10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

x Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

or

¨ Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number 0-18603

INTEGRAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-1267968
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5000 Philadelphia Way, Lanham, MD	20706
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (301) 731-4233

(Former name, address and fiscal year, if changed since last report)

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Registrant had 10,424,163 shares of common stock outstanding as of July 29, 2005.

INTEGRAL SYSTEMS, INC.

TABLE OF CONTENTS

			Page No.
PART I. FINANCIAL INFORMATION:
	Item 1.	Financial Statements
		Consolidated Balance Sheets – June 30, 2005 (unaudited) and September 30, 2004	1
		Unaudited Consolidated Statements of Operations – Three and Nine Months Ended June 30, 2005 and June 30, 2004	3
		Unaudited Consolidated Statement of Stockholders’ Equity – Nine Months Ended June 30, 2005	4
		Unaudited Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2005 and June 30, 2004	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION:
	Item 1.	Legal Proceedings	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
	Item 3.	Defaults Upon Senior Securities	31
	Item 4.	Submission of Matters to a Vote of Security Holders	31
	Item 5.	Other Information	32
	Item 6.	Exhibits	32
	Signatures		33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2005 and September 30, 2004

	June 30, 2005		September 30, 2004
	(unaudited)
ASSETS
CURRENT ASSETS
Cash	$	28,969,421	$	18,198,832
Marketable Securities		27,951,000		29,060,396
Accounts Receivable, net		37,093,709		39,628,515
Notes Receivable		451,573		263,913
Prepaid Expenses		498,235		632,595
Inventory		2,097,549		1,312,161
Deferred Income Tax - Current Portion		941,866		855,700
Income Taxes Receivable		787,073		0
TOTAL CURRENT ASSETS		98,790,426		89,952,112
FIXED ASSETS
Electronic Equipment		4,389,167		4,884,764
Furniture & Fixtures		559,516		876,255
Leasehold Improvements		1,510,824		1,345,634
Software Purchases		795,715		846,413
SUBTOTAL - FIXED ASSETS		7,255,222		7,953,066
Less: Accumulated Depreciation		3,795,321		4,395,933
TOTAL FIXED ASSETS		3,459,901		3,557,133
OTHER ASSETS
Notes Receivable - Non-Current		294,583		300,338
Intangible Assets, net		431,243		637,493
Goodwill		33,338,768		33,256,186
Software Development Costs		3,247,130		4,591,904
Deposits and Deferred Charges		205,144		171,275
TOTAL OTHER ASSETS		37,516,868		38,957,196
TOTAL ASSETS	$	139,767,195	$	132,466,441

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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2005 and September 30, 2004

	June 30, 2005			September 30, 2004
	(unaudited)
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable	$	6,445,710		$	5,491,629
Accrued Expenses		6,470,171			13,893,662
Capital Leases Payable		34,179			35,119
Billings in Excess of Revenue		7,748,940			5,581,124
Income Taxes Payable		0			672,148
TOTAL CURRENT LIABILITIES		20,699,000			25,673,682
LONG TERM LIABILITIES
Capital Leases Payable		0			25,119
Deferred Income Taxes		1,428,340			1,428,344
TOTAL LONG TERM LIABILITIES		1,428,340			1,453,463
STOCKHOLDERS’ EQUITY
Common Stock, $.01 par value, 40,000,000 shares authorized, and 10,406,613 and 9,944,494 shares issued and outstanding at June 30, 2005 and September 30, 2004, respectively		104,066			99,445
Additional Paid-in Capital		89,749,659			81,201,927
Retained Earnings		27,791,521			24,010,558
Accumulated Other Comprehensive Income		(5,391	)		27,366
TOTAL STOCKHOLDERS’ EQUITY		117,639,855			105,339,296
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	139,767,195		$	132,466,441

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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2005			2004			2005			2004
Revenue	$	25,378,591		$	22,632,229		$	70,644,893		$	65,194,551
Cost of Revenue
Direct Labor		5,918,188			5,057,792			16,073,603			14,328,836
Overhead Costs		4,726,979			3,462,270			13,016,367			10,653,469
Travel and Other Direct Costs		568,555			580,638			1,738,271			1,801,414
Direct Equipment & Subcontracts		6,819,565			6,329,565			18,004,785			16,640,383
Total Cost of Revenue		18,033,287			15,430,265			48,833,026			43,424,102
Gross Margin		7,345,304			7,201,964			21,811,867			21,770,449
Selling, General & Administrative		3,383,394			3,273,869			10,268,346			9,359,032
Research & Development		618,852			960,666			1,871,850			2,667,158
Product Amortization		645,409			761,381			1,936,225			2,284,143
Intangible Asset Amortization		68,750			68,750			206,250			713,279
Income From Operations		2,628,899			2,137,298			7,529,196			6,746,837
Other Income (Expense)
Interest Income		347,644			139,611			818,871			449,020
Interest Expense		(1,138	)		(1,585	)		(4,211	)		(5,730	)
Gain on Sale of Marketable Securities		0			0			49,997			21,439
Miscellaneous, net		(105,180	)		(108,434	)		(525,237	)		(392,397	)
Total Other Income		241,326			29,592			339,420			72,332
Income Before Income Tax		2,870,225			2,166,890			7,868,616			6,819,169
Provision for Income Taxes		1,006,575			782,472			2,770,109			2,480,705
Net Income	$	1,863,650		$	1,384,418		$	5,098,507		$	4,338,464
Weighted Avg. Number of Common Shares:
Basic		10,392,973			9,950,330			10,232,203			9,879,034
Diluted		10,629,952			10,099,956			10,424,185			10,053,256
Earnings per Share (Basic)	$	0.18		$	0.14		$	0.50		$	0.44
Earnings per Share (Diluted)	$	0.18		$	0.14		$	0.49		$	0.43

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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED JUNE 30, 2005

(Unaudited)

	Number of Shares		Common Stock At Par Value			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance September 30, 2004	9,944,494		$	99,445		$	81,201,927		$	24,010,558		$	27,366		$	105,339,296
Net Income	—			—			—			5,098,507			—			5,098,507
Unrealized Loss on Marketable Securities (net of deferred tax of $9,129)	—			—			—			—			(14,281	)		(14,281	)
Unrealized Gain on Foreign Currency Exchange Contracts	—			—			—			—			20,843			20,843
Effect of Currency Translation	—			—			—			—			(39,319	)		(39,319	)
Total Comprehensive Income	—			—			—			—			—			5,065,750
Repurchased Shares	(8,100	)		(81	)		(62,663	)		(82,726	)		—			(145,470	)
Shares Issued for FY04 RT Logic Earnout	230,349			2,303			4,184,059			—			—			4,186,362
Stock Options Exercised	239,870			2,399			4,426,336			—			—			4,428,735
Declared Dividends	—			—			—			(1,234,818	)		—			(1,234,818	)
Balance June 30, 2005	10,406,613		$	104,066		$	89,749,659		$	27,791,521		$	(5,391	)	$	117,639,855

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INTEGRAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended June 30, 2005 and 2004

(Unaudited)

	For the Nine Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	5,098,507		$	4,338,464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,328,093			4,269,085
Reserve for doubtful accounts		(20,000	)		65,325
Gain on sale of marketable securities		(49,997	)		(21,439	)
Loss on disposal of fixed assets		40,395			42,661
Changes in operating assets and liabilities, net:
Accounts receivable and other receivables		2,548,296			(576,663	)
Prepaid expenses and deposits		113,619			(217,744	)
Inventories		(1,130,256	)		(625,263	)
Accounts payable		929,035			(27,975	)
Accrued expenses		(3,254,325	)		(3,473,282	)
Billings in excess of revenue		2,167,816			(1,447,174	)
Income taxes payable		(1,405,636	)		(370,722	)
Total adjustments		3,267,040			(2,383,191	)
Net cash provided by operating activities		8,365,547			1,955,273
Cash flows from investing activities:
Purchases of marketable securities		—			(649,807	)
Sale of marketable securities		1,135,983			169,837
Issuance of notes receivable		(54,906	)		—
Proceeds from payments on notes receivable		139,605			92,605
Acquisition of fixed assets		(1,207,258	)		(831,318	)
Software development costs		(591,451	)		(1,510,467	)
Net cash (used in) investing activities		(578,027	)		(2,729,150	)
Cash flows from financing activities:
Proceeds from issuance of common stock		4,428,735			444,871
Stock repurchases		(145,470	)		(237,836	)
Dividend payments		(1,234,818	)		—
Capital lease obligation payments		(26,059	)		(23,945	)
Net cash provided by financing activities		3,022,388			183,090
Effect of currency translations		(39,319	)		93,832
Net increase in cash		10,809,908			(590,787	)
Cash – beginning of year		18,198,832			22,526,718
Cash - end of period	$	28,969,421		$	22,029,763

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INTEGRAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The interim financial statements include the accounts of Integral Systems, Inc. (the “Company”) and its wholly owned subsidiaries, SAT Corporation (“SAT”), Newpoint Technologies, Inc. (“Newpoint”), Real Time Logic, Inc. (“RT Logic”), and Integral Systems Europe (“ISI Europe”). All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the financial statements reflect all adjustments consisting only of normal recurring accruals necessary for a fair presentation of results for such periods. The financial statements, which are condensed and do not include all disclosures included in the annual financial statements, should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended September 30, 2004. The results of operations for any interim period are not necessarily indicative of results for the full year.

2. Accounts Receivable

Accounts receivable at June 30, 2005 and September 30, 2004 consisted of the following:

	June 30, 2005			Sept. 30, 2004
Billed	$	14,453,844		$	15,117,607
Unbilled		22,657,058			24,467,186
Other		112,807			193,722
Reserve		(130,000	)		(150,000	)
Total	$	37,093,709		$	39,628,515

The Company’s accounts receivable consist of amounts due on prime contracts and subcontracts with the U.S. Government and contracts with various commercial and international organizations. Unbilled accounts receivable consist principally of amounts that are billed in the month following the incurrence of cost, amounts related to indirect cost variances on cost reimbursable type contracts or amounts related to milestones that are delivered under fixed price contracts. Substantially all unbilled receivables are expected to be billed and collected within one year.

The reserve for doubtful accounts is determined based upon management’s best estimate of potentially uncollectible accounts receivable.

In June 2004, the Company filed a claim in the amount of approximately $1.8 million against the National Oceanic Atmospheric Administration (NOAA) of the U.S. Department of Commerce. The claim arose under a contract with NOAA to provide the Data Collection System Automated Processing System II (DAPS-II System). During the three months ended June 30, 2005, the Company filed a second but unrelated claim under the same contract for an additional $320,000. As of June 30, 2005, unbilled accounts receivable included approximately $1.3 million associated with the claims.

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INTEGRAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

3. Line of Credit

The Company has a line of credit agreement with a local bank for $10.0 million for general corporate purposes. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5% to 2.4% based on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The line of credit is secured by the Company’s billed and unbilled accounts receivable, inventory, equipment and insurance proceeds and has certain financial covenants, including minimum net worth and liquidity ratios. The Company had no balance outstanding at June 30, 2005 under the line of credit. The line of credit expires on February 28, 2007.

The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $34,200 at June 30, 2005. The outstanding balance is payable over a 11-month period and bears interest at a rate of 8.8% per annum.

4. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 123 (Revised 2004), Shared-Based Payment. Revised SFAS 123 addresses the requirements of an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which an employee is required to provide services in exchange for the award. The Company will be required to adopt this Statement during the first quarter of fiscal year 2006 and is currently evaluating the impact that this pronouncement will have on its future operations and financial reporting.

5. Stock-Based Compensation

The Company recognizes expense for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any.

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The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the three and nine months ended June 30, 2005 and 2004 is as follows:

INTEGRAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

5. Stock-Based Compensation (continued)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2005		2004		2005		2004
Net income, as reported	$	1,863,650	$	1,384,418	$	5,098,507	$	4,338,464
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards		386,914		398,486		1,275,654		1,231,970
Add: Stock-based employee compensation included in net income		—		—		—		—
Pro forma net income	$	1,476,736	$	985,932	$	3,822,853	$	3,106,494
Earnings per share:
As reported - basic	$	0.18	$	0.14	$	0.50	$	0.44
- diluted	$	0.18	$	0.14	$	0.49	$	0.43
Pro forma    - basic	$	0.14	$	0.10	$	0.37	$	0.31
- diluted	$	0.14	$	0.10	$	0.37	$	0.31

These pro forma amounts are not necessarily indicative of future effects of applying the fair value-based method due to, among other things, the vesting period of the stock options and the fair value of additional stock options issued in future years.

6. Business Segment Information

Effective October 1, 2004, the Company reorganized its operations into four reportable segments. The primary purpose of the reorganization was to place the Company’s commercially oriented operations under common marketing and management leadership and to more efficiently sell and promote its products to common customers. The four segments are:

• Ground Systems - Government

• Ground Systems - Commercial

• Space Communications Systems

• Corporate

The Ground Systems – Government segment provides ground systems products and services to the U.S. Government. It is currently the Company’s largest segment in terms of revenue and consists of the Company’s core command and control business for government applications. Its primary customers are the U.S. Air Force and NOAA.

The Ground Systems – Commercial segment provides ground systems products and services to commercial enterprises and international governments and organizations. It consists of the Company’s core command and control business for commercial applications and three of the Company’s wholly owned subsidiaries as follows:

• SAT and Newpoint, acquired by the Company in August 2000 and January 2002, respectively, offer complementary ground system components and systems. This includes turnkey systems, hardware and software for satellite and terrestrial communications signal monitoring, network and ground equipment monitoring and control and satellite data processing.

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INTEGRAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

6. Business Segment Information (continued)

• ISI Europe, the Company’s wholly owned subsidiary formed in March 2001, with headquarters in Toulouse, France, serves as the focal point for the support of all of the Company’s European business.

The Space Communications Systems segment, consisting exclusively of the Company’s wholly owned subsidiary, RT Logic, designs and builds satellite communications equipment and systems, principally for military applications. This equipment is used in satellite tracking stations, control centers, spacecraft factories and range operations.

The Corporate segment is the Company’s “all other” segment. It includes the Company’s Product Division, which is responsible for the Company’s core command and control product line (EPOCH IPS); business areas in the development stage and businesses being disbanded (the Company’s Antenna Division, the Company’s Skylight product, and the Company’s Integration and Test (I&T) Division). The Product Division licenses the Company’s EPOCH IPS product line to other operating segments and to third party customers. It is also the segment responsible for EPOCH IPS maintenance and support revenue and expenses.

The Company evaluates the performance of each segment based on operating income. There are no inter-segment allocations of overhead.

On November 17, 2004, the Company disposed of the intellectual property rights, inventory and certain other assets of the Antenna Division to LJT & Associates, Inc. of Montgomery, Alabama (“LJT”), effective as of November 1, 2004. As consideration, LJT agreed to pay the Company $215,000 and executed a promissory note requiring payment of that sum in eight equal installments of $26,875 due on each July 1 and January 1 beginning on July 1, 2005. As additional consideration, LJT agreed to make future contingent payments to the Company for the period beginning November 1, 2004 through December 31, 2006. The contingent payments are calculated every December 31 beginning December 31, 2005 based on pretax income as defined in the acquisition agreement. Under the acquisition agreement, the Company will continue to fulfill its obligations under existing customer contracts but will engage LJT as a subcontractor to perform the actual work. The Company did not record a material gain or a loss as a result of this transaction.

In addition, the Company loaned LJT $100,000 to assist with initial expenses arising from use of the acquired assets in operations. LJT executed a promissory note requiring payment of that sum in installments to coincide with milestone payments on a certain contract. The Company disbursed the loan to LJT by issuing a cash disbursement in the amount of $54,906, which represents the loan balance after deducting the net assumed obligations with an aggregate total of $45,094.

On April 28, 2005, RT Logic Tract TT2, LLC, a newly-formed and wholly-owned subsidiary of RT Logic, entered into a Purchase Agreement with Northgate Properties, LLC to purchase 10.373 acres of real property in Colorado Springs, Colorado for a purchase price of approximately $2.3 million, which will be paid in full at closing. The closing of the transaction is expected to occur before the end of the fiscal year, subject to due diligence review and customary closing conditions. RT Logic intends to construct its new headquarters on this property.

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INTEGRAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

6. Business Segment Information (continued)

Summarized financial information by business segment is as follows:

	Three Months Ended June 30, 2005			Three Months Ended June 30, 2004			Nine Months Ended June 30, 2005			Nine Months Ended June 30, 2004
Revenue
Ground Systems–Government	$	12,596,099		$	12,037,703		$	33,097,759		$	32,411,231
Ground Systems–Government intersegment		—			250,252			—			250,252
Ground Systems–Commercial		4,862,193			4,253,005			13,305,411			12,871,551
Ground Systems–Commercial intersegment		128,116			7,180			281,515			15,111
Space Communication Systems		7,228,607			5,048,215			21,076,378			15,588,698
Space Communication Systems intersegment		901,184			1,174,342			2,415,866			2,005,129
Corporate		691,692			1,293,306			3,165,345			4,323,071
Corporate intersegment		847,417			958,694			2,653,989			3,461,040
Elimination of intersegment sales		(1,876,717	)		(2,390,468	)		(5,351,370	)		(5,731,532	)
Total Revenue	$	25,378,591		$	22,632,229		$	70,644,893		$	65,194,551
Operating Income
Ground Systems–Government	$	980,313		$	1,360,069		$	2,763,634		$	3,457,859
Ground Systems–Government intersegment		—			—			—			—
Ground Systems–Commercial		419,527			(202,022	)		392,675			(115,253	)
Ground Systems–Commercial intersegment		(6,134	)		26			(22,264	)		(461	)
Space Communication Systems		2,349,173			1,834,419			6,692,232			5,619,073
Space Communication Systems intersegment		(6,100	)		(547	)		1,193			(547	)
Corporate		(1,120,114	)		(855,168	)		(2,319,345	)		(2,214,842	)
Corporate intersegment		(422	)		2,206			(10,450	)		(1,307	)
Elimination of intersegment Operating Income		12,656			(1,685	)		31,521			2,315
Total Operating Income	$	2,628,899		$	2,137,298		$	7,529,196		$	6,746,837
Total Assets
Ground Systems–Government	$	18,725,638		$	21,168,555		$	18,725,638		$	21,168,555
Ground Systems–Commercial		13,468,004			12,170,512			13,468,004			12,170,512
Space Communication Systems		49,435,938			44,442,590			49,435,938			44,442,590
Corporate		71,025,955			58,450,937			71,025,955			58,450,937
Elimination of intersegment accounts receivable		(12,888,340	)		(14,114,683	)		(12,888,340	)		(14,114,683	)
Total Assets	$	139,767,195		$	122,117,911		$	139,767,195		$	122,117,911

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Integral Systems, Inc. (the “Company”) builds satellite ground systems and equipment for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 190 different satellite missions for communications, science, meteorology, and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.

The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional custom-built systems. The Company believes that it was the first to offer a comprehensive commercial off-the-shelf (“COTS”) software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites.

Effective October 1, 2004, the Company reorganized its operations into four reportable segments. The primary purpose of the reorganization was to place the Company’s commercially oriented operations under common marketing and management leadership and to more efficiently sell and promote its products to common customers. The four segments are:

Ground Systems – Government

This segment provides ground systems products and services to the U.S. Government. It is the Company’s largest segment in terms of revenue and consists of the Company’s core command and control business for government applications. Its primary customers are the U.S. Air Force and the National Oceanic Atmospheric Administration (NOAA).

Ground Systems – Commercial

This segment provides ground systems products and services to commercial enterprises and international governments and organizations. It consists of the Company’s core command and control business for commercial applications and three of the Company’s wholly owned subsidiaries as follows:

SAT Corporation (“SAT”) and Newpoint Technologies, Inc. (“Newpoint”), acquired by the Company in August 2000 and January 2002, respectively, offer complementary ground system components and systems. This includes turnkey systems, hardware and software for satellite and terrestrial communications signal monitoring, network and ground equipment monitoring, and control and satellite data processing.

Integral Systems Europe (“ISI Europe”), the Company’s wholly owned subsidiary formed in March 2001, with headquarters in Toulouse, France, serves as the focal point for the support of all of the Company’s European business.

Space Communications Systems

This segment, consisting exclusively of the Company’s wholly owned subsidiary, Real Time Logic, Inc. (“RT Logic”), designs and builds satellite communications equipment and systems, principally for military applications. This equipment is used in satellite tracking stations, control centers, spacecraft factories and range operations.

- 11 -

Corporate

This segment is the Company’s “all other” segment. It includes the Company’s Product Division, which is responsible for the Company’s core command and control product line (EPOCH IPS); business areas in the development stage and businesses being disbanded (the Company’s Antenna Division, the Company’s Skylight product and the Company’s Integration and Test (I&T) Division). The Product Division licenses the Company’s EPOCH IPS product line to other operating segments and to third party customers. It is also the segment responsible for EPOCH IPS maintenance and support revenue and expenses.

All intra-segment and inter-segment revenues and expenses have been eliminated in consolidation as appropriate. Operating results for periods prior to October 1, 2004 have been reclassified for comparative purposes. In order to provide year to year reporting continuity, the Company has elected to provide additional disclosures for SAT and Newpoint through the end of fiscal year 2005.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 123 (Revised 2004), “Shared-Based Payment”. Revised SFAS 123 addresses the requirements of an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which an employee is required to provide services in exchange for the award. The Company will be required to adopt this Statement during the first quarter of fiscal year 2006 and is currently evaluating the impact that this pronouncement will have on its future operations and financial reporting

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COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

Results of Operations

The components of the Company’s income statement as a percentage of revenue are depicted in the following table for the three months ended June 30, 2005 and 2004:

	Three Months Ended June 30,
	2005		% of Revenue	2004		% of Revenue
	(in thousands)			(in thousands)
Revenue	$	25,379	100.0	$	22,632	100.0
Cost of Revenue		18,034	71.1		15,430	68.2
Gross Margin		7,345	28.9		7,202	31.8
Operating Expenses
Selling, General & Admin. (SG&A)		3,383	13.3		3,274	14.5
Research and Development		619	2.4		961	4.2
Product Amortization		645	2.5		761	3.4
Amortization-Intangible Assets		69	0.3		69	0.3
Income from Operations		2,629	10.4		2,137	9.4
Other Income (Expense) (net)		241	0.9		30	0.2
Income Before Income Taxes		2,870	11.3		2,167	9.6
Income Taxes		1,006	4.0		783	3.5
Net Income	$	1,864	7.3	$	1,384	6.1

Revenue

The Company earns revenue, both as a prime contractor and a subcontractor, from sales of its products and services through contracts that are funded by the U.S. Government as well as commercial and international organizations.

For the three months ended June 30, 2005 and 2004, the Company’s revenues were generated from the following sources:

	Three Months Ended June 30,
Revenue Type	2005		2004
U.S. Government Revenue (all segments)
NOAA	6	%	15	%
U.S. Air Force	58		56
Other U.S. Government Users	12		6
Subtotal	76		77
Commercial Revenue (all segments)	24		23
Total	100	%	100	%

- 13 -

On a consolidated basis, revenue increased 12.1%, or $2.8 million, to $25.4 million for the three months ended June 30, 2005, from $22.6 million for the three months ended June 30, 2004. Revenue for the three-month periods ended June 30, 2005 and 2004 for each of the Company’s segments is shown in the following table:

	Three Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Revenue
Ground Systems – Government	$	12,596		$	12,288		$	308
Ground Systems – Commercial
Command & Control		3,157			2,701			456
Newpoint		914			646			268
SAT		1,173			992			181
Intra-Segment Elimination		(254	)		(79	)		(175	)
Ground Systems – Commercial		4,990			4,260			730
Space Communications Systems		8,130			6,223			1,907
Corporate
Product Group		851			1,134			(283	)
Antenna		322			218			104
I&T		—			627			(627	)
Other		366			273			93
Corporate		1,539			2,252			(713	)
Elimination		(1,876	)		(2,391	)		515
Total Revenue	$	25,379		$	22,632		$	2,747

Revenue increases in the Company’s Ground Systems - Government segment between the three months ended June 30, 2005 and 2004 primarily relate to increased sales of $1.9 million from the Company’s contracts with the U.S. Air Force largely offset by revenue decreases from NOAA.

Revenue increases of approximately $460,000 for the Company’s Command & Control unit of its Ground Systems – Commercial segment resulted from increased order bookings and increased system shipments to customers for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

SAT’s revenue increase of approximately $180,000 relates to increased order shipments during the three months ended June 30, 2005 compared to the three months ended June 30, 2004. Newpoint revenue increased approximately $270,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 due to increased order bookings and increased product shipments.

