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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission file number 1-9330
 INTELLIGENT SYSTEMS CORPORATION
 
  Georgia
    
    58-1964787(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4355 Shackleford Road, Norcross, Georgia
    
    30093(Address of principal executive offices)
    
    (Zip Code)
 (770) 381-2900
 Securities registered pursuant to Section 12(b) of the Act:
 Title
of each class

Name of each exchange on which registeredCommon Stock, $.01 par value
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 o
  þ o
 þ
 o þ
 $16,097,000




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TABLE OF CONTENTS
 PAGEPart IItem
    
    1.
    
    Description of business
    
    
    32.
    
    Description of properties
    
    
    83.
    
    Legal proceedings
    
    
    84.
    
    Submission of matters to a vote of security holders
    
    
    9Part II5.
    
    Market for the registrants common equity, related stockholder matters and small business issuer repurchases of equity securities
    
    
    96.
    
    Managements discussion and analysis or plan of operations
    
    
    97.
    
    Financial statements
    
    
    178.
    
    Changes in and disagreements with accountants on accounting and financial disclosure
    
    
    178A.
    
    Controls and procedures
    
    
    18Part III9.
    
    Directors, executive officers, promoters and control persons: compliance with Section 16(a) of the Exchange Act
    
    
    1810.
    
    Executive compensation
    
    
    1811.
    
    Security ownership of certain beneficial owners and management and related stockholder matters
    
    
    1812.
    
    Certain relationships and related transactions
    
    
    1813.
    
    Exhibits
    
    
    1914.
    
    Principal accountant fees and services
    
    
    20Signatures
    
    
    
    
    
    
    21EX-10.9 SECOND MODIFICATION TO LOAN DOCUMENTSEX-21.1 LIST OF SUBSIDIARIES OF REGISTRANTEX-23.1 CONSENT OF TAUBER & BALSER, P.C.EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEO & CFO




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PART I
 Forward-Looking Statements
 In addition to historical information, this Form 10-KSB may contain
forward-looking statements relating to Intelligent Systems Corporation (ISC).
All statements, trend 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. A number of the factors that we believe could impact
our future operations are discussed in Managements Discussion and Analysis in
Item 6 of this Form 10-KSB . ISC undertakes no obligation to update or revise its
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in future operating results.
 
 ITEM 1. BUSINESS
 Overview
 www.intelsys.com
  Financial Reporting
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Industry Segments Overview
     Industry Segment: Information Technology Products and Services
 VISaer, Inc.
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.
 QS Technologies, Inc.
 CoreCard Software, Inc.
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Industrial Products Segment
 ChemFree Corporation ® ® ® ®
 ®
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Incubator Program
  Minority-Owned Partner Companies
  
    
    A 17 percent interest in Horizon Software International, LLC, a
leading provider of software and systems to manage the food
service operations of primary and secondary education, college,
medical and military facilities.
    
    A 25.5 percent interest in NKD Enterprises, LLC (dba CoreXpand), a
software services company with an e-commerce application that
allows customers to centralize and control purchases of supplies
and consumables through an online company store. CoreXpand is
located in our Gwinnett Innovation Park.
 Research and Development
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Patents, Trademarks and Trade Secrets
 ® ® ® ®
 Personnel
  Financial Information About Geographic Areas
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER REPURCHASES OF EQUITY SECURITIES
 Market Information
  Year Ended December 31,
    
    2005
    
    2004High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    4.52
    
    
    $
    2.02
    
    
    $
    2.80
    
    
    $
    1.622nd Quarter
    
    
    2.54
    
    
    
    1.96
    
    
    
    2.53
    
    
    
    1.783rd Quarter
    
    
    3.20
    
    
    
    2.01
    
    
    
    2.09
    
    
    
    1.604th Quarter
    
    
    3.61
    
    
    
    2.00
    
    
    
    2.52
    
    
    
    1.91
  Equity Compensation Plan Information
  Number of securities tobe issued upon exercise
    
    Weighted average exercise
    
    Number of securitiesof outstanding options,
    
    price of outstanding options,
    
    remaining availablePlan category
    
    warrants and rights
    
    warrants and rights
    
    for future issuanceEquity compensation
plans approved by
security holders
    
    
    152,680
    
    
    $
    2.29
    
    
    
    350,000Equity compensation
plans not approved
by security holders
    
    
    86,000
    
    
    $
    3.04
    
    
    
    108,000Total
    
    
    238,680
    
    
    $
    2.56
    
    
    
    458,000
 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 Critical Accounting Policies and Estimates
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Revenue Recognition
     Valuation of Investments
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Valuation of Intangibles
  Overview
   
    
    A change in revenue level at one of our subsidiaries may impact consolidated revenue or be offset by an opposing change
at another subsidiary.
    
    Economic and marketplace trends may impact our subsidiaries differently or not at all. Moreover, two of our software
subsidiaries have very limited experience in their marketplaces which makes it difficult to identify and evaluate
trends that may impact their business.
    
