The expiration dates of 66,509 vested
options held by such terminated employees were extended by the Board of
Directors from three months to eighteen months after the termination of
employment. The weighted average exercise price of these extended options was
$.89 per share.

During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the
Company has elected to continue following the guidance of Accounting Principles
Board (APB) No. 25 for measurement and recognition of stock-based transactions
with employees and to adopt the disclosure only provisions of SFAS No. 123. If
the Company had elected to recognize compensation costs for stock-based
compensation plans with employees based on the fair market value at the grant
dates for awards under those plans consistent with the method prescribed under
SFAS No. 123, such compensation expense would not have been material to the
consolidated statement of operations during the year ended December 31, 2000.
The fair value of the stock options, at the date of grant used to compute such
additional compensation was calculated under the Black-Scholes option pricing
model as described in SFAS No. 123 using the following assumptions: (i)
risk-free interest rate of 5.75% (ii) expected life of five years; (iii) no
dividend yield and (iv) no volatility. The weighted average fair value at the
date of grant for options granted during the year ended December 31, 2000, was
$0.15 per option.

15.  CONCENTRATION OF CREDIT RISK:

Financial instruments that potentially expose the Company to concentrations of
credit risk include trade accounts receivable. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. The Company maintains reserves for potential credit
losses.

As of December 31, 2000, three customers represented approximately 25%, 16% and
13%, respectively, of gross accounts receivable.


                                      S-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE MEMBERS OF VISAER (UK) LIMITED


We have audited the accompanying balance sheet of VISaer (UK) Limited as of 31
December 2000 and the related profit and loss account for the period then ended.
These financial statements are the responsibility of the company's directors.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VISaer (UK) Limited as of 31
December 2000 and the results of its operations for the period then ended in
conformity with accounting principles generally accepted in the United Kingdom.



/S/ HACKER YOUNG
Manchester, England

20 March 2002


                                      S-48
<PAGE>

REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Shareholders,
Visaer (Irl) Limited


We have audited the accompanying balance sheet of Visaer (Irl) Limited as of
December 31, 2000, and the related profit and loss account for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Visaer (Irl) Limited as of
December 31, 2000, and the results of its operations for the year then ended in
conformity with accounting principles generally accepted in Ireland.



/s/Arthur Andersen
Dublin, Ireland

March 20, 2002


                                      S-49
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Visibility Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Visibility Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' deficit and cash flows for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Visibility Inc. and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United
States.

                                        /s/ Arthur Andersen LLP


Boston, Massachusetts
March 15, 2000


                                      S-50
<PAGE>

VISIBILITY INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1999

<TABLE>
<CAPTION>

ASSETS                                                                                                     1999
<S>                                                                                                    <C>
Current Assets:
    Cash and cash equivalents                                                                          $    738,071
    Accounts receivable, net of allowance for doubtful accounts of $373,861                               7,977,903
    Prepaid expenses and other current assets                                                               461,377
                                                                                                       ------------
            Total current assets                                                                          9,177,351
Property and Equipment, net                                                                               1,063,573
Other Assets                                                                                                 44,734
                                                                                                       ------------
            Total assets                                                                               $ 10,285,658
                                                                                                       ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
    Short-term debt                                                                                    $  2,923,370
    Current portion of capital lease obligations                                                            135,368
    Accounts payable                                                                                      3,374,419
    Accrued expenses                                                                                      2,647,204
    Deferred revenue                                                                                      7,801,751
                                                                                                       ------------
            Total current liabilities                                                                    16,882,112
Notes Payable to Shareholders                                                                             1,299,373
Capital Lease Obligations                                                                                   221,444
Deferred Rent                                                                                               124,085
Deferred Income Taxes                                                                                       328,046
                                                                                                       ------------
            Total liabilities                                                                            18,855,060
                                                                                                       ------------
Commitments and Contingencies (Note 10)

Redeemable Convertible Preferred Stock
    Series A redeemable convertible preferred stock, $0.001 par value-
      Authorized, issued and outstanding--1,881,721 shares, at redemption value
        (liquidation preference of $5,250,000)                                                            5,250,000
    Series B redeemable convertible preferred stock, $0.001 par value-
      Authorized, issued and outstanding--1,628,700 shares, at redemption value
        (liquidation preference of $879,500)                                                                879,500
    Series C redeemable convertible preferred stock, $0.001 par value-
      Authorized, issued and outstanding--337,331 shares, at redemption value
        (liquidation preference of $2,250,000)                                                            2,250,000
    Series D redeemable convertible preferred stock, $0.001 par value-
      Authorized, issued and outstanding--369,125 shares (redemption value and
        liquidation preference of $1,988,916)                                                               790,768
                                                                                                       ------------
            Total redeemable convertible preferred stock                                                  9,170,268

Stockholders' Deficit
    Common stock, $0.001 par value-
      Authorized--15,000,000 shares
      Issued and outstanding--958,147 shares                                                                    958
    Additional paid-in capital                                                                              318,677
    Accumulated deficit                                                                                 (18,064,654)
    Accumulated other comprehensive income                                                                    5,349
                                                                                                       ------------
            Total stockholders' deficit                                                                 (17,739,670)
                                                                                                       ------------
            Total liabilities, redeemable convertible preferred stock and stockholders' deficit        $ 10,285,658
                                                                                                       ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-51
<PAGE>

VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                             1999                1998
<S>                                                                     <C>                  <C>
Revenues:
    Software licenses                                                   $  7,088,950         $10,580,620
    Maintenance and support services                                      14,504,997          15,648,548
    Hardware equipment sales                                               2,616,061           3,963,723
                                                                        ------------         -----------

                                                                          24,210,008          30,192,891
                                                                        ------------         -----------

Cost of Revenues:
    Software licenses                                                        942,403           2,140,600
    Maintenance and support services                                       9,050,259           8,874,150
    Hardware equipment sales                                               2,129,342           3,208,613
                                                                        ------------         -----------

                                                                          12,122,004          14,223,363
                                                                        ------------         -----------

            Gross profit                                                  12,088,004          15,969,528

Operating Expenses:
    Selling and marketing                                                  7,757,451           5,928,999
    Research and development                                               5,511,591           6,628,824
    General and administrative                                             2,455,290           2,372,088
                                                                        ------------         -----------

                                                                          15,724,332          14,929,911
                                                                        ------------         -----------

            (Loss) income from operations                                 (3,636,328)          1,039,617

Interest Expense, net (includes amortization of debt discount of            (553,384)
$126,171 in 1999 (Note 7))                                                                      (315,392)

Other (Expense) Income, net                                                  (35,435)             19,751
                                                                        ------------         -----------

            (Loss) income before provision for income taxes               (4,225,147)            743,976

Provision for Income Taxes                                                        --              65,000
                                                                        ------------         -----------

            Net (loss) income                                           $ (4,225,147)        $   678,976
                                                                        ============         ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-52
<PAGE>

VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Deficit
For the Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                               CONVERTIBLE               CONVERTIBLE              CONVERTIBLE
                                                             PREFERRED STOCK           PREFERRED STOCK         PREFERRED STOCK
                                                                 SERIES A                  SERIES B                SERIES C
                                                           SHARES        AMOUNT       SHARES      AMOUNT     SHARES       AMOUNT
<S>                                                      <C>           <C>          <C>           <C>        <C>         <C>
Balance, December 31, 1997                               1,881,721     5,250,000    1,628,700     879,500    337,331     2,250,000

    Comprehensive loss                                          --            --           --          --         --            --

    Net loss                                                    --            --           --          --         --            --
    Foreign currency translation adjustment                     --            --           --          --         --            --

    Comprehensive loss                                          --            --           --          --         --            --
                                                         ---------    ----------    ---------    --------    -------    ----------


Balance, December 31, 1998                               1,881,721     5,250,000    1,628,700     879,500    337,331     2,250,000
    Exercise of stock options                                   --            --           --          --         --            --
    Conversion of common stock to Series D
       convertible preferred stock                              --            --           --          --         --            --
    Accretion of Series D convertible preferred stock           --            --           --          --         --            --
    Issuance of common stock warrants                           --            --           --          --         --            --
    Comprehensive loss                                          --            --           --          --         --            --
    Net loss                                                    --            --           --          --         --            --
    Foreign currency translation adjustment                     --            --           --          --         --            --

    Comprehensive loss                                          --            --           --          --         --            --
                                                         ---------    ----------    ---------    --------    -------    ----------

Balance, December 31, 1999                               1,881,721    $5,250,000    1,628,700    $879,500    337,331    $2,250,000
                                                         =========    ==========    =========    ========    =======    ==========

<CAPTION>
                                                             CONVERTIBLE
                                                            PREFERRED STOCK                               ADDITIONAL
                                                               SERIES D              COMMON SHARES         PAID-IN
                                                          SHARES     AMOUNT       SHARES        AMOUNT     CAPITAL
<S>                                                      <C>        <C>          <C>           <C>       <C>
Balance, December 31, 1997                                    --          --     1,189,669       1,190       452,397

    Comprehensive loss                                        --          --            --          --            --

    Net loss                                                  --          --            --          --            --
    Foreign currency translation adjustment                   --          --            --          --            --

    Comprehensive loss                                        --          --            --          --            --
                                                         -------    --------    ----------     -------     ---------


Balance, December 31, 1998                                    --          --     1,189,669       1,190       452,397
    Exercise of stock options                                 --          --       137,603         137        30,562
    Conversion of common stock to Series D
       convertible preferred stock                       369,125     643,558      (369,125)       (369)     (221,106)
    Accretion of Series D convertible preferred stock         --     147,210            --          --            --
    Issuance of common stock warrants                         --          --            --          --        56,824
    Comprehensive loss                                        --          --            --          --            --
    Net loss                                                  --          --            --          --            --
    Foreign currency translation adjustment                   --          --            --          --            --