Revenue increases for the Company’s Space Communications Systems segment resulted from increased backlog and increased product shipments for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

In the Company’s Corporate segment, revenues for the Product Group decreased approximately $280,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 principally due to decreased license revenue.

- 14 -

Antenna Division revenues increased approximately $100,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 primarily because of the Company’s on-going contract with the Malaysian military for the delivery of two antenna systems.

The Company disbanded its I&T Division during the fourth quarter of fiscal year 2004 and accordingly, no revenues were recorded for this division during the third quarter of fiscal year 2005.

Cost of Revenue/Gross Margin

The Company computes gross margin by subtracting cost of revenue from revenue. Included in cost of revenue are direct labor expenses, overhead charges associated with the Company’s direct labor base and other costs that can be directly related to specific contract cost objectives, such as travel, consultants, equipment, subcontracts and other direct costs.

Gross margins on contract revenues vary depending on the type of product or service provided. Generally, license revenues related to the sale of the Company’s COTS products have the greatest gross margins because of the minimal associated marginal costs to produce. By contrast, gross margins for equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 40%. These definitions and ratios generally apply across all segments, although margins on equipment costs for the Space Communications Systems segment are generally greater than the equipment margins in the other segments because that segment’s business is more hardware intensive.

During the three months ended June 30, 2005, cost of revenue increased by 16.9%, or $2.6 million, compared to the same period during the prior year, increasing from $15.4 million during the three months ended June 30, 2004 to $18.0 million during the three months ended June 30, 2005. Gross margin increased from $7.2 million to $7.3 million, an increase of $100,000, or 2.0%, during the periods being compared. Cost of revenue and gross margin for the three months ended June 30, 2005 and 2004 for each of the Company’s segments are shown in the following table:

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	Three Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Cost of Revenue
Ground Systems – Government	$	10,254		$	9,762		$	492
Ground Systems – Commercial
Command & Control		2,455			2,250			205
Newpoint		477			264			213
SAT		691			541			150
Intra-Segment Elimination		(249	)		(67	)		(182	)
Ground Systems – Commercial		3,374			2,988			386
Space Communications Systems		4,388			3,179			1,209
Corporate
Product Group		836			479			357
Antenna		703			691			12
I&T		—			475			(475	)
Other		351			230			121
Corporate		1,890			1,875			15
Elimination		(1,872	)		(2,374	)		502
Total Cost of Revenue	$	18,034		$	15,430		$	2,604
Gross Margin
Ground Systems – Government	$	2,342		$	2,526		$	(184	)
Ground Systems – Commercial
Command & Control		702			451			251
Newpoint		437			382			55
SAT		482			451			31
Intra-Segment Elimination		(5	)		(12	)		7
Ground Systems – Commercial		1,616			1,272			344
Space Communications Systems		3,742			3,044			698
Corporate
Product Group		15			655			(640	)
Antenna		(381	)		(473	)		92
I&T		—			152			(152	)
Other		15			43			(28	)
Corporate		(351	)		377			(728	)
Elimination		(4	)		(17	)		13
Total Gross Margin	$	7,345		$	7,202		$	143

- 16 -

The decreased gross margin in the Company’s Ground Systems – Government segment (approximately $180,000) primarily relates to a lower percentage of fixed price revenue compared to cost reimbursable revenue in the segment’s revenue mix for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. The Company generally earns higher margins on its fixed price contracts than its cost reimbursable type contracts because of the greater risk associated with fixed price efforts. Many of the Company’s new awards with the U.S. Air Force have been cost reimbursable type contract vehicles.

The higher gross margin (approximately $340,000) for the Company’s Ground Systems - Commercial segment is primarily attributable to increased revenue of $730,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. All units in this segment posted increased gross margins and increased revenue for the current quarter.

The Space Communications System segment experienced an increase in gross margin of approximately $700,000 on increased revenue of $1.9 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. The segment’s gross margin percentage declined from 48.9% for the three months ended June 30, 2004 to 46.0% for the three months ended June 30, 2005 due to a considerably greater mix of third party equipment costs in the segment’s cost of revenue in the current quarter than in the three months ended June 30, 2004. Similar to the Company’s other business segments, the Space Communications Systems segment typically earns less gross margin on third party equipment purchases than on other cost elements.

In the Corporate segment, the Product Group experienced a decrease in gross margin of approximately $640,000 on a period-to-period basis because of decreased license revenue. Further, effective with the beginning of the current quarter, the Company determined that its EPOCH IPS product line was substantially complete and therefore costs associated with the product were no longer eligible for capitalization. The costs of software bug fixes and support were higher in the current quarter than similar costs incurred during the three months ended June 30, 2004, thereby further contributing to the lower gross margin.

Although the Antenna Division was able to reduce its gross margin deficit by approximately $90,000, the Antenna Division nonetheless recorded a $380,000 gross margin deficit during the three months ended June 30, 2005. Contract overruns for the Division have continued on three of the unit’s four remaining contracts. The Company believes that all four of these contracts will be completed by calendar year end (with the exception of warranty obligations).

The I&T Division posted no gross margins as it had no revenue for the current quarter.

- 17 -

Operating Expenses

Operating expenses for the three months ended June 30, 2005 and 2004 for each of the Company’s segments are shown in the following table:

	Three Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Operating Expenses
Ground Systems – Government	$	1,361		$	1,165		$	196
Ground Systems – Commercial
Command & Control		342			325			17
Newpoint		411			371			40
SAT		472			778			(306	)
Intra-Segment Elimination		(22	)		(1	)		(21	)
Ground Systems – Commercial		1,203			1,473			(270	)
Space Communications Systems		1,399			1,210			189
Corporate
Product Group		799			936			(137	)
Antenna		18			75			(57	)
I&T		—			179			(179	)
Other		(47	)		41			(88	)
Corporate		770			1,231			(461	)
Elimination		(17	)		(15	)		(2	)
Total Operating Expenses	$	4,716		$	5,064		$	(348	)

Operating expenses in the Company’s Ground Systems – Government segment increased by approximately $200,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 due to increased bid and proposal costs coupled with increased costs incurred related to compliance with Sarbanes-Oxley regulations.

Operating expenses in the Company’s Ground Systems - Commercial segment decreased by approximately $270,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 due to decreased operating expenses at SAT. Operating expenses at SAT were down more than $300,000 principally due to reductions in research and development costs and product amortization expenses.

The Space Communications Systems segment’s operating expenses for the three months ended June 30, 2005 increased by approximately $190,000 compared to the three months ended June 30, 2004. Although R&D expense decreased approximately $80,000, SG&A expenses increased some $270,000, accounting for the overall increase.

Operating expenses in the Corporate segment for the three months ended June 30, 2005 decreased by approximately $460,000 compared to the three months ended June 30, 2004 principally due to the closure of the I&T Division, the sale of operating assets of the Antenna Division in November 2004 and reduced product related selling expenses.

- 18 -

Income from Operations

Income from operations for the three months ended June 30, 2005 and 2004 for each of the Company’s segments is shown in the following table:

	Three Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Income from Operations
Ground Systems – Government	$	981		$	1,361		$	(380	)
Ground Systems – Commercial
Command & Control		360			126			234
Newpoint		26			11			15
SAT		10			(327	)		337
Intra-Segment Elimination		17			(11	)		28
Ground Systems – Commercial		413			(201	)		614
Space Communications Systems		2,343			1,834			509
Corporate
Product Group		(784	)		(281	)		(503	)
Antenna		(399	)		(548	)		149
I&T		—			(27	)		27
Other		62			2			60
Corporate		(1,121	)		(854	)		(267	)
Elimination		13			(2	)		15
Total Income from Operations	$	2,629		$	2,138		$	491

Income from operations during the periods compared decreased by approximately $380,000 in the Company’s Ground Systems – Government segment as a result of decreased gross margins (related to a lower percentage of fixed price contracts) coupled with increased operating expenses.

Income from operations during the periods compared increased by approximately $610,000 in the Company’s Ground Systems – Commercial segment as a result of increased revenue and gross margins at all business units coupled with decreased operating expenses at SAT as described above.

The Space Communications Systems segment recorded increased income from operations of approximately $510,000 principally due to increased gross margins partially offset by increased operating expenses.

In the Corporate segment, the Product Group posted an operating loss in excess of $500,000 primarily because of decreased gross margin (resulting in part from lower license revenue) partially offset by lower operating expenses. Although the Product Group recorded losses for the quarter, a large portion of the revenue generated in the Company’s ground systems business (both Government and Commercial) is a result of its EPOCH IPS product line, which the Company believes favorably distinguishes it from its competitors.

Operating losses in the Antenna Division have been reduced due to the sale of the unit’s assets, while operating losses at the I&T Division have been eliminated due to the shutdown of that unit.

- 19 -

Other Income/Expense

Other income and expense increased by approximately $210,000 between the quarters being compared, mostly as a result from increased interest income related to favorable interest rate changes.

Income Before Income Taxes/Net Income

Income before income taxes increased by approximately $700,000 over amounts posted during the third quarter of last fiscal year principally due to increased operating income of approximately $490,000 as described above combined with increased interest income.

The Company’s effective tax rate decreased from 36.1% for the three months ended June 30, 2004 to 35.1% for the three months ended June 30, 2005 principally due to a higher percentage of tax exempt income compared to total income before income taxes in the current period.

As a result of the above, net income increased to approximately $1.86 million during the three months ended June 30, 2005 from $1.38 million during the three months ended June 30, 2004.

COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004

Results of Operations

The components of the Company’s income statement as a percentage of revenue are depicted in the following table for the nine months ended June 30, 2005 and 2004:

	Nine Months Ended June 30,
	2005		% of Revenue	2004		% of Revenue
	(in thousands)			(in thousands)
Revenue	$	70,645	100.0	$	65,195	100.0
Cost of Revenue		48,833	69.1		43,424	66.6
Gross Margin		21,812	30.9		21,771	33.4
Operating Expenses
Selling, General & Admin. (SG&A)		10,269	14.5		9,359	14.4
Research and Development		1,872	2.6		2,668	4.1
Product Amortization		1,936	2.7		2,284	3.5
Amortization-Intangible Assets		206	0.4		713	1.1
Income from Operations		7,529	10.7		6,747	10.3
Other Income (Expense) (net)		340	0.4		72	0.2
Income Before Income Taxes		7,869	11.1		6,819	10.5
Income Taxes		2,770	3.9		2,481	3.8
Net Income	$	5,099	7.2	$	4,338	6.7

Revenue

The Company earns revenue, both as a prime contractor and a subcontractor, from sales of its products and services through contracts that are funded by the U.S. Government as well as commercial and international organizations.

- 20 -

For the nine months ended June 30, 2005 and 2004, the Company’s revenues were generated from the following sources:

	Nine Months Ended June 30,
Revenue Type	2005		2004
U.S. Government Revenue (all segments)
NOAA	9	%	16	%
U.S. Air Force	54		54
Other U.S. Government Users	12		6
Subtotal	75		76
Commercial Revenue (all segments)	25		24
Total	100	%	100	%

On a consolidated basis, revenue increased 8.4%, or $5.4 million, to $70.6 million for the nine months ended June 30, 2005, from $65.2 million for the nine months ended June 30, 2004. Revenue for the nine-month periods ended June 30, 2005 and 2004 for each of the Company’s segments is shown in the following table:

	Nine Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Revenue
Ground Systems – Government	$	33,098		$	32,662		$	436
Ground Systems – Commercial
Command & Control		8,846			8,275			571
Newpoint		2,490			2,028			462
SAT		2,733			3,450			(717	)
Intra-Segment Elimination		(482	)		(867	)		385
Ground Systems – Commercial		13,587			12,886			701
Space Communications Systems		23,492			17,594			5,898
Corporate
Product Group		2,726			3,414			(688	)
Antenna		2,100			1,362			738
I&T		—			1,992			(1,992	)
Other		993			1,016			(23	)
Corporate		5,819			7,784			(1,965	)
Elimination		(5,351	)		(5,732	)		381
Total Revenue	$	70,645		$	65,194		$	5,451

Revenue increases in the Company’s Ground Systems—Government segment between the nine months ended June 30, 2005 and 2004 primarily relate to increased sales from the Company’s contracts with the U.S. Air Force partially offset by revenue decreases from NOAA.

- 21 -

Revenue increases in the Company’s Ground Systems – Commercial segment (other than SAT) resulted from increased backlog and increased product shipments to customers. SAT’s revenue decrease relates to decreased order shipments and order delays experienced during the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004.

Revenue increases in the Company’s Space Communications Systems segment resulted from increased backlog and increased product shipments to customers.

In the Company’s Corporate segment, the Product Group recorded decreased license revenues between the periods being compared.

Antenna Division revenues increased approximately $740,000 between the periods being compared primarily because of the Company’s on-going contract with the Malaysian military for the delivery of two antenna systems.

The Company disbanded its I&T Division during the fourth quarter of fiscal year 2004 and accordingly, no revenues were recorded for this division during the nine months ended June 30, 2005.

Cost of Revenue/Gross Margin

The Company computes gross margin by subtracting cost of revenue from revenue. Included in cost of revenue are direct labor expenses, overhead charges associated with the Company’s direct labor base and other costs that can be directly related to specific contract cost objectives, such as travel, consultants, equipment, subcontracts and other direct costs.

Gross margins on contract revenues vary depending on the type of product or service provided. Generally, license revenues related to the sale of the Company’s COTS products have the greatest gross margins because of the minimal associated marginal costs to produce. By contrast, gross margins for equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 40%. These definitions and ratios generally apply across all segments, although margins on equipment costs for the Space Communications Systems segment are generally greater than the equipment margins in the other segments because that segment’s business is more hardware intensive.

During the nine months ended June 30, 2005, cost of revenue increased by 12.5%, or $5.4 million, compared to the same period during the prior year, increasing from $43.4 million during the nine months ended June 30, 2004 to $48.8 million during the nine months ended June 30, 2005. Gross margin remained relatively unchanged at $21.8 million during the periods being compared. Cost of revenue and gross margin for the nine months ended June 30, 2005 and 2004 for each of the Company’s segments are shown in the following table:

- 22 -

	Nine Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Cost of Revenue
Ground Systems – Government	$	26,124		$	26,008		$	116
Ground Systems – Commercial
Command & Control		6,848			6,871			(23	)
Newpoint		1,258			873			385
SAT		1,754			2,054			(300	)
Intra-Segment Elimination		(436	)		(858	)		422
Ground Systems – Commercial		9,424			8,940			484
Space Communications Systems		13,175			8,004			5,171
Corporate
Product Group		1,732			1,448			284
Antenna		2,725			2,143			582
I&T		—			1,622			(1,622	)
Other		960			948			12
Corporate		5,417			6,161			(744	)
Elimination		(5,307	)		(5,689	)		382
Total Cost of Revenue	$	48,833		$	43,424		$	5,409
Gross Margin
Ground Systems – Government	$	6,974		$	6,654		$	320
Ground Systems – Commercial
Command & Control		1,998			1,404			594
Newpoint		1,232			1,155			77
SAT		979			1,396			(417	)
Intra-Segment Elimination		(46	)		(9	)		(37	)
Ground Systems – Commercial		4,163			3,946			217
Space Communications Systems		10,317			9,590			727
Corporate
Product Group		994			1,966			(972	)
Antenna		(625	)		(781	)		156
I&T		—			370			(370	)
Other		33			68			(35	)
Corporate		402			1,623			(1,221	)
Elimination		(44	)		(43	)		(1	)
Total Gross Margin	$	21,812		$	21,770		$	42

- 23 -

The higher gross margin for the Company’s Ground Systems - Government segment is primarily attributable to lower equipment and subcontract costs incurred during the current nine-month period. As a result, gross margin as a percentage of revenue for the Ground Systems - Government segment increased from 20.4% for the nine months ended June 30, 2004 to 21.1% for the nine months ended June 30, 2005.

The gross margin for the Company’s Ground Systems – Commercial segment primarily relates to increased revenue from the segment’s Command & Control Division and from Newpoint. At SAT, gross margin declined by approximately $420,000 due to a $720,000 decrease in revenues.

Gross margin in the Space Communications System increased by approximately $730,000 during the periods being compared on increased revenue of approximately $5.9 million. The segment’s gross margin percentage declined from 54.5% for the nine months ended June 30, 2004 to 43.9% for the nine months ended June 30, 2005 due to a considerably greater mix of third party equipment costs in the segment’s cost of revenue in the nine months ended June 30, 2005 than in the nine months ended June 30, 2004. Similar to the Company’s other business segments, the Space Communications Systems segment typically earns less gross margin on third party equipment purchases than on other cost elements. Further, the segment had an unusually high percentage of production type revenue in the nine months ended June 30, 2004. Generally, production type contracts generate higher gross margins due to increased efficiencies for this segment as compared to non-production oriented jobs.

In the Corporate segment, the Product Group experienced a decrease in gross margin of approximately $970,000 on a period-to-period basis because of decreased license revenue. Further, effective with the beginning of the current quarter, the Company determined that its EPOCH IPS product line was substantially complete and therefore costs associated with the product were no longer eligible for capitalization. The costs of software bug fixes and support were higher in the current nine month period than similar costs incurred during the nine months ended June 30, 2004, thereby further contributing to the lower gross margin.

Although the Antenna Division was able to reduce its gross margin deficit by approximately $160,000, the Antenna Division nonetheless recorded a $630,000 gross margin deficit during the nine months ended June 30, 2005. Contract overruns for the Division have continued on three of the unit’s four remaining contracts. The Company believes that all four of these contracts will be completed by December 31, 2005 (with the exception of warranty obligations).

The I&T Division posted no gross margins as it had no revenue for the current nine month period.

- 24 -

Operating Expenses

Operating expenses for the nine months ended June 30, 2005 and 2004 for each of the Company’s segments are shown in the following table:

	Nine Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Operating Expenses
Ground Systems – Government	$	4,210		$	3,195		$	1,015
Ground Systems – Commercial
Command & Control		1,267			990			277
Newpoint		1,119			1,126			(7	)
SAT		1,460			1,947			(487	)
Intra-Segment Elimination		(53	)		(1	)		(52	)
Ground Systems – Commercial		3,793			4,062			(269	)
Space Communications Systems		3,623			3,971			(348	)
Corporate
Product Group		2,554			2,928			(374	)
Antenna		100			230			(130	)
I&T		—			663			(663	)
Other		78			20			58
Corporate		2,732			3,841			(1,109	)
Elimination		(75	)		(46	)		(29	)
Total Operating Expenses	$	14,283		$	15,023		$	(740	)

Operating expenses in the Company’s Ground Systems – Government segment increased by approximately $1.02 million for the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004 due to increased bid and proposal expenses related to the Company’s recently announced RAIDRS contract with the U.S. Air Force.

Operating expenses in the Command & Control unit of the Company’s Ground Systems – Commercial segment increased by approximately $280,000 for the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004 principally due to allocated bid and proposal expenses. Operating expenses at SAT were down approximately $490,000 principally due to reductions in product amortization expenses and lower research and development costs. At Newpoint operating expenses were essentially flat during the periods being compared.

The Space Communications Systems segment’s operating expenses for the nine months ended June 30, 2005 decreased approximately $350,000 compared to the nine months ended June 30, 2004. Amortization expense decreased approximately $510,000 resulting from certain intangible assets being fully amortized at June 30, 2004. Although SG&A expenses increased by approximately $530,000 on a period to period basis, R&D spending was lower by approximately $370,000 accounting for most of the remaining decline in operating expenses.

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Operating expenses in the Corporate segment decreased by approximately $1.1 million principally due to the closure of the I&T Division, the sale of operating assets of the Antenna Division in November 2004 and reduced product related selling expenses.

Income from Operations

Income from operations for the nine months ended June 30, 2005 and 2004 for each of the Company’s segments is shown in the following table:

	Nine Months Ended June 30,						Increase/ (Decrease)
Segment	2005			2004
	(in thousands)			(in thousands)			(in thousands)
Income from Operations
Ground Systems – Government	$	2,764		$	3,459		$	(695	)
Ground Systems – Commercial
Command & Control		731			414			317
Newpoint		113			29			84
SAT		(481	)		(551	)		70
Intra-Segment Elimination		7			(8	)		15
Ground Systems – Commercial		370			(116	)		486
Space Communications Systems		6,694			5,619			1,075
Corporate
Product Group		(1,560	)		(962	)		(598	)
Antenna		(725	)		(1,011	)		286
I&T		—			(293	)		293
Other		(45	)		48			(93	)
Corporate		(2,330	)		(2,218	)		(112	)
Elimination		31			3			28
Total Income from Operations	$	7,529		$	6,747		$	782

Income from operations during the periods compared decreased approximately $700,000 in the Company’s Ground Systems – Government segment as a result of increased operating expenses, partially offset by increased gross margin.

Income from operations during the periods compared increased by approximately $490,000 in the Company’s Ground Systems – Commercial segment as a result of increased revenue and gross margins exclusive of SAT. SAT recorded lower revenue and gross margins during the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004, but the decrease was somewhat offset by a decrease in operating expenses of approximately $70,000.

The Space Communications Systems segment recorded increased income from operations of approximately $1.08 million principally due to increased revenue and gross margins coupled with decreased operating expenses.

In the Corporate segment, the Product Group posted an operating loss of almost $1.56 million primarily because of amortization expense that approached $1.8 million for the nine months ended June 30, 2005

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coupled with lower license revenue. Although the Product Group recorded losses for the first nine months of the fiscal year, a large portion of the revenue generated in the Company’s ground systems business (both Government and Commercial) is a result of its EPOCH IPS product line, which the Company believes distinctly and favorably distinguishes it from its competitors.

Operating losses in the Antenna Division have been reduced due to the sale of that unit’s assets, although overruns on three of the Antenna Division’s four remaining contracts have resulted in an operating loss of approximately $730,000 for the nine months ended June 30, 2005. Operating losses at the I&T Division have been eliminated due to the shutdown of that unit.

Other Income/Expense

Other income and expense increased approximately $270,000 between the nine-month periods being compared, mostly as a result from increased interest income related to favorable interest rate changes.

Income Before Income Taxes/Net Income

Income before income taxes increased approximately $1.05 million for the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004 principally due to increased operating income of approximately $780,000 as described above combined with increased interest income.

The Company’s effective tax rate decreased from 36.4% for the nine months ended June 30, 2004 to 35.2% for the nine months ended June 30, 2005 principally due to a higher percentage of tax exempt income compared to total income before income taxes in the current period.

As a result, net income increased to approximately $5.1 million during the nine months ended June 30, 2005 from $4.3 million during the nine months ended June 30, 2004.

OUTLOOK

This outlook section contains forward-looking statements, all of which are based on current expectations. There is no assurance that the Company’s projections will in fact be achieved and these projections do not reflect any acquisitions or divestitures that may occur in the future. Reference should be made to the various important factors listed under the heading “Forward-Looking Statements” that could cause actual future results to differ materially.

At this time, the Company has a backlog of work to be performed and it may receive additional contract awards based on proposals in the pipeline, although the estimated backlog under the Company’s government contracts is not necessarily indicative of revenues that will actually be realized under the contracts. Management believes that operating results for future periods will improve based on the following assumptions:

• Demand for satellite technology and related products and services will continue to expand; and

• Sales of its software products and engineering services will continue to increase.

As disclosed in its Form 10-K for the fiscal year ended September 30, 2004, the Company was anticipating that operating results for fiscal year 2005 would be comparable to results recorded for fiscal year 2004. After analyzing its results for the nine months ended June 30, 2005, the Company believes that it is on target to meet or even exceed these goals for fiscal year 2005 in its entirety.

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LIQUIDITY AND CAPITAL RESOURCES

Since the Company’s inception in 1982, it has been profitable on an annual basis and has generally financed its working capital needs through internally generated funds, supplemented by borrowings under the Company’s general line of credit facility with a commercial bank and the proceeds from the Company’s initial public offering in 1988. In June 1999, the Company supplemented its working capital position by raising approximately $19.7 million (net) through the private placement of approximately 1.2 million shares of its common stock. In February 2000, the Company raised an additional $40.9 million (net) for use in connection with potential acquisitions and other general corporate purposes through the private placement of 1.4 million additional shares of its common stock. With respect to the capital raised in the private placements, at June 30, 2005, $14.5 million was invested in variable rate State of Maryland debt securities and $13.5 million was invested in Banc of America Securities LLC Auction Rate Securities.

For the nine months ended June 30, 2005, operating activities provided the Company approximately $8.4 million of cash. The Company used approximately $600,000 (net) in investing activities; financing activities provided approximately $3.0 million. Included in the $600,000 of investing activities is approximately $600,000 in newly capitalized software development costs and $1.2 million used for the purchase of fixed assets which was offset by the proceeds provided by the sale of $1.2 million (net) in marketable securities.

