<SEC-DOCUMENT>0000950123-10-114079.txt : 20110307
<SEC-HEADER>0000950123-10-114079.hdr.sgml : 20110307
<ACCEPTANCE-DATETIME>20101216095801
<PRIVATE-TO-PUBLIC>
ACCESSION NUMBER:		0000950123-10-114079
CONFORMED SUBMISSION TYPE:	CORRESP
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		20101216

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INTELLIGENT SYSTEMS CORP
		CENTRAL INDEX KEY:			0000320340
		STANDARD INDUSTRIAL CLASSIFICATION:	BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452]
		IRS NUMBER:				581964787
		STATE OF INCORPORATION:			GA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		CORRESP

	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>CORRESP
<SEQUENCE>1
<FILENAME>filename1.htm
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<HTML>
<HEAD>
<TITLE>Correspondence</TITLE>
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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 60%">December&nbsp;16, 2010
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Securities and Exchange Commission<BR>
Washington, DC 20549

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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    <TD width="92%">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Re:</B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="justify" valign="top"><B>Intelligent Systems Corporation</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="justify" valign="top"><B>Form&nbsp;10-K for the Fiscal Year Ended December&nbsp;31, 2009</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="justify" valign="top"><B>Filed March&nbsp;23, 2010</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="justify" valign="top"><B>Definitive Proxy Statement on Schedule&nbsp;14A</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="justify" valign="top"><B>Filed April&nbsp;9, 2010</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="justify" valign="top"><B>File No.&nbsp;001-09330</B></TD>
</TR>
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</TABLE>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Ladies and Gentlemen:
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">This letter constitutes the response of Intelligent Systems Corporation (the &#147;Company&#148;) to the
comment letter dated December&nbsp;1, 2010, regarding the Company&#146;s Form 10-K for fiscal year 2009 and
its Definitive Proxy Statement filed April&nbsp;9, 2010.
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our responses below correspond to the numbered paragraphs in the comment letter.
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>General</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">1. We will correct the Item numbers in future filings.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Part&nbsp;I, page 1</U><BR>
<U>Forward-Looking Statements, page 1</U>

</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">2. We will revise the last sentence of the Forward-Looking Statements paragraph in
future filings to read, &#147;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 except as required by law.&#148;

</DIV>

<DIV align="justify" style="margin-top: 10pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="7%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="justify"><U>Item&nbsp;1.</u></TD>
    <TD>&nbsp;</TD>
    <TD><u>Business, page 1</U></TD>
</TR>
</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Industrial Products Segment, page 2</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">3. With a view towards future disclosure, we have addressed your comments in the attached draft
disclosure in Item&nbsp;1. <U>Business</U>, which has been marked to show changes from our Form 10-K
for the Fiscal Year Ended December&nbsp;31, 2009. See the added penultimate paragraph under &#147;Industrial
Products Segment &#151; ChemFree Corporation&#148; on page 3 of the draft disclosure. Also
see the added penultimate paragraph under &#147;Information Technology Products and Services Segment &#151;
CoreCard Software, Inc.&#148; on page 5 of the attached draft disclosure.
</DIV>
<P align="center" style="font-size: 10pt">&nbsp;

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

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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Securities and Exchange Commission<BR>
December&nbsp;16, 2010<BR>
Page 2

</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">4. See the revised fourth paragraph on page 2 and 3 of the attached draft disclosure.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">5. See the last two sentences added to the last paragraph of &#147;Industrial Products Segment &#151;
ChemFree Corporation&#148; on page 3 of the attached draft disclosure.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Information Technology Products and Services Segment, page 3</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">6. See the revised language under &#147;Information Technology Products and Services Segment &#151; CoreCard
Software, Inc.&#148; on page 3 and 5 of the attached draft disclosure.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">7. See the revisions to the third paragraph under this section on page 4 of the attached draft
disclosure.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Patents, Trademarks and Trade Secrets, page 5</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">8. In future filings we will indicate that our patents will generally expire in 2014.
</DIV>


