<PAGE>   1

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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, 1999

                          Commission file number 1-9330

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

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

  4355 SHACKLEFORD ROAD, NORCROSS, GEORGIA                 30093
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  (Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (770) 381-2900

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

   TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
   -------------------            -----------------------------------------
COMMON STOCK, $.01 PAR VALUE             AMERICAN STOCK EXCHANGE

        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 February 29, 2000, 5,684,467 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was $40,486,044 (computed using the closing price of the Common Stock
on February 29, 2000 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 June 9, 2000, are
incorporated by reference in Part III hereof.

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<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                              PAGE
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<S>                                                                                                                           <C>
PART I

         Item 1.   Business.....................................................................................................3
              2.   Properties...................................................................................................7
              3.   Legal proceedings............................................................................................7
              4.   Submission of matters to a vote of security holders..........................................................7

PART II

              5.   Market for the registrant's common equity and related stockholder matters....................................7
              6.   Selected financial data......................................................................................8
              7.   Management's discussion and analysis of financial condition and results of operations........................8
              7A.  Quantitative and qualitative disclosures about market risk..................................................11
              8.   Financial statements and supplementary data.................................................................11
              9.   Changes in and disagreements with accountants on accounting and financial disclosure........................11

PART III

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

PART IV

              14.  Exhibits, financial statement schedules and reports on Form 8-K.............................................12
      Signatures   ............................................................................................................15
</TABLE>



<PAGE>   3

                                     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). 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 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.

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. Our website address is www.intelsys.com.

Our main focus is to help entrepreneurs build valuable companies by forming
flexible partnership arrangements with early stage domestic companies. We bring
value to these companies by providing practical business advice, a proven
incubator program, early stage equity capital and a network of business and
financial contacts. Depending upon the needs of the partner company, we may be
either the majority or minority owner of the business and 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 (Internet,
Business to Business, e-commerce, software) although we are involved in other
promising opportunities as well (biotechnology, health care services etc.).

For almost 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 privately funded incubator
programs in the United States. Our incubator companies have access to resources
such as office space, conference facilities, telecommunication and network
infrastructure, education programs, business advice and planning, a network of
professional services, and 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. The Intelligent Systems Incubator provides us with the
opportunity for day-to-day contact with emerging companies that may become
partnership companies, either as majority-owned subsidiaries or minority-owned
affiliates. Additionally, the incubator increases the number of business and
investment opportunities with which we are presented. Recently, we launched an
Internet incubator program at our facility to support our plan to become more
active in companies tied to internet-related applications, tools or services. In
1999, ChemFree Corporation, an incubator company in which we have a significant
investment, was named Incubator Company of the Year (Manufacturing category) by
the National Business Incubation Association.

We have made equity investments 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 companies that may not be appropriate
investment opportunities for us at a given time. Conversely, we are partners
with a number of companies that are not physically located in our incubator.
Although most of our investments involve companies located in Georgia, we
believe it is too limiting to consider only opportunities in companies that are
close enough geographically to locate in our incubator facility. In acquiring
companies for our incubator program or for investment, we compete with other
sources of business assistance,


                        INTELLIGENT SYSTEMS CORPORATION
                                      -3-
<PAGE>   4

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.

FINANCIAL REPORTING. We consolidate the results of operations of our partner
companies in which we own a majority interest. We account for investments in
which we own 20 to 50 percent 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 investments such as PaySys and Risk Laboratories are shown as zero on our
balance sheet but, we believe their estimated market value is 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. From time to time, we may increase or decrease
our ownership in the company, the business may become a stand-alone public
company or it may be sold to another entity.

Beginning on page 5 of this report in the section titled "Affiliated Partner
Companies", we discuss some of our minority-owned partner companies.

CONSOLIDATED COMPANIES - Our consolidated companies, which currently include
ChemFree Corporation, QS Technologies and PsyCare America, operate in two
industry segments: technology related products and services, and health care
services. These companies are relatively small in size and subject to greater
fluctuation in revenue and profitability than larger, more established
businesses. For ease of comprehension, the business discussion which follows
contains information on products, markets, competitors, research and development
and manufacturing for our current operating subsidiaries, organized by industry
sector and by company. For further information concerning our historical
domestic and foreign operations, see Notes 14 and 16 in the accompanying Notes
to the Consolidated Financial Statements.

INDUSTRY SEGMENT: TECHNOLOGY RELATED PRODUCTS AND SERVICES

CHEMFREE CORPORATION - ChemFree Corporation (ChemFree), an incubator company
since its inception, 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
parts washer sale.

ChemFree's markets include the automotive, transportation, industrial and
military markets. The automotive market includes companies 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 direct 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. The ChemFree business is not seasonal and
would not be impacted significantly by the loss of one customer.

ChemFree competes with larger, established companies using 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.


                        INTELLIGENT SYSTEMS CORPORATION
                                      -4-
<PAGE>   5

Warranty service, typically covering a one-year period, is provided 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. There are
multiple sources available for subassemblies.

QS TECHNOLOGIES - QS Technologies operates from its Greenville, South Carolina
location, providing public health management 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 and maternal health 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. Typically, QS Technologies
provides its customers with service and support under annual contracts. Sales
are typically made in response to competitive bids and may take six to twelve
months to complete. QS Technologies is engaged in new product development
(including a web-based initiative) and sales activities to expand its customer
base and generate future revenue.

INDUSTRY SEGMENT: HEALTH CARE SERVICES

PsyCare provides specialty treatment programs for individuals with psychiatric
and psychological disorders, including depression and substance abuse. The
programs are conducted under PsyCare's Rapha(R) trademark and are directed
toward individuals who prefer a treatment approach that integrates their
physical and psychological needs with their Christian beliefs. The market for
PsyCare's treatment programs includes adults and adolescents suffering from
illnesses such as depression, addiction and behavioral disorders.

Traditionally, PsyCare's programs have been in-patient hospital programs
although PsyCare is introducing individual and group counseling services that
are marketed and conducted via the Internet and telephone. Historically
hospitals in mid to large size metropolitan areas contract with PsyCare to
conduct a Rapha treatment program in the hospital. PsyCare provides medical and
program directors as well as therapists and maintains control over all aspects
of the treatment, while the hospital provides the physical facility,
administrative services, billing and nursing staff. In 1999, PsyCare implemented
a licensing program which allows hospitals to license the Rapha program for a
monthly fee and implement the program using the hospital's existing medical and
therapy staff.

The number of hospital-based programs has declined in the past three years for a
number of reasons. The average length of stay for in-hospital treatment has
declined dramatically and managed care payors are reimbursing treatment
providers and hospitals at much lower rates. Furthermore, managed care is also
placing increased emphasis on drug-based treatment programs, with little or no
hospital stay. Given these trends, PsyCare has reduced overhead costs and
explored alternative business models, including licensing and telephone and
online counseling services. Although it was successful in maintaining
profitability in 1999 and 1998, it is too early to determine if the new
strategies will be effective long-term.

PsyCare's competitors include individual and group practices, private
hospital-affiliated treatment programs, other independent treatment programs
with a religious component, outpatient programs and drug-based therapies. Among
PsyCare's strengths are the consistent content and quality of its programs and
the strong network of Christian organizations that support the program's focus.

AFFILIATED PARTNER COMPANIES

An important part of our business 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, most of these companies are privately held, early stage
companies in technology-related fields. We are often the first investor in these
companies and are actively involved in helping the companies develop their
business strategy and plans. Some examples of our recent involvement are as
follows:

-        A significant equity position in PaySys International, Inc. (PaySys), a
         leading software company involved in providing software systems for
         processing credit transactions. We own a 37 percent common stock
         interest in PaySys (which is


                        INTELLIGENT SYSTEMS CORPORATION
                                      -5-
<PAGE>   6
         approximately 29.6 percent on a fully diluted basis). Revenue at PaySys
         grew to $50 million in 1999. PaySys spent significant amounts on new
         product development during recent years to increase its technological
         leadership. During the past three years, PaySys raised equity capital
         from Oak Partners, GE Capital and Advent, all large venture capital
         firms, at valuations higher than our original investment basis. Our
         investment in PaySys is recorded at zero on our balance sheet as a
         result of the equity method of accounting. Refer to Note 4 to the
         Consolidated Financial Statements.

-        A 33 percent equity position in Visibility, Inc., a privately held
         company involved in engineer-to-order software for large customers
         selling and managing complex products. Other investors include Oak
         Partners and Grubb & Williams. The downturn in the ERP industry in 1999
         had a negative impact on Visibility's sales growth and profitability
         although the company believes it prospects are improving. In addition,
         a new product line should allow Visibility to address a sizable new
         market. Refer to Note 4 to the Consolidated Financial Statements.

-        An approximately 29 percent equity position in Risk Laboratories, a
         privately held company involved in risk management software for
         corporate risk departments. Our investment in Risk is recorded at zero
         on our balance sheet due to early stage losses that we recorded under
         the equity method of accounting. Subsequent to year-end 1999, we sold
         part of our interest in a private transaction for $8.8 million cash and
         still retain an ownership position of approximately 7% of Risk
         Laboratories.

-        A 21 percent interest in Digital Wireless Corporation, a privately held
         incubator company involved in wireless telecommunications products for
         industrial and commercial markets. Refer to Note 4 to the Consolidated
         Financial Statements.

-        A minority equity position in 2order.com, an e-business involved in
         sales configuration software. In early 2000, 2order.com was acquired by
         publicly traded Primus Knowledge Systems and we acquired 66,431 shares
         of Primus stock for our holdings in 2order.com. We expect to recognize
         a significant gain when we sell our Primus shares, following a lock-up
         period.

-        A minority equity position in Novient, a privately held company
         involved in web-based resource and revenue management solutions for the
         professional services market. Novient raised two rounds of financing in
         the past two years from venture capital firms including Hummer Winblad,
         Mellon Ventures and Noro-Moseley, at valuations significantly higher
         than our original investment.

-        Our early investment in MediaMetrix, a leader in providing
         statistically valid tools and methodology to measure Internet use and
         user demographics, was converted into a gain of $995,000 in late 1999
         when we sold our shares following the initial public offering of
         MediaMetrix.

-        An early stage investment in VerticalOne, an emerging company focused
         on providing a personal portal to the Internet, was converted into a
         10,000 share interest in publicly traded SI Corporation when
         VerticalOne was acquired by SI Corporation in November 1999, less than
         a year after the initial financing.

-        A minority ownership in Atherogenics, a development stage company
         involved in novel pharmaceuticals and diagnostic markers which address
         cardiovascular disease and intervention. Atherogenics has raised
         subsequent rounds from large venture capital firms and recently filed a
         registration statement for its initial public offering.

-        A minority ownership in Medizeus, a start-up Internet company that
         provides web-based diagnostic and reporting tools for radiologists,
         medical image archival services and a women's health website, all of
         which are focused initially on the mammography market.

-        A minority ownership in ThinkWorks, an early stage company that
         provides web-based recruitment automation and employee records
         management automation tools via an application service provider model.

A complete list of our partner companies is found on our company website at
www.intelsys.com which is updated regularly to reflect frequent changes,
additions and progress in our affiliate partner companies.


                        INTELLIGENT SYSTEMS CORPORATION
                                      -6-
<PAGE>   7

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 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 Rapha, SmartWasher, OzzyJuice and others.

PERSONNEL

As of February 29, 2000, we had 64 full-time equivalent employees. 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 29, 2000, we have leases covering approximately 144,000 square feet
in two facilities in Atlanta, GA and 6,100 square feet in Greenville, SC to
house our 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 the company's technology business incubator.

ITEM 3. LEGAL PROCEEDINGS

In 1999, a former consultant of the ChemFree subsidiary brought a 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. Refer to
Note 10 to the Consolidated Financial Statements for further detail. 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.

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, 1999.


                                     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,                     1999                             1998
                                  HIGH              LOW              HIGH              LOW
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                   <S>            <C>             <C>               <C>              <C>
                   1ST QUARTER    2 5/8           1 9/16             5 1/8           3 3/8
                   2ND QUARTER    3 5/8           2                  4 5/8           2 7/8
                   3RD QUARTER    3 5/8           2 3/8              3 3/4           2 3/16
                   4TH QUARTER    4 1/4           2 1/16             3               1 3/8
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                      -7-
<PAGE>   8

We had 461 shareholders of record as of February 29, 2000. We did not declare or
pay any cash dividends in the two-year period ended December 31, 1999. The
company has not paid dividends in the past but may pay cash dividends from time
to time on an irregular basis. On March 27, 2000 the company declared a special
cash dividend of $0.52 per share payable to shareholders of record on April 7,
2000.

ITEM 6.           SELECTED FINANCIAL DATA

 (in thousands except share amounts)

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,          1999                1998                 1997              1996              1995
------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>                 <C>                 <C>               <C>
Net Sales                             $     8,479         $    18,253         $    21,160         $   23,678        $   28,240
Net Income (Loss)                             249 (a)          (1,548)(b)          (7,176)(c)          4,239(d)            147(e)
Net Income (Loss) Per Share                  0.05                (.30)              (1.41)              0.80              0.03
Total Assets                               13,658              17,099              19,091             24,927            23,330
Working Capital                               (48)             (1,827)             (1,068)             8,554             4,092
Long-term Debt                                363                 900               1,000                 --                50
Stockholders' Equity                       10,209               9,641              11,396             21,630            18,725
Shares Outstanding at Year End          5,114,467           5,104,467           5,104,467          5,126,767         5,312,867
</TABLE>

a.       Includes investment gains of $2.2 million and $948,000 in net losses in
         equity of investments.
b.       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.
c.       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.
d.       Includes net gains of $6.9 million on investments and non-recurring
         charges of $1.25 million.
e.       Includes $818,000 gain on investment and $1.3 million gain on sale of
         ISJ.

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

         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," and "intend" and other similar expressions
         constitute forward-looking statements. These forward-looking statements
         are subject to business and economic risks and uncertainties, and our
         actual results of operations may differ materially from those contained
         in the forward-looking statements.

In August 1998, our HumanSoft subsidiary discontinued certain product lines
and, in November 1998, filed a petition for relief under Chapter 11 of the
federal bankruptcy code. Although HumanSoft emerged from Chapter 11 in November
1999, since the original 1998 filing date, only the QS Technologies subsidiary
of HumanSoft has continued to develop and sell software products and services to
the public health market. Also, effective February 1, 1999, we sold our
InterQuad Services company and thus do not consolidate the results of
InterQuad's operations since the sale date. Much of the variance in operating
results between 1999 and 1998 can be attributed to these two transactions.

RESULTS OF OPERATIONS

SUMMARY OF OPERATING RESULTS - Our ongoing consolidated subsidiaries are
ChemFree Corporation (bio-remediating parts washers), QS Technologies (health
and human services software) and PsyCare America (specialty psychiatric
treatment programs). The net loss from operations in 1999 was significantly
lower than in 1998 principally because we sold or discontinued the HumanSoft and
InterQuad businesses, which had sustained large losses in 1998, and because our
remaining


                        INTELLIGENT SYSTEMS CORPORATION
                                      -8-
<PAGE>   9

consolidated companies are operating at break even or generating slight profits.
Operating losses in 1999 are principally corporate overhead and expenses related
to the technology incubator program.

SALES - Net sales in 1999 were $8,479,000, a decline of 54 percent compared to
1998. Almost 80 percent of the decrease is related to the sale of the InterQuad
Services business in early 1999 and the discontinuation of certain HumanSoft
operations. The QS Technologies subsidiary of HumanSoft continues to generate
license and maintenance revenue from software products and services. ChemFree
experienced an increase in revenue while PsyCare's revenue declined as the firm
closed certain hospital programs and moved to a licensing arrangement with more
of its programs. Under the licensing arrangement, although revenue billed
declines, expenses associated with the programs also decline.

Net sales in 1998 were $18,253,000, a decline of 14 percent compared to 1997.
The decrease is related to the sale of the Intelligent Enclosures business in
early 1998 and the continued decline in revenue derived from the PsyCare
operations, offset in part by an increased volume of products and services at
ChemFree and InterQuad. In the last quarter of 1998, HumanSoft's contribution to
our revenue was substantially lower than in prior periods as a result of
discontinuing two product lines and the Chapter 11 bankruptcy filing.

Health care services revenues represent 21 percent, 23 percent and 29 percent of
the total revenues for 1999, 1998 and 1997, respectively. The decline in the
contribution of the health care services is due to fewer inpatient programs,
lower reimbursement rates and a shift to licensing arrangements at the PsyCare
subsidiary. Revenue derived from international sales was 16 percent in 1999
compared to 39 percent in 1998 and 33 percent in 1997. The decrease in 1999
compared to prior years is a direct result of the sale of the InterQuad Services
group, the revenue of which was all international.

COST OF SALES - In 1999, cost of sales was 47 percent of revenue compared to 68
percent in 1998. The change is due to the fact that both InterQuad Services and
the discontinued HumanSoft operations had much higher cost of sales than do the
continuing operations. Cost of sales for the continuing operations was not
significantly different in 1999 compared to 1998.

Cost of sales in 1998 was 68 percent of revenue compared to 62 percent in 1997.
Although ChemFree, InterQuad and PsyCare reduced their respective cost of sales
as a percentage of revenue in 1998 as compared to 1997, HumanSoft's cost of
sales increased dramatically. For much of 1998, HumanSoft's expenses increased
significantly for technical personnel to develop, install and support software
for which the company was unable to record sufficient new revenue.