The Company has a line of credit agreement with a local bank for $10.0 million for general corporate purposes. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5% to 2.4% based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The line of credit is secured by the Company’s billed and unbilled accounts receivable, inventory, equipment, and insurance proceeds and has certain financial covenants, including minimum net worth and liquidity ratios. The Company had no balance outstanding at June 30, 2005 under the line of credit. The line of credit expires on February 28, 2007.

The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $34,200 at June 30, 2005. The outstanding balance is payable over an 11-month period and bears interest at a rate of 8.8% per annum.

The Company’s Board of Directors declared a cash dividend of $.04 per share to all stockholders of record as of close of business on June 2, 2005. The dividend was paid on June 29, 2005 in the amount of $416,680. In addition, the Company’s Board of Directors declared a cash dividend of $.04 per share to all stockholders of record as of close of business on September 1, 2005. The dividend will be paid on or about September 28, 2005.

The Company currently anticipates that its current cash balances, amounts available under its lines of credit and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months.

The Company believes that inflation did not have a material impact on the Company’s revenues or income from operations during the nine months ended June 30, 2005 or in past fiscal years.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no “off-balance sheet arrangements” as such term is defined in Item 303(a)(4)(ii) of Regulation S-K.

FORWARD LOOKING STATEMENTS

Certain of the statements contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section, in other parts of this quarterly report on Form 10-Q, and in this section,

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including those under the headings “Outlook” and “Liquidity and Capital Resources,” are forward looking. In addition, from time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “believe”, “expect”, “anticipate”, “estimate”, “continue”, or other similar words, including statements as to the intent, belief, or current expectations of the Company and its directors, officers, and management with respect to the Company’s future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. While the Company believes that these statements are and will be accurate, a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s statements. The Company’s business is dependent upon general economic conditions and upon various conditions specific to its industry, and future trends cannot be predicted with certainty. Particular risks and uncertainties that may affect the Company’s business, other than those described elsewhere herein or in our other filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), include the following:

• A significant portion of the Company’s revenue is derived from contracts or subcontracts funded by the U.S. Government, which are subject to termination without cause, government regulations and audits, competitive bidding, and the budget and funding process of the U.S. Government.

• The presence of competitors with greater financial resources and their strategic response to the Company’s new services.

• The potential obsolescence of the Company’s services due to the introduction of new technologies.

• The response of customers to the Company’s marketing strategies and services.

• The Company’s commercial contracts are subject to strict performance and other requirements.

• The intense competition in the satellite ground system industry could harm the Company’s financial performance.

• With respect to the Company’s acquisition strategy, if the Company is able to identify and acquire one or more businesses, the integration of the acquired business or businesses may be costly and may result in a decrease in the value of the Company’s common stock.

• The Company may not adequately assess the risks inherent in a particular acquisition candidate or correctly assess the candidate’s potential contribution to the Company’s financial performance.

• The Company may need to divert more management resources to integration of an acquired business than it planned, which may adversely affect its ability to pursue other more profitable activities.

• The difficulties of integrating an acquired business may be increased by the necessity of coordinating geographically separated organizations, integrating personnel with disparate backgrounds and combining different corporate cultures.

• The Company may not eliminate as many redundant costs as it anticipated in selecting acquisition candidates.

• Changes in activity levels in the Company’s core markets.

• The Company may not be able to effectively manage any continued growth.

• The business is subject to risks associated with international transactions.

• The Company depends upon intellectual property rights and risks having its rights infringed.

• The estimated backlog is not necessarily indicative of revenues that will actually be realized under the contracts.

• The Company’s quarterly operating results may vary significantly from quarter to quarter.

• The market price of the Company’s common stock may be volatile.

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While sometimes presented with numerical specificity, these forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company’s forward-looking statements, many of which are subject to significant uncertainties and contingencies beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this document. These forward-looking statements are based on current information and expectation, and the Company assumes no obligation to update. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by the Company or any other person that these estimates will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While the Company currently does not have significant European operations, our customer base is expanding outside the U.S. and therefore certain contracts now and in the future will likely be denominated in currencies other than the U.S. dollar. As a result, the Company’s financial results could be affected by factors such as foreign currency exchange rates for contracts denominated in currencies other than the U.S. dollar. To mitigate the effect of changes in foreign currency exchange rates, the Company may hedge this risk by entering into forward foreign currency contracts. As of June 30, 2005, virtually all of the Company’s contracts are denominated in U.S. dollars. Three contracts were denominated in Euros that were hedged. These contracts are not material to the Company’s financial statements. As the Company enters into new foreign currency based contracts in the future, the Company may employ similar hedging contracts.

ITEM 4. CONTROLS AND PROCEDURES

a. Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the fiscal quarter covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

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b. Changes in internal controls

As required by Rule 13a-15 under the Exchange Act, the Company’s management carried out an evaluation of any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the chief executive officer and chief financial officer. Based upon that evaluation, the Company concluded that there was no change in the Company’s internal control over financial reporting during this period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s chief executive officer and chief financial officer, and effected by the board of directors, management and other personnel, 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. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company was held on April 13, 2005. The following matters were voted on by stockholders, and received the votes indicated:

1. The stockholders elected the following individuals to the Board of Directors:

Director	For	Withheld
Steven R. Chamberlain	6,540,052	1,541,555
Thomas L. Gough	6,554,489	1,527,118
Bonnie K. Wachtel	8,035,918	45,689
Dominic Laiti	8,036,768	44,839
R. Doss McComas	7,632,245	449,362

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2. The stockholders approved the Amended and Restated ISI 2002 Stock Option Plan:

For	Against	Abstain	Broker Non-Votes
5,486,780	709,759	1,885,068	—

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits

10.1	Lease Agreement dated April 20, 2005 by and between Real Time Logic, Inc. and the John J. Gogian Jr. Revocable Trust of 1983.
10.2	Purchase Agreement dated April 28, 2005 by and between RT Logic Tract TT2, LLC and Northgate Properties, LLC.
11.1	Computation of Per Share Earnings.
31.1	Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934, as amended.
31.2	Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934, as amended.
32.1	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	INTEGRAL SYSTEMS, INC.
	(Registrant)
Date: August 9, 2005	By:	/s/ THOMAS L. GOUGH
		Thomas L. Gough
		President & Chief Operating Officer
Date: August 9, 2005	By:	/s/ ELAINE M. PARFITT
		Elaine M. Parfitt
		Executive Vice President &
		Chief Financial Officer

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EX-10.1

Exhibit 10.1

LEASE AGREEMENT FACING PAGE

LEASE DATE:	April 15, 2005
LANDLORD:	John J. Gogian Jr. Revocable Trust of 1983, dated April 18, 1983
NAME:	c/o Benson-Price Commercial, Inc., Landlord’s management agent
ADDRESS:	P.O. Box 25069
	Colorado Springs, CO 80936
TENANT:	Real Time Logic, Inc.
NAME:	Sean Conway, Chief Operating Officer
ADDRESS:	1042 Elkton Drive
	Colorado Springs, CO 80907

GUARANTORS (see Rider #1):	None
USE OF PREMISES:	General offices & warehouse
SQUARE FEET:	28,663 +/-
LEASED PREMISES:	1036A – 1046 & 975 Elkton Drive, Colorado Springs, Colorado, see rider #3
UNIT DESIGNATION:	1042 Elkton Drive, Colorado Springs, Colorado
Garden of the Gods Industrial Park located in the City of Colorado Springs, County of El Paso, State of Colorado (the “Building”).
POSSESSION DATE:	January 1, 2006, Tenant is currently in possession of premises
COMMENCEMENT DATE:	January 1, 2006
TERMINATION DATE:	December 31, 2006
LEASE PERIOD:	One (1) Year
BASE RENT:

Period	Annual	Monthly
Year 1	$315,293.00	$26,274.42

SECURITY DEPOSIT:	See rider #4
PARKING:	NON-RESERVED BASIS

THIS LEASE AGREEMENT FACING PAGE, together with the General Lease Provision and any Riders, Exhibits, Schedules, and Lease Guaranties attached hereto and initialed by the parties, shall constitute the Lease between the Tenant described above, as Tenant, and the Landlord described above, as Landlord, for the Premises described above, made and entered into as of the Lease Date specified above.

Schedules and Riders attached:

Rider #1	Lease Guaranty
Rider #2	Acknowledgement of Modification of Commencement Date
Rider #3	Tenant Premises
Rider #4	Additional Provisions
Rider #5	Rules & Regulations

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INDEX

Rev. 4.00

Lease Agreement Facing Page

GENERAL LEASE PROVISIONS

	Section
The Leased Premises	1
Definitions	2
Term of Lease	3
TENANT COVENANTS
Base Rent	4
Commencement and Conduct of Business	5
Business Taxes, etc.	6
Additional Rent	7
Bulbs, Tubes Ballasts	8
Meters	9
Use of Electricity	10
Tenant Repair and Maintenance	11
Assignment and Subletting	12
Master Declaration of Protective Covenants	13
Use of Leased Premises	14
Tenant’s Insurance	15
Cancellation of Insurance	16
Observance of Law	17
Waste and Nuisance	18
Entry by Landlord	19
Exhibiting Premises	20
Alterations	21
Glass	22
Signs, Drapes, Shutters and Banners	23
Name of Building	24
Subordination and Attornment	25
Acceptance of Premises	26
Estoppel Certificates	27
LANDLORD’S COVENANTS
Quiet Enjoyment	28
Services	29
Repair and Maintenance by Landlord	30
Landlord’s Insurance	31
Condemnation	32
Loss and Damage	33
Delays	34
Default	35
Remedies of Landlord	36
End of Term	37
Transfer by Landlord	38
Notice	39
Governing Law	40
Payment in U.S. Currency/Certified Funds	41
Lease Entire Agreement	42

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Binding Effect	43
Security Deposit	44
Interpretation	45
Severability	46
Captions	47
Recording - Short Form Memo	48
Non-Waiver of Defaults/Landlord’s Default	49
Certain Impositions	50
Environmental Matters	51
Disabilities Laws	52
Security	53
Signature Page
Lease Guaranty	Rider 1
Acknowledgement of Modification of Commencement Date	Rider 2
Tenant Premises	Rider 3
Additional Provisions	Rider 4
Rules & Regulations	Rider 5

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GENERAL LEASE PROVISIONS

1. THE LEASED PREMISES

In consideration of the rent and the covenants and agreements hereinafter made on the part of the Tenant to be paid, observed, and performed, the Landlord has demised and leased and by these presents does demise and lease to the Tenant, the Leased Premises described on the Lease Agreement Facing Page attached hereto and outlined in Rider #3 the Tenant Premises attached hereto and forming a part hereof, but excluding therefrom any part of the exterior face of the Building, together with the right of the Tenant, in common with the Landlord, its other tenants, subtenants, and invitees thereof, to the nonexclusive use of the Building grounds and parking area.

2. DEFINITIONS

In this Lease the following terms or words shall have the following meanings:

(a) The terms appearing on the Lease Agreement Facing Page attached hereto shall have the meanings stated thereupon.

(b) “Herein”, “hereof”, “hereunder”, “hereto”, “hereinafter”, and similar expressions refer to this Lease and not to any particular paragraph, section, or other portion thereof unless the context otherwise specifies.

(c) “Business Day” means all of the days of each week unless such day is a holiday.

(d) “Commencement Date” means the date so designated on the Lease Agreement Facing Page attached hereto, or the date identified by the Landlord when the Landlord notifies the Tenant that the Leased Premises are ready for occupancy, whichever last occurs; however, if the Commencement Date has not occurred within six (6) months from the date of this Lease, then this Lease shall be null and void and Landlord and Tenant shall be released from all further obligations under this Lease. If the Commencement Date is different than the date designated on the Lease Agreement Facing Page then Landlord and Tenant shall execute a written acknowledgment modifying the date of Commencement and shall attach it to this Lease as RIDER #2. Unless otherwise set forth in the Lease, Tenant’s obligations to pay rent and related charges begin on the Commencement Date. If Tenant takes possession of or otherwise occupies the Leased Premises prior to the Commencement Date, whether in whole or in part, or whether part time or full time, the Commencement Date shall be deemed to be such date of possession or occupancy.

(e) “Normal Business Hours” means the hours from 8:00 a.m. to 6:00 p.m. on Business Days.

(f) “Term” means the time in the Lease Period set forth on the Lease Agreement Facing Page attached hereto, to be computed from 8:00 o’clock a.m. on the Commencement Date and expiring at 5:00 o’clock p.m. on the last day of such Lease Period.

(g) “Rent” as the term is used throughout this Lease shall denote the “Base Rent”, as is hereinafter defined, and all other financial obligations of the Tenant hereunder which are herein described as “Additional Rental” or “Additional Rent.”

(h) “Real Property” as the term is used throughout this Lease shall designate the total parcel of real property owned by the Landlord upon which the Building and the Leased Premises are located.

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3. TERM OF LEASE

Tenant shall have the right to have and hold the Leased Premises for and during the Term subject to the payment of the Base Rent and the Additional Rent and the full and timely performance by Tenant of the covenants and conditions hereinafter set forth.

TENANT COVENANTS

Tenant covenants and agrees with the Landlord as follows:

4. BASE RENT

As of the Commencement Date, Tenant covenants and agrees to timely pay without notice, deduction, off-set or abatement to the Landlord at the Building, or such other address as Landlord may notify Tenant of in writing, yearly and every year during the Term hereof, the Rent in lawful money of the United States. Base Rent is payable in the monthly installments set forth on the Lease Agreement Facing Page attached hereto; Additional Rent is payable pursuant to the terms of Paragraph 7 hereof. Rent is due and shall be paid in advance on or before the first (1st) day of each month during the term hereof. Rent is considered late and Tenant shall be in default if rent is received after 5:00 o’clock p.m. on the fifth (5th) day of the month. A penalty of fifty dollars ($50.00) per day will be assessed on any sums due under the lease which are received after the fifth (5th) day of the month. In the event that Landlord is required to post a 3-day notice for non-payment of rent or for any other breach of the Lease, Tenant shall pay to Landlord an administrative fee of $250.00 and attorneys fees of $250.00 (total of $500.00) together with any other sums due as an essential part of the cure of default. If the Term hereof commences on any day other than the first day or expires on any day other than the last day of the month, Rent for the fraction of a month at the commencement and at the end of the Term shall be adjusted pro rata on a per diem basis, and all succeeding installments of Base Rent shall be paid on the first (1st) day of each month during the term hereof. Should Tenant be in default, Landlord may collect $50.00 per day penalty under this provision or 18% interest under Paragraph 36, whichever is greater. Any rent check returned for insufficient funds shall constitute an event of default, and Tenant must cover said check with certified funds plus the penalty contained herein. Landlord may also seek additional relief as provided by law.

5. COMMENCEMENT AND CONDUCT OF BUSINESS

Tenant shall commence its business in the Leased Premises on the Commencement Date and hereafter shall operate its business in the entire Leased Premises in accordance with Paragraph 14 in a reputable manner and in compliance with the provisions of this Lease and the requirements of all applicable governmental laws and during Business Days during the Term hereof, provided that nothing in this Section shall require the Tenant to carry on business during any period prohibited by any law or ordinance regulating or limiting the hours during which such business may be carried on.

6. BUSINESS TAXES, ETC.

6.1 Tenant shall fully and timely pay all business and other taxes, separately metered utility charges, other charges, rates, duties, assessments and license fees levied, imposed, charged, or assessed against or in respect of the Tenant’s occupancy of the Leased Premises or in respect of the personal property, trade fixtures, furniture and facilities of the Tenant or the business or income of the Tenant on and from the Leased Premises, if any, as and when the same become due, and shall indemnify and hold Landlord harmless from and against all payment of such taxes, charges, rates, duties, assessments, and license fees and against all loss, costs, charges, and expenses occasioned by or arising from any and all such taxes, rates, duties, assessments, and license fees.

6.2 Tenant shall promptly deliver to Landlord for inspection at Landlord’s option upon written request of Landlord, receipts for payment of all taxes, charges, rates, duties,

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assessments, and licenses in respect to all improvements, equipment, and facilities of the Tenant on or in the Leased Premises which were due and payable up to one (1) year prior to such request and in any event to furnish to the Landlord if requested by the Landlord, evidence satisfactory to the Landlord of any such payments. Landlord shall have no obligation hereunder or otherwise to make or monitor the making of such payments.

7. ADDITIONAL RENT

7.1 Real Estate Taxes and Operating Costs:

(a) Tenant shall pay to the Landlord as Additional Rent both a pro rata portion of the “Real Estate Taxes”, as said term is hereinafter defined, and a portion of the Operating Costs as said term is hereinafter defined. In determining the Tenant’s share of any such Additional Rent, such amount shall be a fraction, the numerator of which shall be the area of the Leased Premises and the denominator of which shall be the total rentable space in the Building. For purposes of this Lease, and unless and until there is physical change in the size of the Leased Premises and/or the rentable space in the Building, the Tenant’s proportional share shall be deemed to be 22% +/- (“Tenants Proportional Share”). Tenant accepts the figures used by the Landlord for the area of the Leased Premises, the total rentable space in the Building, and Tenant’s proportional share, and waives any right to dispute these figures in the future.

(b) Real Estate Taxes

(i) “Real Estate Taxes” shall mean and include all general and special taxes, assessments, dues, duties, and levies charged and levied upon or assessed against the Building, the land upon which it is located, any improvements situated on the Real Property, any leasehold improvements, fixtures, installations, additions, and equipment used in the maintenance or operation of the Building whether owned by Landlord or Tenant, not paid directly by the Tenant. Further, if at any time during the Term of this Lease the method of taxation of real estate prevailing at the time of execution hereof shall be or has been altered so as to cause the whole or any part of the taxes now or hereafter levied, assessed, or imposed upon real estate to be levied, assessed, or imposed upon Landlord wholly or partially as a capital levy or otherwise, or on or measured by the rents therefrom, then such new or altered taxes attributable to the Leased Premises shall be deemed to be included within the term “Real Estate Taxes” for purposes of this Section, save and except that such shall not be deemed to include any increase in said tax not attributable to the Building.

(ii) The amount of Real Estate Taxes attributed to the Leased Premises for any year or portion of year shall be the amount of such taxes multiplied by Tenant’s Proportional Share.

(c) Operating Costs

(i) The term “Operating Costs” means the total amounts paid or payable whether by the Landlord or others on behalf of the Landlord in connection with the ownership, maintenance, repair and operation of the Building, including without limiting the generality of the foregoing, the purchase of steam or other energy for heating or other purposes, the amount paid or payable for all electricity furnished by the Landlord to the Building, the amount paid or payable for replacement of electric light bulbs, tubes and ballasts; the amount paid or payable for all hot and cold water (other than that paid by Tenants), the amount paid or payable for all labor and/or wages and other payments including costs to Landlord or workman’s compensation and disability insurance, payroll taxes, welfare and fringe benefits made to janitors, caretakers, and other employees, contractors and subcontractors of the Landlord (including but not limited to salary or wages of the building manager) involved in the operation, maintenance, and repair of the Building, managerial and administrative expenses related to the Building, the total charges of any independent contractors employed in the repair, care, operation, maintenance, and cleaning of the Building, the amount paid or payable for all supplies including all supplies and necessities which are occasioned by everyday wear and tear, the costs of climate control, window and exterior wall cleaning, roof repairs, telephone and utility costs,

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the cost of accounting services necessary to compute the rents and charges payable by tenants of the Building, fees for management, legal, accounting, inspection and consulting services, travel of ownership to the property, the cost of guards and other protection services, the cost of locks, keys, alarms and related security equipment, payments for general maintenance and repairs to the plant and equipment supplying, the amount paid for premiums for all insurance and all amounts payable in accordance with ground leases, easements, or right of way appurtenant to the Building. Operating Costs shall not, however, include interest on debt, capital improvements (which includes structural, roof replacement and parking lot overlay), capital retirement of debt, depreciation, costs properly chargeable to capital account, and costs directly charged by the Landlord to any tenant or tenants. The reference to “Building” in this subparagraph (c)(i) shall include all related facilities including interior Lease Premises, sidewalks, grounds, elevators, and other public areas contained in and around the Building as well as landscaping, parking areas, and exterior walkways and areas. By setting forth the above items which may or could be included within Operating Costs, it is not meant to indicate or imply that all of such activities or services will be provided by the Landlord.

(ii) The amount of Operating Costs attributed to the Leased Premises for any year or portion of year shall be the amount of such Operating Costs multiplied by Tenant’s Proportional Share.

(d) If only part of the first or final calendar year is included within the Term, the amount of Real Estate Taxes and Operating Costs payable by the Tenant for such period shall be estimated by the Landlord acting reasonably and adjusted proportionately on a per diem basis and shall be payable upon demand as soon as such amount has been ascertained by the Landlord. In the event of assignment, no new assignee-tenant may dispute Landlord’s determination or calculation of expenses prior to the date of assignment.

7.2 Payment of Additional Rent

Any Additional Rent payable by the Tenant under Section 7.1 hereof shall be paid as follows, unless otherwise provided:

(a) During the Term, the Tenant shall pay to the Landlord at the same time as the payment of the Base Rent, one twelfth (1/12th) of the amount of such Additional Rentals as estimated by the Landlord in advance acting reasonably to be due from the Tenant for a twelve month period of time. Such estimate may be adjusted from time to time by the Landlord as actual Real Estate Taxes and Operating Costs become known, and the Tenant shall pay installments of Additional Rentals according to such estimate as periodically adjusted.

(b) If the aggregate amount of such estimated Additional Rental payments made by the Tenant in any year of the Term should be less than the Additional Rentals due for such year of the Term, then the Tenant shall pay to the Landlord as Additional Rental upon demand, the amount of such deficiency. Similarly, if the aggregate amount of such estimated Additional Rental payments made by the Tenant in any year of the Term should be more than the Additional Rentals due for such year of the Term, then such surplus shall be credited to future Additional Rent due and owing in the next subsequent year.

(c) Notwithstanding the foregoing, if the Landlord is required to pay an amount which it is entitled to collect from the tenants of the Building more frequently than monthly, or if the Landlord is required to prepay any such amount, the Tenant shall pay to the Landlord its proportionate share of such amount calculated in accordance with this Lease within ten (10) days from receipt of written demand.

(d) The Landlord shall, within ninety (90) days after the end of each calendar year (or as soon thereafter as possible reasonable), provide the Tenant a statement of the actual Real Estate Taxes and Operating Costs incurred for the previous calendar year, certified by the Landlord as to its accuracy. If the Tenant wishes to dispute the Landlord’s determination or calculation of such expenses for any calendar year, the Tenant shall give the Landlord written

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notice of such dispute within thirty (30) days after receipt of notice from the Landlord of the matter giving rise to the dispute. If the Tenant does not give the Landlord such notice within such time, the Tenant shall have waived its right to dispute such determination or calculation. In the event the Tenant disputes any such determination or calculation, the Tenant shall have the right to inspect the Landlord’s accounting records at the Landlord’s accounting office and if, after such inspection, the Tenant still disputes such determination or calculation, a certification as to the proper amount made by an independent certified public accountant selected by the Landlord shall be final and conclusive. The Tenant agrees to pay the costs of such certification. If such certification reveals that the amount previously determined and calculated by the Landlord was incorrect and improper, a correction shall be made and either the Landlord shall promptly return to the Tenant any overpayment or the Tenant shall promptly pay to the Landlord any underpayment that was based on such incorrect amount. Notwithstanding the pendency of any dispute hereunder, the Tenant shall make payments based upon the Landlord’s then current determination and calculation until such determination and calculation has been established hereunder to be incorrect.

8. BULBS, TUBES, BALLASTS

Tenant shall make any replacement of electric light bulbs, tubes, and ballasts in the Leased Premises throughout the term and any renewal thereof. The Landlord, in its sole discretion, may adopt a system of relamping and reballasting periodically on a group basis in accordance with good practice

9. METERS

Tenant shall pay as Additional Rental, on demand, the cost of any metering which may be required by the Landlord to measure any excess usage of electricity, water, or other utility or energy.

10. USE OF ELECTRICITY

10.1 Tenant’s use of electricity in the Leased Premises shall be separately metered and paid by Tenant to the supplying utility of the Landlord’s discretion.

10.2 If, for any reason, electricity is not separately metered to Tenant, Landlord shall reasonably apportion Tenant’s share of electrical usage and Tenant shall pay the cost thereof as Additional Rent on the dates for payment of Base Rent occurring after billing of Tenant therefore by Landlord.

11. TENANT REPAIR AND MAINTENANCE

11.1 If the Building, boilers, engines, pipes, or other apparatus, or members or elements of the Building (or any of them) used for the purpose of climate control of the Building, or if the water pipes, drainage pipes, electrical lighting, or other equipment of the Building or the roof or outside walls of the Building or Real Property of Landlord become damaged or are destroyed through any act or omission of the Tenant, its servants, agents, employees, or its invitees, then the cost of the necessary repairs, replacements, or alterations, shall be borne by the Tenant who shall pay such cost to Landlord within ten (10) days from receipt of written demand thereof, except to the extent such costs are reimbursed by insurance.