<DIV align="justify" style="margin-top: 10pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="7%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="justify"><U>Item&nbsp;6.</u></TD>
    <TD>&nbsp;</TD>
    <TD><u>Management&#146;s Discussion and Analysis . . . , page 8</U></TD>
</TR>
</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Results of Operations, page 11</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">9. We anticipate addressing known trends and uncertainties regarding the growth of professional
services revenues in future filings by adding language substantially as follows: &#147;We expect that
professional services revenue will continue to grow as CoreCard&#146;s customer base increases; however,
it is not possible to predict with any accuracy the number and value of professional services
contracts that CoreCard&#146;s customers will require in a given period. Customers typically require
our professional services to modify or enhance their CoreCard software implementation based on
their specific business strategy and operational requirements, which vary from customer to customer
and from period to period.&#148;
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">10. The change in investment income is not material; accordingly, we do not anticipate referring to
the $7,000 change or changes of similar magnitude in future filings. The changes in Equity in
Income of Affiliate Company and Other Net Income in 2009 as compared to 2008 resulted from the
effects in 2009 of the economic downturn.
</DIV>
<P align="center" style="font-size: 10pt">&nbsp;

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

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<DIV style="font-family: 'Times New Roman',Times,serif; margin-left: .25in; width: 7.50in">



<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Securities and Exchange Commission<BR>
December&nbsp;16, 2010<BR>
Page 3

</DIV>

<DIV align="justify" style="margin-top: 10pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="7%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="justify"><U>Item&nbsp;8A(T).</u></TD>
    <TD>&nbsp;</TD>
    <TD><U> Controls and Procedures, page 16</U></TD>
</TR>
</TABLE>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">
<U>Evaluation of Disclosure Controls and Procedures, page 16</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">11. We confirm that our disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives and that our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are effective.
</DIV>


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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">12. We will make appropriate revisions in future filings.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Definitive Proxy Statement on Schedule&nbsp;14A</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Proposal 1 &#151; The Election of One Director, page 4</U><BR><br>
<U>Nominee, page 4</U>

</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">13. We will make appropriate revisions in future filings.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Board Leadership Structure and Role in Risk Oversight, page 5</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">14. The Company has determined that risks arising from its compensation policies and practices are
not reasonably likely to have a material adverse effect on the Company. This determination was
based on the limited nature of the Company&#146;s compensation program. Compensation at the corporate
executive level consists of salaries and, on occasion, bonuses based upon the Compensation
Committee&#146;s review at the end of the year of performance of an executive. There are no
pre-existing criteria that could lead to manipulation by an executive officer. No bonuses were
paid to corporate executives in 2009. At the ChemFree level, bonuses are paid to executive
management based on revenue and net income as determined by the audited financial statement. The
nature of ChemFree&#146;s business does not lend itself to a significant risk of manipulation of revenue
recognition, the undertaking of risks to increase sales, or other factors that may result in a
material adverse effect on the Company.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><U>Director Compensation, page 8</U>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">15. The disclosure in our Form 10-K of fees to Mr.&nbsp;Petit and the number of meetings attended by him
is correct. One of the meetings was very brief. Accordingly, the Board determined that the
directors would forgo compensation for that meeting.
</DIV>

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

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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Securities and Exchange Commission<BR>
December&nbsp;16, 2010<BR>
Page 4

</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Company hereby acknowledges that:
</DIV>

<DIV style="margin-top: 10pt">
<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="justify"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company is responsible for the adequacy and accuracy of the disclosure in its
filings under the Securities Exchange Act of 1934;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 10pt">
<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="justify"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Staff comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to such filings; and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 10pt">
<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="justify"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities law of the United States.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Please contact Larry Ledbetter at (404)&nbsp;835-9503 if you have any questions.
</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="justify">&nbsp;</TD>
    <TD colspan="3" align="justify">Sincerely,<BR>
<BR>
Intelligent Systems Corporation<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="justify">&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>
    <TD colspan="2" style="border-bottom: 1px solid #000000" align="justify">/s/ Bonnie L. Herron
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="justify">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Name:&nbsp;&nbsp;</TD>
    <TD align="justify">Bonnie L. Herron&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="justify">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Title:&nbsp;&nbsp;</TD>
    <TD align="justify">Chief Financial Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
</TABLE>

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

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

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<DIV style="font-family: 'Times New Roman',Times,serif; margin-left: .25in; width: 7.50in">


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


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


<DIV style="margin-top: 10pt">
<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><DIV style="text-align: justify"><I>In addition to historical information, this </I><I>Form 10-K</I><I> may contain forward-looking
statements relating to Intelligent Systems Corporation (&#147;ISC&#148;). All statements,
trend analyses and other information contained in the following discussion
relative to markets for our products and trends in revenue, gross margins and
anticipated expense levels, as well as other statements including words such as
&#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 of
Financial Condition and Results of Operations in Item&nbsp;6 of this </I><I>Form 10-K</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></DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="margin-top: 10pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="7%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left"><B>ITEM 1.</B></TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="text-align: justify"><B>BUSINESS</B></DIV></TD>
</TR>
</TABLE>
</DIV>

