10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-9330

INTELLIGENT SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

Georgia (State or other jurisdiction of incorporation or organization)	58-1964787 (I.R.S. Employer Identification No.)
4355 Shackleford Road, Norcross, Georgia (Address of principal executive offices)	30093 (Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 31, 2011, 8,958,028 shares of Common Stock of the issuer were outstanding.

Intelligent Systems Corporation

Index

Form 10-Q

	Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2011 and December 31, 2010		3
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010		4
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		5
Notes to Consolidated Financial Statements		6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 4 Controls and Procedures		14
Part II Other Information
Item 1 Legal Proceedings		15
Item 6 Exhibits		16
Signatures		16
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Intelligent Systems Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

	June 30,			December 31,
	2011			2010
	(unaudited)			(audited)
ASSETS
Current assets:
Cash	$	3,190		$	2,942
Accounts receivable, net		2,941			2,227
Note and interest receivable, current portion		245			600
Inventories, net		928			833
Other current assets		517			404
Total current assets		7,821			7,006
Investments		1,306			1,286
Note and interest receivable, net of current portion		236			473
Property and equipment, at cost less accumulated depreciation		1,353			1,149
Patents, net		155			177
Total assets	$	10,871		$	10,091
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	490		$	322
Deferred revenue, current portion		1,901			1,604
Accrued payroll		460			550
Accrued expenses		782			640
Other current liabilities		277			307
Total current liabilities		3,910			3,423
Deferred revenue, net of current portion		60			70
Other long-term liabilities		146			137
Commitments and contingencies (Note 8)
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 shares issued and outstanding at June 30, 2011 and December 31, 2010		90			90
Additional paid-in capital		21,435			21,418
Accumulated other comprehensive income (loss)		(3	)		3
Accumulated deficit		(16,283	)		(16,566	)
Total Intelligent Systems Corporation stockholders’ equity		5,239			4,945
Non-controlling interest		1,516			1,516
Total stockholders’ equity		6,755			6,461
Total liabilities and stockholders’ equity	$	10,871		$	10,091

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except share and per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011			2010
Revenue
Products	$	3,645	$	3,764		$	6,677		$	7,111
Services		512		844			1,024			1,194
Total net revenue		4,157		4,608			7,701			8,305
Cost of revenue
Products		1,737		2,159			3,285			3,868
Services		341		387			620			560
Total cost of revenue		2,078		2,546			3,905			4,428
Expenses
Marketing		565		553			1,085			1,119
General and administrative		595		672			1,513			1,397
Research and development		730		492			1,368			929
Income (loss) from operations		189		345			(170	)		432
Other income (expense)
Interest income, net		6		17			17			44
Equity in income (loss) of affiliate company		11		(10	)		20			(22	)
Other income, net		458		7			464			13
Income before income taxes		664		359			331			467
Income taxes		27		61			48			84
Net income	$	637	$	298		$	283		$	383
Income per share:
Basic	$	0.07	$	0.03		$	0.03		$	0.04
Diluted	$	0.07	$	0.03		$	0.03		$	0.04
Basic weighted average common shares outstanding		8,958,028		8,958,028			8,958,028			8,958,028
Diluted weighted average common shares outstanding		8,968,253		8,962,735			8,958,069			8,962,493

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

	Six Months Ended June 30,
	2011			2010
OPERATIONS:
Net income	$	283		$	383
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization		180			234
Stock-based compensation expense		17			5
Non-cash interest income, net		(8	)		(36	)
Equity in (income) loss of affiliate company		(20	)		22
Changes in operating assets and liabilities
Accounts receivable		(714	)		(700	)
Inventories		(95	)		192
Other current assets		(113	)		219
Accounts payable		167			48
Deferred revenue		227			(635	)
Accrued payroll		(90	)		10
Accrued expenses and other liabilities		181			182
Net cash provided by (used for) operating activities		15			(76	)
INVESTING ACTIVITIES:
Proceeds from note and interest receivable		600			2
Purchases of property and equipment		(361	)		(226	)
Net cash provided by (used for) investing activities		239			(224	)
FINANCING ACTIVITIES:
Payments on notes payable		—			(116	)
Net cash used for financing activities		—			(116	)
Effects of exchange rate changes on cash		(6	)		21
Net increase (decrease) in cash		248			(395	)
Cash at beginning of period		2,942			2,795
Cash at end of period	$	3,190		$	2,400
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	—		$	3
Cash paid during the period for income taxes	$	19		$	25

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Intelligent Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and six month periods ended June 30, 2011 and 2010. The interim results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with our Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2010, as filed in our Annual Report on Form 10-K.

2. Other Income from Settlement Agreement — As described in more detail in Part II Other Information, Item 1 Legal Proceedings of this report, our ChemFree subsidiary is a party to an action it brought against J. Walter Co. Ltd. and J. Walter, Inc. in the United States District Court for the Northern District of Georgia. In 2007, ChemFree sought sanctions against J. Walter and the law firm then representing the defendants for asserting a frivolous defense and counterclaim. On May 3, 2011, ChemFree entered into a Settlement Agreement with the defendants’ former attorneys whereby they agreed to pay $450,000 in settlement of ChemFree’s claim. The Settlement Agreement was approved by the court on May 6, 2011 and the payment of $450,000 was received by ChemFree on May 9, 2011. Accordingly, the company recorded $450,000 of income in the quarter ended June 30, 2011, which is reported in the category Other Income in the Consolidated Statements of Operations.

3. Comprehensive Income — Comprehensive income is the total of net income and all other non-owner changes in equity in a period. A summary follows:

Consolidated Statements of
Comprehensive Income	Three Months Ended June 30,				Six Months Ended June 30,
(unaudited, in thousands)	2011		2010		2011		2010
Net income	$	637	$	298	$	283	$	383
Other comprehensive income:
Foreign currency translation adjustment		3		4		6		20
Comprehensive income	$	640	$	302	$	289	$	403

4. Stock-based Compensation — At June 30, 2011, we had two stock—based compensation plans in effect. We record compensation cost related to unvested stock option awards by recognizing the unamortized grant date fair value 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 is recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $8,500 and $2,000 of stock-based compensation expense in the three months ended June 30, 2011 and 2010, respectively and $17,000 and $5,000 for the six month periods ended June 30, 2011 and 2010, respectively. The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2010 Form 10-K.

As of June 30, 2011, there is $112,000 of unrecognized compensation cost related to stock options. During the quarter ended June 30, 2011, an aggregate of 12,000 options were granted to the three independent members of our board of directors pursuant to the 2011 Non-Employee Director Stock Option Plan (Director Plan). Pursuant to the terms of the Director Plan, the options were granted at fair market value on the date of the Annual Shareholders meeting. In addition, during the six month period ended June 30, 2011, an aggregate of 80,000 options were granted on March 1, 2011 at fair market value under the terms of the 2003 Employee Stock Option Plan. No options were exercised or expired during the three and six month periods ended June 30, 2011.

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The following table summarizes stock options as of June 30, 2011:

					Wgt Avg
					Remaining		Aggregate
			Wgt Avg		Contractual Life		Intrinsic
	# of Shares		Exercise Price		in Years		Value
Outstanding at June 30, 2011		286,000	$	1.99		5.3	$	9,840
Vested and exercisable at June 30, 2011		188,000	$	2.14		3.0	$	8,880

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the second quarter of 2011 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 June 30, 2011. The amount of aggregate intrinsic value will change based on the fair market value of the company’s stock.

5. Fair Value of Financial Instruments — The carrying value of cash, accounts 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 non-interest bearing notes receivable beyond one year have been discounted at a rate of 4% which approximates rates 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 due to the fact that the investee companies are relatively small, early stage private companies for which there is no comparable valuation data available without unreasonable time and expense.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, trade accounts and note receivable. Our available cash is held in accounts managed by third-party financial institutions. Cash may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

6. Concentration of Revenue — The following table indicates the percentage of consolidated revenue represented by each customer for any period in which such customer represented more than 10% of consolidated revenue.

	Three Months Ended June 30,						Six Months Ended June 30,
(unaudited)	2011			2010			2011			2010
ChemFree Customer A		27	%		28	%		30	%		31	%
ChemFree Customer B		13	%		13	%		12	%		13	%
CoreCard Customer C		12	%		—			—			—
CoreCard Customer D		—			11	%		—			—

7. Short-term Borrowings — On June 30, 2011, we renewed our working capital line of credit with our bank. The revolving line of credit bears interest at the higher of the prime rate plus one and one half percent and 6.5% (6.5% at June 30, 2011); is secured by all assets of the company and our principal subsidiaries; is guaranteed by our subsidiaries; and expires June 30, 2012. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 50 percent of inventory, up to a maximum of $1,250,000. At June 30, 2011, our borrowing base calculation resulted in availability of $1,250,000, of which we had drawn down $0. 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 our bank in each case. Furthermore, the terms of the loan include a covenant requiring the company to maintain a minimum tangible net worth as defined in the loan agreement at the end of each calendar quarter during the loan term. As of June 30, 2011, we were in compliance with the loan covenants.

8. Commitments and Contingencies — Please refer to Note 7 in the Consolidated Financial Statements included in our 2010 Form 10-K for a description of our commitments and contingencies in addition to those disclosed here.

