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<SEC-DOCUMENT>0000950144-07-002577.txt : 20070323
<SEC-HEADER>0000950144-07-002577.hdr.sgml : 20070323
<ACCEPTANCE-DATETIME>20070323091524
ACCESSION NUMBER:		0000950144-07-002577
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		7
CONFORMED PERIOD OF REPORT:	20061231
FILED AS OF DATE:		20070323
DATE AS OF CHANGE:		20070323

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INTELLIGENT SYSTEMS CORP
		CENTRAL INDEX KEY:			0000320340
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-PREPACKAGED SOFTWARE [7372]
		IRS NUMBER:				581964787
		STATE OF INCORPORATION:			GA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-09330
		FILM NUMBER:		07713504

	BUSINESS ADDRESS:	
		STREET 1:		4355 SHACKLEFORD RD
		CITY:			NORCROSS
		STATE:			GA
		ZIP:			30093
		BUSINESS PHONE:		4043812900

	MAIL ADDRESS:	
		STREET 1:		4355 SHACKLEFORD ROAD
		CITY:			NORCROSS
		STATE:			GA
		ZIP:			30093
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>g06209e10ksb.htm
<DESCRIPTION>INTELLIGENT SYSTEMS CORPORATION
<TEXT>
<HTML>
<HEAD>
<TITLE>INTELLIGENT SYSTEMS CORPORATION</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>




<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B>Washington, D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>FORM 10-KSB</B>
</DIV>




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">(Mark One)
</DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>For the fiscal year ended <U>December&nbsp;31, 2006</U>
</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>OR</B>

</DIV>
<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>For the transition period from <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> to <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</B>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 14pt"><B>Commission
file number 1-9330</B></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B>INTELLIGENT SYSTEMS CORPORATION</B>
</DIV>
<DIV align="left">
<DIV style="font-size: 1pt; margin-top: 0pt; width: 100%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>




<DIV align="center" style="font-size: 10pt">(Name of small business issuer in its charter)</DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>
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<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><B>Georgia</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>58-1964787</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="3" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">(State or other jurisdiction of incorporation or organization)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(I.R.S. Employer Identification No.)</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>4355 Shackleford Road, Norcross, Georgia</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>30093</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="3" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">(Address of principal executive offices)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(Zip Code)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">Issuer&#146;s telephone number: <B>(770)&nbsp;381-2900</B>

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>Securities registered pursuant to Section 12(b) of the Act:</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><B>Title of each class</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Name of each exchange on which registered</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="1" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="1" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>Common Stock, $.01 par value</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>American Stock Exchange</B></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>Securities registered pursuant to Section 12(g) of the Act: </B>None

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Check
whether the issuer (1)&nbsp; filed all reports required to be filed by Section&nbsp;13 or 15(d) of
the Securities Exchange Act of 1934 during the past 12&nbsp;months (or for such shorter period that
the registrant was required to file such reports), and (2)&nbsp;has been subject to such filing
requirements for the past 90&nbsp;days. Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Check if
there is no disclosure of delinquent filers in response to Item&nbsp;405 of Regulation&nbsp;S-B
contained in this form, and no disclosure will be contained, to the best of registrant&#146;s knowledge, in
definitive proxy or information statements incorporated by reference in Part&nbsp;III of this Form
10-KSB or any amendment to this Form 10-KSB. <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicated by check mark whether the registrant is a shell company (as defined in Rule&nbsp;12b-2 of the
Exchange Act). Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">State issuer&#146;s revenue for its most recent fiscal year. <U>$14,460,000</U>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the average bid and
asked price of such common equity, as of a specified date within the past 60&nbsp;days. (See definition
of affiliate in Rule&nbsp;12b-2 of the Exchange Act.)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of February&nbsp;28, 2007, 4,478,971 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the registrant on February&nbsp;28,
2007 was $9,985,000 (computed using the closing price of the Common Stock on February&nbsp;28, 2007 as
reported by the American Stock Exchange).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant&#146;s Proxy Statement for the Annual
Meeting of Shareholders are incorporated by reference in Part&nbsp;III hereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Transitional
Small Business Disclosure Format:  Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>



<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">








<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>TABLE OF CONTENTS</B>
</DIV>

<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="85%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>PAGE</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#101"><B>Part I</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#102">Item&nbsp;1.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#102">Description of business</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#103">2.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#103">Description of property</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">8</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#104">3.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#104">Legal proceedings</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">8</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#105">4.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#105">Submission of matters to a vote of security holders</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">8</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#106"><B>Part II</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#107">5.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#107">Market for common equity and related stockholder matters</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">9</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#108">6.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#108">Management&#146;s discussion and analysis or plan of operation</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">9</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#109">7.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#109">Financial statements</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#110">8.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#110">Changes in and disagreements with accountants on accounting and financial disclosure</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#111">8A.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#111">Controls and procedures</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">18</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#112"><B>Part III</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:45px; text-indent:-15px"><A href="#113">9.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#113">Directors, executive officers, promoters, control persons and corporate governance: compliance with  Section 16(a) of the Exchange Act</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="bottom">18</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#114">10.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#114">Executive compensation</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">18</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#115">11.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#115">Security ownership of certain beneficial owners and management and related stockholder matters</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">19</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#116">12.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#116">Certain relationships and related transactions, and director independence</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">19</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#117">13.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#117">Exhibits</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">19</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#118">14.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#118">Principal accountant fees and services</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">21</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><DIV style="margin-left:15px; text-indent:-15px"><A href="#119">Signatures</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">22</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv10w9.htm">EX-10.9 FIFTH MODIFICATION TO LOAN DOCUMENTS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv21w1.htm">EX-21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv23w1.htm">EX-23.1 CONSENT OF TAUBER & BALSER, P.C.</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv31w1.htm">EX-31.1 SECTION 302 CERTIFICATION OF CEO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv31w2.htm">EX-31.2 SECTION 302 CERTIFICATION OF CFO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="g06209exv32w1.htm">EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO</A></FONT></TD></TR>
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

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<A name="101"></A>
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<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART I</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Forward-Looking Statements</B>
</DIV>


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    <TD><I>In addition to historical information, this </I><I>Form 10-KSB</I><I> may contain
forward-looking statements relating to Intelligent Systems Corporation (&#147;ISC&#148;).
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 &#147;anticipate&#148;, &#147;believe&#148;, &#147;plan&#148;, &#147;estimate&#148;, &#147;expect&#148;, &#147;likely&#148; and
&#147;intend&#148;, and other similar expressions constitute forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. A number of the factors that we believe could impact
our future operations are discussed in Management&#146;s Discussion and Analysis in
Item&nbsp;6 of this </I><I>Form 10-KSB</I><I>. ISC undertakes no obligation to update or revise its
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in future operating results.</I></TD>
</TR>

</TABLE>
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<A name="102"></A>
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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 1. DESCRIPTION OF BUSINESS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Intelligent Systems Corporation, a Georgia corporation, and its predecessor companies have operated
since 1973 and its securities have been publicly traded since 1981. In this report, sometimes we
use the terms &#147;company&#148;, &#147;we&#148;, &#147;ours&#148; and similar words to refer to Intelligent Systems
Corporation. Our executive offices are located at 4355 Shackleford Road, Norcross, Georgia 30093
and our telephone number is (770)&nbsp;381-2900. Our Internet address is www.intelsys.com. We publish
our Securities and Exchange Commission (&#147;SEC&#148;) reports on our website as soon as reasonably
practicable after we file them with or furnish them to the SEC, and shareholders may access and
download these reports free of charge.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Since the early 1980&#146;s, we have conducted our operations principally through majority owned
subsidiaries or minority owned affiliates to which we devote extensive management resources.
Depending upon the needs of each company, we may undertake a variety of roles including day-to-day
management of operations, board of director participation, financing, market planning, strategic
contract negotiations, personnel and administrative roles, and similar functions. Currently, our
subsidiary and affiliate companies are primarily in the information technology industry
(principally software for business applications) although one of our subsidiary companies is in the
industrial products industry. A common thread in our corporate and subsidiary efforts is bringing
new applications of technologies to business markets. Thus, an important element of our business
model is being proactive in identifying emerging technologies, markets, or companies that may
advance our interests. From time to time, we see promising companies or technologies that may be
candidates for acquisition or that we believe are in line with our corporate or subsidiary
strategic direction, thus warranting an investment of our time and money in order to build future
shareholder value. In addition, from time to time, we may sell one of our companies or we may
increase our investment in a less-than-wholly owned company. As a result, our ownership position
in a given company may change from time to time, our results of operations vary considerably from
quarter-to-quarter and year-to-year, and our past performance is not necessarily indicative of
future results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Financial Reporting</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We consolidate the results of operations of companies in which we own a majority interest or over
which we exert control. We generally account for investments by the equity method for minority
owned companies (i)&nbsp;in which we own 20 to 50&nbsp;percent and over which we do not exert control or (ii)
entities that are organized as partnerships or limited liability companies. In general, under the
equity method, we report our pro rata share of the income or loss generated by each of these
businesses as equity income/losses of affiliates on a quarterly basis. These equity losses and
income decrease or increase, respectively, the cost basis of our investment. Privately owned
corporations in which we own less than 20&nbsp;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 their
businesses.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Industry Segments Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our consolidated companies operate in two industry segments: Information Technology Products and
Services and Industrial Products. The Information Technology Products and Services segment
includes our VISaer, Inc. and CoreCard Software, Inc. subsidiaries and the Industrial Products
segment includes ChemFree Corporation. As of December&nbsp;31, 2006, we own 100&nbsp;percent of ChemFree, 79
percent of VISaer and 87&nbsp;percent of CoreCard Software. On July&nbsp;31, 2006, we sold the business of
our QS Technologies subsidiary and accordingly, we have classified the QS operations as
Discontinued Operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Operations in the Information Technology Products and Services segment are involved in the design,
development and marketing of application software products that are used by business customers and
government agencies to manage aspects of their operations. Our software products are typically
sold in competitive bids with relatively long sales and implementation cycles. We receive software
license fees that vary depending upon the number of licensed users and the number of software
modules licensed with total contract revenue typically ranging from $100,000 to over $1&nbsp;million.
We also derive service revenue from implementation, customization, training and support services.
Depending on the contract terms and customer implementation and testing schedule, which are
typically outside of our control, the timing of revenue recognition is not generally within our
control or determinable by us with any degree of certainty in advance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Industrial Products segment includes the design, assembly and sale of equipment and associated
supplies that are used by commercial, industrial, military and government agencies to maintain and
service machinery or vehicles used in their operations. Our assembled products are shipped to
resellers or direct to customer sites and do not require set-up or on-site support from us. Unit
pricing varies by model but typical end-user prices are less than $2,000 per unit. Customers
purchase replacement supplies from us after the sale. In some cases, we provide equipment to
multi-site corporate users under leases which typically range between three and four years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our individual operations in both segments are relatively small in size and are subject to
considerable fluctuation in revenue and profitability, which in turn affects our consolidated
revenue and margins. The business in our segments is not seasonal on a consolidated basis although
there is generally some slowdown in ChemFree&#146;s European business in late summer. The business
discussion which follows contains information on products, markets, competitors, research and
development and manufacturing for our operating subsidiaries, organized by industry segment and by
company. For further detailed financial information concerning our segments, see Note 16 in the
accompanying Notes to Consolidated Financial Statements. For further information about trends and
risks likely to impact our business, please refer to Management&#146;s Discussion and Analysis in Item&nbsp;6
of this Form 10-KSB.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Industry Segment: Information Technology Products and Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>VISaer,
Inc. </I></B>&#151; VISaer develops, sells and supports software for the world-wide aircraft maintenance
and engineering industry. VISaer offers a fully integrated, real time software solution that helps
aviation customers efficiently and cost-effectively manage the technical, commercial and
operational aspects of their maintenance, repair and overhaul (&#147;MRO&#148;) operations while also meeting
regulatory requirements, such as those of the Federal Aviation Administration. Headquartered in
Andover, Massachusetts, VISaer also has employees in England to support customer service and sales
activities in Europe and a small technical and project management team in Australia. VISaer&#146;s
product offering includes the following major components: technical records planning and
management, MRO operations, materials management, production scheduling, commercial operations and
financial management. In 2004 and 2005, VISaer focused on developing and delivering to initial
customers the &#147;go-live&#148; Version 3.4 release of its software, which was achieved in late 2005. In
2006, VIsaer continued its focus on product improvements and go-live support of its existing
customers. By the end of 2006, several customer sites were live, Version 3.5 with some significant
enhancements was released and several additional customer sites had signed contracts to implement
Version 3.5 in 2007. In 2007, VISaer expects to remain focused on product improvements and go-live
support with the goal of having most of the VISaer customer base live and referenceable on Version
3.5 and its follow-on versions. VISaer did not allocate significant resources to new sales and
marketing programs in 2006 although it delivered a significant amount of professional services and
maintenance support to its existing base of customers in 2006 and expects to do so again in 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Regulatory requirements continue to dictate that airlines manage their MRO processes carefully.
There is increased pressure to improve and automate MRO business processes, materials and asset
utilization, record-keeping and compliance reporting. VISaer&#146;s software products provide a
comprehensive, cost-effective way to do so. We believe significant sales opportunities exist in
North America as well
as in the Asian Pacific, Latin American and Chinese markets. These markets include MRO service
outsourcing companies, low-cost airlines, small to mid-size domestic regional airlines and IT
services hosting companies.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">VISaer markets and sells its software in both domestic and international markets. International
customers have traditionally represented a significant part of VISaer&#146;s revenue. The markets for
VISaer products include both airline-owned maintenance and engineering shops as well as third party
MRO organizations. VISaer&#146;s sales are direct to the customer with VISaer providing a turnkey
solution that covers project management, software, system implementation, training, consulting and
support. In most cases, sales are made in response to competitive bids and requests for proposals
and have sales cycles of six to eighteen months with implementation periods of an additional six to
eighteen months. VISaer provides a full suite of implementation services and post-sales support
and maintenance activities under annual contracts, as well as customization and professional
services on an as needed basis. VISaer has a number of competitors, some of whom offer MRO
software as part of a broader enterprise resource planning package and who have more financial
resources, larger customer bases and greater market coverage than VISaer. Other competitors are
small players focused on MRO solutions with resources similar to VISaer. VISaer competes on the
basis that its software provides extensive product functionality using Web-native technology;
provides low cost-of-ownership; includes integrated modules offering a complete software and
service solution; and runs on industry standard technology platforms. VISaer believes that its
Version 3.5 Web-native software is a strong competitive offering, although any technical or quality
problems that arise could delay the product&#146;s implementation and negatively impact customer
acceptance and references<B>.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>CoreCard
Software, Inc. </I></B>&#151; CoreCard Software was spun off from our former affiliate company, PaySys
International, in April&nbsp;2001. CoreCard designs, develops, and markets software to accounts
receivable businesses, banks, credit unions, and retailers to manage their credit and debit card,
prepaid cards, merchant, fleet, loyalty, and accounts receivable accounts. CoreCard products allow
financial institutions and commercial customers to optimize their account management systems,
improve customer retention, lower operating costs and create greater market differentiation.
CoreCard&#146;s feature-rich, browser-based financial software allows customers to automate, streamline
and optimize business processes associated with the set-up, administration and management of credit
card, merchant and loan accounts, to process transactions and to generate reports and statements
for these accounts. Because CoreCard&#146;s products are designed to run on PC-based servers, rather
than mini or mainframe computers, customers benefit from a lower overall cost-of-ownership,
scalability, faster implementations and increased flexibility to respond to market conditions.
CoreCard&#146;s product functionality includes embedded multilingual, multi-currency support, web-based
interface, real-time processing, complex rules-based authorizations, account hierarchies, and
flexible, customer-defined pricing and payment terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">CoreCard&#146;s initial target markets include accounts receivable businesses, prepaid cards issuers,
small and mid-size banks, business to business payment processors, and retail and private-label
issuers in the United States and in emerging international markets. The company expects that a
significant amount of its business will come from international markets, particularly with respect
to banks and similar institutions, that are less inclined to outsource their processing than are
the domestic US banks. CoreCard competes with third-party card processors, larger and more
established software suppliers, and a number of software solution providers that offer more limited
functional modules. CoreCard has relatively limited sales and marketing experience compared to
some of its competitors and potential customers may choose to outsource their account transaction
processing rather than acquire software to manage their transactions in-house, which could impact
negatively the total addressable market for CoreCard. One challenge facing most new software
companies is overcoming the reluctance of risk-adverse financial customers to acquire software from
a company with limited customer installations. Certain of CoreCard&#146;s competitors, including
processors, may have significantly more financial, marketing and development resources than does
CoreCard and have large, established customer bases often tied to long-term contracts. CoreCard
believes it can compete successfully in its selected markets by providing customers with a
next-generation technology platform, lower overall cost-of-ownership, greater system flexibility,
multilingual/multicurrency capabilities and more customer-driven marketing options. Furthermore,
we believe that CoreCard&#146;s products can be configured and deployed to address problems in managing
certain types of financial transactions that are not being addressed by other alternatives. Like
most emerging software companies, CoreCard is focusing its extensive development and limited sales
activities on establishing a growing base of referenceable customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">CoreCard licenses its software products typically for a one-time license fee or, in some cases, for
an initial installation charge and a per transaction fee. It provides maintenance and support
services under annual contracts, as well as professional services for customization, implementation
and training activities. Generally, CoreCard expects to sell its products directly to customers in
the domestic U.S. but may work with a small number of resellers and third parties in international
markets to identify, sell and support targeted opportunities. CoreCard completed the initial
functionality in its core software modules, CoreISSUE&#153;, CoreFRAUD&#153; and CoreCOLLECT&#153; in 2003,
developed further enhancements in 2004, and in 2005 delivered its first CoreACQUIRE&#153; functionality
as well as product enhancements
to its existing products. In 2006, CoreCard signed several new license contracts that are expected
to be delivered in 2007. In 2007, CoreCard expects to develop additional software functionality
and continue to add a
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
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<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">limited number of domestic and international customers, including its first
significant bank installation. However, delays or problems in completing, testing and delivering
CoreCard&#146;s new products could adversely affect customer acceptance and references.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Industrial Products Segment</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>ChemFree
Corporation </I></B>&#151; Our only subsidiary in the Industrial Products segment is ChemFree
Corporation. ChemFree designs, manufactures and markets a line of parts washers under the
SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> trademark. SmartWashers<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> use an advanced bio-remediation system that cleans
automotive and machine parts without using hazardous, solvent-based chemicals. Typically, the
SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> system consists 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<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> system is completely self-cleaning. ChemFree sells replacement fluid and
filters to its customers on a regular basis after the initial parts washer sale.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">ChemFree&#146;s markets include the automotive, transportation, industrial and military markets. The
automotive market includes companies and governmental agencies with fleets of vehicles, individual
and chain automobile service centers and auto parts suppliers. The industrial market includes
customers with machinery that requires routine maintenance, such as power plants and tool and
equipment rental companies. Military applications include vehicle, aircraft and weapons
maintenance. ChemFree sells its products directly to high volume customers as well as through
several distribution channels, including international distributors in Europe, Canada, Latin
America and the Pacific Rim. ChemFree also sells under a General Services Administration schedule
to government agencies. Because ChemFree sells in part through large national non-exclusive
distributors such as NAPA and Barnes Group in the United States and exclusive distributors in
certain international markets, its results could be impacted negatively if one or more of such
distributors stops carrying ChemFree products. One of ChemFree&#146;s domestic distributors represented
11&nbsp;percent and nine percent of our consolidated revenue in 2006 and 2005, respectively, and 20
percent and 23&nbsp;percent of our Industrial Products Segment revenue in 2006 and 2005, respectively.
Part of ChemFree&#146;s revenue is derived from multi-year lease contracts under which ChemFree provides
SmartWashers<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> and supplies to nationwide chains of auto repair shops, such as Firestone, Tires Plus
and Pep Boys. In 2006, ChemFree increased its sales to large corporate customers on a direct basis
using a manufacturer&#146;s representative firm and expects to continue to further develop this sales
channel in addition to its reseller distribution network.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">ChemFree competes with larger, established companies that offer solvent-based systems, other
companies that offer aqueous-based 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, desirable health and safety features, less burdensome
regulatory compliance, and cleaning performance. ChemFree believes that overall market demand for
its products could increase significantly if environmental regulations in the U.S. and overseas
prohibiting or restricting the use of solvent-based products, with which ChemFree&#146;s products
compete, continue to become increasingly stringent and such regulations are enforced effectively by
state, local and national governments. Moreover, ChemFree believes there is an opportunity to
provide services, either directly or through third parties, to certain customers that prefer to
outsource periodic fluid and filter replenishment activities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Customer and warranty service, typically covering a one-year period, generally consists of shipping
a replacement part to the customer or returning a defective product to either ChemFree or its
distributors and dealers. ChemFree subcontracts the manufacturing of major sub-assemblies built to
its specifications to various manufacturers and performs final assembly and testing at its own
facility. While it is possible to acquire subassemblies from multiple sources, ChemFree frequently
contracts with a single source for certain components in order to benefit from lower prices and
consistent quality, especially with respect to molded plastic parts which are produced using
ChemFree owned molds. In some cases, manufacturers of molded parts establish minimum quantities
that may require ChemFree to purchase and carry in inventory a larger number of such parts than
ChemFree would otherwise order without such minimum quantities. In the past two years, the cost of
certain parts have increased significantly due to increases in the cost of plastic materials
resulting from higher oil prices.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Incubator Program</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For over fifteen years, we have operated the Gwinnett Innovation Park (formerly called the
Intelligent Systems Incubator) at our corporate facility in a suburb of Atlanta, Georgia. In
exchange for a monthly facility fee, incubator companies have access to resources such as office
space, conference facilities, telecommunication and network infrastructure, business advice and
planning, and a network of professional services. Income from incubator companies reduces our
total corporate facility and personnel costs. Because we have a large facility, we are able to
offer the benefits of the incubator program to companies in which we have no ownership interest.
We view this program as a way to stay abreast of new business opportunities and trends which may be
of benefit to our company while simultaneously contributing to our local community in a very
positive way.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Minority-Owned Partner Companies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A common thread in our corporate and subsidiary efforts is bringing new applications of
technologies to business markets. Thus, an important element of our business model is being
proactive in identifying emerging technologies, markets, or companies that may advance our
interests. Accordingly, we seek to identify companies that we believe are involved in promising
technologies or markets with good growth potential. From time to time, we have acquired an
investment in such companies and expect to continue to do so as a regular part of our strategy.
Typically, these companies are privately held, early stage companies in technology-related fields.
We are often actively involved in helping the companies develop and implement their business plans.
Currently, our largest investment is a 25.5&nbsp;percent interest in NKD Enterprises, LLC (dba
CoreXpand), a software services company with an e-commerce application that allows customers to
centralize and control purchases of supplies and consumables through an online company &#147;store&#148;.
CoreXpand is located in our Gwinnett Innovation Park. In 2006, we sold our 17&nbsp;percent interest in
Horizon Software International, as explained in Note 3 to the Consolidated Financial Statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Research and Development</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We spent $5.7&nbsp;million and $6.1&nbsp;million in the years ended December&nbsp;31, 2006 and 2005, respectively,
on company sponsored research and development. During the years ended December&nbsp;31, 2006 and 2005,
almost all of our consolidated research and development expense related to VISaer and CoreCard,
with the balance spent for research at ChemFree. Although the absolute dollar amount of research
and development declined in 2006, the number of employees involved in company-wide research and
development increased in 2006 as the company added development and testing employees in Romania and
India for CoreCard and VISaer projects, at a lower cost per employee than the domestic workforce.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Patents, Trademarks and Trade Secrets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our ChemFree subsidiary has 11 U.S. patents issued and 15 patents in foreign jurisdictions issued
and pending covering various aspects of the design and construction of the SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> system and
the process of bioremediation used in the SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> system. ChemFree considers these patents an
important component of its overall business strategy. Furthermore, ChemFree considers the
proprietary formulation of the chemicals used in its fluids, which ChemFree protects as a trade
secret, to be an important intellectual property asset and competitive advantage. CoreCard has one
U.S. patent issued and several pending patent applications in the U.S. and Europe covering aspects
of its core software engine. It may be possible for competitors to duplicate certain aspects of
our products and processes even though we regard such aspects as proprietary. We have registered
with the U.S. Patent and Trademark Office and various foreign jurisdictions numerous trademarks and
service marks for our products. We believe that an active trade secret, trade name, trademark, and
copyright protection program is important in developing and maintaining brand recognition and
protecting our subsidiaries&#146; intellectual property. Our companies presently market their products
under trademarks and service marks such as SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>, OzzyJuice<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>, OzzyBooster&#153; ChemFree<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
VISaer&#153;, CoreENGINE&#153;, CoreISSUE&#153;, CoreCOLLECT&#153;, and others.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Personnel</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of February&nbsp;28, 2007, we had 231 total and full-time equivalent employees in our company
(including our majority-owned subsidiaries in the United States and foreign countries). 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.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Financial Information About Geographic Areas</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Refer to Note 14 to the Consolidated Financial Statements for financial information in response to
this item. We do not believe there are any specific risks attendant to our foreign operations that
are significantly different than the general business risks discussed elsewhere in this Annual
Report.
</DIV>
<DIV align="left">
<A name="103"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 2. DESCRIPTION OF PROPERTY</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At February&nbsp;28, 2007, we have leases covering approximately 61,000 square feet in Norcross, GA, and
12,000 square feet in Andover, MA, to house our product development, manufacturing, sales, service
and administration operations, as well as product development offices in Romania and India. Such
leases expire at various dates through July&nbsp;2010. Approximately 10&nbsp;percent of the space we lease
in Norcross is subleased to non-affiliated businesses in our small business incubator. We believe
our facilities are adequate for the foreseeable future.
</DIV>
<DIV align="left">
<A name="104"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 3. LEGAL PROCEEDINGS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our ChemFree subsidiary devotes considerable resources, including management time and legal fees,
to protect its rights in various patents and related contracts and expects to continue to do so in
the foreseeable future. From time to time, these efforts involve initiating legal action such as
the two actions described in this section.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In December&nbsp;2004, ChemFree filed a patent infringement action against J. Walter Co. Ltd. and J.
Walter, Inc. in the United States Court for the Northern District of Georgia. The complaint
alleges that certain of the defendant&#146;s products infringe various U.S. patents held by ChemFree and
seeks a ruling to compel defendant to cease its infringing activities. The defendant has asserted
various defenses and a counterclaim. The case is pending and no trial date has been set. While
the resolution and timing of any legal action is not predictable, ChemFree believes it has
sufficient grounds to prevail in these actions although there can be no assurance that the disputes
will be resolved in its favor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In 2005, ChemFree participated in an arbitration proceeding versus ZYMO International, Inc.
(&#147;Zymo&#148;), a patent co-owner, that resulted in the issuance of a favorable arbitration ruling for
ChemFree. In December&nbsp;2005, ChemFree initiated a proceeding under the Federal Arbitration Act in
the United States District Court for the Northern District of Georgia to obtain judicial
confirmation of the arbitration ruling and to arbitrate a number of other disputes between ChemFree
and Zymo that fall within the arbitration provisions of the co-ownership agreement between the
parties. In July&nbsp;2006, the judge issued a ruling confirming ChemFree&#146;s request to compel
arbitration. In the fourth quarter of 2006, an arbitrator was assigned and the parties submitted
their pleadings to the arbitrator. On February&nbsp;6, 2007, the arbitrator issued a ruling which found
in ChemFree&#146;s favor on all substantive issues. Among other items, the arbitrator ruled that
ChemFree was not in breach of the co-ownership agreement and that Zymo must pay an aggregate of
$156,000 to ChemFree for its share of legal expenses and damages for lack of cooperation in patent
matters covered by the co-ownership agreement. The arbitrator also ruled that, if Zymo
participates in the J. Walter patent infringement action described above after June&nbsp;30, 2007, it
must pay an additional $27,500 to ChemFree.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">From time to time we are or may become a party to a number of other legal matters arising in the
ordinary course of business. It is management&#146;s opinion that none of these other matters will have
a material adverse impact on our consolidated financial position or results of operations.
</DIV>
<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We did not submit any matter to a vote of our shareholders during the fiscal quarter ended
December&nbsp;31, 2006.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-8-<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART II</B>
</DIV>

