10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 March 31, 2008

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 and Zip Code)

Registrant’s telephone number, including area code:

(301) 731-4233

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer  ¨    (do not check if a smaller reporting company)	Smaller reporting company  ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934).    Yes  ¨    No  x

As of May 1, 2008, the Registrant had issued and outstanding 8,470,157 shares of common stock.

TABLE OF CONTENTS

Forward-Looking Statements	i
Part I. Financial information	1
Item 1. Financial Statements	1
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	14
Overview	14
Critical Accounting Policies	14
Results of Operations - Second Quarter 2008 Compared to Second Quarter 2007	17
Results of Operations - Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007	20
Backlog	23
Liquidity and Capital Resources	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II. other information	24
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Submission of Matters to a Vote of Securities Holders	26
Item 5. Other Information	27
Item 6. Exhibits and Financial Statement Schedules	28

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this 10-Q, including in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, including those under “Liquidity and Capital Resources,” are forward looking. In addition, from time to time, Integral Systems, Inc. (the “Company”, “We”, “Us”, “Our”) 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 but not limited to statements as to the intent, belief, or current expectations of the Company and its directors, officers, and management with respect to our future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are predictions. The future results indicated, whether expressed or implied, may not be achieved. Our actual results may differ significantly from the results discussed in the forward-looking statements. While we believe that these statements are and will be accurate, a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our statements. Our business is dependent upon general economic conditions and upon various conditions specific to us and to our industry, and future trends cannot be predicted with certainty. Particular risks and uncertainties that may affect our business, other than those described elsewhere herein, include the risk factors described in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended September 30, 2007. When considering the forward-looking statements in this Form 10-Q, you should keep in mind the risk factors and other cautionary statements set forth in this Form 10-Q and our Annual Report on Form 10-K.

These forward-looking statements are based upon a variety of assumptions relating to our business, which may not be realized. Because of the number and range of the assumptions underlying our forward-looking statements, many of which are subject to significant uncertainties and contingencies beyond our reasonable control, 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 expectations, and we assume no obligation to update. Therefore, our actual experience and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by us or any other person that these estimates will be realized, and actual results may vary materially. Some or all of these expectations may not be realized and any of the forward-looking statements contained herein may not prove to be accurate.

Factors, risks, and uncertainties that could cause our actual results to vary materially from recent results or from anticipated future results are described below. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

• A significant portion of our revenue is derived from contracts or subcontracts funded by the U.S. government and are subject to the budget and funding process of the U.S. government.

• Our contracts and subcontracts that are funded by the U.S. government are subject to termination without cause by the U.S. government.

• Our contracts and subcontracts that are funded by the U.S. government are subject to U.S. government regulations and audits.

• Our contracts and subcontracts that are funded by the U.S. government are subject to a competitive bidding process that may affect our ability to win contract awards or renewals in the future.

• We enter into fixed-price contracts that could subject us to losses in the event that we have cost overruns.

• Our contracts and subcontracts are subject to competition, strict performance, and other requirements.

• Intense competition in the satellite ground system industry could affect our future financial performance.

• We are subject to risks associated with our strategy of acquiring other companies.

i

• We may be exposed to product liability or related claims with respect to our products.

• Our products may become obsolete due to rapid technological change in the satellite industry.

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

• Our business is dependent on the availability of certain components and raw materials that we buy from suppliers.

• We depend upon attracting and retaining a highly skilled professional staff.

• We depend upon the services of our key personnel.

• We depend upon intellectual property rights and risk having our rights infringed.

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

• Performance of some of our U.S. government contracts may require security clearance.

• Some of our contracts are subject to security classification restrictions.

• The market price of our common stock may be volatile.

• Our quarterly operating results may vary significantly from quarter to quarter.

• We have substantial investments in recorded goodwill as a result of prior acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.

• The disruption, expense and potential liability associated with existing and future litigation against us could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

• We currently are subject to a formal SEC investigation and a related NASDAQ inquiry, which could require significant management attention and legal resources and could have a material adverse effect on us.

ii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars, except share amounts)

	March 31, 2008		September 30, 2007
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	9,308	$	23,894
Marketable securities, net		270		568
Accounts receivable, net of allowance for doubtful accounts of $10 at March 31, 2008 and $171 at September 30, 2007		24,159		19,267
Cost and estimated earnings in excess of billings on uncompleted contracts		13,956		16,530
Prepaid expenses		1,072		1,464
Inventory		5,988		5,145
Other current assets		2,326		1,664
Total current assets		57,079		68,532
Property and equipment, net		16,570		15,234
Goodwill		51,304		51,304
Intangible assets, net		16		22
Software development costs, net		99		198
Other assets		731		771
Total assets	$	125,799	$	136,061
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,347	$	9,416
Accrued expenses		9,366		8,948
Billings in excess of revenue for contracts in progress		11,830		11,150
Income taxes payable		—		—
Total current liabilities		28,543		29,514
Other non-current liabilities		22		—
Total liabilities		28,565		29,514
Commitment and contingencies
Stockholders’ equity:
Common stock, $.01 par value, 40,000,000 shares authorized, and 8,436,759 and 9,381,172 shares issued and outstanding at March 31, 2008 and September 30, 2007, respectively		84		94
Additional paid-in capital		57,032		60,907
Retained earnings		40,072		45,537
Accumulated other comprehensive income		46		9
Total stockholders’ equity		97,234		106,547
Total liabilities and stockholders’ equity	$	125,799	$	136,061

The accompanying notes are an integral part of these consolidated financial statements.

1

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended March 31,						Six Months Ended March 31,
	2008			2007			2008			2007
	(Unaudited)
Revenue	$	44,852		$	29,012		$	82,162		$	56,435
Cost of revenue:
Direct labor		8,661			6,999			15,780			12,915
Overhead costs		7,621			5,909			13,695			10,995
Travel and other direct costs		1,424			556			2,114			1,046
Direct equipment & subcontracts		14,908			6,681			22,930			13,259
Product amortization		49			206			98			412
Total cost of revenue		32,663			20,351			54,617			38,627
Gross profit		12,189			8,661			27,545			17,808
		27.2	%		29.9	%		33.5	%		31.6	%
Selling, general & administrative		5,769			5,152			12,085			10,881
Research & development		618			508			1,328			972
Intangible asset amortization		2			59			5			119
Income from operations		5,800			2,942			14,127			5,836
		12.9	%		10.1	%		17.2	%		10.3	%
Other income, net		265			389			200			633
Income before income tax		6,065			3,331			14,327			6,469
Provision for income taxes		2,092			1,189			3,331			2,268
Net income	$	3,973		$	2,142		$	10,996		$	4,201
		8.9	%		7.4	%		13.4	%		7.4	%
Other comprehensive income:
Net unrealized gain from available-for-sale securities		35			—			45			—
Effect of currency translation		53			(87	)		(9	)		74
Comprehensive income	$	4,061		$	2,055		$	11,032		$	4,275
Weighted average number of common shares:
Basic		9,032			11,106			9,207			11,083
Diluted		9,054			11,142			9,207			11,134
Income per share:
Basic	$	0.44		$	0.19		$	1.19		$	0.38
Diluted	$	0.44		$	0.19		$	1.19		$	0.38
Cash dividends per share	$	—		$	0.07		$	—		$	0.14

The accompanying notes are an integral part of these consolidated financial statements.

2

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

	Six Months Ended March 31,
	2008			2007
	(Unaudited)
Cash flows from operating activities:
Net income	$	10,996		$	4,201
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,042			1,495
Stock based compensation expense		589			380
Provision for bad debt expense		(150	)		—
Loss on disposal of fixed assets		—			6
Changes in operating assets and liabilities:
Accounts receivable and other receivables		(4,799	)		(1,105	)
Cost and estimated earnings in excess of billings on uncompleted contracts		2,618			853
Prepaid expenses and deposits		410			279
Inventories		(842	)		(1,007	)
Income taxes receivable/payable		(683	)		(1,134	)
Accounts payable		(2,040	)		(109	)
Accrued expenses		318			(1,059	)
Billings in excess of revenue for contracts in progress		595			814
Net cash provided by operating activities		8,054			3,614
Cash flows from investing activities:
Acquisition of fixed assets		(2,242	)		(1,436	)
Purchases of marketable securities		(848	)		(435	)
Sale of marketable securities		1,205			100
Settlement of litigation		165			—
Proceeds from collections on notes receivable		35			125
Proceeds from the sale of property and equipment		—			9
Net cash (used in) investing activities		(1,685	)		(1,637	)
Cash flows from financing activities:
Proceeds from issuance of common stock		2,566			2,202
Stock repurchase		(23,501	)		(1,118	)
Dividend payments		—			(1,563	)
Net cash (used in) financing activities		(20,935	)		(479	)
Net (decrease) increase in cash and cash equivalents		(14,566	)		1,498
Effect of exchange rate changes on cash		(20	)		74
Cash and cash equivalents - beginning of period		23,894			24,659
Cash and cash equivalents - end of period	$	9,308		$	26,231
Supplemental disclosures of cash flow information:
Income taxes paid	$	4,012		$	3,450
Interest expense paid	$	4		$	5

Supplemental schedule of noncash investing and financing activities:

A capital lease obligation of $27 was incurred when we entered into a lease for new equipment in 2008.

The accompanying notes are an integral part of these consolidated financial statements.

3

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business

Integral Systems, Inc. (the “Company”, “We”, “Us”, “Our”), a Maryland corporation incorporated in 1982, builds satellite ground systems and equipment for command and control, integration and test, data processing, and simulation. Since our inception, we have provided ground systems for over 200 different satellite missions for communications, science, meteorology, and earth resource applications. We have an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.

2. Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008. The consolidated balance sheet at September 30, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2007 filed with the Securities and Exchange Commission on December 12, 2007.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect certain reported amounts of assets and liabilities, and changes therein, disclosure of contingent assets and liabilities, and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.

Certain amounts for the three months and six months ended March 31, 2007 have been reclassified to conform to the presentation for the three months and six months ended March 31, 2008. These reclassifications consist of the presentation of production amortization expense and cost associated with development and support of our licensed software, which are now being classified as a cost of revenue, and reclassification of certain other expense as selling, general, and administrative expense. During the first quarter of 2008, we realigned our operating segments from four segments to three segments, eliminating the Corporate segment, to conform to the way we are now internally managing our business. These reclassifications did not impact net income or earnings per share for the three months and six months ended March 31, 2007. In addition, the amounts presented in the statement of cash flows for the three months and six months ended March 31, 2007 relating to tax benefits of stock option exercises in the cash flows from operating activities and cash flows from financing activities have been excluded as these amounts are not relevant to interim reporting periods.