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Legal Matters — ChemFree Patent Matter — As explained in detail in Part II, Item 1 of this report, our ChemFree subsidiary has been involved since 2004 in a legal matter related to a patent infringement action brought against J. Walter Co. Ltd. and J. Walter, Inc. (“J. Walter”) in the United States Court for the Northern District of Georgia. The complaint alleged that certain of the defendants’ products infringed four U.S. patents held by ChemFree and sought a ruling to compel the defendants to cease their infringing activities. On June 18, 2010, the judge issued his Findings of Fact and Conclusions of Law which found (i) that certain of J. Walter’s products did infringe on ChemFree’s four patents-in-suit; (ii) in ChemFree’s favor on the issue of the patents’ named co-inventors and (iii) in J. Walter’s favor on the issue of invalidity of the four patents-in-suit for “obviousness”. ChemFree filed a Motion for Reconsideration of the judge’s findings and conclusions. In October 2010, the judge hearing the case was arrested on criminal charges by the FBI, subsequently resigned and ChemFree’s case was reassigned to a new judge. On June 6, 2011, the new judge issued a final ruling in J. Walter’s favor upholding the invalidity finding of the first judge and awarding recovery of allowable taxable costs from ChemFree. On July 1, 2011, ChemFree appealed the ruling to the United States Court of Appeals for the Federal Court. ChemFree also filed a motion to disallow the clerk’s award for the recovery of allowable taxable costs. While the company presently believes it will prevail in its appeal, there can be no certainty that the Court of Appeals will find in its favor. If ChemFree does not prevail in the appeal, there is at least a reasonable possibility that ChemFree would incur some expenses for certain allowable taxable costs (which do not include attorney fees) in an amount to be determined by the court at the time.

In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.

Except as noted above, other commitments and contingencies described in Note 7 to our Consolidated Financial Statements included in our 2010 Form 10-K are unchanged.

9. Industry Segments — Segment information is presented consistent with the basis described in our 2010 Form 10-K. The following table contains segment information for continuing operations for the three and six months ended June 30, 2011 and 2010.

	Three Months Ended June 30,						Six Months Ended June 30,
(unaudited, in thousands)	2011			2010			2011			2010
Information Technology
Revenue	$	991		$	1,376		$	1,541		$	1,938
Operating loss		(291	)		(41	)		(844	)		(318	)
Industrial Products
Revenue		3,166			3,232			6,160			6,367
Operating income		687			641			1,269			1,311
Consolidated Segments
Revenue		4,157			4,608			7,701			8,305
Operating income		396			600			425			993
Corporate expenses		(207	)		(255	)		(595	)		(561	)
Consolidated operating income ( loss)	$	189		$	345		$	(170	)	$	432
Depreciation and Amortization
Information Technology	$	34		$	1		$	74		$	24
Industrial Products		82			100			100			202
Consolidated segments		116			101			174			226
Corporate		3			4			6			8
Consolidated depreciation and amortization	$	119		$	105		$	180		$	234
Capital Expenditures
Information Technology	$	35		$	59		$	161		$	158
Industrial Products		136			36			199			67
Consolidated segments		171			95			360			225
Corporate		—			—			1			1
Consolidated capital expenditures	$	171		$	95		$	361		$	226

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(unaudited, in thousands)	June 30, 2011		December 31, 2010
Identifiable Assets
Information Technology	$	2,468	$	2,618
Industrial Products		7,022		6,016
Consolidated segments		9,490		8,634
Corporate		1,381		1,457
Consolidated assets	$	10,871	$	10,091

10. Income Taxes — We have recognized tax benefits from all tax positions taken, and there has been no adjustment to any carry forwards, net operating loss or R&D credits in the past two years. As of June 30, 2011, the company has recorded a liability of $122,228 in connection with unrecognized tax benefits related to uncertain tax positions. The liability includes $19,711 of interest and penalties. As of December 31, 2010, the company has recorded a liability of $90,000 in connection with unrecognized tax benefits, which included $15,000 of interest and penalties. As of June 30, 2011, management expects some incremental but not significant changes in the balance of unrecognized tax benefits over the next twelve months.

Our policy is to recognize accrued interest related to uncertain tax positions in interest expense and related penalties, if applicable, in general and administrative expense. During the three and six months ended June 30, 2011, we recognized $5,007 in interest expense and $61 in penalties related to uncertain tax positions. During the three and six months ended June 30, 2010, we recognized $4,113 in interest expense and $4,509 in penalties related to the uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership exceeds 80 percent, as well as individual subsidiary returns in various states and foreign jurisdictions. For periods prior to April 15, 2008, our VISaer subsidiary filed a separate U.S. federal income tax return. With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for years before 2006.

11. Recent Accounting Pronouncements — We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our Consolidated Financial Statements.

12. Subsequent Events — We evaluated subsequent events through the date when these financial statements were issued. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, this Form 10-Q may contain forward-looking statements relating to ISC. All statements, trend analyses and other information relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, and “intend”, and other similar expressions, constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those factors described below under “Factors That May Affect Future Operations”, and that actual results may differ materially from those contemplated by such forward-looking statements. Except to the extent required by law, ISC undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

For purposes of this discussion and analysis, we are assuming and relying upon the reader’s familiarity with the information contained in Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission.

Overview

Our consolidated subsidiaries operate in two industry segments: Information Technology Products and Services (“Information Technology”) and Industrial Products. The Industrial Products segment includes ChemFree Corporation (bio-remediating parts washer systems). The Information Technology sector consists of CoreCard Software, Inc. (“CoreCard”) (software for managing accounts receivables, prepaid, credit and debit cards).

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 activities such as customization, implementation, consulting, training, maintenance and support for licensed software products as well as for our card processing services in our Information Technology sector. 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:

• A change in revenue level at one of our subsidiaries may be offset by an opposing change at another subsidiary.

• 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.

• In the Information Technology sector, license revenue in a given period may consist of a relatively small number of contracts. Consequently, even small delays in a delivery under a software contract (which may be out of our control) could have an unpredictable impact on consolidated revenue that is recognized in a given quarterly or annual period.

We reported a net profit of $637,000 and $283,000 for the three and six months ended June 30, 2011. Included in these results is non-recurring income of $450,000 earned by our ChemFree subsidiary upon the settlement of a legal action which is described in more detail in Note 2 to the Consolidated Financial Statements. Frequently we report consolidated operating losses on a quarterly or annual basis and are likely to do so in the future from time to time. Our ChemFree subsidiary generates an operating profit on a regular basis but our earlier stage subsidiary, CoreCard, is not consistently profitable, mainly due to significant research and development expense that is invested to complete new product offerings and the deferral of revenue recognition until new software license contracts are complete. 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, CoreCard may report operating profits on an irregular basis as it builds its customer base. A significant portion of our subsidiaries’ expense is related to personnel. For these and other reasons, our operating profits or losses may vary from period to period and at the present time are generally not predictable with any degree of certainty.

From time to time, we also generate income or incur losses from non-operating sources and we may do so in the future. We may derive income from sales of subsidiary, affiliate and other minority-owned companies. Occasionally, 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 an affiliate company accounted for by the equity method. The timing and amount of any 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.

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Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes to Consolidated Financial Statements presented in this quarterly report.

Revenue — Total revenue from continuing operations in the three month period ended June 30, 2011 was $4.2 million compared to $4.6 million in the second quarter of 2010. For the six month period ended June 30, 2011, total revenue was $7.7 million, compared with $8.3 million in the same period in 2010.

• Revenue from products, which includes sales and leases of equipment and supplies in our Industrial Products segment as well as software license fees related to the Information Technology segment, was $3.6 million in the three month period ended June 30, 2011, a 3 percent decrease compared to the three month period ended June 30, 2010. Product revenue was $6.7 million in the six month period ended June 30, 2011, a decline of 6 percent compared to the six month period ended June 30, 2010. The decline in product revenue in the second quarter and year-to-date period of 2011 compared to the prior year periods is the net effect of an increase in international revenue and total sales of consumable supplies at our ChemFree subsidiary which was offset in part by a decline in domestic sales of ChemFree’s SmartWasher^® parts washer machines. In addition, software license revenue associated with the Information Technology segment declined in the three and six month periods ended June 30, 2011 compared to the same periods in 2010 due to fewer new contracts completed with lower total value in 2011 than in the corresponding periods last year. 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, thus delaying license revenue recognition.

• Service revenue associated with the Information Technology segment was $512,000 and $1,024,000 in the three and six months ended June 30, 2011, respectively, compared to $844,000 and $1,193,000 in the respective periods in 2010. Service revenue includes three components: revenue from annual maintenance and support contracts for our installed customer base, revenue from professional services (such as software customizations or modifications) and revenue from our card processing services. The change in the quarter and year-to-date periods in 2011 compared to the same periods in 2010 is attributed to the net effect of an increase in the installed base of customers that pay for maintenance and technical support and card processing services, offset by fewer professional services projects that were completed for CoreCard customers. The number and timing of professional services contracts vary significantly from period to period based on customer requirements and priorities.

Cost of Revenue — Total cost of revenue was 50 percent and 51 percent of total revenue in the three and six month periods ended June 30, 2011, respectively, compared to 55 percent and 53 percent of total revenue in the three and six month periods ended June 30, 2010, respectively. The changes between periods reflect changes in ChemFree’s and CoreCard’s product and service mix from period to period.

• Cost of product revenue was 48 percent and 49 percent of product revenue in the three and six months ended June 30, 2011, respectively, compared to costs of 57 percent and 54 percent of product revenue in the respective periods in 2010. In 2011, the lower cost of sales as a percent of revenue reflects a favorable mix at ChemFree of higher margin consumable products in 2011 as well as some unit cost reductions from bringing its filter production in-house in 2011. In addition, CoreCard’s costs associated with the software contracts recognized in 2011 were lower than the costs associated with contracts recognized in 2010, because they involved less complex implementations and were not fixed price contracts, as was the case in 2010.

• Cost of service revenue (which relates to our CoreCard business only) was 67 percent and 61 percent of service revenue in the three and six month periods ended June 30, 2011, respectively, as compared to 46 percent and 47 percent of service revenue in the respective periods last year. The mix of service revenue in a given period, as well as the number of customers and new products being supported, impacts the gross margin on service revenue. Cost of service revenue includes three components: the costs to provide annual maintenance and support services to our installed base of licensed customers, costs to provide professional services and costs to provide our card processing services. The cost and gross margins on professional services revenue are tied to specific projects and vary depending on the specific project requirements and complexity as well as the mix of our U.S. and offshore employees working on the project. Our initial costs to provide card processing services is high relative to the revenue earned because we are putting in place the systems and processes necessary to support this new service initiative. We had no such costs in the second quarter and year-to-date periods in 2010 because we were not yet offering card processing services. CoreCard is providing a high level of support to its customers for both maintenance and professional services activities to ensure it builds a solid base of reference customers and puts in place an infrastructure for future growth.