<DIV align="left">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Market Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our common stock is listed and traded on the American Stock Exchange (&#147;AMEX&#148;) under the symbol
&#147;INS&#148;. 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.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 0px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 0px solid #000000"><B>2005</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD><B>Year Ended December&nbsp;31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Low</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">1st Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2.76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">4.52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2nd Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.54</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.96</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">3rd Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.01</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">4th Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.00</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We had 344 shareholders of record as of February&nbsp;28, 2007. This number does not include
beneficial owners of our common stock whose shares are held in the names of various dealers,
clearing agencies, banks, brokers and other fiduciaries. The company has in the past paid cash
dividends from time to time on an irregular basis but has not in the past paid regular dividends
and does not expect to pay any regular dividends in the foreseeable future. Under our revolving
line of credit facility, we are precluded from paying dividends without obtaining consent from the
bank. See Note 6 to the Consolidated Financial Statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Equity Compensation Plan Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth information regarding our equity compensation plans as of December
31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>Number of securities to</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>be issued upon</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>Weighted average exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>exercise of outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>price of outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>Number of securities</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>options, warrants and</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>options, warrants and</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>remaining available</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Plan category</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>rights</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>rights</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3"><B>for future issuance</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans approved by
security holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">350,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans not approved
by security holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">203,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2.39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Refer to Note 14 to the Consolidated Financial Statements for a description of the company&#146;s
equity compensation plans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recent Sales of Unregistered Securities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">There have been no sales of unregistered securities during the period covered by this report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Repurchases of Securities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The company did not repurchase any of its own shares of common stock during the fourth quarter of
2006.
</DIV>
<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 6. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Critical Accounting Policies and Estimates</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The discussion and analysis of our financial condition and results of operations is based upon our
Consolidated Financial Statements which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amount of assets, liabilities, revenues
and expenses. We consider certain accounting policies related to revenue recognition, valuation of
acquired
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->-9-<!-- /Folio -->
</DIV>

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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">intangibles and impairment of long-lived assets, and valuation of investments to be
critical policies due to the estimation processes involved in each. For a detailed description on
the application of these and other accounting policies, see Note 1 to the Consolidated Financial
Statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Revenue
Recognition </I></B>&#151; Product revenue consists of fees from software licenses and sales or leases
of industrial products. Service revenue consists of fees for implementation, consulting, training,
customization, reimbursable expenses, maintenance and support for software products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We recognize revenue for industrial products when products are shipped, at which time title
transfers to the customer, and there are no remaining future obligations. As an alternative to
selling the product, on occasion we may lease our equipment. For leased equipment, we recognize
revenue monthly at the contracted monthly rate during the term of the lease.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We recognize software fees in accordance with Statement of Position (&#147;SOP&#148;) No.&nbsp;97-2, &#147;Software
Revenue Recognition&#148;, as amended by SOP No.&nbsp;98-9, &#147;Software Revenue Recognition, With Respect to
Certain Transactions&#148;. Under SOP 97-2, we recognize software license fees when the following
criteria are met: (1)&nbsp;a signed contract is obtained; (2)&nbsp;delivery of the product has occurred; (3)
the license fee is fixed or determinable; and (4)&nbsp;collectibility is probable. Additionally,
license fee revenue is not recognized until there are no material uncertainties regarding customer
acceptance, cancellation provisions, if any, have expired and there are no significant vendor
obligations remaining. SOP No.&nbsp;98-9 requires recognition of revenue using the &#147;residual method&#148;
when (1)&nbsp;there is vendor-specific objective evidence of the fair values of all undelivered elements
in a multiple-element arrangement that is not accounted for using long-term contract accounting;
(2)&nbsp;vendor-specific objective evidence of fair value does not exist for one or more of the
delivered elements in the arrangement; and (3)&nbsp;all revenue recognition criteria in SOP No.&nbsp;97-2
other than the requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the license fee is recognized as
revenue. For those contracts that contain significant production, modification and/or
customization, software license fees are recognized utilizing Accounting Research Bulletin (&#147;ARB&#148;)
No.&nbsp;45, &#147;Long-term Construction Type Contracts&#148;, using the relevant guidance in SOP No.&nbsp;81-1,
&#147;Accounting for Performance of Construction Type and Certain Production Type Contracts&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For percentage of completion contracts, we measure the progress toward completion and recognize the
software license fees based upon input measures (i.e. in the same proportion that the amount of
labor hours incurred to date bears to the total estimated labor hours required for the contract).
If reliable estimates cannot be determined, we follow the completed contract method. Under the
completed contract method, all revenue is deferred until the customer has accepted the software and
any refund rights have expired. The company is presently utilizing the completed contract method
because current contracts are for new software products for which it does not have an historical
basis on which to prepare reliable estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A number of internal and external factors could affect our estimates related to software contracts,
including labor rates, utilization of resources, changes in specifications or testing requirements,
unforeseen technical problems and delays caused by customer issues such as lack of resources or
change in project priorities. If we do not accurately estimate the resources required or the scope
of work to be performed, or we do not manage the contract properly, in future periods we may need
to restate revenues, to defer revenue longer than originally anticipated or to incur additional
cost which would impact our margins and reported results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Valuation
of Investments </I></B>&#151; We hold minority interests in non-publicly traded companies whose values
are difficult to determine and are based on management&#146;s estimate of realizability of the value of
the investment. Future adverse changes in market conditions, poor operating results, lack of
progress of the underlying investee company or its inability to raise capital to support its
business plan could result in investment losses or an inability to recover the current carrying
value of the investment. Some of the companies in which we hold non-control, minority positions
are backed by venture capital, and the value of our investment may be impacted by the amount, terms
and valuation of the investee&#146;s financial transactions with third party venture funds or the terms
of the sale of the investee company to a third party. Our policy with respect to minority
interests is to record an impairment charge when we believe an investment has experienced a decline
in value that is other than temporary. For instance, this could occur if the investee company is
sold for less than our pro rata carrying value or if a new round of funding is at a lower valuation
than our investment was made or if the financing terms for the new investors (such as preferences
on liquidation) otherwise reduce the estimated value of our investment. We do not write-up the
carrying value of our investments based on favorable changes or financial transactions. At least
quarterly, we review our investments to determine any impairment in their carrying value and we
write-down any impaired asset at quarter-end to our best estimate of its current realizable value.
Any such charges could have a material adverse impact on our financial condition or results of
operations and are generally not predictable or quantifiable in advance.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-10-<!-- /Folio -->
</DIV>