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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">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;us&#148;, &#147;ours&#148;, &#147;we&#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 <U>www.intelsys.com</U>. 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="justify" style="font-size: 10pt; margin-top: 10pt">Since the early 1980&#146;s, we have conducted our operations principally through wholly and 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. From time to
time, we see promising companies or technologies that we believe are in line with our corporate or
subsidiaries&#146; strategic direction and may be candidates for acquisition or investment. 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 may vary considerably from quarter-to-quarter
and year-to-year, and our past performance is not necessarily indicative of future results.
</DIV>


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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">We consolidate the results of operations of companies in which we own a majority interest and over
which we exert control. We generally account for investments by the equity method for minority
owned companies in which we own 20 to 50&nbsp;percent and over which we exercise significant influence,
but do not exert control. 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. Privately owned corporations in which we own less than 20&nbsp;percent of the equity
are carried at the lower of cost or market.
</DIV>


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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Our consolidated companies operate in two industry segments: Information Technology Products and
Services and Industrial Products. <u>The principal operating company in our</u> <strike>The</strike> Information Technology
Products and Services segment <strike>includes</strike> <u>is</u> CoreCard Software, Inc. (&#147;CoreCard&#148;) and the Industrial Products
segment consists of ChemFree Corporation (&#147;ChemFree&#148;). As of December&nbsp;31, 2009, we own 100&nbsp;percent
of ChemFree and 96&nbsp;percent of CoreCard. We also have two wholly owned subsidiaries, CoreCard SRL
and ISC
Software in Romania and India, respectively, that perform software development and testing for
CoreCard <u>but do not sell products or services to third parties</u>. On April&nbsp;16, 2008, we sold the
business of our VISaer, Inc. subsidiary and accordingly, we have classified the VISaer operations
as discontinued operations for all periods presented.
</DIV>


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

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

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</DIV>

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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">The business discussion which follows contains information on products, markets, competitors,
research and development and manufacturing for our operating subsidiaries organized by industry
segment. For further detailed financial information concerning our segments, see Note 14 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 of
Financial Condition and Results of Operations in Item&nbsp;6 of this Form 10-K.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">The business in our segments is not seasonal on a consolidated basis although there is generally
some slowdown in demand in Europe during the third quarter of the year for our ChemFree products.
</DIV>


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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><B><I>ChemFree Corporation </I></B><I>&#151; </I>ChemFree, our largest subsidiary in terms of revenue, designs, manufactures
and markets a line of parts washers under the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> trademark. The SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system uses
a proprietary 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 cleaning process and the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system
is completely self-cleaning. 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. ChemFree sells replacement fluid and filters
to its customers on a regular basis after the initial parts washer sale. ChemFree has numerous
U.S. and European patents covering its SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system and protects its proprietary fluid and
filters as trade secrets. As the leader in bio-remediating parts washers, ChemFree seeks to
continually bring new product enhancements, formulations and features to the market.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">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 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, NAPA, represented 13&nbsp;percent
and 11&nbsp;percent of our consolidated revenue in 2009 and 2008, respectively. Part of ChemFree&#146;s
revenue is derived from multi-year lease contracts under which ChemFree provides SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP>
<u>machines</u> and supplies to nationwide chains of auto repair shops, such as Firestone, Tires Plus and
Pep Boys.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">ChemFree also sells to large volume corporate customers on a direct basis rather than through its
distributor network. One such corporate customer, Cintas Corporation, accounted for 35&nbsp;percent of
our consolidated revenue in both 2009 and 2008.
</DIV>


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


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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">ChemFree competes with companies that offer solvent-based systems, other companies that offer
aqueous-based systems, and hazardous waste hauling firms. Although smaller than some 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. <u>Specifically,</u>
</DIV>


<DIV style="margin-top: 10pt">
<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"><u><B>&#149;</B></u></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><u> The SmartWasher system is available in a variety of model sizes and features to meet
specific customer needs and all models incorporate ChemFree&#146;s patented bioremediating system,
employing a heater, recirculating pump, proprietary aqueous based de-greasing fluid and
microbe impregnated filter. Compared to solvent-based systems, these features make the
SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system safer, non-flammable and non-caustic to users and do not require expensive
contracts to haul and dispose of regulated materials.</u></DIV></TD>
</TR>