11.2 Tenant shall keep the Leased Premises in as good order, condition, and repair as when they were entered upon, except for reasonable wear and tear Tenant shall vacuum all carpets weekly and clean all carpets annually. Tenant shall be responsible for the cost of any repair, replacement or alteration of ceiling tile, water pipes, sinks, toilets, plumbing, drainage pipes, electrical wiring, electrical outlets, lighting, climate control, doors, locks (interior and exterior), door hardware, interior walls and flooring, roof if penetrated by tenant as set forth in Section 30 or any portion of the Leased Premises. If Tenant fails to keep the Leased Premises in such good order, condition, and repair as required hereunder to the satisfaction of Landlord,

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Landlord may restore the Leased Premises to such good order and condition and make such repairs without liability to Tenant for any loss or damage that may accrue to Tenant’s property or business by reason thereof, and upon completion thereof, Tenant shall pay to Landlord the costs of restoring the Leased Premises to such good order and condition and of the making of such repairs, within ten (10) days from receipt of written demand thereof.

11.3 Tenant shall deliver at the expiration of the Term hereof or sooner upon termination of the Term, the Leased Premises in the same condition as received except for reasonable wear and tear, and cause to be removed at Tenant’s expense furniture and equipment belonging to Tenant, signs, notices, displays, and the like from the Leased Premises and repair any damage caused by such removal.

11.4 In the event Landlord is responsible for cleaning service under this Lease, Tenant shall leave the Leased Premises at the end of each Business Day in a reasonably tidy condition for the purpose of allowing the cleaning service to perform adequately.

11.5 Landlord reserves the right to enter into contracts for preventive maintenance for all climate control and Tenant shall be responsible for said costs.

12. ASSIGNMENT AND SUBLETTING

12.1 Tenant shall not permit any part of the Leased Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under Section 12.2, and the employees of the Tenant and any such permitted subtenant, or permit any part of the Leased Premises to be used or occupied by any licensee or concessionaire, or permit any persons to be upon the Leased Premises other than the Tenant, such permitted subtenants, and their respective employees, customers, and others having the lawful business with them.

12.2 Tenant shall not assign or sublet or part with the possession of all or part of the Leased Premises without the prior written consent of Landlord, which consent shall not be unreasonably or untimely (30 days) withheld; provided, however, that the use of the Premises by the sublessee or assignee shall be substantially the same as the use permitted by the Tenant, and provided that the Tenant shall: submit in writing to Landlord (a) the name and legal composition of the proposed subtenant or assignee; (b) the nature of the business proposed to be carried on in the Leased Premises; (c) the terms and provisions of the proposed sublease; (d) such reasonable financial and other information as the Landlord may request concerning the proposed subtenant or assignee; (e) assurances, adequate to the Landlord, of the future performance by the proposed subtenant or assignee under the Lease; (f) an initial payment of $500.00 to the Landlord to defray the expense of Landlord in reviewing the aforementioned material, to be paid along with the written request for assignment or subletting; (g) payment of all Landlord’s legal fees and related expenses incurred as a result of the assignment or subletting, to be paid at the execution of the assignment or sublease. No partial assignment or subletting of a portion of the Leased Premises shall be allowed. Any consent to any complete or full assignment or subletting shall not relieve the Tenant from its obligations for the payment of all rental due hereunder and for the full and faithful observance and performance of the covenants, terms and conditions herein contained. No term of assignment or subletting shall extend beyond the primary term of the lease, and any option periods under this Lease shall terminate with respect to any Tenant and any assignee or sublessee. Consent of the Landlord to an assignment or subletting shall not in any way be construed to relieve the Tenant from obtaining the consent of the Landlord to any further assignment or subletting, and shall not bind Landlord to provide any services or benefits to subtenant that Tenant had provided or committed to provide in writing or otherwise. Any violation of this subsection shall be a non-curable default which allows the Landlord the right to possession of the Premises and other rights of default against Tenant or anyone else occupying the Premises as set forth in Section 35, despite efforts by Tenant to cure. Any rent collected by Tenant from a sublessee in excess of the rate of rent under the Lease shall be the property of the Landlord. Landlord shall have the option, in its sole discretion, to demand that a sublessee pay rent directly to the Landlord. Any sublease shall be on a sublease form provided by the Landlord.

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12.3 If the Tenant is an entity other than an individual, the transfer of an interest in more than fifty percent (50%) of such entity (or in more than fifty percent (50%) of any type of equity security of such entity, i.e., preferred stock, any class of common stock) shall constitute an assignment for purposes of this Section, which assignment shall require the same approval and be subject to the same limitations pursuant to Section 12.2 as any other assignment. The rights and obligations described in this Section 12.3 shall be applicable regardless of whether the change in control occurs at one time or as a cumulative result of several changes in ownership. The Tenant shall, upon request of the Landlord, make available to the Landlord for inspection or copying or both, all books and records of the Tenant which alone or with other data show the applicability or inapplicability of this Section 12.3.

12.4 The proposed subtenant or assignee shall have at least three (3) years of experience in the management and/or operation of the business contemplated in the sublease or assignment of the Premises. Tenant shall provide satisfactory evidence of this experience to the Landlord. Or, in lieu of such actual experience, the proposed subtenant or assignee shall provide satisfactory evidence to Landlord that the proposed subtenant or assignee will hire as employees or independent contractors personnel competent to operate the business contemplated in the sublease or assignment of the Premises.

12.5 If any interest holder of the Tenant shall fail or refuse to furnish to the Landlord information or data requested by Landlord, verified by the affidavit of such interest holder or other credible person under Section 12.3 above, then such failure shall constitute an event of default under this Lease.

12.6 If Tenant desires to sublet the Leased Premises, Tenant shall offer Landlord the right to recapture any excess rent represented by the difference between the per-square-foot rental for the space then applicable pursuant to this Lease and the rental which Tenant proposes to obtain for the Leased Premises. Landlord, upon receipt of such notice, shall have the option, to be exercised within twenty (20) days from the date of the receipt of such notice, to recapture the excess rent or to terminate this Lease with the right to sublease to others, or anyone designated by Landlord. If Landlord exercises the option to terminate, Tenant shall be released of all further liability hereunder, from and after the effective date of such termination with respect to the Premises included therein. If Landlord does not exercise such option within such time, Tenant may thereafter assign this Lease or sublet the Premises involved, provided Landlord, pursuant to Section 12, consents thereto, but not later than ninety (90) days after delivery of the aforesaid notice unless a further notice is given.

13. MASTER DECLARATION OF PROTECTIVE COVENANTS

Tenant and employees and all persons visiting or doing business with the Tenant in the Leased Premises shall be bound by and shall observe the Master Declaration of Protective Covenants, if any.

14. USE OF LEASED PREMISES

14.1 Except as expressly permitted by prior written consent of the Landlord, the Leased Premises shall not be used other than as set forth on Lease Agreement Facing Page of this Lease, which use shall be non-exclusive. Tenant shall not engage in any activity which breaches the covenant of quiet enjoyment of any other tenant of Landlord. Landlord, in its sole discretion, may evict Tenant for breach of this provision. Landlord makes no representation or warranty to the Tenant regarding the occupancy or use of any lease space owned by the Landlord or leased to any other tenant. All use of the Leased Premises shall comply with the terms of this Lease and all applicable laws, ordinances, regulations, or other governmental ordinances from time to time in existence. Tenant shall not have more than one (1) person per two hundred and fifty (250) square feet of useable space occupying the premises.

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14.2 Tenant agrees that it will not keep, use, sell or offer for sale in or upon the Leased Premises any articles which may be prohibited by any insurance policy in force time to time covering the Building. In the event the Tenant’s occupancy or conduct of business in or on the Leased Premises, whether or not the Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rental within ten (10) days after bills for such additional premiums shall be rendered by the Landlord in determining whether increased premiums are a result of the Tenant’s use or occupancy of the Leased Premises. A schedule issued by the organization computing the insurance rate shall be conclusive evidence of the several items and charges which make up such rate. The Tenant shall comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises.

15. TENANT’S INSURANCE

15.1 Tenant shall maintain at its expense, in an amount equal to full replacement costs, fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Leased Premises. Tenant shall provide a Schedule of Personal Property to Landlord. Tenant shall make no claim of ownership for any personal property not appearing on the Schedule of Personal Property. Tenant shall maintain insurance coverage for business interruption, including relocation costs in the event of partial or total destruction of the Premises. In the event Tenant’s insurance coverage required by this Section is inadequate, Tenant shall bear all loss associated with the inadequacy, and Tenant shall make no claim against the insurance coverage of the Landlord. Tenant shall carry its own insurance on any boiler owned or installed by Tenant. All of Tenant’s insurance must be in place and proof of insurance provided to Landlord prior to Tenant’s possession of the Premises. Should Tenant’s use cause the Landlord’s insurance premiums to increase, Tenant shall be solely responsible for the increase in the premium.

15.2 Tenant shall, at its sole cost and expense, procure and maintain through the term of this Lease, comprehensive general liability insurance against claims for bodily injury or death and property damage occurring in or upon or resulting from the Leased Premises, in standard form and with such insurance company or companies as may be acceptable to Landlord, such insurance to afford immediate protection, to the limit of not less than $1,000,000.00 in respect of any one accident or occurrence, and to the limit of not less than $100,000.00 for property damage, with not more than $5,000.00 deductible. Such comprehensive general liability insurance shall name the Landlord as an additional insured and shall contain blanket contractual liability coverage which insures contractual liability under the indemnification of Landlord by Tenant set forth in this Lease (but such coverage or the amount thereof shall in no way limit such indemnification). Tenant shall maintain with respect to each policy or agreement evidencing such comprehensive general liability insurance and each policy or agreement evidencing the insurance required pursuant to Section 15(1) above, such endorsements as may be required by Landlord and shall at all times deliver to and maintain with Landlord a certificate with respect to such insurance in form satisfactory to Landlord and the mortgagees of Landlord. Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least ten days prior to cancellation or modification of such insurance. Such policies or duly executed certificates of insurance relating thereto shall be promptly delivered to Landlord and renewals thereof as required shall be delivered to Landlord at least thirty (30) days prior to the expiration of the respective policy terms. If Tenant fails to comply with the foregoing requirements relating to insurance, Landlord may obtain such insurance and Tenant shall pay to Landlord on demand the premium cost thereof, together with interest thereon from the date of payment by Landlord until repaid by Tenant at the rate of eighteen percent (18%) per annum. Failure to comply with any provision of Paragraph 15 by the Tenant shall constitute an event of substantial default justifying eviction of the Tenant.

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16. CANCELLATION OF INSURANCE

If any insurance policy upon the Building or any part thereof shall be canceled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way by reason of the use or occupation of the Leased Premises or any part thereof by the Tenant or by any assignee or subtenant of the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, and if the Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation, or reduction of coverage within twenty-four (24) hours after notice, the Landlord may, at its option, enter upon the Leased Premises and attempt to remedy such condition and the Tenant shall pay the cost thereof to Landlord within ten (10) days from receipt of written demand therefor, Landlord shall not be deemed to be liable for any damage or injury caused to any property of the Tenant or of others located on the Leased Premises as a result of such entry. After such ten (10) day period, interest on such cost shall accrue at the rate of eighteen percent (18%) per annum. In the event that the Landlord shall be unable to remedy such condition, then Landlord shall have all of the remedies provided for in the Lease in the event of a default by Tenant. Notwithstanding the foregoing provisions of this Section 16, if Tenant fails to remedy as aforesaid, Tenant shall be in default of its obligation hereunder and Landlord shall have no obligation to attempt to remedy.

17. OBSERVANCE OF LAW

Tenant shall comply with all provisions of law in effect during the Term and any renewal terms, or while otherwise in possession of the Premises, including without limitation, federal, state, county and city laws, zoning requirements, licensing requirements, any other ordinances, and regulations and any other governmental, quasi-governmental or municipal regulations which relate to the partitioning, equipment operation, alteration, occupancy and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions, or improvements of or to the Leased Premises including signage of any kind, whether located on or off the Premises. Moreover, the Tenant shall comply with all police, fire, and sanitary regulations imposed by any federal, state, county or municipal authorities, or made by insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises during the Term and any renewal terms.

18. WASTE AND NUISANCE

Tenant shall not commit, suffer, or permit any waste or damage or disfiguration or injury to the Leased Premises or the Real Property of Landlord or common areas in the Building or the fixtures and equipment located therein or thereon, or permit or suffer any overloading of the electrical systems or telephone systems or HVAC systems, or overloading of the floors thereof and shall not place therein any safe, heavy business machinery, computers, data processing machines, or other heaving things without first obtaining the consent in writing of the Landlord and, if requested, by Landlord’s superintending architect, and not use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business, and shall not cause or permit any nuisance, noise, or action in, at or on the Leased Premises. Landlord, in its sole discretion, shall determine what constitutes waste or nuisance under this Section. Landlord shall not be liable to Tenant for waste or nuisance committed by any other tenant on the Real Property. If this should occur, Tenant’s sole remedy is against the other tenant committing waste or nuisance.

19. ENTRY BY LANDLORD

Tenant agrees to and shall permit the Landlord, its servants or agents to enter upon the Leased Premises at any time and from time to time for the purpose of inspecting and of making repairs, alterations, or improvements to the Leased Premises or to the Building, or for the purpose of having access to the under-floor ducts, or to the access panels to mechanical shafts (which the Tenant agrees not to obstruct), and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord shall also have

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the right of entry to remedy any condition which Landlord, in its reasonable discretion, believes may cause cancellation or reduction of any insurance maintained by Landlord on the Building. The Landlord shall have the right to enter the Leased Premises in order to check, calibrate, adjust and balance controls and other parts of the heating, ventilating, and climate control system at any time. The Landlord shall attempt to proceed hereunder after reasonable notice has been given to Tenant, if possible, and in such manner as to minimize interference with the Tenant’s use and enjoyment of the Leased Premises. For the purpose of this Section and for all other purposes set forth in this Lease, Landlord shall have and retain a key with which to unlock all doors in, upon and about the Leased Premises and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency, in order to obtain entry to the Leased Premises. Tenant shall not change exterior or interior door locks without prior written permission of Landlord. Tenant shall provide Landlord with keys to any new locks.

20. EXHIBITING PREMISES

Tenant shall permit the Landlord or its agents to exhibit and show the Leased Premises to prospective tenants during normal Business Hours of the last six (6) months of the Term or any renewal thereof, or if Tenant is in default of any term of the Lease. Tenant shall not hold the Landlord liable for any damages resulting from such entry, absent gross negligence on the part of the Landlord.

21. ALTERATIONS

21.1 In the event Tenant desires to make any alterations to any portion of the Building, Real Property or the Leased Premises, including alterations to accommodate Tenant’s for needs for extra services in addition to those provided by the Landlord under Section 29, unless the Tenant has supplied the Landlord with a list of additional services necessary to meet Tenant’s requirements, and said list is attached and incorporated into this lease at the date of execution by Landlord, Tenant is deemed to have accepted the existing services to the Leased Premises as sufficient. Any additional services required by the Tenant shall be deemed an Alteration to be paid by the Tenant under Section 21 of the Lease. Tenant shall give written notice of the proposed alterations to Landlord and shall not proceed with work on the alterations without Landlord’s prior written consent which shall not be unreasonably withheld (which consent in the sole and absolute discretion of Landlord may be withheld). Tenant shall pay for Landlord’s architectural review of the proposed alterations. For purposes of this Paragraph 21, “material alterations” shall mean any alterations that affect the exterior, structure, or mechanical components of the Building, or modify the basic utility and function of the Building. Any material alterations shall at once become the property of the Landlord and shall be surrendered to the Landlord upon termination of the Lease. Any breach of the terms of this section shall be a non-curable event of default.

21.2 No alterations shall be commenced until the Tenant shall have procured and paid for, so far as the same may be required from time to time, all permits and authorizations of all municipal departments and governmental subdivisions having jurisdiction. Landlord shall in its sole and absolute discretion have the right to require, prior to commencement of such alterations, a letter of credit, bond or other satisfactory financial instrument assuring faithful performance and lien free completion of such alterations.

21.3 Any alterations shall be made within a reasonable time and in a good and workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and with all other laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments, departments, commissions, boards and officers.

21.4 In no event shall Tenant, by reason of such alterations, be entitled to any abatement, allowance, reduction or suspension of the Rent and other charges herein reserved or required to be paid hereunder, nor shall Tenant, by reason thereof, be released of or from any other obligations imposed upon Tenant under this Lease.

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21.5 Landlord shall have no responsibility to Tenant or to any contractor, subcontractor, supplier, materialman, workman, or other person, firm, or corporation who shall engage or participate in any alterations, and Landlord shall be entitled to post notices of nonliability on the Leased Premises. If any liens for labor and materials supplied or claimed to have been supplied to the Leased Premises shall be filed, Tenant shall within fifteen (15) days of the filing of such lien discharge such lien or furnish a bond, a letter of credit or title insurance protection to Landlord which in the sole and absolute discretion of Landlord affords its sufficient protection during Tenant’s timely and good faith contesting of such liens. Tenant shall indemnify and hold Landlord harmless against any liability, loss, damage, cost or expense, including attorneys fees, on account of such liens.

21.6 The Tenant may remove from the Leased Premises any personal property installed by the Tenant which have not become fixtures, as well as those of its office supplies and movable office furniture and equipment which are not attached to the Building, provided: (i) such removal is made prior to the termination of the Term of this Lease; (ii) the Tenant is not in default of any obligation or covenant under this Lease at the time of such removal; and (iii) the Tenant promptly repairs all damage caused by such removal so that the Leased Premises or Landlord’s real property as the case may be shall be placed in the condition of such Leased Premises or real property at the inception of this Lease, subject to reasonable deterioration and wear and tear. Additionally, if the Landlord so directs in writing, the Tenant will, prior to the termination of this Lease, remove any and all alterations, additions, fixtures, equipment and property placed or installed by it in the Leased Premises or Landlord’s real property location and will repair any damage caused by such removal to the condition at the inception of this Lease, reasonable deterioration and wear and tear excepted. If the Tenant does not elect or is not directed by Landlord to remove such alterations, additions fixtures and equipment, such property shall become the property of the Landlord and shall remain upon and be surrendered with the Leased Premises as a part thereof at the termination of this Lease, the Tenant hereby waiving all rights to any payment or compensation therefor.

22. GLASS

Tenant shall pay on demand the cost of replacement with as good quality and size of any glass broken on the Leased Premises including outside windows and doors of the perimeter of the Leased Premises (including perimeter windows in the exterior walls or interior glass) during the continuance of this Lease, unless the glass shall be broken by the Landlord, its servants, employees or agents acting on its behalf.

23. SIGNS, DRAPES, SHUTTERS AND BANNERS

23.1 Tenant shall not place or permit to be placed in or upon the Leased Premises where visible from the outside of the Building, or outside the Leased Premises, any signs, notices, drapes, shutters, blinds or displays of any type without the prior written consent of Landlord. In the event of breach of this section, then in addition to the other remedies in this Lease or at law, Landlord may remove the above items at Tenant’s expense.

23.2 Landlord reserves the right in Landlord’s sole discretion to place and locate on any roof or exterior of the Building such signs, notices, displays, and similar items as Landlord deems appropriate in the proper operation of the Building, including Landlord’s brokerage signs.

24. NAME OF BUILDING

Tenant shall not refer to the Building by any name other than that designated from time to time by the Landlord, nor use such name for any purpose other than that of the business address of the Building assigned to it by the Landlord.

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25. SUBORDINATION AND ATTORNMENT

25.1 At Landlord’s option, this Lease shall be subject to and subordinate to all mortgages (including any deed of trust and mortgage securing bonds and all indentures supplemental thereto) and to all underlying, superior, ground or land leases which may now or hereafter encumber the Real Property of which the Leased Premises are a part, and all renewals, modifications, consolidations, replacements and extensions thereof of such mortgages and leases which may now or hereafter affect the Leased Premises or any part thereof subject to Tenant’s receipt of reasonable non-disturbance agreement. The Tenant hereby constitutes and appoints the Landlord its agent and attorney, which power of attorney is coupled with an interest, for the purpose of executing any subordination, acknowledgment, or agreement required by a mortgagee, lender or lessor of Landlord.

25.2 The Tenant agrees that in the event that any holder of any mortgage, indenture, deed of trust, or other encumbrance encumbering any part of the Real Property becomes mortgagee in possession of the Leased Premises, the Tenant will pay to such mortgagee all Rent subsequently payable hereunder. Further, the Tenant agrees that in the event of the enforcement by the trustee or the beneficiary under or holder or owner of any such mortgage, deed of trust, land or ground lease of the remedies provided for by law or by such mortgage, deed of trust, land or ground lease, the Tenant will, upon request of any person or party succeeding to the interest of the Landlord as a result of such enforcement, automatically become the tenant of and attorn to such successor-in-interest without changing the terms or provisions of this Lease. Upon request by such successor-in-interest and without cost to the Landlord or such successor-in-interest, the Tenant shall execute, acknowledge and deliver an instrument or instruments confirming the attornment herein provided for.

26. ACCEPTANCE OF PREMISES

26.1 Taking possession of the Leased Premises by Tenant shall be conclusive evidence as against Tenant that the Leased Premises were in good and satisfactory condition when possession was taken and acknowledgment of completion of any improvements in full accordance with the terms of this Lease, unless Tenant submits a Condition Report describing any problems with the Leased Premises within ten (10) days of taking possession.

26.2 Tenant agrees that there is no promise, representation, or undertaking by or binding upon the Landlord with respect to any alteration, remodeling, or redecorating of or installation of equipment or fixtures in the Leased Premises, except such, if any, as were expressly set forth in this Lease or the Typical Plan Schedule attached hereto.

26.3 Landlord reserves the right to relocate the Tenant from the existing premises to a substitute premises within the property (Landlord's building, shopping center or complex as the case may be) selected by the Landlord. The aforesaid right to relocate shall be exercisable at any time during the term or option period by delivering written notice of Landlord’s intention not less than ninety (90) days in advance. Tenant shall notify Landlord via certified mail within thirty (30) days of notice of its intent of acceptance or rejection. Should Tenant notify Landlord of rejection of premises selected by Landlord, Tenant may terminate this Lease Agreement and vacate prior to the end of the ninety (90) day notice period provided by Landlord. Tenants right of termination in this section is not applicable in situations of fire or other cause set forth in Section 31.

27. ESTOPPEL CERTIFICATES

Tenant agrees that it shall at any time and from time to time upon not less than five (5) days’ prior notice execute and deliver to the Landlord an estoppel certificate in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the annual rental then being paid hereunder, the dates to which the rent, by installment or otherwise, and

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other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has knowledge and such other information reasonably required by Landlord or its mortgagees or any other party with whom Landlord is dealing. Any such statement may be relied upon conclusively by any such party. Tenant’s failure to deliver such statements within such time shall be conclusive upon the Tenant that this Lease is in full force and effect, except as and to the extent any modification has been represented by Landlord, and that there are no uncured defaults in Landlord’s performance, and that not more than one (1) month’s rent has been paid in advance. Tenant grants power of attorney to Landlord to execute an estoppel certificate on Tenant’s behalf in the event Tenant fails to deliver one as set forth herein. Tenant shall be liable to Landlord for all damages incurred by Landlord proximately caused by Tenant’s failure to deliver an estoppel certificate as set forth herein, or proximately caused by any false statement made by Tenant in an estoppel certificate, including Landlord’s lost sale of real property or lost opportunities to refinance.

LANDLORD’S COVENANTS

Landlord covenants and agrees with the Tenant as follows:

28. QUIET ENJOYMENT

Landlord covenants and agrees with Tenant that upon Tenant paying rent and other monetary sums due under the lease, performing its covenants and conditions under the Lease, including the covenant not to disturb other tenants, Tenant shall and may peaceably and quietly have, hold and enjoy the Leased Premises for the term, subject, however, to the terms and limitations of the Lease and of any of the ground leases, mortgages, or deeds of trust referred to in Section 25, and the limitations of Landlord’s liability for acts of other tenants and third parties contained in Sections 18 and 33.