    Two of our software subsidiaries, CoreCard Software and VISaer, have been involved in major new product development
initiatives for at least the past four years and have limited experience delivering and installing their new products
at customer sites, making it difficult to predict with certainty when they will recognize revenue on individual
software contracts.
    
    Our subsidiaries are relatively small in revenue size and, in the Information Technology sector, license revenue at a
subsidiary in a given period may consist of a relatively small number of contracts. Consequently, even minor delays in
a subsidiarys delivery under a software contract (which may be out of their control) could have a significant and
unpredictable impact on the consolidated revenue that we can recognize in a given quarterly or annual period.
    
    Acquisitions or sales of subsidiaries may affect our revenue and expense levels.
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
    
    Customers may decide to postpone or cancel a planned implementation of our software for any number of reasons, which
may be unrelated to our software features or contract performance, but which may affect the amount, timing and
characterization of our deferred and/or recognized revenue.
     Results of Operations
  2005 Compared to 2004
 Revenue
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Product revenue
 
    
    Sales of industrial products by our ChemFree subsidiary were slightly lower in 2005 than in
2004, and the mix of revenue by source and product changed from year-to-year as well.
ChemFrees quantity of fluid sold to the installed base of domestic and international
customers increased slightly in 2005 as compared to 2004 and revenue from leased equipment in
the domestic market increased 3 percent compared to the 2004 level, as ChemFree added both new
and expiring lease business which will contribute future lease revenue. Offset against these
increases was a decline of approximately 17 percent overall compared to the prior year in
revenue from sales of parts washer machines in the domestic and international markets. Trends
in early 2006 indicate renewed strength in both international and domestic markets for parts
washers, which, if sustained, would likely reverse the sales decline experienced in 2005.
    
    License revenue generated by our Information Technology segment was $2.1 million lower in
2005 than in 2004 mainly due to the major VISaer customer contract in 2004 which contributed
$2.7 million in license revenue. After adjusting for this single contract in the year-to-year
comparison, the VISaer subsidiary would have shown a year-to-year increase in license revenue
reflecting more new customer installations and the sale of additional license seats to its
existing customer base. Also contributing to the year-to-year decline in license revenue was
the fact that in 2004 our CoreCard Software subsidiary generated its first significant license
revenue ($1.3 million), but revenue related to another similar size contract was deferred from
2005 to 2006. Our QS Technologies subsidiary recorded an increase in license revenue in 2005
as compared to 2004 as the company completed delivery on more new contracts for both of its
software product lines.
 Service revenue
  Cost of Sales product
 service
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Operating Expenses
 Interest Income -
 Investment Income
 Equity Earnings (Losses) of Affiliate Companies
 Other Income, net
 Taxes
 Liquidity and Capital Resources
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Factors That May Affect Future Operations
   
    
    Delays in software development projects which could cause our customers to delay implementations, delay payments or
cancel contracts, which would increase our costs and reduce our revenue.
    
    Undetected software errors or poor quality control which may delay product releases, increase our costs, result in
non-acceptance of our software by customers or delay revenue recognition.
    
    Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product
offerings) which may cause prospective customers to choose an alternative product solution, resulting in lower revenue
and profits (or increased losses).
    
    The inability of our CoreCard or VISaer subsidiaries to establish a base of referenceable customers for their new
product offerings, resulting in lower revenue and profits (or increased losses), increased cash needs and possibly
leading to restructuring or cutting back of the subsidiarys operations.
    
    Failure of our products specifications and features to achieve market acceptance.
    
    The inability of our software subsidiaries to retain key software developers who have accumulated years of know-how in
our target markets and company products, or failure to attract and train a sufficient number of new software developers
and testers to support our product development plans and customer requirements at projected cost levels.
    
    Continued increases in the price of oil, which could increase ChemFrees product costs and which could affect VISaers
results if potential aviation customers delay or cancel purchases of software or services in the face of declining
industry trends or poor financial condition.
    
    Delays in anticipated customer payments for any reason which would increase our cash requirements and possibly our
losses.
    
    Declines in performance, financial condition or valuation of minority-owned companies which could cause us to
write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively
impact our earnings and cash.
    
    Increased operating expenses and diversion of resources related to compliance with the internal control over financial
reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
    
    Negative trends affecting the commercial aviation industry worldwide which could impact VISaers short-term customer
purchases, thus increasing its losses and need for cash.
    
    In the Industrial Products market, failure by ChemFree to protect its intellectual property assets or to prevail in
legal matters described in Item 3 of this report, which could increase competition in the market place and result in
greater price pressure and lower margins, thus impacting sales, profits and projected cash flow.
    
    An insufficient number of potential CoreCard customers decides to purchase and run an in-house software system and
instead choose to outsource their account transaction processing which could result in lower revenue and greater cash
requirements.
    