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

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    <TD width="3%" nowrap align="left"><u><B>&#149;</B></u></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><u> ChemFree&#146;s products have a positive environmental impact because, unlike solvent-based
systems, they provide necessary cleaning functions to users without using or generating
hazardous chemicals or by-products.</u></DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 10pt">
<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"><u><B>&#149;</B></u></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><u>Unlike solvent-based systems, the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system does not expose workers to harmful,
irritating chemicals. ChemFree&#146;s fluid is non-flammable, non-caustic and produces no VOC
emissions, thus reducing the likelihood of fire and enhancing the safety and health of workers
and the workplaces in which parts washers are used.</u></DIV></TD>
</TR>

</TABLE>
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    <TD width="3%" nowrap align="left"><u><B>&#149;</B></u></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><u> The SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> bioremediation process uses microbes to break down grease, oil
and other harmful contaminants into harmless carbon dioxide and water. Since the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP>
system does not generate hazardous substances that are subject to strict environmental
regulations, users of the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system eliminate their &#147;cradle to grave&#148; liability and
the costs associated with solvent-based systems to comply with regulations for properly
manifesting, recordkeeping, hauling and disposing of hazardous substances.</u></DIV></TD>
</TR>

</TABLE>
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    <TD width="3%" nowrap align="left"><u><B>&#149;</B></u></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><u> Customer feedback as well as market acceptance and repeat orders over a ten year
period indicate that the SmartWasher<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> system cleans as quickly and effectively as
solvent-based systems, while providing the additional advantages of positive environmental,
health and safety features.</u></DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">ChemFree believes that overall domestic and international 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. Increased acceptance of bio-remediating and aqueous-based systems is
expected to result in more competition and pricing pressure as more suppliers of equipment and
fluid enter the market.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><u>ChemFree is not required to obtain government approval for its products and is not presently aware
of any pending regulatory changes that would require it to obtain such approval. Our cost of
compliance with environmental laws is minimal as ChemFree&#146;s products and manufacturing processes do
not use or generate regulated substances. This fact provides a competitive advantage for ChemFree
products over solvent-based products, which subject their users to significant environmental
regulation, compliance costs and potential liability.</u>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">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 purchases raw materials and certain major sub-assemblies built
to its specifications from various manufacturers and performs assembly and testing at its facility
in Norcross, Georgia. ChemFree blends its proprietary fluid at its facility in Norcross, Georgia
and at third party facilities in certain international markets under non-exclusive blending
arrangements. While it is possible to acquire most <u>raw material </u>parts and sub-assemblies 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. One sub-assembly and certain molded
plastic parts have only single qualified suppliers presently and shortages or price increases
associated with such sole-source suppliers could impact ChemFree&#146;s ability to meet market demand
for its products and/or increase its cost of goods sold. <u>ChemFree has from time to time
experienced limited shortages of a sole-sourced molded part that is included in one of its
products, but this has not had and is not anticipated to have a material impact on our business due
to the limited revenue and margin derived from such product. Presently we do not anticipate any
significant price increases of raw materials or subassemblies; however, there can be no assurance
that prices will not increase in the future.</u>
</DIV>


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


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><B><I>CoreCard Software, Inc. </I></B><I>&#151; </I><u> The
principal operating company in our  Information Technology Products
and Services segment is CoreCard Software, Inc. (&#147;CoreCard&#148;). Our wholly owned subsidiaries,
CoreCard SRL and ISC Software in Romania and India, respectively, perform software development and
testing for CoreCard but do not sell products or services to third parties. Accordingly, this
discussion describes the CoreCard business as a single business unit. </u>CoreCard designs, develops,
and markets a comprehensive suite of software solutions to accounts receivable businesses,
financial institutions (such as banks and credit unions), retailers and processors to manage their
credit and debit card, prepaid cards, private label cards, fleet cards, loyalty programs, and
accounts receivable and small loan transactions. <u> The CoreCard<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> software solutions allow companies
to issue various types of debit and credit cards as well as revolving loans, to set up and maintain
account data, to record advances and payments, to assess fees, interest and other charges, to
resolve disputes and chargebacks, to manage collections of accounts receivable, to generate reports
and to settle transactions with financial transactions and network associations.</u>
</DIV>