4

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. Accounts Receivable and Cost and Estimated Earnings in Excess of Billing on Uncompleted Contracts, and Billings in Excess of Revenue for Contracts in Progress

Accounts receivable are recorded at the amount invoiced and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses from the existing accounts receivable. Cost and estimated earnings in excess of billing on uncompleted contracts represent amounts recognized as revenue that have not been billed. Substantially all cost and estimated earnings in excess of billing on uncompleted contracts are expected to be billed and collected within one year.

Accounts receivable and cost and estimated earnings in excess of billings on uncompleted contracts at March 31, 2008 and September 30, 2007 consist of the following:

	March 31, 2008			September 30, 2007
	(in thousands of dollars)
Billed
Government customers	$	19,655		$	14,530
Commercial customers		4,514			4,907
Allowance for doubtful accounts		(10	)		(170	)
Total billed	$	24,159		$	19,267
Cost and estimated earnings in excess of billing on uncompleted contracts
Government customers	$	11,256		$	14,658
Commercial customers		2,700			1,872
Total unbilled	$	13,956		$	16,530

Billings in excess of revenue for contracts in progress represent amounts billed and collected for contracts in progress for which revenue has not been recognized and is reflected as a liability. Revenue will be recognized when revenue recognition criteria are met.

	March 31, 2008		September 30, 2007
	(in thousands of dollars)
Billings in excess of revenue for contracts in progress
Government customers	$	4,939	$	3,868
Commercial customers		6,891		7,282
Total billed	$	11,830	$	11,150

5

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4. Inventories

Inventories are stated at the lower of cost or market using the first in, first-out (“FIFO”) method. Market value is determined on the basis of estimated realizable values. Obsolete inventory is written off and its value is removed from inventory at the time its obsolescence is determined. We did not have a reserve for obsolescence at March 31, 2008 and September 30, 2007. Inventories consist of the following:

	March 31, 2008		September 30, 2007
	(in thousands of dollars)
Finished Goods	$	3,841	$	3,641
Raw Materials		2,147		1,504
Total	$	5,988	$	5,145

5. Net Income Per Share

Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the diluted weighted average common shares, which reflects the potential dilution of stock options. The reconciliation of amounts used in the computation of basic and diluted net income per share consists of the following:

	Three Months Ended March 31,				Six Months Ended March 31,
	2008		2007		2008		2007
	(in thousands, except per share amounts)
Numerator:
Net income available to common shareholders	$	3,973	$	2,142	$	10,996	$	4,201
Denominator:
Shares used for basic earnings per share - weighted-average shares		9,032		11,106		9,207		11,083
Effect of dilutive securities:
Employee stock options		22		36		—		51
Shares used for diluted earnings per share adjusted weighted-average shares and assumed conversions		9,054		11,142		9,207		11,134
Income per common share:
Basic earnings per share	$	0.44	$	0.19	$	1.19	$	0.38
Diluted earnings per share	$	0.44	$	0.19	$	1.19	$	0.38

On March 3, 2008, we repurchased 1,064,972 shares of our common stock for $22.00 per share from Fursa Alternative Strategies, LLC. $0.01 of the per share increase in our basic and diluted earnings per share for the three months and six months ended March 31, 2008 was attributable to the repurchase of such shares.

6

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On August 14, 2007, we launched a tender offer to purchase up to 1,850,000 shares of our common stock for $27.00 per share as part of our overall plan to enhance stockholder value. On September 12, 2007, we accepted for purchase 1,850,000 shares of our common stock tendered in the tender offer at a purchase price of $27.00 per share. $0.07 and $0.20 of the per share increase in our basic and diluted earnings per share for the three months and six months ended March 31, 2008, respectively, was attributable to the repurchase of such shares in the tender offer.

6. Line of Credit and Notes Payable

On September 28, 2007, we entered into an amended and restated credit agreement, which permits unsecured borrowing of up to $25.0 million, including a sub-facility of $10 million for the issuance of letters of credit. Any borrowings under the facility will accrue interest at the one-month London Inter-Bank Offering Rate (“LIBOR”), plus a margin of 1.5% to 2.4% depending on our ratio of funded debt to earnings before interest, taxes and depreciation (“EBITDA”). We are required to pay a fee on the undrawn amount of the facility from time to time, at a rate of 0.20% to 0.25% per annum, depending on our ratio of funded debt to EBITDA, and payable quarterly. We did not have any borrowings during the three or six months ended March 31, 2008 and we did not have any outstanding borrowings on these lines of credit at March 31, 2008 and September 30, 2007.

We had letters of credit amounting to $0 and $ 0.2 million as of March 31, 2008 and September 30, 2007, respectively, with certain banks relating to leased facilities. In addition, we had letters of credit amounting to approximately $2.4 million and $1.1 million as of March 31, 2008 and September 30, 2007, respectively, with a bank relating to obligations on certain contracts.

7. Commitments and Contingencies

We are subject to various legal proceedings and threatened legal proceedings from time to time. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on our business, results of operations, financial condition, or cash flows.

In November 2004, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with LJT & Associates, Inc. (“LJT”) to sell all of the assets of our antenna division. LJT filed an action against us on December 8, 2006 in the circuit court for Howard County, Maryland, seeking unspecified damages for the alleged wrongful hiring of a former LJT employee by us. LJT claimed that we breached our Asset Purchase Agreement as well as the employee’s employment agreement, and LJT claimed that we conspired to and did misappropriate some of LJT’s trade secrets. LJT subsequently claimed in correspondence with us that we would be liable to them for damages in excess of $1,000,000 and LJT would seek to recoup attorney’s fees incurred in supporting this claim. On January 14, 2008, we settled this claim for the sum of $98,000 and forgave a note receivable due from LJT in the amount of $67,000 and are no longer subject to any further obligation.

As previously disclosed, on March 1, 2007, we learned that the SEC had issued a formal order of investigation regarding the Company. We and certain of our officers have received subpoenas in connection with the investigation. The Board of Directors of the Company established a Special Committee of independent directors of the Company to supervise our responses to the SEC’s investigation and to investigate related matters. The Special Committee consists of the following members of our Board of Directors: John M. Albertine, Paul Casner, William F. Leimkuhler, and R. Doss McComas. The Special Committee has retained the law firm of Foley Hoag LLP to serve as its independent counsel.

The investigation by the SEC and a related inquiry by NASDAQ include questions as to whether Gary A. Prince was acting as a

7

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

de facto executive officer of the Company prior to his promotion to the position of Executive Vice President and Managing Director of Operations of the Company in August 2006. The investigation and inquiry also include questions as to whether Mr. Prince was practicing as an accountant before the SEC while an employee of the Company. Mr. Prince agreed with the SEC in 1997 to a permanent injunction barring him from practicing as an accountant before the SEC, as part of a settlement with the SEC related to Mr. Prince’s guilty plea to charges brought against him for conduct principally occurring in 1988 through 1990 while he was employed by Financial News Network, Inc. and United Press International.

We have certified compliance with the SEC’s subpoena to the Company, and are cooperating fully with the SEC and NASDAQ in connection with the investigation and the inquiry.

Effective March 30, 2007, we terminated the employment of Mr. Prince. Mr. Prince’s employment termination was at the direction of the Special Committee, as a result of investigation of the Special Committee concerning the matters under investigation by the SEC and the related inquiry by NASDAQ. We had placed Mr. Prince on paid administrative leave effective November 1, 2006, pending developments in the inquiries by the SEC and NASDAQ and the ongoing investigation by the Special Committee. On April 24, 2007, Mr. Prince sent a letter to us demanding a severance payment of $0.2 million and a bonus payment of $60,000 for fiscal year 2006 services. On May 17, 2007, Mr. Prince filed a lawsuit in Prince George’s County Maryland against us demanding payment of $0.9 million for unpaid wages and treble damages related thereto. We disputed the claims made in the letter and the lawsuit by Mr. Prince. On November 19, 2007, the Company and Mr. Prince entered into a Settlement Agreement and Mutual General Release (the “Settlement Agreement”) in full and complete settlement of the Lawsuit. Under the Settlement Agreement, we agreed to pay Mr. Prince a total of $110,000, of which $65,000 will be treated as wages and $45,000 will be treated as non-wages and as reimbursement of a portion of Mr. Prince’s legal fees. We agreed to make the foregoing payments within seven (7) days following dismissal of the lawsuit with prejudice. The Settlement Agreement also includes mutual general releases by each of the Company and Mr. Prince with respect to the other, except that both parties agreed that the Indemnification Agreement between them effective December 4, 2002 and the Affirmation and Undertaking Re: Advance for Expenses between them dated October 17, 2006 will remain in full force and effect, and that both parties reserve all rights under both agreements. The Settlement Agreement further provides that by making the payment to Mr. Prince, we are not admitting any wrongdoing or liability and, instead, that any wrongdoing or liability is expressly denied.

8. Stock Option Plan and Stock-Based Compensation

Pursuant to the approval by stockholders at the February 20, 2008 Annual Meeting of the Stockholders, we established the 2008 Stock Incentive Plan, which was effective December 5, 2007. Prior to the adoption of the 2008 Stock Incentive Plan, we established the 2002 Stock Option Plan and the 1988 Stock Option Plan. Pursuant to the approval by stockholders at the February 20, 2008 Annual Meeting of the Stockholders, no further options were granted under the 1998 Stock Option Plan and the 2002 Stock Option Plan after February 20, 2008. The 2008 Stock Incentive Plan was created to provide incentives for our employees, consultants, and directors to promote our financial success. The Compensation Committee of the Board of Directors has sole authority to select full-time employees, directors, or consultants to receive awards of options, stock appreciation rights, restricted stock, and restricted stock units under this plan. The maximum number of shares of common stock that may be issued pursuant to the 2008 Stock Incentive Plan is 1,599,947. The exercise price of each award of options and stock appreciation rights is set at our common stock’s closing price on the date of grant, unless the optionee owns greater than 10 percent of our common stock and is granted an incentive stock option (a stock option that is intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code). The exercise price of such incentive stock option must be at least 110 percent of the fair market value of the common stock on the date of grant. Options, stock appreciation rights, restricted stock, and restricted stock units expire no later than ten years from the date of grant (five years for incentive stock options received by greater than 10 percent owners) or 90 days after employment ceases, whichever occurs first, and vest from one to five years.