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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Valuation
of Intangibles </I></B>&#151; From time to time in the past, we have acquired companies and we may do
so in the future. Occasionally, we may increase our ownership or control of an entity from a
minority to a majority position, which generally is treated as an acquisition for accounting
purposes. Purchase accounting for an acquisition requires use of accounting estimates and
judgments to allocate the purchase price to the fair market value of the assets and liabilities
purchased. Our business acquisitions may result in the allocation of a portion of the purchase
price to goodwill and other intangible assets. Additionally, we may acquire an intangible asset
through other means, such as occurred in August&nbsp;2004, when our ChemFree subsidiary acquired
intellectual property assets in settlement of long-standing legal matters. In 2006 or 2005, we did
not acquire any companies and we did not record any write-downs with respect to goodwill or other
intangibles.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The determination of the value of intangible assets requires management to make estimates and
assumptions that affect the amount of future period amortization expenses and possible impairment
expense that we will incur. Sometimes we use the services of a third party appraiser to provide a
valuation of material intangible assets. However, often the acquired company is a small entity
with limited operating history on which to base future projections and thus valuing the assets
requires the use of estimates which are very subjective. Furthermore, the period over which we
amortize certain intangibles may change based on future conditions and consequently we may need to
adjust the intangible value and/or amortization period, which could require us to increase the
amount of amortization expense we record each period or to take a non-cash charge to reduce the
value of the intangible. On at least an annual basis, we review the values assigned to long-lived
assets, generally using an estimate of the undiscounted cash flows of the entity over the remaining
life of the asset. Any resulting impairment could require a write-down that would have a material
adverse impact on our financial condition or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our consolidated subsidiaries operate in two industry segments: Information Technology Products and
Services and Industrial Products. Included in the Information Technology Products and Services
sector are VISaer, Inc. (software for maintenance, repair and overhaul operations in the commercial
aviation industry) and CoreCard Software, Inc. (software for managing financial transactions
involving credit accounts). The Industrial Products segment includes ChemFree Corporation
(bio-remediating parts washers). We sold our former QS Technologies business in July&nbsp;2006 and have
accounted for the QS operations as Discontinued Operations in the Consolidated Financial Statements
for 2006 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We derive our product revenue from sales of software licenses in our Information Technology sector
and sales and leases of equipment and supplies in our Industrial Products sector. Our service
revenue consists of fees for implementation, consulting, customization, training, maintenance and
support for software products in our Information Technology sector. Our consolidated revenue is
the aggregate of the revenue generated at our three subsidiary companies. Our revenue fluctuates
from period to period and our results are not necessarily indicative of the results to be expected
in future periods. Period-to-period comparisons may not be meaningful and it is difficult to
predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons,
including the following:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A change in revenue level at one of our subsidiaries may impact
consolidated revenue or be offset by an opposing change at another
subsidiary.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Economic and marketplace trends may impact our subsidiaries
differently or not at all. Moreover, our software subsidiaries do
not have extensive experience in their marketplaces which makes it
difficult to identify and evaluate trends that may impact their
business.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Our software subsidiaries, CoreCard Software and VISaer, have been
involved in major new product development initiatives for at least
the past five years and have limited experience delivering and
installing their current product releases at customer sites,
making it difficult to predict with certainty when they will
recognize revenue on individual software contracts.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Our subsidiaries are relatively small in revenue size and, in the
Information Technology sector, license revenue at a subsidiary in
a given period may consist of a relatively small number of
contracts. Consequently, even minor delays in a subsidiary&#146;s
delivery under a software contract (which may be out of their
control) could have a significant and unpredictable impact on the
consolidated revenue that we can recognize in a given quarterly or
annual period.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Acquisitions or sales of subsidiaries may affect our revenue and
expense levels, as occurred in 2006 with the sale of our QS
business.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Customers may decide to postpone or cancel a planned
implementation of our software for any number of reasons, which
may be unrelated to our software features or contract performance,
but which may affect the amount, timing and characterization of
our deferred and/or recognized revenue.</TD>
</TR>


</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


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</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Frequently we recognize consolidated operating losses on a quarterly and annual basis and are
likely to do so in the future from time to time. Our operating expenses consist of the aggregate
of our three subsidiaries&#146; expenses and the corporate office expenses. Our ChemFree subsidiary
generates an operating profit on an annual basis but our earlier stage subsidiaries, VISaer and
CoreCard, are not consistently profitable on a quarterly or annual basis, mainly due to significant
research and development expense that is invested to complete their new product offerings and the
deferral of revenue recognition until such products are delivered to customers. Depending upon the
size and number of software licenses recognized in a particular period and the level of expenses
incurred to support development and sales activities, our subsidiaries may report operating profits
on an irregular basis, if at all, as they build their customer base. A significant portion of our
subsidiaries&#146; expense is related to personnel which is relatively fixed in the short-term. We
continually evaluate and strive to balance our financial resources with the resources required to
complete products under development and support our subsidiaries&#146; customers. For these and other
reasons, our operating profits or losses may vary from quarter to quarter and at the present time
are generally not predictable with any degree of certainty.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We also frequently generate income or losses from non-consolidated companies and we may do so from
time to time in the future. Occasionally we derive income from sales of holdings in affiliate and
other minority-owned companies or we record a charge if we believe the value of a non-consolidated
company is impaired. We also recognize on a quarterly basis our pro rata share of the income or
losses of affiliate companies accounted for by the equity method. The timing and amount of gain or
loss recognized as a result of a sale or the amount of equity in the income or losses of affiliates
generally are not under our control and are not necessarily indicative of future results, either on
a quarterly or annual basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In recent years, most of our cash has been generated on an irregular basis from sales of our
investments or subsidiaries. We have used a significant amount of the cash received from these
sales to support the operations of our CoreCard Software and VISaer subsidiaries. We do not expect
to invest the same level of cash in the future in these two entities and presently believe that
customer payments on existing and pending software contracts will be sufficient to fund most of the
cash requirements of the VISaer and a growing portion of the CoreCard operations in 2007, although
the timing of cash receipts is expected to be irregular on a monthly basis. If the business or
cash flow of either subsidiary does not develop as anticipated, we may need to scale back or
restructure their operations, borrow under our line of credit or find alternative sources of
funding.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Under current SEC rules and regulations, beginning with our 2007 fiscal year we will be required to
comply with the requirements related to internal control over financial reporting of Section&nbsp;404 of
the Sarbanes-Oxley Act of 2002 with respect to management&#146;s assessment of internal controls. We
expect to incur substantial expenses and management and staff time related to compliance with
Section&nbsp;404, including increased audit fees, legal fees, and other administrative expenses. We may
encounter unexpected delays in implementing changes related to our internal control over financial
reporting, and we expect that Section&nbsp;404 compliance efforts may constitute a significant diversion
of management time and attention. Therefore, we cannot be certain about the timing of the
completion of our evaluation, testing and/or remediation actions related to internal control over
financial reporting, nor can we predict what impact, it any, these activities will have on our
operations. We are a small company with limited resources, and our efforts to timely comply with
Section&nbsp;404 may constitute a significant strain on these resources. Any failure to timely comply
with Section&nbsp;404 could result in sanctions or other penalties, which could adversely affect our
business or financial results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As explained in our previously filed Forms 10-QSB during 2006, we received a letter from The
American Stock Exchange (&#147;AMEX&#148;) notifying us that AMEX had determined that we do not meet certain
of the AMEX continued listing standards. Specifically, AMEX noted we were not in compliance with
Section&nbsp;1003(a)(ii) of the AMEX Company Guide because our shareholders&#146; equity was less than $4.0
million and we had sustained losses in three out of four of our most recent fiscal years. In May
2006, we submitted a plan to AMEX to achieve compliance with the continued listing standards and on
July&nbsp;21, 2006, AMEX notified us that it had determined we made a reasonable demonstration in the
plan of our ability to regain compliance with the continued listing standards by October&nbsp;27, 2007.
As a result of the QS and Horizon sales explained in Notes 2 and 3 to the Consolidated Financial
Statements, as of September&nbsp;30, 2006 and December&nbsp;31, 2006, our shareholders&#146; equity has exceeded
the minimum standard. The AMEX rules require two consecutive quarters of shareholders&#146; equity in
excess of the minimum of $4.0&nbsp;million before AMEX will determine whether the Company has regained
compliance with continued listing standards. Accordingly, we will ask AMEX to consider and rule on
whether we have regained compliance with continued listing standards promptly following the filing
of this Form 10-KSB.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Results of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following discussion should be read in conjunction with the Consolidated Financial Statements
and the Notes to Consolidated Financial Statements presented in this Annual Report. As explained
in Note 2 to the Consolidated Financial Statements, we sold our former QS Technologies business in
July&nbsp;2006 and have accounted for the QS operations as Discontinued Operations in the Consolidated
Financial Statements for both 2006 and 2005. Accordingly, management&#146;s discussion of the results
of operations does not include the QS operations in the discussion of continuing operations for
either period presented.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>2006 Compared to 2005</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Revenue
</I></B>&#151; Total revenue for the year ended December&nbsp;31, 2006 was $14.5&nbsp;million compared to $12.9
million for the prior year, an increase of 12&nbsp;percent. Revenue from product sales increased three
percent from $8.2&nbsp;million in 2005 to $8.4&nbsp;million in 2006, and service revenue increased 29
percent, from $4.7&nbsp;million in 2005 to $6.1&nbsp;million in 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Product revenue </I>includes sales of industrial products by our Industrial Products segment as well as
software licenses by our Information Technology segment subsidiaries. The increase in product
revenue in 2006 compared to 2005 is the net effect of a $1.7&nbsp;million (28&nbsp;percent) increase in sales
of industrial products offset in part by a decline of $1.5&nbsp;million in software license revenue.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Sales by our ChemFree subsidiary in the Industrial Products
segment grew by 28&nbsp;percent in 2006 as compared to 2005. Almost
all of the year-to-year growth occurred in the domestic U.S.
market with revenue from international markets remaining
essentially flat year-to-year. In 2006, ChemFree had a
significant increase in the number of SmartWasher<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> parts washer
sold in the U.S. market through both its distributor network and,
more significantly, through its expanded direct channel to several
large corporate customers. While ChemFree&#146;s efforts in its first
full year of sales through a direct sales channel were successful,
the company expects the volume and timing of future sales to large
corporate customers to vary considerably from period to period.
ChemFree&#146;s fluid and filters sales to the installed domestic base
of customers increased approximately 13&nbsp;percent in 2006 as
compared to 2005, due to a larger installed base of customers that
purchases such consumable supplies. Revenue from leased equipment
in the domestic market also increased 6&nbsp;percent compared to the
2005 level.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>License revenue generated by our Information Technology segment
was $1.5&nbsp;million lower in 2006 than in 2005 mainly due to fewer
new licenses sold by our VISaer subsidiary in 2006 as compared to
2005. In 2006, most license revenue resulted from additional
licenses sold to VISaer&#146;s existing customer base. Both our VISaer
and CoreCard subsidiaries had expected to recognize revenue in
2006 on several new customer licenses. Revenue related to these
projects has been deferred and is now expected to be recognized in
2007. As we have frequently cautioned, a number of factors, some
of which may be outside of our control, can cause delays in
delivery of our software and implementation by the customer. With
mission-critical, complex software systems such as is sold by
CoreCard and VISaer, customer requirements, available resources
and testing cycles may increase the scope and length of time to
complete the project beyond our original estimates.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Service revenue </I>generated by our Information Technology subsidiaries increased by 29&nbsp;percent ($1.3
million) in 2006 as compared to 2005. This year-to-year increase is primarily attributable to a
single, multi-year contract at the VISaer subsidiary that was completed and recognized in early
2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In 2006, revenue from sales in our Industrial Products segment represented 92&nbsp;percent of
consolidated product revenue and 54&nbsp;percent of total consolidated revenue, as compared with 74
percent of consolidated product revenue and 54&nbsp;percent of total consolidated revenue in 2005. This
year-to-year change in revenue mix is principally related to the significant increase in ChemFree&#146;s
domestic sales of parts washers and consumable supplies and a decline in software license revenue
recognized at our Information Technology companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Cost of Revenue </I></B>&#151; A comparison of the cost of revenue between 2006 and 2005 is influenced
significantly by the change in revenue mix between years as described above. Total cost of revenue
was $7.2&nbsp;million (50&nbsp;percent of total revenue) in 2006 compared to $6.0&nbsp;million (46&nbsp;percent of
total revenue) in 2005, an increase of 20&nbsp;percent.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Cost of <I>product </I>sales in 2006 was $4.4&nbsp;million (52&nbsp;percent of total product revenue),
compared to $3.4&nbsp;million (41&nbsp;percent of total product revenue) in 2005. The difference
between 2006 and 2005 is due to the proportionately greater amount of product revenue
generated by our industrial products, which have a higher cost of sales than do our software
license products. In addition, our
industrial products cost as a percent of sales increased in 2006 as compared to 2005 due to
higher direct</TD>
</TR>

</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


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</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>materials cost and freight-related expenses in 2006. The company experienced an
increase in the cost of certain of its plastics components and in freight costs for incoming
materials, both related to the increase in the price of oil. These increased costs are likely
to continue in the foreseeable future. The company has implemented price increases for certain
of its industrial products, which, depending on the product mix and sales volume, may offset to
some extent the negative impact of the cost of goods increase.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Cost of <I>service </I>sales (which relates to the Information Technology subsidiaries only) was
$2.8&nbsp;million (46&nbsp;percent of service revenue) in 2006, as compared to $2.6&nbsp;million (56&nbsp;percent
of service revenue) in 2005. The reduction in cost of services in 2006 as a percentage of
service revenue is due to the fact that VISaer had lower personnel costs and more favorable
pricing on maintenance and professional services contracts that were delivered in 2006 as
compared to 2005.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Operating Expenses </I></B>&#151; Consolidated operating expenses were two percent lower in 2006 than in 2005,
with reductions in research and development expenses offset by increases in general and
administrative expenses. Marketing expenses increased by 13&nbsp;percent ($243,000) year-to-year,
mainly due to increased sales commission and advertising expenses at the ChemFree subsidiary
related to an increased volume of domestic sales. General and administrative expense in 2006 was
essentially the same as in 2005, with increased costs for accounting, audit and bonuses at the
corporate offices in 2006, offset by reduced legal expenses at ChemFree and administrative costs at
VISaer. ChemFree&#146;s legal expenses were lower in 2006 than in 2005 because a favorable arbitration
award of $107,000 for legal expenses was credited against 2006 actual expenses. Refer to Note 9 to
the Consolidated Financial Statements for details of the arbitration award. Consolidated research
and development expense was $431,000 less in 2006 than in 2005, decreasing from $6.1&nbsp;million to
$5.7&nbsp;million due to a combination of factors, including a reduction in the use of third party
contractors and the number of domestic personnel at VISaer, offset in part by an increase in costs
at the CoreCard subsidiary as the company expanded significantly the number of technical employees
at its India subsidiary. Although the total number of employees and R&#038;D costs increased at our
CoreCard subsidiary, the offshore resources at the company&#146;s offices in Romania and India lower our
average employee cost and increase the productivity of the entire workforce.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Operating Loss </I></B>&#151; Our loss from operations was $4.0&nbsp;million in 2006 compared to $4.6&nbsp;million in
2005, a reduction of 13&nbsp;percent. In 2006, all of the loss from operations is attributable to the
CoreCard and corporate operations, offset in part by improved profitability at our VISaer and
ChemFree subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Interest Income </I></B><I>&#151; </I>We recognized net interest income of $57,000 and $22,000 in 2006 and 2005,
respectively. The increase in 2006 reflects interest earned on the notes receivable related to the
sales of our QS Technologies business and our Horizon Software International investment, as
described in Notes 2 and 3 to the Consolidated Financial Statements, offset in part by a higher
level of borrowings under our bank line of credit during the first seven months of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Investment Income </I></B>&#151; We recognized $2.5&nbsp;million and $1.9&nbsp;million in net investment income in 2006
and 2005, respectively. The 2006 investment income reflects mainly the gain of $2.6&nbsp;million on the
sale of our Horizon Software International investment, offset in part by a charge of $98,000 to
reduce the carrying value of our investment in Paymetric, a privately held company. Included in
investment income in 2005 is a gain of $2.1&nbsp;million related to our holdings in ISC Guernsey, offset
by investment losses and reserves totaling $234,000 related to our holdings in Aderis
Pharmaceuticals, Lancope and Anadigics (RF Solutions, Inc.). Refer to Note 3 to the Consolidated
Financial Statements for more details on the transactions noted in this section.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Equity Earnings of Affiliate Companies </I></B>&#151; We recognize our pro rata share of the earnings or losses
of affiliate companies that we record on the equity method. The amount recorded is not generally
predictable or indicative of future results because it is the aggregate earnings (losses)&nbsp;of
several companies operating in different industries and thus aggregate earnings (losses)&nbsp;are
subject to considerable fluctuation from quarter-to-quarter and year-to-year. In 2006 and 2005, we
recorded $374,000 and $366,000, respectively, in net equity earnings of three affiliate companies
(Horizon Software International, NKD Enterprises and Alliance Technology Ventures). We did not
record equity income related to Horizon Software International after the August&nbsp;31, 2006 sale of
our interest.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Other Income, net &#151; </I></B>In 2005, we recorded $20,000 in other expense, the majority of which is due to
currency exchange losses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Income taxes </I></B>&#151; We did not accrue for any income tax liability in 2006 and we believe our deferred
tax assets should be fully reserved given their character and our historical losses.
</DIV>
 <DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Discontinued Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Net
Income from Discontinued Operations </I></B><B>&#151; </B>The amounts recorded in 2006 and 2005 reflect the results
of operations of the QS Technologies subsidiary which has been classified as a discontinued
operation as a result of the sale of the QS business, as disclosed in more detail in Note 2 to the
Consolidated Financial Statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Gain
on Sale of Discontinued Operations </I></B>&#151; We recorded a gain of $4.9&nbsp;million on the sale of the QS
business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Liquidity and Capital Resources</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our cash balance at December&nbsp;31, 2006 was $2.1&nbsp;million, an increase of $1.8&nbsp;million compared to our
cash balance of $378,000 at December&nbsp;31, 2005. During the year ended December&nbsp;31, 2006, our
principal sources of cash were $3.0&nbsp;million from sales of investments, of which $2.9&nbsp;million
related to the sale of our Horizon Software investment, $1.9&nbsp;million from the sale of our QS
Technologies business, aggregate borrowings under our line of credit of $2.3&nbsp;million, $385,000 in
distributions from minority owned investments and $143,000 in principal payments on notes
receivable. During 2006, we used $2.4&nbsp;million of that cash to pay down our line of credit in full
and used approximately $3.5&nbsp;million in the aggregate to support our CoreCard subsidiary&#146;s U.S. and
international operations, and to a lesser extent, our ViSaer subsidiary operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In recent years, most of our cash has been generated on an irregular basis from sales of assets, as
exemplified by the QS Technologies and Horizon Software International transactions in 2006. We
have used a significant amount of the cash received from such sales to support the operations of
our CoreCard and VISaer subsidiaries. In 2006, we used more cash than originally forecasted to
support CoreCard and VISaer because we experienced delays in meeting certain milestones that
trigger customer payments under several contracts. The delays resulted from a combination of
factors including complex customer requirements that resulted in more time than estimated to
complete initial statements of work, longer than expected review and approval cycles by large
customers, and more time than anticipated for testing and quality assurance cycles. In 2007, we do
not expect the same level of cash investment in these two subsidiaries. We believe our estimates
on the timing of milestone payments on contracts should be more reliable because the scope of the
contracts is more certain and contracts are closer to completion. Based on recent trends and
current projections, we presently believe that scheduled customer payments on existing and pending
software contracts will be sufficient to fund substantially all of VISaer&#146;s and a significant
portion of CoreCard&#146;s operations on an annual basis, although monthly cash flows are expected to be
irregular. A significant amount of our consolidated expenses are related to personnel, none of
whom are represented by a union or have employment contracts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In January&nbsp;2007, we received cash of $2.9&nbsp;million representing payment in full of the note and
interest receivable related to the sale of our Horizon Software International investment in August
2006. We currently project that we will have sufficient liquidity from cash on hand, payments on
notes receivable related to the QS Technologies&#146; sale and milestone payments on software contracts
to meet our operating needs in the foreseeable future. We renewed our $2.0&nbsp;million line of credit
on December&nbsp;1, 2006 and will use it if necessary to support any short-term cash needs, although we
do not expect significant, if any, borrowings in the foreseeable future. Delays in meeting project
milestones or software delivery commitments could cause customers to postpone payments and increase
our need for cash during 2007. Presently, we do not believe there is a material risk to
successfully performing under these contracts but if customer payments are delayed for any reason,
if we do not control costs or if we encounter unforeseen technical or quality problems, then we
could require more cash than planned.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Beyond 2007, we currently expect that liquidity will continue to improve and consolidated
operations will generate sufficient cash to fund their requirements with use of our credit facility
to accommodate short-term needs. Other long-term sources of liquidity include potential sales of
investments, subsidiaries or other assets although the timing and amount of any such transactions
are uncertain and, to the extent they involve non-consolidated companies, generally not within our
control.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Off-Balance Sheet Arrangements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We do not currently have any off-balance sheet arrangements that are reasonably likely to have a
current or future material effect on our financial condition, liquidity or results of operations.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-15-<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Factors That May Affect Future Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Future operations in both the Information Technology and Industrial Products segments are subject
to risks and uncertainties that may negatively impact our future results of operations or projected
cash requirements. It is difficult to predict future quarterly and annual results with any
certainty mainly because our software subsidiaries are early stage companies with limited revenue
and experience in their respective markets, all are relatively small in size and, particularly in
the Information Technology sector, revenue tends to be associated with fewer and larger sales than
in the Industrial Products segment. Thus any trend or delay that affects even one of our
subsidiaries could have a negative impact on the company&#146;s consolidated results of operations or
cash requirements on a quarterly or annual basis. In addition, the carrying value of our
investments is impacted by a number of factors which are generally beyond our control since we are
typically a non-control shareholder in a private company with limited liquidity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Among the numerous factors that may affect our consolidated results of operations or financial
condition are the following:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Delays in software development projects which could cause our customers to delay implementations, delay payments or
cancel contracts, which would increase our costs and reduce our revenue.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Undetected software errors or poor quality control which may delay product releases, increase our costs, result in
non-acceptance of our software by customers or delay revenue recognition.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product
offerings) which may cause prospective customers to choose an alternative product solution, resulting in lower revenue
and profits (or increased losses).</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The inability of our CoreCard or VISaer subsidiaries to establish a base of referenceable customers for their new
product offerings, resulting in lower revenue and profits (or increased losses), increased cash needs and possibly
leading to restructuring or cutting back of the subsidiary&#146;s operations.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Failure of our products&#146; specifications and features to achieve market acceptance.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The inability of our software subsidiaries to retain key software developers and managers who have accumulated years of
know-how in our target markets and company products, or failure to attract and train a sufficient number of new
software developers and testers to support our product development plans and customer requirements at projected cost
levels.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Further increases in the price of oil, which could increase ChemFree&#146;s product costs and which could affect VISaer&#146;s
results if potential aviation customers delay or cancel purchases of software or services in the face of declining
industry trends or poor financial condition.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Delays in anticipated customer payments for any reason which would increase our cash requirements and possibly our
losses.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Declines in performance, financial condition or valuation of minority-owned companies which could cause us to
write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively
impact our earnings and cash.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Increased operating expenses and diversion of resources related to compliance with the internal control over financial
reporting requirements of Section&nbsp;404 of the Sarbanes-Oxley Act of 2002.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Negative trends affecting the commercial aviation industry worldwide which could impact VISaer&#146;s short-term customer
purchases, thus increasing its losses and need for cash.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In the Industrial Products market, failure by ChemFree to protect its intellectual property assets or to prevail in
legal matters described in Item&nbsp;3 of this report, which could increase competition in the marketplace and result in
greater price pressure and lower margins, thus impacting sales, profits and projected cash flow.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An insufficient number of potential CoreCard customers decide to purchase and run an in-house software system and
instead choose to outsource their account transaction processing which could result in lower revenue and greater cash
requirements.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Other general economic and political conditions that cause customers to delay or cancel software purchases.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have certain lease commitments, legal matters and contingent liabilities described in detail in
Note 9 to the Consolidated Financial Statements. We are not aware presently of any facts or
circumstances related to these that are likely to have a material negative impact on our results of
operations or financial condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recent Accounting Pronouncements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In December&nbsp;2004, the FASB issued FASB Statement No.&nbsp;151, &#147;Inventory Costs &#150; An amendment of ARB
No.&nbsp;43&#148;. SFAS No.&nbsp;151 clarifies that certain abnormal amounts of production related expenses
should be expensed as incurred and not included in overhead. Further, it requires that allocation
of fixed production overheads to conversion costs should be based on normal capacity
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-16-<!-- /Folio -->
</DIV>

