10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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

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 R  No £

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 R  No £

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 (Do not check if a smaller reporting company)	Smaller reporting company	þ

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

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

As of October 31, 2012, 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 September 30, 2012 and December 31, 2011 (restated)	3
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011 (restated)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	5
	Notes to Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4	Controls and Procedures	15
Part II	Other Information
Item 1	Legal Proceedings	16
Item 6	Exhibits	16
Signatures		17

Ex. 31.1	Section 302 Certification of Chief Executive Officer
Ex. 31.2	Section 302 Certification of Chief Financial Officer
Ex. 32.1	Section 906 Certification of Chief Executive Officer and Chief Financial Officer
Ex.101.INS**	XBRL Instance
Ex.101.SCH**	XBRL Taxonomy Extension Schema
Ex.101.CAL**	XBRL Taxonomy Extension Calculation
Ex 101.DEF**	XBRL Taxonomy Extension Definitions
Ex.101.LAB**	XBRL Taxonomy Extension Labels
Ex.101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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Part I     FINANCIAL INFORMATION

Item 1.  Financial Statements

Intelligent Systems Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	September 30, 2012			December 31, 2011
	(unaudited)			(restated, unaudited)
ASSETS
Current assets:
Cash	$	2,028		$	3,152
Marketable securities		269			209
Accounts receivable, net		2,822			2,504
Note and interest receivable, current portion		247			249
Inventories, net		1,046			824
Other current assets		382			284
Total current assets		6,794			7,222
Investments		1,572			1,288
Note and interest receivable, net of current portion		--			240
Property and equipment, at cost less accumulated depreciation		1,161			1,222
Patents, net		98			133
Total assets	$	9,625		$	10,105
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	387		$	463
Deferred revenue, current portion		950			907
Accrued payroll		437			460
Accrued expenses		729			669
Other current liabilities		267			369
Total current liabilities		2,770			2,868
Deferred revenue, net of current portion		53			50
Other long-term liabilities		134			140
Commitments and contingencies (Note 9)
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 issued and outstanding at September 30, 2012 and December 31, 2011		90			90
Additional paid-in capital		21,520			21,461
Accumulated other comprehensive loss		(85	)		(111	)
Accumulated deficit		(14,065	)		(14,290	)
Total Intelligent Systems Corporation stockholders’ equity		7,460			7,150
Non-controlling interest		(792	)		(103	)
Total stockholders’ equity		6,668			7,047
Total liabilities and stockholders’ equity	$	9,625		$	10,105

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 Sept. 30,						Nine Months Ended Sept. 30,
	2012			2011 (restated)			2012			2011 (restated)
Revenue
Products	$	3,104		$	4,055		$	9,879		$	10,733
Services		971			875			2,322			1,898
Total net revenue		4,075			4,930			12,201			12,631
Cost of revenue
Products		1,538			1,761			4,984			5,047
Services		689			501			1,779			1,120
Total cost of revenue		2,227			2,262			6,763			6,167
Expenses
Marketing		592			536			1,771			1,621
General and administrative		660			731			2,281			2,244
Research and development		550			649			1,831			2,017
Income (loss) from operations		46			752			(445	)		582
Other income (expense)
Interest income, net		4			8			8			25
Equity in income (loss) of affiliate company		(5	)		(17	)		(16	)		3
Other income, net		12			8			37			472
Income (loss) before income taxes		57			751			(416	)		1,082
Income taxes		--			51			48			99
Net income (loss)		57			700			(464	)		983
Net (income) loss attributable to noncontrolling interest	$	173		$	(133	)	$	689		$	175
Net income attributable to Intelligent Systems Corporation	$	230		$	567		$	225		$	1,158
Income per share based on income attributable to Intelligent Systems Corporation:
Basic	$	0.03		$	0.06		$	0.03		$	0.13
Diluted	$	0.03		$	0.06		$	0.03		$	0.13
Basic weighted average common shares outstanding		8,958,028			8,958,028			8,958,028			8,958,028
Diluted weighted average common shares outstanding		8,968,174			8,967,912			8,967,936			8,968,017

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended Sept. 30,					Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012		2011			2012			2011
Net income (loss)	$	57	$	700		$	(464	)	$	983
Other comprehensive income (loss):
Foreign currency translation adjustment		26		(41	)		7			(43	)
Unrealized gain (loss) on available for sale marketable securities		11		(21	)		19			(21	)
Comprehensive income (loss)	$	94	$	638		$	(438	)	$	919

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)

	Nine Months Ended Sept. 30,
	2012			2011
OPERATIONS:
Net income (loss)	$	(464	)	$	983
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization		373			278
Stock-based compensation expense		59			27
Non-cash interest income, net		(8	)		(12	)
Equity in (income) loss of affiliate company		16			(3	)
Changes in operating assets and liabilities
Accounts receivable		(318	)		(584	)
Inventories		(222	)		(161	)
Other current assets		(98	)		63
Accounts payable		(76	)		76
Deferred revenue		43			(846	)
Accrued payroll		(23	)		(160	)
Accrued expenses		60			81
Other current liabilities		(102	)		(31	)
Other liabilities		(3	)		64
Net cash used for operating activities		(763	)		(225	)
INVESTING ACTIVITIES:
Purchase of marketable securities		(41	)		(222	)
Proceeds from note and interest receivable		250			600
Purchases of property and equipment		(277	)		(382	)
Long-term investment		(300	)		--
Net cash used for investing activities		(368	)		(4	)
Effects of exchange rate changes on cash		7			(46	)
Net decrease in cash		(1,124	)		(275	)
Cash at beginning of period		3,152			2,942
Cash at end of period	$	2,028		$	2,667
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$	15		$	70

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.  As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Commission.  The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 31, 2011, consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

2.     Option Agreement – As disclosed in Note 17 to our 2011 Annual Report Form 10-K, on March 20, 2012, Intelligent Systems Corporation entered into an Option Agreement (the “Option Agreement”) with Central National Bank, a national banking association (“CNB”). The Option Agreement grants to CNB the option to acquire from ISC the number of shares of stock in the company’s CoreCard Software subsidiary equal to five percent (5%) of ISC’s equity ownership in CoreCard. Currently, ISC owns approximately 96 percent of the equity of CoreCard. The number of shares covered by the option may be increased, up to ten percent (10%), based on achievement of certain volumes of prepaid cards issued by CNB and processed by CoreCard, as defined in the Option Agreement. The option has an exercise price of one million dollars, expires on December 31, 2017 and can be exercised at any time before it expires. Further, at any time between September 30, 2014 and June 30, 2017, subject to certain earlier termination provisions, CNB may elect to require ISC to repurchase the option at a purchase price equal to the fair market value of the option less one million dollars. We entered into the Option Agreement in recognition of CNB’s ongoing cooperation and contribution to building CoreCard’s card processing business.  During the nine month period ended September 30, 2012, we recorded an expense of $18,000 in the marketing category and have recorded a long-term liability of $18,000 at September 30, 2012, to recognize the financial impact of the Option Agreement.