8

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We have reserved for issuance an aggregate 3,500 shares of common stock under the 1988 Stock Option Plan and 1,501,888 shares of common stock under the 2008 Stock Incentive Plan.

The following table summarizes the activity for all of our stock option awards during the six months ended March 31, 2008:

	Shares		Weighted Average Exercise Prices		Weighted Average Remaining Life	Aggregate Intrinsic Value ($ in millions)
	(in thousands)
Options outstanding September 30, 2007	640		$	22.35	—		—
Granted	70		$	24.62	—		—
Exercised	(117	)	$	21.38	—		—
Cancelled	(26	)	$	24.54	—		—
Options outstanding March 31, 2008	567		$	22.73	3.36 Years	$	3.69
Exercisable at March 31, 2008	423		$	22.03	2.95 Years	$	3.08

The following table summarizes additional information about stock options outstanding at March 31, 2008:

	Options Outstanding				Options Exercisable
Exercise Price Per Share	Number of Shares	Weighted- Average Remaining Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
	(in thousands)				(in thousands)
$15.00 – 19.99	168	1.55 Years	$	18.50	166	$	18.50
$20.00 – 28.00	399	4.13 Years	$	24.51	257	$	24.26
	567	3.36 Years	$	22.73	423	$	22.03

The following table summarizes information about our nonvested stock options outstanding at March 31, 2008:

Nonvested Shares	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested at September 30, 2007	178		$	7.77
Granted	20		$	7.31
Vested	(35	)	$	6.53
Cancelled	(18	)	$	7.90
Nonvested at March 31, 2008	145		$	7.95

9

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The weighted-average grant date fair value of options which were granted during the six months ended March 31, 2008 was $7.47 per option. The fair value of the options granted was estimated on the date of the grant using the Black-Scholes options pricing model. The following table shows the assumptions used for the grants that occurred during the six months ended March 31, 2008.

	Six Months Ended March 31, 2008
Expected volatility	32.35	%
Risk free interest rate	2.45	%
Dividend yield	0.00	%
Expected lives	4.50 years

The expected volatility is established based on the historical volatility of our common stock. The risk free interest rate is determined based on the U.S. Treasury yield curve that is commensurate with the expected life of the options granted. The dividend yield is 0% based upon the decision by the board of directors on December 5, 2007 to cease the payment of dividends for the foreseeable future. The expected lives are based on the “simplified” method allowed by Staff Accounting Bulletin (“SAB”) No. 107, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award.

We have recognized $0.6 million and $0.4 million of share-based compensation expense in the Consolidated Statements of Operations for the six month periods ended March 31, 2008 and March 31, 2007, respectively.

As of March 31, 2008, there was $1.04 million of unrecognized compensation expense related to remaining non-vested stock options that will be recognized over a weighted average period of 2.85 years. The total fair value of options which vested during the six month period ending March 31, 2008, was $0.6 million.

9. Stockholder’s Equity Transactions

On March 3, 2008, we entered into a definitive Stock Purchase Agreement with Fursa Alternative Strategies, LLC to purchase 1,064,972 shares of our common stock that Fursa beneficially owned on behalf of its affiliated investment funds and separately managed accounts over which it exercised discretionary authority at $22.00 per share.

10. Business Segment and Geographical Information

During the first quarter of 2008, we realigned our operating segments from four segments to three segments, eliminating the Corporate segment, to conform to the way we are now internally managing our business. The Corporate segment was primarily composed of the Product Division, which develops and licenses our EPOCH IPS product line to other operating segments and to third-party customers. This segment was also responsible for EPOCH IPS maintenance and support revenue and expenses. The associated revenue and cost for product license sales, maintenance, and support are now included in the respective results of our Ground Systems – Government and Ground Systems – Commercial segments. The Corporate segment results for the three months and six months ended March 31, 2007 have been reclassified to conform to the presentation of the three months and six months ended March 31, 2008. The reclassification does not modify the previously reported consolidated revenue or net income. We evaluate the performance of our three operating segments based on operating income. The following is a brief description of each of the segments:

Ground Systems – Government: this segment provides ground systems products and services to the U.S. Government. It is currently our largest segment in terms of revenue and consists of our core command and control business for government applications. Its primary customers are the U.S. Air Force and the National Oceanic and Atmospheric Administration (“NOAA”).

10

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

• SAT and Newpoint offer complementary ground system components and systems, which includes turnkey systems, hardware and software for satellite and terrestrial communications signal monitoring, network and ground equipment monitoring, and control and satellite data processing.

• ISI Europe serves as the focal point for our ground systems business in Europe and Africa for command and control, signal monitoring, and network management using our products.

Space Communications Systems: this segment includes our wholly-owned subsidiaries RT Logic and Lumistar. 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. Lumistar provides system level and board level telemetry products.

Summarized financial information by business segment is as follows:

	Three Months Ended March 31,						Six Months Ended March 31,
	2008			2007			2008			2007
	(in thousands of dollars)
Revenue:
Ground Systems - Government	$	25,815		$	14,654		$	44,186		$	29,129
Ground Systems - Commercial		6,778			5,752			14,381			11,733
Space Communication Systems		13,924			9,952			26,326			19,108
Elimination of intersegment sales		(1,665	)		(1,346	)		(2,731	)		(3,535	)
Total revenue	$	44,852		$	29,012		$	82,162		$	56,435
Income from operations:
Ground Systems - Government	$	2,162		$	923		$	6,279		$	1,851
Ground Systems - Commercial		1,120			1,090			3,018			2,163
Space Communication Systems		3,206			2,033			6,311			4,085
Selling, general & administrative expense		(688	)		(1,104	)		(1,481	)		(2,263	)
Total operating income	$	5,800		$	2,942		$	14,127		$	5,836
Other income (expense), net		265			389			200			633
Income before income tax		6,065			3,331			14,327			6,469
Provision for income tax		2,092			1,189			3,331			2,268
Net income	$	3,973		$	2,142		$	10,996		$	4,201

11

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Asset information for our segments at March 31, 2008 and September 30, 2007 is shown in the following table.

	March 31, 2008			September 30, 2007 (1)
	(in thousands of dollars)
Total Assets:
Ground Systems – Government	$	21,884		$	19,745
Ground Systems – Commercial		13,438			12,212
Space Communication Systems		84,477			83,185
Corporate Support Assets		22,061			48,394
Elimination of intersegment accounts receivable		(16,061	)		(27,475	)
Total assets	$	125,799		$	136,061

⁽¹⁾ Asset balances relating to the Ground Systems – Government and Ground Systems – Commercial segments have been reclassified to conform with the presentation for the six months ended March 31, 2008. We realigned our operating segments from four segments to three segments, eliminating the Corporate segment, to conform to the way we are now internally managing our business.

11. Income Taxes

On October 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a “more-likely-than-not” threshold for the recognition and derecognition of tax positions, providing guidance on the accounting for interest and penalties relating to tax positions, and requires that the cumulative effect of applying the provisions of FIN 48 be reported as an adjustment to retained earnings or other appropriate components of equity on the opening balance sheet or net assets in the statement of financial position. We did not have any significant unrecognized tax benefits and there was no material effect on our financial condition or results of operations as a result of implementing FIN 48. During the quarter ended December 31, 2007, we recognized a $1.6 million tax credit for tax deductible research and development expenditures that were incurred in prior years. We filed amended tax returns associated with this tax credit during the quarter ended December 31, 2007.

12. Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS”) No. 157—”Fair Value Measurements.” In October 2006, FASB issued Statement of Financial Accounting Standards No. 157—”Fair Value Measurements,” or SFAS 157. This standard establishes a framework for measuring fair value and expands disclosures about fair value measurement of a company’s assets and liabilities. This standard also requires that the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and, generally, must be applied prospectively. On February 6, 2008, the FASB deferred the effective date of SFAS No.157 for all non-financial assets and liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. We currently plan to adopt this standard beginning on October 1, 2008 and are evaluating the impact that this new standard will have on our financial position and results of operations.

12

INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SFAS No. 159 – “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of SFAS No. 115.” In February 2007, the FASB issued SFAS No. 159. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and, generally, must be applied prospectively. We will be adopting this standard beginning on October 1, 2008. Currently, we are evaluating the impact that this new standard will have on our financial position and results of operations.

SFAS No. 160 – “Noncontrolling Interests in Consolidated Financial Statements —Including an amendment of ARB No. 51.” In December 2007, the FASB issued SFAS No. 160. This Statement improves the relevance, comparability, and transparency of financial information by requiring all entities to report noncontrolling (minority) interest in subsidiaries in the same way—as equity in the consolidated financial statements. This Statement also eliminates the diversity in accounting for transactions between an entity and noncontrolling interests by requiring that such transactions be treated as equity transactions. This Statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Statement is applied prospectively as of the beginning of the fiscal year in which the statement is initially applied, except for the presentation and disclosure requirements. Presentation and disclosure requirements are to be applied retrospectively for all periods presented. We will be adopting this Statement beginning on October 1, 2009. Currently, we do not have any noncontrolling (minority) interest in a subsidiary.

13

ITEM 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Overview

We build satellite ground systems and equipment for command and control, integration and test, data processing, and simulation. Since our inception, we have provided ground systems for over 200 different satellite missions for communications, science, meteorology, and earth resource applications. We have an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.

We measure financial performance for each operating segment based on income from operations, which consists of revenue less cost of revenue, selling, general & administrative, research & development, and intangible asset amortization expenses.

This section contains forward-looking statements, all of which are based on current expectations. Our projections may not 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.

Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments. Our most critical accounting policies, which relate to revenue recognition, allowance for doubtful accounts, the recoverability of goodwill and other long-lived assets, stock-based compensation, the recoverability of deferred tax assets, and obsolescence of inventory, are discussed below.