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<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">of production
facilities. We adopted FASB No.&nbsp;151 effective January&nbsp;1, 2006. The adoption of this standard did
not have a material impact on our financial position and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In December&nbsp;2004, the FASB issued FASB Statement No.&nbsp;123R, &#147;Share Based Payment&#148;, which replaces
APB No.&nbsp;25 and SFAS No.&nbsp;123. The change was effective for small business issuers for the first
interim or annual reporting period that began after December&nbsp;15, 2005. FASB No.&nbsp;123R requires
companies to recognize in financial statements the cost of employee services received in exchange
for awards of equity instruments based on the grant-date fair value of those awards. We adopted
the statement on January&nbsp;1, 2006. The adoption of this statement did not have a material impact on
our results of operations or financial condition. In the discussion of Stock-Based Compensation in
Note 1 to the Consolidated Financial Statements, we disclose the effect of the use of the
fair-value provisions of SFAS No.&nbsp;123R on historical results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On July&nbsp;13, 2006, the FASB issued FASB Interpretation No.&nbsp;48 (FIN 48), &#147;Accounting for Uncertainty
in Income Taxes&#148;. FIN 48 prescribes a comprehensive model for how a company should recognize,
measure, present and disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. FIN 48 is applicable to all uncertain positions for
taxes accounted for under FASB Statement 109, &#147;Accounting for Income Taxes&#148; and requires that a
company record any change in net assets that results from the application of the interpretation as
an adjustment to retained earnings. The interpretation is effective for fiscal years that start
after December&nbsp;15, 2006 and, accordingly we have adopted FIN 48 effective January&nbsp;1, 2007. We are
currently evaluating whether the adoption of this interpretation will have a material impact on our
financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In September&nbsp;2006, the FASB issued FASB Statement No.&nbsp;157, &#147;Fair Value Measurements&#148; to increase
consistency and comparability in fair value measurements. FASB No.&nbsp;157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements of certain assets, liabilities and items in stockholders&#146; equity that are measured at
fair value. FASB No.&nbsp;157 is effective for financial statements issued for fiscal years beginning
after November&nbsp;15, 2007, although early adoption is encouraged. We have not yet determined when we
will adopt the standard or the impact that the adoption of the standard will have on our financial
statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On February&nbsp;15, 2007, the FASB issued Statement No.&nbsp;159, &#147;The Fair Value Option for Financial
Assets and Financial Liabilities: Including an amendment of FASB Statement No.&nbsp;115&#148;. Statement No.
159, which builds on other Statements related to fair value such as Statement No.&nbsp;157 above,
permits entities to elect to measure many financial instruments and certain other items at fair
value with changes in value reported in earnings. It is designed to mitigate earnings volatility
that arises when assets and liabilities are measured differently. FASB No.&nbsp;159 is effective for
financial statements issued for fiscal years beginning after November&nbsp;15, 2007, although earlier
adoption is permitted. We have not yet determined when we will adopt the standard or the impact
that the adoption of the standard will have on our financial statements.
</DIV>
<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 7. FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following consolidated financial statements and related report of independent registered public
accounting firm are included in this report and are incorporated by reference in Part&nbsp;II, Item&nbsp;7
hereof. See Index to Financial Statements on page F-1 hereof.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Report of Independent Registered Public Accounting Firm</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Consolidated Balance Sheets at December&nbsp;31, 2006 and 2005</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Consolidated Statements of Operations for the years ended December&nbsp;31, 2006 and 2005</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Consolidated
Statements of Stockholders&#146; Equity and Comprehensive Income (Loss)</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 0pt">&nbsp;&nbsp;for the years ended December&nbsp;31, 2006 and 2005</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Consolidated Statements of Cash Flows for the years ended December&nbsp;31, 2006 and 2005</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Notes to Consolidated Financial Statements</DIV>


<DIV align="left">
<A name="110"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-17-<!-- /Folio -->
</DIV>

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<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 8A. CONTROLS AND PROCEDURES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of the company&#146;s management, including the company&#146;s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the company&#146;s disclosure controls and procedures pursuant to Rule&nbsp;13a-15(b) under the Exchange Act.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the company&#146;s disclosure controls and the procedures are effective. There were no significant
changes in the company&#146;s internal controls over financial reporting or in other factors identified
in connection with this evaluation that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the company&#146;s internal control
over financial reporting.
</DIV>
<DIV align="left">
<A name="112"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART III</B>
</DIV>

<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left"><B>ITEM 9.</B></TD>
    <TD>&nbsp;</TD>
    <TD><B>DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Please refer to the subsection entitled &#147;Proposal 1 &#151; The Election of One Director &#151; Nominee&#148; and
&#147;Proposal 1 &#151; The Election of One Director &#151; Executive Officers&#148; in our Proxy Statement for the
2007 Annual Meeting of Shareholders (the &#147;Proxy Statement&#148;) for information about the individual
nominated as a director and about the directors and executive officers of the company. This
information is incorporated into this Item&nbsp;9 by reference. Information regarding compliance by
directors and executive officers of the company and owners of more than 10&nbsp;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 &#147;Section&nbsp;16(a) Beneficial Ownership Reporting Compliance&#148;
in this Proxy Statement. This information is incorporated into this Item&nbsp;9 by reference.
Information regarding the company&#146;s Audit Committee and its composition is contained under the
caption &#147;Proposal 1 &#151; The Election of One Director &#151; Nominee&#148; and &#147;Proposal 1 &#151; The Election of One
Director &#151; Meetings and Committees of the Board of Directors&#148; in this Proxy Statement. This
information is incorporated into this Item&nbsp;9 by reference.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">There have been no material changes to the procedures by which shareholders may recommend nominees
to the company&#146;s Board of Directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have a Code of Ethics that applies to all directors, officers, and employees. The Code of
Ethics is posted on our website at <U>www.intelsys.com</U>. We also disclose on our website, within the
time required by the rules of the SEC, any waivers of, or amendments to, the Code of Ethics for the
benefit of an executive officer.
</DIV>
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 10. EXECUTIVE COMPENSATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Please refer to the subsection entitled &#147;Proposal 1 &#151; The Election of One Director &#151; Executive
Compensation&#148; in the Proxy Statement referred to in Item&nbsp;9 for information about management
compensation. This information is incorporated into this Item&nbsp;10 by reference.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-18-<!-- /Folio -->
</DIV>

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<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left"><B>ITEM 11.</B></TD>
    <TD>&nbsp;</TD>
    <TD><B>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Securities Authorized for Issuance Under Equity Compensation Plans</I></B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">(c) Number of securities remaining</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">(a) Number of securities to be</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">(b) Weighted-average</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">available for future issuance under</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">issued upon exercise of</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">exercise price of</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">equity compensation plans</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">outstanding options, warrants</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">outstanding options,</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">(excluding securities reflected in</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">Plan category</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">and rights</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">warrants and rights</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="3">column (a))</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans approved by
security holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">350,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans not approved
by security holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">203,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2.39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,000</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The company instituted the 1991 Incentive Stock Plan (the &#147;1991 Plan&#148;) in December&nbsp;1991 and
the 1991 Plan expired in December&nbsp;2001. Effective August&nbsp;22, 2000, the company adopted the
Non-Employee Director Stock Option Plan (the &#147;Director Plan&#148;). Up to 200,000 shares of common stock
may be issued under the Director Plan to non-employee directors with each director receiving an
initial grant of 5,000 options followed by annual grants of 4,000 options on the date of each
subsequent Annual Meeting. The company instituted the 2003 Incentive Stock Plan (the &#147;2003 Plan&#148;)
in March&nbsp;2003. The 2003 Plan authorizes the issuance of up to 450,000 options to purchase shares
of common stock to officers and key employees. No options were granted under the 2003 Plan in
2005 or 2006 and no options were granted under the Director Plan in 2006. Non-qualified stock
options are granted under the company&#146;s equity compensation plans at fair market value on the date
of grant and vest ratably over two or three year periods after the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Please
refer to the subsection entitled &#147;Voting &#151; Security Ownership of Certain Beneficial Owners
and Management&#148; in the Proxy Statement referred to in Item&nbsp;9 for information about the ownership of
our $0.01 par value common stock by certain persons. This information is incorporated into this
Item&nbsp;11 by reference.
</DIV>
<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The lease on our headquarters and primary facility at 4355 Shackleford Road, Norcross, Georgia is
held by ISC Properties, LLC, an entity controlled by J. Leland Strange, our Chairman and Chief
Executive Officer. Mr.&nbsp;Strange holds a 100% ownership interest in ISC Properties, LLC. In each
of the years ending December&nbsp;31, 2005 and 2006, we paid ISC Properties, LLC $393,000 in rent.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Please refer to the subsection entitled &#147;Proposal 1 &#151; The Election of One Nominee&#148; in the Proxy
Statement referred to in Item&nbsp;9 for information regarding the independence of the company&#146;s
directors. This information is incorporated into this Item&nbsp;12 by reference.
</DIV>
<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM 13. EXHIBITS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">3(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Amended and Restated Articles of Incorporation of the Registrant dated November&nbsp;14, 1991, as
amended November&nbsp;25, 1997. (Incorporated by reference to Exhibit&nbsp;3.1 to the Registrant&#146;s
Annual Report on Form 10-K for the year ended December&nbsp;31, 1991 and to Exhibit&nbsp;3.1 to the
Registrant&#146;s Report on Form 8-K dated November&nbsp;25, 1997.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">3(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Bylaws of the Registrant dated June&nbsp;6, 1997. (Incorporated by reference to Exhibit&nbsp;3(ii) of
the Registrant&#146;s Form 10-K/A for the year ended December&nbsp;31, 1997.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">4.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Rights Agreement dated as of November&nbsp;25, 1997 between the Registrant and American Stock
Transfer &#038; Trust Company as Rights Agent. (Incorporated by reference to Exhibit&nbsp;4.1 of the
Registrant&#146;s Report on Form 8-K dated November&nbsp;25, 1997 and filed on December&nbsp;16, 1997.)</TD>
</TR>