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

Consolidated Statements of Comprehensive Income	Three Months Ended Sept. 30,					Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012		2011			2012			2011
Net income (loss)	$	57	$	700		$	(464	)	$	983
Other comprehensive income (loss):
Foreign currency translation adjustment		26		(41	)		7			(43	)
Unrealized gain (loss) on available for sale marketable securities		11		(21	)		19			(21	)
Comprehensive income (loss)	$	94	$	638		$	(438	)	$	919

4.     Stock-based Compensation – At September 30, 2012, 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 $20,000 and $10,000 of stock-based compensation expense in the three months ended September 30, 2012 and 2011, respectively and $59,000 and $27,000 for the nine months ended September 30, 2012 and 2011, respectively. The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2011 Form 10-K.

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As of September 30, 2012, there is $134,000 of unrecognized compensation cost related to stock options. During the nine month period ended September 30, 2012, an aggregate of 17,000 options were granted on May 24, 2012 to four independent members of our board pursuant to the 2011 Non-Employee Director Stock Option Plan.  All options were granted at fair market value on the date of grant.  No options were exercised during the three and nine month periods ended September 30, 2012.  A total of 14,000 unexercised options expired during the nine month period ended September 30, 2012.

The following table summarizes stock options as of September 30, 2012:

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2012		345,500	$	1.72		5.8	$	12,960
Vested at September 30, 2012		220,833	$	1.77		4.0	$	12,960

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 third quarter of 2012 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 September 30, 2012.  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, marketable securities, 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 the non-interest bearing note receivable approximates its fair value and has been discounted at a rate of 4% which approximates rates offered in the market for notes receivable with similar terms and conditions.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities, 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.     Fair Value Measurements - In determining fair value, the Company uses quoted market prices in active markets.  GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements.  GAAP emphasizes that fair value is a market-based measurement, not an entity specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.  Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability.  Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 

The hierarchy is measured in three levels based on the reliability of inputs:

• Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

• Level 2

Valuations based on quoted prices in less active, dealer or broker markets.  Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.

• Level 3

Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions.  Level 3 valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.

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In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Our available-for-sale investments are classified within level 1 of the valuation hierarchy.

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.

7.     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 Sept. 30,						Nine Months Ended Sept. 30,
(unaudited)	2012			2011			2012			2011
ChemFree Customer A		29.0	%		22.0	%		29.0	%		26.8	%
ChemFree Customer B		10.0	%		--			10.0	%		--
ChemFree Customer C		11.5	%		--			12.9	%		10.2	%
CoreCard Customer D		--			28.4	%		--			11.3	%

8.     Short-term Borrowings – On June 29, 2012, 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 (1.5%) and 6.0% (6.0% at September 30, 2012); is secured by all assets of the company and our principal subsidiaries; is guaranteed by our subsidiaries; and expires June 30, 2014. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 10 percent of inventory, up to a maximum of $1,250,000.  At September 30, 2012, our borrowing base calculation resulted in availability of the maximum 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 September 30, 2012, we were in compliance with the loan covenants.

9.     Commitment and Contingencies –

Leases – We renewed a noncancellable operating lease on May 25, 2012 for a three year term ending May 31, 2015. As of September 30, 2012, our future minimum lease payments are as follows:

Year ended December 31,
(in thousands)
2012 (October 1 through December 31, 2012)	$	116
2013		465
2014		465
2015		194
Total minimum lease payments	$	1,240

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The above future minimum lease payments are payable to a related party, as explained in Note 11 to the Consolidated Financial Statements contained in our 2011 Form 10-K.

Legal Matters – ChemFree Patent Matter – As reported in our 2011 Form 10-K, on March 12, 2012, the United States Court of Appeals issued its final ruling in the long-standing case brought by ChemFree on a patent infringement matter, affirming the invalidity findings of the lower court with respect to certain claims in four of ChemFree’s patents. As a result of the ruling, ChemFree incurred a liability for certain allowable taxable costs. Accordingly, the company accrued for the estimated amount of such costs and recorded an expense of $75,000 reflected in the category Other Income and a corresponding liability reflected in Other Current Liabilities in its 2011 Consolidated Financial Statements.  The total final amount of the liability for taxable costs was $76,000, which ChemFree paid in April 2012.

On September 29, 2011, ChemFree filed a second patent infringement action against J. Walter in the United States District Court for the Northern District of Georgia, alleging that certain of J. Walter’s products infringe a newly issued patent held by ChemFree. The complaint seeks a ruling to compel the defendant to cease its infringing activities. The discovery phase of the litigation is on hold while the parties attempt to settle the matter.  No resolution has been reached as of the date of this filing.

In the ordinary course of business, from time to time we may be 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.

10.   Industry Segments – Segment information is presented consistent with the basis described in our 2011 Form 10-K.The following table contains segment information for continuing operations for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012			2011			2012			2011
Information Technology
Revenue	$	1,001		$	2,131		$	2,412		$	3,673
Operating income (loss)		(352	)		484			(1,576	)		(361	)
Industrial Products
Revenue		3,074			2,799			9,789			8,958
Operating income		696			482			2,215			1,752
Consolidated Segments
Revenue		4,075			4,930			12,201			12,631
Operating income		344			966			639			1,391
Corporate expenses		(298	)		(214	)		(1,084	)		(809	)
Consolidated operating income (loss)	$	46		$	752		$	(445	)	$	582
Depreciation and Amortization
Information Technology	$	60		$	13		$	123		$	87
Industrial Products		78			83			241			181
Consolidated segments		138			96			364			268
Corporate		3			3			9			10
Consolidated depreciation and amortization	$	141		$	99		$	373		$	278
Capital Expenditures
Information Technology	$	73		$	(23	)	$	144		$	139
Industrial Products		88			44			129			243
Consolidated segments		161			21			273			381
Corporate		4			--			4			1
Consolidated capital expenditures	$	165		$	21		$	277		$	382

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(unaudited, in thousands)	September 30, 2012		December 31, 2011
Identifiable Assets
Information Technology	$	1,725	$	1,791
Industrial Products		5,927		6,654
Consolidated segments		7,652		8,445
Corporate		1,973		1,660
Consolidated assets	$	9,625	$	10,105

11.   Income Taxes – We have recognized tax benefits from all tax positions we have taken, and there has been no adjustment to any carry forwards (net operating loss or research and development credits) in the past two years.  As of September 30, 2012 and December 31, 2011, we have recorded a liability of $134,000 and $116,000, respectively, in connection with unrecognized tax benefits related to uncertain tax positions.  The liability includes $25,000 and $20,000 of interest and penalties, as of September 30, 2012 and December 31, 2011 respectively.  As of September 30, 2012, 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 nine months ended September 30, 2012, we recognized $2,000 in interest expense and $3,000 in penalties related to uncertain tax positions.  During the nine months ended September 30, 2011, we recognized $5,000 in interest expense and $0 in penalties related to uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80%, as well as individual subsidiary returns in various states and foreign jurisdictions. 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 2008.