Revenue Recognition

Contract Revenue – We earn revenues from sales of our products and services and may be either a prime contractor directly to the end-user of our products and services or we may act as a subcontractor under a contract with a prime contractor. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed and determinable, and collectibility is reasonably assured. We generally earn revenue under three types of contracts: fixed-price, cost-plus a fixed fee, and time & materials (“T&M”) contracts. Revenue under a fixed-price contract is recognized using a percentage of completion method based on costs incurred in relation to total estimated costs or other measures of completion that are deemed appropriate. Under a cost-plus contract, we are reimbursed for allowable costs within the contractual terms and conditions and are paid a negotiated fee. The fee may be fixed or based on performance incentives. Revenue recognition under a cost-plus contract is based upon actual costs incurred and a pro rata amount of the negotiated fee. Under a T&M contract, we receive fixed hourly rates intended to cover salary costs attributable to work performed on the contract and related indirect expenses, reimbursement for other direct costs, and a profit. Revenue is recognized under a T&M contract at the contractual rates as labor hours and direct expenses are incurred. To date, the vast majority of contracts for the purchase of our commercial off-the-shelf (“COTS”) software products have been fixed-priced in nature, either firm fixed-price contracts or T&M contracts with fixed labor rates.

14

Sale of Software Products – Many of our contracts include the sale of company-owned proprietary software products. Sales of our software products may take many forms. We sell (1) software only (a “Software-Only Sale”), (2) software and services together, or (3) software, services, and hardware together. In addition, depending on a customer’s requirements, we may or may not provide post-contract customer support (“PCS”).

Our recognition of revenue from sales of software products depends on specific customer requirements and the nature of the contracts involved. In accordance with SOP 97-2, “Software Revenue Recognition,” for a Software-Only Sale, we recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable, and collectibility is reasonably assured. In situations where software is customized or otherwise modified and sold together with services and/or hardware, we recognize software license revenue on a percentage of completion basis.

We recognize PCS revenue on a percentage of completion basis when PCS is part of a broader fixed-price contract that includes customization or implementation support services. Alternatively, when PCS services (i.e., software maintenance and support) are awarded to us under a separate maintenance contract, we recognize PCS revenue on a straight-line basis pro rata over the term of the maintenance contract.

We provide products and services under fixed-price contracts for which revenue is generally recognized using the percentage of completion method based on the relationship of actual costs incurred to total costs estimated over the duration of the contract. These estimates regarding costs underlie our determination as to overall contract profitability and the timing of revenue recognition. If we do not accurately estimate the resources required or the scope of the work to be performed, or do not manage our contracts properly within the planned periods of time or satisfy our obligations under the contracts, then actual results may differ from projected results and losses on contracts may need to be recognized. We account for cost-reimbursable contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying the negotiated fee and or estimated award fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred, and estimated completion costs regularly and adjusts revenues and profits on contracts in the period in which changes become determinable.

Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts which is our best estimate of the amount of probable credit losses from the existing accounts receivable. A considerable amount of judgment is required in assessing the ultimate realization of individual accounts receivable balances, including the credit worthiness of each customer and the period in which customers’ financial condition deteriorate and they are no longer able to pay the balances owed to us. We determine the allowance based on historical experience, review of specific accounts, and past due balances of greater than 90 days and over a specific amount. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and recovery is considered remote.

To the extent we do not recognize deterioration in our customers’ financial condition in the period it occurs, or to the extent we overestimate our customers’ ability to pay, the amount of bad debt expense recognized in a given reporting period will be impacted.

Goodwill and Other Long-Lived Assets

Long-lived assets consist of goodwill, identifiable intangible assets, trademarks and agreements, and property and equipment. Long-lived assets such as property and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill is tested annually for impairment, and is reviewed for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Factors which we consider important and that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, and significant negative industry or economic trends. We determine whether impairment has occurred based on gross expected future cash flows and measure the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine impairment, if any, contain management’s best estimates, using appropriate

15

and customary assumptions and projections at the time. The estimates of expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment.” SFAS 123R requires that we account for all stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense over the service period. The fair value of restricted stock awards is based upon the market price of our common stock at the grant date. We estimate the fair value of stock option awards, as of the grant date, using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common stock, the risk-free rate of interest, and the dividend yield on our common stock. If our expected option term and stock-price volatility assumptions were different, the resulting determination of the fair value of stock option awards could be materially different. In addition, judgment is also required in estimating the number of share-based awards that we expect will ultimately vest upon the fulfillment of service conditions (such as time-based vesting) or the achievement of specific performance conditions. If the actual number of awards that ultimately vest differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Deferred Income Taxes

We recognize a deferred tax asset or liability for the estimated future tax effects attributable to temporary differences as well as the effects of any net operating loss carryforwards and tax credits that may be utilized to reduce future taxes payable. Deferred tax assets and liabilities are measured using the currently enacted tax rates, and future tax rate changes are not anticipated. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including past operating results, the reversal of temporary differences, the forecasts of future taxable income from operations and investments, and ongoing feasible and prudent tax planning strategies. These assumptions require management judgment and are updated periodically based on current business conditions which affect us and overall economic conditions and are consistent with estimates being used to manage the business. If it is determined more likely than not that a deferred tax asset will not be realized, we would record a valuation allowance to reduce net deferred tax assets to the amount that is more likely to be realized. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset valuation allowance would increase income in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would decrease income in the period such determination is made.

Inventories

Inventory is composed of items that are required to support delivered product or are necessary to fulfill future customer orders. Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method of accounting. Obsolete inventory is written off and its value is removed from inventory at the time its obsolescence is determined. Inventories are classified as current assets as all inventories are available and necessary to support current sales, even though a portion of the inventories may not be sold within one year.

16

Results of Operations - Second Quarter 2008 Compared to Second Quarter 2007

	Three Months Ended March 31,
	2008 (2nd quarter 2008)			2007 (2nd quarter 2007)			Favorable (unfavorable)
	(in thousands of dollars)
Revenue:
Ground Systems - Government	$	25,815		$	14,654		$	11,161
Ground Systems - Commercial		6,778			5,752			1,026
Space Communication Systems		13,924			9,952			3,972
Elimination of intersegment sales		(1,665	)		(1,346	)		(319	)
Total revenue		44,852			29,012			15,840
Cost of revenue:
Ground Systems - Government		21,560			12,249			(9,311	)
Ground Systems - Commercial		4,238			3,546			(692	)
Space Communication Systems		8,530			5,902			(2,628	)
Elimination of intersegment cost		(1,665	)		(1,346	)		319
Total cost of revenue		32,663			20,351			(12,312	)
Gross profit:
Ground Systems - Government		4,255			2,405			1,850
Gross Margin		16.5	%		16.4	%
Ground Systems - Commercial		2,540			2,206			334
Gross Margin		37.5	%		38.4	%
Space Communication Systems		5,394			4,050			1,344
Gross Margin		38.7	%		40.7	%
Total gross profit		12,189			8,661			3,528
Gross Margin		27.2	%		29.9	%
Operating expense:
Ground Systems - Government		2,093			1,482			(611	)
Ground Systems - Commercial		1,420			1,116			(304	)
Space Communication Systems		2,188			2,017			(171	)
Selling, general & administrative expense and intersegment sales		688			1,104			416
Total operating expense		6,389			5,719			(670	)
Operating income:
Ground Systems - Government		2,162			923			1,239
Operating margin		8.4	%		6.3	%
Ground Systems - Commercial		1,120			1,090			30
Operating margin		16.5	%		18.9	%
Space Communication Systems		3,206			2,033			1,173
Operating margin		23.0	%		20.4	%
Selling, general & administrative expense		(688	)		(1,104	)		416
Total operating income		5,800			2,942			2,858
Operating margin		12.9	%		10.1	%
Other income (expense), net		265			389			(124	)
Income before income taxes		6,065			3,331			2,734
Provision for income taxes		2,092			1,189			(903	)
Net income	$	3,973		$	2,142		$	1,831

17

Revenue

Second quarter 2008 consolidated revenue increased 54.6% from $29.0 million for the second quarter 2007 to $44.9 million for the second quarter 2008. The increase in revenue was primarily related to the following:

Ground Systems – Government revenue was $25.8 million in the second quarter 2008, an increase of $11.1 million or 76.2%, compared to $14.7 million in the second quarter 2007. The increase in revenue in this segment in the second quarter 2008 was primarily attributable to the increase in level of effort on two large government contracts during the second quarter 2008 compared to the second quarter 2007, new contract work with the United States Air Force and revenue increases from our contracts relating to National programs (classified programs with various agencies with the U.S. government). The increase in level of effort on one of the large government contracts was related to the acceleration of timing of work performed at the request of the customer. Partially offsetting this increase was a decrease in revenue due to the completion of a contract relating to Civilian programs during the first quarter 2008 that had work scope during the second quarter 2007.

Ground Systems – Commercial revenue was $6.8 million in the second quarter 2008, an increase of $1.0 million, or 17.8%, compared to $5.8 million in the second quarter 2007. The increase in revenue for this segment in the second quarter 2008 was primarily attributable to revenue increases from new command and control work and from several government contracts held by our SAT subsidiary that are near completion, partially offset by a command and control contract for which the level of effort decreased during the second quarter 2008 compared to the second quarter 2007.

Space Communication Systems revenue was $13.9 million in the second quarter 2008, an increase of $4.0 million or 39.9%, compared to $10.0 million in the second quarter 2007. The increase in revenue for this segment in the second quarter 2008 was primarily attributable to new contracts and an increase in work scope on an existing government contract held by our RT Logic subsidiary.

Gross Profit

Our gross profit can vary significantly depending on the type of product or service provided. Generally, license revenues related to the sale of our COTS software products have the greatest gross profit because of the minimal incremental costs to produce them. By contrast, gross margin for equipment and subcontractor costs are significantly lower. Engineering service gross margin is typically in the 20% range or higher. These gross profit and gross margins are realized in all segments, although profit on equipment costs for the Space Communications Systems segment are generally greater than the equipment profit in the other segments because that segment’s business is composed of internally developed hardware, firmware, and software products.

Gross profit was $12.2 million in the second quarter 2008, an increase of $3.5 million, or 40.7%, compared to $8.7 million in the second quarter 2007. The increase in gross profit in the second quarter 2008 was attributable to all of our segments.

Ground Systems – Government gross profit was $4.3 million in the second quarter 2008, an increase of $1.9 million, or 76.9%, compared to $2.4 million in the second quarter 2007. The increase in gross profit is primarily attributable to new and existing contract work with the United States Air Force and revenue increases from our contracts relating to National programs, partially offset by a decrease in gross profit due to the completion of a contract relating to Civilian programs during the first quarter 2008 that had work scope during the second quarter 2007.

Ground Systems – Commercial gross profit was $2.5 million in the second quarter 2008, an increase of $0.3 million, or 15.1%, compared to $2.2 million in the second quarter 2007. The increase in gross profit is primarily attributable to increases in revenue from new command and control work and our SAT subsidiary, partially offset by a command and control contract for which the level of effort decreased during the second quarter 2008 compared to the second quarter 2007.