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Operating Expenses — In the three and six month periods ended June 30, 2011, total consolidated operating expenses were higher by 10 percent and 15 percent, respectively, than in the corresponding periods in 2010. Consolidated marketing expenses were relatively unchanged in the three and six month periods ended June 30, 2011 compared to the same periods in 2010. Consolidated general and administrative expenses were lower by 11 percent ($77,000) in the three month period ended June 30, 2011 reflecting lower legal, bonus and accounting fees than in the same period of 2010. General and administrative expenses were 8 percent ($115,000) higher in the six month period ended June 30, 2011, compared to the same period of 2010, reflecting mainly higher legal, stock option and salary expenses. Consolidated research and development expenses were 48 percent and 47 percent higher in the three and six month periods ended June 30, 2011, respectively, compared to the same periods in 2010, due to a lower percentage of personnel related R&D expenses charged to cost of sales for revenue recognized in 2011, as well as an increase in the number of employees and compensation rates at the company’s India based software development and testing operations.

Interest Income, net — We recorded net interest income of $6,000 and $17,000,in the three and six month periods ended June 30, 2011, respectively, compared to net interest income of $17,000 and $44,000 in the three and six month periods ended June 30, 2010. The difference between periods reflects primarily the fact that our total note receivable related to the sale of our former VISaer subsidiary was lower in 2011 than in 2010 due to a write down of the carrying balance of the note receivable in the quarter ended December 31, 2010, as explained in more detail in Note 2 to the Consolidated Financial Statements contained in our 2010 Annual Report on Form 10-K.

Equity in Income (Loss) of Affiliate Company — On a quarterly basis, we recognize our pro rata share of the earnings or losses of an affiliate company that we record on the equity method. We recorded $11,000 and $20,000 in net equity income of our affiliate company in the three and six month periods ended June 30, 2011, respectively, compared to net equity losses of $10,000 and $22,000 in the three and six months ended June 30, 2010, respectively. The change between periods reflects improved profitability of the affiliate company in 2011.

Other Income — As explained in more detail in Note 2 to the Consolidated Financial Statements, the second quarter and year-to-date results for 2011 include income of $450,000 earned by our ChemFree subsidiary upon the settlement of a legal matter.

Income Taxes — We recorded $27,000 and $48,000, in the three and six month periods ended June 30, 2011, respectively, for state income tax expense, which amounts include $26,000 in connection with uncertain tax positions. An expense of $56,000 was recorded in the quarter ended June 30, 2010 in connection with uncertain tax positions.

Liquidity and Capital Resources

Our cash balance at June 30, 2011 was $3.2 million compared to $2.9 million at December 31, 2010. During the six months ended June 30, 2011, principal sources of cash include receipt of a $600,000 payment from the purchaser of our former VISaer subsidiary (as explained in more detail in Note 2 to the Consolidated Financial Statements contained in our 2010 Annual Report on Form 10-K) as well as receipt of a $450,000 payment related to the Settlement Agreement (as explained in more detail in Note 2 to the Consolidated Financial Statements contained herein). Major working capital changes included:

• an increase in accounts receivable of $714,000 due to the timing of contract milestone billings as well as a change in payment terms for a large customer

• an increase of $95,000 in inventory due mainly to higher levels of certain materials that had been backlogged at the end of December 2010

• a net increase in deferred revenue of $227,000 reflecting billings to CoreCard customers in advance of revenue recognition

• an increase in accounts payable reflecting timing and level of inventory purchases

During the first six months of 2011, we used $361,000 cash to invest in capital equipment mainly to upgrade CoreCard’s data centers and India office for its new processing services, software testing automation initiatives and additional off-shore employees as well as vehicle and production equipment purchases at ChemFree.

We currently project that we will have sufficient liquidity from cash on hand, continued cash positive operations at ChemFree, projected customer payments at CoreCard and periodic working capital borrowings, if needed, to support our operations and capital equipment purchases in the foreseeable future. We renewed our line of credit in June 2011 with a maximum principal availability of $1.25 million based on qualified receivables and inventory levels which we will use as necessary to support short-term cash needs. We have not borrowed under the line of credit since its renewal. We presently project that we will have sufficient accounts receivable, inventory balances and tangible net worth for the foreseeable future to support the borrowing base and loan covenants for any required draws under our bank line of credit. The line of credit expires June 30, 2012, subject to the bank renewing the line for an additional period. If the bank does not renew our line of credit and if we have cash requirements, we may experience a short-term cash shortfall. Delays in meeting project milestones or software delivery commitments at CoreCard could cause customers to postpone payments and increase our need for cash. Presently, we do not believe there is a material risk that we will not perform successfully on any 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 presently planned.

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Long-term, 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 there are no current plans to do so. Furthermore, the timing and amount of any such transactions are uncertain and, to the extent they involve non-consolidated companies, generally not within our control.

Off-Balance Sheet Arrangements

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.

Critical Accounting Policies and Estimates

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 intangibles and impairment of long-lived assets, and valuation of investments to be critical policies due to the estimation processes involved in each. Management discusses its estimates and judgments with the Audit Committee of the Board of Directors. For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Reference is also made to the discussion of the application of these critical accounting policies and estimates contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for 2010. During the three and six month periods ended June 30, 2011, there were no significant or material changes in the application of critical accounting policies that would require an update to the information provided in the Form 10-K.

Factors That May Affect Future Operations

Future operations in both the Information Technology Products and Services 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 certainty. Any trend or delay that affects even one of our subsidiaries could have a negative impact on the company’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-controlling shareholder in a private company with limited liquidity.

Among the numerous factors that may affect our consolidated results of operations or financial condition are the following:

• Further weakness in the global financial markets could have a negative impact on CoreCard due to potential customers (most of whom are financial institutions or services firms) delaying software purchase or implementation decisions.

• Stricter regulations and reluctance by financial institutions to act as sponsor banks for prospective customers (such as issuers and processors of credit and prepaid cards) could increase CoreCard’s losses and cash requirements.

• Delays in software development projects could cause our customers to delay implementations or payments, which would increase our costs and reduce our revenue.

• Our CoreCard subsidiary could fail to deliver software products which meet the business and technology requirements of its target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model.

• As an alternative to licensing its software, CoreCard is now offering outsourced processing services running on the CoreCard software system. There are numerous risks associated with entering any new line of business and if CoreCard fails to manage the risks associated with its processing operations, it could have a negative impact on our business.

• One of ChemFree’s customers represented 30 percent of our consolidated revenue in the first half of 2011 and any unplanned changes in the volume of orders or timeliness of payments from such customer could potentially have a negative impact on inventory levels and cash, at least in the near-term.

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• It is unclear whether the activity in the ChemFree legal action described in Note 8 to the Consolidated Financial Statements will have any impact on our ChemFree subsidiary in the foreseeable future but if the finding of invalidity of certain of ChemFree’s patents is sustained by the Appeals court, it could result in increased competition in the marketplace and greater price pressure and lower margins, thus potentially impacting revenue, profits and projected cash flows. In addition, it is possible that a negative ruling could affect management’s estimate of future cash flows related to the affected patents. This could result in a write down of some or all of the unamortized carrying value of the ChemFree patents, which was $155,000 (for all ChemFree patents) as of June 30, 2011.

• Delays in production or shortages of any sole-sourced parts for our ChemFree products could impact revenue and orders.

• Anticipated increases in prices of raw materials and sub-assemblies could reduce ChemFree’s gross profit if it is not able to offset such increased costs with higher selling prices for its products or other reductions in production costs.

• Software errors or poor quality control may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition.

• Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or increased losses).

• Increasing and changing government regulations in the United States and foreign countries related to such issues as data privacy, financial and credit transactions could require changes to our products and services which could increase our costs and could affect our existing customer relationships or prevent us from getting new customers.

• CoreCard could fail to expand its base of customers as quickly as anticipated, resulting in lower revenue and profits (or increased losses) and increased cash needs.

• In certain situations, ChemFree’s lease customers are permitted to terminate the lease covering a SmartWasher^® machine, requiring the unamortized balance of the original machine cost to be written off which could reduce profits in that reporting period and result in lower revenue in future periods.

• CoreCard could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products, or fail 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.

• Delays in anticipated customer payments for any reason would increase our cash requirements and possibly our losses.

• Declines in performance, financial condition or valuation of minority-owned companies 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.

• Failure to meet the continued listing standards of NYSE Amex could result in delisting of our common stock, with a potentially negative impact on the market price and liquidity of our common stock.

• Our future capital needs are uncertain and depend on a number of factors; additional capital may not be available on acceptable terms, if at all.