OPERATING EXPENSES - In 1999, marketing expenses declined in both absolute terms
and as a percentage of revenue compared to 1998. Again, much of the year-to-year
change is attributed to the sale of the InterQuad Services group and the
discontinuation of HumanSoft operations. In addition, PsyCare decreased its
marketing expenses in line with lower revenue from hospital based programs
although it is likely to increase marketing expenditures slightly in the future
as it introduces new services. General and administrative expenses were
$3,469,000 compared to $7,346,000 in 1998. Almost 70 percent of the year-to-year
change is due to the sale of InterQuad Services and the downsizing of the
HumanSoft operation. Included in the 1999 results are non-recurring
administrative and legal expenses totaling $156,000 related to the HumanSoft
bankruptcy case. In addition, in 1999 PsyCare reduced its facility and personnel
expenses and ISC's corporate expenses were lower as well, mainly due to lower
personnel expenses. Research and development expense declined in 1999 compared
to 1998 principally because of the downsizing of the HumanSoft operation. The QS
Technologies and ChemFree subsidiaries continue to invest in new product
development efforts.

In 1998, marketing expenses declined in absolute terms but increased as a
percentage of revenue compared to 1997. This change represents the net effect of
increased expenditures in the technology sector to support more customers and
higher revenue levels offset by a decline in marketing spending at PsyCare due
to a decline in in-patient hospital programs. Furthermore, in contrast to the
prior period, in 1998 we include the operating expenses related to two acquired
companies, JK and QS, for the full year. General and administrative expenses
were $7.3 million in 1998 compared to $7.6 million in the prior year. PsyCare
reduced expenses significantly through lower staffing levels and expense
control, as did our corporate group. At the same time, however, general and
administrative expenses at HumanSoft increased significantly. The increase
includes a third-quarter charge of $955,000 to discontinue two product lines, a
$191,000 restructuring charge in the first quarter following the JK acquisition,
and increased amortization expense related to the acquisitions. The $955,000
charge includes a goodwill write-off of $558,000. Research and development
expense for 1998 includes a one-time expense of $944,000 to allocate a portion
of the JK purchase price to in-process research and development as well as
increased new


                        INTELLIGENT SYSTEMS CORPORATION
                                      -9-
<PAGE>   10
product development spending in the first 8 months of this year. By comparison,
in 1997, R&D expense includes a one-time charge of $953,000 to allocate a
portion of the QS purchase price to in-process research and development.

INTEREST INCOME - In 1999, we had net interest expense of $88,000 compared to
net interest expense of $289,000 in 1998 and net interest income of $350,000 in
1997. In 1999, interest expense associated with InterQuad Services was lower
than in 1998 and the domestic operations paid less interest on notes payable to
third parties because there was a lower level of debt in 1999 as compared to
1998. In 1998, we had interest expense on notes payable principally to the
sellers of QS and JK as well as interest on a higher level of bank debt in 1998
than in 1997. We also earned less interest on interest-bearing notes receivable
because some of the notes were repaid early in 1998.

INVESTMENT INCOME - In 1999, we recorded net investment income of $1.2 million
compared to net investment income of $5.8 million in 1998 and a net investment
loss of $2.6 million in 1997. The main components of investment income in 1999
include gains totaling $1.2 million on the sale of certain equity holdings in
three private software companies, a gain of $995,000 on the sale of our holdings
in MediaMetrix stock and $948,000 in net losses in the equity of affiliates
accounted for by the equity method. Refer to Note 3 for details on the sale
transactions mentioned in this section.

The main components of 1998 investment income include a gain of $1.0 million on
the sale of IQ Software common stock, a gain of $2.5 million on the sale of
PaySys stock, a gain of $457,000 on the sale of Paragon Interface stock, a gain
of $1.2 million on the sale of the IE business, and $593,000 in net gains in the
equity of affiliates accounted for by the equity method. Refer to Note 3 for
details on the sale transactions mentioned in this section.

In 1997, we recorded a net loss of $2.6 million on investments. The principal
components of this category include a gain of $1.9 million on the sale of PaySys
stock (see Note 3), a gain of $469,000 on the sale of an investment in Astra
Communications, a gain of $217,000 on the sale of OrCAD stock (see Note 3), a
$3.0 million write-off of a note receivable from DayStar Digital, Inc. and $2.3
million in net losses in the equity of affiliates accounted for by the equity
method.

OTHER INCOME - Other income/expense in each of the last three years consists
mainly of various minor, non-recurring sources of income and expense. However,
in 1999, this category includes a net non-recurring charge of $141,500 related
to final settlement of the amounts owed to creditors in the HumanSoft bankruptcy
case.

TAXES - We had no income tax expense in 1999 because investment gains were
offset by capital loss carryforwards. We recognized a tax benefit in 1998 due to
a net operating loss carryback at the JK, Inc. subsidiary. Taxes payable in 1997
relate to the operations of the QS, Inc. subsidiary acquired in 1997.

COMMON SHARES - In 1999, the exercise of a stock option to acquire 10,000 shares
increased the number of shares outstanding at year-end to 5,114,467.

YEAR 2000 READINESS - In preparation for potential problems arising from the
inability of certain computer programs to correctly interpret dates designated
as "00" as the year 2000 rather than the year 1900, we reviewed our internal
computer-based systems, inquired of our key vendors and suppliers as to their
Year 2000 readiness and upgraded all non-compliant internal systems. Our QS
Technologies subsidiary licenses software to its customers and either migrated
its customers to software versions that we believe are Year 2000 compliant or
had previously informed customers that certain older software versions would no
longer be supported. Our cost to address internal compliance updates was well
under the anticipated level of $100,000. To date, we have not experienced any
impact on our operations or financial position as a result of the Year 2000
issue nor are we aware of any problems that might arise. However, we have
investments in a number of companies over which we do not exercise control. To
the extent that any company in which we have a significant investment
experiences a material negative impact on its business, the long-term value of
our investment could be reduced.

LIQUIDITY AND CAPITAL RESOURCES

With respect to continuing operations, in 1999 we derived $902,000 cash from the
sale of our remaining holdings in Information Advantage (formerly IQ Software),
$416,000 cash from sales of part of our holdings in two privately held software
companies and $1.1 million cash from the sale of our holdings in MediaMetrix,
Inc. During the year, we drew down a total of $1.25 million under a bank line of
credit which was paid down subsequently to $100,000 at year-end 1999.


                        INTELLIGENT SYSTEMS CORPORATION
                                      -10-
<PAGE>   11

We used approximately $1.1 million cash in 1999 to pay down short-term notes
payable to third parties (not including banks), $845,000, net, for investments
in new businesses or follow-on funding for prior investments, and $310,000 for
payments for legal expenses and creditor settlements under the confirmed Plan of
Reorganization of HumanSoft. Significant changes year-to-year in accounts
receivable, property plant and equipment, notes payable, accounts payable, and
other current assets and liabilities are due principally to the sale of
InterQuad Services in February 1999 and the de-consolidation of assets and
liabilities of the former subsidiary.

In 1998, we derived most of our cash from the sale of common stock of IQ
Software (now Information Advantage) for $1.2 million, the sale of our interest
in Paragon Software and payment of a Paragon note for a total of $989,000, the
sale of shares of common stock of PaySys for $2.5 million, advances of $750,000
under a bank loan at the InterQuad subsidiary, and a net cash return of $589,000
on another minority investment. Details on these sales are found in Note 3. We
used approximately $5.3 million cash in 1998 to fund operating losses at certain
subsidiaries (the majority of which relates to the HumanSoft operation),
$200,000 for the initial payment related to the acquisition of JK, $700,000 to
repay a domestic bank line, and $500,000 for a principal payment on a note
related to the acquisition of QS. Accounts receivable are lower at December 31,
1998 than at December 31, 1997 mainly because of improved collection activity,
lower revenue levels at the PsyCare subsidiary and reserves taken at the
HumanSoft subsidiary related to the decision to discontinue certain product
lines.

We believe we have adequate funding for anticipated cash needs for the
foreseeable future. Subsequent to year end, on March 21, 2000, we sold the
majority of our holdings in Risk Laboratories for $8.8 million in cash. In
addition, we have the right to require the purchaser to acquire our remaining 7%
interest in Risk Laboratories from us at various time periods in the next two
years for approximately $2.4 million cash. Refer to Note 19 for further details.
Furthermore, as a result of the acquisitions by public companies of two of our
investments, 2order.com and VerticalOne, we now hold common stock of the two
public companies. These holdings represent additional sources of liquidity
either through borrowings secured by a pledge of the stock or by selling the
stock in the public market, subject to certain short-term holding period
restrictions. As explained in Note 1 to the Consolidated Financial Statements, a
substantial deterioration in the financial condition of companies in which we
have significant long-term investments could have an adverse effect on the
company. Conversely, developments at one or more of these companies which result
in a liquidity event, such as an initial public offering or acquisition, could
impact our financial condition in a positive manner.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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, 1999 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 June 9,
2000 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


                        INTELLIGENT SYSTEMS CORPORATION
                                      -11-
<PAGE>   12

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

In 1999, J. William Goodhew, Vice President of the company, invested $100,000 in
Risk Laboratories, LLC, a business in which Intelligent Systems Corporation
owned an equity interest. The terms of the transaction were negotiated between
Mr. Goodhew and Risk Laboratories at arm's length on terms similar to those
offered to other third parties. On March 21, 2000, as part of the transaction in
which the company sold the majority of its interest in Risk Laboratories (see
Note 19), Mr. Goodhew sold part of his interest for the same valuation as other
shareholders.

On January 5, 2000, three officers of the company exercised stock options and
issued to the company promissory notes in payment of the exercise price. J.
Leland Strange, President and Chief Executive Officer, exercised options to
acquire 230,000 shares of common stock and issued the company a promissory note
for $380,000 representing the total exercise price of the options. Bonnie L.
Herron, Vice President and Chief Financial Officer, and Francis A. Marks, Vice
President, each exercised options to acquire 170,000 shares of common stock and
each issued the company a promissory note for $258,750 representing the total
exercise price of their respective options. Each of the notes is secured by a
pledge of the common stock acquired upon exercise of the option, has a term of
one year and bears interest at the rate of seven percent (7%) per annum.

                                     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, 1999 and 1998
      Consolidated Statements of Operations for the years ended
         December 31, 1999, 1998 and 1997 Consolidated Statements of
      Changes in Stockholders' Equity for the
         years ended December 31, 1999, 1998 and 1997
      Consolidated Statements of Cash Flow for the years ended
         December 31, 1999, 1998 and 1997
      Notes to Consolidated Financial Statements


                        INTELLIGENT SYSTEMS CORPORATION
                                      -12-
<PAGE>   13

         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, 1999 and 1998
      Consolidated Statements of Operations of PaySys for the three years
         ended December 31, 1999
      Consolidated Statements of Changes in Stockholders' Equity of
         PaySys for the three years ended December 31, 1999
      Consolidated Statements of Cash Flow of PaySys for the three years ended
        December 31, 1999
      Notes to Consolidated Financial Statements of PaySys
      Report of Independent Public Accountants for Visibility, Inc.
      Consolidated Balance Sheets of Visibility at December 31, 1999 and 1998
      Consolidated Statements of Operations of Visibility for the three years
        ended December 31, 1999
      Consolidated Statements of Changes in Stockholders' Equity of
        Visibility for the three years ended December 31, 1999
      Consolidated Statements of Cash Flow of Visibility for the three
        years ended December 31, 1999
      Notes to Consolidated Financial Statements of Visibility
      Report of Independent Public Accountants for Digital Wireless Corporation
      Balance Sheet of Digital Wireless Corporation at December 31, 1999
      Statement of Operations of Digital Wireless Corporation for the year ended
        December 31, 1999
      Statement of Changes in Stockholders' Equity of Digital Wireless
        Corporation for the year ended December 31, 1999
      Statement of Cash Flow of Digital Wireless Corporation for the year ended
        December 31, 1999
      Notes to Financial Statements of Digital Wireless Corporation

         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)     Articles of Amendment of Articles of Incorporation dated November 25,
         1997. (Incorporated by reference 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      See Exhibits 3(i) and 3(ii) for instruments defining rights of holders
         of Common Stock and Preferred Stock of Registrant.

4.2      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.)

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

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.)


                        INTELLIGENT SYSTEMS CORPORATION
                                      -13-
<PAGE>   14

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.

         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
         Registrant's Form 10-K for the year ended December 31, 1993.

10.4     Revolving Loan Agreement dated July 2, 1999 between Registrant and
         Fidelity National Bank.

10.5     Stock Pledge Agreement dated July 2, 1999 between Registrant and
         Fidelity National Bank.

10.6     Second Modification to Loan Documents dated March 7, 2000 between
         Registrant and Fidelity National Bank.

10.7     Commercial Promissory Note dated July 2, 1999 in favor of Fidelity
         National Bank.

10.8     Second Amendment to Commercial Promissory Note dated March 7, 2000 in
         favor of Fidelity National Bank.

10.9     Conditional Guaranty of Payment dated November 29, 1999 by the
         Registrant in favor of certain creditors of HumanSoft LLC, related to
         the confirmation of the Amended and Restated Plan of Reorganization of
         HumanSoft LLC, a wholly owned subsidiary of the Registrant.

21.0     List of subsidiaries of Registrant.

23.1     Consent of Arthur Andersen LLP.

23.2     Consent of Ernst and Young LLP.

23.7     Financial Data Schedule (for SEC only).

(B)  REPORTS ON FORM 8-K.

We did not file any reports on Form 8-K during the quarter ended December 31,
1999.

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

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


                        INTELLIGENT SYSTEMS CORPORATION
                                      -14-
<PAGE>   15

                                   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 29, 2000                 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 29, 2000
-----------------------             Chief Executive Officer and Director
     J. Leland Strange              (Principal Executive Officer)



/s/ Bonnie L. Herron                Chief Financial Officer                              March 29, 2000
-----------------------             (Principal Accounting and Financial Officer)
     Bonnie L. Herron


/s/ Donald A. McMahon               Director                                             March 29, 2000
-----------------------
     Donald A. McMahon


/s/ James V. Napier                 Director                                             March 29, 2000
-----------------------
     James V. Napier


/s/ John B. Peatman                 Director                                             March 29, 2000
-----------------------
     John B. Peatman


/s/ Parker H. Petit                 Director                                             March 29, 2000
-----------------------
     Parker H. Petit
</TABLE>


                        INTELLIGENT SYSTEMS CORPORATION
                                      -15-
<PAGE>   16


                         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, 1999 and 1998.................................................................F-3

 Consolidated Statements of Operations -
        Years Ended December 31, 1999, 1998 and 1997......................................................................F-4

 Consolidated Statements of Changes in Stockholders' Equity -
        Years Ended December 31, 1999, 1998 and 1997......................................................................F-5

 Consolidated Statements of Cash Flow -
        Years Ended December 31, 1999, 1998 and 1997......................................................................F-6

 Notes to Consolidated Financial Statements...............................................................................F-7

FINANCIAL STATEMENT SCHEDULES:

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

 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, 1999 and 1998...............................................S-3
        Consolidated Statements of Operations of PaySys for the three years ended December 31, 1999.......................S-4
        Consolidated Statements of Changes in Shareholders' Equity (Deficit) of PaySys
           for the three years ended December 31, 1999....................................................................S-5
        Consolidated Statements of Cash Flow of PaySys for the three years ended December 31, 1999........................S-6
        Notes to Consolidated Financial Statements of PaySys..............................................................S-7

 Report of Independent Public Accountants for Visibility, Inc............................................................S-31
        Consolidated Balance Sheets of Visibility at December 31, 1999 and 1998..........................................S-32
        Consolidated Statements of Operations of Visibility for the three years ended December 31, 1999..................S-33
        Consolidated Statements of Changes in Shareholders' Equity of Visibility
           for the three years ended December 31, 1999...................................................................S-34
        Consolidated Statements of Cash Flow of Visibility for the three years ended December 31, 1999...................S-35
        Notes to Consolidated Financial Statements of Visibility.........................................................S-36

 Report of Independent Public Accountants for Digital Wireless Corporation...............................................S-49
        Balance Sheet of Digital Wireless Corporation at December 31, 1999...............................................S-50
        Statement of Operations of Digital Wireless Corporation for the year ended December 31, 1999.....................S-52
        Statement of Changes in Shareholders' Equity of Digital Wireless Corporation
           for the year ended December 31, 1999..........................................................................S-53
        Statement of Cash Flow of Digital Wireless Corporation for the year ended December 31, 1999......................S-54
        Notes to Financial Statements of Digital Wireless Corporation....................................................S-55
</TABLE>

*These documents are available upon request to Bonnie Herron and payment of $.50
per page for copying charges.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-1
<PAGE>   17

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


             TO THE STOCKHOLDERS OF INTELLIGENT SYSTEMS CORPORATION:

We have audited the accompanying consolidated balance sheets of Intelligent
Systems Corporation (a Georgia corporation) and its subsidiary companies and
operating partnerships as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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. We did not audit
the financial statements of InterQuad Services Limited, which statements reflect
0 percent of total assets and 7 percent of total revenues in 1999 and 19.5
percent of total assets and 37.1 percent of total revenues in 1998. We did not
audit the financial statements of PaySys International, Inc., an investment
which is reflected in the accompanying financial statements using the equity
method of accounting. The investment in PaySys International, Inc. represents 0
percent of total assets in 1999 and 1998, and the equity in its 1999 and 1998
net loss represents 0 percent of consolidated net income for 1999 and 0 percent
of consolidated net loss for 1998. The statements of InterQuad Services Limited
and PaySys International, 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 InterQuad Services Limited and PaySys International, 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 audit 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 subsidiary
companies and operating partnerships as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 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, fairly states in all
material respects 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 23, 2000