29. SERVICES

29.1 Landlord agrees to provide, at its cost, utility services such as electrical, gas, water and sewer, HVAC services (such as heating, ventilation and cooling), and telephone connections to the Building in such capacity as shall be sufficient to meet building design requirements. Tenant shall be responsible for assessing its needs and arranging for procurement of additional services to meet its needs prior to occupancy. In this regard, Tenant represents that it has no requirements in excess of those provided in the building design for utility services and telephone and other telecommunications capacity relating to the operations that Tenant intends to conduct in the Leased Premises as permitted in accordance with the terms of this Lease. Unless otherwise treated as part of the Tenant Finish items to be installed as part of this Lease, all connection charges and all outlets, risers, wiring, piping, duct work or other means of distribution of such services within the Leased Premises unless shown on the Exhibits hereto shall be supplied by Tenant at Tenant’s sole expense. Tenant covenants and agrees that at all times its use of any such services shall never exceed the capacity of the mains, feeders, ducts, and conduits bringing the utility services to the Building; provided, however, that Tenant may increase the capacity of the mains, feeders, ducts and conduits aforementioned if Tenant pays for and performs all necessary work therefore subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld. Landlord’s responsibility ends with bringing the above services in the first sentence of this subsection to the Building. Tenant shall pay for anything else. Tenant shall pay all charges incurred by it for any utility services consumed on the Leased Premises and any maintenance charges for utilities and shall furnish all ballasts, electric light bulbs and tubes. Landlord shall not be liable for any interruption or failure of utility services on the Leased Premises, unless due to the affirmative or actions of Landlord.

29.2 Provided that the Tenant has no special or extraordinary requirements, the Landlord shall contract to provide air conditioning and heating for the occupied portion of the Leased Premises during the Term, at such temperatures and in such amounts as may be reasonably required, in the Landlord’s sole judgment, for comfortable use and occupancy under normal office conditions, everyday from 8:00 a.m. to 6:00 p.m. Tenant shall pay for the costs of

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said climate control services under Paragraph 7.1.c. or Paragraph 11 as may be applicable. In the event the Tenant has special requirements for air conditioning and heating, Tenant shall pay for the cost to provide air conditioning and heating at such temperatures and in such amounts as may be reasonably required as an alteration under Section 21 of the Lease. Alternatively, at Landlord’s sole discretion, the Landlord may treat said costs as Operating Costs under Section 7.1(c) of the Lease.

29.3 No slowdown, interruption, stoppage, or malfunction of any services identified in Section 29 shall constitute an eviction or disturbance of the Tenant’s use and possession of the Leased Premises or the Building or a breach by the Landlord of any of its obligations under this Lease, nor render the Landlord liable for damages or entitle the Tenant to be relieved from any of its obligations under this Lease (including the obligation to pay Rent), nor grant the Tenant any right of setoff or recoupment. In no event shall the Landlord be liable for damages to persons or property, or be in default under this Lease, as a result of such slowdown, interruption, stoppage, or malfunction. In the event of any such interruption, however, the Landlord shall use reasonable diligence to restore such service. The Tenant agrees that if any payment of Rent shall remain unpaid for more than ten (10) days after it shall become due, the Landlord may, without notice to the Tenant, discontinue furnishing any or all of such services until all arrearages of Rent have been paid in full, and the Landlord shall not be liable for damages to persons or property for any such discontinuance or consequential damages resulting therefrom, nor shall such discontinuance in any way be construed as an eviction or constructive eviction of the Tenant or cause an abatement of Rent or operate to release the Tenant from any of the Tenant’s obligations under this Lease.

30. REPAIR AND MAINTENANCE BY LANDLORD

Subject to the other provisions of this Lease imposing obligations for repair and maintenance upon the Tenant, including but not limited to Tenant Repair and Maintenance in Section 11, the Landlord shall as necessary or when required by governmental authority, repair, replace and maintain the external and structural parts of the Building, to include the roof provided that the roof has not been penetrated by Tenant, and grounds which do not comprise a part of the Leased Premises and are not leased to others and shall perform such repairs, replacements and maintenance with reasonable dispatch, in a good and workmanlike manner. The Landlord shall not be liable for any damages direct or indirect or consequential or for damages for personal discomfort, illness, or inconvenience of the Tenant or the Tenant’s servants, clerks, employees, invitees, or other persons by reason of failure to repair such equipment facilities or systems or reasonable delays in the performance of such repairs, replacements, and maintenance, unless caused by the deliberate act or omissions or the negligence of the Landlord, its servants, agents or employees.

31. LANDLORD’S INSURANCE

31.1 Landlord shall maintain fire and extended coverage insurance on the Building and the Leased Premises in such amounts as Landlord shall deem reasonable. Such insurance shall be maintained at the expense of Landlord (but assessed to Tenant as a part of the Operational Costs), and payments for losses thereunder shall be made solely to Landlord or the mortgagees of Landlord as their interest shall appear.

31.2 If the Building shall be partially damaged by fire or other cause not resulting from the act or omission of Tenant, Tenant’s employees, agents, contractors, customers, licensees or invitees, the damages shall be repaired by and at the expense of Landlord, and the Rent due hereunder shall be apportioned according to the part of the Leased Premises which is usable by Tenant until such repairs are made. If such partial damage is due to the action or omission of Tenant or Tenant’s employees, agents, contractors, licensees, or Tenant’s customers or invitees who Tenant negligently leaves in a position to cause such partial damage, there shall be no apportionment or abatement of Rent due hereunder by Tenant, and the debris, if any, shall be removed by and at the expense of Tenant. No penalty shall accrue for reasonable delay which may arise by reason of adjustment of fire insurance on the part of Landlord or Tenant, for

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reasonable delay on account of shortages of labor or materials, acts of God, or any other cause beyond Landlord’s control. Landlord shall not be obligated to restore fixtures, improvements, or other property of Tenant.

31.3 Insurance claims shall be file at the sole discretion of the Landlord.

31.4. If the Building should be totally destroyed by fire, tornado, or other casualty, or if it should be so damaged that rebuilding or repairs to the Leased Premises cannot be completed or commenced within one hundred eighty (180) days after the date upon which Tenant is notified by Landlord of such damage (or within one hundred eighty (180) days after the date on which Landlord otherwise becomes aware of such damage), this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. Notwithstanding the above termination provisions, the one hundred eighty day period for completion of repairs or rebuilding may be extended by the Landlord in its sole discretion in the event that the processing of insurance claim or claims prevents the completion of rebuilding or repairs within one hundred eighty days.

32. CONDEMNATION

If all or any part of or interest in the Leased Premises shall be taken as a result of the exercise of the power of eminent domain or purchase in lieu thereof, this Lease shall terminate as to the part so taken as of the date of taking. If a part of or interest in the Leased Premises, or if a substantial portion of the Building is so taken, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Leased Premises by written notice to the other within thirty (30) days after the date of taking; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Leased Premises or Building taken shall be of such extent and nature as to substantially handicap, impede, or impair Tenant’s use of the Leased Premises, or the balance of the Leased Premises remaining, for the purposes for which they were leased. In the event of any taking, Landlord shall be entitled to any and all compensation, damages, income, rent and awards with respect thereto except for an award, if any, specified by the condemning authority for the fixtures and other property that Tenant has the right to remove upon termination of this Lease and the value of the unexpired Lease Term if any. Tenant shall have no claim against Landlord for the value of any unexpired term. In the event of a partial taking of the Leased Premises which does not result in a termination of this Lease, the Rent thereafter to be paid shall be equitably reduced. Termination as provided herein with respect to a total or partial taking shall be without prejudice to the rights of either Landlord or Tenant to recover compensation and damages caused by condemnation from the condemner as hereinafter provided. The rights and obligations by Landlord and Tenant with respect to a taking or partial taking shall be provided herein (any statute, principle of law or rule of equity to the contrary notwithstanding), and each of the parties agree to cooperate with the other and to do everything necessary to effect the results herein described. Landlord and Tenant shall each have the right to claim separate awards consistent with the terms of this Lease or to litigate the matter of the taking and damages or awards. In the event of a taking or partial taking during the Term of the Lease, all sums awarded as compensation for the loss or damage to the property or the Building, fixtures and permanently attached equipment, except as set forth above, shall be awarded to Landlord; and all sums awarded as compensation for loss or damage to Tenant’s equipment and other personal property and as compensation for loss of or detriment to the business of Tenant upon the Leased Premises and for loss of anticipated profits of such business shall be awarded to Tenant. If, under the laws, rules or procedures regulating any such taking or partial taking, it shall not be possible for the parties to obtain in such proceedings segregation of awards as herein above prescribed, then the entire award or the aggregate of the awards as may be adjudged shall be paid to Landlord. The foregoing provisions of this paragraph are subject to the terms of any deed of trust conveying the Leased Premises, the Building, or Real Property now or hereafter in existence, and to which Landlord is a party.

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33. LOSS AND DAMAGE

Landlord shall not be liable to Tenant or Tenant’s employees, agents, patrons or visitors, or to any other person whomsoever, for any injury to person or damage to property in or about the Leased Premises caused by the negligence or affirmative acts of Tenant, or any other tenant or third party on the Real Property, its agents, servants, or employees, or of any other person entering upon the Leased Premises under express or implied invitation of Tenant, or caused by the Building or any obligation of Tenant to maintain the Building, or caused by leakage of gas, oil, water or steam, or by electricity emanating from the Building, and Tenant agrees to indemnify Landlord and hold it harmless from any and all loss, expense, or claims, including attorneys’ fees, arising out of such damage or injury.

34. DELAYS

Whenever and to the extent that the Landlord shall be unable to fulfill or shall be delayed or restricted in the fulfillment of any obligation hereunder in respect to the supply or provision of any service or utility or the doing of any work, or the making of any repairs by reason of being unable to obtain the material goods, equipment, service, utility, insurance proceeds or labor required to enable it to fulfill such obligation or by reason of any statute, law, or any regulation or order passed or made pursuant thereto or by reason of the order passed or made pursuant thereto or by reason of the order of direction of any administrator, controller, or board or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby or by reason of any other cause beyond its control whether of the foregoing character or not, including any delay caused by the processing of insurance claims, the Landlord shall be entitled to extend the time for fulfillment of such obligation by a time equal to the duration of such delay or restriction, and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned.

35. DEFAULT

35.1 The following events shall be deemed to be events of default by Tenant under this Lease:

(a) The failure of Tenant to timely and fully pay any installment of Rent or other charge or money obligation herein required to be paid by Tenant. Rent is due and shall be paid in advance on the first (1st) day of each month during the Term hereof, and Tenant shall be in default as set forth in Section 4.

(b) The failure of Tenant to perform, or if not immediately curable, to commence performance of (and diligently pursue performance thereafter), any one or more of its other covenants under this Lease within three (3) days after written notice to Tenant specifying the covenant or covenants Tenant has not performed.

(c) Tenant becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due.

(d) The attachment, seizure, levy upon or taking of possession by any creditor, receiver, or custodian of any portion of the property of Tenant.

(e) The instituting of proceedings in a court of competent jurisdiction for the involuntary bankruptcy arrangement, reorganization, liquidation, or dissolution of Tenant under the U.S. Bankruptcy Code (as now or hereafter in effect) or any state bankruptcy or insolvency act or for its adjudication as a bankrupt or insolvent or for the appointment of a receiver of the property of Tenant, and said proceedings are not dismissed or any receiver, trustee, or liquidator appointed herein is not discharged within sixty (60) days after the institution of said proceedings of Tenant and said proceedings are not dismissed.

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(f) Any change occurs in the financial condition of Tenant or any guarantor which Landlord considers materially or significantly adverse.

(g) The instituting of proceedings for the voluntary bankruptcy arrangement, reorganization, liquidation, or dissolution of Tenant under the U.S. Bankruptcy Code (as now or hereafter in effect) or any state bankruptcy or insolvency act, or if Tenant shall otherwise take advantage of any state or federal bankruptcy or insolvency act as a bankrupt or insolvent.

(h) Tenant shall cease to conduct its normal business operations in the Leased Premises or shall vacate or abandon same for a period of at least ten (10) days.

(i) Tenant shall repeatedly default in the timely payment of Rent or any other charges required to be paid, or shall repeatedly default in keeping, observing or performing any other covenant, agreement, condition or provisions of this Lease, whether or not Tenant shall timely cure any such payment or other default. For the purposes of this subsection, the occurrence of any such defaults three (3) times during any twelve (12) provided timely written notice is given to Tenant of each default month period shall constitute a repeated default, regardless of cure by the Tenant. The Parties agree that repeated default shall constitute a basis for eviction, regardless of partial or total cure of the individual events of default by Tenant.

(j) Tenant’s breach of quiet enjoyment of any other tenant of Landlord.

35.2 No condoning, excusing, or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenants, provisions, or conditions herein contained shall operate as a waiver of the Landlord’s right hereunder in respect of any continuing or subsequent default, breach, or non-observance, or so as to defeat or affect such continuing or subsequent default or breach, and no waiver shall be inferred or implied by anything done or omitted by the Landlord save only express waiver in writing. All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative.

36. REMEDIES OF LANDLORD

36.1 If an event of default set forth in Section 35.1 occurs, including repeated default under Section 35.1(i), the Landlord shall have the following rights and remedies, in addition to all other remedies at law or equity, and none of the following whether or not exercised by the Landlord shall preclude the exercise of any other right or remedy whether herein set forth or existing at law or equity, and all such remedies shall be cumulative:

(a) Landlord shall have the right to terminate this Lease by giving the Tenant notice in writing at any time. No act by or on behalf of the Landlord, such as entry of the Leased Premises by the Landlord to perform maintenance and repairs and efforts to relet the Leased Premises, other than giving the Tenant written notice of termination, shall terminate this Lease. If the Landlord gives such notice, this Lease and the Term hereof as well as the right, title and interest of the Tenant under this Lease shall wholly cease and expire in the same manner and with the same force and effect (except as to the Tenant’s liability) on the date specified in such notice as if such date were the expiration date of the Term of this Lease without the necessity of re-entry or any other act on the Landlord’s part. Upon any termination of this Lease, the Tenant shall quit and surrender to the Landlord the Leased Premises as set forth in Section 37.1. If this Lease is terminated, the Tenant shall be and remain liable to the Landlord for damages as hereinafter provided and the Landlord shall be entitled to recover forthwith from the Tenant as damages an amount equal to the total of:

(i) the cost, including reasonable attorneys’ fees, of enforcing any provision of this Lease, defending counterclaims, crossclaims or third party actions, and of recovering the Leased Premises;

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(ii) all Rent accrued and unpaid at the time of termination of the Lease, plus interest thereon at the rate provided in Section 36.1(g); and

(iii) any other money and damages owed by the Tenant to the Landlord.

In addition, the Landlord shall also be entitled to recover from the Tenant as damages the amounts determined, at the Landlord’s election, under (iv) or (v) below:

(iv) the amount of Rent that would have been payable hereunder if the Lease had not been terminated, less the net proceeds, if any, received by the Landlord from any reletting of the Leased Premises, after deducting all costs incurred by the Landlord in finding a new tenant and reletting the space, including costs of remodeling and refinishing space for a new tenant, reasonable tenant inducements, reasonable brokerage commissions or agents’ commissions in connection therewith, redecorating costs, attorneys’ fees and other costs and expenses incident to the reletting of the Leased Premises (collectively referred to herein as “Reletting Costs”); provided, however, that the Landlord shall have no obligation to relet or attempt to relet the Leased Premises. The Tenant shall pay such damages to the Landlord on the days on which the Rent would have been payable if the Lease had not terminated; or

(v) the present value (discounted at the rate of eight percent (8%) per annum) on the balance of the Rent for the remainder of the stated Term of this Lease after the termination date plus anticipated Reletting Costs, Less the present value (discounted at the same rate) of the fair market rental value of the Leased Premises for such period. No provision of this Lease shall limit or prejudice the right of the Landlord to prove and obtain as damages by reason of any termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to or less than the amounts referred to above.

(b) The Landlord may, without demand or notice of any kind to the Tenant, terminate the Tenant’s right of possession (but not the Lease) and re-enter and take possession of the Leased Premises or any part thereof, and repossess the same as of the Landlord’s former estate and expel the Tenant and those claiming through or under the Tenant, and remove the effects of any and all such persons (forcibly, if necessary) and change the locks on the Leased Premises without being deemed guilty of any manner of trespass, without prejudice to any remedies for arrears of Rent of preceding breach of covenants and without terminating this Lease or otherwise relieving the Tenant of any obligation hereunder. Should the Landlord elect to re-enter as provided in this Section 36.1(b), or should the Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law, the Landlord may, from time to time, without terminating this Lease, relet the Leased Premises or any part thereof for such term or terms and at such rental or rentals, and upon such other conditions as the Landlord may in its absolute discretion deem advisable, with the right to make alterations and repairs to the Leased Premises. No such re-entry, repossession or reletting of the Leased Premises by the Landlord shall be construed as an election on the Landlord’s part to terminate this Lease unless a written notice of termination is given to the Tenant by the Landlord. No such re-entry, repossession or reletting of the Leased Premises shall relieve the Tenant of its liability and obligation under this Lease, all of which shall survive such re-entry, repossession or reletting. Upon the occurrence of such re-entry or repossession, the Landlord shall be entitled to the amount of the monthly Rent which would be payable hereunder if such re-entry or repossession had not occurred, less the net proceeds, if any, of any reletting of the Leased Premises after deducting all Reletting Costs and all attorneys’ fees, other costs and expenses incurred in the re-entry, repossession and reletting procedures. The Tenant shall pay such amount to the Landlord on the days on which the Rent or any other sums due hereunder would have been payable hereunder if possession had not been retaken. In no event shall the Tenant be entitled to receive the excess, if any, of net Rent collected by the Landlord as a result of such reletting over the sums payable by the Tenant to the Landlord hereunder. If this Lease is terminated by operation of law as a result of the Landlord’s actions under this Section, then the Landlord shall be entitled to recover damages from the

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Tenant as provided in Section 36.1(a). The Landlord shall have the right to collect from the Tenant amounts equal to such deficiencies and damages provided for above by suits or proceedings brought from time to time on one or more occasions without the Landlord being obligated to wait until the expiration of the term of this Lease.

(c) In the event Landlord gives Tenant notice of default or delivers to Tenant a Notice of Demand for Payment or Possession pursuant to the applicable statute, any such notice will not constitute an election to terminate the Lease unless Landlord expressly states in any such notice that it is exercising its rights to terminate the Lease.

(d) If the Tenant shall default in making any payment required to be made by the Tenant (other than payments of Rent) or shall default in performing any other obligations of the Tenant under this Lease, the Landlord may, but shall not be obligated to, make such payment or, on behalf of the Tenant, expend such sum as may be necessary to perform such obligation. All sums so expended by the Landlord with interest thereon at the rate provided in Section 36.1(g) shall be repaid by the Tenant to the Landlord on demand. No such payment or expenditure by the Landlord shall be deemed a waiver of the Tenant’s default nor shall it affect any other remedy of the Landlord by reason of such default.

(e) If the Tenant shall default in making payment of any Rent due under this Lease, the Landlord may charge and the Tenant shall pay, upon demand, interest thereon at the rate provided in Section 36.1(g), but the payment of such interest shall not excuse or cure any default by the Tenant under this Lease. In addition to such interest, the Tenant shall be responsible for the late charges set forth in Section 36.3. Such interest and late payment penalties are separate and cumulative and are in addition to and shall not diminish or represent a substitute for any or all of the Landlord’s rights or remedies under any other provisions of this Lease.

(f) In any action of unlawful detainer commenced by the Landlord against the Tenant by reason of any default hereunder, the reasonable rental value of the Leased Premises for the Period of the unlawful detainer shall be deemed to be the amount of Rent reserved in this Lease for such period.

(g) Whenever the Tenant shall be required to make payment to the Landlord of any sum with interest, interest on such sum shall be computed from the date such sum is due until paid, at an interest rate equal to eighteen percent (18%) per annum or, if such amount violates any then applicable law with respect to interest rates, at the highest interest rate otherwise allowable under then applicable law. Should Tenant be in default, Landlord may collect 18% interest under this provision or $50.00 per day penalty under Paragraph 4, whichever is greater.

(h) In addition to any damages described as being collectable herein, damages will also include, in all cases, the unamortized portion of any costs, expenses, or inducements provided by the Landlord to the Tenant in connection with this Lease. Such expenses include, without limitation, any tenant inducements paid directly to the Tenant, expenses incurred in providing tenant improvements or other similar improvements to the Leased Premises, and free rent periods or reduced rent periods granted to the Tenant. All such expenses will be amortized over the Term (or initial term, if applicable) of the Lease and will be prorated in proportion to the total amount of time of the Term of the Lease as compared to the time during which the Tenant performed under the Lease without default.

(i) As used in this Lease, the terms “re-entry”, “take possession”, “repossess” and “repossession” are not restricted to their technical legal meaning.

(j) Tenant hereby expressly waives, to the full extent waivable, any and all right of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Leased Premises, by reason of the violation by Tenant of any of the covenants or conditions of this Lease, or otherwise.

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36.2 As additional security for the Tenant’s performance of its obligations under this Lease, the Tenant hereby grants to the Landlord a security interest in and to all of the personal property of Tenant situated on the Leased Premises, subject to a perfected purchase money security interest and prior existing security interests, as security for the payment of all Rent and other sums due, or to become due, under this Lease. Tenant shall execute such documents as the Landlord may reasonably require to evidence the Landlord’s security interest in such personal property. If the Tenant is in default under this Lease, such personal property shall not be removed from the Leased Premises (except to the extent such property is replaced with an item of equal or greater value) without the prior written consent of the Landlord. It is intended by the parties hereto that the instrument shall have the effect of a security agreement covering such personal property, and the Landlord may upon the occurrence of an event of default set forth in Section 35.1 exercise any rights of a secured party under the Uniform Commercial Code of the State of Colorado including the right to take possession of such personal property and (after ten (10) days notice to those parties required by statute to be notified) to sell the same for the best price that can be obtained at public or private sale and out of the money derived therefrom, pay the amount due the Landlord, and all costs arising out of the execution of the provisions of this Section, paying the surplus, if any, to the Tenant. If such personal property or any portion thereof shall be offered at a public sale, the Landlord may become the purchaser thereof.

36.3 As part of the consideration for the Landlord’s executing this Lease, Tenant hereby waives a trial by jury and the right to interpose any counterclaim or offset of any nature or description in any litigation between the Tenant and Landlord with respect to this Lease, the Leased Premises and the repossession hereof.

36.4 Tenant hereby acknowledges that late payment by Tenant to Landlord of Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Real Property. Accordingly, if any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord’s designee within five (5) days after such amount shall be due, Tenant shall pay to the Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the rights and remedies granted hereunder.

37. END OF TERM

37.1 Upon the expiration or other termination of this Lease, the Tenant shall vacate and surrender to the Landlord the Leased Premises, broom clean condition, carpets professionally cleaned, dry wall repaired and in good order. The Tenant shall remove all property of the Tenant as set forth in Section 21.6, as directed by the Landlord. Any property left on the Leased Premises at the expiration or other termination of this Lease, or after the occurrence of any default as set forth in Section 35, may at the option of the Landlord either be deemed abandoned or be placed in storage at a public warehouse in the name of and for the account of and at the expense and risk of the Tenant. If such property is not claimed by the Tenant within ten (10) days after such expiration, termination or the happening of an event of default, it may be sold or otherwise disposed of by the Landlord without further notice. The Tenant expressly releases the Landlord from any and all claims and liability for damage to or loss of property left by the Tenant upon the Leased Premises at the expiration or other termination of this Lease, and the Tenant hereby indemnifies the Landlord against any and all claims and liability with respect thereto.

37.2 If the Tenant shall continue to occupy and continue to pay rent for the Leased Premises after the expiration of this Lease with or without the consent of the Landlord, and without any further written agreement, the Tenant shall be a tenant from month to month at a

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monthly Base Rent equal to the last full monthly Base Rent payment due hereunder times 1.5, and subject to all of the additional rentals, terms, and conditions herein set out except as to expiration of the Lease Term.

38. TRANSFER BY LANDLORD

In the event of a sale or other transfer by the Landlord of the Building or a portion thereof containing the Leased Premises (including a foreclosure or deed in lieu of foreclosure), the Landlord shall without further written agreement be freed, released and relieved of all liability or obligations under this Lease. The rights of Landlord under this Lease shall not be affected by any such sale, lease or other transfer.

39. NOTICE

39.1 Any notice, request, statement, or other writing pursuant to this Lease shall be deemed to have been given if sent by registered or certified mail, postage prepaid, return receipt requested, to the party at the address stated on the Lease Agreement Facing Page of this Lease.

39.2 Notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to Landlord, to an executive officer of the Landlord, or the managing agent, and in the case of notice to the Tenant or the Guarantor of the Tenant, to the Leased Premises. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If in this Lease two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons.

39.3 Any party may, by notice to the other, from time to time designate another address in the United States or Canada to which notice mailed more than ten (10) days thereafter shall be addressed.