    Budget reductions by state and local governments for information technology products that delay award of contracts or
implementations for our QS Technologies subsidiary.
    
    Consolidation of software vendors or software tool providers in the public health market or changes in the regulations
governing electronic records which could increase competition or require expensive software modifications, affecting QS
Technologies revenue and costs.
    
    An insufficient level of qualifying accounts receivable and inventories to support a borrowing base sufficient to meet
our borrowing requirements under our bank line of credit.
    
    Other general economic and political conditions, particularly those which may cause international business and domestic
government customers to delay or cancel software purchases.
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
    
    The sale of a subsidiary which could impact future revenue, profit/loss or cash contribution, and result in a one-time
gain or loss on the sale transaction.
  Recent Accounting Pronouncements
   
 ITEM 7. FINANCIAL STATEMENTS
  Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2005 and 2004Consolidated Statements of Operations for the years ended December 31, 2005 and 2004Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Loss) for the years ended December 31, 2005 and 2004Consolidated Statements of Cash Flow for the years ended December 31, 2005 and 2004Notes to Consolidated Financial Statements
 Financial Statements Schedule
  Schedule II  Valuation and Qualifying Accounts and Reserves
 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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ITEM 8A. CONTROLS AND PROCEDURES
  
 PART III
 
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
  www.intelsys.com
 
 ITEM 10. EXECUTIVE COMPENSATION
  
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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ITEM 13. EXHIBITS
  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.)10.1
    
    Lease Agreement dated June 1, 2004, between the Registrant and ISC Properties, LLC.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 10-KSB for the year ended
December 31, 2004.)10.2
    
    Management Compensation Plans and Arrangements:
 (a)
    
    Intelligent Systems Corporation 2003 Stock Incentive Plan(b)
    
    Intelligent Systems Corporation 1991 Stock Incentive Plan, amended June 6, 1997(c)
    
    Intelligent Systems Corporation Change in Control Plan for Officers(d)
    
    Intelligent Systems Corporation Outside Directors Retirement Plan(e)
    
    Non-Employee Directors Stock Option Plan
 Exhibit 10.2(a) is incorporated by reference to Exhibit 10.2(a) to the Registrants Form 10-K
for the year ended December 31, 2003.Exhibit 10.2(b) is incorporated by reference to Exhibit 4.1 of the Registrants Form S-8 dated
July 25, 1997.Exhibits 10.2(c) and (d) are incorporated by reference to Exhibit 10.4 to the Registrants
Form 10-K for the year ended December 31, 1993.Exhibit 10.2(e) is incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for
the year ended December 31, 2000.10.3
    
    Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October
1, 2003. (Incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for the
year ended December 31, 2003.)10.4
    
    Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of
October 1, 2003. (Incorporated by reference to Exhibit 10.4 to the Registrants Form 10-K for
the year ended December 31, 2003.)
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10.5
    
    Form of Security Agreement by and among majority owned subsidiary companies of Intelligent
Systems Corporation and Fidelity Bank as of October 1, 2003. (Incorporated by reference to
Exhibit 10.5 to the Registrants Form 10-K for the year ended December 31, 2003.)10.6
    
    Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank
dated October 1, 2003. (Incorporated by reference to Exhibit 10.6 to the Registrants Form
10-K for the year ended December 31, 2003.)10.7
    
    Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of
Fidelity Bank dated October 1, 2004. (Incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-K for the year ended December 31, 2003.)10.8
    
    Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor
of Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.3 to the
Registrants Form 10-K for the year ended December 31, 2003.)10.9
    
    Second Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated September 1, 2005.10.10
    
    Consent Order entered in United States District Court for the Northern District of Georgia,
Atlanta Division dated September 10, 2004. (Incorporated by reference to Exhibit 10.10 of the
Registrants Form 10-KSB for the year ended December 31, 2004.)21.1
    
    List of subsidiaries of Registrant.23.1
    
    Consent of Tauber & Balser, P.C.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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SIGNATURES
  INTELLIGENT SYSTEMS CORPORATIONRegistrantDate:  March 31, 2006
    By:
    /s/ J. Leland StrangeJ. Leland StrangeChairman of the Board, President
and Chief Executive Officer  Signature
    
    Capacity
    
    Date/s/ J. Leland Strange

  J. Leland Strange
    
    Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 31, 2006/s/ Bonnie L. Herron

  Bonnie L. Herron
    
    Chief Financial Officer
(Principal Accounting and Financial Officer)
    
    March 31, 2006/s/ James V. Napier

  James V. Napier
    
    Director
    
    March 31, 2006/s/ John B. Peatman

  John B. Peatman
    
    Director
    
    March 31, 2006/s/ Parker H. Petit

  Parker H. Petit
    
    Director
    
    March 31, 2006
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INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
  Financial Statements:
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets  December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2005 and 2004
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Loss)  Years Ended December 31, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flow  Years Ended December 31, 2005 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule:The following supplemental schedule of the Registrant and its subsidiaries is submitted herewith in response to Item 15(a)(2):Schedule II  Valuation and Qualifying Accounts and Reserves
    