</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-19-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">4.2</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Form of Rights Certificate. (Incorporated by reference to Exhibit&nbsp;4.2 of the Registrant&#146;s
Report on Form 8-K dated November&nbsp;25, 1997 and filed on December&nbsp;16, 1997.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Lease Agreement dated June&nbsp;1, 2004, between the Registrant and ISC Properties, LLC.
(Incorporated by reference to Exhibit&nbsp;10.1 of the Registrant&#146;s Form 10-KSB for the year ended
December&nbsp;31, 2004.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.2</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Management Compensation Plans and Arrangements:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Intelligent Systems Corporation 2003 Stock Incentive Plan</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Intelligent Systems Corporation Change in Control Plan for Officers</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Intelligent Systems Corporation Outside Director&#146;s Retirement Plan</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Non-Employee Directors Stock Option Plan</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Exhibit&nbsp;10.2(a) is incorporated by reference to Exhibit&nbsp;10.2(a) to the Registrants Form 10-K
for the year ended December&nbsp;31, 2003.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Exhibits 10.2(b) and (c)&nbsp;are incorporated by reference to Exhibit&nbsp;10.4 to the Registrant&#146;s
Form 10-K for the year ended December&nbsp;31, 1993.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Exhibit&nbsp;10.2(d) is incorporated by reference to Exhibit&nbsp;10.3 to the Registrant&#146;s Form 10-K for
the year ended December&nbsp;31, 2000.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.3</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October
1, 2003. (Incorporated by reference to Exhibit&nbsp;10.3 to the Registrant&#146;s Form 10-K for the
year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.4</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of
October&nbsp;1, 2003. (Incorporated by reference to Exhibit&nbsp;10.4 to the Registrant&#146;s Form 10-K for
the year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.5</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Form of Security Agreement by and among majority owned subsidiary companies of Intelligent
Systems Corporation and Fidelity Bank as of October&nbsp;1, 2003. (Incorporated by reference to
Exhibit&nbsp;10.5 to the Registrant&#146;s Form 10-K for the year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.6</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank
dated October&nbsp;1, 2003. (Incorporated by reference to Exhibit&nbsp;10.6 to the Registrant&#146;s Form
10-K for the year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.7</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of
Fidelity Bank dated October&nbsp;1, 2004. (Incorporated by reference to Exhibit&nbsp;10.7 to the
Registrant&#146;s Form 10-K for the year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.8</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor
of Fidelity Bank dated October&nbsp;1, 2003. (Incorporated by reference to Exhibit&nbsp;10.3 to the
Registrant&#146;s Form 10-K for the year ended December&nbsp;31, 2003.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.9</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Fifth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated December&nbsp;1, 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.10</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Asset Purchase Agreement dated as of July&nbsp;31, 2006 by and between QS Technologies, Inc. and
Intelligent Systems Corporation, as Sellers, and Netsmart Public Health, Inc. as Buyer and
Netsmart Technologies, Inc. (Incorporated by reference to Exhibit&nbsp;2.1 of the Registrant&#146;s Form
8-K dated July&nbsp;31, 2006.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.11</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Promissory Note of Netsmart Technologies, Inc. dated July&nbsp;31, 2006. (Incorporated by
reference to Exhibit&nbsp;2.2 to the Registrant&#146;s Form 8-K dated July&nbsp;31, 2006.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.12</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Interest Purchase and Transfer Agreement by and between Horizon Software Holdings, Inc. and
Intelligent Systems Corporation dated August&nbsp;31, 2006. (Incorporated by reference to Exhibit
2.1 to Registrant&#146;s Form 8-K dated August&nbsp;31, 2006.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.13</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Promissory Note of Horizon Software Holdings, Inc. dated August&nbsp;31, 2006. (Incorporated by
reference to Exhibit&nbsp;2.2 to Registrant&#146;s Form 8-K dated August&nbsp;31, 2006.)</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-20-<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.14</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Security Agreement and Assignment of Interest in Limited Liability Company by and between
Horizon Software Holding, Inc. and Intelligent Systems Corporation dated August&nbsp;31, 2006.
(Incorporated by reference to Exhibit&nbsp;2.3 to Registrant&#146;s Form 8-K dated August&nbsp;31, 2006.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">10.15</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Form of Guaranty of Payment of Shareholders of Buyer dated August&nbsp;31, 2006. (Incorporated by
reference to Exhibit&nbsp;2.4 to Registrant&#146;s Form 8-K dated August&nbsp;31, 2006.)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">21.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>List of subsidiaries of Registrant.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">23.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Consent of Tauber &#038; Balser, P.C.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">31.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certification of Chief Executive Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">31.2</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certification of Chief Financial Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">32.1</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the
Sarbanes-Oxley Act of 2002.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left">
<A name="118"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Please refer to the subsection entitled &#147;Independent Public Accountants&#148; in the Proxy Statement
referred to in Item&nbsp;9 for information about the fees paid to and services performed by our
independent public accountants. This information is incorporated into this Item&nbsp;14 by reference.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-21-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="left">
<A name="119"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SIGNATURES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Pursuant to the requirements of Section&nbsp;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.
</DIV>

<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">INTELLIGENT SYSTEMS CORPORATION<BR>
Registrant <BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">Date:  March 23, 2007&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>
    <TD colspan="2" style="border-bottom: 1px solid #000000" align="left"><I>/s/ J. Leland Strange</I>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">J. Leland Strange&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Chairman of the Board, President
and Chief Executive Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="29%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>Capacity</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>Date</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><I>/s/ J. Leland Strange</I>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chairman of the Board, President,
Chief Executive Officer
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">March&nbsp;23, 2007</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
J. Leland Strange
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;and Director (Principal
Executive Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><I>/s/ Bonnie L. Herron</I>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chief Financial Officer
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">March&nbsp;23, 2007</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
Bonnie L. Herron
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;(Principal
Accounting and Financial Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><I>/s/ James V. Napier</I>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">March&nbsp;23, 2007</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
James V. Napier
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><I>/s/ John B. Peatman</I>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">March&nbsp;23, 2007</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
John B. Peatman
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><I>/s/ Parker H. Petit</I>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">March&nbsp;23, 2007</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
Parker H. Petit
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-22-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Exhibit&nbsp;Index</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">Exhibit Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">Description</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">10.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fifth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated December&nbsp;1, 2006.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">21.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">List of subsidiaries of Registrant.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">23.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Tauber and Balser, P.C.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Executive Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of
2002.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Financial Officer Pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of
2002.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;9056 of the
Sarbanes-Oxley Act of 2002.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><FONT style="font-variant: SMALL-CAPS">Intelligent Systems Corporation</FONT>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->-23-<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>INTELLIGENT SYSTEMS CORPORATION<BR>
INDEX TO FINANCIAL STATEMENTS</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following consolidated financial statements of the Registrant and its subsidiaries are
submitted herewith in response to Item&nbsp;7:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Financial Statements:</B>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#300">Report of Independent Registered Public Accounting Firm</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">Consolidated Balance Sheets &#151; December&nbsp;31, 2006 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#302">Consolidated Statements of Operations &#151; Years Ended December&nbsp;31, 2006 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#303">Consolidated
Statements of Stockholders&#146; Equity and Comprehensive Income (Loss) &#151;
Years Ended December&nbsp;31, 2006 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#304">Consolidated Statements of Cash Flows &#151; Years Ended December&nbsp;31, 2006 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#305">Notes to Consolidated Financial Statements</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-8</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-1<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left">
<A name="300"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">To the Board of Directors and Shareholders of<BR>
Intelligent Systems Corporation:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation and
subsidiaries (the &#147;Company&#148;) as of December&nbsp;31, 2006 and 2005, and the related consolidated
statements of operations, stockholders&#146; equity and comprehensive income (loss), and cash flows for
the years then ended. These financial statements are the responsibility of the Company&#146;s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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. The
Company is not required to have, nor were we engaged to perform, an audit of their internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company&#146;s internal control
over financial reporting. Accordingly, we express no such opinion. 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Intelligent Systems Corporation and subsidiaries as of
December&nbsp;31, 2006 and 2005, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of
America.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">/s/ Tauber &#038; Balser, P.C.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Atlanta, Georgia<BR>
March&nbsp;21, 2007
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Intelligent Systems Corporation</B>
</DIV>

<DIV align="left">
<A name="301"></A>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED BALANCE SHEETS</B>
<BR><I>(in thousands, except share amounts)</I></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>ASSETS</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">378</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,827</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes and interest receivable, current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,445</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">770</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,563</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,330</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,571</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Notes and interest receivable, net of current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment, at cost less accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">940</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other intangibles, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">532</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,437</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Short-term borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">847</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,094</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,779</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued payroll</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,092</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued expenses and other current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">849</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long term liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Commitments and contingencies (Note 9)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,516</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146; equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971
issued and outstanding at December&nbsp;31, 2006 and 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Additional paid-in capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,425</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated other comprehensive loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(127</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,919</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,388</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,006</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total liabilities and stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,437</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The accompanying notes are an integral part of these consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-3<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Intelligent Systems Corporation</B>
</DIV>

<DIV align="left">
<A name="302"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></DIV>


<DIV align="center" style="font-size: 10pt"><I>(in thousands, except share and per share amounts)</I></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,185</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,713</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,460</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,898</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,355</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,812</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total cost of revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,978</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,825</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General &#038; administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,519</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,531</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research &#038; development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,127</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,981</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,563</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (expense)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,884</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equity in income of affiliate companies, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">366</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other income (expense), net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from continuing operations before income tax provision</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,004</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,311</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax provision</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from continuing operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,004</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,316</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income from discontinued operations, no tax effect</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">690</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gain on sale of discontinued operations, no tax effect</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;per share from continuing operations: Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.22</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.52</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:321px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.22</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.52</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income per share from discontinued operations: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:321px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;per share: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:321px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic weighted average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,478,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,478,971</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted weighted average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,571,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,478,971</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The accompanying notes are an integral part of these consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-4<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Intelligent Systems Corporation</B>
</DIV>

<DIV align="left">
<A name="303"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF</B></DIV>


<DIV align="center" style="font-size: 10pt"><B>STOCKHOLDERS&#146; EQUITY AND COMPREHENSIVE INCOME (LOSS)</B></DIV>


<DIV align="center" style="font-size: 10pt"><I>(in thousands, except share amounts)</I></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>STOCKHOLDERS&#146; EQUITY</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Common stock, number of shares, </B>beginning and end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,478,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,478,971</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Common stock, amount, </B>beginning and end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Paid-in capital, </B>beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,410</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Additions during year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">End of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,425</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Accumulated other comprehensive loss, </B>beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(124</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustment during year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in unrealized loss on marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">End of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(127</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Accumulated deficit, </B>beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,388</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,762</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">End of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,919</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,388</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total stockholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,006</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>COMPREHENSIVE INCOME (LOSS)</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income (loss):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Change in unrealized loss on marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,563</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The accompanying notes are an integral part of these consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-5<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Intelligent Systems Corporation</B>
</DIV>

<DIV align="left">
<A name="304"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B></DIV>


<DIV align="center" style="font-size: 10pt"><I>(in thousands)</I></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>OPERATIONS:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments to reconcile net income (loss)&nbsp;to net cash used for operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">546</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">525</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Loss on disposal of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Stock-based compensation expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Gain on sale of QS business</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,873</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Investment income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,547</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,884</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Equity in earnings of affiliate companies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(374</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(366</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Changes in operating assets and liabilities, net of effect of sale of QS business</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(179</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,104</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accrued interest receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(103</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(134</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(137</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other non-current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accrued payroll</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(116</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Accrued expenses and other current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(232</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(62</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash used for operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,928</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,231</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>INVESTING ACTIVITIES:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds related to sales of investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,033</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from sale of QS business</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Distributions from long-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">312</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from notes receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Payments on notes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(100</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchases of intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(523</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(511</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash provided by investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,838</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>FINANCING ACTIVITIES:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Borrowings under short-term borrowing arrangements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,335</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">936</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments under short-term borrowing arrangements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,435</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,103</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from exercise of stock option in subsidiary</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash used for financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(97</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(167</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effects of exchange rate changes on cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase (decrease)&nbsp;in cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,758</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(292</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">670</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">378</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The accompanying notes are an integral part of these consolidated financial statements</I>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-6<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Intelligent Systems Corporation<BR>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)</B><BR>
<I>(in thousands)</I>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash paid during the year for interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash paid during the year for income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES IN 2006:</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Sale of Horizon Software investment:</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As explained in Note 3 to the consolidated financial statements, the company sold its 17&nbsp;percent
interest in Horizon as of August&nbsp;31, 2006. The carrying value of the Horizon investment at the
time of the sale was $3,062,000 and the proceeds of the sale included a note receivable of
$2,850,000 in addition to the cash proceeds of $2,850,000. The sale resulted in a gain of
$2,638,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">S<I>ale of
QS Technologies Business (Discontinued Operations):</I></DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Below is a reconciliation of the cash and non-cash activities associated with the sale of the QS
Technologies business, as disclosed in Note 2 to the consolidated financials statements. The
assets and liabilities are valued at their carrying values as of the date of the transaction, July
31, 2006.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><I>( in $000s)</I></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Proceeds from sale of QS Technologies Business:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,900</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Note receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,435</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">305</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Liabilities assumed by (assets transferred to) buyer:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(167</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Property, plant and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued payroll</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,730</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued transaction related expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(515</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gain on sale of QS Technologies business</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">4,873</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The accompanying notes are an integral part of these consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-7<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation
</DIV>

<DIV align="left">
<A name="305"></A>
</DIV>
<DIV align="center" style="font-size: 10pt">Notes to Consolidated Financial Statements</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Organization </I>&#151; In this document, terms such as the &#147;company&#148;, &#147;we&#148;, &#147;us&#148;, and &#147;ISC&#148; refer to
Intelligent Systems Corporation, a Georgia corporation, and its consolidated subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Nature of Operations </I>&#151; Consolidated companies (in which we have majority ownership and control) are
engaged in two industries: Information Technology Products and Services and Industrial Products.
Continuing operations in Information Technology Products and Services, which consist of our VISaer
and CoreCard Software subsidiaries, include development and sales of software licenses and related
professional services and software maintenance contracts. Operations in the Industrial Product
segment include the manufacture and sale of bio-remediating parts washer systems by our ChemFree
subsidiary. Our operations are explained in further detail in Note 16. Included in Discontinued
Operations is our former QS Technologies, Inc., a company engaged in the development and sales of
software products and services, which was sold effective July&nbsp;31, 2006. Our affiliate companies
(in which we have a minority ownership) are mainly involved in the information technology industry.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Use of Estimates </I>&#151; In preparing the financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Some areas where we use estimates and make assumptions are
to determine our allowance for doubtful accounts, valuation allowances on our investments,
depreciation and amortization expense, accrued expenses and deferred income taxes. These estimates
and assumptions also affect amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Consolidation </I>&#151; 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 inter-company accounts and transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Translation of Foreign Currencies </I>&#151; We consider that local currencies are the functional currencies
for foreign operations. We translate assets and liabilities to U.S. dollars at period-end exchange
rates. We translate income and expense items at average rates of exchange prevailing during the
period. Translation adjustments are accumulated as a separate component of stockholders&#146; equity.
Gains and losses that result from foreign currency transactions are recorded in the consolidated
statement of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Cash </I>&#151; We consider all highly liquid instruments with maturities of less than 90&nbsp;days when
purchased to be cash.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Accounts Receivable and Allowance for Doubtful Accounts </I>&#151; Accounts receivable are customer
obligations due under normal trade terms. They are stated at the amount management expects to
collect. We sell our products to distributors and end users involved in a variety of industries
including automotive, aircraft operators and maintenance providers and financial services entities.
We perform continuing credit evaluations of our customers&#146; financial condition and we generally do
not require collateral.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Senior management reviews accounts receivable on a monthly basis to determine if any receivables
will potentially be uncollectible. We include any accounts receivable balances that are estimated
to be uncollectible, along with a general reserve, in our overall allowance for doubtful accounts.
After all attempts to collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to us, we believe our allowance for doubtful
accounts as of December&nbsp;31, 2006 is adequate. However, actual write-offs might exceed the recorded
allowance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Inventories </I>&#151; We state the value of inventories at the lower of cost or market determined on a
first-in first-out basis. Market is defined as net realizable value. The value of inventories at
December&nbsp;31, 2006 and 2005 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raw materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">619</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Finished goods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">151</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">770</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-8<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Property and Equipment </I>&#151; Property and equipment are carried at cost less accumulated depreciation.
For financial reporting purposes, we use the straight-line method of depreciation for machinery,
equipment, furniture and fixtures.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Classification</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Useful life in years</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Machinery and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3 &#151; 5</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Furniture &#038; fixtures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5 &#151; 7</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1 &#151; 5</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The cost of each major class of property and equipment at December&nbsp;31, 2006 and 2005 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Machinery and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,894</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,835</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Furniture and fixtures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">219</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">273</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">271</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Subtotal</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,368</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,359</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,385</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">940</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Depreciation expense was $373,000 and $352,000 in 2006 and 2005, respectively. These expenses are
included in general and administrative expenses, except with respect to our Industrial Products
Segment, where the depreciation expense relates primarily to products leased to customers and is
included in cost of revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Leased Equipment </I>&#151; In the Industrial Products segment, certain equipment is leased to customers.
In the year ended December&nbsp;31, 2006, we recorded a charge of $51,000 to reduce the carrying value
of certain leased equipment which was no longer in service. The cost, carrying value and
accumulated depreciation associated with the leased equipment at December&nbsp;31, 2006 and 2005 is as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,112</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">980</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(706</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(697</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Carrying value of equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">283</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The minimum future lease revenue under non-cancelable contracts at December&nbsp;31, 2006 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">216</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">216</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">198</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total minimum future lease revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">630</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">There is no contingent rental income under the leases. The leased equipment assets are included in
Machinery and Equipment at December&nbsp;31, 2006 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Investments </I>&#151; We account for investments by the equity method for (i)&nbsp;entities in which we have a
20 to 50&nbsp;percent ownership interest and over which we do not exert control or (ii)&nbsp;entities that
are organized as partnerships or limited liability companies. We account for investments of less
than 20&nbsp;percent in non-marketable equity securities of corporations at the lower of cost or market.
The aggregate value of investments accounted for by the equity method was $944,000 and $4.1&nbsp;million
at December&nbsp;31, 2006
and 2005, respectively. At December&nbsp;31, 2006 and 2005, the aggregate value of investments
accounted for by the cost method was $230,000 and $504,000, respectively.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-9<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Marketable securities, which are included in other current assets, are accounted for in accordance
with Statement of Financial Accounting Standards (&#147;SFAS&#148;) No.&nbsp;115, &#147;Accounting for Certain
Investments in Debt and Equity Securities&#148;. At December&nbsp;31, 2006 and 2005, the aggregate fair
market value of our available-for-sale securities consisted of equity securities totaling $38,000
and $0, respectively. When calculating gain or loss on the sale of an investment, we use the
average cost basis of the securities. These amounts include a net unrealized holding loss of
$11,000 and $0 as of December&nbsp;31, 2006 and 2005, respectively. These amounts are reflected as a
separate component of stockholders&#146; equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Other
Intangibles and Goodwill </I>&#151; Other intangibles are carried at cost net of related amortization.
We account for acquisitions in accordance with SFAS No.&nbsp;141, &#147;Business Combinations&#148; and SFAS No.
142, &#147;Goodwill and Other Intangible Assets&#148;. In accordance with SFAS No.&nbsp;142, we periodically, but
at least annually, assess goodwill for impairment. Our annual assessment date for the largest
component of our intangible assets is at year end. When circumstances indicate that an intangible
other than goodwill may be impaired, we utilize the guidance provided by SFAS No.&nbsp;144, &#147;Accounting
for the Impairment or Disposal of Long-Lived Assets&#148;. For the years ended December&nbsp;31, 2006 and
2005, no impairment was identified.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table shows the changes in carrying value of our goodwill and intangibles for the
years ended December&nbsp;31, 2006 and 2005:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Goodwill</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Other Intangibles</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">699</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Additions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(173</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">532</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(173</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>

<TR><TD colspan="9">Other intangibles, net at December&nbsp;31, 2006 and 2005 consisted of the following:</TD></TR>