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

13.   Restatement – On January 1, 2009, we adopted Financial Account Standards Board (“FASB”) authoritative guidance establishing accounting and reporting standards for Noncontrolling Interests in Consolidated Financial Statements.  The standard requires the recognition of a noncontrolling interest in a subsidiary as a component of equity in the consolidated financial statements, separate from the parent’s equity for all periods presented.  In addition, the standard requires the parent to attribute to the noncontrolling interest their share of net income and losses of the subsidiary and to disclose on the face of the consolidated income statement the amounts of net income and losses attributed to the noncontrolling interest.  The standard also requires the parent to attribute to the noncontrolling interest their share of losses even if such attribution results in a deficit noncontrolling interest balance within the parent’s equity accounts.  We recently determined that we have not been applying the guidance correctly in all respects because we have not been attributing to the noncontrolling interest (held by common shareholders of our CoreCord Software subsidiary) their share of the losses or income of the subsidiary and have not been disclosing such attributed amounts on the face of the consolidated statements of operations.  Accordingly, we have restated the consolidated statements of operations for the quarter and year-to-date periods ended September 30, 2011 and the stockholders’ equity section of the consolidated balance sheets as of December 31, 2011 to fully comply with the standard.  Below is a summary of the impact of the restatement.

· For the three month period ended September 30, 2011, we previously reported $700,000 of net income.  In restatement, we attributed $133,000 of income to the noncontrolling interest, resulting in net income attributable to Intelligent Systems Corporation of $567,000 ($0.06 per basic and diluted share) as restated.

· For the nine month period ended September 30, 2011, we previously reported $983,000 of net income.  In restatement, we attributed $175,000 of loss to the noncontrolling interest, resulting in net income attributable to Intelligent Systems Corporation of $1,158,000 ($0.13 per basic and diluted share) as restated.

· As of December 31, 2011, we previously reported Intelligent Systems Corporation stockholders’ equity of $5,531,000 and noncontrolling interest equity of $1,516,000.  In restatement, we reduced Intelligent Systems Corporation stockholders’ accumulated deficit by $1,619,000 (representing the accumulated losses attributed to the noncontrolling interest) and reduced the noncontrolling interest equity by the same amount.  After restatement, Intelligent Systems’ Corporation stockholders’ equity increased to $7,150,000 and the noncontrolling interest became a deficit of $103,000.  Total stockholders’ equity was unchanged at $7,047,000.

14.   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, 2011 as filed with the Securities and Exchange Commission.

We derive our product revenue from sales and leases of equipment and supplies in our Industrial Products sector and from sales of software licenses in our Information Technology Products and Services sector. Our service revenue consists of fees for consulting, customization, training, processing services, maintenance and support for software products in our Information Technology Products and Services 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 impact consolidated revenue or be offset by an opposing change at another subsidiary.

· Software license revenue in a given period may consist of a relatively small number of contracts and contract values can vary considerably depending on the software product and scope of the license sold. Consequently, even minor delays in delivery under a software contract (which may be out of our control) could have a significant and unpredictable impact on the consolidated revenue that we recognize in a given quarterly or annual period.

· Customers may decide to postpone a planned implementation of our software for any number of reasons, which may be unrelated to our software or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue.

We have frequently recognized consolidated operating losses on a quarterly and annual basis and are likely to do so in the future from time to time. Our ChemFree subsidiary generates an operating profit and positive cash flow on a quarterly and annual basis. Our CoreCard subsidiary is not consistently profitable, due in part to significant research and development expense that is invested in its product offerings and the deferral of initial contract revenue recognition until licensed software and associated services are delivered to its customers. Depending upon the size and number of software licenses recognized in a particular period and the level of expenses incurred to support existing customers and development and sales activities, CoreCard may report operating profits on an irregular basis as it builds a larger customer base. A significant portion of CoreCard’s expense is related to personnel, including a workforce of approximately 200 employees located in India. In addition, CoreCard is now offering processing services as an alternative for customers who prefer to outsource this function instead of licensing our software and running the application in-house. There are a number of uncertainties related to a new line of business. We are likely to incur losses in the near future for the processing business because contract revenue is spread out over multi-year contracts while we are currently investing in the infrastructure, resources and internal and compliance processes to support this new line of business. For these and other reasons, our operating results may vary from quarter to quarter and at the present time are generally not predictable with a reasonable degree of certainty.

From time to time, we derive income from sales of holdings in affiliate and other minority-owned companies or we may 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 the gain or loss recognized as a result of a sale or the amount of equity in the income or losses of the affiliate are not under our control and are not necessarily indicative of future results, either on a quarterly or annual basis.

In recent years, most of our cash has been generated by our ChemFree operations and, on an irregular basis, from sales of our investments or subsidiaries, and from a shareholder rights offering in mid-2009. We have used a significant amount of the cash received from these transactions and operations to support the domestic and international operations associated with our CoreCard subsidiary and the corporate office.

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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 September 30, 2012 was $4,075,000 compared to $4,930,000 in the third quarter of 2011.  For the nine month period ended September 30, 2012, total revenue was $12,201,000, compared to $12,631,000 in the same period in 2011.

· 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 $3,104,000 in the three month period ended September 30, 2012, a 23 percent decline compared to the three month period ended September 30, 2011. Product revenue was $9,879,000 in the nine month period ended September 30, 2012, an 8 percent decline compared to the nine month period ended September 30, 2011. In both the three and nine month periods ended September 30, 2012, our ChemFree subsidiary reported year-over-year growth in total product revenue of approximately 9 percent, led by increased domestic sales and lease volume of its SmartWasher® parts washer machines. ChemFree’s revenue from worldwide consumable supplies also experienced period-to-period growth in both the quarter and year-to-date periods of 2012.  However, software license revenue associated with our Information Technology segment declined in both the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 due to fewer new software license contracts completed in 2012 than in the corresponding periods last year.

· Service revenue associated with the Information Technology segment was $971,000 and $2,322,000 in the three and nine months ended September 30, 2012, respectively, an increase of 11 percent and 22 percent compared to the respective periods in 2011.  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 growth in the quarter and year-to-date periods in 2012 as compared to the same periods in 2011 is attributed to an increase in 2012 in the installed base of customers that pay for maintenance and technical support as well as card processing services and more 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 55 percent of total revenue in both the three and nine month periods ended September 30, 2012, respectively, compared to 46 percent and 49 percent of total revenue in the three and nine month periods ended September 30, 2011, respectively.  The changes between periods reflect variations in ChemFree’s and CoreCard’s product and service mix from period to period.

· Cost of product revenue was 50 percent of product revenue in both the three and nine months ended September 30, 2012, respectively, compared to costs of 43 percent and 47 percent of product revenue in the respective periods in 2011.  In 2012, the higher cost of sales as a percent of product revenue reflects the fact that CoreCard’s software license revenue (which has a lower cost of sales than ChemFree’s partswasher products) represented a smaller percentage of total product revenue in 2012 than in 2011.  ChemFree’s cost of sales as a percentage of its revenue was relatively consistent in 2012 and 2011 but the decline in software license revenue in the 2012 periods impacted the total product cost of sales percentage.