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-2
<PAGE>   18

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31,                                                                                      1999                 1998
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                   <C>                  <C>
Current assets:
  Cash                                                                                                $    737             $    461
  Accounts receivable, net                                                                               1,464                2,165
  Notes and interest receivable                                                                            254                  189
  Inventories                                                                                              325                  741
  Other current assets                                                                                     263                  990
-----------------------------------------------------------------------------------------------------------------------------------
    Total current assets                                                                                 3,043                4,546
-----------------------------------------------------------------------------------------------------------------------------------
Long-term investments                                                                                    8,576                8,593
Long-term notes receivable                                                                                  53                   75
Property and equipment, at cost less accumulated depreciation and amortization                             686                2,570
Excess of cost over underlying net assets of businesses acquired,
      net of accumulated amortization                                                                       --                   15
 Other assets                                                                                            1,300                1,300
===================================================================================================================================
Total assets                                                                                          $ 13,658             $ 17,099

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
  Short-term borrowings                                                                               $  1,000             $  2,078
  Accounts payable                                                                                         444                1,727
  Accrued expenses and other current liabilities                                                         1,647                2,568
-----------------------------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                                            3,091                6,373
-----------------------------------------------------------------------------------------------------------------------------------
Long-term debt                                                                                             363                  900
-----------------------------------------------------------------------------------------------------------------------------------
Minority interest                                                                                           (5)                 185
-----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
  Common stock, $.01 par value, 20,000,000 authorized, 5,114,467 and
      5,104,467 outstanding at December 31, 1999 and 1998, respectively                                     51                   51
  Paid-in capital                                                                                       24,069               24,046
  Foreign currency translation adjustment                                                                   --                 (197)
  Unrealized gain in available-for-sale securities                                                         731                  633
  Accumulated deficit                                                                                  (14,642)             (14,892)
-----------------------------------------------------------------------------------------------------------------------------------
    Total stockholders' equity                                                                          10,209                9,641
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                            $ 13,658             $ 17,099
===================================================================================================================================
</TABLE>

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


                         INTELLIGENT SYSTEMS CORPORATION
                                      F-3
<PAGE>   19


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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                            1999                    1998                    1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                     <C>                     <C>
Net sales                                                      $     8,479             $    18,253             $    21,160
Expenses:
    Cost of sales                                                    3,983                  12,495                  13,031
    Marketing                                                        1,021                   3,561                   3,860
    General & administrative                                         3,469                   7,346                   7,638
    Research & development                                             805                   1,892                   1,485
--------------------------------------------------------------------------------------------------------------------------
Loss from operations                                                  (799)                 (7,041)                 (4,854)
--------------------------------------------------------------------------------------------------------------------------
Other income:
    Interest income (expense), net                                     (88)                   (290)                    350
    Investment income (loss), net                                    1,222                   5,776                  (2,585)
    Other loss, net                                                    (76)                   (135)                    (61)
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax provision (benefit)
     and minority interest                                             259                  (1,690)                 (7,150)
--------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit)                                          --                    (152)                     16
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest                                 259                  (1,538)                 (7,166)
--------------------------------------------------------------------------------------------------------------------------
Minority interest                                                       10                      10                      10
==========================================================================================================================
Net income (loss)                                              $       249             $    (1,548)            $    (7,176)
Basic net income (loss) per share                              $      0.05             $     (0.30)            $     (1.41)
Diluted net income (loss) per share                            $      0.05             $     (0.30)            $     (1.41)
Basic weighted average shares outstanding                        5,106,134               5,104,467               5,087,456
--------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding                      5,336,776               5,104,467               5,087,456
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements.



                         INTELLIGENT SYSTEMS CORPORATION
                                      F-4
<PAGE>   20


                         INTELLIGENT SYSTEMS CORPORATION
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                              STOCKHOLDERS' EQUITY
                       (in thousands except share amounts)
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
STOCKHOLDERS' EQUITY                                                         1999                    1998                    1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                     <C>                     <C>
COMMON STOCK, NUMBER OF SHARES, beginning of year                       5,104,467               5,104,467               5,126,767
Exercise of options during year                                            10,000                      --                  25,000
Purchase and retirement of stock                                               --                      --                 (47,300)
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                           5,114,467               5,104,467               5,104,467
---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, AMOUNT, beginning of year                               $        51             $        51             $        51
Purchase and retirement of stock                                               --                      --                      --
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                                  51                      51                      51
---------------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL, beginning of year                                         24,046                  24,046                  24,139
Proceeds from options exercised                                                23                      --                      67
Purchase and retirement of stock                                               --                      --                    (160)
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                              24,069                  24,046                  24,046
---------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, beginning of year                   (197)                   (193)                   (196)
Foreign currency translation adjustment during year                           197                      (4)                      3
---------------------------------------------------------------------------------------------------------------------------------
 End of year                                                                  --                    (197)                   (193)
---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN IN AVAILABLE-FOR-SALE SECURITIES                              731                     633                     836
---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, beginning of year                                    (14,892)                (13,344)                 (6,168)
Net income (loss)                                                             249                  (1,548)                 (7,176)
---------------------------------------------------------------------------------------------------------------------------------
  End of year                                                             (14,642)                (14,892)                (13,344)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                            $    10,209             $     9,641             $    11,396
=================================================================================================================================

COMPREHENSIVE INCOME
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                     $       249             $    (1,548)            $    (7,176)
Other comprehensive income (loss):
   Foreign currency translation adjustments                                    --                      (4)                      3
   Unrealized gain                                                            731                     633                     836
---------------------------------------------------------------------------------------------------------------------------------
 Comprehensive income (loss)                                          $       980             $      (919)            $    (6,337)
=================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.


                         INTELLIGENT SYSTEMS CORPORATION
                                      F-5
<PAGE>   21

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


<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
CASH PROVIDED BY (USED FOR):                                                       1999                1998              1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>                 <C>
OPERATIONS:
   Net income (loss)                                                             $   249             $(1,548)            $(7,176)
   Adjustments to reconcile net income (loss) to net cash provided by
      (used for) operating activities, net of
      effects of acquisitions and dispositions:
         Depreciation and amortization                                               347               1,509               2,193
         Loss (gain) from sale or write-down of assets, net                       (2,170)             (5,184)                330
         Equity in net loss (income) of affiliates                                   948                (592)              2,262
         Changes in operating assets and liabilities:
            Accounts receivable                                                       19               2,013                 453
            Inventories                                                              279                (130)                 37
            Other current assets                                                     290                (200)                (36)
            Accounts payable                                                        (459)                353                 301
            Accrued expenses and other current liabilities                           315              (1,507)              2,668
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) continuing operations                                   (182)             (5,286)              1,032
---------------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES:
   Proceeds from sales of investments                                              2,365               5,451               3,667
   Decrease in net assets/liabilities of
      discontinued operations                                                         --                  --                 100
   Acquisition of company, net of cash acquired                                       --                  83                (870)
   Increase in ownership of subsidiaries                                              --                  --                 (50)
   Increase (decrease) in minority interests                                        (190)                 10                  --
   Acquisitions of long-term investments                                            (788)               (306)             (6,329)
   Repayments (advances) under notes receivable, net                                 (57)                232              (1,223)
   Maturity (purchases) of certificates of deposit                                    --                  --               1,056
   Dispositions (purchases) of property and equipment, net                           (13)                838              (1,162)
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities                                   1,317               6,308              (4,811)
---------------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES:
   Net borrowings (repayments) under short-term
     borrowing arrangements                                                         (975)               (600)              1,478
   Purchase and retirement of stock                                                   --                  --                (160)
   Exercise of stock options                                                          23                  --                  67
   Foreign currency translation adjustment                                            93                  (4)                  3
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities                                    (859)               (604)              1,388
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                                      276                 418              (2,391)
Cash at beginning of year                                                            461                  43               2,434
---------------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                              $   737             $   461             $    43
=================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.



                         INTELLIGENT SYSTEMS CORPORATION
                                      F-6

<PAGE>   22
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 and us refer to Intelligent Systems Corporation.

Nature of Operations - Our business is to create, manage 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: technology related products and services and health
care services (as defined more specifically in Note 16). Our affiliate
companies (in which we have a minority ownership or non-controlling interest)
are mainly involved in the technology industry.

Use of Estimates - In preparing the financial statements in conformity with
generally accepted accounting principles, 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, 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, 1999, the aggregate fair
market value of our available-for-sale securities, which consist of 10,000
shares of common stock of S1 Corporation (which shares were acquired as a
result of the merger of one of our minority owned businesses) totaled $781,000.
At December 31, 1998, the aggregate fair value of our available-for-sale
securities, which consisted primarily of 95,449 shares of common stock of
Information Advantage, Inc. (successor by merger to IQ Software Corporation
(IQ)) totaled $725,000. These amounts include unrealized holding gains of
$731,000 and $633,000 as of December 31, 1999 and 1998, respectively. These
amounts are reflected as a separate component of stockholders' equity.

We classify short-term investments as trading securities under SFAS No. 115.
The impact on the December 31, 1999 and 1998 financial statements of applying
SFAS No. 115 to the trading securities was immaterial. Our investment in
Visibility represents approximately $4.2 million of our long-term investments
at December 31, 1999 (see Note 4). If the financial condition of Visibility
deteriorates, it could have an adverse effect on our financial condition.

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 year-end exchange rates. We translate income and
expense items at average rates of exchange prevailing during the year.
Translation adjustments are accumulated as a separate component of
stockholders' equity. Earnings include gains and losses that result from
foreign currency transactions.

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

Property and Equipment - Property and equipment are carried at cost. For
financial reporting purposes, 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                        5
Furniture & fixtures                       7
Leasehold improvements                    1-7
--------------------------------------------------------
</TABLE>

Accumulated depreciation and amortization was $1,024,000 and $2,241,000 at
December 31, 1999 and 1998, respectively.


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-7
<PAGE>   23

Intangibles - Intangibles are carried at cost net of related amortization. When
we acquire a business, we generally amortize the excess of the cost of the
acquisition over underlying net assets of the business acquired over three to
five year periods using the straight-line method. Accumulated amortization of
intangibles totaled $179,000 and $2.7 million at December 31, 1999 and 1998,
respectively. Our policy is to write off the asset and accumulated amortization
for fully amortized intangibles. Periodically we review the values assigned to
intangible assets to determine whether they have been permanently impaired. To
measure whether goodwill is recoverable, we use an estimate of the undiscounted
cash flows of the applicable entity over the remaining life of the goodwill. In
1998, we wrote off $558,000 of goodwill associated with discontinuing certain
product lines of the HumanSoft subsidiary (see Note 18). This write-off is
reflected in general and administrative expense in the accompanying statements
of operations. In 1999, 1998 and 1997, we recorded intangible amortization
expense of approximately $14,987, $957,000 and $604,000, respectively. In 1998,
we expensed $944,000 of purchased research and development related to the
acquisition of JK, Inc. (see Note 2). In 1997, we expensed $953,000 of
purchased research and development related to the acquisition of QS, Inc. (see
Note 2). These expenses are included in research and development expense on the
accompanying statements of operations.

Accrued Expenses and Other Current Liabilities - Accrued expenses and other
liabilities at December 31, 1999 and 1998 consist of the following:

<TABLE>
<CAPTION>
(in thousands)                            1999     1998
---------------------------------------------------------
<S>                                       <C>      <C>
Accrued wages and payroll taxes           $ 277     $454
Deferred revenue                            709      782
Other accrued expenses                      660    1,329
---------------------------------------------------------
</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 -Sales of software licenses, technology-related products
and services and health care services make up our revenue. We recognize revenue
when products are shipped or, in the case of service providers, when the
services are rendered. Revenue recognition practices for software are in
accordance with Statement of Position 97-2, "Software Revenue Recognition".
Generally, we recognize software license revenue upon delivery of the software
and related documentation when there are no significant remaining obligations.
We accrue the costs of insignificant remaining obligations at the time that we
recognize software license revenue. Service fees received from the sale of
software maintenance and support contracts provide customers access to
technical support and minor upgrades to licensed revenues. These fees are
recognized as services are provided over the life of such contracts. We provide
for estimated sales returns in the period in which the sales are recorded.

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

Cost of Sales - Cost of sales includes direct material, direct labor and
production overhead for product companies and direct cost of services rendered
for service companies.

NOTE 2

ACQUISITIONS

QS, Inc. - Effective July 1, 1997, we acquired all of the outstanding common
stock of QS, Inc. (QS), a company engaged in providing software products and
services to the public health market. We paid $2.0 million in cash and issued a
promissory note for $1.5 million due in three equal annual installments
beginning July 1, 1998 and bearing interest at 8.5 percent per annum, payable
quarterly. The promissory note is guaranteed by an executive officer of the
company. The acquisition was accounted for as a purchase. We expensed $953,000
of purchased research and development projects that had not reached
technological feasibility and that did not have an alternative future use.
Since the acquisition date, we have consolidated the results of operations of
QS.

JK, Inc. - Effective January 1, 1998, our HumanSoft LLC subsidiary acquired all
of the common stock of JK, Inc. (JK), a company that provides software and
services to the public health market, in exchange for 1,523 units of limited
liability interest in HumanSoft. Immediately afterward, Intelligent Systems
acquired 878 of the newly issued HumanSoft units from the sellers of JK for
$200,000 cash and a promissory note of $600,000. The note was due in three
equal annual installments beginning January 1, 1999 and bears interest of 8.5


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-8
<PAGE>   24

percent per annum payable annually. The acquisition was accounted for as a
purchase. We expensed $944,000 of purchased research and development projects
that had not reached technological feasibility and that did not have an
alternative future use. We have consolidated the results of operations of JK
since the acquisition. The company ceased operations in September 1998.

Intelligent Systems made a claim against the sellers of JK for breach of
certain representations and warranties in the acquisition agreements and
asserted its right to offset amounts owed to the sellers under the notes. The
sellers indicated they disagree with our claim. Neither party has taken any
further action in this matter.

NOTE 3

SALES OF ASSETS

Intelligent Enclosures Corporation - Effective April 1, 1998, we sold
substantially all the assets and the business operations of our Intelligent
Enclosures (IE) subsidiary to Daw Technologies, Inc. in exchange for common
stock of Daw. The number of shares of common stock of Daw that we will receive
for the assets will be determined at a second closing two years from the date
of the sale (or earlier based on certain events). The sales price was fixed at
$1.3 million; therefore, the trading price of Daw shares at the second closing
will determine the number of Daw shares we will receive.

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.

IQ Software Corporation - In 1998, we recorded a gain of $1.0 million and cash
proceeds of $1.2 million on the sale of 114,000 shares of common stock of IQ.
In January 1999, we sold our remaining 95,449 shares of common stock of
Information Advantage (formerly IQ Software). We recorded a gain on the sale of
$814,000 and netted cash proceeds of $902,000.

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 24,501 shares of MediaMetrix stock. We sold the shares in the public
market on November 6, 1999 after the one year holding period, realizing a gain
of $995,000 on the sale and cash of $1,045,000.

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, 1999, we retain
227,250 shares of preferred stock in the private company.

OrCAD, Inc. - We sold our remaining 104,484 shares of common stock of OrCAD
(acquired in the sale of our Japanese affiliate in 1995) in the second quarter
of 1997, recognizing a gain of $217,000 on the sale.

Paragon Interface, Inc. - Effective April 17, 1998, we sold our minority
interest in Paragon Interface, Inc. for $839,000 cash. At the closing, Paragon
also repaid a loan of $150,000 from us. We recorded a gain of $457,000 on the
sale. In the second quarter of 1999, we recorded additional gain of $130,000
upon the expiration of certain contingencies.

PaySys International, Inc. - On March 31, 1997, we sold 252,685 shares
(adjusted for a stock split) of common stock of PaySys International, Inc. in a
private transaction. We received $2.0 million in cash for the stock and
recorded a gain of $1.9 million on the sale. In a second private transaction on
July 1, 1998, we sold 437,063 shares of common stock of PaySys. The transaction
netted $2.5 million in cash and resulted in a gain of $2.5 million on the sale.
At December 31, 1998, we still own 3,606,382 shares of common stock of PaySys.

NOTE 4

INVESTMENTS IN AFFILIATES

PaySys International, Inc. - At December 31, 1999, we owned a 37 percent
interest (approximately 29.6% on a diluted basis) in PaySys International,
Inc., a software company accounted for using the equity method of accounting.
Our pro rata share of PaySys losses was $7.9 million in 1997. However, in
accordance with the equity method of accounting, we only recorded $3.0 million,
reducing our investment of $3.0 million to zero


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-9
<PAGE>   25

on the balance sheet at December 31, 1998 and 1999. During 1998 and 1999, we
did not record any additional losses or income related to PaySys. We have no
obligation or intent to provide additional funding to PaySys. No dividends were
received from the affiliate during 1999 and 1998.

The following table contains the summarized financial information of PaySys.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
(in thousands)                    1999           1998          1997
---------------------------------------------------------------------
<S>                            <C>            <C>            <C>
Current assets                 $ 18,929       $ 14,852       $ 10,658
Current liabilities              18,947         18,957         20,981
Noncurrent assets                 4,960          3,005          3,604
Noncurrent liabilities           16,370          8,653          5,204

Net sales                      $ 50,068       $ 45,905       $ 32,787
Operating income (loss)             902         (3,814)       (15,063)
Net income (loss)                (1,706)        (5,163)(1)    (15,815)(2)
---------------------------------------------------------------------
</TABLE>
(1)       Includes non-recurring charges totaling $4.3 million.
(2)       Includes non-recurring charges totaling $5.8 million.

Visibility, Inc. - At December 31, 1998, we owned a 33 percent interest in
Visibility, Inc., a software company. The investment is classified as an
affiliate and accounted for using the equity method of accounting. Our pro rata
share of Visibility income (loss) was $(1,418,000), $195,000 and $797,000 in
1999, 1998 and 1997, respectively. No dividends were received from the
affiliate in 1998 or 1997.