<TR><TD>&nbsp;</TD></TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Patents</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">464</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(105</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(60</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">404</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Capitalized software development costs</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">641</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">641</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(641</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(513</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Intangible assets, net</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">532</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-10<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of December&nbsp;31, 2006, annual amortization expense for the following years is expected to be:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">134</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total amortization expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">359</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Deferred Revenue &#151; </I>Current deferred revenue consists of advance payments by software customers for
annual maintenance and support services, advance payments from customers for software licenses
expected to be delivered in 2007, and payments by ChemFree lease customers that are billed
quarterly for leased equipment and supplies. Net billings in excess of costs are included in
deferred revenue. Net costs in excess of billings on incomplete contracts are included in other
current assets. We do not anticipate any loss under these contracts. Deferred revenue is
classified as long-term until such time that it becomes likely that the services or products will
be provided within 12&nbsp;months of the balance sheet date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Fair Value of Financial Instruments </I>&#151; The carrying value of cash, accounts receivable, short-term
notes receivable, accounts payable and certain other financial instruments (such as short-term
borrowings, accrued expenses, and other current liabilities) included in the accompanying
consolidated balance sheets approximates their fair value principally due to the short-term
maturity of these instruments. The carrying value of notes receivable beyond one year approximates
fair value because they bear interest at rates currently offered in the market for notes receivable
with similar terms and conditions. The fair value of equity method and cost method investments has
not been determined as it was impracticable to do so.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Financial instruments that potentially subject us to concentrations of credit risk consist
principally of cash and trade accounts and notes receivable. We invest cash in high
credit-quality financial institutions. A concentration of credit risk may exist with respect to
trade receivables, as a substantial portion of our customers are concentrated in the following
industries (by subsidiary):
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="72%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">ChemFree:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Automotive parts distributors and equipment rental depots</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">VISaer:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Aviation</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We perform ongoing credit evaluations of customers worldwide and generally do not require
collateral from our customers. Historically, we have not experienced significant losses related
to receivables from individual customers or groups of customers in any particular industry or
geographic area.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Revenue Recognition </I>&#151; Product revenue consists of fees from software licenses and sales or leases
of industrial products. Service revenue consists of fees for implementation, consulting, training,
customization, reimbursable expenses, maintenance and support for software products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We recognize revenue for industrial products when products are shipped, at which time title
transfers to the customer and there are no remaining future obligations. We do not provide for
estimated sales returns allowances and rebates because ChemFree&#146;s well-established policy rarely
authorizes such transactions. As an alternative to selling the product, on occasion we may lease
our equipment. For leased equipment, we recognize revenue monthly at the contracted monthly rate
during the term of the lease.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We recognize software fees in accordance with Statement of Position (&#147;SOP&#148;) No.&nbsp;97-2, &#147;Software
Revenue Recognition&#148;, as amended by SOP No.&nbsp;98-9, &#147;Software Revenue Recognition, With Respect to
Certain Transactions&#148;. Under SOP 97-2, we recognize software license fees when the following
criteria are met: (1)&nbsp;a signed contract is obtained; (2)&nbsp;delivery of the product has occurred; (3)
the license fee is fixed or determinable; and (4)&nbsp;collectibility is probable. Additionally,
license fee revenue is not recognized until there are no material uncertainties regarding customer
acceptance, cancellation provisions, if any, have expired and there are no significant vendor
obligations remaining. SOP No.&nbsp;98-9 requires recognition of
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-11<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">revenue using the &#147;residual
method&#148; when (1)&nbsp;there is vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using long-term contract
accounting; (2)&nbsp;vendor-specific objective evidence of fair value does not exist for one or more of
the delivered elements in the arrangement; and (3)&nbsp;all revenue recognition criteria in SOP No.&nbsp;97-2
other than the requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the license fee is recognized as
revenue. For those contracts that contain significant production, modification and/or
customization, software license fees are recognized utilizing Accounting Research Bulletin (&#147;ARB&#148;)
No.&nbsp;45, &#147;Long-term Construction Type Contracts&#148;, using the relevant guidance in SOP No.&nbsp;81-1,
&#147;Accounting for Performance of Construction Type and Certain Production Type Contracts&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For percentage of completion contracts, we measure the progress toward completion and recognize the
software license fees based upon input measures (i.e. in the same proportion that the amount of
labor hours incurred to date bears to the total estimated labor hours required for the contract).
If reliable estimates cannot be determined, we follow the completed contract method. Under the
completed contract method, all revenue is deferred until the customer has accepted the software and
any refund rights have expired. The company is presently utilizing the completed contract method
because current contracts are for new software products for which it does not have an historical
basis on which to prepare reliable estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Service revenue related to implementation, consulting, customization, training and other
professional services is recognized when the services are performed. Service revenue related to
software maintenance and support contracts is recognized on a straight-line basis over the life of
the contract (typically one year). Substantially all of our software customers purchase software
maintenance and support contracts and renew such contracts annually.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Cost of Revenue </I>&#151; Cost of revenue for product revenue includes direct material, direct labor,
production overhead and third party license fees. Cost of sales for service revenue includes
direct cost of services rendered, including reimbursed expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Software Development Expense </I>&#151; We have evaluated the establishment of technological feasibility of
our products in accordance with SFAS No.&nbsp;86, &#147;Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed<I>&#148;. </I>We sell products in markets that are subject to rapid
technological change, new product development and changing customer needs; accordingly, we have
concluded that technological feasibility has generally not been established until the development
stage of the product is nearly complete. We define technological feasibility as the completion of
a working model. The time period during which cost could be capitalized, from the point of
reaching technological feasibility until the time of general product release, is very short and,
consequently, the amounts that could be capitalized are not material to our financial position or
results of operations. Therefore, we have charged all such costs to research and development in
the period incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In circumstances in which we acquire software, the annual amortization is the greater of (1)&nbsp;the
ratio of current revenues to the expected revenues from the related product sales or (2)&nbsp;the
straight-line method over the remaining useful life of the product.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In accordance with SOP No.&nbsp;98-1, &#147;Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use&#148;, we have expensed all costs incurred in the preliminary project stage
for software developed for internal use. Thereafter, we capitalize all direct costs of materials
and services consumed in developing or obtaining internal use software. All costs incurred for
upgrades, maintenance and enhancements that do not result in additional functionality are expensed.
During the years ended December&nbsp;31, 2006 and 2005, we did not capitalize any internal use software
costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Warranty Costs </I>&#151; We accrue the estimated costs associated with our industrial product warranties as
an expense in the period the related sales are recognized. The warranty accrual is included in
accrued expenses and other current liabilities at December&nbsp;31, 2006 and 2005. At December&nbsp;31, 2006
and 2005, the warranty accrual was $71,000 and $43,000, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Research and Development </I>&#151; Research and development costs consist principally of compensation and
benefits paid to certain company employees and certain other direct costs. All research and
development costs are expensed as incurred.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-12<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Stock Based Compensation </I>&#151; At December&nbsp;31, 2006, we have two stock-based compensation plans in
effect which are more fully described in Note 14. In December&nbsp;2004, the FASB issued FASB Statement
No.&nbsp;123R, &#147;Share-Based Payment&#148; (SFAS
No.&nbsp;123R) which replaced APB No.&nbsp;25 and SFAS 123. Through December&nbsp;31, 2005, we had accounted for
the plans under the intrinsic value recognition and measurement principles of Accounting Principles
Board (&#147;APB&#148;) No.&nbsp;25, &#147;Accounting for Stock Issued to Employees&#148;. Under APB 25, no compensation
expense was recognized because the exercise price of the employee stock options equaled the market
price of the underlying stock on the date of grant. Through December&nbsp;31, 2005, we applied SFAS No.
123, &#147;Accounting for Stock-Based Compensation&#148; for disclosure purposes only. We adopted SFAS 123R
effective January&nbsp;1, 2006 using the modified prospective application method of adoption which
requires us to record compensation cost related to unvested stock awards as of December&nbsp;31, 2005 by
recognizing the unamortized grant date fair value in accordance with provisions of SFAS 123R on a
straight line basis over the service periods of each award. We have estimated forfeiture rates
based on our historical experience. Stock option compensation expense for the year ended December
31, 2006 has been recognized as a component of general and administrative expenses in the
accompanying Consolidated Financial Statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As a result of adopting SFAS 123R, net income for the year ended December&nbsp;31, 2006 was lower by
$12,000 than if the company had continued to account for stock-based compensation under APB No.&nbsp;25.
The impact on basic and diluted income per share for the year ended December&nbsp;31, 2006 was $0. The
following table illustrates the effect on net income (loss)&nbsp;and income (loss)&nbsp;per share as if we
had applied the fair value recognition provisions of SFAS No.&nbsp;123R in both periods shown.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000" nowrap align="right" colspan="2">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000" nowrap align="right" colspan="2">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands, except per share amounts)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss), reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Add: stock-based compensation programs recorded as
expense,
net of related tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deduct: stock-based compensation expense determined
under fair value based method for all awards,
net of related tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro forma net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,664</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;per common share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic, as reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic, pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.37</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted, as reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted, pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.37</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">No options were granted during 2006. In 2005, 12,000 options were granted at fair market value on
the date of grant pursuant to the Non-employee Directors Stock Option Plan. The fair value of each
option granted in 2005 has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Risk free interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">4</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected life of option in years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected dividend yield rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected volatility</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">40</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Under these assumptions, the weighted average fair value of options granted in 2005 was $0.98 per
share. The fair value of the grants is being amortized over the vesting period for the options.
All of the company&#146;s stock-based compensation expense relates to stock options.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-13<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Income Taxes &#151; </I>In accordance with SFAS No.&nbsp;109, &#147;Accounting for Income Taxes&#148;, we utilize the asset
and liability method of accounting for income taxes. As such, deferred tax assets and liabilities
are established to recognize the future tax consequences attributable to differences between the
financial statement carrying amounts of the existing assets and liabilities and their respective
tax bases and for income tax carryforwards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Comprehensive Income (Loss) </I>&#151; Comprehensive income (loss)&nbsp;represents net income (loss)&nbsp;adjusted for
the results of certain stockholders&#146; equity changes not reflected in the consolidated statements of
operations. These items are accumulated over time as accumulated other comprehensive loss on the
consolidated balance sheet and are primarily the result of cumulative translation adjustments at
December&nbsp;31, 2006 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Reclassifications &#151; </I>It is our policy to reclassify prior year amounts to conform with current year
financial statements presentation when necessary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>New Accounting Pronouncements &#151; </I>In December&nbsp;2004, the FASB issued FASB Statement No.&nbsp;151,
&#147;Inventory Costs &#150; An amendment of ARB No.&nbsp;43&#148;. SFAS No.&nbsp;151 clarifies that certain abnormal
amounts of production related expenses should be expensed as incurred and not included in overhead.
Further, it requires that allocation of fixed production overheads to conversion costs should be
based on normal capacity of production facilities. We adopted FASB No.&nbsp;151 effective January&nbsp;1,
2006. The adoption of this standard did not have a material impact on our financial position and
results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In December&nbsp;2004, the FASB issued FASB Statement No.&nbsp;123R, &#147;Share-Based Payment&#148;, which replaces
APB No.&nbsp;25 and SFAS No.&nbsp;123. The change was effective for small business issuers for the first
interim or annual reporting period that began after December&nbsp;15, 2005. FASB No.&nbsp;123R requires
companies to recognize in financial statements the cost of employee services received in exchange
for awards of equity instruments based on the grant-date fair value of those awards. We adopted
the statement on January&nbsp;1, 2006. The adoption of this statement did not have a material impact on
our results of operations or financial condition. In the discussion of Stock-Based Compensation
earlier in this Note 1, we disclose the effect of the use of the fair-value provisions of SFAS No.
123R on historical results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On July&nbsp;13, 2006, the FASB issued FASB Interpretation No.&nbsp;48 (FIN 48), &#147;Accounting for Uncertainty
in Income Taxes&#148;. FIN 48 prescribes a comprehensive model for how a company should recognize,
measure, present and disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. FIN 48 is applicable to all uncertain positions for
taxes accounted for under FASB Statement 109, &#147;Accounting for Income Taxes&#148; and requires that a
company record any change in net assets that results from the application of the interpretation as
an adjustment to retained earnings. The interpretation is effective for fiscal years that start
after December&nbsp;15, 2006 and, accordingly we have adopted FIN 48 effective January&nbsp;1, 2007. We are
presently evaluating whether the adoption of this interpretation will have a material impact on our
financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In September&nbsp;2006, the FASB issued FASB Statement No.&nbsp;157, &#147;Fair Value Measurements&#148; to increase
consistency and comparability in fair value measurements. FASB No.&nbsp;157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements of certain assets, liabilities and items in stockholders&#146; equity that are measured at
fair value. FASB No.&nbsp;157 is effective for financial statements issued for fiscal years beginning
after November&nbsp;15, 2007, although early adoption is encouraged. We have not yet determined when we
will adopt the standard or the impact that the adoption of the standard will have on our financial
statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On February&nbsp;15, 2007, the FASB issued Statement No.&nbsp;159, &#147;The Fair Value Option for Financial
Assets and Financial Liabilities: Including an amendment of FASB Statement No.&nbsp;115&#148;. Statement No.
159, which builds on other Statements related to fair value such as Statement No.&nbsp;157 above,
permits entities to elect to measure many financial instruments and certain other items at fair
value with changes in value reported in earnings. It is designed to mitigate earnings volatility
that arises when assets and liabilities are measured differently. FASB No.&nbsp;159 is effective for
financial statements issued for fiscal years beginning after November&nbsp;15, 2007. We have not yet
determined when we will adopt the standard or the impact that the adoption of the standard will
have on our financial statements.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-14<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>2. DISCONTINUED OPERATIONS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Effective July&nbsp;31, 2006, we completed the sale of the business and certain assets of our QS
Technologies, Inc. (&#147;QS&#148;) subsidiary to Netsmart Public Health, Inc. and its parent company,
Netsmart Technologies, Inc., referred to collectively as &#147;Netsmart&#148;. Netsmart is an independent
third party that expressed an interest in acquiring the QS business and the company subsequently
negotiated an arms-length transaction resulting in the sale of the QS business. We sold the
operations and assets associated with the QS business for a combination of $1,900,000 in cash, a
promissory note of Netsmart in the amount of $1,435,000 and additional payments totaling $305,000
for unbilled receivables of QS. In addition, Netsmart assumed liabilities of QS, net of assets
acquired, of $1,748,000 in the aggregate. We retained accounts receivable and cash of QS. The
unsecured promissory note of Netsmart bears interest at the rate of 8.25&nbsp;percent and is payable in
thirty-six monthly payments of $45,133 beginning September&nbsp;1, 2006. The principal amount of the
note is subject to adjustment based on revenue and earnings of the QS business for the period from
August&nbsp;1, 2006 through January&nbsp;31, 2007. At this time, we do not expect a material adjustment, if
any, to the note.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In accordance with Financial Accounting Standards Board Statement No.144, &#147;Accounting for the
Impairment or Disposal of Long-Lived Assets&#148;, the QS business is presented as discontinued
operations for the two years ended December&nbsp;31, 2006. Based on the carrying basis of the assets and
liabilities transferred to Netsmart at July&nbsp;31, 2006 and estimated costs and expenses incurred in
connection with the sale, we recorded a net gain on the sale of QS of $4,873,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The transaction also provides for contingent payments of up to $1,450,000 which we may earn in the
future based on the attainment by the QS business of certain levels of revenue and bookings in
2007. As the amount, if any, of such payments is not quantifiable at this time, no amount has been
recorded for such contingency payments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following condensed financial information is provided for the QS Discontinued Operations for
the periods shown.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>( in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006 *</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,199</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income before tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income from discontinued operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">690</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>




<DIV style="margin-top: 3pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Includes results for 7&nbsp;months ended July&nbsp;31, 2006, the date of the sale of the QS business</TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>3. SALES AND WRITE-DOWNS OF ASSETS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Gains, losses and writedowns related to long-term investments described below are reflected in the
category investment income, net in the Consolidated Statements of Operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Aderis Pharmaceuticals, Inc. </I>&#151; In the year ended December&nbsp;31, 2005, we wrote down the carrying
value of our investment in Aderis Pharmaceuticals, Inc. to net realizable value, based the sale of
the privately held company. We recorded a charge of $101,000 against long-term investments. While
terms of the Aderis sale provide for the possibility of additional payments, the amount of any
future payments, if any, is not determinable and therefore we did not record any value for such
future payments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Horizon Software Interest &#151; </I>Effective August&nbsp;31, 2006, we completed the sale of our 17&nbsp;percent
ownership position in Horizon Software International, LLC (&#147;Horizon&#148;) to Horizon Software
Holdings, Inc., an entity comprised of the founder and officers of Horizon (the &#147;Horizon Buyer&#148;)
for a purchase price of $5,600,000. Simultaneously, we sold our interest in an affiliate company
of Horizon for $100,000. At the close of the transaction, we received an aggregate of $2,850,000
in cash and a promissory note from the Horizon Buyer in the principal amount of $2,850,000. We
recorded a gain of $2,638,000 on the sale of our Horizon interest on a carrying value of $3,062,000
at the time of the sale.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>ISC Guernsey, Ltd. </I>&#151; We owned a 19&nbsp;percent interest in ISC Guernsey, Ltd., an entity whose
principal asset was an investment in a U.K. based company which was sold in 2004. In the year ended
December&nbsp;31, 2005, we received two cash distributions related to the sale totaling $2.1&nbsp;million and
recognized $2.1&nbsp;million which is reflected in investment income. We
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-15<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">did not incur a tax liability
related to these cash distributions and do not anticipate any future distributions related to ISC
Guernsey.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Lancope, Inc. &#151; </I>In June&nbsp;2005, we recorded a charge of $85,000 to reduce the carrying value of our
interest in Lancope, a private technology company, to net realizable value based on a financing
transaction completed by Lancope which was at a lower price per share than our original share
purchase price.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Paymetric. Inc. &#151; </I>In December&nbsp;2006, we recorded a charge of $98,000 to reduce the carrying value of
our interest in Paymetric, Inc., a private technology company in which we are a small common
shareholder, to net realizable value which we estimate to be zero. Management believes that the
terms of a new financing round at Paymetric are likely to result in an other than temporary decline
of the value of the company&#146;s investment in Paymetric.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>4. INVESTMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following summarizes our ownership interest in our largest (measured by ownership and
investment value), non-consolidated companies included in our long-term investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006 and 2005, our ownership interest in NKD Enterprises, LLC was 25.5% in both
periods and our interest in Horizon Software International, LLC was 0% and 17%, respectively (we
sold our interest on August&nbsp;31, 2006 as explained in Note 3). We account for each of these
companies by the equity method of accounting in 2006 and 2005.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Carrying Value</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Original</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>At December 31, </B><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Investment</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NKD Enterprises</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">891</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,286</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Horizon Software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,864</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,500</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table presents summarized combined financial information for our 50&nbsp;percent or less
owned investments named above for the respective time periods:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>As of and for the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006 *</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">21,405</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,673</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,516</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,634</TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,154</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,976</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,038</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,851</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,512</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">856</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,307</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>