    
    S-1
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 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
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 F-2




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Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 As of December 31,
    
    2005
    
    
    2004ASSETSCurrent assets:Cash
    
    $
    378
    
    
    $
    670Accounts receivable, net
    
    
    1,827
    
    
    
    2,931Inventories
    
    
    770
    
    
    
    653Other current assets
    
    
    355
    
    
    
    217Total current assets
    
    
    3,330
    
    
    
    4,471Long-term investments
    
    
    4,571
    
    
    
    4,879Property and equipment, at cost less accumulated depreciation
    
    
    940
    
    
    
    781Goodwill, net
    
    
    2,047
    
    
    
    2,049Other intangibles, net
    
    
    532
    
    
    
    699Other assets, net
    
    
    17
    
    
    
    25Total assets
    
    $
    11,437
    
    
    $
    12,904LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    100
    
    
    $
    267Accounts payable
    
    
    847
    
    
    
    867Deferred revenue
    
    
    4,779
    
    
    
    4,895Accrued payroll
    
    
    1,092
    
    
    
    928Accrued expenses and other current liabilities
    
    
    849
    
    
    
    552Total current liabilities
    
    
    7,667
    
    
    
    7,509Long term liabilities
    
    
    248
    
    
    
    310Commitments and contingencies (Note 8)Minority interest
    
    
    1,516
    
    
    
    1,516Stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971
issued and outstanding at December 31, 2005 and 2004
    
    
    45
    
    
    
    45Paid-in capital
    
    
    18,410
    
    
    
    18,410Accumulated other comprehensive loss
    
    
    (61
    )
    
    
    (124
    )Accumulated deficit
    
    
    (16,388
    )
    
    
    (14,762
    )Total stockholders equity
    
    
    2,006
    
    
    
    3,569Total liabilities and stockholders equity
    
    $
    11,437
    
    
    $
    12,904
 The accompanying notes are an integral part of these consolidated financial statements.
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 F-3




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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 Year Ended December 31,
    
    2005
    
    
    2004RevenueProducts
    
    $
    9,090
    
    
    $
    11,386Services
    
    
    7,007
    
    
    
    10,946Total revenue
    
    
    16,097
    
    
    
    22,332Cost of salesProducts
    
    
    3,356
    
    
    
    3,699Services
    
    
    3,593
    
    
    
    5,177Total cost of sales
    
    
    6,949
    
    
    
    8,876ExpensesMarketing
    
    
    2,133
    
    
    
    2,558General & administrative
    
    
    3,999
    
    
    
    3,542Research & development
    
    
    6,820
    
    
    
    7,630Loss from operations
    
    
    (3,804
    )
    
    
    (274
    )Other income (expense)Interest income, net
    
    
    22
    
    
    
    Investment income, net
    
    
    1,884
    
    
    
    2,524Equity in income (losses) of affiliate companies, net
    
    
    366
    
    
    
    (76
    )Other income (expense), net
    
    
    (20
    )
    
    
    392Income (loss) before income tax provision
    
    
    (1,552
    )
    
    
    2,566Income tax provision
    
    
    74
    
    
    
    3Net income (loss)
    
    $
    (1,626
    )
    
    $
    2,563Basic net income (loss) per share
    
    $
    (0.36
    )
    
    $
    0.57Diluted net income (loss) per share
    
    $
    (0.36
    )
    
    $
    0.56Basic weighted average shares outstanding
    
    
    4,478,971
    
    
    
    4,478,971Diluted weighted average shares outstanding
    
    
    4,478,971
    
    
    
    4,607,641
 The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CHANGES IN
 STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (in thousands, except share amounts)
 Year Ended December 31,2005
    
    
    2004STOCKHOLDERS EQUITYCommon stock, number of shares,beginning and end of year
    
    
    4,478,971
    
    
    
    4,478,971Common stock, amount,beginning and end of year
    
    $
    45
    
    
    $
    45Paid-in capital,beginning and end of year
    
    
    18,410
    
    
    
    18,410Accumulated other comprehensive loss,beginning of year
    
    
    (124
    )
    
    
    (60
    )Foreign currency translation adjustment during year
    
    
    66
    
    
    
    (67
    )Change in unrealized gain on marketable securities
    
    
    (3
    )
    
    
    3End of year
    
    
    (61
    )
    
    
    (124
    )Accumulated deficit,beginning of year
    
    
    (14,762
    )
    
    
    (17,325
    )Net income (loss)
    
    
    (1,626
    )
    
    
    2,563End of year
    
    
    (16,388
    )
    
    
    (14,762
    )Total stockholders equity
    
    $
    2,006
    
    
    $
    3,569COMPREHENSIVE INCOME (LOSS)Net income (loss)
    
    $
    (1,626
    )
    