    Comprehensive loss                                        --          --            --          --            --
                                                         -------    --------    ----------     -------     ---------

Balance, December 31, 1999                               369,125    $790,768       958,147     $   958     $ 318,677
                                                         =======    ========    ==========     =======     =========


<CAPTION>

                                                                          ACCUMULATED
                                                                             OTHER                           TOTAL
                                                        COMPREHENSIVE    COMPREHENSIVE  ACCUMULATED     STOCKHOLDERS'
                                                        INCOME (LOSS)    INCOME (LOSS)    DEFICIT           DEFICIT
<S>                                                     <C>              <C>            <C>             <C>
Balance, December 31, 1997                                                  (4,240)     (14,371,273)     (13,921,926)

    Comprehensive loss                                                          --               --               --

    Net loss                                            $     678,976           --          678,976          678,976
    Foreign currency translation adjustment                     6,054        6,054               --            6,054
                                                        -------------
    Comprehensive loss                                  $     685,030           --               --               --
                                                        =============       ------     ------------     ------------


Balance, December 31, 1998                                                   1,814      (13,692,297)     (13,236,896)
    Exercise of stock options                                                   --               --           30,699
    Conversion of common stock to Series D
       convertible preferred stock                                              --               --         (221,475)
    Accretion of Series D convertible preferred stock                           --         (147,210)        (147,210)
    Issuance of common stock warrants                                           --               --           56,824
    Comprehensive loss                                                          --               --               --
    Net loss                                            $  (4,225,147)          --       (4,225,147)      (4,225,147)
    Foreign currency translation adjustment                     3,535        3,535               --            3,535
                                                        -------------
    Comprehensive loss                                  $  (4,221,612)          --               --               --
                                                        =============       ------     ------------     ------------

Balance, December 31, 1999                                                  $5,349     $(18,064,654)    $(17,739,670)
                                                                            ======     ============     ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-53
<PAGE>

VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                                1999              1998
<S>                                                                                         <C>               <C>
Cash Flows from Operating Activities:
    Net (loss) income                                                                       $(4,225,147)      $   678,976
    Adjustments to reconcile net income (loss) to net cash used in
      operating activities-
      Depreciation and amortization                                                             781,716           734,440
      Interest expense capitalized to debt                                                      162,459            76,925
      Noncash amortization of debt discount                                                     126,171                --
      Changes in assets and liabilities, net of assets acquired-
          Accounts receivable, net                                                              585,998        (4,743,798)
          Prepaid expenses and other current assets                                              48,227          (204,607)
          Accounts payable                                                                      153,906         1,063,590
          Accrued expenses                                                                     (859,601)          272,695
          Deferred revenue                                                                    1,815,373         1,269,554
          Deferred rent                                                                           5,274            26,402
                                                                                            -----------       -----------

            Net cash used in operating activities                                            (1,405,624)         (825,823)
                                                                                            -----------       -----------

Cash Flows from Investing Activities:
    Acquisition, net of cash acquired                                                                --          (126,000)
    Purchases of fixed assets                                                                  (588,162)         (206,878)
    Other assets                                                                                 35,609            (3,078)
                                                                                            -----------       -----------

            Net cash used in investing activities                                              (552,553)         (335,956)
                                                                                            -----------       -----------

Cash Flows from Financing Activities:
    Proceeds from issuance of common stock                                                       30,700                --
    Proceeds from issuance of Series A preferred stock                                               --                --
    Proceeds from issuance of notes payable and Series D preferred stock                      1,100,000                --
    Proceeds from short-term bank loans, net                                                    423,370                --
    Repayment of notes payable                                                                       --                --
    Payment of capital lease obligation                                                         (23,962)         (311,395)
    Payments of short-term bank loans, net                                                           --                --
                                                                                            -----------       -----------

            Net cash provided by (used in) by financing activities                            1,530,108          (311,395)
                                                                                            -----------       -----------

Foreign Exchange Impact on Cash                                                                   3,535             6,054
                                                                                            -----------       -----------

Net (Decrease) Increase in Cash and Cash Equivalents                                           (424,534)       (1,467,120)

Cash and Cash Equivalents, beginning of year                                                  1,162,605         2,629,725
                                                                                            -----------       -----------

Cash and Cash Equivalents, end of year                                                      $   738,071       $ 1,162,605
                                                                                            ===========       ===========

Supplemental Disclosure of Cash Flow Information:
    Cash paid during the year for interest                                                  $   433,334       $   242,771
                                                                                            ===========       ===========

Supplemental Disclosure of Noncash Financing and Investing Activities:
    Acquisition of equipment under capital lease                                            $   197,352       $   283,731
                                                                                            ===========       ===========
    Conversion of  369,125 shares of common stock into 369,125 shares of Series D
       redeemable convertible preferred stock, net of discount (Note 12)                    $   643,558       $        --
                                                                                            ===========       ===========
    Conversion of notes payable into 627,240 shares of Series A redeemable convertible
       preferred stock                                                                      $        --       $        --
                                                                                            ===========       ===========
    Discount on issuance of note payable to shareholders                                    $   478,907       $        --
                                                                                            ===========       ===========
    Acquisition of certain assets of the former European distributor-
      Fair value of assets acquired-
          Equipment                                                                         $        --       $        --
          Goodwill and other intangible assets                                                       --           126,000
                                                                                            -----------       -----------
                                                                                                     --           126,000
      Forgiveness of Visibility debt, net                                                            --                --
                                                                                            -----------       -----------

            Cash payment for acquisition                                                    $        --       $   126,000
                                                                                            ===========       ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      S-54
<PAGE>

VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999

(1)      NATURE OF THE BUSINESS

         Visibility Inc., a Delaware corporation, and subsidiaries (the
         Company), develops, markets, sells and supports an integrated line of
         business application software for manufacturers and aviation
         maintenance, repair and overhaul companies. The Company is subject to a
         number of risks similar to those of other companies in a similar stage
         of development. Principal among these risks are the need to obtain
         adequate financing, dependence on key individuals, the need for
         successful development and marketing of services and products, and
         competition from other companies.

         Management believes that its current cash and available borrowings
         under the Company's current and future bank lines of credit (see Note
         6) will provide sufficient capital to finance the Company through
         December 31, 2000. The Company may attempt to raise additional capital
         during 2000 in order to fund operations, product marketing and
         development, and working capital requirements. There can be no
         assurance that additional financing will be available or on terms
         favorable to the Company. The Company's largest investors have stated
         that they continue to support the Company and that they have the
         positive ability, intent and commitment to fund or arrange funding of
         any cash requirements that Visibility may have, resulting from
         operating losses or other uses of cash required in the ordinary course
         of business, through at least December 31, 2000.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A summary of the Company's significant accounting policies follows:

         USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.

         RECLASSIFICATIONS

         Certain prior-year balances have been reclassified in order to conform
         with the current year's presentation.

         PRINCIPLES OF CONSOLIDATION

         The accompanying financial statements include the accounts of the
         Company and its wholly owned subsidiaries after elimination of
         intercompany accounts and transactions.

         CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments purchased with a
         maturity of three months or less to be cash equivalents. The carrying
         amounts of cash and cash equivalents approximate their fair value due
         to the short-term maturities of these investments.


                                      S-55
<PAGE>

         FOREIGN CURRENCY TRANSLATION

         The functional currency for the Company's United Kingdom subsidiary is
         the British pound sterling. Gains (losses) from foreign currency
         translations of the United Kingdom subsidiary are credited or charged
         to accumulated other comprehensive income (loss), which is included as
         a component of stockholders' equity in the accompanying consolidated
         balance sheets. The functional currency of the Company's other foreign
         operations is the U.S. dollar. Gains and losses for these subsidiaries
         resulting from the remeasurement of foreign currencies into U.S.
         dollars are included in the results of operations and the amounts are
         insignificant.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company's financial instruments consist primarily of cash and cash
         equivalents, accounts receivable, accounts payable and long-term debt.
         The carrying amounts of the Company's cash and cash equivalents,
         accounts receivable and accounts payable approximate fair value due to
         their short-term nature. See Note 6 for fair value information
         pertaining to the Company's long-term debt.

         REVENUE RECOGNITION

         In accordance with the provisions of Statement of Position (SOP) No.
         97-2, Software Revenue Recognition, the Company recognizes revenue from
         noncancelable software licenses upon product shipment, provided
         collection is probable and no significant vendor and postcontract
         customer obligations remain at the time of shipment. Sales of the
         Company's products do not require significant production, modification
         or customization of software. Installation of the software is routine,
         requires insignificant effort and is not essential to the functionality
         of the system or software. The Company accounts for insignificant
         vendor obligations by deferring a portion of the revenue and
         recognizing it when the related services are performed. Postcontract
         support (maintenance) service fees are typically billed separately and
         are recognized on a straight-line basis over the life of the applicable
         agreement. The Company recognizes service revenues from consulting and
         implementation services, including training, provided by both its own
         personnel and by third parties, upon performance of the services.
         Long-term service and development contracts are recognized using the
         percentage-of-completion method. Revenue from equipment sales is
         recognized upon shipment of the equipment.

         SOFTWARE DEVeLOPMENT COSTS

         The Company capitalizes certain software development costs after
         technological feasibility of the product has been established. Costs
         incurred prior to the establishment of technological feasibility are
         charged to research and development expense. The Company capitalized no
         software development costs during 1999 and 1998, as the costs incurred
         after technological feasibility was established were deemed to be
         immaterial. Capitalized software costs are amortized ratably over the
         useful life of the product, generally two years, and are charged to
         cost of revenues. There was no amortization expense for the year ended
         December 31, 1999 relating to capitalized software.