· Cost of service revenue (which relates to our CoreCard business only) was 71 percent and 77 percent of service revenue in the three and nine month periods ended September 30, 2012, respectively, as compared to 57 percent and 59 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 costs to provide card processing services are high in 2012 relative to the revenue earned because we are putting in place the systems and processes necessary to support this new service initiative. These costs were significantly higher in 2012 than in 2011. In 2012, CoreCard is also allocating additional resources for regulatory compliance and support to its processing and software license customers.

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Operating Expenses – Consolidated marketing expenses were higher by 10 percent ($56,000) and 9 percent ($150,000) in the three and nine month periods ended September 30, 2012 compared to the same periods in 2011, mainly due to increased sales commissions associated with growth in domestic sales of ChemFree’s Smartwasher® products as well as increases in personnel and consulting expenses. Consolidated general and administrative expenses were lower by 10 percent ($71,000) in the three month period ended September 30, 2012 compared to the respective period in 2011 due mainly to lower legal expenses related to the matters described in Part II, Item 1 of this Form 10-Q.  Consolidated research and development expenses were lower by 15 percent ($99,000) and 9 percent ($187,000) in the three and nine month periods ended September 30, 2012, respectively, compared to the same periods in 2011, due to a higher percentage of technical personnel expenses being charged to cost of services revenue for maintenance, processing and professional services in 2012.

Interest Income, net – We recorded net interest income of $4,000 and $8,000 in the three and nine month periods ended September 30, 2012, respectively, compared to net interest income of $8,000 and $25,000 in the three and nine month periods ended September 30, 2011, respectively. The difference between periods reflects primarily the fact that the note receivable related to the sale of our former VISaer subsidiary was lower in 2012 than in 2011 due to principal payments made in 2011 and 2012.

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 a net equity loss of $5,000 and $16,000 in the three and nine month periods ended September 30, 2012, respectively, compared to net equity loss of $17,000 and net equity income of $3,000 in the three and nine months ended September 30, 2011, respectively.  Changes between periods reflect variations in profitability of the affiliate company.

Other Income – As previously explained, the 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 $48,000, in the nine month period ended September 30, 2012, respectively, for state income tax expense, which amounts include $13,000 in connection with uncertain tax positions. In the comparable period in 2011, the nine month amount shown for income taxes includes $27,000 in connection with uncertain tax positions.

Liquidity and Capital Resources

Our cash balance at September 30, 2012 was $2,028,000 as compared to $3,152,000 at December 31, 2011. During the nine months ended September 30, 2012, sources of cash included receipt of a scheduled $250,000 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 2011 Annual Report on Form 10-K).  We used $763,000 cash for operations during the nine month period ended September 30, 2012.  Major working capital changes included:

· an increase in accounts receivable of $318,000 reflecting higher billings in the third quarter of 2012 as compared to the fourth quarter of 2011.

· an increase of $222,000 in inventory due mainly to building inventory to support ChemFree’s sales growth, estimated near-term demand and planned new product introductions.

· A reduction of $102,000 in other current liabilities, the majority of which is related to reductions in accrued legal and royalty expenses at the ChemFree subsidiary.

During the nine months ended September 30, 2012, we used $277,000 cash for fixed assets, reflecting an increase in ChemFree products that are leased to customers (the cost of such leased products is included in PP&E on our balance sheet), as well as purchases of computer and facility equipment at our operating companies. We also used $300,000 to acquire a minority ownership interest in an early stage technology company and $41,000 to purchase marketable securities.

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 or sale of marketable securities, if needed, to support our operations and capital equipment purchases in the foreseeable future. We renewed our line of credit in June 2012 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. The line of credit expires June 30, 2014, subject to the bank renewing the line for an additional period.  We have not drawn down under the bank line of credit in more than two years. 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..  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 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 intangibles and valuation of investments to be critical policies due to the estimation processes involved in each.  For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  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 2011.  During the three and nine month periods ended September 30, 2012, 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 perform some type of financial services) delaying purchase or software 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.

· As an alternative to licensing its software, CoreCard is now offering 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.

· CoreCard’s processing business is more regulated than is its licensed software business.  If the company fails to comply with applicable regulations and processing standards, it could be subject to financial or other penalties that could have a significant impact on its business.

· 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.

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· One of ChemFree’s customers represented 29% percent of our consolidated revenue in the three and nine month periods ended September 30, 2012 and any unplanned changes in the volume of orders or timeliness of payments from such customer could have a negative impact on revenue, inventory levels and cash, at least in the near-term.

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

· Increased 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. In 2011, the company raised prices on certain of its SmartWasher® products to offset cost increases but may not be able to do so in the future due to competitive pressure.

· 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 or service 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 to meet applicable compliance requirements, 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, which may require 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, which could negatively impact our earnings.

· 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

ChemFree Patent Matter – As reported in our 2011 Form 10-K, on March 12, 2012, the United States Court of Appeals issued its final ruling in the long-standing case brought by ChemFree on a patent infringement matter, affirming the invalidity findings of the lower court with respect to certain claims in four of ChemFree’s patents. As a result of the ruling, ChemFree incurred a liability for certain allowable taxable costs. Accordingly, the company accrued for the estimated amount of such costs and recorded an expense of $75,000 reflected in the category Other Income and a corresponding liability reflected in Other Current Liabilities in its 2011 Consolidated Financial Statements.  The total final amount of the liability for taxable costs was $76,000, which ChemFree paid in April 2012.

On September 29, 2011, ChemFree filed a second patent infringement action against J. Walter in the United States District Court for the Northern District of Georgia, alleging that certain of J. Walter’s products infringe a newly issued patent held by ChemFree. The complaint seeks a ruling to compel the defendant to cease its infringing activities. The discovery phase of the litigation is on hold while the parties attempt to settle the matter.  No resolution has been reached as of the date of this filing.

In the ordinary course of business, from time to time we may be 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.

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.)
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.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definitions
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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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:  November 14, 2012	By:	/s/ J. Leland Strange
	J. Leland Strange
	Chief Executive Officer, President

Date:  November 14, 2012	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.)
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.INS	**	XBRL Instance Document
101.SCH	**	XBRL Taxonomy Extension Schema
101.CAL	**	XBRL Taxonomy Extension Calculation
101.DEF	**	XBRL Taxonomy Extension Definitions
101.LAB	**	XBRL Taxonomy Extension Labels
101.PRE	**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Page 18

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; and

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: November 14, 2012

	/s/ J. Leland Strange
J. Leland Strange
Chief Executive Officer, 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; and

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: November 14, 2012

	/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 September 30, 2012 (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:  November 14, 2012		/s/ J. Leland Strange
	J. Leland Strange
	Chief Executive Officer, President

	/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.