    $
    2,563Other comprehensive income:Foreign currency translation adjustments
    
    
    66
    
    
    
    (67
    )Change in unrealized gain on marketable securities
    
    
    (3
    )
    
    
    3Comprehensive income (loss)
    
    $
    (1,563
    )
    
    $
    2,499
 The accompanying notes are an integral part of these consolidated financial statements.
 Intelligent Systems Corporation
 F-5




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##### Table of Contents



Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 (in thousands)
 Year Ended December 31,2005
    
    
    2004OPERATIONS:Net income (loss)
    
    $
    (1,626
    )
    
    $
    2,563Adjustments to reconcile net income (loss) to net cash used for operating activities,
net of effects of acquisitions and dispositions:Depreciation and amortization
    
    
    525
    
    
    
    598Deferred gain recognized
    
    
    
    
    
    
    (382
    )Investment income, net
    
    
    (1,884
    )
    
    
    (2,524
    )Equity in (income) loss of affiliate companies
    
    
    (366
    )
    
    
    76Changes in operating assets and liabilitiesAccounts receivable
    
    
    1,104
    
    
    
    (1,388
    )Inventories
    
    
    (117
    )
    
    
    113Other current assets
    
    
    (137
    )
    
    
    397Other assets
    
    
    8
    
    
    
    (6
    )Accounts payable
    
    
    (20
    )
    
    
    (65
    )Deferred revenue
    
    
    (116
    )
    
    
    (2,750
    )Accrued payroll
    
    
    164
    
    
    
    (432
    )Accrued expenses and other current liabilities
    
    
    296
    
    
    
    (492
    )Other liabilities
    
    
    (62
    )
    
    
    310Cash used for operating activities
    
    
    (2,231
    )
    
    
    (3,982
    )INVESTING ACTIVITIES:Proceeds related to sales of investments
    
    
    2,243
    
    
    
    3,754Acquisition of company, net of cash acquired
    
    
    
    
    
    
    (25
    )Distributions from long-term investments
    
    
    312
    
    
    
    268Acquisitions of long-term investments
    
    
    
    
    
    
    (47
    )Repayments under notes receivable
    
    
    
    
    
    
    15Purchases of intangible assets
    
    
    (4
    )
    
    
    Purchases of property and equipment
    
    
    (511
    )
    
    
    (399
    )Cash provided by investing activities
    
    
    2,040
    
    
    
    3,566FINANCING ACTIVITIES:Borrowings under short-term borrowing arrangements
    
    
    936
    
    
    
    2,201Repayments under short-term borrowing arrangements
    
    
    (1,103
    )
    
    
    (2,184
    )Exercise of stock options
    
    
    
    
    
    
    3Cash provided by (used for) financing activities
    
    
    (167
    )
    
    
    20Effects of exchange rate changes on cash
    
    
    66
    
    
    
    (67
    )Net decrease in cash
    
    
    (292
    )
    
    
    (463
    )Cash at beginning of year
    
    
    670
    
    
    
    1,133Cash at end of year
    
    $
    378
    
    
    $
    670SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for interest
    
    $
    8
    
    
    $
    21Cash paid during the year for income taxes
    
    
    74
    
    
    
    3
 The accompanying notes are an integral part of these consolidated financial statements.
 Intelligent Systems Corporation
 F-6




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##### Table of Contents



NOTE 1
  Organization
 Nature of Operations
 Use of Estimates
 Consolidation
 Translation of Foreign Currencies
 Cash
 Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
 (in thousands)
    
    2005
    
    
    2004Raw materials
    
    $
    619
    
    
    $
    503Finished goods
    
    
    151
    
    
    
    150Total inventories
    
    $
    770
    
    
    $
    653
 Property and Equipment
 Intelligent Systems Corporation
 F-7




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##### Table of Contents



Useful life inClassification
    
    yearsOperating equipment
    
    
    3 - 5Furniture & fixtures
    
    
    5 - 7Leasehold improvements
    
    
    1 - 5
  Property and equipment(in thousands)
    
    2005
    
    
    2004Machinery and equipment
    
    $
    3,835
    
    
    $
    3,254Furniture and fixtures
    
    
    219
    
    
    
    217Leasehold improvements
    
    
    271
    
    
    
    239Subtotal
    
    
    4,325
    
    
    
    3,710Accumulated depreciation
    
    
    (3,385
    )
    
    
    (2,929
    )Property and equipment, net
    
    $
    940
    
    
    $
    781
   Leased Equipment
 (in thousands)
    
    2005
    
    
    2004Cost of equipment
    
    $
    980
    
    
    $
    924Accumulated depreciation
    
    
    (697
    )
    
    
    (640
    )Carrying value of equipment
    
    $
    283
    
    
    $
    284
  (in thousands)2006
    
    $
    3782007
    
    
    2202008
    
    
    2202009
    
    
    184Total minimum future lease revenue
    
    $
    1,002
  Investments
  Other Intangibles and Goodwill
 Intelligent Systems Corporation
 F-8