The following table contains the summarized financial information of
Visibility.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(in thousands)                  1999        1998       1997
--------------------------------------------------------------
<S>                           <C>         <C>        <C>
Current assets                $ 9,177     $10,236    $ 6,755
Current liabilities            16,862      14,402     11,894
Noncurrent assets               1,108       1,337      1,452
Noncurrent liabilities          1,972       2,029      1,855

Net sales                     $24,210     $30,193    $21,850
Operating income (loss)        (3,636)      1,040     (2,892)
Net income (loss)              (4,225)        679     (3,360)
--------------------------------------------------------------
</TABLE>

Digital Wireless Corporation - At December 31, 1999, we owned a 21 percent
interest in Digital Wireless Corporation, a private company involved in
wireless telecommunication products for industrial and commercial markets. Our
pro rata share of Digital's income in 1999 was $184,000. No dividends were
received from the affiliate in 1999.

The following table contains the summarized financial information of Digital
Wireless.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands)               1999
----------------------------------
<S>                         <C>
Current assets              $2,785
Current liabilities            439
Noncurrent assets              115
Noncurrent liabilities         103

Net sales                   $4,471
Operating income             1,006
Net income                     794
                            ------
</TABLE>

NOTE 5

LONG-TERM INVESTMENTS

Investments in Alliance Technology Ventures (a private technology venture fund)
and Atherogenics, Inc. (a biotechnology firm) represent 8% each of the
company's long-term investments at December 31, 1999 and 4% and 8%,
respectively, of long-term investments at December 31, 1998.

NOTE 6

ACCOUNTS AND NOTES RECEIVABLE AND OTHER COMMITMENTS

At December 31, 1999 and 1998, our allowance for doubtful accounts and sales
returns amounted to $58,000 and $1,188,000, respectively.

Provisions for doubtful accounts and sales returns were $24,000, $240,000 and
$46,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, we hold a minority ownership position in Risk
Laboratories, LLC (risk management software). We own approximately 29 percent
of Risk Laboratories and account for this investment by the equity method. We
have also made loans to Risk Laboratories with original terms expiring in 1999
and bearing interest at various rates over prime. These loans amounted to
$148,000 and $133,000 at December 31, 1999 and 1998, respectively. Our pro rata


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-10

<PAGE>   26

share of Risk Laboratories losses was $106,000 in 1998. However, in accordance
with the equity method of accounting, we only recorded $80,000, reducing our
investment of $200,000 to zero on the balance sheet at December 31, 1998.
During 1999, we did not record any additional losses or income related to Risk
Laboratories. Refer to Note 19 for an explanation of the sale of our interest
in Risk Laboratories on March 21, 2000.

At December 31, 1999, one UK-based customer of our ChemFree subsidiary
represented 25 percent of consolidated accounts receivable as a result of a
high volume of shipments to the customer in the last 45 days of the year.
Balances were paid within terms subsequent to the year-end.


NOTE 7

BORROWINGS

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

<TABLE>
<CAPTION>
(in thousands)                           1999        1998
-----------------------------------------------------------
<S>                                     <C>          <C>
Maximum outstanding (month-end)         $1,250       $2,477
Outstanding at year end                 $  100       $  750
Average interest rate at  year end         8.5%         8.5%
Average borrowings during the year      $  387       $1,127
Average interest rate                      8.5%        10.4%
-----------------------------------------------------------
</TABLE>

Interest paid on debt during 1999, 1998 and 1997 amounted to $33,000, $118,000
and $103,000, respectively.

NOTE 8

LONG-TERM DEBT

Our long-term debt consists of the promissory notes payable to the sellers of
JK, as more fully described in Note 2, and the long-term portion of the
creditor payments related to the HumanSoft reorganization. Maturities of
long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(in thousands)
---------------------------------------------------------
<S>                                             <C>
              2001                              $363
---------------------------------------------------------
Total long-term debt payments                   $363
=========================================================
</TABLE>

NOTE 9

INCOME TAXES

The income tax provision (benefit) related to operations consists of the
following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(in thousands)                 1999      1998       1997
---------------------------------------------------------
<S>                            <C>       <C>        <C>
Current:
  Domestic                     $ --      $(152)     $ 16
---------------------------------------------------------
                               $ --      $(152)     $ 16
=========================================================
</TABLE>

We do not show a reconciliation between our effective tax rate and the U.S.
statutory rate since only state income taxes are provided.

At December 31, 1999, our domestic subsidiaries had net operating loss
carryforwards totaling $24.0 million. The net operating loss carryforwards, if
unused as offsets to future taxable income, will expire beginning in 2006 and
continuing through 2019. 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 Statement of Financial Accounting Standard
109, "Accounting for Income Taxes". We have a deferred tax benefit of
approximately $11.0 million at December 31, 1999 and $10.0 million at December
31, 1998. Since our ability to realize the deferred tax asset is uncertain, the
amount is offset in both 1999 and 1998 by a valuation allowance of an equal
amount. The deferred tax benefit at December 31, 1999 and 1998 relates
primarily to net operating loss carryforwards.

Income taxes paid (or refunds received) during 1999, 1998 and 1997 amounted to
$0, $(152,000), and $16,000, respectively.

NOTE 10

COMMITMENTS AND CONTINGENCIES

Leases - We have noncancellable operating leases expiring at various dates
through 2002. Future minimum lease payments are as follows:


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-11
<PAGE>   27

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(in thousands)
--------------------------------------------------------
<S>          <C>                                 <C>
                2000                             $  989
                2001                                923
                2002                                764
             Thereafter                              --
--------------------------------------------------------
Total minimum lease payments                     $2,676
========================================================
</TABLE>

Rental expense for leased facilities and equipment related to operations
amounted to $995,000, $1.2 million and $1.2 million, for the years ended
December 31, 1999, 1998 and 1997, respectively.

Guaranty Of HumanSoft Obligations - In connection with the confirmation on
November 18, 1999 of the Plan of Reorganization of HumanSoft LLC, a wholly
owned subsidiary of the company, we guaranteed the future payments to certain
creditors of HumanSoft. The total amount of future payments is $327,000, due in
two equal payments on the first and second anniversary of the confirmation.

Legal Matters - In 1999, a suit was brought against our ChemFree subsidiary and
two other parties by a former paid 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 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.

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 $80,000 to date for
anticipated future payments under the plan.

NOTE 12

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. We
repurchased and retired 47,300 shares of common stock in the year ended
December 31, 1997 but made no repurchases during 1998 and 1999.

NOTE 13

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 provides shares of common stock that may be sold to
officers and key employees. Stock options are granted at fair market value on
the date of grant. As of December 31, 1999, 655,000 options are fully vested
and exercisable at a weighted average price per share of $1.75. All options
expire ten years from their respective dates of grant. At December 31, 1999,
the weighted average remaining contractual life of the outstanding options is
4.73 years. There are 655,000 options exercisable with option prices ranging
from $0.875 to $2.94 and with a weighted average price per share of $1.75.
Stock option transactions during the three years ended December 31, 1999 were
as follows:


                        INTELLIGENT SYSTEMS CORPORATION
                                     F-12
<PAGE>   28


<TABLE>
<CAPTION>

                                           1999             1998             1997
---------------------------------------------------------------------------------

<S>                                     <C>             <C>            <C>
Options outstanding
  at Jan. 1                             665,000          665,000          690,000
Options granted                              --               --               --
Options exercised                        10,000               --           25,000
Options canceled                             --               --               --
Options outstanding
  at Dec. 31                            655,000          665,000          665,000

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

Option price ranges per share:
  Granted                                    --               --               --
  Exercised                               $2.25               --       $2.25-2.94
  Canceled                                   --               --               --

Weighted average
  option price per
  share:
  Granted                                    --               --
  Exercised                               $2.25               --            $2.67
  Canceled                                   --               --
  Outstanding at
    Dec. 31                               $1.75            $1.75            $1.75
---------------------------------------------------------------------------------
</TABLE>

We account for the Plan under the provisions of APB 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. The fair value of each option granted
in 1996 has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:

-        risk free interest rate of 6.3 percent

-        expected life of the option of 6 years

-        expected dividend yield rate of 0 percent

-        expected volatility of 63 percent

Under these assumptions, the weighted average fair value of options granted in
1996 was $1.54. There were no awards under the Plan in 1997, 1998 or 1999. The
fair value of the grants would be amortized over the vesting period for the
options. Accordingly, our pro forma net income (loss) and net income (loss) 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                 1999               1998                1997
  per share data)
--------------------------------------------------------------------------------
<S>                              <C>               <C>                 <C>
Net income (loss)                $    249          $  (1,548)          $  (7,176)
Net income (loss)
  per common share
  basic                          $   0.05          $   (0.30)          $   (1.53)
--------------------------------------------------------------------------------
Net income (loss)
  per common share
  diluted                        $   0.05          $   (0.30)          $   (1.53)
--------------------------------------------------------------------------------
</TABLE>


NOTE 14

FOREIGN SALES AND OPERATIONS

Aggregate export and foreign sales were $1.3 million, $7.0 million and $7.0
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Export and foreign sales were made principally in the United Kingdom and the
Pacific Rim. Sales in these geographic areas are as follows:



<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(in thousands)               1999         1998        1997
----------------------------------------------------------
<S>                        <C>          <C>         <C>
United Kingdom             $1,317       $7,011      $6,813
Pacific Rim                    22           49         210
----------------------------------------------------------
</TABLE>

For the years ended December 31, 1999, 1998 and 1997, income (loss) before
provision for income taxes derived from foreign subsidiaries approximated
$(109,000), $(1,092,000) and $(930,000), respectively.

As of December 31, 1999 and 1998, foreign subsidiaries had assets of $0 and $3.3
million, respectively, and total liabilities of $0 and $3.4 million,
respectively.

As a result of the sale of our InterQuad subsidiary in early 1999, we have no
foreign subsidiaries and therefore no currency exchange restrictions 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.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-13
<PAGE>   29
NOTE 15

EARNINGS PER SHARE

For the year ended December 31, 1999, our diluted weighted average shares
outstanding include the assumed conversion of stock options resulting in an
increase of 222,000 shares outstanding.

For the years ended December 31, 1998 and 1997, basic and diluted weighted
average shares outstanding are the same because all of our common stock
equivalents (stock options) are non-dilutive since we reported a loss for each
period.

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands)                    1999      1998        1997
------------------------------------------------------------
<S>                             <C>      <C>         <C>
Net income (loss)               $  249   $(1,548)    $(7,176)
Basic earnings (loss) per
  share                         $ 0.05   $ (0.30)    $ (1.41)
Basic weighted average
   shares                        5,106     5,104        5,087
Diluted earnings (loss)
  per share                     $ 0.05   $ (0.30)    $ (1.41)
Diluted weighted
average shares                   5,337     5,104        5,087
</TABLE>

NOTE 16

INDUSTRY SEGMENTS

Our consolidated subsidiaries are involved in two industry segments: health care
services and technology related products and services. Operations in health care
services involve mental health and substance abuse treatment programs. We
derived 2.4 percent, 10.6 percent and 13.5 percent of our consolidated revenue
in 1999, 1998 and 1997, respectively, from a national chain of hospitals in
which our PsyCare subsidiary conducts some of its treatment programs. Operations
in technology related products include development and sales of software
products and services and manufacture and sale of bio-remediating parts washers.

Total revenue by industry includes sales to unaffiliated customers. Sales
between the two industry segments are not material. Operating profit (loss) is
total revenue less operating expenses. None of the general corporate overhead
expense has been allocated to the individual industry segments. Identifiable
assets by industry are those assets that are used in our operations in each
industry. Corporate assets are principally cash, marketable securities, notes
receivable and investments.

The table following contains segment information for the years ended December
31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>

YEAR  ENDED DECEMBER 31, 1999
-----------------------------------------------------------
                                          Health
(in thousands)                 Tech.       Care     Consol.
-----------------------------------------------------------
<S>                            <C>        <C>      <C>
Net sales                      $6,693     $1,786   $  8,479
R&D                               805         --        805
Depreciation                      215         76        291
Operating income (loss)            35         65        100
General corp. expenses                                  899
-----------------------------------------------------------
  Consolidated operating
    loss                                               (799)
Interest expense                                        (88)
Investment income                                     1,222
Other loss, net                                         (76)
-----------------------------------------------------------
Income from continuing
  operations before
  income tax  provision
  and minority interest                                 259
Income tax provision                                     --
-----------------------------------------------------------
Income before minority
  interest                                              259
Minority interest                                        10
-----------------------------------------------------------
Net income from
  continuing operations                            $    249
===========================================================
Capital expenditures           $  188     $    7   $    195
===========================================================
Identifiable assets            $3,288     $  497   $  3,785
Corporate assets                                      9,873
-----------------------------------------------------------
Total assets at year end                           $ 13,658
===========================================================
</TABLE>

                        INTELLIGENT SYSTEMS CORPORATION
                                      F-14

<PAGE>   30
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
                                          Health
(in thousands)                 Tech.       Care     Consol.
-----------------------------------------------------------
<S>                           <C>        <C>        <C>
Net sales                     $14,124    $ 4,129    $18,253
R&D                             1,892         --      1,892
Depreciation                      814         97        911
Operating income (loss)        (5,848)        77     (5,771)
General corp. expenses                                1,270
-----------------------------------------------------------
  Consolidated operating
    loss                                             (7,041)
Interest expense                                       (290)
Investment income                                     5,776
Other loss, net                                        (135)
-----------------------------------------------------------
Loss from continuing
  operations before
  income tax  provision
  and minority interest                              (1,690)
Income tax benefit                                      152
-----------------------------------------------------------
Loss before minority
  interest                                           (1,538)
Minority interest                                        10
-----------------------------------------------------------
Net loss from
  continuing operations                             $(1,548)
===========================================================
Capital expenditures          $   896    $     9    $   905
===========================================================
Identifiable assets           $ 6,954    $   960    $ 7,914
Corporate assets                                      9,185
-----------------------------------------------------------
Total assets at year end                            $17,099
===========================================================
</TABLE>

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
                                          Health
(in thousands)                 Tech.       Care    Consol.
----------------------------------------------------------
<S>                           <C>         <C>     <C>
Net sales                     $14,957     $6,203  $ 21,160
R&D                             1,485         --     1,485
Depreciation                      964        147     1,111
Operating loss                 (2,290)      (912)   (3,202)
General corp. expenses                               1,652
----------------------------------------------------------
  Consolidated operating
    loss                                            (4,854)
Interest income                                        350
Investment loss                                     (2,585)
Other loss, net                                        (61)
----------------------------------------------------------
Loss from continuing
  operations before
  income tax  provision
  and minority interest                             (7,150)
Income tax provision                                   (16)
----------------------------------------------------------
Loss before minority
  interest                                          (7,166)
Minority interest                                       10
----------------------------------------------------------
Net loss from continuing
  operations                                      $ (7,176)
==========================================================
Capital expenditures          $ 1,973     $    7  $  1,980
==========================================================
Identifiable assets           $ 7,762     $1,059  $  8,821
Corporate assets                                    10,270
----------------------------------------------------------
Total assets at year end                          $ 19,091
==========================================================
</TABLE>

NOTE 17

QUARTERLY FINANCIAL DATA (unaudited)

The table below contains a summary of selected quarterly data for the years
ended December 31, 1999 and 1998.

<TABLE>
<CAPTION>

                                                           FOR QUARTERS ENDED
(in thousands except              MARCH                 JUNE                 SEPT.                DEC.
   per share data)                  31                   30                   30                   31
-------------------------------------------------------------------------------------------------------

<S>                              <C>                  <C>                  <C>                  <C>
1999
Net sales                        $ 2,683              $ 2,090              $ 1,816              $ 1,890
Operating loss                      (284)                (322)                 (58)                (135)
Net income (loss)                  1,094 (a)             (898)(b)             (872)(C)              926 (d)
Basic income (loss) per
  share                             0.21                (0.18)               (0.17)                0.18
Diluted income (loss)
  per share                         0.21                (0.18)               (0.17)                0.17

                                                                                                   1998
Net sales                        $ 4,804              $ 5,322              $ 4,409              $ 3,718
Operating loss                    (3,389)                (813)              (2,093)                (746)
Net income (loss)                 (2,608)(e)              690 (f)              282 (g)               88 (h)
Basic income (loss)
per share                          (0.51)                0.14                 0.06                 0.02

Diluted income                     (0.51)                0.13                 0.05                 0.02
(loss) per share
</TABLE>


a.       Includes gain of $1.0 million on investments and $370,000 income in
         equity of affiliates.

b.       Includes gain of $128,000 on investments and $674,000 loss in equity of
         affiliates.

c.       Includes $556,000 loss in equity of affiliates.

d.       Includes gain of $995,000 on investment and $89,000 loss in equity of
         affiliates.

e.       Includes charge of $944,000 for in-process R&D, $191,000 charge for
         restructuring and gain of $947,000 on investment.

f.       Includes gains of $1.7 million on investments.

g.       Includes charge of $955,000 to discontinue product lines and gain of
         $2.5 million on investment.

h.       Includes $829,000 income in equity of affiliates.