XML

Note 11 - Income Taxes (Detail) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Unrecognized Tax Benefits	$ 134,000		$ 116,000
Unrecognized Tax Benefits, Income Tax Penalties and Interest Accrued	25,000		20,000
Unrecognized Tax Benefits, Interest on Income Taxes Expense	2,000	5,000
Unrecognized Tax Benefits, Income Tax Penalties Expense	$ 3,000	$ 0

XML

Note 7 - Concentration of Revenue (Detail) - Concentration of Revenue	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
ChemFree Customer A [Member]
Percentage of consolidated revenue	29.00%	22.00%	29.00%	26.80%
ChemFree Customer B [Member]
Percentage of consolidated revenue	10.00%		10.00%
ChemFree Customer C [Member]
Percentage of consolidated revenue	11.50%		12.90%	10.20%
CoreCard Customer D [Member]
Percentage of consolidated revenue		28.40%		11.30%

XML

Note 10 - Industry Segments (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012			2011			2012			2011
Information Technology
Revenue	$	1,001		$	2,131		$	2,412		$	3,673
Operating income (loss)		(352	)		484			(1,576	)		(361	)
Industrial Products
Revenue		3,074			2,799			9,789			8,958
Operating income		696			482			2,215			1,752
Consolidated Segments
Revenue		4,075			4,930			12,201			12,631
Operating income		344			966			639			1,391
Corporate expenses		(298	)		(214	)		(1,084	)		(809	)
Consolidated operating income (loss)	$	46		$	752		$	(445	)	$	582
Depreciation and Amortization
Information Technology	$	60		$	13		$	123		$	87
Industrial Products		78			83			241			181
Consolidated segments		138			96			364			268
Corporate		3			3			9			10
Consolidated depreciation and amortization	$	141		$	99		$	373		$	278
Capital Expenditures
Information Technology	$	73		$	(23	)	$	144		$	139
Industrial Products		88			44			129			243
Consolidated segments		161			21			273			381
Corporate		4			--			4			1
Consolidated capital expenditures	$	165		$	21		$	277		$	382

Reconciliation of Assets from Segment to Consolidated [Table Text Block]

(unaudited, in thousands)	September 30, 2012		December 31, 2011
Identifiable Assets
Information Technology	$	1,725	$	1,791
Industrial Products		5,927		6,654
Consolidated segments		7,652		8,445
Corporate		1,973		1,660
Consolidated assets	$	9,625	$	10,105

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Note 10 - Industry Segments (Detail) - Industry Segments - Operating Information (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenue	$ 4,075	$ 4,930	$ 12,201	$ 12,631
Operating income (loss)	46	752	(445)	582
Depreciation and amortization	141	99	373	278
Capital expenditures	165	21	277	382
Corporate expenses	660	731	2,281	2,244
Information Technology [Member]
Revenue	1,001	2,131	2,412	3,673
Operating income (loss)	(352)	484	(1,576)	(361)
Depreciation and amortization	60	13	123	87
Capital expenditures	73	(23)	144	139
Industrial Products [Member]
Revenue	3,074	2,799	9,789	8,958
Operating income (loss)	696	482	2,215	1,752
Depreciation and amortization	78	83	241	181
Capital expenditures	88	44	129	243
Operating Segments [Member]
Operating income (loss)	344	966	639	1,391
Depreciation and amortization	138	96	364	268
Capital expenditures	161	21	273	381
Corporate [Member]
Depreciation and amortization	3	3	9	10
Capital expenditures	4		4	1
Corporate expenses	$ (298)	$ (214)	$ (1,084)	$ (809)

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Note 3 - Comprehensive Income

9 Months Ended

Sep. 30, 2012

Comprehensive Income (Loss) Note [Text Block]

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

Consolidated Statements of Comprehensive Income	Three Months Ended Sept. 30,					Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012		2011			2012			2011
Net income (loss)	$	57	$	700		$	(464	)	$	983
Other comprehensive income (loss):
Foreign currency translation adjustment		26		(41	)		7			(43	)
Unrealized gain (loss) on available for sale marketable securities		11		(21	)		19			(21	)
Comprehensive income (loss)	$	94	$	638		$	(438	)	$	919

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Note 4 - Stock-based Compensation (Detail) - Stock Options (USD $)	9 Months Ended
	Sep. 30, 2012
Outstanding at September 30, 2012	345,500
Outstanding at September 30, 2012 (in Dollars per share)	$ 1.72
Outstanding at September 30, 2012	5 years 292 days
Outstanding at September 30, 2012 (in Dollars)	$ 12,960
Vested at September 30, 2012	220,833
Vested at September 30, 2012 (in Dollars per share)	$ 1.77
Vested at September 30, 2012	4 years
Vested at September 30, 2012 (in Dollars)	$ 12,960

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Note 4 - Stock-based Compensation (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Number of Stock-Based Compensation Plans in Effect	2		2
Share-based Compensation	$ 20,000	$ 10,000	$ 59,000	$ 27,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	$ 134,000		$ 134,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures (in Shares)	17,000
Number of Non-executive Directors	4		4
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period (in Shares)			14,000

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Note 5 - Fair Value of Financial Instruments (Detail)	Sep. 30, 2012
Discount Rate	4.00%

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Note 6 - Fair Value Measurements (Detail)	Sep. 30, 2012
Number of Levels in Fair Value Hierarchy	3

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Note 2 - Option Agreement

9 Months Ended

Sep. 30, 2012

Other Income and Other Expense Disclosure [Text Block]

2.     Option Agreement – As disclosed in Note 17 to our 2011 Annual Report Form 10-K, on March 20, 2012, Intelligent Systems Corporation entered into an Option Agreement (the “Option Agreement”) with Central National Bank, a national banking association (“CNB”). The Option Agreement grants to CNB the option to acquire from ISC the number of shares of stock in the company’s CoreCard Software subsidiary equal to five percent (5%) of ISC’s equity ownership in CoreCard. Currently, ISC owns approximately 96 percent of the equity of CoreCard. The number of shares covered by the option may be increased, up to ten percent (10%), based on achievement of certain volumes of prepaid cards issued by CNB and processed by CoreCard, as defined in the Option Agreement. The option has an exercise price of one million dollars, expires on December 31, 2017 and can be exercised at any time before it expires. Further, at any time between September 30, 2014 and June 30, 2017, subject to certain earlier termination provisions, CNB may elect to require ISC to repurchase the option at a purchase price equal to the fair market value of the option less one million dollars. We entered into the Option Agreement in recognition of CNB’s ongoing cooperation and contribution to building CoreCard’s card processing business.  During the nine month period ended September 30, 2012, we recorded an expense of $18,000 in the marketing category and have recorded a long-term liability of $18,000 at September 30, 2012, to recognize the financial impact of the Option Agreement.