• Other general economic and political conditions could cause customers to delay or cancel software purchases.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective. There were no significant changes in the company’s internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

As previously reported in Part 1, Item 3 of our 2010 Annual Report on Form 10-K, our ChemFree subsidiary is a party to an action it brought against J. Walter Co. Ltd. and J. Walter, Inc. in the United States District Court for the Northern District of Georgia. The complaint alleged that certain of the defendants’ products infringed four U.S. patents held by ChemFree and sought a ruling to compel the defendants to cease their infringing activities. The defendants asserted various defenses. The trial took place during the week of July 13, 2009. On June 18, 2010, the judge issued his Findings of Fact and Conclusions of Law which found (i) that certain of J. Walter’s products did infringe on ChemFree’s four patents-in-suit; (ii) in ChemFree’s favor on the issue of the patents’ named co-inventors and (iii) in J. Walter’s favor on the issue of invalidity of the four patents-in-suit for “obviousness”. In his ruling on invalidity of four of ChemFree’s patents due to obviousness, the judge relied heavily on a 2007 U.S. Supreme Court ruling (issued more than three years after ChemFree’s lawsuit was filed) which modified the manner for determining obviousness of a patent by replacing the long-standing rigid application of the “teaching, suggestion or motivation test” for determining obviousness with an “expansive and flexible approach”. ChemFree filed a Motion for Reconsideration of the judge’s findings and conclusions followed by the filing of a Second Motion for Additional Findings and Conclusions. In October 2010, the judge hearing the case was arrested on criminal charges by the FBI, subsequently resigned and ChemFree’s case was reassigned to a new judge. On June 6, 2011, the new judge issued a final ruling in J. Walter’s favor upholding the invalidity finding of the first judge and awarding recovery of allowable taxable costs from ChemFree. On July 1, 2011, ChemFree appealed the ruling to the United States Court of Appeals for the Federal Court. ChemFree also filed a motion to disallow the clerk’s recovery of allowable taxable costs. While the company presently believes it will prevail in the appeal, there can be no certainty that the Court of Appeals will find in its favor. If ChemFree does not prevail in the appeal, there is at least a reasonable possibility that ChemFree would incur some expenses for certain allowable taxable costs (which do not include attorney fees) in an amount to be determined by the court at the time.

As previously reported in our Form 10-Q for the period ended March 31, 2011, in September 2007 ChemFree sought sanctions against the defendants J. Walter and the law firm then representing the defendants for asserting certain frivolous defenses and counterclaims. In June 2008, the court imposed sanctions on the law firm, which no longer represents the defendants, and ChemFree submitted an application to the court seeking an award of attorneys fees associated with defending the frivolous claims. The court found in ChemFree’s favor and awarded sanctions against the former law firm. On May 3, 2011, ChemFree entered into a Settlement Agreement with the defendants’ former attorneys whereby they agreed to pay $450,000 to ChemFree in settlement of ChemFree’s claim. The Settlement Agreement was approved by the court on May 6, 2011 and payment of the $450,000 was received by ChemFree on May 9, 2011.

In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.

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Item 6. Exhibits

The following exhibits are filed or furnished with this report:

3.1	Amended and Restated Articles of Incorporation of the Registrant dated May 4, 2011 (Incorporated by reference to Exhibit 3.(1) to the Registrant’s Form 10-Q for the period ended March 31, 2011)
3.2	Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K dated December 7, 2007.)
10.1	Tenth Modification to Loan Documents by and among Intelligent Systems Corporation and Fidelity Bank dated June 30, 2011, filed herein.
10.2	Settlement Agreement executed May 3, 2011, filed herein.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer furnished as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101	XBRL Instance Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	INTELLIGENT SYSTEMS CORPORATION Registrant
Date: August 15, 2011	By:	/s/ J. Leland Strange
		J. Leland Strange
		Chief Executive Officer, President
Date: August 15, 2011	By:	/s/ Bonnie L. Herron
		Bonnie L. Herron
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit
No.		Descriptions
	3.1	Amended and Restated Articles of Incorporation of the Registrant dated May 4, 2011 (Incorporated by reference to Exhibit 3.(1) to the Registrant’s Form 10-Q for the period ended March 31, 2011)
	3.2	Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K dated December 7, 2007.)
	10.1	Tenth Modification to Loan Documents by and among Intelligent Systems Corporation and Fidelity Bank dated June 30, 2011, filed herein.
	10.2	Settlement Agreement executed May 3, 2011, filed herein.
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer and Chief Financial Officer furnished as required by Section 906 of the Sarbanes-Oxley Act of 2002.
	101	XBRL Instance Document

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EX-10.1

Exhibit 10.1

TENTH MODIFICATION TO LOAN DOCUMENTS

THIS TENTH MODIFICATION TO LOAN DOCUMENTS (herein the “Modification”) is made and entered into as of this 30th day of June, 2011, by and between Intelligent Systems Corporation, a Georgia corporation (herein the “Borrower”), Corecard Software, Inc., a Delaware corporation and Chemfree Corporation, a Georgia corporation (the aforesaid two corporations being individually and collectively referred to herein as the “Guarantors”), and Fidelity Bank, a Georgia state chartered bank (f/k/a Fidelity National Bank ) (herein the “Lender”).

RECITALS:

WHEREAS, on October 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 “Loan”) evidenced by that certain Commercial Promissory Note dated October 1, 2003 executed by Borrower in favor of Lender (herein the “Note”).

WHEREAS, the Loan and the Note are secured and evidenced by, among other instruments, the following:

(a)	Security Agreement from Borrower in favor of Lender dated of even date with the Note (herein the “Security Agreement”);
(b)	Loan Agreement by and between Borrower and Lender dated of even date with the Note (herein the “Loan Agreement”);
(c)	Financing Statement filed in Gwinnett County, Georgia records, File no. 067-2003-010805 (herein the “Borrower Financing Statement”).
(d)	Negative Pledge Agreement by and between Borrower and Lender dated of even date with the Note (herein the “Negative Pledge Agreement”);
(e)	Assignment of Policy as Collateral Security from Borrower in favor of Lender dated of even date with the Note (herein the “Life Insurance Assignment”); and
(f)	Subordination Agreements from Borrower and certain of the Guarantors in favor of Lender dated of even date with the Note (herein “Subordination Agreements”).

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 “Loan Documents”.

WHEREAS, on October 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 “Guaranties”);

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 1, 2003 (herein the “Guarantor Security Agreements”), which Guarantor Security Agreements are further evidenced by a Financing Statement filed in Gwinnett County, Georgia Records File No. 067-2003-010805 and that certain Financing Statement filed with the Delaware Department of State under Filing No. 20032749870 (herein collectively the “Guarantor Financing Statements”) (the Guaranties, the Guarantor Security Agreements and the Guarantor Financing Statements are herein collectively referred to herein as the “Guaranty Documents”);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain First Modification of Loan Documents dated as of September 1, 2004 for the purpose of extending the Maturity Date of the Loan on the Note from September 1, 2004 to September 1, 2005 (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid First Modification of Loan Documents);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Second Modification of Loan Documents dated as of September 1, 2005 for the purpose of extending the Maturity Date of the Loan on the Note from September 1, 2005 to September 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);

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 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);

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 1, 2006 to December 1, 2006, and Borrower, Guarantors and Lender entered into that certain Fourth Modification of Loan Documents dated on or about August 9, 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);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Fifth Modification of Loan Documents dated as of December 1, 2006 for the purpose of extending the Maturity Date of the Loan on the Note from December 1, 2006 to December 1, 2007 (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid Fifth Modification of Loan Documents);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Sixth Modification of Loan Documents dated as of December 1, 2007 for the purpose of extending the Maturity Date of the Loan on the Note from December 1, 2007 to December 1, 2008 (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid Sixth Modification of Loan Documents);

WHEREAS, Lender filed (i) a continuation statement in the UCC Records of Gwinnett County, Georgia under File No. 067-2008-003877 on April 15, 2008, which continuation statement continued in full force and effect both the Financing Statement and the Guarantor Financing Statement of record naming Borrower, QS Technologies, Inc. and Chemfree Corporation as debtors, and (ii) a continuation statement in the UCC Records of the Secretary of State of Delaware under File No. 20081731866 on May 20, 2008, which continuation statement continued in full force and effect both the Guarantor Financing Statement of record Visaer, Inc. and Corecard Software, Inc. as debtors.

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Seventh Modification of Loan Documents dated as of December 1, 2008 for the purpose of extending the Maturity Date of the Loan on the Note from December 1, 2008 to June 30, 2009 (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid Seventh Modification of Loan Documents);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Eight Modification of Loan Documents dated as of June 26, 2009 for the purpose of extending the Maturity Date of the Loan on the Note from June 30, 2009 to June 30, 2010 and to provide for certain other modifications with respect to the Loan (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid Eight Modification of Loan Documents);

WHEREAS, Lender, Borrower and the Guarantors entered into that certain Ninth Modification of Loan Documents dated as of June 28, 2010 for the purpose of extending the Maturity Date of the Loan on the Note from June 30, 2010 to June 30, 2011 and to provide for certain other modifications with respect to the Loan (all references to the Loan, Note, Loan Documents and Guaranty shall be as amended by the aforesaid Ninth Modification of Loan Documents);

WHEREAS, Borrower has requested and Lender has agreed to further extend the maturity date of the Loan and Note from June 30, 2011 to June 30, 2012, 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.

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:

1. Recitals. The foregoing recitals are true and correct and are incorporated herein by this reference.

2.	Capitalized Terms. All capitalized terms contained in this Modification shall have the same meaning afforded to them in the Note, Loan Documents and Guaranty Documents.
3.	Specific Modifications to Documents.

a.	The Note, each of the Loan Documents and each of the Guaranty Documents are hereby modified to reflect that the maximum availability under the terms of the Loan shall be equal to $1,250,000.
b.	The Maturity Date of the Loan and the Note is hereby extended from June 30, 2011 to June 30, 2012, and Section 11.1 of the Loan Agreement is hereby modified to provide that the date set forth in the third line of such Section 11.1 shall hereafter read “June 29, 2012”.
c.	The Note is hereby modified to provide that interest shall continue to accrue thereunder at the greater of (i) the “prime rate” of Lender (as defined on the face of the Note) plus one and one half percent (1.5%) per annum, or (ii) six and one half percent (6.5%), and shall be adjusted daily with changes in the prime rate during the term of the Note in the event the prime rate of Lender shall be greater than five percent (5.0%).
d.	In connection with the execution of this Modification, Borrower shall pay to Lender a loan extension fee in the amount of $6,250.00.
e.	Section 7.11 of the Loan Agreement (which was added to the Loan Agreement pursuant to the Eighth Modification of Loan Documents referenced in the recitals hereinabove) is hereby modified to provide that the Borrower shall maintain a minimum Tangible Net Worth of $4,200,000 as of the end of each calendar quarter ending on September 30, 2011 and December 31, 2011, and a minimum Tangible Net Worth of $4,800,000 as of the end of each calendar quarter during the remaining term of the Loan.