                                      S-56
<PAGE>

         INCOME TAXES

         The Company accounts for income taxes in accordance with SFAS No. 109,
         Accounting for Income Taxes. Under this method, deferred tax assets and
         liabilities are recognized for the expected future tax consequences,
         utilizing current tax rates, of temporary differences between the
         carrying amounts and the tax bases of assets and liabilities.

         RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
         Instruments and Hedging Activities. This statement requires companies
         to record derivatives on the balance sheet as assets or liabilities,
         measured at fair value. Gains or losses resulting from changes in the
         values of those derivatives would be accounted for depending on the use
         of the derivative and whether it qualifies for hedge accounting. In
         June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
         Financial Instruments and Hedging Activities--Deferral of the Effective
         Date of FASB Statement No. 133. Consequently, SFAS No. 133 will be
         effective for the Company's year ending December 31, 2001. Management
         believes that this statement will not have a significant impact on the
         Company.

(3)      ACQUISITION

         On May 15, 1997, the Company established a wholly owned UK subsidiary,
         Visibility Europe Ltd. (the Subsidiary), which acquired certain
         equipment and intangible assets of the Company's then European
         distributor, whose parent company was formerly also a minority
         stockholder of the Company, for $250,000. The purchase price was
         allocated $109,135 to equipment and $140,865 to goodwill and other
         intangibles, which are being amortized on a straight-line basis over
         three years. This acquisition was accounted for as a purchase.
         Additional purchase price was contingent on the Subsidiary achieving
         certain profitability levels for 1997 and 1998, which the Company did
         not achieve in 1997. The Company achieved the 1998 targeted
         profitability, resulting in an additional $117,000 of contingent
         consideration. This payment has been accounted for as an addition to
         goodwill. $87,677 of goodwill amortization was recorded as an expense
         in 1999. Pro forma information for this acquisition has not been
         presented, as the impact was not material.

(4)      ACCOUNTS RECEIVABLE; ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>

                                     BALANCE AT     PROVISION      NET DEDUCTIONS
                                    BEGINNING OF    CHARGED TO         FROM            BALANCE AT
                                       PERIOD       OPERATIONS      ALLOWANCE(1)     END OF PERIOD
<S>                                 <C>             <C>            <C>               <C>
Year Ended December 31, 1999            $424            $55            $(105)            $374
Year Ended December 31, 1998             484             40             (100)             424
</TABLE>

         (1) Accounts deemed uncollectable, net of recoveries.


                                      S-57
<PAGE>

(5)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are recorded at cost and depreciated
         using the straight-line method over the estimated useful lives of the
         assets. Maintenance and repair costs are charged to expense as
         incurred.

         Fixed assets consist of the following at December 31, 1999:

<TABLE>
<CAPTION>
                                                                      ESTIMATED
                                                                     USEFUL LIVES               1999
           <S>                                                       <C>                    <C>
           Furniture and fixtures                                     5 years               $  708,980
           Equipment                                                  1-3 years              3,503,784
           Computer software                                          3 years                  636,493
           Leasehold improvements                                     2-10 years               352,207
                                                                                            ----------

                                                                                             5,201,464

           Less--Accumulated depreciation and amortization                                   4,137,891
                                                                                            ----------

                                                                                            $1,063,573
                                                                                            ==========
</TABLE>

         Included above is equipment held under capital leases with a cost of
         $477,494 and accumulated amortization of $149,319 at December 31, 1999.

(6)      SHORT-TERM DEBT

         LINE OF CREDIT

         The Company has two line of credit facilities with a bank which allow
         the Company to borrow up to $3,125,000 as of December 31, 1999.
         Borrowings are secured by substantially all of the Company's assets
         under these two facilities. Aggregate borrowings under these facilities
         at December 31, 1999 totaled $1,923,370. The facilities expire on March
         31, 2000.

         The first facility allows the Company to borrow against 80% of factored
         U.S. accounts receivable up to a maximum of $2,125,000. Interest
         accrues at the bank's prime rate (8.5% at December 31, 1999) plus 1.5%
         points. In addition, a 0.5% administrative fee is due on the value of
         each factored account receivable when it is collected. The facility has
         certain covenants that pertain to the Company's profitability, as
         defined, which the Company was in compliance with at December 31, 1999.
         $1,673,370 was outstanding under this facility at December 31, 1999.

         The second facility was entered into on October 1, 1999 and established
         a line of credit in the maximum principal amount of $1,000,000
         guaranteed by the U.S. Export-Import Bank (EXIM). This facility allowed
         the Company to borrow the lesser of a borrowing base calculation based
         on certain percentages of accounts receivable originating outside the
         U.S., primarily from the U.K., as defined, or $1,000,000. As of
         December 31, 1999, the Company had borrowed $250,000 under this
         facility. During 1999, the interest rate under this facility was the
         bank's prime rate (8.5% at December 31, 1999) plus 2% points. The
         facility has certain covenants that include the Company's profitability
         and quick ratios, as defined. At December 31, 1999, the


                                      S-58
<PAGE>

         Company was not in compliance with these covenants. During 2000, the
         Company is obligated to pay down the borrowings in $125,000
         installments on the 15th and last day of each month, beginning in
         February. The bank applied the February payments to the $250,000 EXIM
         loan that has settled this facility.

         In connection with the November 1997 amendment of the credit line
         agreement with the bank, the Company issued the bank a warrant to
         purchase 71,685 shares of common stock at an exercise price of $2.79
         per share. The fair value of this warrant was immaterial. In connection
         with the April 1998 amendment of the agreement with the bank, the bank
         will be issued a warrant to purchase 10,526 shares of common stock at
         an exercise price of $4.75 per share in the event that the Company
         defaults on its payment obligations to the bank and it is not cured
         within two business days. To date, warrants have not been issued since
         the Company has not defaulted on its payments to the bank.

         The Company has executed a Commitment Letter offered by a commercial
         credit corporation that offers a $4 million credit line effective March
         31, 2000. Borrowings under the credit line would be advanced against a
         borrowing base calculation and would allow the lesser of 85% of
         worldwide accounts receivable or $4 million. To secure the loans, the
         lender would be granted a first priority security interest in all the
         assets of the Company. Interest would accrue at the commercial credit
         corporation's prime lending rate plus 2% points and a 1% commitment fee
         has been paid subsequent to year-end. Minimum monthly interest charges
         would be $4,150. The Company would grant to the lender warrants to
         purchase 55,363 shares of the Company's common stock at an exercise
         price of $5.78 per share which would be exercisable for seven years
         from the date of issuance. The credit line period is one year and is
         automatically renewable. There are no profitability or financial ratio
         covenants associated with the credit line. The Company expects that
         this credit line would be sufficient to provide for its working capital
         needs through December 31, 2000.

         NOTE PAYABLE TO OTHERS

         The Company has $1,000,000 of borrowings under a senior subordinated
         note agreement due to a former shareholder, the parent company of its
         former European distributor. The note plus accrued interest is
         reflected as short-term debt in the accompanying 1999 balance sheet and
         is due on May 15, 2000. The note is subject to acceleration provisions
         upon the closing of an initial public offering, sale or other
         disposition, as defined. The note accrues interest at 8% per annum,
         payable upon maturity, and is unsecured. As part of the financing, the
         Company also issued a warrant for the purchase of up to 50,000 shares
         of common stock at $6.67 per share. The fair value of the warrant was
         not material. The warrant expires upon repayment of the senior
         subordinated note.

         Interest expense on this note for 1999 and 1998 was $80,000 for each
         year.

(7)      LONG-TERM DEBT

         The Company has $402,555 of notes outstanding to a stockholder as of
         December 31, 1999. The notes accrue interest at 10% per annum. During
         1999, the maturity date was extended to January 1, 2000. Subsequent to
         year-end, the maturity date was further extended to January 31, 2001
         and, accordingly, the outstanding


                                      S-59
<PAGE>

         borrowings and accrued interest of $509,904 at December 31, 1999 are
         reflected as noncurrent in the accompanying balance sheet. The
         borrowings are secured by the Company's accounts receivable.

         On September 17, 1999, the Company entered into several stockholder
         note agreements totaling $1,100,000. These notes accrue interest at a
         rate of 10% per annum and are unsecured. The original maturity date was
         March 31, 2000 but subsequent to year-end this was extended to January
         31, 2001. Accordingly, the outstanding borrowings and accrued interest
         are reflected as noncurrent in the accompanying balance sheet. The debt
         is carried in the financial statements net of unamortized discount,
         based on the relative fair values of securities issued in connection
         with the notes (see Note 12 (a)). The original debt discount of
         $478,907 is being amortized over the term of the debt as additional
         noncash interest expense. This noncash interest expense amounted to
         $126,171 in 1999.

         Interest expense, including amortized debt discount, for 1999 and 1998
         on these notes payable to stockholders totaled $208,631 and $40,255,
         respectively.

         The fair value of the Company's debt approximates its carrying value
         based on the current rate offered to the Company for obligations of the
         same remaining maturities.

(8)      BENEFIT PLAN

         The Company has a defined contribution plan, which is qualified under
         Section 401(k) of the Internal Revenue Code. The plan covers
         substantially all employees who meet minimum age and service
         requirements and allows participants to defer a portion of their
         salary. After one year of employment, the Company contributes 25% of
         the employee's contribution, up to a maximum of 6% of the employee's
         salary. Employer contributions may be suspended at the option of the
         Board of Directors. The Company's contributions to the plan for the
         years ended December 31, 1999 and 1998 were approximately $100,000 and
         $100,000, respectively.