NOTE 18

HUMANSOFT SUBSIDIARY REORGANIZATION UNDER CHAPTER 11

On November 17, 1998, our HumanSoft subsidiary filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Northern District of Georgia in response to an involuntary filing under
Chapter 7 by three creditors. In the quarter ended September 30, 1998, we
recorded a write-off related to the discontinued product lines. On November 18,
1999, the court confirmed the HumanSoft Plan of


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-15

<PAGE>   31

Reorganization. The plan provides for payment of a fixed percent of the allowed
claims for certain trade creditors and customers of HumanSoft as well as payment
of the administrative expenses. The first payments were made immediately
following the confirmation, with two additional payments of $163,000 each due to
certain creditors on the first and second anniversary of the confirmation.
Intelligent Systems has guaranteed the future payments. The final plan expanded
the creditor class to include certain customer claims, which caused the final
settlement amount to exceed the original amount reserved for the bankruptcy.
Accordingly, in the fourth quarter of 1999, we recorded additional reserves
totaling $141,000 to reflect the provisions of the confirmed plan of
reorganization.


NOTE 19

SUBSEQUENT EVENTS (unaudited)

Acquisition of 2order.com - On January 21, 2000, 2order.com, a company in which
we hold 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 2order.com. The shares must be held for a
short period of time.

Sale of interest in Risk Laboratories - On March 21, 2000, we sold part of our
interest in Risk Laboratories in a private transaction. We sold 2,310,000 shares
for $8.8 million in cash and can require the purchaser to acquire our remaining
623,515 shares (7% of Risk Laboratories) at approximately the same price per
share within two years from the original transaction date. At the closing of the
transaction, Risk also repaid a note in the amount of $43,000.


                        INTELLIGENT SYSTEMS CORPORATION
                                      F-16

<PAGE>   32



SCHEDULE II


                         INTELLIGENT SYSTEMS CORPORATION
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999



<TABLE>
<CAPTION>

                                       BALANCE AT    CHARGED TO
                                       BEGINNING     COSTS AND                                               BALANCE AT
DESCRIPTION                            OF PERIOD      EXPENSES      DEDUCTIONS(a.)   RECLASSIFICATION(c.)   END OF PERIOD
-------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>            <C>              <C>                    <C>
ALLOWANCE FOR
  DOUBTFUL ACCOUNTS b.
  Year Ended December 31, 1997             371,705       46,963         211,760                     --         206,908
  Year Ended December 31, 1998             206,908      239,734         126,537                867,463       1,187,568
  Year Ended December 31, 1999           1,187,568       23,375       1,156,523                  3,238          57,658
</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.

<PAGE>   33

                         Report of Independent Auditors

Board of Directors
PaySys International, Inc.

We have audited the accompanying consolidated balance sheets of PaySys
International, Inc. and subsidiaries as of December 31, 1999 and 1998, 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,
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 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, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 1997
(effective October 1, 1997) the Company adopted Statement of Position 97-2,
"Software Revenue Recognition", changing its method of recognizing revenue on
software transactions.

                                                             Ernst and Young LLP





February 18, 2000
Atlanta, Georgia

<PAGE>   34

                   PaySys International, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                                             DECEMBER 31
                                                                                       1999               1998
                                                                                  ---------------------------------
                                                                                  (In thousands, except share data)
<S>                                                                                  <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                         $  3,974           $  1,846
   Accounts receivable, less allowance for bad debts of $2,266 and
     $1,078 at December 31, 1999 and 1998, respectively                                 9,450              8,338
   Unbilled receivables                                                                 4,837              4,382
   Prepaid expenses and other current assets                                              668                286
                                                                                     ---------------------------
Total current assets                                                                   18,929             14,852

Furniture and equipment, net                                                            2,936              2,511
 Computer software costs, net of accumulated amortization
   of $1,204 and $770 at December 31, 1999 and 1998, respectively
                                                                                        1,685                301
 Deposits and other assets                                                                339                193
                                                                                     ---------------------------
                                                                                     $ 23,889           $ 17,857
                                                                                     ===========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable                                                                  $  1,821           $  1,734
   Accrued employee compensation                                                        2,415              2,000
   Deferred revenues                                                                   10,728              9,586
   Current portion of long-term debt and capital lease obligations                        733              3,629
   Accrued royalties                                                                       --                926
   Other current liabilities                                                            3,250              1,082
                                                                                     ---------------------------
Total current liabilities                                                              18,947             18,957

Other liabilities                                                                         226                 --
Long-term debt and capital lease obligations, less current portion                     12,378              7,679
Deferred rent expense                                                                     183                520
                                                                                     ---------------------------
                                                                                       31,734             27,156

Redeemable stock purchase warrants                                                      3,583                454

Shareholders' equity (deficit):
   Preferred stock, $.01 par value; 10,000,000 shares authorized; 2,779,689
     shares issued and outstanding; liquidation
     preference of $15,900 at December 31, 1999 and 1998                                   28                 28
   Common stock, $.01 par value; 30,000,000 shares authorized;
     6,976,644 and 5,797,534 shares issued and outstanding at
     December 31, 1999 and 1998, respectively                                              70                 58
   Additional paid-in capital                                                          16,282             12,782
   Notes receivable - officers                                                         (3,423)                --
   Deferred stock compensation                                                             (3)               (41)
   Accumulated deficit                                                                (24,123)           (22,417)
   Cumulative translation adjustments                                                    (259)              (163)
                                                                                     ---------------------------
                                                                                      (11,428)            (9,753)
                                                                                     ---------------------------
                                                                                     $ 23,889           $ 17,857
                                                                                     ===========================
</TABLE>

See accompanying notes.


                                                                               2
<PAGE>   35

                   PaySys International, Inc. and Subsidiaries

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>

                                                          YEAR ENDED DECEMBER 31
                                                 1999              1998               1997
                                              ----------------------------------------------
                                                              (In thousands)

<S>                                           <C>                <C>                <C>
Revenues:
   License fees                               $ 19,789           $ 18,385           $ 13,088
   Services                                     30,279             27,520             19,699
                                              ----------------------------------------------
Total revenues                                  50,068             45,905             32,787

Cost of revenues:
   License fees                                    998              1,934              4,223
   Services                                     21,552             20,608             15,683
                                              ----------------------------------------------
Total cost of revenues                          22,550             22,542             19,906

Gross margin                                    27,518             23,363             12,881

Operating expenses:
   Sales and marketing                           7,691              6,240              4,865
   Research and development                     12,424             11,804             10,641
   General and administrative                    6,501              4,793              6,900
   Royalty termination settlement                   --              4,340                 --
   Non-cash compensation                            --                 --              3,722
   Write-off of capitalized software                --                 --                949
   Cost of abandoned stock offering                 --                 --                867
                                              ----------------------------------------------
Total operating expenses                        26,616             27,177             27,944

Income (loss) from operations                      902             (3,814)           (15,063)
Interest income (expense):
   Interest income                                 217                118                 95
   Interest expense                             (2,555)            (1,279)              (442)
                                              ----------------------------------------------
                                                (2,338)            (1,161)              (347)
                                              ----------------------------------------------
Income (loss) before income taxes               (1,436)            (4,975)           (15,410)
Income tax expense                                 270                188                405
                                              ----------------------------------------------
Net income (loss)                             $ (1,706)          $ (5,163)          $(15,815)
                                              ==============================================
</TABLE>

See accompanying notes.


                                                                               3
<PAGE>   36
                  PaySys International, Inc. and Subsidiaries

      Consolidated Statements of Changes in Shareholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                              PREFERRED STOCK                 COMMON STOCK             TREASURY STOCK
                                     ----------------------------------------------------------------------------------------------

                                        NUMBER                           NUMBER                     NUMBER
                                      OF SHARES            AMOUNT       OF SHARES       AMOUNT     OF SHARES       AMOUNT
                                     ----------------------------------------------------------------------------------------------
                                                               (In thousands, except share data)
<S>                                  <C>                  <C>           <C>              <C>         <C>           <C>
Balance at December 31, 1996                     --       $     --       6,826,520       $ 68        159,050       $  (491)
   Comprehensive loss:
     Net loss                                    --             --              --         --             --            --
     Foreign currency translation
       adjustment                                --             --              --         --             --            --

   Comprehensive loss
   Noncash compensation from stock               --
     purchase warrants and stock
     options                                     --             --              --         --             --            --
   Exercise of stock purchase                    --
     warrants and stock options                  --                        464,355          5             --            --
   Retirement of treasury stock                  --             --        (159,050)        (2)      (159,050)          491
                                     -----------------------------------------------------------------------------------------------
Balance at December 31, 1997                     --             --       7,131,825         71             --            --
   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         --             --            --
   Issuance of preferred stock and
     repurchase and retirement of
     common stock                         2,779,689             28      (1,342,626)       (13)            --            --
                                     -----------------------------------------------------------------------------------------------
Balance at December 31, 1998              2,779,689             28       5,797,534         58             --            --
   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             --            --
   Issuance of common stock for
     notes receivable from officers              --             --       1,104,110         11             --            --
                                     -----------------------------------------------------------------------------------------------
Balance at December 31, 1999              2,779,689       $     28       6,976,644       $ 70             --       $    --
                                     ===============================================================================================

<CAPTION>



                                         ADDITIONAL      NOTES      DEFERRED                   CUMULATIVE
                                          PAID-IN     RECEIVABLE     STOCK      ACCUMULATED    TRANSLATION
                                          CAPITAL      OFFICERS   COMPENSATION    DEFICIT      ADJUSTMENTS      TOTAL
                                     ----------------------------------------------------------------------------------------------
                                                               (In thousands, except share data)
<S>                                  <C>                <C>           <C>        <C>            <C>           <C>
Balance at December 31, 1996             $  2,079       $    --       $ --       $ (1,439)      $   (55)      $    162
   Comprehensive loss:
     Net loss                                  --            --         --        (15,815)           --        (15,815)
     Foreign currency translation
       adjustment                              --            --         --             --           (16)           (16)

   Comprehensive loss                                                                                          (15,831)
   Noncash compensation from stock
     purchase warrants and stock
     options                                3,793            --        (67)            --            --          3,726
   Exercise of stock purchase
     warrants and stock options                15            --         --             --            --             20
   Retirement of treasury stock              (489)           --         --             --            --             --
                                     -----------------------------------------------------------------------------------------------
Balance at December 31, 1997                5,398            --        (67)       (17,254)          (71)       (11,923)
   Comprehensive loss:
     Net loss                                  --            --         --         (5,163)           --         (5,163)
     Foreign currency translation
       adjustment                              --            --         --             --           (92)           (92)
                                                                                                              --------
                                                                                                                (5,255)
   Comprehensive loss
   Noncash compensation from stock
     purchase warrants and stock
     options                                   --                       26             --            --             26
   Exercise of stock options                   26            --         --             --            --             26
   Issuance of preferred stock and
     repurchase and retirement of           7,358            --         --             --            --          7,373
     common stock                    -----------------------------------------------------------------------------------------------
Balance at December 31, 1998               12,782            --        (41)       (22,417)         (163)        (9,753)
   Comprehensive loss:
     Net loss                                  --            --         --         (1,706)           --         (1,706)
     Foreign currency translation
       adjustment                              --            --         --             --           (96)           (96)
                                                                                                              --------
                                                                                                                (1,802)
   Comprehensive loss
   Noncash compensation from stock
     purchase warrants and stock               --            --         38             --            --             38
     options
   Exercise of stock options                   88            --         --             --            --             89
   Issuance of common stock for
     notes receivable from officers         3,412        (3,423)        --             --            --             --
                                    -----------------------------------------------------------------------------------------------
Balance at December 31, 1999             $ 16,282       $(3,423)      $ (3)      $ 24,123)      $  (259)      $(11,428)
                                    ===============================================================================================
</TABLE>

See accompanying notes.

4

<PAGE>   37



                  PaySys International, Inc. and Subsidiaries

                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31
                                                                       1999          1998            1997
                                                                   ----------------------------------------
                                                                                (In thousands)
<S>                                                                <C>             <C>            <C>
OPERATING ACTIVITIES
Net income (loss)                                                   $ (1,706)      $ (5,163)      $(15,815)
Add (deduct) adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities:
     Depreciation                                                      1,294          1,480          1,052
     Amortization of computer software costs                             434            391          2,257
     Amortization of discounts on debt                                   353            118             15
     Provision for doubtful accounts                                   1,915          1,940            288
     Accrued rent expense                                               (337)          (308)          (294)
     Deferred income taxes                                                --             --            277
     Noncash compensation                                                 38             26          3,726
     Changes in operating assets and liabilities:
       Accounts receivable and unbilled receivables                   (3,482)        (5,361)        (2,254)
       Deposits and other assets                                        (528)           (48)          (138)
       Accounts payable                                                   87         (1,321)         1,195
       Accrued employee compensation                                     415           (483)         1,164
       Deferred revenues                                               1,142            199          2,830
       Other liabilities                                               1,468         (3,639)         4,163
                                                                   ---------------------------------------
Net cash provided by (used in) operating activities                    1,093        (12,169)        (1,534)

INVESTING ACTIVITIES
Purchases of furniture and equipment                                  (1,721)        (1,224)        (2,112)
Purchased computer software rights                                    (1,818)            --             --
Computer software development                                             --             --           (216)
                                                                   ---------------------------------------
Net cash used in investing activities                                 (3,539)        (1,224)        (2,328)

FINANCING ACTIVITIES
Proceeds from issuance of preferred stock                                 --          7,373             --
Exercise of options and warrants                                          89            172             20
Proceeds from borrowings                                              15,016          9,735          4,491
Principal payments on long-term debt, capital lease
   obligations                                                       (10,435)        (3,023)        (1,596)
                                                                   ---------------------------------------
Net cash provided by financing activities                              4,670         14,257          2,915
                                                                   ---------------------------------------
Effect of foreign currency translation on cash and cash
   equivalents                                                           (96)           (92)           (16)
                                                                   ---------------------------------------
Increase (decrease) in cash and cash equivalents                       2,128            772           (963)
Cash and cash equivalents at beginning of period                       1,846          1,074          2,037
                                                                   ---------------------------------------
Cash and cash equivalents at end of period                          $  3,974       $  1,846       $  1,074
                                                                   =======================================
</TABLE>

See accompanying notes.

                                                                              5
<PAGE>   38

                  PaySys International, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                               December 31, 1999


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, Vision PLUS (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.

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.

Through September 30, 1997, the Company's revenue recognition policies were in
accordance with Statement of Position (SOP) 91-1, "Software Revenue
Recognition". Under the provisions of SOP 91-1, the Company generally
recognized software license revenue upon delivery of the software and related
documentation when there were no significant remaining obligations and
collectibility was assessed as probable. Service fees received from the sales
of software maintenance and support contracts and sales of

                                                                              6
<PAGE>   39

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

other professional services were recognized over the period the services were
provided or as the services were performed.

Adoption of the new revenue recognition policies of SOP 97-2, "Software Revenue
Recognition", is required for all transactions beginning January 1, 1998, but
earlier adoption is encouraged for periods not previously reported. Prior
periods reported under SOP 91-1 may not be restated.

The Company elected to adopt the provisions of SOP 97-2 effective October 1,
1997. The most significant impact of adopting SOP 97-2 on the Company's revenue
recognition policies is later recognition of revenue on certain contracts than
under past practices. Under SOP 97-2, license and professional service fee
revenues from contracts which 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.

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, Australia, New
Zealand, 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 $240,000,
$240,000 and $680,000 during the years ended 1999, 1998 and 1997, respectively.
During 1999 and 1998, no individual customer exceeded 10% of revenues. During
1997, one customer accounted for 19% of revenues.

                                                                              7
<PAGE>   40

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, 1999 unamortized
software costs from purchased software totaled $774,000, net of accumulated
amortization of $65,000 which is included in furniture and equipment (see Note
2).

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 1999 or 1998. The Company capitalized
software development costs of $210,000 during 1997. The Company records
amortization of capitalized software development costs using the greater of the
straight-line method (currently three years) or the estimated economic life

                                                                              8
<PAGE>   41

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE COMPUTER COSTS (CONTINUED)

of the product. Amortization of software development costs totaled $252,000,
$357,000 and $2,257,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The higher amortization of capitalized software costs for 1997 is
due to the write-off of $949,000 of capitalized software costs for projects
deemed to have no net realizable value.

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 software development costs and is
being amortized over five years, the estimated economic life of the product.
Amortization costs totaled $182,000 for the year ended December 31, 1999 and
are 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.

STOCK-BASED COMPENSATION

As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
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.

                                                                              9
<PAGE>   42

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ABANDONED STOCK OFFERING

In December 1997, the Company abandoned a planned public offering of its common
stock. Costs associated with the abandoned offering were expensed during 1997.

RECLASSIFICATION

Certain amounts reported in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 financial statement presentation.

2. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            1999              1998
                                                      -----------------------------------
                                                                (In thousands)
 <S>                                                  <C>                   <C>
 Furniture and equipment:
   Office furniture and equipment                         $   1,313         $   1,011
   Computer equipment and software                            4,808             2,551
   Computer equipment under capital lease                     1,565             1,960
                                                      -----------------------------------
                                                              7,686             5,522
   Less allowances for depreciation and amortization
                                                             (4,750)           (3,011)
                                                      -----------------------------------
                                                          $   2,936         $   2,511
                                                      ===================================
</TABLE>

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company considers its cash and cash equivalents, accounts receivable, line
of credit 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,

                                                                             10
<PAGE>   43
                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


degree of risk and remaining maturities. The remaining financial instruments
approximate fair value based on their short-term nature.