4. No Impairment. 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 or the priority of any lien evidenced by the Note, the Loan Documents or the Guaranty Documents, except as modified hereby.

5. No Defenses. 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.

6. Ratification. 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 Borrower and Guarantors hereby specifically acknowledge and consent to the extension of the Maturity Date from June 30, 2011 to June 30, 2012, as well as the release by Lender of QS Technologies, Inc. and Newvisco, Inc. (as successor to Visaer, Inc.) as guarantors under the Loan.

7. No Novation. 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.

8. Effect of Modification. 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.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
(SIGNATURE PAGE TO TENTH MODIFICATION TO LOAN DOCUMENTS TO FOLLOW)

IN WITNESS WHEREOF, Borrower, Guarantors and Lender have set their hands and seals to this Tenth Modification as of the day and year first above-written.

BORROWER:
INTELLIGENT SYSTEMS CORPORATION,
a Georgia corporation
By:	/s/ J. Leland Strange
Title:	President/CEO
Attest:	/s/ Bonnie L. Herron
Title:	Secretary
	[CORPORATE SEAL]
GUARANTORS:
CORECARD SOFTWARE, INC.,
a Delaware corporation
By:	/s/ J. Leland Strange
Title:	President/CEO
Attest:	/s/ Bonnie L. Herron
Title:	Secretary
	[CORPORATE SEAL]
CHEMFREE CORPORATION,
a Georgia corporation
By:	/s/ Bonnie L. Herron
Title:	Secretary/CFO
Attest:	/s/ J. Leland Strange
Title:	Director
	[CORPORATE SEAL]
LENDER:
FIDELITY BANK,
a Georgia state chartered bank
(f/k/a Fidelity National Bank)
By:	/s/ Raymond Zavacki
Title:	Vice President
	(BANK SEAL)

EX-10.2

Exhibit 10.2

SETTLEMENT AGREEMENT

This Settlement Agreement is entered into as of April 5, 2011, between, on the one hand, ChemFree Corporation, a corporation organized and existing under the laws of the State of Georgia, (“ChemFree”), and, on the other hand, McKenna Long & Aldridge LLP, (“MLA”), a limited liability partnership organized and existing under the laws of the District of Columbia (Washington, D.C.). ChemFree and MLA are referred to in this Settlement Agreement collectively as the “Parties” and individually as a “Party”.

WHEREAS, on or about December 20, 2004, ChemFree instituted a civil action in the United States District Court for the Northern District of Georgia against J. Walter Company, Ltd. and J. Walter, Inc. alleging infringement of various patents owned by ChemFree, said civil action being captioned ChemFree Corporation v. J. Walter, Inc. et al, Civil Action No. 04-cv-03711 (CRW) (hereinafter the “Civil Action;” the defendants J. Walter Company, Ltd. and J. Walter, Inc. shall hereinafter be referred to collectively as “Walter”);

WHEREAS, MLA entered an appearance as counsel on behalf of Walter in the Civil Action and, in the course of its representation of Walter, participated in the assertion of an affirmative defense and counterclaim alleging that ChemFree and/or its inventors and/or its patent prosecution counsel and/or its co-owner, ZYMO International, Inc., committed inequitable conduct before the United States Patent and Trademark Office in connection with prosecuting the patents-in-suit, including various parent, continuation, and/or divisional applications related to the patents-in-suit;

WHEREAS, on or about August 24, 2007, ChemFree served on MLA a proposed motion and brief under the 21 day “safe harbor” provision of Rule 11(c)(2) of the Federal Rules of Civil Procedure that proposed to seek sanctions against Walter for pursuing the inequitable conduct defense and counterclaim in the Civil Action;

WHEREAS, on or about September 21, 2007, ChemFree moved the Court to impose sanctions under Rule 11 of the Federal Rules of Civil Procedure against Walter for pursuing the inequitable conduct defense and counterclaim in the Civil Action (hereinafter the “Rule 11 Motion”);

WHEREAS, on or about December 28, 2007, ChemFree moved the Court to grant it partial summary judgment on the affirmative defense and counterclaim of inequitable conduct in the Civil Action;

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WHEREAS, on or about January 10, 2008, the law firm of King & Spalding LLP entered an appearance of counsel on behalf of the Defendants in the Civil Action;

WHEREAS, on or about March 5, 2008, MLA attorneys Bruce P. Brown, Gregory S. Brow, Audrey E. Klein, Shari Klevens, Adrian Mollo, Amir Rashid-Farokhi and Renzo Rocchegiani withdrew as counsel for Defendants in the Civil Action;

WHEREAS, on or about June 10, 2008, the Court entered an Order granting ChemFree’s motion for partial summary judgment on the inequitable conduct defense and counterclaim and granting-in-part and denying-in-part ChemFree’s motion for Rule 11 sanctions in connection with pursuit of the allegations of inequitable conduct set forth in Walter’s Amended Counterclaim in the Civil Action;

WHEREAS, the June 10, 2008, Order imposed Rule 11 sanctions only against MLA in its capacity as counsel for Walter, but did not impose sanctions against Walter, either separately or jointly and severally with MLA;

WHEREAS, on or about June 24, 2008, ChemFree submitted an application to the Court for attorney’s fees and costs associated with defending against the inequitable conduct allegations;

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WHEREAS, on or about July 24, 2008, MLA attorneys Matthew Bailey and Rel Ambrozy withdrew as counsel for Walter in the Civil Action;

WHEREAS, on or about July 28, 2008, MLA submitted a response in opposition to ChemFree’s application to the Court for attorney’s fees and costs;

WHEREAS, by reason of the June 24, 2008, and July 28, 2008, submissions, there is a dispute between ChemFree and MLA regarding the amount of Rule 11 sanctions that should be imposed under the June 10, 2008, Order;

WHEREAS, notwithstanding the grant of partial summary judgment on the inequitable conduct defense and counterclaim, Walter has continued to contest various other issues in the Civil Action subsequent to the withdrawal of MLA’s attorney and Walter has been represented by the law firm of King & Spalding LLP in connection with such other and ongoing litigation;

WHEREAS, from time to time during the Civil Action, ChemFree has alluded to the possibility of seeking an additional award of attorneys fees under applicable law including, without limitation, under the exceptional circumstances provision of 35 U.S.C. § 285;

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WHEREAS, on or about February 3, 2011, the Court in the Civil Action granted the joint request of ChemFree and MLA to delay a hearing on ChemFree’s fee application in order to pursue settlement of their dispute through mediation;

WHEREAS, the Parties desire to resolve the present dispute over ChemFree’s pending Rule 11 fee application without further time and expense of litigation or other legal action;

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, ChemFree and MLA agree as follows:

1. MONETARY CONSIDERATION (the “Settlement Payment”): MLA agrees to pay and ChemFree agrees to accept the sum of $450,000.00 (the “Settlement Payment”) in cash or other good funds within a reasonable period of time after execution of this Settlement Agreement and approval of the Settlement Agreement by the Court in the Civil Action;

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2. RELEASE OF MLA BY CHEMFREE. Upon receipt of the Settlement Payment in full, ChemFree and its officers, directors, members, trustees, employees, successors, assigns, insurers, agents and attorneys of each of them do hereby forever, fully and finally, release, acquit and discharge MLA and any current or former partners, employees, successors, insurers, assigns, agents and attorneys of each of them from and for liability arising from, related to, or in connection with: (i) the Rule 11 Motion; and (ii) any other claim for an award of attorney fees that ChemFree could have brought or could bring under applicable law including, without limitation, under 28 U.S.C. § 1927 and/or 35 U.S.C. § 285, based on allegations of litigation misconduct by MLA or Walter during the course of and in connection with MLA’s representation of Walter in the Civil Action.

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3. LIMITED RELEASE OF WALTER BY CHEMFREE. ChemFree hereby releases Walter and its officers, directors, members, trustees, employees, successors, assigns, and insurers, for any claim for an award of attorneys fees based on allegations of litigation misconduct whether under Rule 11 of Federal Rules of Civil Procedure, 28 U.S.C. § 1927, 35 U.S.C. § 285 or other applicable law. The release granted in this paragraph is limited in time to conduct, events and occurrences taking place on or before July 24, 2008, representing the date that MLA withdrew as counsel for Walter in the Civil Action. Otherwise, it is expressly understood and agreed that Walter is not a party to this Settlement Agreement, nor is Walter entitled to receive a copy of or otherwise review this Settlement Agreement except as otherwise provided in this agreement. The Parties agree that the sole purpose for affording the within limited release to Walter is to benefit MLA by reducing the likelihood that Walter will be able to bring a claim of contribution or indemnity against MLA subsequent to execution of this Settlement Agreement for alleged acts of litigation misconduct that may have occurred during the period of time that Walter was represented by MLA in the Civil Action;

4. LIMITATION ON SCOPE OF RELEASE. It is understood by and between ChemFree and MLA that the releases contemplated herein in favor of MLA and Walter shall be strictly limited to acts of misconduct in connection with the conduct of the litigation through the date of MLA’s withdrawal of representation set forth hereinabove. Otherwise, nothing in this Settlement Agreement shall be construed as limiting ChemFree’s right to seek and obtain an award of attorneys’ fees under applicable law including, without limitation, 35 U.S.C. § 285, based on a finding that Walter or its attorneys committed acts of litigation misconduct after the date of MLA’s withdrawal of representation;

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5. RESERVATION OF RIGHTS TO OBTAIN DAMAGES AND OTHER REMEDIES AGAINST WALTER FOR PATENT INFRINGEMENT. It is understood by and between ChemFree and MLA that the releases contemplated herein in favor of MLA and Walter shall be strictly limited to acts of “litigation misconduct,” i.e., misconduct in connection with the conduct of the litigation. Otherwise, it is understood that ChemFree does not release Walter, in any way, for liability for any causes of action, including acts of patent infringement as alleged in ChemFree’s pleadings in the Civil Action.