40. GOVERNING LAW, VENUE AND COMMENCEMENT OF ACTION

40.1 This Lease shall be deemed to have been made in and shall be construed in accordance with the laws of El Paso County in the State of Colorado. Venue shall be in El Paso County in the State of Colorado.

40.2 Any claim, demand, right, or defense by Tenant that arises out of this Lease or the negotiations that preceded this Lease shall be barred unless Tenant commences an action thereon, or interposes a defense by reason thereof, within six (6) months after the date of the inaction, omission, event, or action that gave rise to such claim, demand, right, or defense.

40.3 Tenant acknowledges and understands, after having consulted with its legal counsel, that the purpose of Paragraph 40.2 above is to shorten the period within which Tenant would otherwise have to raise such claims, demands, rights, or defenses under applicable laws.

41. PAYMENT IN UNITED STATES CURRENCY/CERTIFIED FUNDS

The rentals reserved herein and all other amounts required to be paid or payable under the provisions of this Lease shall be paid in lawful money of the United States. No electronic transfers shall be accepted. Landlord shall have the right in its sole and absolute discretion to require that Rental and all other sums due by Tenant be paid in certified funds.

42. LEASE ENTIRE AGREEMENT

The Tenant acknowledges that there are no covenants, representations, warranties, agreements, or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save expressly set out in this Lease, the Lease

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Agreement Facing Page, Exhibits, Riders, and Schedules attached hereto and that this Lease, the Lease Agreement Facing Page, Exhibits, Riders, and Schedules attached hereto and the Rules and Regulations promulgated by Landlord in accordance with Section 13 hereof constitute the entire agreement between the Landlord and the Tenant and may not be amended or modified except as explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the party to be charged therewith. The Tenant acknowledges that Tenant has provided review of and input to this Lease, and therefore agrees that this Lease has been jointly drafted by Landlord and Tenant.

43. BINDING EFFECT

Except as expressly provided herein, this indenture shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns, and all covenants and agreements herein contained to be observed and performed by the Tenant shall be joint and several.

44. SECURITY DEPOSIT

The Tenant shall keep on deposit with the Landlord at all times during the term of this Lease the Security Deposit specified on the Lease Lease Agreement Facing Page hereof as security for the payment by the Tenant of the Rent and any other sums due under this Lease and for the faithful performance of all the terms, conditions, and covenants of this Lease, it being expressly understood that the Security Deposit shall not be considered advance payment of Rent or a measure of Landlord’s damages in the case of default by Tenant. Security Deposit is due in full prior to Tenant’s possession of the Premises. Any interest earned on the Security Deposit shall be retained by Landlord. If an event of a default set forth in Section 35.1 occurs, the Landlord may (but shall not be required to) use any such deposit, or so much thereof as necessary in payment of any Rent or any other sums due under this Lease in default, in reimbursement of any expense incurred by the Landlord, and to repair any damage or to clean, paint, carpet and fumigate the Leased Premises after termination of possession by Tenant. In such event the Tenant shall on written demand of the Landlord forthwith remit to the Landlord a sufficient amount in cash to restore such deposit to its original amount. If such deposit has not been utilized as aforesaid, such deposit, or as much thereof as has not been utilized for such purposes, shall be refunded to the Tenant upon full performance of this Lease by the Tenant. Landlord shall have the right to commingle such deposit with other funds of the Landlord, and such deposit need not be kept in an escrow or other segregated account. Landlord shall deliver the funds deposited herein by the Tenant to any purchaser of the Landlord’s interest in the Leased Premises in the event such interest be sold, and thereupon, the Landlord shall be discharged from further liability with respect to such deposit.

45. INTERPRETATION

Unless the context otherwise requires, the word “Landlord” wherever it is used herein shall be construed to include and shall mean the Landlord, its successors, and/or assigns, and the word “Tenant” shall be construed to include and shall mean the Tenant, and the executors, administrators, successors and/or assigns of the Tenant and when there are two or more tenants, or two or more persons bound by the Tenant’s covenants herein contained their obligation hereunder shall be joint and several. The word “Tenant” and the personal pronouns “his” or “it” relating thereto and used therewith shall be read and construed as Tenants and “his,” “its,” or “their” respectively as the number and gender of the party or parties referred to each require and the tense of the verb agreeing therewith, shall be construed and agree with the said word or pronoun so substituted. Time shall be of the essence in all respects hereunder.

46. SEVERABILITY

Should any provision or provisions of this Lease be illegal or not enforceable, it or they shall be considered separate and severable from this Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included.

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47. CAPTIONS

The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit, or enlarge the scope or meaning of this Lease or of any provision hereof.

48. RECORDING - SHORT FORM MEMO

This Lease shall not be recorded by Tenant in whole or in part. If recorded in any form by Tenant, this Lease may be terminated at Landlord’s option as of the date of recording and Landlord shall then have all rights and remedies provided in the case of default by Tenant hereunder. If requested by Landlord, Tenant shall execute in recordable form, a short form memorandum of Lease which may, at Landlord’s option, be placed of record.

49. NON-WAIVER OF DEFAULTS/LANDLORD’S DEFAULT

49.1 No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy on account of the violation of such provision, even if such violation be continued or repeated subsequently, and no express waiver shall affect any provision other than the one specified in such waiver and in that event only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease will in any way alter the length of the Term or Tenant’s right of possession hereunder or, after the giving of any notice, shall reinstate, continue or extend the Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Leased Premises, Landlord may receive and collect any Rent due, and the payment of Rent shall not waive or affect said notice, suit or judgment, nor shall any such payment be deemed to be other than on account of the amount due, nor shall the acceptance of Rent be deemed a waiver of any breach by Tenant of any term, covenant or condition of this Lease. No endorsement or statement on any check or any letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction. Landlord may accept any such check or payment without prejudice to Landlord’s right to recover the balance due of any installment or payment of Rent or pursue any other remedies available to Landlord with respect to any existing Defaults. None of the terms, covenants or conditions of this Lease can be waived by either Landlord or Tenant except by appropriate written instrument.

49.2 If any act or omission by the Landlord shall occur which would give the Tenant the right to damages from the Landlord or the right to terminate this Lease by reason of a constructive or actual eviction from all or part of the Lease Premises or otherwise, the Tenant shall not sue for such damages or exercise any such right to terminate until (i) it shall have given written notice of such act or omission to the Landlord and to the holder(s) of the indebtedness or other obligations secured by any mortgage or deed of trust affecting the Leased Premises or the Real Property, if the name and address of such holder(s) shall previously have been furnished to the Tenant, and (ii) a reasonable period of time for remedying such act or omission shall have elapsed following the giving of such notice, during which time the Landlord and such holder(s), or either of them, their agents or employees, shall be entitled to enter upon the Leased Premises and do therein whatever may be necessary to remedy such act or omission. Claims against insurance policies which cause delay shall not be deemed an act or omission of the Landlord which shall give the Tenant right to damages from the Landlord.

50. CERTAIN IMPOSITIONS

The Tenant shall pay, as Additional Rent, and shall indemnify the Landlord against, and reimburse the Landlord on demand for, all future duties, taxes, levies, imposts, charges and impositions, whatsoever, imposed, assessed, levied or collected by or for the benefit of any federal, state or local government or any political subdivision or taxing authority thereof, together with any interest thereon and penalties with respect thereto on or in respect of the Leased Premises, the Lease or by reason of the tenancy.

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51. ENVIRONMENTAL MATTERS

51.1 The Tenant shall not cause or permit any Hazardous Substances (as hereafter defined) to be generated, produced, brought upon, used, stored, treated or disposed of in, on, under or about the Leased Premises, except that the Tenant shall be entitled to store Hazardous Substances in the Leased Premises, in the ordinary course of its business, but only with the prior written consent of the Landlord. The Tenant agrees to indemnify, defend and hold the Landlord and its officers, shareholders, directors, partners, employees, and agents harmless from any claims, judgments, damages, penalties, fines, costs, liabilities (including sums paid in settlement of claims), losses or expenses, including without limitation, reasonable attorney’s fees, reasonable consultant fees, and reasonable expert fees, which are incurred or arise during or after the term of this Lease from or in any way connected with the presence or suspected presence of Hazardous Substances in, on, under or about the soil, groundwater, surface water, air or soil vapor in, on under or about the Leased Premises arising out of the use of the Leased Premises by the Tenant, its officers, employees, agents, invitees, or contractors. Without limiting the generality of the foregoing, the indemnification provided by this Section specifically shall cover costs incurred in connection with any investigation of site conditions existing prior to, at or after the date of execution of this Lease or any remediation, including, without limitation, studies or reports as needed or required, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of the presence or suspected presence of Hazardous Substances in, on under or about the soil, groundwater, surface water, air or soil vapor on, under or about the Leased Premises, arising out of the use of the Leased Premises by the Tenant, its officers, employees, agents, invitees, or contractors.

51.2 For purposes of this section, “Hazardous Substances” shall mean any hazardous, toxic, radioactive, infectious, or carcinogenic substance material, gas, or waste which is or becomes listed or regulated by any federal, state, or local law or governmental authority or agency, including, without limitation, petroleum and petroleum products in underground tanks, PCSs, asbestos, lead, cyanide, DDT, and all substances defined as hazardous materials, hazardous wastes, hazardous substances, or extremely hazardous waste under any present or future federal, state, or local law or regulation, as amended from time to time.

51.3 Those claims, judgments, damages, penalties, fines, costs, liabilities, losses, and expenses for which each party and its officers, shareholders, directors, partners, employees, and agents are indemnified hereunder shall be reimbursable as incurred without any requirement of waiting for the ultimate outcome of any litigation, claim or other proceeding, and the indemnifying party shall pay such claims, judgments, damages, penalties, fines, costs, liabilities, losses, and expenses as incurred by the indemnified party within fifteen (15) days after notice itemizing the amounts incurred to the date of such notice. Any defense of any claim against an indemnified party shall be made by counsel satisfactory to the indemnified party.

51.4 The foregoing provisions of this Section shall survive the termination of this Lease.

52. DISABILITIES LAWS

52.1 Disabilities Laws as used herein shall include the Americans with Disabilities Act and any state, county or local laws, statutes, or ordinances applicable to the Leased Premises, the Tenant’s business or the activities of the Tenant in or about the Leased Premises. Disabilities Laws shall also include any amendments thereto, regulations or court decisions interpreting such laws.

52.2 Tenant shall comply with all Disability Laws relating to the use and occupancy of and access to the Leased Premises. Tenant shall be responsible to perform its own assessment of the compliance of the Leased Premises with such laws by surveying the facility, determining

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what barrier removal is readily achievable and shall comply with alternative and new construction requirements of Disability Laws. Tenant shall bear the sole cost and expense of determining compliance. To the extent Tenant determines that compliance may require alteration or future construction on the Leased Premises, Tenant shall notify Landlord and shall obtain Landlord’s consent to such alteration in advance. Landlord shall not unreasonably withhold consent to reasonable alterations to be made by Tenant in order to comply with the provisions of such Disabilities Laws. In addition to any other reasonable requirements of Landlord for granting such consent, Landlord’s consent may be conditioned upon Tenant providing adequate assurances of the proper completion of such alterations and payment therefor, and that the alterations be in conformity to the aesthetic style and future expansion plans for the Building.

Should Landlord incur any additional costs as a result of Tenant’s occupancy of the Leased Premises and obligations under Disability Laws, Tenant shall reimburse Landlord for such costs.

52.3 Any costs incurred by Landlord in complying with Disabilities Laws shall be considered a Common Area Maintenance charge, and Tenant shall pay his pro-rata share of such charge pursuant to the provisions of Paragraph 51 of this Lease.

52.4 Tenant hereby indemnifies Landlord and agrees to defend and hold Landlord harmless from and against any and all losses, liabilities, damages, injuries, costs (including, without limitation, court costs and reasonable attorneys’ fees), expenses and claims of any and every kind whatsoever caused by Tenant or any of its subtenants, permittees, agents or representatives, which at any time or from time to time may be paid, incurred or suffered by, or asserted against, Landlord for, with respect to or as a direct or indirect result of, Tenant’s failure to comply with the requirements of paragraph 35.1(b) above including, without limitation, any losses resulting from a diminution in the value of the Building and any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Disabilities Laws.

52.5 Tenant covenants and agrees that: (i) Tenant will comply with any reasonable requirements of Landlord and any mortgagee from time to time to implement or facilitate the administration or enforcement of any or all of the provisions of this Section; (ii) Tenant will certify annually, if so requested by Landlord that it is in compliance with all Disabilities Laws; and (iii) Tenant will cause every sublease and concession agreement to contain provisions substantially the same as those in the preceding clauses (i) and (ii) and expressly state that they are for the benefit of and may be enforced by Landlord and any mortgagee (in addition to any other person Tenant may desire to name therein).

52.6 Tenant’s liability for the undertakings and indemnifications set out in this Section 52 shall survive the Termination or expiration of this Lease. The provisions of this Section shall govern and control over any inconsistent provisions of this Lease or any other agreement between Landlord (or any of its affiliates) and Tenant.

53. SECURITY

Tenant shall be responsible for locking and keeping the Leased Premises secure, as well as locking any outside door to the building in which the Leased Premises are located upon entering or leaving the building.

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IN WITNESS WHEREOF, the parties hereto have executed these Lease provisions as of the Lease Date on the Lease Agreement Facing Page attached hereto.

LANDLORD: John J. Gogian Jr. Revocable Trust of 1983, dated April 18, 1983

BY: /S/ JOHN J. GOGIAN JR.

TENANT: Real Time Logic, Inc.

BY: /S/ SEAN J. CONWAY

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LEASE GUARANTY

RIDER #1

LEASE DATE:
LANDLORD:
NAME:	c/o Benson-Price Commercial, Inc
ADDRESS:	P.O. Box 25069
	Colorado Springs, CO 80936
TENANT:
NAME:
ADDRESS:
USE OF PREMISES:
SQUARE FEET:
LEASED PREMISES:
UNIT DESIGNATION:
Building located in the City of Colorado Springs, County of El Paso, State of Colorado (the "Building").
POSSESSION DATE:
COMMENCEMENT DATE:
TERMINATION DATE:
LEASE PERIOD:
BASE RENT:

Period Annual Monthly

SECURITY DEPOSIT:
PARKING:	NON-RESERVED BASIS
GUARANTOR:
NAME:
ADDRESS:

THIS LEASE GUARANTY is attached to and made a part of the Lease referenced above, and is in effect as of the date it is signed. To induce the Landlord to enter into, to waive a default under, or to extend or renew the term of the Lease, the Guarantor agrees as follows:

1. The Guarantor hereby covenants and agrees with the Landlord,

a. to make due and punctual payment of all rent, monies, and charges payable under the Lease during the Term thereof and all renewals thereof:

b. to effect prompt and complete performance of all and each of the terms, covenants, conditions and provisions in the Lease required on the part of the Tenant to be kept, observed and performed during the period of the Term and any renewals thereof; and

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c. to indemnify and save harmless the Landlord from any loss, attorney's fees, costs or damages arising out of any failure to pay the aforesaid rent, monies, and charges or the failure to perform any of the terms, covenants, conditions and provisions of the Lease.

2. In the event of a default under the Lease, the Guarantor waives any right to require the Landlord to:

a. proceed against the Tenant or pursue any rights or remedies with respect to the Lease;

b. proceed against or exhaust any security of the Tenant held by the Landlord; or

d. pursue any other remedy whatsoever in the Landlord's power.

The Landlord shall have the right to enforce this Guaranty regardless of the acceptance of additional security from the Tenant and regardless of the release or discharge of the Tenant or any other Guarantor of the Lease by the Landlord or by others, or by operation of any law or the amendment or modification of any terms of the Lease, to which the Guarantor gives the Tenant the express authority to consent on behalf of the Guarantor.

3. The Guarantor hereby expressly waives notice of the acceptance of this Guaranty and all notice of non-performance, non-payment or non-observance on the part of the Tenant of the terms, covenants or conditions and provisions of the Lease.

4. Without limiting the generality of the foregoing, the liability of the Guarantor under this Guaranty shall not be deemed to have been waived, released, discharged, impaired or affected by reason of the release or discharge of the Tenant in any receivership, bankruptcy, winding-up or other creditor proceedings or the rejection, disaffirmance or disclaimer of the Lease by any party, and shall continue with respect to the periods prior thereto and thereafter, for and with respect to the Term originally contemplated and expressed in the Lease. The liability of the Guarantor shall not be affected by any repossession of the Leased Premises by the Landlord, the extension by Landlord of time for the payment by Tenant of any sums owing or payable under the Lease, the assignment or subletting of the Leased Premises or the waiver, failure, omission or delay of Landlord to enforce, assert or exercise any right, power or remedy.

5. Guarantor shall pay all costs, charges and expenses, including reasonable attorney fees and court costs, incurred by Landlord in enforcing Guarantor's obligations under this Guaranty.

6. This Guaranty shall be one of payment and performance and not of collection. Notwithstanding the use of the word "indemnity" or "guaranty", each guarantor or indemnitor shall be jointly and severally liable under this and any other guaranty of the Lease.

7. The Guarantor shall, without limiting the generality of the foregoing, be bound by this Guaranty in the same manner as though the Guarantor were the Tenant named in the Lease.

8. All of the terms, agreements and conditions of this Guaranty shall extend to and be binding upon the Guarantor, his heirs, executors, administrators, successors and assigns, and shall inure to the benefit of and may be enforced by the Landlord, its successors and assigns, and the holder of any mortgage to which the Lease may be subject.

IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed as of the Guaranty Date first above written.

Guarantor

SS#:                                                                              

Home Address:                                                            

Guarantor

SS#:                                                                              

Home Address:                                                            

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ACKNOWLEDGEMENT OF MODIFICATION OF COMMENCEMENT DATE

RIDER #2

* To be signed only if Commencement Date is different than the date set forth on the Lease Agreement Lease Agreement Facing Page (See Section 2(d) for definition of “Commencement Date”.)

LANDLORD:	John J. Gogian Jr. Revocable Trust of 1983, dated April 18, 1983
NAME:	c/o Benson-Price Commercial, Inc.
ADDRESS:	P.O. Box 25069
	Colorado Springs, CO 80936
TENANT:	Real Time Logic
NAME:	Randy Culver
ADDRESS:	1042 Elkton Drive, Colorado Springs, CO 80907
LEASED PREMISES:	1040, 1040A, 1042, 1044, 1044A and 1046 Elkton Drive
	Colorado Springs, CO 80907
UNIT DESIGNATION:	1042 Elkton Drive, Colorado Springs, CO 80907

It is hereby acknowledged by and between Landlord and Tenant that the Lease Commencement Date pursuant to section 2(d) of the General Lease Provisions, is the 1st day of January 1, 2001.

Landlord shall deliver the premises known as 1040 & 1040 A on January 1, 2002.

Landlord to have a grace period of 45 days to move Tenant in.

Dated this              day of                             , 20    .

LANDLORD:

BY:                                                          

TENANT:

BY:                                                          

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TENANT PREMISES

RIDER #3

Typical Plan Schedule

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ADDITIONAL PROVISIONS

RIDER #4

A. Base Rent shall be paid as of Commence Date in the following manner:

PERIOD	ANNUAL	MONTHLY
Year 1	$315,293.00	$26,274.42

B. Tenant Agrees to accept the premises in an “as is” condition except for the following: None

C. Tenant shall provide throughout the term of this Lease Agreement an irrevocable letter of credit in the amount of $300,000.00 for the sole benefit of the Landlord in the event of default.

D. Unless this Lease Agreement is signed and initialed on every page without modification by Tenant and returned to Landlord on or before April 20, 2005, Landlord may without any further notice rescind this Lease Agreement

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RULES & REGULATIONS

RIDER #5

1. Tenant shall not block or obstruct any of the entries, passages, doors, hallways, or stairways of Building or parking lots or garage, or place, empty, or throw any rubbish, litter, trash, or material of any nature into such areas, or permit such areas to be used at any time except for ingress or egress of Tenant, its officers, agents, servants, employees, patrons, licenses, customers, visitors, or invitees.

2. Landlord will not be responsible for lost or stolen personal property, equipment, money, or any article taken from Leased Premises, regardless of how or when loss occurs.

3. Tenant shall not install or operate any refrigerating, heating, or air conditioning apparatus or carry on any mechanical operation on the Leased Premises without written permission of Landlord.

4. Tenant shall not use Leased Premises for housing, lodging, or sleeping purposes or for the cooking or preparation of food without written permission of Landlord.

5. Tenant shall not bring into the Leased Premises or keep on Leased Premises any fish, fowl, reptile, insect or animal or any bicycle or other vehicle without the prior written consent of Landlord; wheelchairs, however, will be permitted.

6. No additional locks shall be placed on any door in the Building without the prior written consent of Landlord. Landlord may at all times keep a pass key to the Leased Premises. All of Tenant’s keys shall be returned to Landlord promptly upon termination of this Lease.

7. Tenant shall do no painting or decorating in Leased Premises; or mark, paint or cut into, drive nails or screw into, nor in any way deface any part of Leased Premises or Building without the prior written consent of Landlord. If Tenant desires signal, communication, alarm, or other utility or service connection installed or changed, such work shall be done at expense of Tenant with the approval and under the direction of Landlord.

8. Tenant shall not permit the operation of any musical or sound-producing instruments or device which may be heard outside Leased Premises, or which may emanate electrical waves or x-rays or other emissions which will impair radio or television broadcasting or reception from or in the Building, or be hazardous to health, well-being, or condition of persons or property.

9. Tenant shall, before leaving Leased Premises unattended, close and lock all doors and shut off all utilities. Damage resulting from failure to do so shall be paid by Tenant. Each Tenant, before closing for the day and leaving the Leased Premises, shall see that all doors are locked.

10. Tenant shall give Landlord prompt notice of all accidents to or defects in air conditioning equipment, plumbing, electrical facilities, or any part or appurtenance of the Leased Premises.

11. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne directly by the Tenant, who shall, or whose officers, employees, agents, servants, patrons, customers, licensees, visitors, or invitees shall have caused it. Landlord shall not be responsible for any damage due to stoppage, backup, or overflow of the drains or other plumbing fixtures.

12. All contractors and/or technicians performing work for Tenant within the Leased Premises, the Building, or garage facilities shall be referred to Landlord for approval before performing such work. This shall apply to all work including, but not limited to, installation of telephones, telegraph equipment, electrical devices and attachments, and all installations affecting floors, walls, windows, doors, ceilings, equipment, or any other physical feature of the Building, Leased Premises, or garage facilities. None of this work shall be done by Tenant without Landlord’s prior written approval.

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13. Neither Tenant nor any officer, agent, employee, servant, patron, customer, visitor, licensee, or invitee of any Tenant shall go upon the roof of the Building without the written consent of the Landlord.

14. In the event Tenant must dispose of crates, boxes, etc. which will not fit into wastepaper baskets, it will be the responsibility of Tenant to dispose of same properly.

15. If the Leased Premises shall become infested with vermin, roaches, or other undesirable creatures, Tenant, at its sole cost and expense, shall cause the Leased Premises to be professionally treated from time to time to the satisfaction of Landlord and shall employ such exterminators for this purpose as shall be approved by Landlord.

16. Tenant shall not install any antenna or aerial wires, radio or television equipment, or any other type of equipment inside or outside of the Building without Landlord’s prior approval in writing and upon such terms and conditions as may be specified by Landlord in each and every instance.

17. Tenant shall not make or permit any use of Leased Premises, the Building, or garage or parking facilities which, directly or indirectly, is forbidden by law, ordinance, or governmental or municipal regulation, code, or order or which may be disreputable or dangerous to life, limb, or property.

18. Tenant shall not advertise the business, profession, or activities of Tenant in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining thereto, use the name of the Building for any purpose other than that of the business address of Tenant or use any picture or likeness of the Building or the Building name in any picture or likeness of the Building or the Building name in any letterheads, envelopes, circulars, notices, advertisements, containers, or wrapping material without Landlord’s express consent in writing.

19. Tenant shall neither conduct its business nor control its officers, agents, employees, servants, patrons, customers, licensees, and visitors in such a manner as to create any nuisance or interfere with, annoy, or disturb any other tenant or Landlord in its operation of the Building, common area or parking facilities, or commit waste, or suffer or permit waste to be committed in Leased Premises or any part of Landlord’s property.

20. The Tenant shall not install in the Leased Premise any equipment which uses a substantial amount of electricity without the advance written consent of Landlord. The Tenant shall ascertain from the Landlord the maximum amount of electrical current which can safely be used in the Leased Premises, taking into account the capacity of the electric wiring in the Building and the Leased Premises and the need of other tenants in the Building and shall not use more than such safe capacity. The Landlord’s consent to the installation of electric equipment shall not relieve the Tenant from the obligation not to use more electricity that such safe capacity.

