8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 31, 2007

INTEGRAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Maryland	0-18603	52-1267968
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

5000 Philadelphia Way, Lanham, Maryland	20706-4417
(Address of principal executive offices)	(ZIP Code)

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

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 1 – Registrant’s Business and Operations

Item 1.01. Entry into a Material Definitive Agreement.

On January 31, 2007, Integral Systems, Inc. (the “Company”) entered into a letter agreement (the “Letter Agreement”) with Fursa Alternative Strategies LLC (“Fursa”), William F. Harley, III (“Harley”), and Chartwell Capital Investors II, L.P. (“Chartwell”). The Company believes that both Fursa and Chartwell are beneficial owners of more than five percent (5%) of the Company’s outstanding common stock.

The Letter Agreement provides that Fursa, Harley, and Chartwell will not initiate or support a change in the membership of the Company’s Board of Directors prior to 2008. Under the terms of the Letter Agreement, the parties have agreed as follows: the Company will undo changes it made to its by-laws in March 2006 (except for certain changes addressing the conduct of meetings); Harley will join the Board at the next Board meeting; the Company’s slate of directors to be recommended for election at the 2007 Annual Meeting of the Company’s stockholders will include Harley and seven (7) currently serving members of the Board; a new outside Chairman would be selected from among the existing directors by the Board prior to the 2007 Annual Meeting of the Company’s stockholders; beginning at the next Board meeting, the entire Board will work together to identify available strategic alternatives, and set goals for enhancing stockholder value; Chartwell agrees to withdraw its previously submitted stockholder proposal; and the Annual Meeting will be conducted in accordance with the provisions of the Addendum attached to the Letter Agreement. Under the terms of the Letter Agreement, any failure by the Company to honor its commitments thereunder will release Harley, Fursa, and Chartwell from their respective commitments. A copy of the Letter Agreement is attached hereto as Exhibit 10.1.

A copy of a press release with respect to the Letter Agreement is attached hereto as Exhibit 99.1.

Section 9 – Financial Statements and Exhibits

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

Exhibit	Description
10.1	Letter Agreement dated January 31, 2007 by and among Integral Systems, Inc., Fursa Alternative Strategies LLC, William F. Harley, III, and Chartwell Capital Investors II, L.P.
99.1	Press Release dated February 6, 2007

SIGNATURES

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

INTEGRAL SYSTEMS, INC.
By:	/s/ Peter J. Gaffney
	Peter J. Gaffney
	Chief Executive Officer

Date: February 6, 2007

EXHIBIT INDEX

Exhibit Number	Description
10.1	Letter Agreement dated January 31, 2007 by and among Integral Systems, Inc., Fursa Alternative Strategies LLC, William F. Harley, III, and Chartwell Capital Investors II, L.P.
99.1	Press Release dated February 6, 2007

EX-10.1

Exhibit 10.1

Fursa Alternative Strategies LLC

200 Park Avenue, 54^th Floor

New York, NY 10166

January 31, 2007

Via Telecopy and Overnight Express

Integral Systems, Inc.

5000 Philadelphia Way, Suite A

Lanham, MD 20706-4417

Attention: Mr. Peter Gaffney

Dear Pete:

This will confirm that Fursa Alternative Strategies LLC (“Fursa”), William F. Harley, III (“Harley”) and Chartwell Capital Investors II, L.P. (“Chartwell”) will not initiate or support a change in the membership of the Board of Integral Systems, Inc. (“Integral”) prior to 2008 in view of our mutual commitment to the following effect:

• By prompt Board action, Integral will undo the by-law changes made by the Company in the Summer of 2006, including de-staggering the Board and reinstating the prior by-laws regarding the calling of special meetings and removing directors as they existed prior to March, 2006 (except that the changes made by Integral last summer to the section of the by-laws addressing the conduct of meetings (Section 8 of Article II) shall remain in effect).

• Harley will join the Board at the next Board meeting, now scheduled for February 7, 2007 (but in any event, by a date sufficiently prior to the Annual Meeting this April to permit the Company to timely provide its proxy materials), and will be included in the Company’s slate of Directors recommended for election at that Annual Meeting.

• Prior to mailing proxy materials for the next Annual Meeting, the Board will agree upon a slate of eight (8) directors for election at such meeting, of which Harley will be one (1), and the remaining seven (7) other nominees will be currently serving Directors. A new outside Chairman would be selected from among the existing Directors by the Board prior to the Annual Meeting.