Space Communication Systems gross profit was $5.4 million in the second quarter 2008, an increase of $1.3 million, or 33.2%, compared to $4.1 million in the second quarter 2007. The increase in gross profit was primarily attributable to the increase in revenue from our RT Logic subsidiary.

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Operating Expenses

Second quarter 2008 operating expenses increased 11.7% from $5.7 million in the second quarter 2007 to $6.4 million in the second quarter 2008. The increase is primarily attributable to higher salary and personnel related expense, professional services fees, and research and development (“R&D”) expenses, offset by lower selling expense, primarily bid and proposal expense.

Operating expenses in our Ground Systems – Government segment increased by $0.6 million from $1.5 million for the second quarter 2007 to $2.1 million for the second quarter 2008 principally due to an increase in the allocation of corporate expenses.

Operating expenses in our Ground Systems—Commercial segment increased by approximately $0.3 million from $1.1 million for the second quarter 2007 to $1.4 million for the second quarter 2008, due to an increase in the allocation of corporate expenses.

The Space Communications Systems segment’s operating expenses increased by approximately $0.2 million from $2.0 million for the second quarter 2007 to $2.2 million for the second quarter 2008. The increase is primarily attributable to higher R&D expense, partially offset by lower selling, general, and administrative expense, which includes bid and proposal costs, and intangible amortization expense.

Corporate selling, general & administrative expenses decreased by $0.4 million from $1.1 million for the second quarter 2007 to $0.7 million for the second quarter 2008 principally due to high legal costs incurred during the second quarter 2007 associated with the previously disclosed SEC.

Other income, net

Other income, net decreased by $0.1 million from $0.4 million for the second quarter 2007 to $0.3 million for the second quarter 2008, mostly as a result of lower interest income on marketable securities due primarily to lower amounts invested in marketable securities. During the fourth quarter 2007, we sold marketable securities and used the proceeds to purchase 1,850,000 shares of our common stock in a tender offer.

Income Tax Expense

We recorded income tax expense of $2.1 million in the second quarter 2008 and $1.2 million in the second quarter 2007. The increase in income tax expense is primarily due to an increase in taxable income. The effective tax rates for the second quarter 2008 and the second quarter 2007 are 34.5% and 35.7%, respectively.

Net Income

Net income was $4.0 million in the second quarter 2008 as compared to $2.1 million in the second quarter 2007. The increase in net income in the second quarter 2008 as compared to the second quarter 2007 is primarily related to higher operating income.

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Results of Operations – Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007

	Six Months Ended March 31,
	2008			2007			Favorable (unfavorable)
	(in thousands of dollars)
Revenue:
Ground Systems - Government	$	44,186		$	29,129		$	15,057
Ground Systems - Commercial		14,381			11,733			2,648
Space Communication Systems		26,326			19,108			7,218
Elimination of intersegment sales		(2,731	)		(3,535	)		804
Total revenue		82,162			56,435			25,727
Cost of revenue:
Ground Systems - Government		33,021			23,811			(9,210	)
Ground Systems - Commercial		8,549			7,188			(1,361	)
Space Communication Systems		15,778			11,163			(4,615	)
Elimination of intersegment cost		(2,731	)		(3,535	)		(804	)
Total cost of revenue		54,617			38,627			(15,990	)
Gross profit:
Ground Systems - Government		11,165			5,318			5,847
Gross Margin		25.3	%		18.3	%
Ground Systems - Commercial		5,832			4,545			1,287
Gross Margin		40.6	%		38.7	%
Space Communication Systems		10,548			7,945			2,603
Gross Margin		40.1	%		41.6	%
Total gross profit		27,545			17,808			9,737
Gross Margin		33.5	%		31.6	%
Operating expense:
Ground Systems - Government		4,886			3,467			(1,419	)
Ground Systems - Commercial		2,814			2,382			(432	)
Space Communication Systems		4,237			3,860			(377	)
Selling, general & administrative expense and intersegment sales		1,481			2,263			782
Total operating expense		13,418			11,972			(1,446	)
Operating income:
Ground Systems - Government		6,279			1,851			4,428
Operating margin		14.2	%		6.4	%
Ground Systems - Commercial		3,018			2,163			855
Operating margin		21.0	%		18.4	%
Space Communication Systems		6,311			4,085			2,226
Operating margin		24.0	%		21.4	%
Selling, general & administrative expense		(1,481	)		(2,263	)		782
Total operating income		14,127			5,836			8,291
Operating margin		17.2	%		10.3	%
Other income (expense), net		200			633			(433	)
Income before income taxes		14,327			6,469			7,858
Provision for income taxes		3,331			2,268			(1,063	)
Net income	$	10,996		$	4,201		$	6,795

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Revenue

Consolidated revenue for the six months ended March 31, 2008 increased 45.6% from $56.4 million for the six months ended March 31, 2007 to $82.2 million for the six months ended March 31, 2008. The increase in revenue was primarily related to the following:

Ground Systems – Government revenue was $44.2 million for the six months ended March 31, 2008, an increase of $15.1 million, or 51.7%, compared to $29.1 million for the six months ended March 31, 2007. The increase in revenue in this segment for the six months ended March 31, 2008 was primarily attributable to the up-front delivery of licenses under the GPS OCX (Next Generation Control Segment) contract with Northrop Grumman Corporation, which was awarded during the first quarter 2008, the increase in level of effort on two large government contracts for the six months ended March 31, 2008 compared to the six months ended March 31, 2007 and revenue increases from our contracts relating to National programs. The increase in level of effort on one of the large government contracts was related to the acceleration of timing of work performed at the request of the customer.

Ground Systems – Commercial revenue was $14.4 million for the six months ended March 31, 2008, an increase of $2.7 million, or 22.6%, compared to $11.7 million for the six months ended March 31, 2007. The increase in revenue for this segment for the six months ended March 31, 2008 was primarily attributable to revenue increases from new command and control work and from several government contracts held by our SAT subsidiary that are near completion, partially offset by decrease in the level of effort during the six months ended March 31, 2008 compared to the six months ended March 31, 2007 with respect to a command and control contract.

Space Communication Systems revenue was $26.3 million for the six months ended March 31, 2008, an increase of $7.2 million, or 37.8%, compared to $19.1 million for the six months ended March 31, 2007. The increase in revenue for this segment for the six months ended March 31, 2008 was primarily attributable to new contracts, an increase in work scope on an existing government contract held by our RT Logic subsidiary and increases in product shipments to customers from our Lumistar subsidiary.

Gross Profit

Our gross profit can vary significantly depending on the type of product or service provided. Generally, license revenues related to the sale of our COTS software products have the greatest gross profit because of the minimal incremental costs to produce. By contrast, gross margin for equipment and subcontractor costs are significantly lower. Engineering service gross margin is typically in the 20% range or higher. These gross profit and gross margins are realized in all segments, although profit on equipment costs for the Space Communications Systems segment are generally greater than the equipment profit in the other segments because that segment’s business is composed of internally developed hardware, firmware, and software products.

Gross profit was $27.5 million for the six months ended March 31, 2008, an increase of $9.7 million, or 54.7%, compared to $17.8 million for the six months ended March 31, 2007. The increase in gross profit for the six months ended March 31, 2008 was attributable to all of our segments.

Ground Systems – Government gross profit was $11.2 million for the six months ended March 31, 2008, an increase of $5.8 million, or 109.9%, compared to $5.3 million for the six months ended March 31, 2007. The increase in gross profit is primarily attributable to the GPS OCX (Next Generation Control Segment) contract, which included $2.4 million of license revenue. There are minimal costs associated with the sale of licenses due to the minimal incremental costs to produce them. In addition, gross profit increased during the six months ended March 31, 2008 due to increases in revenue from a large government contract and National programs and an increase related to the completion of a Civilian program during the first quarter 2008, earlier than anticipated.

Ground Systems – Commercial gross profit was $5.8 million for the six months ended March 31, 2008, an increase of $1.3 million, or 28.3%, compared to $4.5 million for the six months ended March 31, 2007. The increase in gross profit is primarily attributable to increases in revenue from new command and control work and our SAT subsidiary, partially offset by several command and control contracts for which the level of effort decreased during the six months ended March 31, 2008 compared to the six months ended March 31, 2007.

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Space Communication Systems gross profit was $10.5 million for the six months ended March 31, 2008, an increase of $2.6 million, or 32.8%, compared to $7.9 million for the six months ended March 31, 2007. The increase in gross profit was primarily attributable to the increases in revenue in that segment.

Operating Expenses

Operating expenses for the six months ended March 31, 2008 increased 12.1% from $12.0 million for the six months ended March 31, 2007 to $13.4 million for the six months ended March 31, 2008. The increase is primarily attributable to higher salary and personnel related expense, professional services fees and R&D expense, offset by lower selling expense, primarily bid and proposal expense.

Operating expenses in our Ground Systems – Government segment increased by $1.4 million from $3.5 million for the six months ended March 31, 2007 to $4.9 million for the six months ended March 31, 2008 principally due to an increase in the allocation of corporate expenses.

Operating expenses in our Ground Systems—Commercial segment increased by approximately $0.4 million from $2.4 million for the six months ended March 31, 2007 to $2.8 million for the six months ended March 31, 2008 principally due to an increase in the allocation of corporate expenses.

The Space Communications Systems segment’s operating expenses increased by approximately $0.4 million from $3.8 million for the six months ended March 31, 2007 to $4.2 million for the six months ended March 31, 2008. The increase is primarily attributable to higher R&D expense and salary and related expenses, partially offset by lower selling, general, and administrative expense, which includes bid and proposal costs, and intangible amortization expense.

Corporate selling, general & administrative expenses decreased by $0.8 million from $2.3 million for the six months ended March 31, 2007 to $1.5 million for the six months ended March 31, 2008 principally due to high legal costs incurred during the six months ended March 31, 2007 associated with the previously disclosed SEC investigation and due diligence expenses associated with the previously announced exploration of strategic alternatives.

Other income, net

Other income, net decreased by $0.4 million from $0.6 million for the six months ended March 31, 2007 to $0.2 million for the six months ended March 31, 2008, mostly as a result of lower interest income on marketable securities due primarily to lower amounts invested in marketable securities. During the fourth quarter 2007, we sold marketable securities and used the proceeds to purchase 1,850,000 shares of our common stock in a tender offer.