6. RESERVATION OF RIGHTS TO OBTAIN ATTORNEY FEE AWARD FOR WILLFUL INFRINGEMENT. Nothing in this Settlement Agreement shall be construed as limiting ChemFree’s right to seek and obtain an award of attorneys’ fees and expenses of litigation under applicable law including, without limitation, 35 U.S.C. § 285, based on a finding that Walter’s infringement of one or more of ChemFree’s patent claims has been “willful,” it being otherwise understood and agreed that “willful infringement” and “litigation misconduct” are two separate and distinct grounds for finding that a case is “exceptional” within the meaning of 35 U.S.C. § 285.

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7. LIMITED WAIVER OF APPEAL RIGHTS: MLA and ChemFree, respectively, each waive the right to seek an appeal of the June 10, 2008, Order including, without limitation, an appeal of the order granting partial summary judgment on the inequitable conduct defense and/or the order granting-in-part and denying-in-part ChemFree’s motion for Rule 11 sanctions. In addition, MLA and ChemFree, respectively, each agree not to seek reconsideration of such order before the District Court. However, nothing in this paragraph shall be construed as limiting ChemFree’s right to appeal or seek reconsideration of the District Court’s June 18, 2010 Order, maintaining that one or more of ChemFree’s patent claims is invalid as obvious under 35 U.S.C. § 103.

8. WAIVER OF RIGHT TO RECOUP SETTLEMENT PAYMENT IN THE EVENT OF APPEAL OR RECONSIDERATION INITIATED BY WALTER: In the event that Walter appeals or otherwise seeks review or reconsideration of the June 10, 2008, Order, and notwithstanding the outcome of any such appeal, review, and/or reconsideration, MLA agrees and understands that it will not be able to recoup or otherwise recover any of the Settlement Payment, it being the purpose of this Settlement Agreement to fully and finally fix the amount to be paid by MLA, which amount shall neither be increased nor diminished/refunded as a result of any further litigation in the case, whether before the District Court or any Court of Appeals.

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9. RELEASE OF CHEMFREE BY MLA: Upon payment of the Settlement Payment in full, MLA, and its partners, employees, successors, assigns, insurers, agents and attorneys of each of them do hereby forever, fully and finally, release, acquit and discharge ChemFree and its officers, directors, members, employees, successors, assigns, agents and attorneys of each of them from and for all manner of actions, causes of actions, civil actions, debts, dues, sums of money, covenants, contracts, controversies, agreements, promises, damages, judgments, executions, claims and demands whatsoever, which have accrued or which may hereafter accrue, known or unknown, expressed or implied, obligations, contracts, negotiations, representations, matters, events or occurrences, at law or in equity, arising from, related to, or in connection with the Civil Action, ChemFree’s patents asserted in the Civil Action, ChemFree’s efforts to enforce its patent rights against Walter, and/or ChemFree’s efforts to obtain an award of attorneys fees in the Civil Action.

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10. CONDITIONAL CONFIDENTIALITY: Within a reasonable time following execution of this Settlement Agreement, the Parties shall prepare and file with the Court a joint motion dismissing ChemFree’s pending application for attorneys’ fees in a form substantially identical to Exhibit “A” attached hereto, together with an accompanying, proposed Consent Order in a form substantially identical to Exhibit “B” attached hereto. Otherwise, the Parties expressly agree that the terms and conditions of this Settlement Agreement shall be kept confidential and shall not be disclosed, divulged or disseminated to any third persons or entities except as necessary for tax purposes or reporting required information to governmental agencies. Notwithstanding the foregoing, however, either of the parties shall be permitted to disclose the terms of this Settlement Agreement in the event that it becomes necessary for the Court to take the amount of the Settlement Payment or any other terms of this Settlement Agreement into account, for example, in connection with the calculation of any other and further attorney fee award that may be imposed or awarded in the Civil Action including, without limitation, in the event that the Court determines that Walter’s infringement is willful or that the litigation otherwise constitutes an “exceptional case” within the meaning of 35 U.S.C. § 285, or in the event that it is otherwise necessary to disclose the terms of this Settlement Agreement in order to enforce the terms of this Settlement Agreement. In addition, MLA shall be permitted to disclose the terms of this Settlement Agreement to the Court, any other court or tribunal and/or to Walter and its counsel in the event that Walter threatens or asserts a claim against MLA to which this Settlement Agreement is determined by MLA in good faith to be relevant.

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11. SEVERABILITY: In case any provision of this Settlement Agreement shall be held invalid, illegal, or unenforceable in whole or in part, neither the validity of the remaining part of such provision, nor the validity of any other provisions of this Settlement Agreement shall in any way be affected thereby.

12. ENTIRE AGREEMENT: This Settlement Agreement supersedes all prior agreements, discussions, and negotiations between ChemFree and MLA concerning all events and circumstances related to the Civil Action, oral or written, and constitutes the entire agreement between ChemFree and MLA concerning all events and circumstances related to the Civil Action, and all prior discussions and negotiations are merged herein.

13. MODIFICATION OR AMENDMENT MUST BE IN WRITING: This Settlement Agreement may not be amended, modified, changed, released, or discharged except by a writing signed by the duly authorized representatives of each of the Parties or their successors or assigns.

14. GOVERNING LAW AND CONSTRUCTION: This Settlement Agreement shall be governed and construed in accordance with the laws of the State of Georgia without regard to application of conflict of law provisions of the laws of said State.

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15. BINDING EFFECT OF AGREEMENT: This Settlement Agreement including every obligation, representation and warranty contained herein shall be binding upon and inure to the benefit of ChemFree and MLA and their respective past, present or future, direct or indirect, parent, subsidiary and affiliated entity of legal successors, agents, attorneys, insurers, employees, representatives, officers, directors, partners, shareholders, successors and assigns.

16. WARRANTY OF AUTHORITY TO MAKE THIS AGREEMENT: ChemFree and MLA represent and warrant to each other on behalf of themselves that all necessary corporate consents, if any, have been obtained and that the Parties are duly authorized to enter into and be bound by this Settlement Agreement, that the individuals signing this Settlement Agreement on their behalf are duly authorized to enter into and bind them to its terms and that by signing this Agreement the Parties are bound to the terms hereof. Each Party further represents and warrants that it has been represented by, or had the full opportunity to consult with, legal counsel with respect to the negotiation of this Settlement Agreement and that each has participated in the review and drafting of this Settlement Agreement such that no construction of the terms or effect of this Agreement shall be made against any Party on the basis of such Party’s capacity as principal drafter hereof. Each Party further represents and warrants that it has read this document and that the terms of the Settlement Agreement are fully understood and voluntarily accepted by it.

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17. COUNTERPARTS AND FACSIMILE COPY: This Settlement Agreement may be executed in several counterparts, so all taken together shall constitute one and the same instrument, including sending and signing this Agreement by telecopy. Each facsimile showing the signatures of all Parties shall be accepted as an original.

IN WITNESS WHEREOF, the Parties do hereby execute this Settlement Agreement by duly authorized officials as of April 5, 2011:

CHEMFREE CORPORATION		McKENNA LONG & ALDRIDGE, LLP
By:	/s/ Thomas W. McNally	By:	/s/ David L. Balser
	Thomas W. McNally		David L. Balser
	Vice-President &		Partner and
	General Manager		General Counsel
Witnessed by me this 2d day of May, 2011.		Witnessed by me this 3rd day of May, 2011.
/s/ Brenda W. Shelton		/s/ Susan J. Davis
Notary Public		Notary Public
My Commission Expires:		My Commission Expires:

- 14 -

EXHIBIT “A”

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

CHEMFREE CORPORATION,	)
	)
Plaintiff,	)
	)
v.	)	CIVIL ACTION NO:
	)	1: 04-CV-3711 (CRW)
J. WALTER, INC. and	)
J. WALTER COMPANY, LTD.,	)
	)
Defendants.	)
	)
***************************	)
	)
CHEMFREE CORPORATION,	) )
Applicant,	) )
v.	) )
McKENNA LONG & ALDRIDGE LLP,	)
	)
Respondent.	)

JOINT MOTION TO DISMISS FEE APPLICATION

NOW COME Applicant Plaintiff ChemFree Corporation (ChemFree) and Respondent McKenna Long & Aldridge LLP (“MLA”) and jointly move the Court to approve their confidential settlement agreement and, subject to and in connection therewith, jointly move the Court to dismiss Plaintiff’s Application for Attorneys’ Fees And Costs Pursuant to the Court’s June 5, 2008, Order Imposing Rule 11 Sanctions Against McKenna Long & Aldridge, filed under seal on or about June 24, 2008.

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ChemFree and MLA show the Court that, pursuant to the Court’s permission to engage in mediation, they mediated their dispute before a professional mediator during the period March 29, through April 5, 2011. As a result of such mediation, the parties report that they have reached a confidential settlement agreement resolving their dispute over the subject fee application thereby obviating the need for the Court to determine the amount of any such fee award.

ChemFree and MLA further represent to the Court that they have agreed to keep the terms of their settlement agreement confidential, except to the extent that it becomes necessary, at some later stage of this civil action, for the Court to take the terms of the settlement agreement into account in connection with making any other and further ruling in the case, such as, for example, in the event that the Court awards additional attorneys fees and costs to ChemFree under circumstances where the Walter defendants may be entitled to a credit against the amount of attorneys’ fees awarded by reason of any amounts paid by MLA to ChemFree under the subject settlement agreement, or to otherwise enforce the terms of the settlement agreement. In that regard, ChemFree and MLA are amenable to allowing the Court to view their confidential settlement agreement in camera if the Court deems such to be necessary in connection with approving the settlement and dismissing the pending fee application.

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A proposed Consent Order granting the within joint motion is attached hereto for the consideration of the Court.

WHEREFORE, ChemFree and MLA jointly pray that the Court will consider and grant their motion.