                                                                             11
<PAGE>   44

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. LONG-TERM DEBT AND LEASES

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

<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                       1999             1998
                                                                 --------------------------------
                                                                           (In thousands)
<S>                                                              <C>              <C>
12.5% Note payable due May 15, 2006 (1)                            $ 15,000       $     --
Less discount                                                         2,785             --
                                                                 --------------------------------
                                                                     12,215             --

13.5% Note payable due March 31, 2001 (2)                                --          4,000
Less discount                                                            --            314
                                                                 --------------------------------
                                                                         --          3,686

12% Note payable due in quarterly installments through April
   30, 2001 (3)                                                          --          4,444

Unsecured note payable due in quarterly installments through
   April 30, 2001, interest at 8%                                        --            535

Unsecured obligation due in monthly installments through
   December 15, 1999, interest at 8.5%                                   --          1,374

Loan from product development joint venture due August 31,
   2002, no interest (4)                                                550            536

Other debt                                                               52             52

Capital lease obligations, various imputed interest rates and
   monthly payments                                                     294            681
                                                                 --------------------------------
                                                                     13,111         11,308
Less current portion                                                   (733)        (3,629)
                                                                 --------------------------------
                                                                   $ 12,378       $  7,679
                                                                 ================================
</TABLE>

                                                                             12

<PAGE>   45

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. LONG-TERM DEBT AND LEASES (CONTINUED)

(1)  This note, which is junior to a line of credit facility (see Note 5), is
     secured by a lien, on equipment, accounts receivable and software and
     related material. The lender has been 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.

(2)  In 1998, this note was secured by a first lien on equipment, accounts
     receivable and software and related material. In addition, this note
     required periodic issuance of warrants to purchase shares of the Company's
     common stock (see Note 7). The note was retired in 1999.

(3)  In 1998, this note which was junior to the $4,000,000 13.5% note payable
     due March 31, 2001, was secured by a lien on equipment, accounts
     receivable and software and related material. The lender had also been
     granted a contingent warrant to purchase 962,055 shares of the Company's
     common stock, exercisable at $.01 per share only upon an event of default
     as defined in the loan agreement. The note and warrant were retired in
     1999.

(4)  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 is non-interest bearing and repayment is due by the earlier of
     August 31, 2002 or as future revenue is recognized from the sales of the
     jointly developed product. The Company expects to repay this loan in 2000
     and accordingly the balance is included in the current portion of long
     term debt.

                                                                             13
<PAGE>   46


                           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
$342,000, $310,000 and $145,000 for 1999, 1998 and 1997, respectively.

Total rental expense was $2,861,000, $2,784,000 and $2,209,000 for 1999, 1998,
and 1997, 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, 1999, were as follows:
<TABLE>
<CAPTION>
                                                       LONG-TERM         CAPITAL          OPERATING
YEAR ENDING DECEMBER 31,                                 DEBT            LEASES             LEASES
------------------------------------------------------------------------------------------------------
                                                                    (In thousands)
<S>                                              <C>                       <C>              <C>
2000                                                 $      602            $158             $2,120
2001                                                         --             112              1,903
2002                                                         --              62              1,846
2003                                                      3,750              --              1,771
2004 and beyond                                          11,250              --              1,442
                                                 -----------------------------------------------------
                                                         15,602             332              9,082
Less amounts representing interest and discounts
                                                         (2,785)            (38)                --
                                                 -----------------------------------------------------
                                                        $12,817            $294             $9,082
                                                 =====================================================
</TABLE>

                                                                             14
<PAGE>   47

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

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. The line of credit matures 18
months from the effective date, subject to automatic annual renewals, and is
secured by a first lien on equipment, accounts receivable and software and
related material. Availability under the facility is based on a formula of
eligible accounts receivable and a collection multiple, based on such eligible
accounts receivable as defined. The line of credit contains covenants
restricting additional borrowings, the incurrence of liens on assets, the
acquisition and disposition of assets, capital expenditures, and distributions
to shareholders and certain financial restrictions. Interest at Prime plus
1.75% is payable monthly on the daily average outstanding balance, based on a
minimum of 20% of the maximum availability for the first six months and 50% of
the maximum availability thereafter. 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.

Under the provisions of this line of credit facility as discussed above, the
Company is required to maintain a minimum level of net tangible worth. Net
tangible worth as defined by the agreement at December 31, 1999, was
$4,954,000. The Company's lender agreed to reduce the net tangible worth
requirement at December 31, 1999 to $4,950,000 from $5,000,000. The Company
expects to incur operating losses in 2000. As a result, the Company does not
anticipate satisfying the net tangible worth requirement for all of 2000. The
Company plans to work towards another amendment of the requirement to a level
acceptable to both the Company and lender and to a level that the Company
believes it will obtain.

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 which totaled less
than $1,000,000 and 15% of any sale, license or other grant of

                                                                             15
<PAGE>   48


                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5. COMMITMENTS AND CONTINGENCIES (CONTINUED

ROYALTY AGREEMENT (CONTINUED)

right to use the product which 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.

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, 1999 the remaining balance of
$564,000 is included in the balance sheet as $338,000 other current liabilities
and $226,000 other long term liabilities.

LEGAL MATTERS

In August 1997, the Company settled a copyright infringement lawsuit for
$550,000. The Company paid $200,000 and $350,000 during the years ended
December 31, 1999 and 1998, respectively. The Company accrued an estimated
reserve of $325,000 for this lawsuit at December 31, 1996 and accrued an
additional $225,000 in 1997 when additional information regarding the total
settlement of $550,000 became available.

The Company is a party to various legal proceedings 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.

                                                                             16

<PAGE>   49

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


6. INCOME TAXES

The provisions for income taxes for 1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                                                 1999              1998               1997
                                      -----------------------------------------------------
                                                             (In thousands)
      <S>                             <C>                          <C>                 <C>
      Current tax expense:
         Federal                               $ --                $ --                $ --
         Foreign                                270                 188                 128
         State                                   --                  --                  --
                                      -----------------------------------------------------
      Total current                             270                 188                 128

      Deferred tax expense (benefit):
         Federal                                 --                  --                 248
         Foreign                                 --                  --                  --
         State                                   --                  --                  29
                                      -----------------------------------------------------
      Total deferred                             --                  --                 277
                                      =====================================================
                                               $270                $188                $405
                                      =====================================================
</TABLE>

Income tax expense for the year ended December 31, 1999 relates to current
foreign withholding taxes. No additional income tax expense has been recorded
for the year ended December 31, 1999 due to the Company's loss for the period
and the related net operating loss carryforward position.

                                                                             17
<PAGE>   50

                           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
                                                           1999             1998            1997
                                                    --------------------------------------------------
                                                                       (In thousands)
    <S>                                             <C>                      <C>              <C>
    Tax (benefit) at statutory federal rate              $(488)              $(1,692)         $(5,239)
    State taxes, net of federal benefit                   (38)               (131)               (406)
    Foreign tax credits                                  (270)               (274)                 --
    Foreign withholding taxes                             190                 188                 128
    Foreign operations not subject to U.S. tax             80                  50                 349
    Meals and entertainment                                40                  74                  34
    Increase in other tax credits                        (423)                 --                  --
    Other-net                                            (144)               (189)                101
    Change in valuation allowance                        1,323               2,162              5,438
                                                    --------------------------------------------------
    Total income tax expense                             $270                $188                $405
                                                    ==================================================
</TABLE>

                                                                             18
<PAGE>   51

                           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
                                                            1999         1998          1997
                                                      ---------------------------------------
                                                                  (In thousands)
<S>                                                   <C>               <C>           <C>
Deferred tax assets:
   Net operating loss carryforwards                       $  6,217      $  5,591      $ 4,126
   Accruals not deductible for tax purposes                  2,532         2,629        2,424
   General business credit carryforwards                     2,070         1,567        1,280
   Foreign tax credit carryforwards                            506           316          407
   Minimum tax credit carryforwards                            213           213          185
   Property and equipment, principally due to
     depreciation                                               15             9           --
                                                      ---------------------------------------
Total gross deferred tax assets                             11,553        10,325        8,422

Deferred tax liability:
   Property and equipment, principally due to
     depreciation                                               --            --         (109)
   Amortization of intangibles                                 (18)         (113)        (263)
                                                      ---------------------------------------
Total gross deferred tax liabilities                           (18)         (113)        (372)

Less valuation allowance                                   (11,535)      (10,212)      (8,050)
                                                      ---------------------------------------
Net deferred tax asset                                    $     --      $     --      $    --
                                                      =======================================
</TABLE>

At December 31, 1999, the Company had general business and foreign tax
carryforwards which expire in 2000 through 2014 and AMT credit carryforwards
available to offset future federal income tax liabilities totaling
approximately $2,800,000. The Company has net federal loss carryforwards of
$12,000,000 generated through December 31, 1999 federal income tax purposes
which expire at various dates between 2012 through 2019.

                                                                             19
<PAGE>   52

                           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
$4,500,000 at December 31, 1999. 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

COMMON STOCK

In October 1997 the Company's Board of Directors approved a five-for-one stock
split effected as a stock dividend. Accordingly, all the share data has been
retroactively adjusted to reflect these changes.

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 and are fully
exercisable and outstanding at December 31, 1999. The value allocated to the
warrants has been recorded as a discount to the related debt and redeemable
stock purchase warrants. The discount is amortized to interest over eighty-four
months, term of the debt. The related interest expense in 1999 was $300,000.
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

                                                                             20
<PAGE>   53

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

WARRANTS (CONTINUED)

net issue election, as defined. Warrantholders 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.

Pursuant to a 1992 loan agreement between the Company and Sirrom Capital, L.P.
(Sirrom), Sirrom obtained a warrant to purchase 150,000 shares of the Company's
common stock at an exercise price of $.002 per share. The warrant was exercised
in August 1997.

Pursuant to a loan agreement dated January 24, 1994 between the Company and
ISC, ISC received a warrant to purchase 277,605 shares of the Company's common
stock at $.002 per share in consideration for making the loan. The warrant was
exercised in August 1997.

In connection with a financing agreement entered into with 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. During 1999 and 1998, the Company
issued warrants to purchase 9,560 and 47,500, respectively, additional shares
exercisable at $.002 per share and valued these additional warrants at
approximately $30,000 and $147,000, respectively. Of the additional warrants,
57,060 and 47,500 were fully exercisable and outstanding, at December 31, 1999
and 1998, 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. Warrants issued
under this agreement expire March 31, 2001.

                                                                             21
<PAGE>   54

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

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.

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 1999,
1998 and 1997: risk-free interest rate of 6% for 1997, 5.5% for 1998 and 6% for
1999; no dividend yield; and a weighted-average expected life of the awards of
7 years, 7 years and 8 years, respectively. The weighted average fair value of
awards during 1999, 1998 and 1997 was $1.10, $.93 and $.66 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.

                                                                             22
<PAGE>   55

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK-BASED AWARDS TO EMPLOYEES (CONTINUED)

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
                                                1999               1998               1997
                                         ------------------------------------------------------
                                                               (In thousands)
<S>                                      <C>                       <C>             <C>
Net income (loss)                              $(1,824)            $(5,255)        $(17,032)
</TABLE>

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
1999, the 1995 Plan was amended to increase the number of options by 932,835,
or a total of 2,021,585.

In October 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan allows for the granting of options for up to 411,250
shares of common stock to employees, non-employee directors, consultants and
other vendors.

                                                                             23
<PAGE>   56


                           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 1999, 1998 and 1997 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, 1996                     916,500        $   0-$3.10            $1.02
   Granted                                           297,075               3.10             3.10
   Exercised                                          (1,750)                 0                0
   Expired                                          (153,740)              3.10             3.10
                                                   -------------------------------------------------
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
                                                   =================================================

Exercisable at December 31, 1997                     583,845        $0.80-$3.10            $1.04
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
</TABLE>

Options outstanding at $.80 per share totaled 762,250 of which 600,310 were
exercisable at December 31, 1999. The weighted average remaining contractual
life of options exercisable at $.80 per share was six years at December 31,
1999. Options outstanding at $3.10 per share totaled 509,812 of which 244,549
were exercisable at December 31, 1999. The weighted average remaining
contractual life of options exercisable at $3.10 per share was eight years at
December 31, 1999


                                                                              24
<PAGE>   57



                           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 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, 1999 notes receivable
balance is included in shareholders' equity.

At December 31, 1999, a total of 6,281,897 shares of the Company's common stock
were reserved for the exercise of outstanding stock warrants and options and
conversion of convertible 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,


                                                                              25
<PAGE>   58



                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



7. SHAREHOLDERS' EQUITY (CONTINUED)

PREFERRED STOCK (CONTINUED)

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 who have completed
three months of service are eligible to participate in the Plan and are fully
vested. 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. Contribution expense related to the Plan during 1999, 1998, and
1997 was $219,000, $194,000 and $200,000, respectively.

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.


                                                                              26
<PAGE>   59



                           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>

                                              1999               1998               1997
                                            ----------------------------------------------
                                                            (In thousands)

<S>                                         <C>                <C>                <C>
UNITED STATES
Revenues:
  License fees                              $ 19,789           $ 18,385           $ 13,088
  Service                                     25,144             23,443             19,455
                                            ----------------------------------------------
Total Revenues                              $ 44,933           $ 41,828           $ 32,543

Interest income                             $    211           $    108           $     95
Interest expense                            $ (2,554)          $ (1,279)          $   (442)
Depreciation and amortization               $ (1,577)          $ (1,783)          $ (1,020)
Income tax expense                          $     --           $     --           $   (405)
Income (loss) before income taxes           $ (1,150)          $ (4,826)          $(14,662)
Long-lived assets                           $  4,593           $  2,571           $  3,425
Total segment assets                        $ 22,702           $ 17,148           $ 14,332
Expenditures for long-lived assets          $  3,371           $    757           $  1,956

FOREIGN OPERATIONS
Revenues:
  License fees                              $     --           $     --           $     --
  Service                                      5,135              4,077                244
                                            ----------------------------------------------
Total Revenues                              $  5,135           $  4,077           $    244

Interest income                             $      8           $     10           $     --
Interest expense                            $     (1)          $     --           $     --
Depreciation and amortization               $   (151)          $    (88)          $    (32)
Income tax expense                          $   (270)          $   (188)          $     --
Income (loss) before income taxes           $   (286)          $   (149)          $ (1,153)
Long-lived assets                           $    367           $    434           $    179
Total segment assets                        $  1,187           $    709           $    340
Expenditures for long-lived assets          $    168           $    467           $    156
</TABLE>


                                                                              27
<PAGE>   60

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



9. SEGMENTS AND GEOGRAPHICAL INFORMATION (CONTINUED)

Export sales were $30.6 million, $27.6 million and $20.7 million in 1999, 1998,
and 1997, respectively. Such revenues were derived principally from Australia,
New Zealand, Canada, West Indies, South Africa and South America. Accounts
receivable (billed and unbilled) arising from foreign revenues total $8.1
million and $8.6 million as of December 31, 1999 and 1998, 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
                                                            1999         1998          1997
                                                          ---------------------------------
                                                                   (In thousands)

<S>                                                       <C>         <C>              <C>
Furniture and equipment acquired under
   capital lease obligations                              $    46     $    382         $358
                                                          =================================
Cash paid for interest                                    $ 2,010     $  1,303         $277
                                                          =================================
Cash paid for income taxes                                $   247     $    188         $128
                                                          =================================
</TABLE>

11. YEAR 2000 DATE CONVERSION (UNAUDITED)

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning an implementation efforts, the
Company experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.


                                                                              28
<PAGE>   61

                           PaySys International, Inc.
                                and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



12. SUBSEQUENT EVENTS

On January 19, 2000, Capital Resource Partners IV, L.P. and CRP Investment
Partners IV, L.L.C. exercised the common stock warrants (Note 7) issued pursuant
to the financing agreement (Note 4). The warrants were exercised in their
entirety, resulting in the issuance of 996,338 shares of common stock at a value
of approximately $3,100,000.


                                                                              29
<PAGE>   62


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 1998 and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' deficit and cash flows for each of the three
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 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.