Income Tax Expense

We recorded income tax expense of $3.3 million for the six months ended March 31, 2008 and $2.3 million for the six months ended March 31, 2007. Included for the six months ended March 31, 2008 income tax expense is a $1.6 million tax credit for tax deductible research and development expenditures that were incurred in prior years. We have filed amended tax returns associated with this tax credit. Tax expense, net of this tax credit, is $4.9 million for the six months ended March 31, 2008. The increase in income tax expense is primarily due to an increase in taxable income. The effective tax rates for the six months ended March 31, 2008 and the first quarter of 2007 are 34.5% and 35.1%, respectively.

Net Income

Net income was $11.0 million for the six months ended March 31, 2008 as compared to $4.2 million for the six months ended March 31, 2007. The increase in net income for the six months ended March 31, 2008 as compared to the six months ended March 31, 2007 is primarily related to higher operating income and the R&D tax credit.

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Backlog

We ended the six months ended March 31, 2008 with a backlog of approximately $254.5 million as compared to $250.5 million at the end of fiscal 2007. Many of our contracts are multi-year contracts and contracts with option years, and portions of these contracts are carried forward from one year to the next as part of our contract backlog. Our total contract backlog represents management’s estimate of the aggregate unearned revenues expected to be earned by us over the life of all of our contracts, including option periods. Because many factors affect the scheduling of projects, we cannot predict when revenues will be realized on projects included in our backlog. In addition, although contract backlog represents only business where we have written agreements with our customers, it is possible that cancellations or scope adjustments may occur.

Liquidity and Capital Resources

We have been routinely profitable on an annual basis and have generally financed our working capital needs through funds generated from income from operations, supplemented by borrowings under our general line of credit facility with a commercial bank when necessary.

For the six months ended March 31, 2008, operating activities provided us $8.0 million of cash, primarily as a result of net income, depreciation and amortization, higher billings in excess of revenue for contracts in progress balances, and lower cost and estimated earnings in excess of billings on uncompleted contract balances. Partially offsetting our cash from operations were higher accounts receivable, inventory, and income tax receivable and lower accounts payable balances. We invested $2.2 million to purchase fixed assets (principally leasehold improvements and new computers and equipment), and we received $0.4 million net proceeds from the sale of marketable securities. Our financing activities included the use of $23.5 million in cash to repurchase our common stock, and we received $2.6 million in proceeds from the issuance of common stock.

For the six months ended March 31, 2007, operating activities provided $3.6 million of cash, primarily as a result of net income, depreciation and amortization, higher billings in excess of revenue for contracts in progress balances, and lower cost and estimated earnings in excess of billings on uncompleted contract balances. Partially offsetting our cash from operations were higher income taxes payable, accrued expenses, inventories, and accounts receivable balances. We invested $1.6 million to purchase fixed assets (principally leasehold improvements and new computers and equipment). Our financing activities included the use of $2.7 million in cash to pay dividends and repurchase common stock and we received proceeds of $2.2 million from the issuance of common stock.

We have a credit agreement that permits unsecured borrowing up to $25.0 million, including a sub-facility of $10 million for the issuance of letters of credit. Any borrowings under the facility will accrue interest at the one-month London Inter-Bank Offering Rate (“LIBOR”), plus a margin of 1.5% to 2.4% depending on our ratio of funded debt to earnings before interest, taxes and depreciation (“EBITDA”). We are required to pay a fee on the undrawn amount of the facility from time to time, at a rate of 0.20% to 0.25% per annum, depending on our ratio of funded debt to EBITDA, and payable quarterly. The credit agreement has certain financial covenants, including the maintenance of a maximum ratio of funded debt to EBITDA of 2.5 to 1.0 and a minimum fixed charge coverage ratio of 1.25 to 1, and expires on December 31, 2010. The credit agreement contains customary covenants, including affirmative covenants that require, among other things, certain financial reporting by us, and negative covenants that, among other things, restrict our ability to incur additional indebtedness, incur encumbrances on assets, reorganize, consolidate or merge with any other company, and make acquisitions and stock repurchases. The credit agreement also contains customary events of default, including a cross-default to other indebtedness by us. Failure by us to comply with such covenants, or the occurrence of any other event of default, could result in the acceleration of any loans or other financial obligations of ours under the credit agreement and the termination of the facility. The availability of loans and letters of credit under the facility is subject to customary conditions, including the material accuracy of certain representations and warranties by us and to no default continuing under the credit agreement. At March 31, 2008, we had no amounts outstanding under the line of credit.

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On December 5, 2007, our Board of Directors decided to cease the payment of dividends for the foreseeable future beginning with fiscal 2008 and future years in order to maximize our ability to invest in future R&D, marketing, business development, and strategic acquisition efforts that, in the Board’s opinion, will result in a greater return for our shareholders. As we contemplate these strategic efforts to grow our company, the Board will continue to evaluate the most effective measures that it can take to maximize shareholder value.

We currently anticipate that our current cash balances, amounts available under our line of credit, and net cash provided by operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended September 30, 2007. Our exposures to market risk have not changed materially since September 30, 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and Form 10-Q.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control Over Financial Reporting.

As required by Rule 13a-15 under the Exchange Act, our management carried out an evaluation of any changes in our internal control over financial reporting that occurred during our second quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. This evaluation was carried out under the supervision and with the participation of our management, including the chief executive officer and chief financial officer. Based upon that evaluation, we concluded that there was no change in our internal control over financial reporting during this period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings and threatened legal proceedings from time to time. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on our business, results of operations, financial condition, or cash flows.

In November 2004, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with LJT & Associates, Inc. (“LJT”) to sell all assets of our antenna division. LJT filed an action against us on December 8, 2006 in the circuit court for Howard County, Maryland, seeking unspecified damages for the alleged wrongful hiring of a former LJT employee by us. LJT claimed that we breached our Asset Purchase Agreement as well as the employee’s employment agreement, and LJT claimed that we conspired to and did misappropriate some of LJT’s trade secrets. LJT subsequently claimed in correspondence with us that we would be liable to

24

them for damages in excess of $1,000,000 and LJT would seek to recoup attorney’s fees incurred in supporting this claim. On January 14, 2008, we agreed to settle this claim for a sum of $98,000 and to forgive a note receivable due from LJT in the amount of $67,000 and are no longer subject to any further obligation.

As previously disclosed, on March 1, 2007, we learned that the SEC had issued a formal order of investigation regarding the Company. We and certain of our officers have received subpoenas in connection with the investigation. The Board of Directors of the Company established a Special Committee of independent directors of the Company to supervise our responses to the SEC’s investigation and to investigate related matters. The Special Committee consists of the following members of our Board of Directors: John M. Albertine, Paul Casner, William F. Leimkuhler, and R. Doss McComas. The Special Committee has retained the law firm of Foley Hoag LLP to serve as its independent counsel.

The investigation by the SEC and a related inquiry by NASDAQ include questions as to whether Gary A. Prince was acting as a de facto executive officer of the Company prior to his promotion to the position of Executive Vice President and Managing Director of Operations of the Company in August 2006. The investigation and inquiry also include questions as to whether Mr. Prince was practicing as an accountant before the SEC while an employee of the Company. Mr. Prince agreed with the SEC in 1997 to a permanent injunction barring him from practicing as an accountant before the SEC, as part of a settlement with the SEC related to Mr. Prince’s guilty plea to charges brought against him for conduct principally occurring in 1988 through 1990 while he was employed by Financial News Network, Inc. and United Press International.

We have certified compliance with the SEC’s subpoena to the Company, and are cooperating fully with the SEC and NASDAQ in connection with the investigation and the inquiry.

Effective March 30, 2007, we terminated the employment of Mr. Prince. Mr. Prince’s employment termination was at the direction of the Special Committee, as a result of investigation by the Special Committee concerning the matters under investigation by the SEC and the related inquiry by NASDAQ. We had placed Mr. Prince on paid administrative leave effective November 1, 2006, pending developments in the inquiries by the SEC and NASDAQ and the ongoing investigation by the Special Committee. On April 24, 2007, Mr. Prince sent a letter to us demanding a severance payment of $0.2 million and a bonus payment of $60,000 for fiscal year 2006 services. On May 17, 2007, Mr. Prince filed a lawsuit in Prince George’s County Maryland against us demanding payment of $0.9 million for unpaid wages and treble damages related thereto. We disputed the claims made in the letter and the lawsuit by Mr. Prince. On November 19, 2007, the Company and Mr. Prince entered into a Settlement Agreement and Mutual General Release (the “Settlement Agreement”) in full and complete settlement of the Lawsuit. Under the Settlement Agreement, we agreed to pay Mr. Prince a total of $110,000, of which $65,000 will be treated as wages and $45,000 will be treated as non-wages and as reimbursement of a portion of Mr. Prince’s legal fees. We agreed to make the foregoing payments within seven (7) days following dismissal of the lawsuit with prejudice. The Settlement Agreement also includes mutual general releases by each of the Company and Mr. Prince with respect to the other, except that both parties agreed that the Indemnification Agreement between them effective December 4, 2002 and the Affirmation and Undertaking Re: Advance for Expenses between them dated October 17, 2006 will remain in full force and effect, and that both parties reserve all rights under both agreements. The Settlement Agreement further provides that by making the payment to Mr. Prince, we are not admitting any wrongdoing or liability and, instead, that any wrongdoing or liability is expressly denied.

Item 1A. Risk Factors

A description of our risk factors can be found in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2007. There were no material changes to those risk factors during the six months ended March 31, 2008.

25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes our purchases of our equity securities during the three months ended March 31, 2008:

(c) Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31, 2008	—	$	0.00	—	—
February 1 to February 29, 2008	—	$	0.00	—	—
March 1 to March 31, 2008	1,064,972	$	22.00	—	—
Total	1,064,972	$	22.00	—	—

On March 3, 2008, we entered into a definitive Stock Purchase Agreement with Fursa Alternative Strategies, LLC to purchase 1,064,972 shares of our common stock that Fursa beneficially owned on behalf of its affiliated investment funds and separately managed accounts over which it exercised discretionary authority at $22.00 per share.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Securities Holders

The Annual Meeting of Stockholders of the Company was held on February 20, 2008. The following matters were voted on by stockholders, and received the votes indicated:

1. Election of Board of Directors:

Director	For	Withheld
John M. Albertine	9,961,682	419,390
Alan W. Baldwin	8,163,769	217,303
Paul G. Casner, Jr.	7,991,187	389,885
William F. Harley III	7,892,547	488,525
William F. Leimkuhler	7,978,144	402,928
R. Doss McComas	7,936,359	444,713

The terms of each of the elected directors will expire at the next Annual Meeting of Stockholders in 2009 or when their successors are elected and qualified. On March 14, 2008, Mr. William F. Harley III resigned from the Board of Directors and Committees thereof. On March 20, 2008, our Board of Director’s appointed Major General James B. Armor, Jr., USAF (Ret.) to serve as a member of the Company’s Board of Directors.