(9)      INCOME TAXES

         (Loss) income before income taxes for domestic and foreign operations
         is as follows:

<TABLE>
<CAPTION>

                                   1999                  1998
           <S>                <C>                    <C>
           Domestic           $(2,932,507)           $1,649,938
           Foreign             (1,292,640)             (905,962)
                               ----------             ---------

                              $(4,225,147)           $  743,976
                               ==========             =========
</TABLE>


                                      S-60
<PAGE>

         The provision for income taxes consists of the following for 1999 and
         1998:

<TABLE>
<CAPTION>
                                              1999                   1998
           <S>                             <C>                   <C>
           Current tax expense-
                Federal                    $       --            $   38,000
                State                              --                27,000
                Foreign                            --                    --
                                           ----------            ----------

                                           $       --            $   65,000
                                           ==========            ==========
</TABLE>

         The 1998 federal tax expense represents alternative minimum taxes
         payable and the 1998 state provision represents minimum and other
         non-income-measured taxes. The Company utilized $1,655,000 of federal
         and state net operating loss carryforwards in 1998 and reduced the
         valuation allowance accordingly.

         A reconciliation of the federal statutory rate to the Company's
         effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                                    1999        1998
            <S>                                                    <C>          <C>
            Income tax provision (benefit) at
               statutory rate                                        (34)%        34%
            State tax provision (benefit)                             (5)         10
            Impact of foreign tax rates (benefit)                      2           9
            (Decrease) increase in valuation allowance                45         (59)
            Other                                                     (8)         15
                                                                   -----       -----

                                                                      --%          9%
                                                                   =====       =====
</TABLE>

         The Company has approximately $9,000,000 of U.S. federal net operating
         loss carryforwards available to reduce future taxable income, if any.
         These net operating loss carryforwards expire in varying amounts
         through 2019 and are subject to the review and possible adjustment by
         the Internal Revenue Service. The Company has $4,915,000 of foreign net
         operating loss carryforwards available to reduce future taxable income
         in the foreign jurisdictions, if any.

         Section 382 of the Internal Revenue Code and the tax laws of certain
         foreign jurisdictions also contain provisions that could place annual
         limitations on the utilization of these net operating loss
         carryforwards in the event of a change in ownership, as defined.


                                      S-61

<PAGE>


         Significant components of deferred income taxes are as follows:


<TABLE>
<CAPTION>
                                                        1999

         <S>                                        <C>
         Deferred tax liabilities                   $   328,046
                                                    -----------


         Deferred tax assets-
            Net operating loss carryforwards        $ 4,652,900
            Allowance for doubtful accounts             117,035
            Deferred rent                                50,875
            Accrued benefits                            112,503
            Tax credits                                 617,934
            Other                                        44,038
                                                    -----------

                                                      5,595,285

         Valuation allowance                         (5,595,285)
                                                    -----------

                  Total deferred tax assets         $        --
                                                    ===========
</TABLE>

       The valuation allowance at December 31, 1999 relates to the uncertainty
       of realizing the tax benefits of the deferred tax assets. Nonetheless,
       some, if not all, of these deferred tax assets may be available to offset
       any deferred income tax liabilities as they become otherwise payable.

(10)   COMMITMENTS AND CONTINGENCIES

       The Company leases facilities under various operating leases. The Company
       also leases certain equipment under noncancelable capital and operating
       leases. Future minimum lease commitments under all noncancelable
       operating and capital leases at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                        OPERATING           CAPITAL
                                                          LEASES            LEASES

         <S>                                            <C>               <C>
         2000                                           $  534,380        $  187,290
         2001                                              514,943           198,744
         2002                                              445,416            52,404
         2003                                              425,699                --
         2004                                              282,422
         Thereafter                                      1,292,400                --
                                                        ----------        ----------

         Total minimum lease payments                   $3,495,260           438,438
                                                        ==========

         Less--Amount representing interest                                   81,626
                                                                          ----------

         Present value of minimum lease payments
         (including current portion of $135,368)                          $  356,812
                                                                          ==========
</TABLE>

       Total rent expense under noncancelable operating leases was approximately
       $493,000 and $464,000 for the years ended December 31, 1999 and 1998,
       respectively.

                                      S-62


<PAGE>


(11)     CONCENTRATIONS OF CREDIT RISK

         Financial instruments that potentially expose the Company to
         concentrations of credit risk include trade accounts receivable. To
         minimize this risk, ongoing credit evaluations of customers' financial
         condition are performed, although collateral is not required. The
         Company maintains reserves for potential credit losses.

         No one customer accounted for 10% or more of gross accounts receivable
         at December 31, 1999. One customer accounted for 13% of total revenues
         in 1999. No customer accounted for 10% or more of total revenues in
         1998.

(12)     STOCKHOLDERS' EQUITY

         (A)      PREFERRED STOCK

                  On October 6, 1997, the Company amended and restated its
                  Certification of Incorporation, whereby the Company's
                  authorized shares of $0.001 par value common stock was
                  increased to 15,000,000. The Company also authorized the
                  issuance of 3,847,752 shares of $0.001 par value preferred
                  stock, of which 1,881,721 shares are designated as Series A
                  Preferred Stock, 1,628,700 shares are designated as Series B
                  Preferred Stock and 337,331 shares are designated as Series C
                  Preferred Stock.

                  The Company issued 1,881,721 shares of Series A Redeemable
                  Convertible Preferred Stock in exchange for $3,500,000 of cash
                  plus the conversion of the $1,750,000 notes payable issued in
                  1997 and 1996. In 1997, the Company also allowed common
                  stockholders to convert 1,966,031 shares of common stock into
                  1,628,700 shares of Series B Redeemable Convertible Preferred
                  Stock and 337,331 shares of Series C Redeemable Convertible
                  Preferred Stock.

                  On September 10, 1999, the Company further amended and
                  restated the Amended and Restated Certification of
                  Incorporation to provide for the authorization and issuance of
                  369,125 additional shares of $0.001 par value preferred stock,
                  335,569 shares to be designated as Series D-1 Preferred Stock,
                  16,778 shares to be designated as Series D-2 Preferred Stock,
                  16,778 shares to be designated as Series D-3 Preferred Stock
                  (collectively, the Series D Preferred Stock).

                  In connection with the September 17, 1999 stockholder debt
                  financing discussed in Note 7, the Company allowed certain
                  common stockholders who participated in the debt financing to
                  convert 369,125 shares of common stock into 335,569 shares of
                  Series D-1 Redeemable Convertible Preferred Stock, 16,778
                  shares of Series D-2 Redeemable Convertible Preferred Stock
                  and 16,778 shares of Series D-3 Redeemable Convertible
                  Preferred Stock. Warrants to purchase 415,847 shares of common
                  stock were also issued to the investors who participated in
                  the debt financing. The warrants expire on September 17, 2002,
                  have an exercise price of $0.60, and were valued using the
                  Black-Scholes option pricing model. The value of the
                  consideration received has been allocated to the debt and
                  equity instruments based on their relative fair values. The
                  resulting discount is being accreted over the term of the
                  securities.


                                      S-63

<PAGE>


         The Series A, Series B Series C and Series D redeemable convertible
         preferred stock have the following rights and preferences:

                  VOTING

                  Preferred stockholders are entitled to vote on an as-converted
                  basis together with common stockholders as one class.

                  DIVIDENDS

                  The preferred stockholders are entitled to receive dividends
                  or other distributions equal to the dividend or distribution
                  that would be received had the preferred stockholders
                  converted their shares into common stock.

                  LIQUIDATION

                  In the event of any voluntary or involuntary liquidation,
                  dissolution or winding up of the Company, the holders of
                  Series A, B and C redeemable convertible preferred stock are
                  entitled to receive a $2.79, $.54 and $6.67 per share
                  liquidation preference, respectively, plus accrued or unpaid
                  dividends. The holders of Series D-1, D-2 and D-3 redeemable
                  convertible preferred stock are entitled to receive a $5.78,
                  $0.54 and $2.40 per share liquidation preference,
                  respectively, plus accrued or unpaid dividends. If the assets
                  available for distribution are insufficient to permit payment
                  of the liquidation preference amount, then the holders of the
                  preferred stock shall share ratably in any distribution, as
                  defined. After distribution to the preferred stockholders of
                  the full liquidation preference amount, any remaining assets
                  available for distribution are distributed both to holders of
                  common stock and preferred stock on a pro rata basis, with the
                  exception of holders of Series D redeemable convertible
                  preferred stock, assuming the preferred stock is converted
                  into common stock. Any dissolution or liquidation resulting
                  from an event of sale, as defined, with proceeds of greater
                  than or equal to $15.00 per share on an as-converted basis,
                  will not result in distributions in accordance with the
                  foregoing; rather, all preferred stock will be converted into
                  common and share in the proceeds on a pro rata basis.

                  CONVERSION

                  Each share of preferred stock is convertible, at the option of
                  the holder, into one share of common stock, adjusted for
                  certain dilutive events, as defined. In the event of an
                  initial public offering with a per share price of less than
                  $15.00, each holder of the preferred stock will receive a cash
                  payment equal to the liquidation preference (the IPO
                  Preference Amount) and all shares shall convert automatically
                  into common stock. The shares automatically convert upon the
                  occurrence of a qualified offering with a per share price
                  greater than or equal to $15.00 without any IPO Preference
                  Amount.


                                      S-64


<PAGE>


                           REDEMPTION

                           As of March 31, 2003, the holders of the preferred
                           stock may require the Company, with 30 days' written
                           notice, to redeem outstanding preferred stock. The
                           redemption price equals the liquidation preference
                           plus all accrued but unpaid dividends.

                           OTHER RESTRICTIONS

                           The Corporation is restricted, without the approval
                           of 51% of the holders of preferred stock, from
                           issuing additional shares of preferred stock, common
                           stock or convertible debt, altering the terms of
                           outstanding preferred stock, amending its articles of
                           incorporation, selling or otherwise disposing of all
                           or substantially all of its assets, or voluntary
                           dissolving or otherwise liquidating the Company.