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



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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Our software products are typically sold in competitive situations 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 $150,000 to over $1&nbsp;million. We derive service revenue from implementation,
customization, training and support services. We have also begun to offer boutique processing
services (running the CoreCard software platform) and will derive monthly fees for providing
processing services beginning in 2010. Depending on factors such as contract terms, customer
implementation and testing schedule, and extent of customization or configuration required, the
timing of revenue recognition on software contracts is not generally predictable by us with any
degree of certainty and may lead to considerable fluctuation in revenue and profitability, which in
turn affects our consolidated revenue and profit or loss.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">CoreCard has developed proprietary software applications based on its core financial transaction
processing platform (CoreENGINE&#153;) to address the unique requirements of customers and program
managers that issue or process:
</DIV>


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    <TD><DIV style="text-align: justify">Credit/Debit Cards &#151; involving revolving or non-revolving credit issued to consumer or
business accounts (with or without a physical card) that typically involve interest, fees,
settlement, collections, etc. Within this market, CoreCard offers software specifically
tailored to handle private label cards, network branded (i.e. MasterCard or VISA) bank cards,
fleet cards, short-term consumer loans and revolving accounts receivable.</DIV></TD>
</TR>

</TABLE>
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify">Prepaid Cards &#151; involving pre-loaded funds drawn down for purchase or cash withdrawal
typically involving a variety of fees but no interest. Numerous examples exist including gift
cards, loyalty/reward cards, health benefit cards, payroll and benefits disbursement,
healthcare cards, government assistance payments, and transit cards.</DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">CoreCard&#146;s software solutions allow financial institutions and commercial customers to optimize
their card account management systems, improve customer retention, lower operating costs and create
greater market differentiation. <u>For example, </u>CoreCard&#146;s feature-rich, browser-based financial
transaction processing software allows customers to automate, streamline and optimize business
processes associated with the set-up, administration, management and settlement of credit, prepaid
and loan accounts, to process transactions, and to generate reports and statements for these
accounts. <u>In addition, b<strike>B</strike></u>ecause CoreCard&#146;s products are designed to run on <u>low cost, scalable </u>PC-based servers, rather than <strike>legacy</strike> <u>expensive legacy</u> mainframe computers, customers benefit from a lower
overall cost-of-ownership<u> and</u><strike>,</strike> scalability<u> by simply adding additional servers as their card volume
grows. </u><strike>, and increased flexibility to respond to market trends.</strike> CoreCard&#146;s product functionality includes embedded multi-lingual, multi-currency support,
a web-based interface, real-time processing, complex rules-based authorizations, account
hierarchies, and robust fee libraries<u>, features</u> that support customer-defined pricing and payment
terms<u> and allow CoreCard customers to create new and innovative card programs to differentiate
themselves in the marketplace and improve customer retention. </u>.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">We believe CoreCard is unique among software companies because it offers a full array of card and
account management software solutions, all available either for in-house license, outsourced
processing (Software as a Service or SaaS) or Platform as a Service (PaaS), at the customer&#146;s
option. CoreCard also provides customers with a unique option to license the same CoreCard
software that is used in the processing environment and transfer it in-house for customer
controlled processing at a later date.
</DIV>


<DIV style="margin-top: 10pt">
<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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><U>License</U> &#151; Typically CoreCard sells a software license to customers who then run
CoreCard&#146;s software system, configured for their unique requirements, at a customer controlled
location.</DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 10pt">
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    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><U>SaaS</U> &#151; Recently CoreCard has expanded the ways customers can access or deploy its
software and now offers a boutique processing service that allows customers to outsource their
processing requirements to CoreCard. CoreCard manages all aspects of the processing functions
using its proprietary software configured for each processing customer in a Software as a
Service (&#147;SaaS&#148;) model.</DIV></TD>
</TR>

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

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    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><DIV style="text-align: justify"><U>PaaS</U> &#151; For customers who prefer greater customization and control of the processing
environment, CoreCard offers its software, uniquely customized for the customer, hosted by
CoreCard on customer owned equipment at the CoreCard data center, in a Platform as a Service
(&#147;PaaS&#148;) offering.</DIV></TD>
</TR>

</TABLE>
</DIV>

<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">CoreCard has set up its data processing center and disaster recovery site at secure third party
locations and has received a certification of compliance with the Payment Card Industry (PCI)&nbsp;Data
Security Standards, an important step in ensuring protection of all consumer data handled by the
CoreCard processing system.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">CoreCard&#146;s principal target markets include accounts receivable businesses, prepaid cards issuers,
retail and private-label issuers, small third-party processors, and small and mid-size financial
institutions in the United States and in emerging international markets.
</DIV>