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Note 7 - Concentration of Revenue (Detail) (Minimum for Disclosure [Member])	9 Months Ended
	Sep. 30, 2012
Minimum for Disclosure [Member]
Percentage of Consolidated Revenue	10.00%

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Note 13 - Restatement (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	$ 57,000	$ 700,000	$ (464,000)	$ 983,000
Net Income (Loss) Attributable to Noncontrolling Interest	(173,000)	133,000	(689,000)	(175,000)
Net Income (Loss) Attributable to Parent	230,000	567,000	225,000	1,158,000
Earnings Per Share, Basic and Diluted (in Dollars per share)		$ 0.06		$ 0.13
Stockholders' Equity Attributable to Parent	7,460,000		7,460,000		7,150,000
Stockholders' Equity Attributable to Noncontrolling Interest	(792,000)		(792,000)		(103,000)
Retained Earnings (Accumulated Deficit)	(14,065,000)		(14,065,000)		(14,290,000)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	6,668,000		6,668,000		7,047,000
Scenario, Previously Reported [Member]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest		700,000		983,000
Stockholders' Equity Attributable to Parent					5,531,000
Stockholders' Equity Attributable to Noncontrolling Interest					1,516,000
Restatement Adjustment [Member]
Retained Earnings (Accumulated Deficit)					$ 1,619,000

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Consolidated Balance Sheets (Current Period Unaudited) (Prior Period Restated) (USD $)	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash	$ 2,028,000	$ 3,152,000
Marketable securities	269,000	209,000
Accounts receivable, net	2,822,000	2,504,000
Note and interest receivable, current portion	247,000	249,000
Inventories, net	1,046,000	824,000
Other current assets	382,000	284,000
Total current assets	6,794,000	7,222,000
Investments	1,572,000	1,288,000
Note and interest receivable, net of current portion		240,000
Property and equipment, at cost less accumulated depreciation	1,161,000	1,222,000
Patents, net	98,000	133,000
Total assets	9,625,000	10,105,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	387,000	463,000
Deferred revenue, current portion	950,000	907,000
Accrued payroll	437,000	460,000
Accrued expenses	729,000	669,000
Other current liabilities	267,000	369,000
Total current liabilities	2,770,000	2,868,000
Deferred revenue, net of current portion	53,000	50,000
Other long-term liabilities	134,000	140,000
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 issued and outstanding at September 30, 2012 and December 31, 2011	90,000	90,000
Additional paid-in capital	21,520,000	21,461,000
Accumulated other comprehensive loss	(85,000)	(111,000)
Accumulated deficit	(14,065,000)	(14,290,000)
Total Intelligent Systems Corporation stockholders’ equity	7,460,000	7,150,000
Non-controlling interest	(792,000)	(103,000)
Total stockholders’ equity	6,668,000	7,047,000
Total liabilities and stockholders’ equity	$ 9,625,000	$ 10,105,000

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
OPERATIONS:
Net income (loss)	$ (464,000)	$ 983,000
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization	373,000	278,000
Stock-based compensation expense	59,000	27,000
Non-cash interest income, net	(8,000)	(12,000)
Equity in (income) loss of affiliate company	16,000	(3,000)
Changes in operating assets and liabilities
Accounts receivable	(318,000)	(584,000)
Inventories	(222,000)	(161,000)
Other current assets	(98,000)	63,000
Accounts payable	(76,000)	76,000
Deferred revenue	43,000	(846,000)
Accrued payroll	(23,000)	(160,000)
Accrued expenses	60,000	81,000
Other current liabilities	(102,000)	(31,000)
Other liabilities	(3,000)	64,000
Net cash used for operating activities	(763,000)	(225,000)
INVESTING ACTIVITIES:
Purchase of marketable securities	(41,000)	(222,000)
Proceeds from note and interest receivable	250,000	600,000
Purchases of property and equipment	(277,000)	(382,000)
Long-term investment	(300,000)
Net cash used for investing activities	(368,000)	(4,000)
Effects of exchange rate changes on cash	7,000	(46,000)
Net decrease in cash	(1,124,000)	(275,000)
Cash at beginning of period	3,152,000	2,942,000
Cash at end of period	2,028,000	2,667,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$ 15,000	$ 70,000

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Note 9 - Commitments and Contingencies (Detail) (USD $)	1 Months Ended
	Apr. 30, 2012	May 25, 2012	Dec. 31, 2011
Operating Lease, Term		3 years
Estimated Litigation Liability			$ 75,000
Payments for Legal Settlements	$ 76,000

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Note 4 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2012		345,500	$	1.72		5.8	$	12,960
Vested at September 30, 2012		220,833	$	1.77		4.0	$	12,960

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Note 9 - Commitments and Contingencies (Detail) - Future Minimum Annual Payments Under Operating Lease (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
2012 (October 1 through December 31, 2012)	$ 116
2013	465
2014	465
2015	194
Total minimum lease payments	$ 1,240

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Note 9 - Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Year ended December 31,
(in thousands)
2012 (October 1 through December 31, 2012)	$	116
2013		465
2014		465
2015		194
Total minimum lease payments	$	1,240

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Note 1

9 Months Ended

Sep. 30, 2012

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [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.  As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Commission.  The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The December 31, 2011, consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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Consolidated Balance Sheets (Current Period Unaudited) (Prior Period Restated) (Parentheticals) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Common stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in Shares)	20,000,000	20,000,000
Common stock, shares issued (in Shares)	8,958,028	8,958,028
Common stock, shares outstanding (in Shares)	8,958,028	8,958,028

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Note 11 - Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

11.   Income Taxes – We have recognized tax benefits from all tax positions we have taken, and there has been no adjustment to any carry forwards (net operating loss or research and development credits) in the past two years.  As of September 30, 2012 and December 31, 2011, we have recorded a liability of $134,000 and $116,000, respectively, in connection with unrecognized tax benefits related to uncertain tax positions.  The liability includes $25,000 and $20,000 of interest and penalties, as of September 30, 2012 and December 31, 2011 respectively.  As of September 30, 2012, 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 nine months ended September 30, 2012, we recognized $2,000 in interest expense and $3,000 in penalties related to uncertain tax positions.  During the nine months ended September 30, 2011, we recognized $5,000 in interest expense and $0 in penalties related to uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80%, as well as individual subsidiary returns in various states and foreign jurisdictions. 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 2008.