                                             Arthur Andersen LLP



Boston, Massachusetts
March 15, 2000


1
<PAGE>   63


VISIBILITY INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1999 and 1998



<TABLE>
<CAPTION>

ASSETS                                                                                       1999                   1998
                                                                                        ------------           ------------
<S>                                                                                     <C>                    <C>
Current Assets:
   Cash and cash equivalents                                                            $    738,071           $  1,162,605
   Accounts receivable, net of allowance for doubtful accounts of $373,861 and
     $423,627 in 1999 and 1998, respectively                                               7,977,903              8,563,901
   Prepaid expenses and other current assets                                                 461,377                509,604
                                                                                        ------------           ------------

         Total current assets                                                              9,177,351             10,236,110

Property and Equipment, net                                                                1,063,573              1,112,122

Other Assets                                                                                  44,734                225,348
                                                                                        ------------           ------------

         Total assets                                                                   $ 10,285,658           $ 11,573,580
                                                                                        ============           ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
   Short-term debt                                                                      $  2,923,370           $  1,500,000
   Current portion of capital lease obligations                                              135,368                188,068
   Accounts payable                                                                        3,374,419              3,220,513
   Accrued expenses                                                                        2,647,204              3,294,076
   Deferred revenue                                                                        7,801,751              5,986,378
                                                                                        ------------           ------------

         Total current liabilities                                                        16,882,112             14,189,035

Notes Payable to Shareholders                                                              1,299,373              1,602,378

Capital Lease Obligations                                                                    221,444                192,706

Deferred Rent                                                                                124,085                118,811

Deferred Income Taxes                                                                        328,046                328,046
                                                                                        ------------           ------------

         Total liabilities                                                                18,855,060             16,430,976
                                                                                        ------------           ------------

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              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                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              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              8,379,500

Stockholders' Deficit
   Common stock, $0.001 par value-
     Authorized--15,000,000 shares
     Issued and outstanding--958,147 shares                                                      958                  1,190
   Additional paid-in capital                                                                318,677                452,397
   Accumulated deficit                                                                   (18,064,654)           (13,692,297)
   Accumulated other comprehensive income                                                      5,349                  1,814
                                                                                        ------------           ------------

         Total stockholders' deficit                                                     (17,739,670)           (13,236,896)
                                                                                        ------------           ------------

         Total liabilities, redeemable convertible preferred stock and
         stockholders' deficit                                                          $ 10,285,658           $ 11,573,580
                                                                                        ============           ============
</TABLE>


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


2
<PAGE>   64


VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>

                                                                               1999                   1998                 1997
                                                                          ------------           ------------         ------------
<S>                                                                       <C>                    <C>                  <C>
Revenues:
   Software licenses                                                      $  7,088,950           $ 10,580,620         $  7,468,984
   Maintenance and support services                                         14,504,997             15,648,548           11,866,985
   Hardware equipment sales                                                  2,616,061              3,963,723            2,513,204
                                                                          ------------           ------------         ------------

                                                                            24,210,008             30,192,891           21,849,173
                                                                          ------------           ------------         ------------

Cost of Revenues:
   Software licenses                                                           942,403              2,140,600            1,382,908
   Maintenance and support services                                          9,050,259              8,874,150            7,825,208
   Hardware equipment sales                                                  2,129,342              3,208,613            1,997,848
                                                                          ------------           ------------         ------------

                                                                            12,122,004             14,223,363           11,205,964
                                                                          ------------           ------------         ------------

         Gross profit                                                       12,088,004             15,969,528           10,643,209

Operating Expenses:
   Selling and marketing                                                     7,757,451              5,928,999            5,231,012
   Research and development                                                  5,511,591              6,628,824            5,370,082
   General and administrative                                                2,455,290              2,372,088            2,934,459
                                                                          ------------           ------------         ------------

                                                                            15,724,332             14,929,911           13,535,553
                                                                          ------------           ------------         ------------

         (Loss) income from operations                                      (3,636,328)             1,039,617           (2,892,344)

Interest Expense, net (includes amortization of debt discount of              (553,384)
$126,171 in 1999 (Note 7))                                                                           (315,392)            (448,801)

Other (Expense) Income, net                                                    (35,435)                19,751              (19,169)
                                                                          ------------           ------------         ------------

         (Loss) income before provision for income taxes                    (4,225,147)               743,976           (3,360,314)

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

         Net (loss) income                                                $ (4,225,147)          $    678,976         $ (3,360,314)
                                                                          ============           ============         ============
</TABLE>


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


3
<PAGE>   65


VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Deficit
For the Years Ended December 31, 1999, 1998 and 1997



<TABLE>
<CAPTION>


                                              CONVERTIBLE PREFERRED STOCK  CONVERTIBLE PREFERRED STOCK  CONVERTIBLE PREFERRED STOCK
                                                       SERIES A                      SERIES B                    SERIES C

                                                SHARES          AMOUNT         SHARES         AMOUNT       SHARES         AMOUNT
                                              ---------       ----------     ---------       --------     -------       ----------
<S>                                           <C>             <C>            <C>             <C>          <C>           <C>
Balance, December 31,1996                            --       $       --            --       $     --          --       $       --
   Issuance of Series A convertible
     preferred stock                          1,881,721        5,250,000            --             --          --               --
   Conversion of common stock to
     convertible preferred stock                     --               --     1,628,700        879,500     337,331        2,250,000
   Comprehensive loss                                --               --            --             --          --               --
   Net loss                                          --               --            --             --          --               --
   Foreign currency translation adjustment           --               --            --             --          --               --

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

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      COMPREHENSIVE
                                                  SHARES        AMOUNT        SHARES        AMOUNT       CAPITAL      INCOME (LOSS)
                                                 -------       --------     ----------     -------     -----------    -------------
<S>                                            <C>             <C>          <C>            <C>         <C>            <C>
Balance, December 31,1996                             --             --      3,155,700     $ 3,156     $ 3,579,931
   Issuance of Series A convertible
     preferred stock                                  --             --             --          --              --
   Conversion of common stock to
     convertible preferred stock                      --             --     (1,966,031)     (1,966)     (3,127,534)
   Comprehensive loss                                 --             --             --          --              --
   Net loss                                           --             --             --          --              --    $ (3,360,314)
   Foreign currency translation adjustment            --             --             --          --              --          (4,240)
                                                                                                                      ------------
   Comprehensive loss                                 --             --             --          --              --    $ (3,364,554)
                                                 -------       --------     ----------     -------     -----------    ============

Balance, December 31, 1997                            --             --      1,189,669       1,190         452,397
   Comprehensive loss                                 --             --             --          --              --
   Net loss                                           --             --             --          --              --    $    678,976
   Foreign currency translation adjustment            --             --             --          --              --           6,054
                                                                                                                      ------------
   Comprehensive loss                                 --             --             --          --              --    $    685,030
                                                 -------       --------     ----------     -------     -----------    ============

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                                           --             --             --          --              --    $ (4,225,147)
   Foreign currency translation adjustment            --             --             --          --              --           3,535
                                                                                                                      ------------
   Comprehensive loss                                 --             --             --          --              --    $ (4,221,612)
                                                 -------       --------     ----------     -------     -----------    ============

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


<CAPTION>



                                                     ACCUMULATED
                                                        OTHER                                    TOTAL
                                                    COMPREHENSIVE      ACCUMULATED           STOCKHOLDERS'
                                                    INCOME (LOSS)        DEFICIT                DEFICIT
                                                    -------------     ------------           ------------
<S>                                                 <C>               <C>                    <C>
Balance, December 31,1996                           $         --      $(11,010,959)          $ (7,427,872)
   Issuance of Series A convertible
     preferred stock                                          --                --                     --
   Conversion of common stock to
     convertible preferred stock                              --                --             (3,129,500)
   Comprehensive loss                                         --                --                     --
   Net loss                                                   --        (3,360,314)            (3,360,314)
   Foreign currency translation adjustment                (4,240)               --                 (4,240)

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

Balance, December 31, 1997                                (4,240)      (14,371,273)           (13,921,926)
   Comprehensive loss                                         --                --                     --
   Net loss                                                   --           678,976                678,976
   Foreign currency translation adjustment                 6,054                --                  6,054

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

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)
   Foreign currency translation adjustment                 3,535                --                  3,535

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

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.


4
<PAGE>   66


VISIBILITY INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997



<TABLE>
<CAPTION>

                                                                               1999                  1998                  1997
                                                                           -----------           -----------           -----------
<S>                                                                        <C>                   <C>                   <C>
Cash Flows from Operating Activities:
   Net (loss) income                                                       $(4,225,147)          $   678,976           $(3,360,314)
   Adjustments to reconcile net income (loss) to net cash used in
   operating activities-
     Depreciation and amortization                                             781,716               734,440               911,003
     Interest expense capitalized to debt                                      162,459                76,925                57,016
     Noncash amortization of debt discount                                     126,171                    --                    --
     Changes in assets and liabilities, net of assets acquired-
       Accounts receivable, net                                                585,998            (4,743,798)             (377,113)
       Prepaid expenses and other current assets                                48,227              (204,607)             (128,544)
       Accounts payable                                                        153,906             1,063,590              (167,529)
       Accrued expenses                                                       (859,601)              272,695               201,367
       Deferred revenue                                                      1,815,373             1,269,554               557,387
       Deferred rent                                                             5,274                26,402                26,402
                                                                           -----------           -----------           -----------

         Net cash used in operating activities                              (1,405,624)             (825,823)           (2,280,324)
                                                                           -----------           -----------           -----------

Cash Flows from Investing Activities:
   Acquisition, net of cash acquired                                                --              (126,000)              (23,346)
   Purchases of fixed assets                                                  (588,162)             (206,878)             (372,292)
   Other assets                                                                 35,609                (3,078)               15,626
                                                                           -----------           -----------           -----------

         Net cash used in investing activities                                (552,553)             (335,956)             (380,012)
                                                                           -----------           -----------           -----------

Cash Flows from Financing Activities:
   Proceeds from issuance of common stock                                       30,700                    --                    --
   Proceeds from issuance of Series A preferred stock                               --                    --             3,500,000
   Proceeds from issuance of notes payable and Series D preferred
     stock                                                                   1,100,000                    --             2,200,000
   Proceeds from short-term bank loans, net                                    423,370                    --                    --
   Repayment of notes payable                                                       --                    --              (250,000)
   Payment of capital lease obligation                                         (23,962)             (311,395)             (358,092)
   Payments of short-term bank loans, net                                           --                    --              (600,000)
                                                                           -----------           -----------           -----------

         Net cash provided by (used in) by financing activities              1,530,108              (311,395)            4,491,908
                                                                           -----------           -----------           -----------

Foreign Exchange Impact on Cash                                                  3,535                 6,054                (4,240)
                                                                           -----------           -----------           -----------

Net (Decrease) Increase in Cash and Cash Equivalents                          (424,534)           (1,467,120)            1,827,332

Cash and Cash Equivalents, beginning of year                                 1,162,605             2,629,725               802,393
                                                                           -----------           -----------           -----------

Cash and Cash Equivalents, end of year                                     $   738,071           $ 1,162,605           $ 2,629,725
                                                                           ===========           ===========           ===========

Supplemental Disclosure of Cash Flow Information:
   Cash paid during the year for interest                                  $   433,334           $   242,771           $   236,980
                                                                           ===========           ===========           ===========

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                                $        --           $        --           $ 1,750,000
                                                                           ===========           ===========           ===========
   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                                                           $        --           $        --           $   109,135
       Goodwill and other intangible assets                                         --               126,000               140,865
                                                                           -----------           -----------           -----------
                                                                                    --               126,000               250,000
     Forgiveness of Visibility debt, net                                            --                    --              (226,654)
                                                                           -----------           -----------           -----------

         Cash payment for acquisition                                      $        --           $   126,000           $    23,346
                                                                           ===========           ===========           ===========
</TABLE>


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


5
<PAGE>   67


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.


6
<PAGE>   68


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       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, 1998 and 1997, 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 years ended
       December 31, 1999 and 1998 relating to capitalized software.


7
<PAGE>   69


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       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 END
                                            PERIOD         OPERATIONS       ALLOWANCE (1)       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
    Year Ended December 31, 1997              518               99              (133)               484
</TABLE>

       (1) Accounts deemed uncollectable, net of recoveries.


8
<PAGE>   70


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



(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 and 1998:

<TABLE>
<CAPTION>

                                                     ESTIMATED
                                                   USEFUL LIVES         1999          1998

           <S>                                     <C>              <C>           <C>
           Furniture and fixtures                     5 years       $   708,980   $   528,255
           Equipment                                 1-3 years        3,503,784     3,192,787
           Computer software                          3 years           636,493       541,847
           Leasehold improvements                   2-10 years          352,207       350,411
                                                                    -----------   -----------

                                                                      5,201,464     4,613,300

           Less--Accumulated depreciation and
                   amortization                                       4,137,891     3,501,178
                                                                    -----------   -----------

                                                                    $ 1,063,573   $ 1,112,122
                                                                    ===========   ===========
</TABLE>

       Included above is equipment held under capital leases with a cost of
       $477,494 and $943,950 and accumulated amortization of $149,319 and
       $531,633 at December 31, 1999 and 1998, respectively.

(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


9
<PAGE>   71


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       Company's profitability and quick ratios, as defined. At December 31,
       1999, the 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 and December 31, 1998. The notes accrue interest at 10%
       per annum. During 1999, the maturity date was extended to January 1,
       2000. Subsequent


10
<PAGE>   72


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       to year-end, the maturity date was further extended to January 31, 2001
       and, accordingly, the outstanding borrowings and accrued interest of
       $509,904 and $473,004 at December 31, 1999 and 1998, respectively, 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, 1998 and 1997 were approximately $100,000, $100,000 and $86,000,
       respectively.

(9)    INCOME TAXES

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

<TABLE>
<CAPTION>

                           1999           1998          1997

          <S>          <C>            <C>            <C>
          Domestic     $(2,932,507)   $ 1,649,938    $(2,235,762)
          Foreign       (1,292,640)      (905,962)    (1,124,552)
                       -----------    -----------    -----------

                       $(4,225,147)   $   743,976    $(3,360,314)
                       ===========    ===========    ===========
</TABLE>


11
<PAGE>   73


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999




       The provision for income taxes consists of the following for 1999, 1998
       and 1997:

<TABLE>
<CAPTION>

                                          1999              1998               1997

          <S>                           <C>               <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           1997

          <S>                                            <C>            <C>            <C>
          Income tax provision (benefit) at
            statutory rate                                (34)%           34%           (34)%
          State tax provision (benefit)                    (5)            10             (4)
          Impact of foreign tax rates (benefit)             2              9              3
          (Decrease) increase in valuation
            allowance                                      45            (59)            29
          Other                                            (8)            15              6
                                                          ---            ---            ---

                                                           --%             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.


12
<PAGE>   74


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       Significant components of deferred income taxes are as follows:

<TABLE>
<CAPTION>

                                                           1999                  1998

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


          Deferred tax assets-
             Net operating loss carryforwards          $ 4,652,900           $ 2,822,000
             Allowance for doubtful accounts               117,035               153,275
             Deferred rent                                  50,875                48,713
             Accrued benefits                              112,503               188,430
             Tax credits                                   617,934               402,023
             Other                                          44,038                59,054
                                                       -----------           -----------

                                                         5,595,285             3,673,495

          Valuation allowance                           (5,595,285)           (3,673,495)
                                                       -----------           -----------

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

       The valuation allowance at December 31, 1999 and 1998 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, $464,000 and $491,000 for the years ended December 31, 1999,
       1998 and 1997, respectively.


13
<PAGE>   75


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



(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 or December 31, 1998. One customer accounted for 13% of
       total revenues in 1999. No customer accounted for 10% or more of total
       revenues in 1998 or 1997.

(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-Sholes 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.


14
<PAGE>   76


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



              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.


15

<PAGE>   77


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



                  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.


16

<PAGE>   78

VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



              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, 1996             728,400           $     1.11
             Granted                           1,098,850                 0.20
             Exercised                                --                   --
             Canceled                           (674,700)                0.63
                                              ----------

          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, 1998 and 1997, options to purchase 457,122, 549,162
       and 364,600 shares were exercisable, respectively. The options
       exercisable at December 31, 1999, 1998 and 1997 had a weighted average
       exercise price of $0.46, $0.49 and $0. 55, 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 and 1997 net losses and 1998 net income would have been increased
       and decreased, respectively, to the following pro forma amounts:

<TABLE>
<CAPTION>

                                     1999             1998              1997

         <S>                   <C>                 <C>            <C>
         Net (loss) income-
           As reported         $  (4,225,147)      $   678,976    $  (3,360,314)
           Pro forma              (4,228,464)          665,174       (3,373,765)
</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.


17

<PAGE>   79


VISIBILITY INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1999



       The weighted average per share fair values of options granted during
       1999, 1998 and 1997 were $0.10, $0.09 and $0.05, respectively. The values
       were estimated on the date of grant using the following weighted average
       assumptions for grants in 1999, 1998 and 1997: risk-free interest rate of
       5.50 %, 5.17% and 6.15%, respectively; 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                   1997

        <S>                                    <C>                    <C>                    <C>
        Revenues-
          North America                        $ 19,664,679           $ 24,022,301           $ 19,592,990
          Europe                                  4,545,329              6,170,590              2,256,183
                                               ------------           ------------           ------------

               Consolidated total              $ 24,210,008           $ 30,192,891           $ 21,849,173
                                               ============           ============           ============

       (Loss) income from operations-
         North America                         $ (2,932,507)          $  1,964,561           $ (1,767,792)
         Europe                                  (1,292,640)              (924,944)            (1,124,552)
                                               ------------           ------------           ------------

              Consolidated total               $ (4,225,147)          $  1,039,617           $ (2,892,344)
                                               ============           ============           ============

       Identifiable assets-
         North America                         $  8,061,279           $  7,872,620           $  6,204,875
         Europe                                   2,224,379              3,700,960              2,002,173
                                               ------------           ------------           ------------

              Consolidated total               $ 10,285,658           $ 11,573,580           $  8,207,048
                                               ============           ============           ============
</TABLE>

       Export sales were not material in 1999, 1998 or 1997.


18

<PAGE>   80

                    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
<PAGE>   81


                          DIGITAL WIRELESS CORPORATION

                                 BALANCE SHEET

                               DECEMBER 31, 1999

                                     ASSETS



<TABLE>
<S>                                                                                        <C>
Current assets:
   Cash and cash equivalents                                                               $    917,129
   Accounts receivable, less allowance of $20,109                                               618,053
   Inventories                                                                                1,250,012
                                                                                           ------------

     Total current assets                                                                     2,785,194
                                                                                           ------------

Property and equipment, at cost:
   Research and development equipment                                                           235,814
   Production equipment                                                                          27,083
   Office equipment                                                                              21,428
   Furniture and fixtures                                                                         6,843
   Computers and software                                                                        64,568
                                                                                           ------------

                                                                                                355,736

   Less accumulated depreciation                                                                259,552
                                                                                           ------------

     Net property and equipment                                                                  96,184
                                                                                           ------------


Other assets:
    Patents, net of accumulated amortization of $12,234                                          11,724
    Deposits                                                                                      6,656
                                                                                           ------------

     Total other assets                                                                          18,380
                                                                                           ------------

       Total assets                                                                        $  2,899,758
                                                                                           ============
</TABLE>


                                      -2-
<PAGE>   82

                      LIABILITIES AND SHAREHOLDERS' EQUITY



<TABLE>
<S>                                                                                        <C>
Current liabilities:
    Accounts payable                                                                       $    158,165
    Accrued expenses                                                                             86,231
    Income taxes payable                                                                        153,292
    Current maturities of notes payable                                                          41,016
                                                                                           ------------
     Total current liabilities                                                                  438,704
                                                                                           ------------
Notes payable, less current maturities                                                           82,033
Deferred income taxes                                                                            21,460
                                                                                           ------------
     Total long term liabilities                                                                103,493
                                                                                           ------------

       Total liabilities                                                                        542,197
                                                                                           ------------

Stockholders' equity:
    Common stock, $.01 par value;  5,000,000 shares
      authorized, 633,888 shares issued and outstanding                                           6,339
    Additional paid in capital                                                                1,432,482
    Retained earnings                                                                           918,740
                                                                                           ------------

     Total stockholders' equity                                                               2,357,561
                                                                                           ------------



       Total liabilities and stockholders' equity                                          $  2,899,758
                                                                                           ============
</TABLE>


         The accompanying notes are an integral part of this statement.