         (B)      STOCK OPTION PLANS

                  In 1994, the Company adopted the Visibility Inc. and
                  Subsidiaries Stock Option Plan (the 1994 Plan), which is
                  administered by the Board of Directors. The 1994 Plan provides
                  for the issuance to key employees and directors of the Company
                  options to purchase shares of common stock. The maximum number
                  of shares of common stock that may be issued under the 1994
                  Plan is 202,500 shares. Options are granted under the 1994
                  Plan at exercise prices not less than the fair value of the
                  stock on the date of grant. The options are exercisable over
                  periods determined by the Board of Directors and expire after
                  10 years from the date of grant.

                  On February 2, 1996, the Company adopted the Visibility Inc.
                  and Subsidiaries 1996 Stock Plan (the Plan), which is
                  administered by the Board of Directors. The Plan provides for
                  the issuance of incentive and nonqualified options to purchase
                  shares of common stock to key employees and directors of the
                  Company. The maximum number of shares of common stock that may
                  be issued under the Plan is 1,050,000 shares. Incentive stock
                  options may be granted under the Plan at exercise prices not
                  less than the fair value of the stock on the date of grant.
                  The options are exercisable over periods determined by the
                  Board of Directors and expire 10 years from the date of grant.

                                      S-65

<PAGE>


                           The following summarizes the stock option activity
                           under the Company's stock option plans:


<TABLE>
<CAPTION>
                                                                   WEIGHTED
                                           OUTSTANDING             AVERAGE
                                             OPTIONS            EXERCISE PRICE

         <S>                               <C>                  <C>
         Balance, December 31, 1997           1,152,550                 0.40
            Granted                             196,300                 0.40
            Exercised                                --                   --
            Canceled                           (162,499)                0.25
                                           ------------

         Balance, December 31, 1998           1,186,351                 0.42
            Granted                             344,000                 0.58
            Exercised                          (137,603)                0.22
            Canceled                           (495,797)                0.52
                                           ------------

         Balance, December 31, 1999             896,951         $       0.46
                                           ============         ============
</TABLE>

         At December 31, 1999 and 1998, options to purchase 457,122 and 549,162
         shares were exercisable, respectively. The options exercisable at
         December 31, 1999 and 1998 had a weighted average exercise price of
         $0.46 and $0.49, respectively. Options generally vest over three to
         four years. At December 31, 1999, 127,946 shares were available for
         future option grants.

         During 1995, the Financial Accounting Standards Board issued SFAS No.
         123, Accounting for Stock-Based Compensation, which defines a fair
         value-based method of accounting for employee stock options or similar
         equity instruments and encourages all entities to adopt that method of
         accounting for all their employee stock compensation plans. However, it
         also allows an entity to continue to measure compensation costs for
         those plans using the intrinsic method of accounting prescribed by APB
         Opinion 25. Entities electing to remain with the accounting in APB
         Opinion 25 must make pro forma disclosures of net income as if the
         fair-value-based method of accounting defined in SFAS No. 123 has been
         applied. The Company has elected to account for its stock-based
         compensation plans under APB Opinion 25.

         Had compensation costs for the stock option plan been determined using
         the fair value-based method as prescribed by SFAS No. 123, the
         Company's 1999 net loss and 1998 net income would have been increased
         and decreased, respectively, to the following pro forma amounts:

<TABLE>
<CAPTION>
                                    1999             1998
         Net (loss) income-
         <S>                   <C>                <C>
           As reported         $ (4,225,147)      $ 678,976
           Pro forma             (4,228,464)        665,174
</TABLE>

         Consistent with SFAS No. 123, pro forma compensation cost has not been
         calculated for options granted prior to January 1, 1995. Pro forma
         compensation cost may not be representative of that to be expected in
         future years.

         The weighted average per share fair values of options granted during
         1999 and 1998 were $0.10 and $0.09, respectively. The values were
         estimated on the date of grant using the following weighted average
         assumptions for grants in 1999 and 1998: risk-


                                      S-66
<PAGE>

         free interest rate of 5.50 % and 5.17%; expected life of five years;
         expected dividend yield of 0% and volatility factor of 0%.

         The weighted average remaining contractual life of outstanding options
         was 7.67 years and the range of exercise prices was $0.20 to $1.67 at
         December 31, 1999.

(13)     FOREIGN OPERATIONS

         The following table summarizes the Company's operations by geographic
         area:

<TABLE>
<CAPTION>
                                                  1999             1998
            <S>                               <C>              <C>
            Revenues-
              North America                   $ 19,664,679     $ 24,022,301
              Europe                             4,545,329        6,170,590
                                              ------------     ------------

                   Consolidated total         $ 24,210,008     $ 30,192,891
                                              ============     ============

            (Loss) income from operations-
              North America                   $ (2,932,507)    $  1,964,561
              Europe                            (1,292,640)        (924,944)
                                              ------------     ------------

                   Consolidated total         $ (4,225,147)    $  1,039,617
                                              ============     ============

            Identifiable assets-
              North America                   $  8,061,279     $  7,872,620
              Europe                             2,224,379        3,700,960
                                              ------------     ------------

                   Consolidated total         $ 10,285,658     $ 11,573,580
                                              ============     ============
</TABLE>

         Export sales were not material in 1999 and 1998.


                                      S-67
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Digital Wireless Corporation:

We have audited the accompanying balance sheet of Digital Wireless Corporation
as of December 31, 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

         We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Wireless Corporation as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.

Atlanta, Georgia                       ARTHUR ANDERSEN LLP
February 18, 2000


                                      S-68
<PAGE>
                                  CIRRONET INC.

                                 Balance Sheets

                           December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                        ASSETS                                       2001                2000
                                                                                  -----------         -----------
                                                                                  (unaudited)         (unaudited)
<S>                                                                               <C>                 <C>
Current assets:
    Cash and cash equivalents                                                     $   630,085            333,274
    Accounts receivable, less allowance for doubtful accounts
       of $9,055 and 24,980, respectively                                             966,132          1,292,741
    Inventories                                                                     1,371,608          1,425,605
    Income tax refund receivable                                                       39,366            152,855
    Deferred income tax assets                                                         37,757             41,961
    Prepaid expenses and other current assets                                          76,334             10,001
                                                                                  -----------         ----------
                   Total current assets                                             3,121,282          3,256,437
Property and equipment, net                                                           370,165            315,365
Deferred income tax assets                                                             77,388                 --
Other assets                                                                           42,611             48,728
                                                                                  -----------         ----------
                   Total assets                                                   $ 3,611,446          3,620,530
                                                                                  ===========         ==========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                              $   326,152            579,135
    Accrued expenses                                                                  222,454            171,993
    Current maturities of obligations under capital leases
        and long-term debt                                                             27,472            136,688
                                                                                  -----------         ----------
                   Total current liabilities                                          576,078            887,816
Obligations under capital leases and long-term debt
    excluding current maturities                                                      165,877             66,156
Deferred income tax liabilities                                                            --             18,266
                                                                                  -----------         ----------
                   Total liabilities                                                  741,955            972,238
                                                                                  -----------         ----------
Stockholders' equity:
    Common stock, $.001 par value; 40,000,000 shares authorized;
       7,359,458 and 7,335,050 shares issued and outstanding, respectively             73,590             73,350
    Additional paid-in capital                                                      1,862,557          1,831,788
    Retained earnings                                                               1,079,362            880,419
    Note receivable from employee for stock options                                  (146,018)          (137,265)
                                                                                  -----------         ----------
                   Total stockholders' equity                                       2,869,491          2,648,292
Commitments and contingencies
                                                                                  -----------         ----------
                   Total liabilities and stockholders' equity                     $ 3,611,446          3,620,530
                                                                                  ===========         ==========
</TABLE>

See accompanying notes to financial statements.


                                      S-69


<PAGE>


                                  CIRRONET INC.

                            Statements of Operations

                  Years ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                           2001                2000                1999
                                                                        -----------         -----------         -----------
                                                                        (unaudited)         (unaudited)          (audited)
<S>                                                                     <C>                 <C>                 <C>
Revenues:
    Product sales and service revenues                                  $ 8,760,866           5,975,684           4,118,153
    Development contracts                                                    60,000             265,067             352,700
                                                                        -----------         -----------         -----------
                   Total revenues                                         8,820,866           6,240,751           4,470,853
Costs of revenues                                                         4,921,757           3,059,098           1,912,709
                                                                        -----------         -----------         -----------
                   Gross profit                                           3,899,109           3,181,653           2,558,144
Operating expenses:
    Research and development                                              1,250,026             857,347             520,720
    Sales and marketing                                                   1,593,835           1,133,739             656,285
    General and administrative                                              943,789             836,806             375,447
    Compensation charge for warrants                                             --             471,200                  --
                                                                        -----------         -----------         -----------
                   Total operating expenses                               3,787,650           3,299,092           1,552,452
                                                                        -----------         -----------         -----------
                   Operating (loss) income                                  111,459            (117,439)          1,005,692
Other income (expense):
    Interest income                                                          11,232              33,309              23,921
    Interest expense                                                        (32,551)            (14,886)             (9,387)
    Other (expense) income                                                      540              (7,053)             13,487
                                                                        -----------         -----------         -----------
                   Total other income (expense)                             (20,779)             11,370              28,021
                                                                        -----------         -----------         -----------
                   Income (loss) before income tax expense and
                     cumulative effect of accounting change                  90,680            (106,069)          1,033,713
Income tax (benefit) expense                                               (108,263)            (67,748)            274,208
                                                                        -----------         -----------         -----------
                   Net income (loss) before cumulative effect of
                     accounting change                                      198,943             (38,321)            759,505
Cumulative effect of accounting change, less applicable
    income taxes of $-0-, $-0- and $22,980 in 2001, 2000
    and 1999, respectively                                                       --                  --              34,469
                                                                        -----------         -----------         -----------
                   Net income (loss)                                    $   198,943             (38,321)            793,974
                                                                        ===========         ===========         ===========
</TABLE>


See accompanying notes to financial statements.