<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left"><I>*</I></TD>
    <TD>&nbsp;</TD>
    <TD><I>Includes data for Horizon Software through date of sale, August&nbsp;31, 2006.</I></TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-16<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">



<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Marketable Securities &#151; </I>The carrying and estimated fair values of available-for-sale securities at
December&nbsp;31, 2006 and 2005 are summarized as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">49</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross unrealized loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Estimated fair values</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Inhibitex, Inc. &#091;NASDAQ:INHX&#093; comprised the balance of $38,000 at December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>5. ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006 and 2005, our allowance for doubtful accounts amounted to $66,000 and $83,000,
respectively. Net charges against the allowance for doubtful accounts were $29,000 and $60,000 in
2006 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table indicates the percentage of consolidated revenue and year-end accounts
receivable represented by each customer for any period in which such customer represented more than
10&nbsp;percent of consolidated revenue or year-end accounts receivable.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="53%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B>Revenue</B></TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B>Accounts Receivable</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B><I>ChemFree</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer A</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">11</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">11</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">13</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer B</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">14</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B><I>CoreCard</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer C</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">16</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B><I>VISaer</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer D</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">12</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As explained in Note 2 to the Consolidated Financial Statements, in connection with the sale of our
QS Technologies business, we received a promissory note from the buyer in the amount of $1,435,000,
which bears interest at the rate of 8.25&nbsp;percent annually and is payable in thirty-six monthly
payments of $45,000 beginning September&nbsp;1, 2006. At December&nbsp;31, 2006, the current portion of the
principal amount of this note is $452,000 and the non-current portion is $841,000. The principal
amount of the note is subject to adjustment based on revenue and earnings of the QS business for
the period from August&nbsp;1, 2006 through January&nbsp;31, 2007. At the present time, we do not anticipate
a material adjustment, if any, to the note.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On August&nbsp;31, 2006, we received a promissory note from the buyer of Horizon Software in the
principal amount of $2,850,000 as explained in Note 3 to the Consolidated Financial Statements.
The note bears interest at the prime rate plus one and one half percent annually and has a maturity
date of January&nbsp;31, 2007. The $2,850,000 principal amount of the note is included in current notes
receivable in the Consolidated Financial Statements. On January&nbsp;4, 2007, the note and accrued
interest were paid in full.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-17<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>6. SHORT-TERM BORROWINGS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Terms and borrowings under our credit facility are summarized as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" colspan="9" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Maximum outstanding (month-end)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">417</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding at year end</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest rate at year end</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">9.75</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">8.75</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Average interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">9.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.7</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We established a working capital credit facility with a bank in October&nbsp;2003 and have renewed the
line periodically with the most recent renewal effective December&nbsp;1, 2006. The $2,000,000
revolving line of credit bears interest at the prime rate plus one and one half percent, is secured
by all assets of the company and our principal subsidiaries, is guaranteed by our subsidiaries, and
expires December&nbsp;1, 2007. We may borrow an aggregate of 80&nbsp;percent of qualified accounts receivable
of our consolidated subsidiaries plus 50&nbsp;percent of inventory, up to a maximum of $2,000,000, less
any amount tied to a letter of credit. At December&nbsp;31, 2006, our borrowing base calculation
resulted in availability of $1,157,000 of which we had drawn down $0 at year end. The terms of
the loan contain typical covenants not to sell or transfer material assets, to create liens against
assets, to merge with another entity, to change corporate structure or the nature of our business,
to declare or pay dividends, or to redeem shares of common stock. The loan agreement also contains
covenants not to change the chief executive and chief financial officers of the company or to make
loans to or invest in new minority-owned companies, without first obtaining the consent of the
financial institution in each case.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>7. NOTE PAYABLE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In March&nbsp;2006, our VISaer subsidiary and a customer reached a mutual agreement to terminate a
Software License Agreement. The Settlement and Release Agreement provided for a refund to the
customer of $512,000 of certain prepaid maintenance and other expenses to be paid in monthly
installments over a three year period. VISaer issued an unsecured note payable in the amount of
$512,000 (recorded as $446,000, which is equal to $512,000 discounted at 9.25%). At December&nbsp;31,
2006, the current portion of the note payable ($135,000) is included in other current liabilities
and the long-term portion of the note payable ($210,000) is included in other long-term
liabilities. Principle maturities are $135,000, $168,000 and $42,000 in 2007, 2008 and 2009,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>8. INCOME TAXES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The income tax provision from continuing operations consists of the following:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Following is a reconciliation of estimated income taxes at the blended statutory rate from
continuing operations to estimated tax expense (benefit)&nbsp;as reported:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Statutory rate, blended</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">38</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">38</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>%)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>%)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effective rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-18<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of December&nbsp;31, the following net operating loss carryforwards, if unused as offsets to future
taxable income, will expire during the following years:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2017</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,038</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2019</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,901</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,901</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2021</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">495</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">495</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2022</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">658</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2023</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,778</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,721</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,602</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,415</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A subsidiary of the company has an additional $1.1&nbsp;million of net operating loss carryforward which
is subject to limitation by the Federal Income Tax code section 382.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Net deferred tax assets consist of the following at December&nbsp;31:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Federal, state and foreign loss carryforward</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,537</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capitalized research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,054</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,890</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,631</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(138</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">858</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Federal and state tax credits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,804</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Long term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,109</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,657</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">342</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">313</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total deferred tax asset</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,661</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,690</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Less valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,661</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,690</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net deferred tax asset</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Federal and state tax credits of $1,238,000 included in the above table expire at various dates
between 2012 and 2021.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We account for income taxes using SFAS No.&nbsp;109, &#147;Accounting for Income Taxes&#148;. We have a deferred
tax asset of approximately $19.7&nbsp;million at December&nbsp;31, 2006 and 2005. Since our ability to
realize the deferred tax asset is uncertain, the amount is offset in both 2006 and 2005 by a
valuation allowance of an equal amount. No deferred taxes have been provided on temporary
differences related to investments in foreign subsidiaries because these investments are considered
to be permanent. We do not believe it is practicable to determine the amount of these unrecognized
deferred taxes at this time.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-19<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>9. COMMITMENTS AND CONTINGENCIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Leases
</I>&#151; We have noncancellable operating leases expiring at
various dates through July&nbsp;2010. Future
minimum lease payments are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">528</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">528</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">299</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total minimum lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,434</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Included in the above are future minimum lease payments to a related party of $393,000, $393,000
and $164,000 in 2007, 2008 and 2009, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Rental expense for leased facilities and equipment related to operations amounted to $538,000 and
$637,000 for the years ended December&nbsp;31, 2006 and 2005, respectively. Companies in Intelligent
Systems incubator sublease space from the company. For the years ended December&nbsp;31, 2006 and 2005,
we received $77,000 and $94,000 respectively, in sublease rental income which reduced the company&#146;s
rental expense during these years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Legal Matters &#151; </I>In December&nbsp;2004, ChemFree filed a patent infringement action against J. Walter Co.
Ltd. and J. Walter, Inc. in the United States Court for the Northern District of Georgia. The
complaint alleges that certain of the defendant&#146;s products infringe various U.S. patents held by
ChemFree and seeks a ruling to compel defendant to cease its infringing activities. The defendant
has asserted various defenses and a counterclaim. The case is pending and no trial date has been
set. While the resolution and timing of any legal action is not predictable, ChemFree believes it
has sufficient grounds to prevail in these actions although there can be no assurance that the
disputes will be resolved in its favor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In 2005, ChemFree participated in an arbitration proceeding versus ZYMO International, Inc.
(&#147;Zymo&#148;), a patent co-owner, that resulted in the issuance of a favorable arbitration ruling for
ChemFree. In December&nbsp;2005, ChemFree initiated a proceeding under the Federal Arbitration Act in
the United States District Court for the Northern District of Georgia to obtain judicial
confirmation of the arbitration ruling and to arbitrate a number of other disputes between ChemFree
and Zymo that fall within the arbitration provisions of the co-ownership agreement between the
parties. In July&nbsp;2006, the judge issued a ruling confirming ChemFree&#146;s request to compel
arbitration. In the fourth quarter of 2006, an arbitrator was assigned and the parties submitted
their pleadings to the arbitrator. On February&nbsp;6, 2007, the arbitrator issued a ruling which found
in ChemFree&#146;s favor on all substantive issues. Among other items, the arbitrator ruled that
ChemFree was not in breach of the co-ownership agreement and that Zymo must pay an aggregate of
$156,000 to ChemFree for its share of legal expenses and damages for lack of cooperation in patent
matters cover by the co-ownership agreement. The arbitrator also ruled that, if Zymo participates
in the J. Walter patent infringement action described above after June&nbsp;30, 2007, it must pay an
additional $27,500 to ChemFree.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>ISC Guarantees &#151; </I>In conjunction with a Software License Agreement entered into on June&nbsp;12, 2003
between our majority owned subsidiary, CoreCard Software, Inc. and a CoreCard customer, ISC entered
into a letter of guarantee with the CoreCard customer. Under the guarantee, in the event that the
Software License is terminated due to CoreCard discontinuing operations, ISC has guaranteed to make
available at its expense up to four employees to provide technical assistance to the customer
during a transition period of up to one year. The guarantee is limited to the amount paid by the
customer to CoreCard under the Software License Agreement at the time of termination. The
guarantee phases out upon the achievement of certain operational milestones by CoreCard or after
five years, whichever occurs sooner. As of December&nbsp;31, 2006, it does not appear probable that
the guarantee will be paid; thus no amounts have been accrued with respect to this guarantee.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-20<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>10. POST-RETIREMENT BENEFITS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Effective January&nbsp;1, 1992, we adopted the Outside Directors&#146; 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. At December&nbsp;31, 2006 and 2005, we have
accrued $145,000 for future payments under the plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>11. DEFINED CONTRIBUTION PLANS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We maintain two 401(k) defined contribution plans covering substantially all U.S. employees. Our
matching contributions under the plans, which are optional and are based on the level of individual
participant&#146;s contributions, amounted to $85,000 and $92,000 in 2006 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. RELATED PARTY TRANSACTION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The lease on our headquarters and primary facility at 4355 Shackleford Road, Norcross, Georgia is
held by ISC Properties, LLC, an entity controlled by our Chairman and Chief Executive Officer, J.
Leland Strange. Mr.&nbsp;Strange holds a 100% ownership interest in ISC Properties, LLC. In each of
the years ended December&nbsp;31, 2006 and 2005, we paid $393,000 in rent to ISC Properties, LLC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. STOCKHOLDERS&#146; EQUITY</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have authorized 20,000,000 shares of Common Stock, $0.01 par value per share, and 2,000,000
shares of Series&nbsp;A Preferred Stock, $0.10 par value per share. No shares of Preferred Stock have
been issued; however, we adopted a Rights Agreement on November&nbsp;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 from time to time but no repurchases were made in 2006 or 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>14. STOCK OPTION PLANS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We instituted the 2003 Incentive Stock Plan (the &#147;2003 Plan&#148;) in March&nbsp;2003. The 2003 Plan
authorizes the issuance of up to 450,000 options to purchase shares of common stock to officers and
key employees, with vesting of such options occurring equally over a 3-year time period. No
options were granted under the 2003 Plan in 2006 or 2005. We instituted the 1991 Incentive Stock
Plan (the &#147;1991 Plan&#148;) in December&nbsp;1991 and the 1991 Plan expired in December&nbsp;2001, with 148,000
shares ungranted. In August&nbsp;2000, we instituted a Non-Employee Directors&#146; Stock Option Plan (the
&#147;Directors&#146; Plan&#148;) that authorizes the issuance of up to 200,000 shares of common stock to
non-employee directors. Upon adoption of the Directors&#146; Plan, each non-employee director was
granted an option to acquire 5,000 shares. At each Annual Meeting, each director may receive a
grant of 4,000 shares, which vests in 50% increments on the first and second anniversary. Stock
options under all three plans are granted at fair market value on the date of grant. As of December
31, 2006, a total of 969,000 options under all three Plans have been granted, 724,320 have been
exercised and 197,666 options are fully vested and exercisable. All options expire ten years from
their respective dates of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A summary of the company&#146;s nonvested shares as of December&nbsp;31, 2006 and changes during the year
ended December&nbsp;31, 2006 follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted Average</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Nonvested Shares,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Grant&#150;Date Fair Value</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nonvested at January&nbsp;1, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Vested</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nonvested at December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-21<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of December&nbsp;31, 2006, there was no unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plans. The total fair value of shares
vested during the years ended December&nbsp;31, 2006 and 2005 was $12,000 and $38,000, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Stock option transactions during the years ended December&nbsp;31, 2006 and 2005 were as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at January 1</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">226,680</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options canceled</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">203,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">238,680</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options available for grant at December 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercisable at December 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">187,348</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Option price ranges per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.08</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canceled</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">2.96-$4.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">1.51-$4.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">1.51-$4.26</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average option price per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.08</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canceled</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding at Dec. 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.56</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercisable at Dec. 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.80</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following tables summarize information about the stock options outstanding under the company&#146;s
option plans as of December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Options Outstanding:</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Wgt. Avg. Contractual</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Wgt. Avg. Exercise</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">Range of Exercise Price</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Number Outstanding</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Life Remaining</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Price</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$1.51 - $2.08</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">136,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">6.6 yrs</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.62</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$3.15 - $4.26</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">4.2 yrs</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3.95</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">203,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>

<TR><TD>&nbsp;</TD></TR>



<TR><TD colspan="13"><B>Options Exercisable:</B></TD></TR>



<TR><TD>&nbsp;</TD></TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Wgt. Avg.</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Aggregate</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000">Range of Exercise Price</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">Number Exercisable</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">Exercise Price</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">Intrinsic Value</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$1.51 - $2.08</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">130,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.60</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">208,471</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$3.15 - $4.26</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">700</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">209,171</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the company&#146;s closing stock price on the last trading day of the year ended
December&nbsp;31, 2006 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on
December&nbsp;31, 2006. The amount of aggregate intrinsic value will change based on the fair market
value of the company&#146;s common stock.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-22<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">
<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>15. FOREIGN REVENUES AND OPERATIONS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Foreign revenues are based on the location of the customer. Revenues from customers by geographic
areas for the years ended December&nbsp;31, 2006 and 2005 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>


<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign Countries:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">United Kingdom</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,596</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,257</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Chile</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">940</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">916</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Pacific Rim *</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">951</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Panama</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">277</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">525</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Ireland</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">138</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">661</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">163</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Subtotal</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,473</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">United States</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,526</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,425</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,460</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,898</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>