                                      -3-
<PAGE>   83

                          DIGITAL WIRELESS CORPORATION

                            STATEMENT OF OPERATIONS

                          YEAR ENDED DECEMBER 31, 1999



<TABLE>
<S>                                                                                        <C>
Revenues:
  Product sales and service revenues                                                       $  4,118,153
  Development contracts                                                                         352,700
                                                                                           ------------

   Total revenues                                                                             4,470,853

Costs of revenues                                                                             1,912,709
                                                                                           ------------

Gross profit                                                                                  2,558,144
                                                                                           ------------

Operating expenses:
  Research and development costs                                                                520,720
  Marketing and sales costs                                                                     656,285
  General and administrative expenses                                                          375,447
                                                                                           ------------

   Total operating expenses                                                                   1,552,452
                                                                                           ------------

Income from operations                                                                        1,005,692

Other income (expense):
  Interest income                                                                                23,921
  Interest expense                                                                               (9,387)
  Other income (expense)                                                                         13,487
                                                                                           ------------

    Total other income (expense)                                                                 28,021
                                                                                           ------------

Income before provision for income taxes
  and cumulative effect of accounting change                                                  1,033,713

Provision for income taxes:
  Federal income taxes                                                                          240,706
  State income taxes                                                                             33,502
                                                                                           ------------

    Total provision for income taxes                                                            274,208
                                                                                           ------------

Net income before cumulative effect of
  accounting change                                                                             759,505

Cumulative effect of accounting change (less
  applicable income taxes of $22,980)                                                            34,469
                                                                                           ------------

Net income                                                                                 $    793,974
                                                                                           ============
</TABLE>


         The accompanying notes are an integral part of this statement.


                                      -4-
<PAGE>   84

                          DIGITAL WIRELESS CORPORATION

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                          YEAR ENDED DECEMBER 31, 1999


<TABLE>
<CAPTION>
                                                     Common Stock               Additional                              Total
                                           ----------------------------           paid-in           Retained        stockholders'
                                                Shares           Amount           capital           earnings           equity
                                           ------------         -------         -----------         ---------       -------------

<S>                                        <C>                  <C>             <C>                 <C>             <C>
Balance, December 31, 1998                      625,888         $ 6,259         $ 1,392,562         $ 124,766         $ 1,523,587

Conversion of subordinated debentures
   into common stock                              8,000              80              39,920                --              40,000

Net income                                           --              --                  --           793,974             793,974
                                               --------         -------         -----------         ---------         -----------

Balance, December 31, 1999                      633,888         $ 6,339         $ 1,432,482         $ 918,740         $ 2,357,561
                                               ========         =======         ===========         =========         ===========
</TABLE>


         The accompanying notes are an integral part of this statement.


                                      -5-
<PAGE>   85

                          DIGITAL WIRELESS CORPORATION

                            STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1999


<TABLE>
<S>                                                                                        <C>
Cash flows from operating activities:
   Net income                                                                              $    793,974
   Adjustments to reconcile net income to net cash
          provided by operating activities:
           Cumulative effect of accounting change                                               (57,449)
           Depreciation and amortization                                                         29,508
   Net changes in assets and liabilities:
          Accounts receivable                                                                  (118,738)
          Inventory                                                                            (307,098)
          Accounts payable                                                                       62,432
          Accrued expenses                                                                      (24,054)
          Advance billings                                                                     (102,060)
          Income taxes payable                                                                   58,289
                                                                                           ------------
   Net cash provided by operating activities                                                    334,804
                                                                                           ------------
Cash flows from investing activities:
   Acquisition of property and equipment                                                        (28,085)
                                                                                           ------------
        Net cash used in investing activities                                                   (28,085)
                                                                                           ------------
Cash flows from financing activities:
   Net proceeds on notes payable and line-of-credit                                             123,049
   Payments on convertible subordinated debentures                                             (143,557)
   Payments on notes payable                                                                    (17,742)
   Payments on obligations under capital leases                                                 (34,916)
                                                                                           ------------

        Net cash used in financing activities                                                   (73,166)
                                                                                           ------------
Net increase in cash and cash equivalents                                                       233,553
Cash and cash equivalents at beginning of year                                                  683,576
                                                                                           ------------
Cash and cash equivalents at end of year                                                   $    917,129
                                                                                           ============

Supplemental disclosure of cash flow information:
   Cash paid during the year for:
     Interest                                                                              $     19,757
                                                                                           ============
     Income taxes                                                                          $    239,899
                                                                                           ============
</TABLE>


         The accompanying notes are an integral part of this statement.


                                      -6-
<PAGE>   86

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


1.     DESCRIPTION OF BUSINESS

       Digital Wireless Corporation (the "Company") designs, manufactures and
       markets wireless telecommunications products for industries that provide
       a wireless pathway for data 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 market.
       Additionally, the Company holds a patent on a wireless system called
       Recombinant Spread Spectrum (RSS) 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 telecommunication
       products are 3-5 years.


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       A.    REVENUE RECOGNITION

             The Company recognizes revenue from product sales at shipment.
             Revenue from development contracts is recognized as earned based on
             the agreements.


       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.    BAD DEBTS

             The Company uses the reserve method of accounting for bad debts.
             Accounts are written off against the reserve at the time at which
             they are determined to be uncollectible.


                                      -7-
<PAGE>   87

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       D.    INVENTORIES

             Inventories are stated at cost or market, whichever is lower. Cost
             is determined using the first-in, first-out ("FIFO") method of
             valuation. At December 31, 1999, the major components of
             inventories were as follows:


<TABLE>
                      <S>                                                      <C>
                      Raw materials and purchased parts                        $  688,863
                      Work-in-process                                             338,240
                      Finished goods                                              222,909
                                                                               ----------

                      Total inventories                                        $1,250,012
</TABLE>


       E.    PROPERTY AND EQUIPMENT

             Property and equipment are stated at cost and depreciated over the
             estimated useful lives of the assets. Depreciation is computed on
             the straight-line method for financial reporting purposes and on
             the declining balance method for federal income tax purposes.
             Maintenance and repairs that do not improve or extend the lives of
             the respective assets are expensed. Depreciation expense for the
             year ended December 31, 1999 was $28,099 (Note 10).


       F.    PATENTS

             Patents are being amortized on a straight-line basis over the
             expected useful life of the asset, which is estimated at 17 years.
             Amortization expense for the year ended December 31, 1999 was
             $1,409.


                                      -8-
<PAGE>   88

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       G.    INCOME TAXES

             Income taxes are computed under the provisions of Statement of
             Financial Accounting Standards ("SFAS") No. 109, "Accounting for
             Income Taxes". Income taxes are provided for the tax effects of
             transactions reported in the financial statements and consist of
             taxes currently due plus deferred taxes. Deferred taxes are
             recognized for differences between the basis of assets and
             liabilities for financial statement and income tax purposes. The
             differences relate primarily to depreciation methods and research
             and experimentation credits. The Company uses the flow-through
             method in accounting for research and experimentation credits. The
             credits reduce income tax expense in the years they are used. The
             deferred tax assets and liabilities represent the future tax
             return consequences of those differences, which will either be
             taxable or deductible when the assets and liabilities are
             recovered or settled. Deferred tax assets are reduced by a
             valuation allowance when, in the opinion of management, it is more
             likely than not that some portion or all of the deferred tax
             assets will not be realized. Deferred tax assets and liabilities
             are adjusted for the effects of changes in tax laws and rates on
             the date of enactment.


       H.    STOCK-BASED COMPENSATION

             The Company has elected to follow Accounting Principles Board
             ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees"
             and related interpretations in accounting for its employee stock
             options. Under APB Opinion No. 25, because the exercise price of
             employee stock options equals the market price of the underlying
             stock on the date of grant, no compensation expense is recorded.
             The Company has adopted the disclosure-only provisions of SFAS No.
             123, "Accounting for Stock-Based Compensation" (Note 7).


       I.    USE OF ESTIMATES

             The use of estimates is necessary in the preparation of financial
             statements in accordance with generally accepted accounting
             principles. Management believes that the estimates used in
             preparation of the Company's financial statements are reasonable.
             Actual results may differ from the estimates.


                                      -9-
<PAGE>   89

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


3.   NOTES PAYABLE AND LINE OF CREDIT

       The Company had available a $300,000 revolving line of credit and a
       $200,000 equipment line of credit with a bank during the year.
       Outstanding borrowings under the lines accrued interest at the prime
       rate plus .75% and 1.25%, respectively. At December 31, 1999, the lines
       had expired.

       Borrowings under the revolving line of credit were limited to 80% of
       eligible accounts receivable, as defined. The equipment line of credit
       was used to finance equipment and other fixed asset purchases between
       May 1, 1998 and June 1, 1999. Interest accrued from the date of each
       advance at the appropriate rate and was payable monthly until June 1,
       1999. On June 1, 1999, the equipment line of credit was converted to a
       term note, payable in 42 equal monthly installments of principal and
       accrued interest of $3,418.

       The note bears interest at a variable rate of prime plus 1.25% (9.75% at
       December 31, 1999) and is secured by substantially all assets of the
       Company. Future minimum principal payments are as follows:

<TABLE>
<CAPTION>
                  Year ending December 31:
                  <S>                                          <C>
                           2000                                $  41,017
                           2001                                   41,016
                           2002                                   41,016
                                                               ---------

                                                               $ 123,049
                                                               =========
</TABLE>


       The Company used the equipment line of credit to retire any
       non-converted subordinated debentures (Note 4).

4.     CONVERTIBLE SUBORDINATED DEBENTURES

       At December 31, 1998 the Company had outstanding convertible
       subordinated debentures amounting to $183,557. These debentures bore
       interest at varying rates from 8% to 10% and were convertible into
       common stock at a conversion rate of $5 per share. The debentures
       matured on May 31, 1999. Interest accrued and was payable annually on
       May 31. The debentures were redeemable at face value beginning June 1,
       1997. They 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 8,000 shares of common stock of the Company. The
       Company used the equipment line of credit to retire the remaining
       debentures during 1999 (Note 3).


                                     -10-

<PAGE>   90

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


5.     INCOME TAXES

       The components of the provision for income taxes for the year ended
       December 31, 1999 are as follows:

<TABLE>
              <S>                                                      <C>
              Current:
                  Federal                                              $222,465
                  State                                                  30,283

              Deferred:
                  Federal                                              $ 18,241
                  State                                                   3,219
                                                                       --------

              Total:
                  Federal                                              $240,706
                  State                                                  33,502
                                                                       ========
</TABLE>

       Deferred income taxes at December 31, 1999 were $21,460 and are the
       result of temporary differences due to depreciation methods. The net
       change in the deferred tax valuation allowance during 1999 was a
       decrease of $63,906.

       The Company utilized $90,630 of available research and experimentation
       credits during 1999. At December 31, 1999, the Company has no research
       and experimentation credit carryforwards.

       The following is a summary of the items which resulted in recorded
       income taxes to differ from taxes computed using the statutory federal
       income tax rate for the year ended December 31, 1999:

<TABLE>
              <S>                                                        <C>
              Statutory federal income tax rate                            34%
              Effect of:
                  State income tax, net of federal benefit                  4%
                  Research and development credits                         (8)%
                  Valuation allowance                                      (5)%
                  Other                                                     2%
                                                                         ----
              Effective income tax rate                                    27%
                                                                         ====
</TABLE>

6.     STOCK WARRANTS

       At December 31, 1999, the Company had outstanding to an officer and
       employees, stock warrants to purchase 62,000 shares of common stock at
       $0.02 per share. The warrants expire on January 1, 2006.


                                     -11-
<PAGE>   91

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


7.   STOCK OPTIONS

       The Company has an incentive stock option plan and outstanding
       non-qualified 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.

       A summary of the status of the Company's stock option plans as of
       December 31, 1999 and changes during the year is presented below:

<TABLE>
<CAPTION>
                                                                                             Weighted-Average
                                                                                 Shares       Exercise Price
                                                                                --------     ----------------

       <S>                                                                      <C>          <C>
       Outstanding at beginning of year                                          272,326           $ 4.20
       Granted                                                                    14,550             4.79
       Exercised                                                                      --               --
       Forfeited                                                                  (2,600)          $ 3.08
                                                                               ---------           ------

       Outstanding at end of year                                                284,276           $ 4.24
                                                                               =========           ======


       Options exercisable at end of year                                        170,976           $ 4.22
                                                                               =========           ======


       Weighted-average fair value of options granted during the year                              $ 4.79
                                                                                                   ======
</TABLE>


       The following table summarizes information about stock options
       outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                     Options Outstanding                               Options Exercisable
                      -------------------------------------------------------------------------------------------
                                           Weighted-
                         Number             Average             Weighted-           Number           Weighted-
         Exercise     Outstanding          Remaining             Average         Outstanding          Average
          Prices      at 12/31/99      Contractual Life       Exercise Price     at 12/31/99       Exercise Price
         --------     -----------      ----------------       --------------     -----------       --------------

         <S>          <C>              <C>                    <C>                <C>               <C>
           $7.00        22,450               3.98                  $7.00            22,450             $7.00
           $5.00        25,100               9.29                  $5.00            19,700             $5.00
           $4.37        58,250               6.94                  $4.37            40,250             $4.37
           $4.35         4,983               6.81                  $4.35             2,883             $4.35
           $4.30        10,200               9.08                  $4.30             3,400             $4.30
           $4.00       127,500               7.63                  $4.00            46,500             $4.00
           $3.08        25,050               2.40                  $3.08            25,050             $3.08
           $2.00         2,000               4.36                  $2.00             2,000             $2.00
           $1.08         2,876               1.86                  $1.08             2,876             $1.08
           $1.00         5,867               2.94                  $1.00             5,867             $1.00
                       -------                                                     -------

                       284,276                                                     170,976
                       =======                                                     =======
</TABLE>


                                     -12-
<PAGE>   92

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


       The Company applies APB Opinion No. 25 and related interpretations in
       accounting for stock options; accordingly, no compensation cost has been
       recognized. Had compensation cost been determined based upon the fair
       value of the stock options at grant date consistent with the method of
       SFAS No. 123, it would not have had a material effect on either the
       Company's net income or the financial statements as a whole.


8.     COMMITMENTS

       The Company has a compensation agreement with an officer/employee of the
       Company. Under the agreement, during 2000, the employee is entitled to a
       base salary and bonuses based on increases in revenues and operating
       profit. The employee was granted stock options to purchase 36,000 shares
       of the Company's common stock at $4.37 a share during 1998. Vesting
       occurs over a two year period. This agreement is revised annually by the
       Company's Board of Directors.


9.     RELATED PARTY TRANSACTIONS

       The Company leases space under an operating lease and purchases certain
       services from a company controlled by the same parties as one of its
       stockholders. During 1999, the Company paid approximately $95,000 for
       rent and other services to this related company. The lease expires in
       September, 2000. At December 31, 1999, future minimum rental payments due
       under the lease are approximately $54,000. In management's opinion the
       amounts paid were reasonable and equivalent to what it would have paid an
       unrelated party for the same facility rental and services. At December
       31, 1999, no amounts were owed to the related company.

       Also outstanding are 61,926 non-qualified stock options to directors at
       prices ranging from $1.00 to $7.00, expiring at varying dates through
       October, 2009.


                                     -13-
<PAGE>   93

                          DIGITAL WIRELESS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS


10.    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 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.

11.    NON-CASH INVESTING AND FINANCING ACTIVITIES

       During the year, a subordinated debenture holder converted a note for
       $40,000 into 8,000 shares of common stock of the Company.

12.    CONCENTRATION OF CREDIT RISK

       Financial instruments that potentially subject the Company to
       significant concentration of credit risk consist primarily of cash and
       cash equivalents and accounts receivable.

       The Company maintains cash balances at two financial institutions, which
       at times may exceed federally insured limits. The Company maintains its
       cash and cash equivalents with high credit, quality financial
       institutions. The Company believes no significant concentration of
       credit risk exists with respect to these cash investments. At December
       31, 1999, the Company's cash and cash equivalents exceeded federally
       insured limits by $717,004.


13.    DEFINED CONTRIBUTION PLAN

       The Company has a contributory, defined contribution 401(k) plan (the
       "Plan") covering all employees. Employees are eligible to participate in
       the Plan on the first day of the month following the date of their
       employment.

       Under the Plan there are two types of contributions which can be made
       during the Plan period. The contributions are:

              1.  Salary reduction contributions: The amount by which the
                  participants have elected to reduce their compensation for
                  the plan year.

              2.  Employer discretionary matching contributions: The employer,
                  in its sole discretion, may make discretionary matching
                  contributions within certain limits provided by law.

       The Company made a $40,000 contribution to the Plan for the year ended
       1999. Such amount is included in accrued expenses in the accompanying
       balance sheet.


                                     -14-