Respectfully submitted, this  _____^th day of May, 2011.

DUANE MORRIS LLP	McKENNA LONG & ALDRIDGE LLP
/s/ William A. Capp	/s/
William A. Capp	[signed w/expressed permission by WAC]
Georgia Bar No. 108823	David L. Balser
bcapp@duanemorris.com	Georgia Bar No. 035835
	dbalser@mckennalong.com
Atlantic Center Plaza
1180 West Peachtree Street NW	303 Peachtree Street
Suite 700	Suite 5300
Atlanta, Georgia 30309-3448	Atlanta, GA 30308
Attorneys for Plaintiff
ChemFree Corporation

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EXHIBIT “B”

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

CHEMFREE CORPORATION,	)
	)
Plaintiff,	)
	)
v.	)	CIVIL ACTION NO:
	)	1: 04-CV-3711 (CRW)
J. WALTER, INC. and	)
J. WALTER COMPANY, LTD.,	)
	)
Defendants.	)
	)
***************************	)
	)
CHEMFREE CORPORATION,	)
	)
Applicant,	) )
v.	)
	)
McKENNA LONG & ALDRIDGE LLP,	)
	)
Respondent.	)

CONSENT ORDER DISMISSING FEE APPLICATION

This matter is before the Court on Plaintiff’s Application for Attorneys’ Fees And Costs Pursuant to the Court’s June 5, 2008, Order Imposing Rule 11 Sanctions Against McKenna Long & Aldridge, filed under seal on or about June 24, 2008 (hereinafter “ChemFree’s Fee Application”), and a joint motion by Plaintiff/Applicant ChemFree Corporation (“ChemFree”) and Respondent McKenna Long & Aldridge LLP (“MLA”) to dismiss ChemFree’s Fee Application subject to approval of their settlement agreement.

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ChemFree and MLA have represented to the Court that they have reached a confidential settlement agreement resolving their dispute over the subject fee application thereby obviating the need for the Court to determine the amount of any such fee award.

ChemFree and MLA have further represented to the Court that they have agreed to keep the terms of their settlement agreement confidential, except to the extent that it becomes necessary for the Court to take the terms of the settlement agreement into account in connection with making any other and further ruling in the case, such as, for example, in the event that the Court awards additional attorneys fees and costs to ChemFree and against the Walter defendants under circumstances where the Walter defendants may be entitled to a credit toward the amount of attorneys’ fees owed by reason of any amounts paid to ChemFree by MLA under the subject settlement agreement.

It appearing to the Court that the parties have consented hereto and it further appearing that the relief requested by the parties is otherwise just and equitable under the circumstances, it is hereby

ORDERED AS FOLLOWS:

(1) In lieu of ruling on ChemFree’s Fee Application, the Court approves the settlement agreement between ChemFree and MLA;

(2) ChemFree’s Fee Application is hereby dismissed subject to the other terms and conditions of this order;

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(3) The Court will conditionally approve of ChemFree and MLA’s joint request to maintain the terms of their settlement agreement confidential, except that, in the event the Court deems it necessary to take the terms of such settlement agreement into consideration in connection with deciding any other matter in this case or otherwise enforcing the provisions of the settlement agreement, the parties shall promptly comply with any further Order of the Court to disclose the terms of the settlement agreement to the Court and/or either of the Walter defendants, as may be later determined by the Court; and

(4) The Court will retain jurisdiction as necessary to enforce the terms of the settlement agreement.

SO ORDERED, this  _____^th day of May, 2011.

	CHARLES R. WOLLE
	UNITED STATES DISTRICT COURT
CONSENTED TO:	CONSENTED TO:
DUANE MORRIS LLP	McKENNA LONG & ALDRIDGE LLP
/s/ William A. Capp	/s/
William A. Capp	[signed w/expressed permission by WAC]
Georgia Bar No. 108823	David L. Balser
bcapp@duanemorris.com	Georgia Bar No. 035835
	dbalser@mckennalong.com
Atlantic Center Plaza
1180 West Peachtree Street NW	303 Peachtree Street
Suite 700	Suite 5300
Atlanta, Georgia 30309-3448	Atlanta, GA 30308
Attorneys for Plaintiff
ChemFree Corporation

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, J. Leland Strange, certify that:

1. I have reviewed this report on Form 10-Q of Intelligent Systems Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) 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 report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’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

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) 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’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2011

/s/ J. Leland Strange  

J. Leland Strange 

Chief Executive Officer and President 

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Bonnie L. Herron, certify that:

1. I have reviewed this report on Form 10-Q of Intelligent Systems Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	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 report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’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
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) 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’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2011

/s/ Bonnie L. Herron  

Bonnie L. Herron 

Chief Financial Officer 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned officers of Intelligent Systems Corporation (the “Company”) hereby certifies to his or her knowledge that the Company’s report on Form 10-Q for the period ended June 30, 2011 (the “Report”), 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.

Date: August 15, 2011	/s/ J. Leland Strange
	J. Leland Strange
	Chief Executive Officer
	/s/ Bonnie L. Herron
	Bonnie L. Herron
	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Intelligent Systems Corporation and will be retained by Intelligent Systems Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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Consolidated Balance Sheets (Parentheticals) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Common stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	8,958,028	8,958,028
Common stock, shares outstanding	8,958,028	8,958,028

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Consolidated Statements of Operations (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Revenue
Products	$ 3,645	$ 3,764	$ 6,677	$ 7,111
Services	512	844	1,024	1,194
Total net revenue	4,157	4,608	7,701	8,305
Cost of revenue
Products	1,737	2,159	3,285	3,868
Services	341	387	620	560
Total cost of revenue	2,078	2,546	3,905	4,428
Expenses
Marketing	565	553	1,085	1,119
General and administrative	595	672	1,513	1,397
Research and development	730	492	1,368	929
Income (loss) from operations	189	345	(170)	432
Other income (expense)
Interest income, net	6	17	17	44
Equity in income (loss) of affiliate company	11	(10)	20	(22)
Other income, net	458	7	464	13
Income before income taxes	664	359	331	467
Income taxes	27	61	48	84
Net income	$ 637	$ 298	$ 283	$ 383
Income per share:
Basic (in Dollars per share)	$ 0.07	$ 0.03	$ 0.03	$ 0.04
Diluted (in Dollars per share)	$ 0.07	$ 0.03	$ 0.03	$ 0.04
Basic weighted average common shares outstanding (in Shares)	8,958,028	8,958,028	8,958,028	8,958,028
Diluted weighted average common shares outstanding (in Shares)	8,968,253	8,962,735	8,958,069	8,962,493

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Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Jul. 31, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	INTELLIGENT SYSTEMS CORP
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		8,958,028
Amendment Flag	false
Entity Central Index Key	0000320340
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Note 7 - Short-term Borrowings

6 Months Ended

Jun. 30, 2011

Short-term Debt [Text Block]

7. Short-term Borrowings – On June 30, 2011, we renewed our working capital line of credit with our bank.  The revolving line of credit bears interest at the higher of the prime rate plus one and one half percent and 6.5% (6.5% at June 30, 2011); is secured by all assets of the company and our principal subsidiaries; is guaranteed by our subsidiaries; and expires June 30, 2012. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 50 percent of inventory, up to a maximum of $1,250,000.  At June 30, 2011, our borrowing base calculation resulted in availability of $1,250,000, of which we had drawn down $0.  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 our bank in each case.  Furthermore, the terms of the loan include a covenant requiring the company to maintain a minimum tangible net worth as defined in the loan agreement at the end of each calendar quarter during the loan term.  As of June 30, 2011, we were in compliance with the loan covenants.

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Note 12 - Subsequent Event

6 Months Ended

Jun. 30, 2011

Subsequent Events [Text Block]

12. Subsequent Events – We evaluated subsequent events through the date when these financial statements were issued.  We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.

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Note 3 - Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income (Loss) Note [Text Block]

3. Comprehensive Income – Comprehensive income is the total of net income and all other non-owner changes in equity in a period.  A summary follows:

Consolidated Statements of Comprehensive Income	Three Months Ended June 30,				Six Months Ended June 30,
(unaudited, in thousands)	2011		2010		2011		2010
Net income	$	637	$	298	$	283	$	383
Other comprehensive income:
Foreign currency translation adjustment		3		4		6		20
Comprehensive income	$	640	$	302	$	289	$	403

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Note 9 - Industry Segments

6 Months Ended

Jun. 30, 2011

Segment Reporting Disclosure [Text Block]

9. Industry Segments – Segment information is presented consistent with the basis described in our 2010 Form 10-K.The following table contains segment information for continuing operations for the three and six months ended June 30, 2011 and 2010.

	Three Months Ended June 30,						Six Months Ended June 30,
(unaudited, in thousands)	2011			2010			2011			2010
Information Technology
Revenue	$	991		$	1,376		$	1,541		$	1,938
Operating loss		(291	)		(41	)		(844	)		(318	)
Industrial Products
Revenue		3,166			3,232			6,160			6,367
Operating income		687			641			1,269			1,311
Consolidated Segments
Revenue		4,157			4,608			7,701			8,305
Operating income		396			600			425			993
Corporate expenses		(207	)		(255	)		(595	)		(561	)
Consolidated operating income ( loss)	$	189		$	345		$	(170	)	$	432
Depreciation and Amortization
Information Technology	$	34		$	1		$	74		$	24
Industrial Products		82			100			100			202
Consolidated segments		116			101			174			226
Corporate		3			4			6			8
Consolidated depreciation and amortization	$	119		$	105		$	180		$	234
Capital Expenditures
Information Technology	$	35		$	59		$	161		$	158
Industrial Products		136			36			199			67
Consolidated segments		171			95			360			225
Corporate		--			--			1			1
Consolidated capital expenditures	$	171		$	95		$	361		$	226

(unaudited, in thousands)	June 30, 2011		December 31, 2010
Identifiable Assets
Information Technology	$	2,468	$	2,618
Industrial Products		7,022		6,016
Consolidated segments		9,490		8,634
Corporate		1,381		1,457
Consolidated assets	$	10,871	$	10,091

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Note 10 - Income Taxes

6 Months Ended

Jun. 30, 2011

Income Tax Disclosure [Text Block]

10. Income Taxes – We have recognized tax benefits from all tax positions taken, and there has been no adjustment to any carry forwards, net operating loss or R&D credits in the past two years.  As of June 30, 2011, the company has recorded a liability of $122,228 in connection with unrecognized tax benefits related to uncertain tax positions.  The liability includes $19,711 of interest and penalties.  As of December 31, 2010, the company has recorded a liability of $90,000 in connection with unrecognized tax benefits, which included $15,000 of interest and penalties.  As of June 30, 2011, management expects some incremental but not significant changes in the balance of unrecognized tax benefits over the next twelve months.