• Beginning at the next Board meeting, the entire Board will work together to identify available strategic alternatives, and set goals for enhancing shareholder value, including potential acquisitions, mergers, dispositions, recapitalizations and plans for internal growth.

• Chartwell agrees to withdraw its shareholder proposal submitted to Integral on November 17, 2006.

• Harley will honor his responsibilities as a Director of Integral including confidentiality of Board deliberations and of Integral’s proprietary information. Harley acknowledges that his responsibilities include compliance with Integral’s Insider Trading Policy.

• The next Annual Meeting will be conducted in accordance with the provisions of the Addendum attached hereto.

Integral Systems, Inc.

January 31, 2007

Page 2

While Harley is a member of the Board, and the Company agrees to include him in its slate for election at the upcoming Annual Meeting, Harley, Fursa and Chartwell will abide by the foregoing commitment with the understanding and on the condition that the Company will do likewise. As the obligations of the parties hereto are interdependent, any failure by the Company to honor the foregoing commitment shall release Harley, Fursa and Chartwell from their respective commitments. As fiduciaries for our investors, we note that nothing here binds Fursa to vote its shares in any particular manner on any issue requiring shareholder action, except that Fursa will agree to vote for the Slate of Directors described above.

[Remainder of Page Intentionally Blank]

Integral Systems, Inc.

January 31, 2007

Page 3

Very truly yours,
Fursa Alternative Strategies LLC
By:	/s/ William F. Harley, III
Name:	William F. Harley, III
Title:	Chief Investment Officer

Chartwell Capital Investors II, L.P.
By:	/s/ Kenneth E. Purcell
Name:	Kenneth E. Purcell
Title:	Managing Director

William F. Harley, III, Individually

/s/ William F. Harley, III

AGREED:

Integral Systems, Inc.
By:	/s/ Peter J. Gaffney
Name:	Peter J. Gaffney
Title:	Chief Executive Officer

Addendum

Agreement Governing Conduct of Annual Meeting

1. The chairman of the meeting (the “Chairman”) of the 2007 Annual Meeting of Stockholders of Integral Systems, Inc., currently scheduled to be held in April 2007 (together with any adjournment(s) or postponement(s) of such Annual Meeting, the “Meeting”), who will preside at the Meeting, will be designated by a majority vote of Integral’s Board of Directors. To the extent that this paragraph 1 is inconsistent with Section 7 of Article II of the Amended and Restated By-Laws of Integral, as amended and currently in effect (the “Bylaws”), such Section of the Bylaws shall be amended to the extent necessary to be consistent with this paragraph 1.

2. The Chairman will be impartial in the conduct of the Meeting, maintain the orderly conduct of the Meeting, and adhere to this Agreement Governing Conduct of Meeting.

3. Each of Fursa, Harley, Chartwell and Integral will conduct themselves in a professional manner and in accordance with this Agreement.

4. Each of Elaine M. Brown and Albert Alderete, or such other person(s) as may be designated by a majority vote of Integral’s Board of Directors, will be appointed by Integral’s Board of Directors, with full power of substitution and resubstitution in each of them, to serve as proxies on behalf of the stockholders of the Company in connection with the Meeting.

5. The only matters to be voted on by the stockholders of the Company at the Meeting, and the only business to be considered at the Meeting, shall be as follows: (1) the election of eight (8) directors and (2) consideration of any stockholder proposal previously made in accordance with the advance notice procedures set forth in the By-Laws and not withdrawn prior to the Meeting. Any other business shall be deemed to have not been properly brought before the Meeting and shall not be transacted.