                                      S-70


<PAGE>


                                  CIRRONET INC.

                       Statements of Stockholders' Equity

                  Years ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                                                 NOTE
                                              COMMON STOCK        ADDITIONAL                  RECEIVABLE           TOTAL
                                          ----------------------    PAID-IN    RETAINED      FROM EMPLOYEE     STOCKHOLDERS'
                                            SHARES      AMOUNT      CAPITAL    EARNINGS    FOR STOCK OPTIONS      EQUITY
                                          ----------  ----------  ----------  ----------   -----------------   -------------
<S>                                       <C>         <C>         <C>         <C>          <C>                 <C>
Balances at Dec. 31, 1998 (audited)        6,258,880  $   62,588   1,335,513     124,766                  --       1,522,867
Conversion of subordinated debentures
       into common stock                      80,000         800      39,920          --                  --          40,720
Net income                                        --          --          --     793,974                  --         793,974
                                          ----------  ----------  ----------  ----------   -----------------   -------------
Balances at Dec. 31, 1999 (audited)        6,338,880      63,388   1,375,433     918,740                  --       2,357,561
Note receivable from employee
       for stock options exercise            346,500       3,465     130,815          --            (134,280)             --
Interest on note receivable                       --          --       2,985          --              (2,985)             --
Issuance of stock in exchange for
       warrants                              620,000       6,200     303,800          --                  --         310,000
Exercise of stock options                     29,670         297       2,670          --                  --           2,967
Issuance of stock options for
       services compensation                      --          --      16,085          --                  --          16,085
Net loss                                          --          --          --     (38,321)                 --         (38,321)
Balances at Dec. 31, 2000 (unaudited)      7,335,050      73,350   1,831,788     880,419            (137,265)      2,648,292
Issuance of stock to non-employee
       for services                           24,408         240      11,963          --                  --          12,203
Interest on note receivable                       --          --       8,753          --              (8,753)             --
Issuance of stock options to
       non-employee for services                  --          --      10,053          --                  --          10,053
Net income                                        --          --          --     198,943                  --         198,943
                                          ----------  ----------  ----------  ----------   -----------------   -------------
Balances at December 31, 2001(unaudited)   7,359,458      73,590   1,862,557   1,079,362            (146,018)      2,869,491
                                          ==========  ==========  ==========  ==========   =================   =============
</TABLE>



See accompanying notes to financial statements.


                                      S-71
<PAGE>


                                  CIRRONET INC.

                            Statements of Cash Flows

                  Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                            2001         2000         1999
                                                                         ----------   ----------   ----------
                                                                         (unaudited)  (unaudited)   (audited)
<S>                                                                      <C>          <C>          <C>
Cash flows from operating activities:
    Net (loss) income                                                    $  198,943      (38,321)     793,974
    Adjustments to reconcile net income (loss) to net cash
       provided by (used in) operating activities:
          Depreciation and amortization                                     111,095       62,676      (27,941)
          Provision for doubtful accounts receivable and returns             55,893       41,129       20,109
          Provision for inventory obsolescence                               20,000       30,000           --
          Deferred income tax (benefit) expense                             (91,450)     (45,503)      21,460
          Stock compensation expense                                         22,256      324,845           --
          Loss on disposal of property and equipment                          6,785           --           --
          (Increase) decrease in:
            Accounts receivable                                             270,716     (738,817)    (138,847)
            Inventories                                                      33,997     (205,593)    (307,098)
            Income tax receivable                                           113,489     (152,855)          --
            Other assets                                                    (62,533)     (26,158)          --
          Increase (decrease) in:
            Accounts payable                                               (252,983)     420,970       62,432
            Accrued expenses                                                 50,461      (44,878)      12,775
            Advance billings                                                     --           --     (102,060)
                                                                         ----------   ----------   ----------
                   Net cash (used in) provided by operating activities      476,669     (372,505)     334,804
                                                                         ----------   ----------   ----------
Cash flows from investing activities:
    Purchases of property and equipment                                     (36,419)    (164,054)     (28,085)
    Increase in other assets                                                     --      (15,434)          --
                                                                         ----------   ----------   ----------
                   Net cash used in investing activities                    (36,419)    (179,488)     (28,085)
                                                                         ----------   ----------   ----------
Cash flows from financing activities:
    Proceeds from long-term debt                                            135,000       41,900      123,049
    Payments on convertible subordinated debentures                              --           --     (143,557)
    Payments on long-term debt                                             (121,538)     (43,411)     (17,742)
    Payments on obligations under capital leases                           (156,901)     (34,558)     (34,916)
    Proceeds from exercise of stock options                                      --        2,967           --
    Proceeds from exercise of stock warrants                                     --        1,240           --
                                                                         ----------   ----------   ----------
                   Net cash used in financing activities                   (143,439)     (31,862)     (73,166)
                                                                         ----------   ----------   ----------
                   Net (decrease) increase in cash and cash equivalents     296,811     (583,855)     233,553
Cash and cash equivalents at beginning of year                              333,274      917,129      683,576
                                                                         ----------   ----------   ----------
Cash and cash equivalents at end of year                                 $  630,085      333,274      917,129
                                                                         ==========   ==========   ==========
Supplemental disclosure of cash flow information:
   Cash paid during the year for:
       Interest                                                          $   29,153       13,536       19,757
       Income taxes                                                      $       --      137,880      239,899
Supplemental disclosures of noncash operating and investing
   activities:
       Issuance of stock options for services                            $   22,256       16,085           --
       Issuance of stock warrant                                                 --      308,760
       Capital lease obligations incurred for the purchase of
          property and equipment                                         $  133,944      115,864           --
       Note receivable and interest from employee for stock
          option exercise                                                $    8,753      137,265           --
                                                                         ==========   ==========   ==========
</TABLE>


The accompanying notes are an integral part of these statements.


                                      S-72
<PAGE>

(1)      BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A)      DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

                  Cirronet Inc., formerly known as Digital Wireless Corporation
                  (the "Company"), designs, manufactures, and markets wireless
                  telecommunications products for industries that provide a
                  wireless pathway for information. The Company has expertise in
                  a wide range of wireless technologies, including wireless
                  system architecture, application-specific integrated circuit
                  design, data communications software, protocols, and hardware.
                  The Company focuses exclusively on products for the industrial
                  and commercial markets. Additionally, the Company holds a
                  patent on a wireless system called Recombinant Spread Spectrum
                  that minimizes dropout or data transfer errors in wireless
                  data transmission.

                  The Company's customers are spread across the United States
                  and Europe. However, the Company derives a substantial portion
                  of its revenue from one product. Typical product lives for
                  wireless telecommunications products are three to five years.

                  The markets for the Company's telecom products are
                  characterized by significant risk as a result of rapid changes
                  in technology, competitors with significant financial
                  resources, frequent new product and service introductions, and
                  mergers and acquisition activity in the telecom industry.
                  Furthermore, the Company's business is also subject to
                  additional significant risks such as availability of capital,
                  dependency on major suppliers, protection of intellectual
                  property rights, dependence on key personnel, and new laws or
                  regulations affecting the telecom industry. As a result,
                  negative developments in the Company's markets or in managing
                  these additional risks could have an adverse effect on the
                  Company's financial position, results of operations, and
                  liquidity.

         (B)      CASH AND CASH EQUIVALENTS

                  The Company considers all highly liquid investments with
                  original maturities of three months or less to be cash
                  equivalents.

         (C)      INVENTORIES

                  Inventories are stated at lower of cost or market. Cost is
                  determined using the first-in, first-out (FIFO) method.

         (D)      PROPERTY AND EQUIPMENT

                  Property and equipment are stated at cost less accumulated
                  depreciation. Depreciation on property and equipment are
                  provided using the straight-line method over the estimated
                  useful lives of the assets as follows:

<TABLE>
                  <S>                                                   <C>
                  Computer software and equipment                       3-5 years
                  Furniture and fixtures                                5-7 years
                  Vehicles                                                5 years
                  Equipment                                             5-7 years
</TABLE>


                                      S-73
<PAGE>

         (E)      REVENUE RECOGNITION

                  Revenue from the sale of products is recognized at the time of
                  shipment. Revenues from services and development contracts are
                  recognized as services are performed.

         (F)      INCOME TAXES

                  Income taxes are accounted for under the asset and liability
                  method. Deferred income tax assets and liabilities are
                  recognized for the future tax consequences attributable to
                  differences between the financial statement carrying amounts
                  of existing assets and liabilities and their respective tax
                  bases and operating loss and tax credit carryforwards.
                  Deferred income tax assets and liabilities are measured using
                  enacted tax rates expected to apply to taxable income in the
                  years in which those temporary differences are expected to be
                  recovered or settled. The effect on deferred income tax assets
                  and liabilities of a change in tax rates is recognized in the
                  consolidated statement of operations in the period that
                  includes the enactment date.

         (G)      STOCK OPTION PLAN

                  The Company accounts for its stock option plans in accordance
                  with Statement of Financial Accounting Standards No. 123,
                  Accounting for Stock-Based Compensation ("SFAS No. 123"),
                  which encourages entities to recognize as compensation expense
                  over the vesting period the fair value of all stock-based
                  awards on the date of grant. Alternatively, SFAS No. 123
                  allows entities to continue to apply the provisions of
                  Accounting Principles Board ("APB") Opinion No. 25 and provide
                  pro forma disclosures for employee stock-based awards as if
                  the fair-value based method of SFAS No. 123 had been applied.
                  As such, compensation expense would be recorded only if the
                  current market price of the underlying stock as of the date of
                  grant exceeded the exercise price. The Company has elected to
                  continue applying the provisions of APB Opinion No. 25 and
                  include the pro forma disclosures required under SFAS No. 123.