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


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<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">The company expects that a significant amount of its bankcard 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 U.S. banks. CoreCard competes with larger and more
established software suppliers, and a number of software solution providers that offer more limited
functional modules. CoreCard also competes with third-party card processors that allow potential
prospects to outsource their account transaction processing rather than acquire software to manage
their transactions in-house. 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 robust technology
platform, lower overall cost-of-ownership, greater system flexibility, multilingual/multicurrency
capabilities and more customer-driven marketing options. Furthermore, we believe our boutique
processing will be an attractive alternative particularly for small, prepaid card issuers or other
companies entering new credit or prepaid markets that may not have the technology expertise to run
the software in-house initially. Under the Core Processing option, customers will contract with
CoreCard to provide them with processing services for their accounts using CoreCard software
configured to the customer&#146;s preferences, with a built-in option to license the same software and
bring it in-house when and if the customer decides to become its own processor in the future.
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><u>CoreCard&#146;s principal software platform and modules include CoreENGINE&#153;, CoreISSUE&#153;, CoreFRAUD&#153;,
CoreCOLLECT&#153;, CoreSALES&#153; and CoreACQUIRE&#153;. Using the same base transaction processing called
CoreENGINE, the CoreCard application modules have been further enhanced to meet the specific
requirements of different market segments; for instance, CoreISSUE is available in different
versions tailored to the requirements for issuing Prepaid cards, Fleet cards, Bank cards or Private
Label cards/accounts. In addition, CoreCard configures and/or customizes its base modules with
additional or specific functionality to meet each customer&#146;s requirements. </u>Through 2009, CoreCard
has focused its extensive development and limited sales activities on establishing a growing base
of reference customers in its target markets. In 2008, the company added new fleet and prepaid
card customers to its reference base and in 2009 added additional private label customers as well
as its first international and processing customers. The company has focused on completing its
suite of products and building the infrastructure and processes to be able to scale the business
successfully before devoting extensive resources to sales and marketing.<u> The company expects to
continually enhance and upgrade its existing software solutions to meet changing customer and
market requirements.</u>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">Typically, CoreCard licenses its software products for a one-time license fee or, in the case of
its prepaid card software offering, for an initial set-up charge and a monthly fee based on number
of accounts processed. It provides maintenance and support services under annual contracts, as
well as professional services for customization, implementation, testing and training activities.
Processing customers pay an implementation and setup fee and monthly service fees and typically
enter into contracts with terms of three or more years. CoreCard sells its products directly to
customers in the U.S. but may work with a small number of resellers and third parties in
international markets to identify, sell and support targeted opportunities. <strike>CoreCard&#146;s principal software platform and modules include CoreENGINE&#153;, CoreISSUE&#153;, CoreFRAUD&#153;, CoreCOLLECT&#153;, CoreSALES&#153; and CoreACQUIRE&#153;. CoreCard configures and/or customizes the modules with additional or specific functionality to meet the market and/or customer requirements to provide a complete card management solution for applications such as private label, prepaid, bankcard or fleet.
 </strike>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt"><u>CoreCard does not need governmental approval for its products and services. However, CoreCard&#146;s
software products are used by customers to manage and process various credit, debit and prepaid
card programs and there are a number of federal and state regulations governing the issuance of and
the processing of financial transactions associated with such cards. CoreCard&#146;s customers are
required to comply with such regulations and, to the extent that customers depend on their licensed
CoreCard software to manage and process their card accounts, the CoreCard<SUP style="FONT-size: 85%; vertical-align: text-top">&#174;</SUP> software features and
functionality must allow customers to comply with the various governmental regulations. CoreCard
continually evaluates applicable regulations and regularly upgrades and enhances its software to
help its customers meet their obligations to comply with current and anticipated governmental
regulations. As a part of CoreCard&#146;s CoreProcessing services, CoreCard is responsible for
providing processing services, including data and network security, in compliance with all
applicable governmental regulations. Depending on the extent of changes in new governmental
regulations, CoreCard may from time to time incur additional costs to modify its software to be
compliant. CoreCard has no costs related to compliance with environmental laws.</u>
</DIV>


<DIV align="justify" style="font-size: 10pt; margin-top: 10pt">We believe that the uncertainty and turmoil in the financial services sector of the domestic U.S.
marketplace had a negative impact on buying decisions for potential customers in 2009. The
situation has impacted and may continue to impact the willingness of banks and network associations
(such as MasterCard or VISA) to approve new customer programs which could lower demand for our
product and service offerings in the near-term.
</DIV>

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



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