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Document And Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
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	Sep. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3

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Note 12 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

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

12.   Recent Accounting Pronouncements – We have considered all 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 Statements of Operations (Unaudited) (Prior Periods Restated) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenue
Products	$ 3,104,000	$ 4,055,000	$ 9,879,000	$ 10,733,000
Services	971,000	875,000	2,322,000	1,898,000
Total net revenue	4,075,000	4,930,000	12,201,000	12,631,000
Cost of revenue
Products	1,538,000	1,761,000	4,984,000	5,047,000
Services	689,000	501,000	1,779,000	1,120,000
Total cost of revenue	2,227,000	2,262,000	6,763,000	6,167,000
Expenses
Marketing	592,000	536,000	1,771,000	1,621,000
General and administrative	660,000	731,000	2,281,000	2,244,000
Research and development	550,000	649,000	1,831,000	2,017,000
Income (loss) from operations	46,000	752,000	(445,000)	582,000
Other income (expense)
Interest income, net	4,000	8,000	8,000	25,000
Equity in income (loss) of affiliate company	(5,000)	(17,000)	(16,000)	3,000
Other income, net	12,000	8,000	37,000	472,000
Income (loss) before income taxes	57,000	751,000	(416,000)	1,082,000
Income taxes		51,000	48,000	99,000
Net income (loss)	57,000	700,000	(464,000)	983,000
Net (income) loss attributable to noncontrolling interest	173,000	(133,000)	689,000	175,000
Net income attributable to Intelligent Systems Corporation	$ 230,000	$ 567,000	$ 225,000	$ 1,158,000
Income per share based on income attributable to Intelligent Systems Corporation:
Basic (in Dollars per share)	$ 0.03	$ 0.06	$ 0.03	$ 0.13
Diluted (in Dollars per share)	$ 0.03	$ 0.06	$ 0.03	$ 0.13
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)	8,968,174	8,967,912	8,967,936	8,968,017

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Note 6 - Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Text Block]

6.     Fair Value Measurements - In determining fair value, the Company uses quoted market prices in active markets.  GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements.  GAAP emphasizes that fair value is a market-based measurement, not an entity specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.  Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability.  Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 

The hierarchy is measured in three levels based on the reliability of inputs:

• Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

• Level 2

Valuations based on quoted prices in less active, dealer or broker markets.  Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.

• Level 3

Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions.  Level 3 valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Our available-for-sale investments are classified within level 1 of the valuation hierarchy.

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.

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Note 5 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value, Option [Text Block]

5.     Fair Value of Financial Instruments -The carrying value of cash, marketable securities, 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 the non-interest bearing note receivable approximates its fair value and has been discounted at a rate of 4% which approximates rates offered in the market for notes receivable with similar terms and conditions.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities, 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 7 - Concentration of Revenue (Tables)

9 Months Ended

Sep. 30, 2012

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
(unaudited)	2012			2011			2012			2011
ChemFree Customer A		29.0	%		22.0	%		29.0	%		26.8	%
ChemFree Customer B		10.0	%		--			10.0	%		--
ChemFree Customer C		11.5	%		--			12.9	%		10.2	%
CoreCard Customer D		--			28.4	%		--			11.3	%

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Note 13 - Restatement

9 Months Ended

Sep. 30, 2012

Restatement Disclosure [Text Block]

13.   Restatement – On January 1, 2009, we adopted Financial Account Standards Board (“FASB”) authoritative guidance establishing accounting and reporting standards for Noncontrolling Interests in Consolidated Financial Statements.  The standard requires the recognition of a noncontrolling interest in a subsidiary as a component of equity in the consolidated financial statements, separate from the parent’s equity for all periods presented.  In addition, the standard requires the parent to attribute to the noncontrolling interest their share of net income and losses of the subsidiary and to disclose on the face of the consolidated income statement the amounts of net income and losses attributed to the noncontrolling interest.  The standard also requires the parent to attribute to the noncontrolling interest their share of losses even if such attribution results in a deficit noncontrolling interest balance within the parent’s equity accounts.  We recently determined that we have not been applying the guidance correctly in all respects because we have not been attributing to the noncontrolling interest (held by common shareholders of our CoreCord Software subsidiary) their share of the losses or income of the subsidiary and have not been disclosing such attributed amounts on the face of the consolidated statements of operations.  Accordingly, we have restated the consolidated statements of operations for the quarter and year-to-date periods ended September 30, 2011 and the stockholders’ equity section of the consolidated balance sheets as of December 31, 2011 to fully comply with the standard.  Below is a summary of the impact of the restatement.

· For the three month period ended September 30, 2011, we previously reported $700,000 of net income.  In restatement, we attributed $133,000 of income to the noncontrolling interest, resulting in net income attributable to Intelligent Systems Corporation of $567,000 ($0.06 per basic and diluted share) as restated.

· For the nine month period ended September 30, 2011, we previously reported $983,000 of net income.  In restatement, we attributed $175,000 of loss to the noncontrolling interest, resulting in net income attributable to Intelligent Systems Corporation of $1,158,000 ($0.13 per basic and diluted share) as restated.

· As of December 31, 2011, we previously reported Intelligent Systems Corporation stockholders’ equity of $5,531,000 and noncontrolling interest equity of $1,516,000.  In restatement, we reduced Intelligent Systems Corporation stockholders’ accumulated deficit by $1,619,000 (representing the accumulated losses attributed to the noncontrolling interest) and reduced the noncontrolling interest equity by the same amount.  After restatement, Intelligent Systems’ Corporation stockholders’ equity increased to $7,150,000 and the noncontrolling interest became a deficit of $103,000.  Total stockholders’ equity was unchanged at $7,047,000.

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Note 9 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Legal Matters and Contingencies [Text Block]

9.     Commitment and Contingencies –

Leases – We renewed a noncancellable operating lease on May 25, 2012 for a three year term ending May 31, 2015. As of September 30, 2012, our future minimum lease payments are as follows:

Year ended December 31,
(in thousands)
2012 (October 1 through December 31, 2012)	$	116
2013		465
2014		465
2015		194
Total minimum lease payments	$	1,240

The above future minimum lease payments are payable to a related party, as explained in Note 11 to the Consolidated Financial Statements contained in our 2011 Form 10-K.

Legal Matters – ChemFree Patent Matter – As reported in our 2011 Form 10-K, on March 12, 2012, the United States Court of Appeals issued its final ruling in the long-standing case brought by ChemFree on a patent infringement matter, affirming the invalidity findings of the lower court with respect to certain claims in four of ChemFree’s patents. As a result of the ruling, ChemFree incurred a liability for certain allowable taxable costs. Accordingly, the company accrued for the estimated amount of such costs and recorded an expense of $75,000 reflected in the category Other Income and a corresponding liability reflected in Other Current Liabilities in its 2011 Consolidated Financial Statements.  The total final amount of the liability for taxable costs was $76,000, which ChemFree paid in April 2012.

On September 29, 2011, ChemFree filed a second patent infringement action against J. Walter in the United States District Court for the Northern District of Georgia, alleging that certain of J. Walter’s products infringe a newly issued patent held by ChemFree. The complaint seeks a ruling to compel the defendant to cease its infringing activities. The discovery phase of the litigation is on hold while the parties attempt to settle the matter.  No resolution has been reached as of the date of this filing.