21. The Tenant, without the written consent of Landlord, shall not lay linoleum or other similar floor covering.

22. No outside storage of any material, including disabled vehicles will be permitted.

23. Tenant shall place chair pads beneath each desk chair to protect the carpet in the Leased Premises.

24. Landlord may waive any one or more of these Rules & Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of these Rules & Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules & Regulations against any or all of the tenants of the Building.

Benson-Price Commercial, Inc. 36 LL        /T         

25. Landlord reserves the right to make any such other reasonable Rules & Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein or in response to governmental regulation of any kind. Tenant agrees to abide by all such Rules & Regulations herein above stated and any additional Rules and Regulations which are adopted within five (5) days after receiving a copy of such additional Rules and Regulations.

26. Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant’s officers, employees, agents, servants, clients, customers, patrons, invitees, licensees, visitors and guests.

Benson-Price Commercial, Inc. 37 LL        /T         

EX-10.2

NORTHGATE PROPERTIES, LLC – RT LOGIC Tract TT2, LLC

PURCHASE AGREEMENT

THIS AGREEMENT (the “Agreement”), dated 28 April, 2005 (the “Effective Date”), is among NORTHGATE PROPERTIES, LLC, a Colorado limited liability company (“Seller”), on the one hand, and RT Logic Tract TT2, LLC, a Colorado Single Member LLC Owned by Real Time Logic, Inc., (“Buyer”), on the other hand. Northgate is referred to herein as the “Seller.”

RECITALS

A.    Seller owns a development in the City of Colorado Springs (the “City”), County of El Paso and State of Colorado commonly known as “Northgate”;

B.    Buyer and Seller now desires to enter into this Agreement to sell to Buyer certain land within the Northgate Property comprising a total of approximately 10 acres and being more particularly described on Exhibit A attached hereto (collectively the “Property”). Buyer desires to enter into this Agreement to purchase the Property from Seller, all pursuant to the terms and conditions set forth herein;

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein and the sum of $35,000.00 as earnest money deposit as discussed in Section 1.1 below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

I. PURCHASE OF PROPERTY

Seller agrees to sell the Property to Buyer and Buyer agrees to purchase the Property from Seller, on the terms and conditions of this Agreement.

1.1    Deposit. Within five (5) business days after the execution of this Agreement, Buyer shall deliver the sum of $35,000.00 as earnest money to Security Title, 1277 Kelly Johnson Blvd., Suite 100, Colorado Springs, Colorado 80920 (the “Title Company”). Title Company shall deposit these funds in an interest-bearing account. The $35,000.00 in earnest money and all interest earned thereon are referred to in this Agreement as the “Deposit.” As provided in Section 4.4 hereof, the Deposit shall not be refundable to Buyer except in the event of a default by Seller, termination of this Agreement as provided herein, and except as otherwise specifically provided in this Agreement. The Deposit shall apply to the purchase price for the Property.

1.2    Purchase Price. Seller shall sell and Buyer shall purchase the Property on the terms and conditions of the Agreement for a total price of $2,259,239.40 (the “Purchase Price”). The Purchase Price shall be paid as follows: (a) by cashier’s check or wire transfer of funds at Closing, credited for the Deposit and adjusted for real property taxes as provided below in Section 3.2(c).

1.3    Property. Approximately 10 acres as described on Exhibit A attached hereto. The Property is identified as Tract TT2 on that preliminary survey by J.R. Engineering dated December 6, 2004. The Property is subject to certain easements and rights of way yet to be recorded, as well as matters currently of record, all of which are subject to Buyer’s review and approval.

II. SURVEY AND TITLE

2.1    Survey. Within 30 days after the Effective Date, Seller, at its expense, shall obtain and provide to Buyer an ALTA/ACSM land title survey of the Property (the “Survey”). The Survey shall be certified to Buyer, Seller, and Title Company and shall include a certification of the total gross square footage and acreage of the Property. The Survey shall also include items 1, 2, 3, 6, 8, 10, 11, 13, 14, 15 and 16 from ALTA/ACSM Table A, as well as any significant observations by the surveyor not otherwise disclosed.

2.2    Title Commitment. Within ten (10) days after the Effective Date, Seller, at its expense, shall furnish Buyer with a commitment for owner’s title insurance for the Property issued by Title Company, committing to insure fee title to the Property in Buyer in the amount of the Purchase Price under an ALTA Owner’s Policy of Title Insurance (Form B-1970) (the “Commitment”). Seller shall deliver to Buyer with the Commitment, the best available copies of any recorded instruments identified in the Commitment, including all exceptions to title (which documents, together with the Commitment, are referred to as the “Title Documents”). The Commitment shall commit to delete standard printed exceptions from the owner’s title policy. The Commitment shall also include a tax certificate.

2.3    Objections to Title. If title to the Property is subject to exceptions, including without limitation those identified in this Agreement, that are not acceptable to Buyer, Buyer shall deliver a notice of objections to Seller within the Inspection Period (as defined in Section 4.2 below), or, if later, within ten (10) days after Buyer has received any endorsement to the Commitment or any other notice disclosing new exceptions to title. If Buyer does not deliver a notice of objections within the Inspection Period or such ten day period, as applicable, Buyer shall be deemed to have accepted and approved all exceptions and waived all objections to title, and all exceptions will be deemed Permitted Exceptions, as defined in Section 2.4 below. If Seller receives timely written notice from Buyer of a defect of title or Buyer’s objection to any title matter, Seller shall have the right, in its sole and absolute discretion, to: (a) correct or cure the defect of title or other Buyer objection, (b) with Buyer’s written consent, obtain title insurance coverage over the defect of title or Buyer objection through title policy endorsement or otherwise, or (c) notify Buyer that Seller does not intend to cure or insure over the defect of title or Buyer objection. Seller shall notify Buyer in writing as to what steps, if any, Seller is willing to undertake to address Buyer’s objections. In the event an endorsement is agreed to and provided as contemplated by item (b) above, then upon the Title Company committing to issue such endorsement, the matter objected to shall be deemed a Permitted Exception, as defined below.

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If Seller is unable or unwilling to obtain such endorsement and fails to otherwise satisfy Buyer, or if Seller and Buyer do not agree upon a resolution of Buyer’s title objections within ten days after Buyer has received Seller’s response to Buyer’s notice of objections, then Buyer may, as its sole remedy and within five days after Buyer has received Seller’s response to Buyer’s notice of objections: (i) terminate this Agreement by delivery of written notice to Seller within such five day period, in which case this Agreement shall be deemed terminated, the Deposit shall be promptly returned to Buyer, and neither party shall have any further rights or obligations hereunder, except as expressly set forth herein; or (ii) waive any or all objections to title made in Buyer’s notice of objections. In the event that (a) Buyer has made title objections; (b) Buyer and Seller have not agreed upon a resolution of Buyer’s title objections; and (c) Buyer does not deliver notice of termination to Seller within such ten day period, Buyer shall be deemed to have waived any objection to the matters described in Buyer’s written notice of objection and all such matters shall thereafter be deemed Permitted Exceptions.

2.4    Title Conveyed and Title Policy. Title to the Property shall be conveyed subject to real property taxes for the year of Closing, the Seller Business Covenants and the Commerce Park Covenants (each defined in Article VIII below), the Amended and Restated Annexation Agreement for Seller and the Seller Pump Station Agreement, and all other exceptions accepted or waived by Buyer as provided in Section 2.3 above (collectively referred to as the “Permitted Exceptions”). Promptly after the Closing, Seller shall, at Seller’s expense, deliver to Buyer an owner’s title policy for the Property consistent with the Commitment in the amount of the Purchase Price for the Property, subject only to the Permitted Exceptions, with standard printed and creditors’ rights exceptions deleted, and with access and zoning endorsements included.

2.5    No Water Rights. Seller and Buyer each understand, acknowledge and agree that the Property will be served by City water and does not include any water rights, ditch rights, well rights or reservoir rights which have been or are currently used in connection with the Property, or any rights or interests in or to any groundwater underlying the Property. Seller does not own and is not committing to convey to Buyer any water rights or interests appurtenant to the Property.

III. CLOSING

3.1    Time and Place. The closing of Buyer’s acquisition of the Property (the “Closing”) shall be at the offices of Title Company in Colorado Springs, Colorado, at a time agreed upon by the parties. The Closing for the Property will occur within ten (10) business days after the expiration of the Due Diligence Period or after Buyer obtains or receives the last of the final Governmental Approvals, whichever occurs last, but no later than 120 days from the Effective Date.

3.2    Procedure. At the Closing, the following shall occur:

a) Seller shall convey the Property, by platted description, to Buyer by special warranty deed, subject only to Permitted Exceptions.

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b) Buyer shall deliver to Title Company for the benefit of Seller the Purchase Price, credited for the Deposit and adjusted for real property taxes as provided below, and other funds, if any, required to be paid by Buyer in order to close the purchase of the Property. Such funds shall be paid by cashier’s check or by wire transfer of funds.

c) Real property taxes on the Property for the year of the Closing, due and payable the following year, shall be prorated to the date of the Closing on the basis of the most recently available assessment and mill levy. This proration shall be considered a final settlement of the real property taxes.

d) Buyer and Seller shall execute and deliver such other documents as are customarily executed and delivered by the parties at commercial real estate closings in Colorado Springs, Colorado, including, but not limited to, settlement statements, tax proration agreements, Title Company’s closing instructions and mechanic’s lien affidavits.

e) Seller shall provide Colorado Department of Revenue Form DR 1083, and affidavit of non-foreign status pursuant to Section 1445 of the Internal Revenue Code, and a Form 1099S.

f) Seller shall deliver possession of the Property being purchased by Buyer, subject only to the Permitted Exceptions.

3.3    Closing Costs. Buyer shall pay all costs and fees relating to Buyer’s financing, costs of obtaining additional special endorsements to the owner’s title policy requested by Buyer, any mortgagee title policy, Buyer’s attorneys’ fees and the documentary and recording fees payable upon recording of the deed and any deed of trust. Any fees charged by Title Company as escrow agent shall be divided equally between the parties. Seller shall pay all other customary closing costs and its own attorneys’ fees.

3.4    Governmental Approvals. Buyer and Seller agree that this Agreement is contingent upon Buyer obtaining or receiving the following Governmental Approvals, and that if any such Governmental Approvals are not obtained within sixty (60) days of the Effective Date or as outlined below, Buyer may either (a) waive the requirement for such Governmental Approvals or (b) terminate this Agreement by written notice to Seller that any such Governmental Approvals have not been obtained. Buyer and Seller agree, as the case may be, to reasonably, promptly, diligently and expeditiously pursue such Governmental Approvals after the Effective Date:

a) Platting. Seller shall, at Seller’s expense, engineer and apply for and obtain final platting approval platting the Property as a separate lot, consistent with Exhibit A attached hereto, and Sybilla Road, all on terms and provisions reasonably acceptable to Buyer. Seller shall obtain final plat and Buyer shall pay all City of Colorado fees and charges relating to or required as a

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result of such platting, including without limitation bridge and drainage fees and charges.

b) Zoning. Seller shall, at Seller’s expense, apply for and obtain or confirm that the Zoning of the Property is PIP1 or such other zoning classification, in each case as is reasonably acceptable to Buyer.

c) Building. Buyer shall, at Buyer’s expense, apply for and obtain such preliminary City approvals and permits as it deems necessary or appropriate for its projected buildings and improvements on the Property.

d) Architectural Control. Buyer shall, at Buyer’s expense, apply for and obtain such architectural control committee approvals, if any is provided for or required, as it deems necessary or appropriate for its projected grading, buildings and improvements on the Property.

e) Pond. Seller, at Seller’s expense, shall apply for and obtain all final City approvals for the pond described in Section 7.4 hereof.

f) Drainage. Buyer shall, at Buyer’s expense, apply for and obtain such preliminary City approvals and permits as it deems necessary or appropriate for grading and drainage on the Property.

Buyer shall have the right to file any petitions for such approvals as Buyer deems necessary or appropriate. Seller shall fully cooperate with Buyer, execute all necessary consents and other documents and attend any necessary meetings with governmental officials, boards, commissions, city councils, etc., in connection with the Government Approvals. In the event the Government Approvals are not obtained within the time periods stated above, Buyer may extend such approval date for an additional sixty (60) days or whatever time period is required to obtain the Government Approvals by providing Seller written notice of such extension within five (5) business days after the expiration of the original approval period.

IV. Inspection of Property

4.1    Inspection Items. Within ten (10) days after the Effective Date, Seller shall deliver to Buyer copies (to the extent in Seller’s possession or custody or control) of all information, plans, studies, tests and reports including without limitation, those with respect to soils, traffic, survey, environmental conditions, drainage, land use, title policies, development, geohazard, engineering and recorded or unrecorded governmental documents, easements and all other documents as or relating to the Property. If Buyer does not close, all other copies shall be returned to Seller.

Attached is the form (Exhibit B) which Seller shall deliver to Buyer to be completed by Seller to the best of Seller’s current actual knowledge as to a list by Seller of all fees and assessments associated with the Property that are due, have been paid, or are expected, to the City of Colorado Springs (“City”).

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4.2    Inspection Period. Buyer shall have from the Effective Date through 5:00 p.m. Colorado Springs, Colorado time on the date which is sixty (60) days after the later of the Effective Date and the ROFO Termination Date described in Section 4.5 below (the “Inspection Period”), within which to determine whether or not the Property is suitable for Buyer’s intended use, which determination shall be in Buyer’s sole discretion. On or before the end of the Inspection Period, Buyer shall provide written notice to Seller indicating that: (i) Buyer has determined that all inspections are suitable and Buyer has elected to proceed with the purchase of the Property; (ii) Buyer is dissatisfied with certain aspects of its inspection and is willing to proceed with the purchase of the Property only so long as Seller is willing to comply with Buyer’s request to satisfy certain conditions, as specified in such written notice; or (iii) Buyer is dissatisfied with certain aspects of its inspection and is electing to terminate the Agreement. Buyer’s failure to provide such written notice will conclusively be deemed to be Buyer’s election of item (i) above.

In the event that Buyer’s written notice indicates that Buyer has selected item (iii) above, then this Agreement shall be deemed terminated, the Deposit shall be promptly returned to Buyer, and neither party shall have any further rights or obligations hereunder, except as expressly set forth herein. In the event that Buyer’s written notice indicates that Buyer has selected item (ii) above, the parties may, in their sole and absolute discretion, enter into an amendment to this Agreement setting forth the conditions of Seller’s compliance in satisfaction of Buyer’s objections. If Buyer and Seller are unable to reach agreement as to Seller’s compliance in satisfaction of Buyer’s objections and such amendment has not been completed within ten days after Buyer has delivered its written notice to Seller, then Buyer may either (a) waive its objections and proceed in accordance with the terms of this Agreement to the Closing, or (b) terminate this Agreement by written notice to Seller given within ten days after the end of such ten day period, in which case this Agreement shall be deemed terminated, the Deposit shall be promptly returned to Buyer, and neither party shall have any further rights or obligations hereunder, except as expressly set forth herein. Buyer’s failure to provide written notice of its intention to terminate this Agreement shall be deemed Buyer’s election of item (a) above.

4.3    Access to Property. During the Inspection Period, Buyer and its agents and representatives shall have access to the Property to conduct a physical inspection and to conduct such testing, including without limitation core drilling and soils reports, geohazard, environmental site assessments (“ESA”), and other testing as Buyer deems appropriate. Until the Closing, Buyer shall not materially alter the existing condition of the Property. Buyer hereby, protects, defends, indemnifies and holds Seller harmless from and against any and all losses, costs, demands, damages, claims, suits, liabilities or expenses (including, without limitation, lien and personal injury claims, settlement and reasonable attorneys’ fees) which arise from or are otherwise in any way related to such entry and work, and which may be asserted against Seller or any portion of the Property.

4.4    Deposit Becomes Non-Refundable. If Buyer elects not to terminate this Agreement pursuant to the provisions of Article II, Section 3.4 or this Article IV, then

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Seller and Buyer agree that the Deposit shall thereafter become forfeited and non-refundable, but shall remain applicable to the Purchase Price. As used herein, “forfeited and non-refundable” shall mean that Buyer shall not be entitled to a refund of any portion of the Deposit for any reason whatsoever, save and except for (a) Seller’s breach of its obligations hereunder, or (b) Seller’s or Buyer’s termination of this Agreement pursuant to any of its rights under this Agreement where a return of the Deposit is expressly provided for.

4.5    Progressive Insurance Right of First Offer. Progressive Insurance has a right of first offer on the property, pursuant to an alleged prior oral agreement between it and the Seller’s predeccessor. Seller will provide Buyer, as soon as it is available, with written documentation of Progressive Insurance’s rejection of any interest or right to purchase the property, and if such is not received by Buyer on or before May 16, 2005 (“ROFO Termination Date”), Buyer shall have the right to terminate this Agreement by written notice to Seller, in which case the Deposit shall be promptly returned to Buyer, and neither party shall have any further rights or obligations hereunder.

V. REPRESENTATIONS AND WARRANTIES

5.1    Seller’s Representations and Warranties. As of the Effective Date and as of the date of the Closing, Seller hereby represents and warrants to Buyer to the best of Seller’s actual knowledge (inquiring or investigation) and subject to Section 6.1 hereof, that:

a) Seller is authorized to enter into this Agreement, has full right, power and authority to sell, convey and transfer the Property to Buyer as provided in this Agreement and to carry out Seller’s obligations under this Agreement. This Agreement and all documents executed by Seller that are to be delivered prior to or at the Closing have been duly authorized and have been (or when executed and delivered, will be) duly executed and delivered by Seller and are (or, when executed and delivered will be) legal, valid and binding obligations of Seller.

b) The execution, delivery and performance of this Agreement, and the consummation of the transaction contemplated hereby, will not result in any breach of or constitute any default under any agreement or other instrument to which Seller is a party or by which Seller or any part of the Property might be bound.

c) Seller is aware of the provisions of the Deficit Reduction Act of 1984, 26 U.S.C. Section 1445, et seq., and the Internal Revenue Service regulations implementing said Act referring to the withholding tax on the disposition of United States real property interests by foreign persons and foreign corporations, and Seller is not a foreign person or corporation as defined by said Act and regulations.

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d) There are no legal or administrative proceedings pending or to the best of Seller’s actual knowledge, without inquiry or investigation, threatened against or affecting Seller, that may adversely affect its legal authority or financial ability to perform its obligations under this Agreement.

e) There are no outstanding assessments currently payable to the Seller Business Owners Association.

f) Seller, without diligence, inquiry or investigation, has no actual knowledge or actual notice of any storage, contamination, dumping or spillage of any hazardous or toxic materials, wastes or substances upon, on or under the Property, or any other environmental issues relating to the Property.

g) All utilities required for the operation of any future improvements to be made on the Property including water, sanitary sewer, storm sewer, phone, natural gas, high speed internet, and electric will be installed as provided by the City or pursuant to this Agreement, or are available to the Property at the current terminus of Sybilla Boulevard, and will be installed by Seller at Seller’s expense to the Property’s perimeter as provided in Section VII hereof, and all such utilities are and will be available to the Property through adjoining public streets or through adjoining private land in accordance with valid public or private easements that will inure to the benefit of Buyer.

h) The person signing this Agreement has the full right, power and authority to enter into this Agreement on behalf of Seller.

i) Except as provided herein, Seller will not enter into any agreement, contract, covenants, or take any action that would constitute an encumbrance of the Property, that would bind Buyer or the Property after the Closing, or that would be outside the normal scope of maintaining and operating the Property, without the prior written consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed.

j) No notice has been received by Seller from any insurance company that has issued a policy with respect to the Property or from any board of fire underwriters (or other body exercising similar functions), claiming any defects or deficiencies or requiring the performance of any work.

k) There are no unpaid bills other than those by, through or under Buyer for work performed on the Property or materials delivered to the Property that would give rise to the creation of any mechanic’s or materialmen’s lien against the Property.

l) Sybilla Boulevard has been and will be installed and dedicated as a public street, to the Property’s boundaries so the Property will abut and will have access to.

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m) To the best of Seller’s knowledge, there are no current, proposed, pending, or imminent assessments or special taxing districts against or affecting the Property or the owners thereof.

n) There is no proposed, pending, or imminent condemnation of all or any part of the Property.

o) To the best of Seller’s knowledge, there is no violation of any zoning, planning, environmental, use, building and/or land use rules, laws, regulations, codes, covenants, administrative and judicial orders, requirements or ordinances affecting the Property.

p) There are no proposed, pending, or imminent litigation, claims, actions, or proceedings regarding or affecting the Property.

q) There are no underground storage tanks on, in, or under the Property.

r) Other than the Permitted Exceptions, there are no service contracts, licenses, franchise agreements, management agreements or other contracts or agreements affecting any of the Property which extend beyond the Closing that are not terminable at will, without liability.

s) Seller has not received any written notice of, any inaccuracy in the documents and reports delivered to Buyer concerning the Property.

t) Seller has not received any written notice of, any material faults, defects or matters which would detract from the value, affect the marketability, or materially interfere with or materially increase the costs of Buyer’s intended development of the Property.

u) Except as disclosed by Buyer’s Phase 1, Seller has no written notice of any radon, lead-based paint, underground storage tanks, or hazardous or toxic materials, wastes, or substances or contamination in, on, or under the Property in violation of applicable environmental laws.

v) During the Inspection Period, and if this Agreement is not terminated as a result thereof, until Closing, Seller shall not offer the Property to, nor negotiate with, any other person, party or entity, except as set forth in Section 4.5 hereof.

w) Seller has received no written notice of any actions, proceedings, investigations (whether conducted by any judicial or regulatory body or any other person) pending or, to the knowledge of Seller, threatened, that question the validity of this Agreement or any action taken, or to be taken, that might, individually or in the aggregate, materially adversely affect the Property, or

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materially impair the right or the ability of Seller to perform its obligations under this Agreement.

x) Seller has received no written notice that it is in violation of any term of any agreement, instrument, judgment, decree, or, to the knowledge of Seller, any order, statute, rule or governmental regulation applicable to it, that adversely affects the Property. The execution, delivery and performance of, and compliance with, the Agreement by Seller will not be in conflict with or constitute a default under any term of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to Seller.

y) The Property will, at Closing, consist of one (1) existing, legal lot.

5.2    Buyer’s Representations and Warranties. As of the Effective Date and as of the date of the Closing, Buyer hereby represents and warrant to Seller that:

a) This Agreement and all documents executed by Buyer that are to be delivered prior to or at the Closing have been duly authorized and have been (or, when executed and delivered, will be) duly executed and delivered by Buyer and are (or, when executed and delivered will be) legal, valid and binding obligations of Buyer.

b) Neither the entering into of this Agreement nor the consummation or the transaction contemplated hereby will constitute a violation or breach by Buyer of any contract or other instrument to which Buyer is a party, or to which it is subject or by which any of its assets or properties may be affected, or of any judgment, order, writ, injunction or decree issued against or imposed upon it, or will result in an violation of any applicable law, order, rule or regulation of any governmental authority affecting Buyer.

c) To the best of Buyer’s actual knowledge, without inquiry or investigation, there is no action, suit or proceeding pending or threatened against Buyer which would affect Buyer’s ability to enter into or consummate this Agreement.

VI. CONDITION OF PROPERTY; DISCLAIMER OF WARRANTIES

6.1    As Is With All Faults. Seller and Buyer each expressly understand, acknowledge and agree that, except as otherwise specifically set forth in this Agreement:

a) Seller has not made, does not make and specifically negates and disclaims any representations, warranties, promises, covenants, agreements or guaranties of any kind or character whatsoever, whether express or implied, oral or written, past, present or future, of, as to, concerning or with respect to (i) the

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value, nature, quality or condition of the Property, including, without limitation, the water, soil and geology; (ii) the suitability of the Property for any and all activities and uses which Buyer may conduct thereon; or (iii) the habitability, merchantability, marketability, profitability or fitness for a particular purpose of the Property; and Seller specifically disclaims any representations regarding compliance with any environmental protection, pollution or land use laws, rules, regulations, orders or requirements, including solid waste, as defined by the U.S. Environmental Protection Agency regulations at 40 C.F.R., Part 261, or the disposal or existence, in or on the Property, of asbestos or any hazardous substances, as defined by the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and regulations promulgated thereunder.

b) Seller has made no representations or warranties concerning the condition of soils on the Property, drainage conditions on the Property or any other matter pertaining to the physical condition of the Property. Buyer is solely responsible for making such investigations concerning the soils, drainage and other physical conditions on the Property as it deems necessary or appropriate, and covenants that it will undertake all such inspection and investigations, and, except as otherwise set forth in this Agreement, Buyer shall rely entirely on its own investigations concerning such matters. This Agreement is not contingent in any way on the condition of the soils or other conditions existing on the Property, except pursuant to Sections 3.4 and 4.2 above. If this Agreement is not terminated pursuant to Section 4.2 above, then, except as otherwise set forth in this Agreement, Buyer shall purchase the Property “AS IS AND WITH ALL FAULTS” at the time of Closing. Subject to the foregoing, Buyer, for itself and its successors and assigns, hereby waives and relinquishes forever any and all claims it may have relating to the condition of the soils and drainage on the Property or any other physical conditions on the Property.

c) Buyer has been given the opportunity to inspect the Property, Buyer is relying solely on its own investigation of the Property and not on any information provided or to be provided by Seller other than information referred to in this Agreement.

d) Any information provided or to be provided by or on behalf of Seller with respect to the Property was obtained from a variety of sources and that Seller has not made any independent investigation or verification of such information and, except as otherwise set forth in this Agreement, makes no representations as to the accuracy or completeness of such information.

e) Seller is not liable or bound in any manner by any oral or written statements, representations or information pertaining to the Property, or the operation thereof, furnished by any real estate broker, agent, employee, servant or other person.