<DIV style="margin-top: 3pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Includes Australia, New Zealand, Japan and Singapore.</TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">With the acquisition of VISaer in 2001, we acquired foreign subsidiaries in the United Kingdom and
Ireland and in 2004 established a subsidiary in Australia. In 2003, we established a subsidiary of
CoreCard Software in Romania for certain software development and testing activities. In 2006, we
established a subsidiary in India for software development and testing activities for our CoreCard
subsidiary. Substantially all long-lived assets are in the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006 and 2005, foreign subsidiaries had assets of $321,000 and $293,000,
respectively, and total liabilities of $556,000 and $505,000, respectively. There are no currency
exchange restrictions related to our foreign subsidiaries that would affect our financial position
or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Refer to Note 1 for a discussion regarding how we account for translation of non-U.S. currency
amounts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16. INDUSTRY SEGMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our consolidated subsidiaries are involved in two industry segments: Information Technology
Products and Services and Industrial Products. Operations in Information Technology Products and
Services, which include our VISaer and CoreCard Software subsidiaries, involve development and
sales of software licenses and related professional services and software maintenance contracts.
Operations in the Industrial Product segment include the manufacture and sale of bio-remediating
parts washers by our ChemFree subsidiary. Total revenue by industry segment includes sales to
unaffiliated customers. Sales between our industry segments are not material. Operating income
(loss)&nbsp;is total revenue less operating expenses. None of the corporate overhead expense is
allocated to the individual industry segments. Identifiable assets by industry segment are those
assets that are used in our subsidiaries in each industry segment. Corporate assets are principally
cash, investments and notes receivable.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->F-23<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table contains segment information for the years ended December&nbsp;31, 2006 and 2005:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Information Technology</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,829</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Operating loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,256</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,995</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital expenditures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">194</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Identifiable assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,624</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,680</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Industrial Products</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">7,769</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,069</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Operating income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">377</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">256</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">234</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital expenditures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">368</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Identifiable assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,849</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,913</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Consolidated Segments</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,460</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,898</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Operating income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,810</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,617</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">477</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital expenditures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">491</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">454</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Identifiable assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,593</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,047</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A reconciliation of consolidated segment data above to consolidated data follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap colspan="9" align="left" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated segments operating income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(2,810</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,617</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,171</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(946</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated loss from continuing operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,981</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(4,563</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" colspan="9" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Depreciation and amortization</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated segments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">477</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">546</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">493</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Capital expenditures</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated segments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">491</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">454</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">502</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" colspan="9" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Assets</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated segments identifiable assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">7,473</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,593</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,537</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,844</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,437</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-24<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Intelligent Systems Corporation<BR>
Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>17. EARNINGS (LOSS)&nbsp;PER SHARE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Basic and diluted earnings (loss)&nbsp;per share are computed in accordance with SFAS No.&nbsp;128 &#147;Earnings
per Share&#148;. Basic net earnings (loss)&nbsp;per share are computed by dividing net earnings (loss)
(numerator)&nbsp;by the weighted average number of common shares outstanding (denominator)&nbsp;during the
period and exclude the dilutive effect of stock options. Diluted net earnings per share gives
effect to all dilutive potential common shares outstanding during a period. In computing diluted
net earnings per share, the average stock price for the period is used in determining the number of
shares assumed to be reacquired under the treasury stock method for the hypothetical exercise of
stock options.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following tables represent required disclosure of the reconciliation of the earnings (loss)&nbsp;and
the shares used in the basic and diluted net earnings (loss)&nbsp;per share computation:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><I>(in thousands except per share data)</I></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Basic</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net earnings (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,479</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net earnings (loss)&nbsp;per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Diluted</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net earnings (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,479</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Effect of dilutive potential common shares: stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,571</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,479</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net earnings (loss)&nbsp;per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.36</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 3px double #000000">&nbsp; &nbsp; &nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2005, potentially dilutive stock options to purchase 150,673 shares of the
company&#146;s common stock were not included in the diluted earnings (loss)&nbsp;per share as their effect
would be antidilutive.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->F-25<!-- /Folio -->
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>2
<FILENAME>g06209exv10w9.htm
<DESCRIPTION>EX-10.9 FIFTH MODIFICATION TO LOAN DOCUMENTS
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-10.9 FIFTH MODIFICATION TO LOAN DOCUMENTS</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: Helvetica,Arial,sans-serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;10.9</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><U><B>FIFTH MODIFICATION TO LOAN DOCUMENTS</B></U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>THIS FIFTH MODIFICATION TO LOAN DOCUMENTS </B>(herein the &#147;<B>Modification&#148;</B>) is made and entered into
as of this 1<SUP style="font-size: 85%; vertical-align: text-top">st</SUP> day of December, 2006, by and between <B>Intelligent Systems Corporation, </B>a
Georgia corporation (herein the &#147;<B>Borrower&#148;</B>), <B>QS Technologies, Inc., </B>a Georgia corporation, <B>Visaer,
Inc</B>., a Delaware corporation, <B>Corecard Software, Inc.</B>, a Delaware corporation, and <B>Chemfree
Corporation</B>, a Georgia corporation (the aforesaid four corporations being individually and
collectively referred to herein as the &#147;<B>Guarantors</B>&#148;), and <B>Fidelity Bank, </B>a Georgia state chartered
bank (f/k/a Fidelity National Bank ) (herein the &#147;<B>Lender&#148;</B>).
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><U>RECITALS</U>:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, on October&nbsp;1, 2003, Lender made a loan to Borrower in the original principal amount
of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) (the &#147;<B>Loan&#148;</B>) evidenced by
that certain Commercial Promissory Note dated October&nbsp;1, 2003 executed by Borrower in favor of
Lender (herein the &#147;<B>Note&#148;</B>).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, the Loan and the Note are secured and evidenced by, among other instruments, the
following:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Security Agreement from Borrower in favor of Lender dated of even date with the
Note (herein the &#147;<B>Security Agreement&#148;</B>);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Loan Agreement by and between Borrower and Lender dated of even date with the
Note (herein the &#147;<B>Loan Agreement&#148;</B>);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Financing Statement filed in Gwinnett County, Georgia records, File no.
067-2003-010805 (herein the &#147;<B>Financing Statement</B>&#148;).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Negative Pledge Agreement by and between Borrower and Lender dated of even date
with the Note (herein the &#147;<B>Negative Pledge Agreement&#148;</B>);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(e)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Assignment of Policy as Collateral Security from Borrower in favor of Lender
dated of even date with the Note (herein the &#147;<B>Life Insurance Assignment&#148;</B>); and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(f)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Subordination Agreements from Borrower and certain of the Guarantors in favor
of Lender dated of even date with the Note (herein &#147;<B>Subordination Agreements&#148;</B>).</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Security Agreement, the Loan Agreement, the Financing Statement, the Negative Pledge Agreement,
the Life Insurance Assignment and the Subordination Agreements are collectively referred to herein
as the &#147;<B>Loan Documents&#148;</B>.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, on October&nbsp;1, 2003, each of the Guarantors executed a Guaranty in favor of Lender
whereby each of the Guarantors guaranteed all of the obligations of Borrower to Lender contained
under the Loan, Note and Loan Documents (herein collectively the &#147;Guaranties&#148;);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, in order to secure their obligations under the terms of the Guaranties, each of the
Guarantors executed in favor of Lender certain Security Agreements dated October&nbsp;1, 2003 (herein
the &#147;Guarantor Security Agreements&#148;), which Guarantor Security Agreements are further evidenced by
a Financing Statement filed in Gwinnett County, Georgia Records File No.&nbsp;067-2003-010805 and that
certain Financing Statement filed with the Delaware Department of State under Filing No.&nbsp;3274987
(herein
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">collectively the &#147;Guarantor Financing Statements&#148;) (the Guaranties, the Guarantor Security
Agreements and the Guarantor Financing Statements are herein collectively referred to herein as the
&#147;Guaranty Documents&#148;);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Lender, Borrower and the Guarantors entered into that certain First Modification of
Loan Documents dated as of September&nbsp;1, 2004 for the purpose of extending the Maturity Date of the
Loan on the Note from September&nbsp;1, 2004 to September&nbsp;1, 2005 (all references to the Loan, Note,
Loan Documents and Guaranty shall be as amended by the aforesaid First Modification of Loan
Documents);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Lender, Borrower and the Guarantors entered into that certain Second Modification of
Loan Documents dated as of September&nbsp;1, 2005 for the purpose of extending the Maturity Date of the
Loan on the Note from September&nbsp;1, 2005 to September&nbsp;1, 2006 and to increase the maximum
availability under the Loan and the Note from $1,500,000 to $2,000,000 (all references to the Loan,
Note, Loan Documents and Guaranty shall be as amended by the aforesaid Second Modification of Loan
Documents);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Borrower requested and Lender agreed to increase the maximum availability under the
Loan and the Note from $2,000,000 to $2,500,000 and Borrower, Guarantors and Lender entered into
that certain Third Modification of Loan Documents dated as of June&nbsp;16, 2006 in order to modify and
ratify certain terms and provisions of the Note, the Loan Documents and the Guaranty Documents as
more particularly set forth therein (all references to the Loan, Note, Loan Documents and Guaranty
shall be as amended by the aforesaid Third Modification of Loan Documents);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Borrower requested and Lender agreed to decrease the maximum availability under the
Loan and the Note from $2,500,000 to $2,000,000 and to further extend the Maturity Date of the Loan
and Note from September&nbsp;1, 2006 to December&nbsp;1, 2006, and Borrower, Guarantors and Lender entered
into that certain Fourth Modification of Loan Documents dated as of August &#95;&#95;&#95;, 2006 in order to
modify and ratify certain terms and provisions of the Note, the Loan Documents and the Guaranty
Documents as more particularly set forth therein (all references to the Loan, Note, Loan Documents
and Guaranty shall be as amended by the aforesaid Fourth Modification of Loan Documents);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Borrower has requested and Lender has agreed to further extend the Maturity Date of
the Loan and Note from December&nbsp;1, 2006 to December&nbsp;1, 2007 and Borrower, Guarantors and Lender
desire to enter into this Amendment in order to modify and ratify certain terms and provisions of
the Note, the Loan Documents and the Guaranty Documents as more particularly set forth herein.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars ($10.00) and other good and
valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged,
Lender, Borrower and Guarantors hereby agree as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;<U>Recitals</U>. The foregoing recitals are true and correct and are incorporated herein
by this reference.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;<U>Capitalized Terms</U>. All capitalized terms contained in this Modification shall have
the same meaning afforded to them in the Note, Loan Documents and Guaranty Documents.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;<U>Specific Modifications to Documents</U>.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">a.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The maximum availability under the terms of the Loan
shall continue to be $2,000,000 during the remaining term of the Loan.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">b.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Maturity Date of the Loan and the Note is hereby
extended from December&nbsp;1, 2006 to December&nbsp;1, 2007.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;<U>No Impairment</U>. Borrower and Guarantors agree that the terms and provisions hereof
shall in no manner impair, limit, restrict or otherwise affect the obligations of Borrower and
Guarantors to Lender
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">or the priority of any lien evidenced by the Note, the Loan Documents or the Guaranty Documents,
except as modified hereby.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;<U>No Defenses</U>. Borrower and Guarantors acknowledge that they have no offsets,
claims, counterclaims or defenses against Lender or under any of their obligations contained in the
Note, the Loan Documents or the Guaranty Documents and to the extent any such offsets, claims,
counterclaims, or defenses exist, the same are hereby waived by the Borrower and Guarantors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;<U>Ratification</U>. Except as amended hereby, each and every term and provision of the
Note, the Loan Documents and the Guaranty Documents are hereby ratified and affirmed by Borrower
and Guarantors and shall remain in full force and effect. The Guarantors hereby specifically
acknowledge and consent to the decrease of the extension of the Maturity Date from December&nbsp;1, 2006
to December&nbsp;1, 2007, as well as the prior release by Lender of (i)&nbsp;all of Lender&#146;s collateral
interest with respect to Borrower&#146;s interest in Horizon Software International, LLC and (ii)&nbsp;all of
Lender&#146;s collateral interest in certain of the primary assets of QS Technologies, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;<U>No Novation</U>. It is the intention of the parties hereto that the execution and
delivery of this Modification shall in no way constitute a novation or extinguishment of the debt
evidenced by the Note, Loan Documents or the Guaranty Documents.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;<U>Effect of Modification</U>. In signing this Modification, the parties hereto expressly
certify and covenant that they have carefully read all provisions contained herein, have had an
opportunity to consult with legal counsel of their choosing and to consider the ramifications and
terms of this Modification, and they have voluntarily signed this Modification with the
understanding that it will be final and binding as to their interests and they have had a
sufficient opportunity to review the Modification and consult with counsel of their choice prior to
making such decision to execute this Modification. The parties hereby represent and warrant that
this Modification is executed without reliance on any statement or representation of the other,
except as expressly set forth in the within and foregoing Modification, and this Modification
constitutes the entire Modification between the parties hereto and that no promise or inducement or
consideration, other than that expressed in the within and foregoing Modification, has been offered
or accepted and all such prior inducements or considerations are deemed merged herein<B>.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">&#091;REMAINDER OF PAGE INTENTIONALLY LEFT BLANK&#093;
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">&#091;SIGNATURES COMMENCE ON FOLLOWING PAGE&#093;

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->3<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IN WITNESS WHEREOF, Borrower, Guarantors and Lender have set their hands and seals to this
Fifth Modification as of the day and year first above-written.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="55%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><U><B>BORROWER</B></U><B>:</B></TD>
</TR>


<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>INTELLIGENT SYSTEMS CORPORATION,</B><BR>
a Georgia corporation</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ J. Leland Strange</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President &#038; CEO</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attest:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Bonnie Herron</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Secretary</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="center">&#091;CORPORATE SEAL&#093;<BR></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><BR></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><U><B>GUARANTORS</B></U><B>:</B></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>QS TECHNOLOGIES, INC., </B>a Georgia corporation</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ J. Leland Strange</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attest:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Bonnie Herron</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Secretary</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="center">&#091;CORPORATE SEAL&#093;<BR></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" colspan="3"><b>VISAER, INC.,</B> a Delaware corporation</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ David Spellman</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President &#038; COE</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attest:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Martin Crockett</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Controller</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="center">&#091;CORPORATE SEAL&#093;<BR></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>CORECARD SOFTWARE, INC.</B>,
a Delaware corporation</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ J. Leland Strange</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attest:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Bonnie Herron</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Secretary</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">&#091;CORPORATE SEAL&#093;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>CHEMFREE CORPORATION</B>,<BR>
a Georgia corporation</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Francis A. Marks</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attest:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Bonnie Herron</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Secretary</TD>
</TR>


<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="center">&#091;CORPORATE SEAL&#093;<BR></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">(SIGNATURES CONTINUED ON FOLLOWING PAGE)
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->4<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt">(SIGNATURE PAGE TO FIFTH MODIFICATION TO LOAN DOCUMENTS)
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="55%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><U><B>LENDER</B></U><B>:</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>FIDELITY BANK,</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">a Georgia state chartered bank</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">(f/k/a Fidelity National Bank)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Rusty Bramlett</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Vice President</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="center">(BANK SEAL) <BR></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->5<!-- /Folio -->
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>3
<FILENAME>g06209exv21w1.htm
<DESCRIPTION>EX-21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;21.1</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>INTELLIGENT SYSTEMS CORPORATION</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>LIST OF PRINCIPAL SUBSIDIARY COMPANIES AS OF MARCH 1, 2007</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B><I>Subsidiary Name</I></B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B><I>State of Organization</I></B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">ChemFree Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Georgia</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">CoreCard Software, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Delaware</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">CoreCard SRL
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Romania</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">ISC Software Pvt. Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">India</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">VISaer, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Delaware</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio --><!-- /Folio -->
</DIV>


</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>g06209exv23w1.htm
<DESCRIPTION>EX-23.1 CONSENT OF TAUBER & BALSER, P.C.
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-23.1 CONSENT OF TAUBER & BALSER, P.C.</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;23.1</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Intelligent Systems Corporation<BR>
Norcross, GA
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We hereby consent to the incorporation by reference in the registration statements Form S-8 No.
333-58134 and No.&nbsp;333-32157 of our report dated March&nbsp;21, 2007, relating to the consolidated
financial statements of Intelligent Systems Corporation and Subsidiaries appearing in the company&#146;s
annual report on Form 10-KSB for the year ended December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">/s/ Tauber &#038; Balser, P.C.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Tauber &#038; Balser, P.C.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Atlanta, Georgia<BR>
March&nbsp;23, 2007
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio --><!-- /Folio -->
</DIV>


</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>5
<FILENAME>g06209exv31w1.htm
<DESCRIPTION>EX-31.1 SECTION 302 CERTIFICATION OF CEO
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-31.1 SECTION 302 CERTIFICATION OF CEO</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;31.1</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO<BR>
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">I, J. Leland Strange, the Chief Executive Officer of Intelligent Systems Corporation, certify that:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>I have reviewed this Annual Report on Form 10-KSB of Intelligent Systems Corporation;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Based on my knowledge, this Annual Report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this Annual Report;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Based on my knowledge, the financial statements, and other financial information included in
this Annual Report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
Annual Report;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules&nbsp;13a-15(e) and
15d-15(e) for the registrant and we have:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
Annual Report is being prepared; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>evaluated the effectiveness of the registrant&#146;s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>disclosed in this report any change in the registrant&#146;s internal control over
financial reporting that occurred during the registrant&#146;s most recent fiscal quarter (the
registrant&#146;s fourth fiscal quarter in the case of an Annual Report) that has materially
affected, or is reasonably likely to materially affect, the registrant&#146;s internal control
over financial reporting.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">5.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the
audit committee of registrant&#146;s board of directors (or persons performing the equivalent
functions):</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant&#146;s ability to record, process, summarize and report financial information;
and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial reporting.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Date: March&nbsp;23, 2007
</DIV>


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left">                                              <I>/s/ J. Leland Strange</I>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">J. Leland Strange&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chief Executive Officer and President&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>



<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>6
<FILENAME>g06209exv31w2.htm
<DESCRIPTION>EX-31.2 SECTION 302 CERTIFICATION OF CFO
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-31.2 SECTION 302 CERTIFICATION OF CFO</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>

</TABLE>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;31.2</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO<BR>
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">I, Bonnie L. Herron, the Chief Financial Officer of Intelligent Systems Corporation, certify that:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>I have reviewed this Annual Report on Form 10-KSB of Intelligent Systems Corporation;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Based on my knowledge, this Annual Report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this Annual Report;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">5.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Based on my knowledge, the financial statements, and other financial information included in
this Annual Report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
Annual Report;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">6.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules&nbsp;13a-15(e) and
15d-15(e) for the registrant and we have:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
Annual Report is being prepared; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>evaluated the effectiveness of the registrant&#146;s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>disclosed in this report any change in the registrant&#146;s internal control over
financial reporting that occurred during the registrant&#146;s most recent fiscal quarter (the
registrant&#146;s fourth fiscal quarter in the case of an Annual Report) that has materially
affected, or is reasonably likely to materially affect, the registrant&#146;s internal control
over financial reporting.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">7.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the
audit committee of registrant&#146;s board of directors (or persons performing the equivalent
functions):</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant&#146;s ability to record, process, summarize and report financial information;
and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial reporting.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Date: March&nbsp;23, 2007
</DIV>


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left">                                               <I>/s/ Bonnie L. Herron</I>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Bonnie L. Herron&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chief Financial Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>7
<FILENAME>g06209exv32w1.htm
<DESCRIPTION>EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO
<TEXT>
<HTML>
<HEAD>
<TITLE>EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: Helvetica,Arial,sans-serif">


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>

</TABLE>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;32.1</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CERTIFICATION PURSUANT TO<BR>
18 U.S.C. SECTION 1350,<BR>
AS ADOPTED PURSUANT TO<BR>
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Each of the undersigned officers of Intelligent Systems Corporation (the &#147;Company&#148;) hereby
certifies to his or her knowledge that the Company&#146;s Annual Report on Form 10-KSB for the period
ended December&nbsp;31, 2006 (the &#147;Report&#148;), as filed with the Securities and Exchange Commission on the
date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended, and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company.
</DIV>

<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">Date: March 23, 2007&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left"><I>/s/ J. Leland Strange</I>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">J. Leland Strange&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chief Executive Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>

<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left">     <I>/s/ Bonnie L. Herron</I>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Bonnie L. Herron&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chief Financial Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
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