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##### Table of Contents



Other(in thousands)
    
    Goodwill
    
    IntangiblesBalance as of December 31, 2003
    
    $
    2,038
    
    
    $
    476Additions
    
    
    14
    
    
    
    458Amortization
    
    
    
    
    
    
    (235
    )Other adjustments
    
    
    (3
    )
    
    
    Balance as of December 31, 2004
    
    
    2,049
    
    
    
    699Additions
    
    
    
    
    
    
    6Amortization
    
    
    
    
    
    
    (173
    )Other adjustments
    
    
    (2
    )
    
    
    Balance as of December 31, 2005
    
    $
    2,047
    
    
    $
    532
  (in thousands)
    
    2005
    
    
    2004Patents
    
    $
    464
    
    
    $
    458Accumulated amortization
    
    
    (60
    )
    
    
    (15
    )404
    
    
    
    443Capitalized software
development costs
    
    
    641
    
    
    
    641Accumulated amortization
    
    
    (513
    )
    
    
    (385
    )128
    
    
    
    256Intangible assets, net
    
    $
    532
    
    
    $
    699
  (in thousands)2006
    
    $
    1752007
    
    
    472008
    
    
    472009
    
    
    472010
    
    
    47Thereafter
    
    
    169Total amortization expense
    
    $
    532
 Deferred Revenue 
 Fair Value of Financial Instruments
  ChemFree:
    
    Automotive parts distributorsQS Technologies:
    
    State and local governmentsVISaer:
    
    Aviation
  Revenue Recognition
  Intelligent Systems Corporation
 F-9




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##### Table of Contents



Cost of Sales
 Software Development Expense .
   Warranty Costs
 Research and Development
 Intelligent Systems Corporation
 F-10




---



##### Table of Contents



Stock Based Compensation
 Year ended December 31,(in thousands, except per share amounts)
    
    2005
    
    
    2004Net income (loss), reported
    
    $
    (1,626
    )
    
    $
    2,563Deduct: stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effect
    
    
    (38
    )
    
    
    (37
    )Pro forma net income (loss)
    
    $
    (1,664
    )
    
    $
    2,526Income (loss) per common shareBasic, as reported
    
    $
    (0.36
    )
    
    $
    0.57Basic, pro forma
    
    $
    (0.37
    )
    
    $
    0.56Diluted, as reported
    
    $
    (0.36
    )
    
    $
    0.56Diluted, pro forma
    
    $
    (0.37
    )
    
    $
    0.55
  Year ended December 31,
    
    2005
    
    
    2004Risk free interest rate
    
    
    4
    %
    
    
    4
    %Expected life of option in years
    
    
    6.6
    
    
    
    6.9Expected dividend yield rate
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
  Income Taxes 
 Comprehensive Income (Loss)
 Reclassifications 
 New Accounting Pronouncements 
  Intelligent Systems Corporation
 F-11




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##### Table of Contents



NOTE 2
  Aderis Pharmaceuticals, Inc.
 Ardext Technologies, Inc. -
 Cirronet, Inc. 
 ISC Guernsey, Ltd. 
 Lancope, Inc. 
 RF Solutions, Inc. 
 Riverside Software, LLC 
 NOTE 3
    Intelligent Systems Corporation
 F-12




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##### Table of Contents



At December 31, 2005
    
    Carrying
    
    Original(in thousands)
    
    Value
    
    InvestmentNKD Enterprises
    
    $
    837
    
    
    $
    1,286Horizon Software
    
    
    2,864
    
    
    
    2,500
 At December 31, 2004
    
    Carrying
    
    Original(in thousands)
    
    Value
    
    InvestmentNKD Enterprises
    
    $
    830
    
    
    $
    1,286Horizon Software
    
    
    2,711
    
    
    
    2,500
  As of and for the year ended December 31,
 (in thousands)
    
    2005
    
    
    2004Revenues
    
    $
    21,405
    
    
    $
    15,521Operating income
    
    
    2,516
    
    
    
    351Net income
    
    
    2,634
    
    
    
    404Current assets
    
    
    5,976
    
    
    
    3,740Non-current assets
    
    
    5,038
    
    
    
    5,149Current liabilities
    
    
    4,851
    
    
    
    3,505Non-current liabilities
    
    
    856
    
    
    
    685Stockholders equity
    
    
    5,307
    
    
    
    4,699
 Marketable Securities 
 (in thousands)
    
    2005
    
    
    2004Cost
    
    
    
    
    
    $
    173Gross unrealized gain
    
    
    
    
    
    
    3Estimated fair values
    
    
    
    
    
    $
    176
  NOTE 4
    Revenue
    
    
    
    A/R2005
    
    
    2004
    
    
    
    2005
    
    
    2004VISaerCustomer A
    
    
    
    
    
    
    34
    %
    
    
    
    
    