2. Ratification of the appointment of Bernstein & Pinchuk LLP as the Company’s independent registered public accounting firm by the Audit Committee of the Board of Directors:

For	Against	Abstain	Broker non-vote
8,293,137	85,221	2,714	—

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3. To approve the Integral Systems, Inc. 2008 Stock Incentive Plan:

For	Against	Abstain	Broker non-vote
4,399,205	392,618	856,989	2,732,260

4. To approve the Integral Systems, Inc. Employee Stock Purchase Plan:

For	Against	Abstain	Broker non-vote
4,312,219	481,405	855,188	2,732,260

Item 5. Other Information

On May 7, 2008, the Compensation Committee of the Board of Directors approved a Form of Standard Terms and Conditions for Nonqualified Stock Options Award and a Form of Standard Terms and Conditions for Incentive Stock Options Award for use from time to time pursuant to the terms and conditions of the Integral Systems, Inc. 2008 Stock Incentive Plan. These Forms are attached hereto as Exhibits 10.5 and 10.6 and are incorporated herein by reference.

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Item 6. Exhibits and Financial Statement Schedules

Index to Exhibits

3.1	Articles of Restatement of the Company dated May 7, 1999, as supplemented by Articles Supplementary of the Company dated March 13, 2006 and as supplemented by Articles Supplementary of the Company dated February 12, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2007 filed with the Commission on May 10, 2007).
3.2	Amended and Restated Bylaws of the Company, as amended by Amendments No. 1, 2, 3, and 4 to the Amended and Restated By-laws of Integral Systems, Inc. (Incorporated by reference to Company’s current report on Form 8-K filed with the Commission on September 20, 2007).
10.01+	Employment Agreement between Jeffrey A. Rosolio and the Company, effective as of November 19, 2007 (filed herewith).
10.02+	2008 Incentive Compensation Plan (filed herewith).
10.03+	Integral Systems, Inc. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on February 26, 2008).
10.04+	Integral Systems, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Commission on February 26, 2008).
10.05+	Form of grant document for Nonqualified Stock Options under Integral Systems, Inc. 2008 Stock Incentive Plan (filed herewith).
10.06+	Form of grant document for Incentive Stock Options under Integral Systems, Inc. 2008 Stock Incentive Plan (filed herewith).
10.07	Stock Purchase Agreement Between Fursa Alternative Strategies, LLC and the Company, dated February 29, 2008 (filed herewith).
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.

+ Indicates management or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of May 7, 2008.

INTEGRAL SYSTEMS, INC.
By:	/s/ WILLIAM M. BAMBARGER, JR.
	William M. Bambarger, Jr.
	Chief Financial Officer and Treasurer, Principal Accounting Officer
By:	/s/ HEMI G. LEE-GALLAGHER
	Hemi G. Lee-Gallagher
	Corporate Controller

29

EXHIBIT INDEX

Exhibit Number	Description
3.1	Articles of Restatement of the Company dated May 7, 1999, as supplemented by Articles Supplementary of the Company dated March 13, 2006 and as supplemented by Articles Supplementary of the Company dated February 12, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2007 filed with the Commission on May 10, 2007).
3.2	Amended and Restated Bylaws of the Company, as amended by Amendments No. 1, 2, 3, and 4 to the Amended and Restated By-laws of Integral Systems, Inc. (Incorporated by reference to Company’s current report on Form 8-K filed with the Commission on September 20, 2007).
10.01+	Employment Agreement between Jeffrey A. Rosolio and the Company, effective as of November 19, 2007 (filed herewith).
10.02+	2008 Incentive Compensation Plan (filed herewith).
10.03+	Integral Systems, Inc. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on February 26, 2008).
10.04+	Integral Systems, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Commission on February 26, 2008).
10.05+	Form of grant document for Nonqualified Stock Options under Integral Systems, Inc. 2008 Stock Incentive Plan (filed herewith).
10.06+	Form of grant document for Incentive Stock Options under Integral Systems, Inc. 2008 Stock Incentive Plan (filed herewith).
10.07	Stock Purchase Agreement Between Fursa Alternative Strategies, LLC and the Company, dated February 29, 2008 (filed herewith).
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.

+ Indicates management or compensatory plan or arrangement

EX-10.01

Exhibit 10.01

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is entered into on the 23^rd of October, 2007, to be effective on and as of the 19th of November, 2007 (the “Effective Date”), by and between Integral Systems, Inc., a Maryland corporation (the “Company”), and Jeffrey A. Rosolio (the “Executive”).

NOW, THEREFORE, in consideration of the mutual promises made below, the parties agree as follows:

1. Employment, Duties and Acceptance.

1.1 Employment.

(a) Effective upon the Effective Date, the Company shall employ the Executive as the Vice President, Human Resources. The Executive shall have such powers, perform such duties and fulfill such responsibilities as may be determined by the Chief Executive Officer of the Company from time to time. The Executive accepts such employment and shall perform his duties faithfully and to the best of his abilities.

(b) The Executive shall devote his full working time and creative energies to the performance of his duties hereunder and will at all times devote such additional time and efforts as are reasonably sufficient for fulfilling the significant responsibilities entrusted to him. So long as such activities, in the aggregate, do not interfere with the performance by the Executive of his duties hereunder: (i) the Executive shall be permitted a reasonable amount of time to supervise his personal, passive investments; and (ii) the Executive shall be permitted a reasonable amount of time to participate (as board member, officer or volunteer) in civic, political and charitable activities.

1.2 Place of Employment. The Executive’s principal place of employment shall be in Lanham, Maryland, subject to such travel as may be reasonably required by his employment pursuant to the terms hereof.

2. Term of Employment.

2.1 Term of Employment. Executive agrees that the initial term of this Agreement shall be for a period of three (3) years commencing on the date first written above (the “Effective Date”) and will continue until the first anniversary of the Effective Date (as may be extended, the “Term”). At the end of the initial Term or at the end of any twelve (12) month renewal period (as described in Section 2.2 below), the Term of this Agreement may automatically extend as provided below in Section 2.2. Notwithstanding anything to the contrary contained herein, the Company may terminate Executive’s employment with or without Cause.

2.2 Renewal Periods. If this Agreement has not been terminated earlier in accordance with the provisions of this Agreement, at the end of the initial Term or any twelve (12) month renewal period, the Term shall be extended automatically for an additional twelve (12) month period unless either party provides written notice of non-renewal to the other party at least one hundred twenty (120) days prior to the last day of the Term or any renewal period, as applicable.

3. Compensation.

3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company shall pay to the Executive during the Term a salary of $200,000 per annum (the “Base Salary”), which shall be pro-rated for calendar year 2007, less such deductions as shall be required to be withheld by applicable laws and regulations or as otherwise authorized by the Executive. The Base Salary shall accrue from and after the Effective Date, and shall be payable during the Term, in arrears in equal periodic installments and in accordance with the practices of the Company in effect from time to time for the payment of salaries to employees of the Company, but in any event not less frequently than monthly. The Executive’s Base Salary shall be reviewed at least annually and may be increased (but not decreased) based upon the evaluation of the Executive’s performance and the compensation policies of the Company in effect at the time of each such review.

3.2 Additional Compensation. During the Term, Executive shall be entitled to participate, in accordance with the terms thereof and in a manner substantially similar to other similarly situated executive officers, in any present or future bonus, profit sharing, stock option (whether incentive or non qualified) or other employee compensation or incentive plan adopted by the Company.

3.3 Participation in Executive Officer Benefit Plans; Vacation. The Executive shall be permitted during the Term, if and to the extent eligible, to participate in any group life, hospitalization or disability insurance plan, health program, 401(k) pension or similar benefit plan of the Company which may be available to other executive officers of the Company generally on the same terms as such other executive officers. The Executive shall receive vacation in accordance with the vacation policy of the Company.

3.4 Expenses. The Company shall pay or reimburse the Executive for all ordinary, necessary and reasonable expenses (including, without limitation, travel, meetings, dues, subscriptions, fees, educational expenses, computer equipment, mobile telephones, professional insurance, and the like) actually incurred or paid by the Executive during the Term in the performance of the Executive’s services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as may be required by the policies and procedures of the Company in effect from time to time.

3.5 Withholding. The Company is authorized to withhold from the amount of any Base Salary and any other things of value paid to or for the benefit of the Executive, all sums authorized by the Executive or required to be withheld by law, court decree,

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or executive order, including (but not limited to) such things as income taxes, employment taxes, and employee contributions to fringe benefit plans sponsored by the Company.

4. Termination.

4.1 General. The employment of the Executive hereunder shall terminate as provided in Section 2, unless earlier terminated in accordance with the provisions of this Section 4.

4.2 Termination Upon Mutual Agreement. The Company and the Executive may, by mutual written agreement, terminate this Agreement and/or the employment of the Executive at any time.

4.3 Death or Disability of Executive.

(a) The employment of the Executive hereunder shall terminate upon (i) the death of the Executive, and (ii) at the option of the Company upon not less than thirty (30) days’ prior written notice to the Executive or his personal representative or guardian, if the Executive suffers a “Total Disability” (as defined in Section 4.3(b) below).

(b) For purposes of this Agreement, “Total Disability” shall mean (i) if the Executive is subject to a legal decree of incompetency (the date of such decree being deemed the date on which such disability occurred), or (ii) the written determination by a physician selected by the Company that, because of a medically determinable disease, injury or other physical or mental disability, the Executive is unable substantially to perform each of the material duties of the Executive required hereby, and that such disability has lasted for the immediately preceding ninety (90) days and is, as of the date of determination, reasonably expected to last an additional ninety (90) days or longer after the date of determination, in each case based upon medically available reliable information, and the provision of clear and convincing evidence by the Company of the Executive’s inability substantially to perform each material duty hereunder in support of such determination by the physician.