Our policy is to recognize accrued interest related to uncertain tax positions in interest expense and related penalties, if applicable, in general and administrative expense.  During the three and six months ended June 30, 2011, we recognized $5,007 in interest expense and $61 in penalties related to uncertain tax positions.  During the three and six months ended June 30, 2010, we recognized $4,113 in interest expense and $4,509 in penalties related to the uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership exceeds 80 percent, as well as individual subsidiary returns in various states and foreign jurisdictions. For periods prior to April 15, 2008, our VISaer subsidiary filed a separate U.S. federal income tax return.  With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for years before 2006.

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Note 8 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Legal Matters and Contingencies [Text Block]

8. Commitments and Contingencies –Please refer to Note 7 in the Consolidated Financial Statements included in our 2010 Form 10-K for a description of our commitments and contingencies in addition to those disclosed here.

Legal Matters – ChemFree Patent Matter – As explained in detail in Part II, Item 1 of this report, our ChemFree subsidiary has been involved since 2004 in a legal matter related to a patent infringement action brought against J. Walter Co. Ltd. and J. Walter, Inc. (“J. Walter”) in the United States Court for the Northern District of Georgia.  The complaint alleged that certain of the defendants’ products infringed four U.S. patents held by ChemFree and sought a ruling to compel the defendants to cease their infringing activities. On June 18, 2010, the judge issued his Findings of Fact and Conclusions of Law which found (i) that certain of J. Walter’s products did infringe on ChemFree’s four patents-in-suit; (ii) in ChemFree’s favor on the issue of the patents’ named co-inventors and (iii) in J. Walter’s favor on the issue of invalidity of the four patents-in-suit for “obviousness”. ChemFree filed a Motion for Reconsideration of the judge’s findings and conclusions. In October 2010, the judge hearing the case was arrested on criminal charges by the FBI, subsequently resigned and ChemFree’s case was reassigned to a new judge.  On June 6, 2011, the new judge issued a final ruling in J. Walter’s favor upholding the invalidity finding of the first judge and awarding recovery of allowable taxable costs from ChemFree. On July 1, 2011, ChemFree appealed the ruling to the United States Court of Appeals for the Federal Court. ChemFree also filed a motion to disallow the clerk’s award for the recovery of allowable taxable costs. While the company presently believes it will prevail in its appeal, there can be no certainty that the Court of Appeals will find in its favor. If ChemFree does not prevail in the appeal, there is at least a reasonable possibility that ChemFree would incur some expenses for certain allowable taxable costs (which do not include attorney fees) in an amount to be determined by the court at the time.

In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.

Except as noted above, other commitments and contingencies described in Note 7 to our Consolidated Financial Statements included in our 2010 Form 10-K are unchanged.

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Note 1

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries.  The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements.  Accordingly, they do not include all of the information and notes required for complete financial statements.  In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and six month periods ended June 30, 2011 and 2010.  The interim results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.  These statements should be read in conjunction with our Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2010, as filed in our Annual Report on Form 10-K.

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Note 4 - Stock-based Compensation

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

4. Stock-based Compensation – At June 30, 2011, we had two stock–based compensation plans in effect. We record compensation cost related to unvested stock option awards by recognizing the unamortized grant date fair value 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 is recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements.  We recorded $8,500 and $2,000 of stock-based compensation expense in the three months ended June 30, 2011 and 2010, respectively and $17,000 and $5,000 for the six month periods ended June 30, 2011 and 2010, respectively. The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2010 Form 10-K.

As of June 30, 2011, there is $112,000 of unrecognized compensation cost related to stock options. During the quarter ended June 30, 2011, an aggregate of 12,000 options were granted to the three independent members of our board of directors pursuant to the 2011 Non-Employee Director Stock Option Plan (Director Plan).  Pursuant to the terms of the Director Plan, the options were granted at fair market value on the date of the Annual Shareholders meeting.  In addition, during the six month period ended June 30, 2011, an aggregate of 80,000 options were granted on March 1, 2011 at fair market value under the terms of the 2003 Employee Stock Option Plan.  No options were exercised or expired during the three and six month periods ended June 30, 2011.

The following table summarizes stock options as of June 30, 2011:

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at June 30, 2011		286,000	$	1.99		5.3	$	9,840
Vested and exercisable at June 30, 2011		188,000	$	2.14		3.0	$	8,880

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the second quarter of 2011 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 June 30, 2011.  The amount of aggregate intrinsic value will change based on the fair market value of the company’s stock.

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Note 5 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Text Block]

5. Fair Value of Financial Instruments -The carrying value of cash, accounts 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 non-interest bearing notes receivable beyond one year have been discounted at a rate of 4% which approximates rates 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 due to the fact that the investee companies are relatively small, early stage private companies for which there is no comparable valuation data available without unreasonable time and expense.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, trade accounts and note receivable.  Our available cash is held in accounts managed by third-party financial institutions.  Cash may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

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Note 6 - Concentration of Revenue

6 Months Ended

Jun. 30, 2011

Concentration Risk Disclosure [Text Block]

6. Concentration of Revenue–The following table indicates the percentage of consolidated revenue represented by each customer for any period in which such customer represented more than 10% of consolidated revenue.

	Three Months Ended June 30,						Six Months Ended June 30,
(unaudited)	2011			2010			2011			2010
ChemFree Customer A		27	%		28	%		30	%		31	%
ChemFree Customer B		13	%		13	%		12	%		13	%
CoreCard Customer C		12	%		--			--			--
CoreCard Customer D		--			11	%		--			--

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Consolidated Statements of Cash Flows (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
OPERATIONS:
Net income	$ 283	$ 383
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization	180	234
Stock-based compensation expense	17	5
Non-cash interest income, net	(8)	(36)
Equity in (income) loss of affiliate company	(20)	22
Changes in operating assets and liabilities
Accounts receivable	(714)	(700)
Inventories	(95)	192
Other current assets	(113)	219
Accounts payable	167	48
Deferred revenue	227	(635)
Accrued payroll	(90)	10
Accrued expenses and other liabilities	181	182
Net cash provided by (used for) operating activities	15	(76)
INVESTING ACTIVITIES:
Proceeds from note and interest receivable	600	2
Purchases of property and equipment	(361)	(226)
Net cash provided by (used for) investing activities	239	(224)
FINANCING ACTIVITIES:
Payments on notes payable		(116)
Net cash used for financing activities		(116)
Effects of exchange rate changes on cash	(6)	21
Net increase (decrease) in cash	248	(395)
Cash at beginning of period	2,942	2,795
Cash at end of period	3,190	2,400
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest		3
Cash paid during the period for income taxes	$ 19	$ 25

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Note 2 - Other Income from Settlement Agreement

6 Months Ended

Jun. 30, 2011

Other Income and Other Expense Disclosure [Text Block]

2. Other Income from Settlement Agreement - As described in more detail in Part II Other Information, Item 1 Legal Proceedings of this report, our ChemFree subsidiary is a party to an action it brought against J. Walter Co. Ltd. and J. Walter, Inc. in the United States District Court for the Northern District of Georgia. In 2007, ChemFree sought sanctions against J. Walter and the law firm then representing the defendants for asserting a frivolous defense and counterclaim.  On May 3, 2011, ChemFree entered into a Settlement Agreement with the defendants’ former attorneys whereby they agreed to pay $450,000 in settlement of ChemFree’s claim. The Settlement Agreement was approved by the court on May 6, 2011and the payment of $450,000 was received by ChemFree on May 9, 2011.  Accordingly, the company recorded $450,000 of income in the quarter ended June 30, 2011, which is reported in the category Other Income in the Consolidated Statements of Operations.

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Note 11 - Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Description of New Accounting Pronouncements Not yet Adopted [Text Block]

11. Recent Accounting Pronouncements – We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our Consolidated Financial Statements.

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Consolidated Balance Sheets (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash	$ 3,190	$ 2,942
Accounts receivable, net	2,941	2,227
Note and interest receivable, current portion	245	600
Inventories, net	928	833
Other current assets	517	404
Total current assets	7,821	7,006
Investments	1,306	1,286
Note and interest receivable, net of current portion	236	473
Property and equipment, at cost less accumulated depreciation	1,353	1,149
Patents, net	155	177
Total assets	10,871	10,091
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	490	322
Deferred revenue, current portion	1,901	1,604
Accrued payroll	460	550
Accrued expenses	782	640
Other current liabilities	277	307
Total current liabilities	3,910	3,423
Deferred revenue, net of current portion	60	70
Other long-term liabilities	146	137
Commitments and contingencies (Note 8)
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 shares issued and outstanding at June 30, 2011 and December 31, 2010	90	90
Additional paid-in capital	21,435	21,418
Accumulated other comprehensive income (loss)	(3)	3
Accumulated deficit	(16,283)	(16,566)
Total Intelligent Systems Corporation stockholders’ equity	5,239	4,945
Non-controlling interest	1,516	1,516
Total stockholders’ equity	6,755	6,461
Total liabilities and stockholders’ equity	$ 10,871	$ 10,091