6. The Chairman will not accept or consider any motions, nominations or proposals from the floor.

7. The agenda for the meeting shall be as follows:

A. Meeting called to order

B. Welcoming remarks

C. Procedural matters, including proof of due notice of Meeting, determination of quorum and examination of proxies, reading and disposing of minutes of last meeting of stockholders; and announcement of purposes for which the meeting was called

D. Election of Directors (as set forth in paragraph 5 above)

E. Consideration of Stockholder Proposal (as set forth in paragraph 5 above)

i

F. Question and Answer Period

G. Adjournment

H. Report of Officers to Stockholders

8. During the Question and Answer Period specified in the Agenda set forth in paragraph 7 above, any stockholder or proxy holder may ask appropriate questions from the floor and receive appropriate answers, which questions shall not be more than three (3) minutes. All questions shall be directed to the Chairman who shall answer them or, if the Chairman shall determine, refer them to the appropriate person or persons for response. The questioners shall be asked to identify themselves by name and to state on whose behalf they are speaking, if other than themselves.

ii

EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

CONTACT:

Tory Harris

Investor Relations

Integral Systems

Tel: 301-731-4233 x1109

Email: info@integ.com

Web: www.integ.com

INTEGRAL SYSTEMS ANNOUNCES AGREEMENT

TO DE-CLASSIFY THE BOARD OF DIRECTORS

Lanham, MD, February 6, 2007 – Integral Systems, Inc. (the “Company”) (NASDAQ-ISYS) today announced its agreement, after consultations with various Company stockholders, to de-classify its board of directors. After this change is effected, the Board will consist of a single class of directors in which all directors will stand for election every year. The Company also announced that it intends to add Mickey Harley, as a representative of Fursa Alternative Strategies LLC, the largest stockholder of the Company, to its Board of Directors at the next regular Board meeting, which is scheduled for February 7, 2007.

“I believe that the Company’s decision to de-classify the Board of Directors at this time is in the best interests of the Company and its stockholders,” stated Pete Gaffney, Chief Executive Officer of the Company. “These actions demonstrate the Company’s commitment to strong, stockholder-focused, contemporary corporate governance practices which I believe are consistent with the Company’s goal of maximizing stockholder value. Since the annual stockholder meeting in April, 2006, the Board has been reconfigured significantly to address stockholder requests. Messrs Harley, Leimkuhler, Baldwin (all stockholder recommendations), Albertine, and Casner have been added providing greater depth and independence to the previously elected Board. The resulting Board composition is well constituted to evaluate and guide the Company in directions to maximize stockholder value” added Mr. Gaffney.

“I am pleased that the Company is listening to its shareholders, and believe that these recent actions will facilitate steps toward realizing the maximum potential for the Company,” Mickey Harley stated. “I look forward to working with my fellow directors to explore strategic alternatives for the Company,” he added.

In connection with the Company’s decision to de-classify the Board, Fursa Alternative Strategies LLC and Chartwell Capital Investors II, L.P., another large stockholder of the Company, has agreed not to initiate or pursue a change in the Board before 2008. In light of the actions being taken by the Company, Chartwell agreed to withdraw its stockholder proposal.

-more-

ABOUT INTEGRAL SYSTEMS

Founded in 1982, Integral Systems, Inc. is a leading provider of satellite systems and has supported over 205 different satellite missions for communications, science, meteorological and earth resource applications. The Company was the first to offer an integrated suite of COTS (Commercial-Off-The-Shelf) software products for satellite command & control, the EPOCH IPS product line. EPOCH has become a world market leader in commercial applications with successful installations on 5 continents.

The Company’s subsidiary Real Time Logic, Inc. builds telemetry processing systems for military applications including tracking stations, control centers, satellite manufacturers and range operations. The Company’s subsidiary Lumistar, Inc. is a provider of system-level and board-level telemetry acquisition products. The Company also provides software for equipment monitoring and control to satellite operators and telecommunications firms through its subsidiary Newpoint Technologies, Inc. Through its subsidiary SAT Corporation, the Company provides satellite and terrestrial communications signal monitoring systems to satellite operators and users throughout the world. Integral Systems has approximately 430 employees working at Company headquarters in Lanham, Maryland, and at other locations in the U.S. and Europe. For more information, visit http: //www.integ.com.

Except for statements of historical facts, this news release contains forward-looking statements about the Company, all of which are based on the Company’s current expectations. The forward-looking statements contained in this news release are subject to additional risks and uncertainties, including the Company’s reliance on contracts and subcontracts funded by the U.S. government, intense competition in the ground systems industry, the competitive bidding process to which the Company’s government and commercial contracts are subject, the Company’s dependence on the satellite industry for most of its revenues, rapid technological changes in the satellite industry, the Company’s acquisition strategy and those other risks noted in the Company’s SEC filings. The Company assumes no obligation to update or revise any forward-looking statements appearing in this news release.

###