    
    
    QS TechnologiesCustomer B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    %ChemFreeCustomer C
    
    
    
    
    
    
    
    
    
    
    
    13
    %
    
    
    
 NOTE 5
   Year ended December 31,(in thousands)
    
    2005
    
    
    2004Maximum outstanding (month-end)
    
    $
    417
    
    
    $
    763Outstanding at year end
    
    
    100
    
    
    
    267Interest rate at year end
    
    
    8.75
    %
    
    
    6.75
    %Average interest rate
    
    
    7.7
    %
    
    
    5.9
    %
  Intelligent Systems Corporation
 F-13




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##### Table of Contents



NOTE 6
   NOTE 7
   Year ended December 31,(in thousands)
    
    2005
    
    2004Current
    
    $
    74
    
    
    $
    3
  Year ended December 31,
    
    2005
    
    
    2004Statutory rate, blended
    
    
    38
    %
    
    
    37
    %Change in valuation allowance
    
    
    (38
    %)
    
    
    (37
    %)Other
    
    
    5
    %
    
    
    0
    %Effective rate
    
    
    5
    %
    
    
    0
    %
  (in thousands)
    
    2005
    
    
    20042017
    
    $
    1,038
    
    
    $
    1,0382019
    
    
    2,901
    
    
    
    2,9012021
    
    
    495
    
    
    
    4952022
    
    
    658
    
    
    
    6572023
    
    
    1,721
    
    
    
    1,830Thereafter
    
    
    1,602
    
    
    
    454Total
    
    $
    8,415
    
    
    $
    7,375
   (in thousands)
    
    2005
    
    
    2004Deferred tax assets:Federal, state and foreign
loss carryforward
    
    $
    3,537
    
    
    $
    3,206Capitalized research
and development
    
    
    4,890
    
    
    
    1,365Accrued interest
    
    
    1,631
    
    
    
    938Deferred revenue
    
    
    858
    
    
    
    563Federal and state tax credits
    
    
    2,804
    
    
    
    2,392Long term investments
    
    
    5,657
    
    
    
    5,428Other
    
    
    313
    
    
    
    325Total deferred tax asset
    
    
    19,690
    
    
    
    14,217Less valuation allowance
    
    
    (19,690
    )
    
    
    (14,217
    )Net deferred tax asset
    
    $
    
    
    
    $
    
  Intelligent Systems Corporation
 F-14




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##### Table of Contents



NOTE 8
  Leases
 Year ended December 31,(in thousands)2006
    
    $
    5802007
    
    
    5522008
    
    
    4762009
    
    
    2492010
    
    
    882011
    
    
    15Total minimum lease payments
    
    $
    1,960
  Legal Matters
  ISC Guarantees 
  Intelligent Systems Corporation
 F-15




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##### Table of Contents



NOTE 9
   NOTE 10
   NOTE 11
   NOTE 12
   NOTE 13
   Intelligent Systems Corporation
 F-16




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##### Table of Contents



2005
    
    
    2004Options outstanding
at Jan. 1
    
    
    226,680
    
    
    
    220,680Options granted
    
    
    12,000
    
    
    
    12,000Options exercised
    
    
    
    
    
    
    Options canceled
    
    
    
    
    
    
    6,000Options outstanding at
Dec. 31
    
    
    238,680
    
    
    
    226,680Options available for
grant at Dec. 31
    
    
    458,000
    
    
    
    470,000Options exercisable
at Dec. 31
    
    
    187,348
    
    
    
    142,014Option price ranges per share:Granted
    
    $
    2.08
    
    
    $
    1.92Canceled
    
    
    
    
    
    $
    1.75-$3.15Outstanding
    
    $
    1.51-$4.26
    
    
    $
    1.51-$4.26Weighted average option price per share:Granted
    
    $
    2.08
    
    
    $
    1.92Canceled
    
    
    
    
    
    $
    2.22Outstanding at Dec. 31
    
    $
    2.56
    
    
    $
    2.59Exercisable at Dec. 31
    
    $
    2.80
    
    
    $
    3.19
  Options OutstandingWgt. Avg.Contractual
    
    Wgt. Avg.Range of
    
    Number
    
    Life
    
    ExerciseExercise Price
    
    outstanding
    
    Remaining
    
    Price$1.51-$2.08
    
    
    136,000
    
    
    7.5 yrs
    
    $
    1.62$2.96-$4.26
    
    
    102,680
    
    
    4.2 yrs
    
    $
    3.81238,680
 Options ExercisableRange of
    
    
    
    
    
    Wgt. Avg.Exercise Price
    
    Number exercisable
    
    Exercise Price$1.51-$2.08
    
    
    84,668
    
    
    $
    1.57$2.96 -$4.26
    
    
    102,680
    
    
    $
    3.81187,348
 NOTE 14
   Year ended December 31,(in thousands)
    