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6.2    Radon. The Colorado Department of Health and the United States Environmental Protection Agency (“EPA”) have detected elevated levels of naturally occurring radon in structures in the Colorado Springs area. EPA has raised concerns with respect to adverse effects on human health of long-term exposure to high levels of radon. Buyer may conduct radon tests to determine the possible presence of radon in the Property and may conduct such other investigations and consult such experts as Buyer deems appropriate to evaluate radon mitigation measures that can be employed in the design and construction of improvements on the Property. Buyer shall rely solely upon such investigations and consultations and acknowledges that Seller has made no representation, express or implied, concerning the presence or absence of radon in the Property, the suitability of the Property for development or the design or construction techniques, if any, that can be employed to reduce any radon levels in improvements built on the Property; and Buyer, for itself and its successors and assigns, releases Seller from any liability whatsoever with respect to the foregoing matters.

VII. DEVELOPMENT OBLIGATIONS

7.1    Streets. Buyer shall be entitled to escrow at Closing pursuant to Section 7.8 hereof, the cost and expense to construct to the Property’s boundary line, and provide a fully-improved road extension, with sidewalks on the south side (except those provided for in Section 7.3 hereof), of Sybilla Boulevard providing direct access to the Property.

7.2    Utilities. Buyer shall be entitled to escrow at closing pursuant to Section 7.8 hereof, the cost and expense, water, sanitary sewer, storm sewer, phone, natural gas, high speed internet and electric lines have been or will be dedicated to the City and are or will be constructed and installed and located underground within public and/or private rights-of-ways adjacent to and to the property line of the Property. Buyer shall be responsible, at its sole cost and expense, for tapping into and extending utility lines from their then existing locations at the Property perimeter and to the improvements to be built on the Property, all as needed for Buyer’s development of and use of the Property, and for obtaining utility service from the City.

7.3    Sidewalks. Buyer, at its sole cost and expense, shall be responsible for installing sidewalks along all streets immediately adjacent to the Property and all sidewalks along streets constructed by Buyer within the Property, if and as required by the City.

7.4    Drainage. Buyer shall be entitled to escrow at closing pursuant to Section 7.8 hereof, the cost and expense for the proposed drainage detention basin. Buyer acknowledges that approximately 1 acre adjacent to the Property contains a proposed drainage detention basin. At such time as requested by the City, or as required for Buyer’s use, development or improvement of the Property, Seller, at Seller’s sole cost and expense, including without limitation all engineering, permit approvals, and other costs and fees, will construct the drainage detention facilities on approximately 1 acre in the location shown on Exhibit A. Such detention facilities will be constructed in accordance with the drainage plan and Development Plan for 26.7962 acres approved by

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the City, a copy of which will be provided to Buyer pursuant to Section 4.1 hereof. Buyer, at its sole cost and expense, shall provide all on-site drainage facilities required by Buyer’s Development Plan and any applicable drainage plans of Buyer approved by the City, in each case relating solely to the development of the Property. The drainage requirements or improvements on or off the Property shall not interfere with Buyer’s intended use and development of the Property. Buyer agrees to provide a drainage easement facilitating access to the drainage detention basin through the Property at no cost to Seller.

7.5    Grading. Buyer shall be responsible, at its sole cost and expense, for all grading to be performed on the Property. Before commencing any grading on any portion of the Property, Buyer shall submit a grading plan to the “Declarant” under the Commerce Park Covenants for its approval. Seller/Declarant will not unreasonably delay, withhold or condition its consent to any grading plan that is consistent with the drainage plan. At the present time, Seller is the acting Declarant under the Commerce Park Covenants. Buyer shall not commence grading until Buyer’s grading plan submitted for approval has been approved pursuant to such Covenants, and Buyer shall grade the Property in accordance with the respective plan approved by Declarant.

7.6    Construction of Improvements. Construction of all improvements contemplated for the Property shall be in accordance with the Commerce Park Covenants, each Development Plan, each Plat, all plans of Buyer approved by Declarant and Seller and all provisions of this Agreement. No substantial change in any document or plan approved by Declarant or Seller shall be made unless such change is submitted to and approved by the Declarant and Seller. Declarant shall approve, disapprove or grant conditional approval of Buyer’s building plans in accordance with the Commerce Park Covenants.

7.7    Timing. The improvements in this Article VII shall be promptly, diligently and expeditiously completed at such time as is requested or required by the City or other governmental entity with authority, or if earlier at such time as is requested or required for Buyer’s use, development or improvement of the Property.

7.8    Escrow. The cost of the improvements described in Sections 7.1, 7.2 and 7.4 shall be escrowed from Seller’s proceeds hereunder. Buyer and Seller shall agree upon such costs prior to closing and such escrow shall be 125 percent of the expected cost of the completion of such matter. The escrow shall be held by the title company under an escrow agreement signed by Buyer and Seller which shall specify the contractor, the completion dates, the required governmental approvals and other agreed provisions for Buyer’s benefit to assure such completion, including without limitation, Buyer’s ability to obtain and use the escrowed amounts to complete any such of those obligations that have not been timely completed. Any excess in the escrow after completion shall be paid to Seller.

VIII. COVENANTS

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8.1    Covenants. As part of the Title Documents, Buyer will receive a copy of the Declaration of Covenants, Conditions, Restrictions and Easements for the Seller Business Properties recorded in the real property records of El Paso County, Colorado on June 19, 1998 under Reception No. 098084696 (the “Seller Business Covenants”), which encumber the Property. The Seller Business Covenants provide for an owners association known as the Northgate Business Owners Association (the “Association”) and the imposition of assessments to pay the cost of maintaining common areas, among other things. Prior to the Closing, the Property will be made subject to the Declaration of Covenants, Conditions Restrictions and Easements for Northgate Commerce Park recorded in the real property records of El Paso County, Colorado on April 16, 1999 under Reception No. 099059477 (the “Commerce Park Covenants”), a copy of which will be provided to Buyer with the Title Documents. The Commerce Park Covenants provide for the Association to impose assessments in order to pay for the cost of maintaining common areas owned by the Association. The Property will be subject to the Commerce Park Covenants, and Buyer agrees to comply with the Commerce Park Covenants.

8.2    Other Development. Other than the matters described in Section VII above, Buyer acknowledges that Seller has made no representations or warranties to Buyer concerning the development of any other property adjacent to or in the vicinity of the Property on which Buyer has relied.

IX. NAMES AND LOGOS

Except for directional and location identification purposes, neither the name “Northgate,” or any derivatives thereof, nor the logos associated with such name may be used in any way in connection with the Property or any promotion of it, unless Seller has given its prior written approval to such use.

X. BROKERS

Seller and Buyer each represent and warrant to the other that the only real estate broker involved in this transaction is Michael Payne Palmer, SIOR of NAI Highland Commercial Group LLC, who is entitled to a six percent (6%) commission, which shall be paid by Seller pursuant to a separate agreement, and that no other broker has been retained or dealt with by either of them in connection with the transaction contemplated by this Agreement, and each agrees to hold the other harmless from and indemnify the other against, any claim or demand for commission by any broker based on their respective acts.

XI. ASSIGNMENT

Buyer shall not have the right to assign all or any part of their interest or rights under this Agreement without the prior written consent of Seller, which shall not be unreasonably withheld, conditioned or delayed, except for an assignment to an affiliate. For purposes hereof, “affiliate” means any person or entity, which controls, is controlled

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by, is related to, or is under common control with, the Buyer. A person or entity shall be deemed to have control of or, related to another person or entity if such person or entity directly or indirectly or acting in concert with one or more persons and/or entities, or through one or more subsidiaries, owns, controls or holds with power to vote more than 50 percent of the voting shares or rights of such other entity, or controls in any manner the election or appointment of a majority of the directors, trustees or managers of another entity, or is the general partner in or has contributed more than 50 percent of the capital of such other entity.

XII. CONDEMNATION; CASUALTY

If, between the Effective Date and a Closing, any portion of the Property is taken in condemnation, Seller shall notify Buyer of that fact and Buyer shall have the option to terminate this Agreement and its obligations hereunder. The option to terminate contained in this Article XII must be exercised by written notice to Seller no later than ten business days after Buyer is notified in writing by Seller or others of the condemnation, the exact areas to be condemned, and the condemning authority’s appraised condemnation value. If Buyer exercises its option to terminate in accordance with this Article XII, the Title Company shall return the Deposit to Buyer and neither party shall have any further obligation hereunder. If Buyer does not exercise its option to terminate as provided in this Article XII, the Agreement shall continue in full force and effect. In such event, the Purchase Price shall be paid by Buyer at Closing without reduction, but Seller shall remit to Buyer all awards or other proceeds received by Seller as a result of the condemnation.

If, between the Effective Date and a Closing, the Property is materially damaged or destroyed by fire or other casualty, Seller shall notify Buyer of that fact and Buyer shall have the option to terminate this Agreement and its obligations hereunder. The option to terminate contained in this Article XII must be exercised by written notice to Seller no later than ten business days after Buyer is notified in writing by Seller or others of the casualty. If Buyer exercises its option to terminate in accordance with this Article XII, the Title Company shall return the Deposit to Buyer and neither party shall have any further obligation hereunder. If Buyer does not exercise its option to terminate as provided in this Article XII, the Agreement shall continue in full force and effect and Seller shall have no obligation to make any repairs or replacement of the Property, and shall assign and transfer to Buyer all right title and interest of Seller in and to any collected or uncollected casualty insurance which Seller may be entitled to receive from such damage. For purposes of this paragraph the Property shall be considered “materially damaged” if the cost of repair is in excess of $35,000.00.

XIII. DEFAULT AND REMEDIES

In the event of default by either party under this Agreement, Buyer and Seller agree as follows:

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13.1    Default by Buyer. If Buyer shall materially default in the performance of its obligations hereunder, Seller’s sole and only remedy shall be to terminate this Agreement and to retain the Deposit as liquidated damages; provided, however, that such limitation upon Seller’s remedies against Buyer shall not apply with respect to: (i) Buyer’s indemnification obligations under Section 4.3 above, (ii) a breach of Buyer’s representations and warranties under Section 5.2 above, (iii) a breach of Buyer’s representations and warranties under Article VIII above, or (iv) any breach or default by Buyer following Closing.

13.2    Default by Seller. If Seller shall default in the performance of its obligations hereunder, Buyer shall have the right to either (a) terminate this Agreement and to obtain the return of the Deposit or (b) enforce this Agreement through an action for specific performance.

XIV. NOTICES

Any notice or other documents or materials required or permitted under this Agreement shall be deemed properly delivered when given as provided in this Section. Notices may be hand delivered, sent by United States mail, return receipt requested, with postage prepaid, or transmitted by electronic facsimile (i.e., fax). Notices shall be addressed and delivered as follows:

If intended for Seller, to:

Northgate Properties LLC

1295 Kelly Johnson Blvd., Suite 230

Colorado Springs, CO 80920

Telephone: (719) 531-0707

Facsimile: (719) 531-7622

with a copy to:

Anderson, Dude & Lebel, P.C.

Lenard Rioth

111 S. Tejon, Suite 400

Colorado Springs, CO 80903

Telephone: (719) 632-3545

Facsimile: (719) 632-5452

If intended for Buyer, to:

Real Time Logic

Sean J. Conway, COO

1042 Elkton Drive

Colorado Springs, CO 80907

Telephone: (719)598-2801

Facsimile: (719)598-2655

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with a copy to:

Sparks Willson Borges Brandt & Johnson, P.C.

Christopher M. Brandt

24 So. Weber, Suite 400

Colorado Springs, CO 80903

Telephone: (719) 634-5700

Facsimile: (719) 633-8477

Any notice delivered by overnight carrier in accordance with this paragraph shall be deemed to have been duly given when delivered. Any notice which is hand delivered shall be effective upon receipt by the party to whom it is addressed. Either party, by notice given as above, may change the address to which future notices should be sent.

XV. INTERPRETATION OF AGREEMENT

15.1    No Recording. Neither party may record this Agreement or any memorandum of it.

15.2    Saturdays, Sundays and Holidays. If any payment or delivery of any document is required pursuant to any term of this Agreement to be made on the date which falls on a Saturday, Sunday or legal holiday in the State of Colorado, such payment or delivery shall be made on the first business day following such Saturday, Sunday or legal holiday. In calculating any period of time provided for in this Agreement, the number of days allowed shall refer to calendar and not business days, except where such days are specifically described as “business days.”

15.3    Counterparts. This Agreement may be executed in any number of counterparts, which together shall constitute one and the same instrument.

15.4    Effect of Agreement. All negotiations relative to the matters contemplated by this Agreement are merged herein and there are no other understandings or agreements relating to the matters and things herein set forth other than those incorporated in this Agreement. This instrument, together with the exhibits attached hereto, sets forth the entire agreement between the parties. No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing signed by the party to be charged with such amendment, revocation or waiver. Subject to the provisions of Article XI, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective person representatives, heirs, successors and assigns.

15.5    Headings; Exhibits. The section and subsection headings contained in this Agreement are inserted only for convenient reference and do not define, limit or proscribe the scope of this Agreement or any exhibit attached hereto. All exhibits attached to this Agreement are incorporated herein by this reference.

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15.6    Unenforceable Provisions. If any provision of this Agreement, or the application thereof to any person or situation shall be held invalid or unenforceable, the remainder of this Agreement, and the application of such provision to persons or situations other than those to which it shall have been held invalid or unenforceable, shall continue to be valid and enforceable to the fullest extent permitted by law.

15.7    Time of the Essence. Time is strictly of the essence with respect to each and every term, condition, obligation and provision of this Agreement, and the failure to timely perform any of the terms, conditions, obligations or provisions hereunder by either party shall constitute a breach of and a default under this Agreement by the party so failing to perform.

15.8    Waivers. No waiver by either party of any provision hereof shall be effective unless in writing or shall be deemed to be a waiver of any other provision hereof or of any subsequent breach by either party of the same or any other provision.

15.9    Attorneys’ Fees and Costs. In the event of a dispute or litigation between Seller and Buyer arising out of the enforcement of or a default under this Agreement, the prevailing party shall recover its court costs and reasonable attorneys’ fees in an amount to be determined by the court. For purposes of this Section 15.9, the prevailing party shall be determined based on a consideration of which party is the most successful in the dispute/proceeding, taken as a whole

15.10    Governing Law; Construction of Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. Seller and Buyer and their respective counsel have reviewed, revised and approved this Agreement. Accordingly, the normal rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto.

15.11    Tax Free Exchange. At Seller’s option, so long as such does not delay Closing, does not require Buyer to hold title to any other property, and is without any cost, obligation or liability of or to Buyer, Buyer agrees to cooperate with Seller in closing the sale of the Property as a like-kind exchange under Section 1031 of the Internal Revenue Code. Such cooperation shall include, without limitation, the substitution by Seller of an intermediary (the “Intermediary”) to act in place of Seller as the Seller of the Property. If Seller so elects, Buyer agrees to accept all required performance from the Intermediary and to render its performance of all of its obligations to the Intermediary. Buyer agrees that performance by the Intermediary will be treated as performance by Seller and Seller agrees that Buyer’s performance to the Intermediary will be treated as performance to Seller. Notwithstanding the foregoing, Seller shall remain liable to Buyer for each and every one of the representations, warranties, indemnities and obligations of the Seller under this Agreement and Buyer may proceed directly against Seller without the need to join the Intermediary as a party to any action against Seller.

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IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the date first written above.

SELLER:

NORTHGATE PROPERTIES, LLC
By:
	Gary Erickson
Date:

BUYER:

RT Logic Tract TT2, LLC
By:
	Sean J. Conway
Date:

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Exhibit A

Exhibit B

The printed portions of this form, except differentiated additions, have been approved by the Colorado Real Estate Commission. (LC 38-5-04)

THIS FORM HAS IMPORTANT LEGAL CONSEQUENCES AND THE PARTIES SHOULD CONSULT LEGAL AND TAX OR OTHER COUNSEL BEFORE SIGNING.

SELLER’S PROPERTY DISCLOSURE

(VACANT LAND)

THIS DISCLOSURE SHOULD BE COMPLETED BY SELLER, NOT BY BROKER

If the Property Includes A Residence, attach Seller’s Property Disclosure (Residential) (LC-18-1-03).

Seller states that the information contained in this Disclosure is correct to the best of Seller’s CURRENT ACTUAL KNOWLEDGE as of this Date. Broker may deliver a copy of this Disclosure to prospective buyers.

Date:                                                              

Property Address:                                                                              

Seller:                                                                                                    

A.	USE AND ACCESS	Yes	No	Do Not   Know	COMMENTS/EXPLANATION
1	Current use of the Property
2	Describe any access problems
3	Roads, driveways, trails or paths through the Property used by others
4	Public highway or country road border the Property
5	Encroachments, boundary disputes, unrecorded easements
6	Notice of zoning action related to the Property
7	Zoning violations, variances, conditional use or non-conforming use
8	Crops being grown on the Property
9	Seller owns all crops
10	Livestock on the Property
11	Any land leased from others ¨  State    ¨  BLM    ¨  Federal    ¨  Private    ¨  Other
12	Any part of the Property leased to others (written or oral)
13	Conservation Easement
14
15

A-2

B.	WATER AND SEWER	Yes	No	Do Not   Know	COMMENTS/EXPLANATION
1	Type of water supply:    ¨  Public    ¨  Community ¨  Well    ¨  Shared Well    ¨  Cistern    ¨  None ¨  Other If the Property is served by a well, supply to Buyer a copy of the well permit. Well Permit # Water Company Name:
2	Water tap fees paid
3	Water rights				If yes, identify:
4	Type of sanitary sewer service:    ¨  Public ¨  Community    ¨  Septic System    ¨  None ¨  Other    ¨  Tank    ¨  Leach    ¨  Lagoon
5	Sewer tap fees paid
6
7	-

A-3

C.	ENVIRONMENTAL CONDITIONS To Seller’s current actual knowledge, do any of the following conditions now exist or have they ever existed:	Yes	No	Do Not   Know	COMMENTS/EXPLANATION
1	Hazardous materials on the Property, such as radioactive materials, toxic materials, asbestos, pesticides, wastewater and other sludge, radon, methane, or oil
2	Underground or above ground storage tanks
3	Underground transmission lines
4	Governmentally designated geological hazard or sensitive area
5	Environmental assessments, studies or reports done involving the physical condition of the Property
6	Sliding, settling, upheaval, movement or instability of earth, or expansive soil of the Property
7	Property used as, situated on, or adjacent to, a dump, land fill, or municipal solid waste land fill
8	Within governmentally designated Flood Plain area
9	Received any notice that a portion of the Property is a governmentally designated wetland area
10	Property used for any mining, graveling, or other natural resource extraction operations such as oil and gas wells
11	Diseased or infested trees or shrubs
12	Endangered species on the Property
13	Archeological features, fossils or artifacts on the Property
14	Mine shafts, tunnels or abandoned wells on the Property
15
16

D.	NOXIOUS WEEDS The Colorado Weed management Act became law on January 1, 1992. The law requires that every county or municipality in Colorado adopt a weed management plan, outlining the rules governing identification and method of eradication. The State of Colorado has identified PURPLE LOOSESTRIFE, SPOTTED KNAPWEED, MUCK THISTLE, LEAFY SPURGE, CANADIAN THISTLE, DIFFUSE KNAPWEED, RUSSIAN KNAPWEED, DALMATION TOADFLAX and YELLOW TOADFLAX, among others, as noxious weeds.
	To Seller’s current actual knowledge, have any of the following occurred to the Property within the last 3 years:	Yes	No	Do Not   Know	COMMENTS/EXPLANATION
1	Identification of noxious weeds
2	Subject to written weed control plan
3	Herbicides applied
4	Biological agents or insects released on any of the noxious weeds
5
6

A-4

E.	Other DISCLOSURES To Seller’s current actual knowledge, do any of the following conditions now exist:	Yes	No	Do Not   Know	COMMENTS/EXPLANATION
1	Special assessments or increases in regular assessments approved by owners’ association but not yet implemented
2	Notice or threat of condemnation proceedings
3	Other legal action related to the Property
4	Government special improvements approved but not yet installed, which may become a lien against the property
5	Any part of the Property enrolled in any governmental programs such as Conservation Reserve Program (CRP), Wetlands Reserve Program (WRP), etc.
6
7

Seller and Buyer understand that the real estate brokers do not warrant or guarantee the above information on the Property. Property inspection services may be purchased. This form is not intended as a substitute for an inspection of the Property.

ADVISORY TO SELLER:

• Failure to disclosure a known material defect may result in legal liability.

The information contained in this Disclosure has been furnished by Seller, who certifies to the truth thereof based on Seller’s CURRENT ACTUAL KNOWLEDGE. Any changes will be disclosed by Seller to Buyer promptly after discovery. Seller hereby receipts for a copy of this Disclosure.

Date: Date:

Seller Seller

ADVISORY TO BUYER:

• Even though Seller has answered the above questions to the best of Seller’s current actual knowledge, Buyer should obtain expert assistance to accurately and fully evaluate the Property regarding use and access, water, sewer, other utilities, environmental and geological conditions, noxious weeds and other matters which may affect Buyer’s use of the Property. Valuable information may be obtained from various local/state/federal agencies, and other experts may perform more specific evaluations of the Property.

• Boundaries, location and ownership of fences, driveways, hedges, and similar items may become matters of dispute. A survey may be used to determine such matters.

Buyer acknowledges that Seller does not warrant that the Property is fit for Buyer’s intended purposes or use of the Property. Buyer hereby receipts for a copy of this Disclosure.

Date: Date:

Buyer Buyer

A-5

EX-11.1

Exhibit 11.1

INTEGRAL SYSTEMS INC. AND SUBSIDIARIES

COMPUTATION OF EARNINGS PER SHARE

	Three Months Ended June 30,				Nine Months Ended June 30,
	2005		2004		2005		2004
Numerator:
Net Income	$	1,863,650	$	1,384,418	$	5,098,507	$	4,338,464
Denominator:
Denominator for basic earnings per share-weighted-average shares		10,392,973		9,950,330		10,232,203		9,879,034
Effect of dilutive securities:
Employee stock options		236,979		149,626		191,982		174,222
Denominator for diluted earnings per share adjusted weighted-average shares and assumed conversions		10,629,952		10,099,956		10,424,185		10,053,256
Basic earnings per share	$	0.18	$	0.14	$	0.50	$	0.44
Diluted earnings per share	$	0.18	$	0.14	$	0.49	$	0.43

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Steven R. Chamberlain, Chairman and Chief Executive Officer of Integral Systems, Inc. (the “Registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Registrant;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) 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 quarterly report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) Disclosed in this quarterly report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent first fiscal quarter 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 controls over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal controls 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 controls over financial reporting.

	Integral Systems, Inc.
Date: August 9, 2005	/s/ STEVEN R. CHAMBERLAIN
	Steven R. Chamberlain
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Elaine M. Parfitt, Chief Financial Officer of Integral Systems, Inc. (the “Registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Registrant;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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)) 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 quarterly report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) Disclosed in this quarterly report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent first fiscal quarter 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 controls over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal controls 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 controls over financial reporting.

	Integral Systems, Inc.
Date: August 9, 2005	/s/ ELAINE M. PARFITT
	Elaine M. Parfitt
	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

In connection with the Quarterly Report of Integral Systems, Inc. (the “Company”) on Form 10-Q for the three months ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven R. Chamberlain the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STEVEN R. CHAMBERLAIN

Steven R. Chamberlain

Chief Executive Officer

Date: August 9, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Integral Systems, Inc. (the “Company”) on Form 10-Q for the three months ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elaine M. Parfitt, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ELAINE M. PARFITT

Elaine M. Parfitt

Chief Financial Officer

Date: August 9, 2005