In the ordinary course of business, from time to time we may be 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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Note 7 - Concentration of Revenue

9 Months Ended

Sep. 30, 2012

Concentration Risk Disclosure [Text Block]

7.     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 Sept. 30,						Nine Months Ended Sept. 30,
(unaudited)	2012			2011			2012			2011
ChemFree Customer A		29.0	%		22.0	%		29.0	%		26.8	%
ChemFree Customer B		10.0	%		--			10.0	%		--
ChemFree Customer C		11.5	%		--			12.9	%		10.2	%
CoreCard Customer D		--			28.4	%		--			11.3	%

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Note 8 - Short-term Borrowings

9 Months Ended

Sep. 30, 2012

Short-term Debt [Text Block]

8.     Short-term Borrowings – On June 29, 2012, 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 (1.5%) and 6.0% (6.0% at September 30, 2012); is secured by all assets of the company and our principal subsidiaries; is guaranteed by our subsidiaries; and expires June 30, 2014. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 10 percent of inventory, up to a maximum of $1,250,000.  At September 30, 2012, our borrowing base calculation resulted in availability of the maximum 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 September 30, 2012, we were in compliance with the loan covenants.

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Note 10 - Industry Segments

9 Months Ended

Sep. 30, 2012

Segment Reporting Disclosure [Text Block]

10.   Industry Segments – Segment information is presented consistent with the basis described in our 2011 Form 10-K.The following table contains segment information for continuing operations for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012			2011			2012			2011
Information Technology
Revenue	$	1,001		$	2,131		$	2,412		$	3,673
Operating income (loss)		(352	)		484			(1,576	)		(361	)
Industrial Products
Revenue		3,074			2,799			9,789			8,958
Operating income		696			482			2,215			1,752
Consolidated Segments
Revenue		4,075			4,930			12,201			12,631
Operating income		344			966			639			1,391
Corporate expenses		(298	)		(214	)		(1,084	)		(809	)
Consolidated operating income (loss)	$	46		$	752		$	(445	)	$	582
Depreciation and Amortization
Information Technology	$	60		$	13		$	123		$	87
Industrial Products		78			83			241			181
Consolidated segments		138			96			364			268
Corporate		3			3			9			10
Consolidated depreciation and amortization	$	141		$	99		$	373		$	278
Capital Expenditures
Information Technology	$	73		$	(23	)	$	144		$	139
Industrial Products		88			44			129			243
Consolidated segments		161			21			273			381
Corporate		4			--			4			1
Consolidated capital expenditures	$	165		$	21		$	277		$	382

(unaudited, in thousands)	September 30, 2012		December 31, 2011
Identifiable Assets
Information Technology	$	1,725	$	1,791
Industrial Products		5,927		6,654
Consolidated segments		7,652		8,445
Corporate		1,973		1,660
Consolidated assets	$	9,625	$	10,105

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Note 8 - Short-term Borrowings (Detail) (USD $)	1 Months Ended
	Jun. 29, 2012	Sep. 30, 2012
Debt Instrument, Interest Rate, Stated Percentage Rate Range, Minimum	6.00%
Line of Credit Facility, Interest Rate at Period End		6.00%
Secured Borrowings Limit, Accounts Receivable, Percentage		80.00%
Secured Borrowings Limit, Inventory, Percentage		10.00%
Line of Credit Facility, Maximum Borrowing Capacity (in Dollars)		$ 1,250,000
Line of Credit Facility, Current Borrowing Capacity (in Dollars)		1,250,000
Line of Credit Facility, Amount Outstanding (in Dollars)		$ 0
Maximum [Member]
Debt Instrument, Basis Spread on Variable Rate	1.50%

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Note 3 - Comprehensive Income (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Comprehensive Income (Loss) [Table Text Block]

Consolidated Statements of Comprehensive Income	Three Months Ended Sept. 30,					Nine Months Ended Sept. 30,
(unaudited, in thousands)	2012		2011			2012			2011
Net income (loss)	$	57	$	700		$	(464	)	$	983
Other comprehensive income (loss):
Foreign currency translation adjustment		26		(41	)		7			(43	)
Unrealized gain (loss) on available for sale marketable securities		11		(21	)		19			(21	)
Comprehensive income (loss)	$	94	$	638		$	(438	)	$	919

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Note 2 - Option Agreement (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Mar. 20, 2012	Dec. 31, 2011
Noncontrolling Interest, Ownership Percentage by Noncontrolling Owners					5.00%
Noncontrolling Interest, Ownership Percentage by Parent					96.00%
Increase In Shares Covered By Option					10.00%
Open Option Contracts Written, Exercise Price (in Dollars per Item)					1,000,000
Marketing Expense (in Dollars)	$ 592,000	$ 536,000	$ 1,771,000	$ 1,621,000
Other Liabilities, Noncurrent (in Dollars)	134,000		134,000			140,000
Option Expense [Member]
Marketing Expense (in Dollars)			18,000
Other Liabilities, Noncurrent (in Dollars)	$ 18,000		$ 18,000

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net income (loss)	$ 57	$ 700	$ (464)	$ 983
Other comprehensive income (loss):
Foreign currency translation adjustment	26	(41)	7	(43)
Unrealized gain (loss) on available for sale marketable securities	11	(21)	19	(21)
Comprehensive income (loss)	$ 94	$ 638	$ (438)	$ 919

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Note 4 - Stock-based Compensation

9 Months Ended

Sep. 30, 2012

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

4.     Stock-based Compensation – At September 30, 2012, 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 $20,000 and $10,000 of stock-based compensation expense in the three months ended September 30, 2012 and 2011, respectively and $59,000 and $27,000 for the nine months ended September 30, 2012 and 2011, respectively. The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2011 Form 10-K.

As of September 30, 2012, there is $134,000 of unrecognized compensation cost related to stock options. During the nine month period ended September 30, 2012, an aggregate of 17,000 options were granted on May 24, 2012 to four independent members of our board pursuant to the 2011 Non-Employee Director Stock Option Plan.  All options were granted at fair market value on the date of grant.  No options were exercised during the three and nine month periods ended September 30, 2012.  A total of 14,000 unexercised options expired during the nine month period ended September 30, 2012.

The following table summarizes stock options as of September 30, 2012:

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2012		345,500	$	1.72		5.8	$	12,960
Vested at September 30, 2012		220,833	$	1.77		4.0	$	12,960

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 third quarter of 2012 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 September 30, 2012.  The amount of aggregate intrinsic value will change based on the fair market value of the company’s stock.

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Note 3 - Comprehensive Income (Detail) - Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net income (loss)	$ 57	$ 700	$ (464)	$ 983
Other comprehensive income (loss):
Foreign currency translation adjustment	26	(41)	7	(43)
Unrealized gain (loss) on available for sale marketable securities	11	(21)	19	(21)
Comprehensive income (loss)	$ 94	$ 638	$ (438)	$ 919

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Note 10 - Industry Segments (Detail) - Industry Segments - Asset Information (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Identifiable assets	$ 9,625	$ 10,105
Information Technology [Member]
Identifiable assets	1,725	1,791
Industrial Products [Member]
Identifiable assets	5,927	6,654
Operating Segments [Member]
Identifiable assets	7,652	8,445
Corporate [Member]
Identifiable assets	$ 1,973	$ 1,660

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Note 14 - Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Text Block]

14.   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.