    2005
    
    
    2004Foreign Countries:United Kingdom
    
    $
    2,257
    
    
    $
    2,484Chile
    
    
    916
    
    
    
    1,043Australia
    
    
    877
    
    
    
    547China
    
    
    661
    
    
    
    21Panama
    
    
    525
    
    
    
    New Zealand
    
    
    74
    
    
    
    155Other
    
    
    163
    
    
    
    149Subtotal
    
    
    5,473
    
    
    
    4,399United States
    
    
    10,624
    
    
    
    17,933Total
    
    $
    16,097
    
    
    $
    22,332
    Intelligent Systems Corporation
 F-17




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##### Table of Contents



NOTE 15
   Year ended December 31,(in thousands)
    
    2005
    
    
    2004Information TechnologyRevenue
    
    $
    10,028
    
    
    $
    16,032Operating income (loss)
    
    
    (3,235
    )
    
    
    217Depreciation and amortization
    
    
    275
    
    
    
    374Capital expenditures
    
    
    203
    
    
    
    136Identifiable assets
    
    
    3,746
    
    
    
    4,777Goodwill
    
    
    2,047
    
    
    
    2,049Industrial ProductsRevenue
    
    $
    6,069
    
    
    $
    6,300Operating income
    
    
    377
    
    
    
    313Depreciation and amortization
    
    
    234
    
    
    
    195Capital expenditures
    
    
    260
    
    
    
    259Identifiable assets
    
    
    2,913
    
    
    
    3,013Goodwill
    
    
    
    
    
    
    Consolidated SegmentsRevenue
    
    $
    16,097
    
    
    $
    22,332Operating income (loss)
    
    
    (2,858
    )
    
    
    530Depreciation and amortization
    
    
    509
    
    
    
    569Capital expenditures
    
    
    463
    
    
    
    395Identifiable assets
    
    
    6,659
    
    
    
    7,790Goodwill
    
    
    2,047
    
    
    
    2,049
  Year ended December 31,(in thousands)
    
    2005
    
    
    2004Consolidated segments
operating income (loss)
    
    $
    (2,858
    )
    
    $
    530Corporate expenses
    
    
    (946
    )
    
    
    (804
    )Consolidated operating loss
    
    
    (3,804
    )
    
    
    (274
    )Interest income
    
    
    22
    
    
    
    Investment income (loss)
    
    
    1,884
    
    
    
    2,524Equity of affiliates
    
    
    366
    
    
    
    (76
    )Other income
    
    
    (20
    )
    
    
    392Income (loss) before taxes
    
    
    (1,552
    )
    
    
    2,566Income taxes
    
    
    74
    
    
    
    3Net income (loss)
    
    $
    (1,626
    )
    
    $
    2,563Depreciation and amortizationConsolidated segments
    
    $
    509
    
    
    $
    569Corporate
    
    
    16
    
    
    
    29Consolidated
    
    $
    525
    
    
    $
    598Capital ExpendituresConsolidated segments
    
    $
    463
    
    
    $
    395Corporate
    
    
    48
    
    
    
    4Consolidated
    
    $
    511
    
    
    $
    399
 As of December 31,(in thousands)
    
    2005
    
    
    2004AssetsConsolidated segments
identifiable assets
    
    $
    6,593
    
    
    $
    7,790Corporate
    
    
    4,844
    
    
    
    5,114Consolidated
    
    $
    11,437
    
    
    $
    12,904
 NOTE 16
   Intelligent Systems Corporation
 F-18




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##### Table of Contents



Year ended December 31,(in thousands except per share data)
    
    2005
    
    
    2004BasicNet earnings (loss)
    
    $
    (1,626
    )
    
    $
    2,563Weighted average shares
outstanding
    
    
    4,479
    
    
    
    4,479Net earnings (loss)
per share
    
    $
    (0.36
    )
    
    $
    0.57DilutedNet earnings (loss)
    
    $
    (1,626
    )
    
    $
    2,563Weighted average shares
outstanding
    
    
    4,479
    
    
    
    4,479Effect of dilutive potential
common shares:Stock options
    
    
    
    
    
    
    129Total
    
    
    4,479
    
    
    
    4,608Net earnings (loss) per share
    
    $
    (0.36
    )
    
    $
    0.56
  NOTE 17
   Intelligent Systems Corporation
 F-19




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##### Table of Contents



Schedule II
 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2004 and 2005  (in thousands)
 Balance at
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Charged to Costs
    
    
    
    
    
    End ofDescription
    
    of Period
    
    and Expenses
    
    Deductionsa
    
    PeriodAllowance for Doubtful AccountsYear Ended December 31, 2004
    
    
    124
    
    
    
    67
    
    
    
    (88
    )
    
    
    103Year Ended December 31, 2005
    
    
    103
    
    
    
    60
    
    
    
    (80
    )
    
    
    83
 
 a.
    
    Write-offs of accounts receivable against allowance accounts. Intelligent Systems Corporation
 S-1