         (H)      USE OF ESTIMATES

                  The preparation of financial statements in conformity with
                  accounting principles generally accepted in the United States
                  of America requires management to make estimates and
                  assumptions that affect the reported amounts of assets and
                  liabilities and disclosures of contingent assets and
                  liabilities at the date of the financial statements and the
                  reported amounts of revenue and expenses during the reporting
                  period. Actual results could differ from those estimates.

         (I)      COMPREHENSIVE INCOME (LOSS)

                  No statements of comprehensive income (loss) have been
                  included in the accompanying financial statements since
                  comprehensive income (loss) and net income (loss) presented in
                  the accompanying statements of operations would be the same.

         (J)      RESEARCH AND DEVELOPMENT

                  Research and development costs consist principally of
                  compensation and benefits paid to the Company's employees and
                  certain allocated indirect costs. All research and development
                  costs are expensed as incurred.


                                      S-74
<PAGE>

         (K)      FAIR VALUE OF FINANCIAL INSTRUMENTS

                  The carrying amounts of cash and cash equivalents, accounts
                  receivable, income tax refund receivable, accounts payable,
                  accrued expenses, income taxes payable, and obligations under
                  capital leases approximate fair value because of the short
                  maturity of these instruments. The Company also believes that
                  the carrying values of its long-term debt approximates fair
                  value because of the floating interest rate terms applicable
                  to the Company's long-term financing arrangements.

         (L)      IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
                  DISPOSED OF

                  The Company accounts for long-lived assets in accordance with
                  the provisions of SFAS No. 121, Accounting for the Impairment
                  of Long-Lived Assets and for Long-Lived Assets to Be Disposed
                  Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived
                  assets and certain identifiable intangibles be reviewed for
                  impairment whenever events or changes in circumstances
                  indicate that the carrying amount of an asset may not be
                  recoverable. Recoverability of assets to be held and used is
                  measured by a comparison of the carrying amount of an asset to
                  future net cash flows expected to be generated by the asset.
                  If such assets are considered to be impaired, the impairment
                  to be recognized is measured by the amount by which the
                  carrying amount of the assets exceeds the fair value of the
                  assets. Assets to be disposed of are reported at the lower of
                  the carrying amount or fair value less costs to sell.

         (M)      RECLASSIFICATIONS

                  Reclassifications were made to certain amounts in the 1999
                  financial statements to conform with the presentation in the
                  2000 financial statements.

(2)      RELATED PARTY TRANSACTIONS

         The Company leased space under an operating lease and purchased certain
         services from a company controlled by one of its stockholders. During
         2000 and 1999, the Company paid approximately $107,000 and $95,000,
         respectively, for rent and other services to this related company. The
         lease expired in September 2000. In management's opinion, the amounts
         paid were reasonable and equivalent to what it would have paid an
         unrelated party for the facility rental and services. At December 31,
         2000 and 1999, no amounts were owed to the related company.

(3)      INVENTORIES

         Inventories consist of the following at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                         2000                      1999
                                                                                     ------------               ----------
                                                                                      (unaudited)                (audited)
                  <S>                                                                <C>                        <C>
                  Raw materials and purchased parts                                  $    628,962                  688,863
                  Work in process                                                         402,310                  338,240
                  Finished goods                                                          424,333                  222,909
                                                                                     ------------               ----------
                                                                                        1,455,605                1,250,012
                  Less valuation allowances                                               (30,000)                      --
                                                                                     ------------               ----------

                                    Total inventories                                $  1,425,605                1,250,012
                                                                                     ============               ==========
</TABLE>


                                      S-75
<PAGE>

(4)      PROPERTY AND EQUIPMENT

         Property and equipment consists of the following at December 31, 2000
         and 1999:

<TABLE>
<CAPTION>
                                                                                         2000                      1999
                                                                                     ------------               ----------
                                                                                      (unaudited)                (audited)
                  <S>                                                                <C>                        <C>
                  Vehicles                                                           $     25,496                       --
                  Furniture and fixtures                                                   76,101                    3,344
                  Equipment                                                               359,395                  267,026
                  Computer software and equipment                                         174,662                   85,366
                                                                                     ------------               ----------
                                                                                          635,654                  355,736
                  Less accumulated depreciation and amortization                          320,289                  259,552
                                                                                     ------------               ----------

                                                                                      $    315,365                   96,184
                                                                                      ============               ==========
</TABLE>

         Depreciation and amortization relating to property and equipment for
         the years ended December 31, 2000 and 1999 was approximately $60,737
         and $28,009, respectively.

(5)      NOTE PAYABLE TO BANK

         The Company maintains a revolving credit facility with a commercial
         bank whereby it may borrow the lesser of $300,000 or 80% of eligible
         accounts receivable, as defined. The facility is secured by all assets
         of the Company and expires on March 31, 2001. Outstanding advances
         under the line accrue interest at the prime rate plus .75%. The Company
         has borrowed no monies under the revolving line of credit as of
         December 31, 2000 and 1999.

(6)      LONG-TERM DEBT

         The Company also maintained two equipment lines of credit during the
         years ended December 31, 2000 and 1999. Equipment line No. 1 was used
         to finance property and equipment purchases up to a maximum of
         $200,000. Advances accrue interest at the prime rate plus 1.25%.
         Interest accrued from the date of each advance and was payable monthly
         until June 1, 1999. On June 1, 1999, the balance outstanding under the
         line of $123,049 was converted to a term note, payable in 42 equal
         monthly installments of principal and accrued interest through 2002.
         The outstanding balance of the notes accrues interest at the rate of
         10.75% as of December 31, 2000. The note is secured by all the assets
         of the Company.

         In connection with a March 2000 amendment to the credit facility, the
         bank extended the Company another equipment line credit ("Line No. 2").
         Line No. 2 was used to finance the purchase of property and equipment
         up to a maximum of $100,000. Advances accrue interest at the prime rate
         plus 1.00%. Interest accrued from the date of each advance and was
         payable monthly until October 31, 2000. On October 31, 2000, the
         outstanding balance of advances of $41,900 was converted to a term
         note, payable in 35 equal monthly installments of principal plus
         accrued interest beginning on November 31, 2000 through 2002. The
         outstanding balance of the note accrues interest at the rate of 10.50%
         as of December 31, 2000. The note is secured by all the assets of the
         Company.


                                      S-76
<PAGE>

         Future minimum principal payments are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING DECEMBER 31,                      AMOUNT
                  ------------------------                    ----------
                  <S>                                         <C>
                              2001                            $   55,382
                              2002                                66,156
                                                              ----------

                                                              $  121,538
                                                              ==========
</TABLE>

(7)      CONVERTIBLE SUBORDINATED DEBENTURES

         At December 31, 1998, the Company had outstanding convertible
         subordinated debentures amounting to $183,557. These debentures
         included interest at varying rates from 8% to 10% and were convertible
         into common stock at a conversion rate of $0.50 in debentures for one
         share of common stock. The debentures matured on May 31, 1999. Interest
         accrued and was payable annually on May 31. The debentures were
         convertible any time until maturity, at the option of the holder. The
         debentures were subordinated to current and future obligations due to
         financial institutions and/or certain other traditional lending
         institutions. During 1999, $40,000 of debentures were converted into
         80,000 shares of common stock of the Company. The Company used existing
         financing facilities to retire the remaining debentures during 1999.

(8)      INCOME TAXES

         The components of the income tax expense (benefit) for the years ended
         December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                   2000                     1999
                                                                               -----------                --------
                                                                               (unaudited)                (audited)
                  <S>                                                          <C>                        <C>
                  Current Federal and state income taxes                        $  (22,245)                240,706
                  Deferred Federal and state income taxes                          (45,503)                 33,502
                                                                                ----------                --------

                           Total provision for income taxes                     $  (67,748)                274,208
                                                                                ==========                ========
</TABLE>

         The following is a summary of the items that caused recorded income
         taxes to differ from income taxes computed using the statutory Federal
         income tax rate for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                            2000                      1999
                                                                                         -----------               ---------
                                                                                         (unaudited)               (audited)
                  <S>                                                                    <C>                       <C>
                  Computed "expected" income taxes                                        $  (36,063)                351,462
                  Increase (decrease) in income taxes resulting from:
                     State income taxes, net of Federal income taxes                          (3,889)                 41,349
                     Research and development credits                                        (30,470)                (82,697)
                     Decrease in valuation allowance                                              --                 (63,906)
                     Nondeductible items                                                       2,676                  28,000
                                                                                          ----------                --------

                                                                                          $  (67,748)                274,208
                                                                                          ==========                ========
</TABLE>


                                      s-77
<PAGE>

         Deferred income tax assets and liabilities are determined based on the
         difference between the financial accounting and tax bases of assets and
         liabilities. Significant components of the Company's deferred income
         tax assets and liabilities as of December 31, 2000 and 1999 are as
         follows:

<TABLE>
<CAPTION>
                                                                                            2000                      1999
                                                                                         -----------               ---------
                                                                                         (unaudited)               (audited)
                  <S>                                                                    <C>                       <C>
                  Deferred income tax assets - accrued expenses
                     and reserve accounts                                                 $   42,309                      --
                  Deferred income tax liabilities - differences in the
                     book and tax bases of depreciable fixed assets                          (18,614)                (21,460)
                                                                                          ----------                --------

                            Net deferred income tax assets                                $   23,695                 (21,460)
                                                                                          ==========                ========
</TABLE>

         The net decrease in the valuation allowance for deferred income tax
         assets 2000 and 1999 was $-0- and $63,906, respectively. In assessing
         the realizability of deferred tax assets, management considers whether
         it is more likely than not that some portion or all of the deferred
         income tax assets will not be realized. The ultimate realization of
         deferred income tax assets is dependent upon the generation of future
         taxable income during the periods in which those temporary differences
         become deductible. Management considers the scheduled reversal of
         deferred income tax liabilities, projected future taxable income, and
         tax planning strategies in making this assessment.

         The Company utilized $3,470 and $90,630 of available research and
         experimentation credits during the years ended December 31, 2000 and
         1999, respectively. At December 31, 2000, the Company has no research
         and experimentation credits available for carryforward to future
         taxable years.

(9)      STOCKHOLDERS' EQUITY

         (A)      WARRANTS

                  On December 31, 1995 and January 1, 1996, the Company issued
                  to various long-term employees stock warrants to purchase a
                  total of 620,000 shares of the Company's common stock at $.002
                  per share. The warrants vested over a two-year period and were
                  fully vested and exercisable as of December 31, 1997. During
                  the year ended December 31, 2000, the Company agreed to waive
                  the exercise price and provide the holders with cash bonuses
                  to cover their income tax liabilities. As a result, the
                  Company recorded a compensation charge equal to the fair value
                  of the common stock issued pursuant to the warrants price.

         (B)      STOCK SPLIT

                  On October 31, 2000, the Company effected a 10-for-1 stock
                  split which became effective immediately. All common stock and
                  stockholders' equity amounts have been retroactively adjusted
                  to reflect the stock split.


                                      S-78
<PAGE>

         (C)      STOCK OPTIONS

                  The Company has an incentive stock option plan and outstanding
                  nonqualified stock options for the benefit of directors,
                  shareholders, officers, and employees. Options are granted at
                  fair value at the time of grant as determined by the Company's
                  board of directors.

                  The following summarizes stock option activity for the years
                  ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                                                  WEIGHTED-
                                                                                                                   AVERAGE
                                                                                              NUMBER OF           EXERCISE
                                                                                                SHARES              PRICE
                                                                                              ----------          ---------
                  <S>                                                                         <C>                 <C>
                  Outstanding at December 31, 1998                                              2,723,260          $  .420
                     Granted                                                                      145,500             .479
                     Exercised                                                                         --               --
                     Canceled or expired                                                         (26,000)             .308
                                                                                              ----------           -------

                  Outstanding at December 31, 1999                                             2,842,760              .424

                     Granted                                                                   1,077,500              .500
                     Exercised                                                                  (376,170)             .365
                     Canceled or expired                                                         (97,000)             .331
                                                                                              ----------           -------

                  Outstanding at December 31, 2000                                             3,447,090           $  .457
                                                                                              ==========           =======
</TABLE>


                  At December 31, 2000 and 1999, the number of options
                  exercisable was 2,031,420 and 1,709,760, respectively.

                  The following table summarizes information about stock options
                  outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                       OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                                       -----------------------------------------------       ---------------------------
                                          NUMBER           WEIGHTED-                           NUMBER
                                       OUTSTANDING          AVERAGE          WEIGHTED-       OUTSTANDING       WEIGHTED-
                     RANGE OF               AT             REMAINING          AVERAGE            AT             AVERAGE
                     EXERCISE          DECEMBER 31,       CONTRACTUAL        EXERCISE        DECEMBER 31,      EXERCISE
                      PRICES               2000              LIFE              PRICE            2000             PRICE
                  -------------        ------------       -----------        ---------       ------------      ---------
                  <S>                  <C>                <C>                <C>             <C>               <C>
                  $ 0.11 - 0.20              48,760           1.89             0.15               48,760          0.15
                    0.31 - 0.44           1,870,330           6.50             0.41            1,515,330          0.41
                    0.50 - 0.70           1,528,000           8.14             0.53              467,330          0.59
                  -------------          ----------          -----            -----           ----------         -----

                  $ 0.11 - 0.70           3,447,090           7.17             0.46            2,031,420          0.44
                  =============          ==========          =====            =====           ==========         =====
</TABLE>


                                      S-79
<PAGE>

                  The Company applies APB Opinion No. 25 in accounting for its
                  stock option plans and, accordingly, no compensation cost has
                  been recognized for stock options issued with exercise prices
                  at fair value in the consolidated financial statements. Had
                  the Company determined compensation cost based on the fair
                  value at the grant date for its stock options under SFAS No.
                  123, the Company's net loss would have been adjusted to the
                  pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                         --------------------------------
                                                                             2000                 1999
                                                                         ------------           ---------
                                                                          (unaudited)           (audited)
                  <S>                                                    <C>                    <C>
                  Net (loss) income          As reported                 $   (38,321)           793,974
                                             Pro forma                      (187,426)           778,160
</TABLE>

                  Pro forma net loss reflects only options granted during the
                  years ended December 31, 2000 and 1999. Therefore, the full
                  impact of calculating compensation cost for stock options
                  under SFAS 123 is not reflected in the pro forma loss amounts
                  presented above because compensation cost is reflected over
                  the options' vesting periods ranging from three to four years
                  and compensation cost for options granted prior to January 1,
                  1999 is not considered.

         (D)      NOTE RECEIVABLE FROM EMPLOYEE

                  Note receivable from employee for stock option resulted from
                  the exercise of stock options for a full-recourse promissory
                  note during the year ended December 31, 2000.

         (E)      STOCK OPTIONS FOR SERVICES

                  The Company has an arrangement whereby they are compensating a
                  nonemployee for services provided to the Company. During the
                  year ended December 31, 2000, the Company has issued a stock
                  option for 20,000 shares under this agreement at an exercise
                  price of $.50 per share. At the time of issuance, the Company
                  recorded a compensation charge of $16,085 to reflect the fair
                  value of the stock option granted using the Black-Scholes
                  option pricing model. At December 31, 2000, all of these
                  options remain outstanding.

(10)     COMMITMENTS AND CONTINGENCIES

         (A)      EMPLOYEE COMPENSATION AGREEMENT

                  The Company has a compensation agreement with an
                  officer/employee of the Company. Under the agreement, the
                  employee is entitled to a base salary and bonuses based on
                  increases in revenues and operating profit and the success of
                  raising capital during 2001.

                  The employee was granted stock options to purchase 360,000
                  shares of the Company's common stock at $.44 per share during
                  1998. Vesting for the 360,000 shares occurred over a two-year
                  period. During December 2000, the employee was awarded options
                  for 2000, 2001, and 2002, to purchase 350,000, 250,000, and
                  140,000 shares, respectively, of the Company's common stock at
                  $.50 per share. The options have four-year vesting periods
                  from the year for which the options were granted. All of the
                  options will be fully vested on December 31, 2005.


                                      S-80
<PAGE>

         (B)      401(K) PLAN

                  The Company maintains a tax-qualified defined contribution
                  plan under Section 401(k) of the Internal Revenue Code (the
                  "401(k) Plan"). Employees are eligible to participate the
                  first of the month following their date of hire. The 401(k)
                  Plan allows participants to contribute by salary reduction up
                  to 20% of eligible compensation, subject to Internal Revenue
                  Service limitations. The 401(k) Plan also provides for
                  discretionary employer matching contributions.

                  The Company made $-0- and $40,000 in contributions to the Plan
                  for the years ended December 31, 2000 and 1999, respectively.

         (C)      LEASES

                  The Company leases office and warehouse facilities as well as
                  certain other equipment under noncancelable operating lease
                  agreements which expire in 2005.

                  Rental expense under all lease agreements for the years ended
                  December 31, 2000 and 1999 was approximately $43,000 and
                  $59,340, respectively.

                  The Company has also entered into capital lease arrangements
                  for equipment.

                  Future minimum lease payments under non-cancelable operating
                  leases (with initial or remaining lease terms in excess of one
                  year) and future minimum lease payments under capital lease
                  arrangements as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                         YEAR ENDING                                                          CAPITAL                OPERATING
                         DECEMBER 31,                                                          LEASES                  LEASES
                  ----------------------------                                               ----------             ----------
                  <S>                                                                        <C>                    <C>
                            2001                                                             $  86,400                122,000
                            2002                                                                    --                121,000
                            2003                                                                    --                121,000
                            2004                                                                    --                121,000
                            2005                                                                    --                 80,000
                                                                                            ----------             ----------

                              Total future minimum lease payments                               86,400             $  565,000
                                                                                                                   ==========

                  Less amount representing interest (at a rate
                    of 12.0%)                                                                    5,094
                                                                                            ----------
                           Present value of future minimum
                             capital lease payments                                             81,306

                  Less current maturities of obligations
                    under capital leases                                                        81,306
                                                                                            ----------

                           Obligations under capital leases,
                             excluding current maturities                                    $      --
                                                                                            ==========
</TABLE>

                  At December 31, 2000, the gross amount of property and
                  equipment under capital leases and related accumulated
                  amortization was $119,000 and $10,270, respectively.


                                      S-81
<PAGE>

(11)     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

         During 1999, the Company changed its method of depreciating property
         and equipment from the declining-balance method to the straight-line
         method. The Company believes that using the straight-line method over
         the estimated useful lives is a more accurate and conservative approach
         to depreciating the assets. The effect of this change was to increase
         income before provision for income taxes and cumulative effect of
         accounting change and net income for 1999 by $57,449 and $34,469,
         respectively.

(12)     MAJOR CUSTOMERS, SUPPLIERS, AND INTERNATIONAL SALES

         Sales derived from major customers (those customers representing more
         than 10% of total sales) as a percentage of total sales for the year
         ended December 31, 2000 were Customer A - 16%, Customer B - 15%,
         Customer C - 12%, and Customer D - 11%.

         The Company had international sales that represented approximately 30%
         of sales for the year ended December 31, 2000.

         The Company had purchases from two suppliers representing 52% and 21%
         of purchases for the years ended December 31, 2000 and 1999,
         respectively.


                                      S-82