(c) Any leave on account of illness or temporary disability which is short of “Total Disability” shall not constitute a breach of this Agreement by the Executive and in no event shall any party be entitled to terminate this Agreement for “Cause” (as defined in Section 4.4 below) due to any such leave. All physicians selected hereunder shall be Board certified in the specialty most closely related to the nature of the disability alleged to exist.

4.4 Termination For Cause. The Company may, upon written notice to the Executive specifying in reasonable detail the reason therefore, terminate the employment of the Executive at any time for “Cause” (as defined below). For purposes of this Agreement, “Cause” means (i) the material failure of the Executive to perform his duties under this Agreement, or to follow the Company’s policies and procedures applicable to executive officers of the Company in effect from time to time, after notice and a reasonable opportunity to cure; (ii) willful malfeasance by the Executive in connection with the performance of his duties under this

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Agreement; (iii) the Executive being convicted of, or pleading guilty or nolo contendere to, or being indicted for a felony or other crime involving theft, fraud or moral turpitude; (iv) fraud or embezzlement against the Company; (v) the failure of the Executive to obey in any material respects any proper written direction of the Chief Executive Officer of the Company that is not inconsistent with this Agreement; (vi) or the material violation by the Executive of any of the provisions of Section 5 of this Agreement.

4.5 Payments Upon Termination.

(a) The Company may at any time during the Term terminate the Executive without Cause. In the event the Executive’s employment is terminated by the Company without Cause during the Term, then the Company shall pay (on the same schedule used to pay Base Salary to the Executive during the Term) the Executive:

(1) the Base Salary to which the Executive would have been entitled pursuant to Section 3.1 of this Agreement had the Executive remained in the employ of the Company for a period commencing upon the date of such termination and ending on the first anniversary of the date of termination (“Termination Coverage Period”); provided, however, that in the event that during the Termination Coverage Period such period Executive receives compensation from a third party employer (“Third Party Employer Compensation”), then Executive shall promptly provide written evidence of such compensation and any payments under this Section 4.5(a) shall be net of such Third Party Employer Compensation, and

(2) The Executive’s COBRA Premiums for the Termination Coverage Period, or the portion thereof, that Executive or Executive’s dependents are eligible for such COBRA coverage.

(b) In the event the Executive’s employment is terminated (i) by the Company for Cause, or (ii) voluntarily by the Executive, then the Company shall have no duty to make any payments or provide any benefits to the Executive pursuant to this Agreement other than payment of the amount of the Executive’s Base Salary accrued through the date of termination of his employment and any other benefits the Executive is then due pursuant to the employment benefit plans of the Company.

(d) Upon termination of Executive’s employment for death or due to Total Disability, the Company shall pay to the Executive, guardian, personal representative or estate, as the case may be, in addition to any insurance or disability benefits to which Executive may be entitled hereunder, all amounts accrued or vested prior to such termination.

(e) Upon termination of Executive’s employment for death, due to Total Disability or without Cause, the Executive, or the Executive’s guardian, personal representative or estate, as the case may be, shall be entitled to a bonus (consistent with the provisions of Section 3.2 of this Agreement) for the fiscal year in which the date of termination of employment occurs, prorated for the period of employment in such fiscal year; provided, however, that such bonus will be withheld and not deemed earned only in the

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event that: (i) the Company reasonably determines that Executive had not substantially met, to the extent reasonably obtainable, Executive’s bonus related goals as of the date of termination of employment or (ii) no other similarly situated executive actually receives a bonus for such fiscal year. Any such bonus deemed earned, shall be payable at the time in which other similarly situated Company executives receive their bonus payments.

(f) In the event that this Agreement is not renewed either after the initial Term or after a renewal period, then the Company shall have no duty to make any payments or provide any benefits to the Executive pursuant to this Agreement other than payment of the amount of the Executive’s Base Salary accrued through the date of termination of his employment and any other benefits the Executive is then due pursuant to the employment benefit plans of the Company.

4.6 No Disparaging Comments Upon Termination.

Upon termination of this Agreement, the Company will refrain from making any disparaging remarks about the Executive. Similarly, the Executive shall refrain from making any disparaging remarks about the Company or the businesses, services, products, stockholders, officers, directors or other personnel of the Company or any of its affiliates.

5. Certain Covenants of the Executive.

5.1 Restrictive Covenants.

(a) The parties hereto agree that as used herein “Confidential Information” means all information which becomes known to the Executive as a consequence of his employment by the Company and includes, but is not limited to, information about the Company’s customers, methods of operation, prospective and executed contracts, trade secrets, business contacts, customer lists, and all technological, business, financial, accounting, statistical and personnel information regarding the Company. The parties hereto further agree and stipulate that this Confidential Information was developed by the Company at considerable expense, that this information is a valuable asset and part of the Company’s goodwill, that this information is vital to the Company’s success and is the sole property of the Company.

(b) The Executive recognizes and acknowledges that during his employment by the Company, the Executive has, or will, become familiar with the Company’s Confidential Information.

(c) The Executive recognizes and acknowledges that the Company is engaged in the business of, among other things, building satellite ground systems and equipment for command and control, integration and test, data processing and simulation (the “Business”). The Business is a highly competitive enterprise, so that any unauthorized disclosure or unauthorized use by the Executive of the Confidential Information protected under this Agreement, whether during his employment with the Company or after its termination, would cause immediate, substantial and irreparable injury to the Business and the goodwill of the Company.

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(d) The Executive agrees that upon termination of his employment with the Company for any reason, whether voluntary or involuntary or with or without Cause, he will surrender to the Company every item and every document which is the Company’s property or will completely remove from the Executive’s personal property such Confidential Information in whatever form (e.g. cell phones, PDA’s, personal computers, etc.). All such documents and Confidential Information are the sole and absolute property of the Company. At the written request of the Company, the Executive shall provide the designated representative of the Company a certificate containing the following statement: “The Executive hereby certifies that he has notified the Company’s designated representative of all Confidential Information residing on any personal property of the Executive to which the Executive is aware of after due review and inspection and has removed and destroyed (unless otherwise directed in writing by the Company) all Confidential Information from all personal property of the Executive.” Thereafter, in the event that the Executive becomes aware of any further Confidential Information on the Executive’s personal property, the Executive shall notify the Company in writing and again comply with the immediately preceding sentence.

(e) The Executive agrees that during his employment and following the termination of that employment for any reason, whether voluntary or involuntary or with or without Cause, he will not, on his own behalf or as a partner, officer, director, employee, agent, or consultant of any other person or entity, directly or indirectly, disclose the Company’s Confidential Information to any person or entity other than agents of the Company, and he will not use or aid others in obtaining or using any such Confidential Information. The Executive’s obligations under this Section 5.1(e) shall not be deemed violated in the event that (i) the Executive discloses any Confidential Information pursuant to order of a court of competent jurisdiction, provided the Executive has notified the Company of such potential legal order and provided the Company with the opportunity to challenge or limit the scope of the disclosure, or (ii) the information becomes generally available from a source other than the Company, any of its affiliates, or any of their employees when such source is not legally prohibited, to the best of the Executive’s knowledge, from making such information available.

(f) All inventions, prototypes, discoveries, improvements, innovations and the like (“Inventions”) and all works of original authorship or images that are fixed in any tangible medium of expression and all copies thereof (“Works”) which are designed, created or developed by the Executive, solely or in conjunction with others, in the course of performance of the Executive’s duties which relate to the Business, shall be made or conceived for the exclusive benefit of and shall be the exclusive property of the Company. The Executive shall immediately notify the Company upon the design, creation or development of all Inventions and Works. At any time thereafter, the Executive, at the request and expense of the Company, shall execute and deliver to the Company all documents or instruments which may be necessary to secure or perfect the Company’s title to or interest in the Inventions and Works, including but not limited to applications for letters of patent, and extensions, continuations or reissues thereof, applications

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for copyrights and documents or instruments of assignment or transfer. All Works are agreed and stipulated to be “works made for hire,” as that term is used and understood within the Copyright Act of 1976, as amended or any successor statute. To the extent any Works are not deemed to be works made for hire as defined above, and to the extent that title to or ownership of any Invention or Work and all other rights therein are not otherwise vested exclusively in the Company, the Executive shall, without further consideration but at the expense of the Company, assign and transfer to the Company the Executive’s entire right, title and interest (including copyrights and patents) in or to those Inventions and Works.

(g) The Executive agrees that during his employment with the Company and for a period commencing on the termination of such employment and ending (i) in the event the Executive’s employment is terminated in accordance with Section 2 by the Company without Cause, at the end of the Termination Coverage Period, or (ii) in the event the Executive’s employment terminates for any other reason (whether voluntarily or involuntarily), on the date one (1) year following such date of termination, he will not, on his own behalf or as a partner, officer, director, employee, agent, or consultant of any other person or entity, directly or indirectly, engage or attempt to engage in a business which competes against the Business of the Company in any geographic area in which the Company engages in the Business. This subsection shall not be construed as precluding the Executive from working as an employee or consultant for a separate business unit of a competitor of the Company, if the separate business unit is not in competition with the Business.

(h) The Executive agrees that during his employment and for a period of twenty four (24) months after the termination of such employment, whether voluntary or involuntary or with or without Cause, he will not, on his own behalf or as a partner, officer, director, employee, agent, or consultant of any other person or entity, directly or indirectly, solicit or induce (or attempt to solicit or induce) any employees of the Company to leave their employment with the Company and/or consider employment with any other person or entity.

5.2 Rights and Remedies Upon Breach. If the Executive breaches, or threatens, either in writing or as evidenced by a demonstrable course of conduct, to commit a breach of, any of the provisions of Section 5.1 (the “Restrictive Covenants”), the Company shall, in addition to its right immediately to terminate this Agreement, have the right and remedy (which right and remedy shall be independent of others and severally enforceable, and which shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity) to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach could cause irreparable injury to the Company or its affiliates and that money damages may not provide adequate remedy to the Company.

5.3 Covenants Currently Binding the Executive. The Executive warrants that his employment by the Company, and his execution, delivery and performance of this Agreement, will not (a) violate any non-disclosure agreements, covenants against competition, or other restrictive covenants made by the Executive to or for the benefit of any previous employer or partner, or (b) violate or constitute a breach or default under, any statute, law, judgment, order, decree, writ, injunction, deed, instrument, contract, lease, license or permit to which the Executive is a party or by which the Executive is bound.

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5.4 Litigation. There is no litigation, proceeding or investigation of any nature (either civil or criminal) which is pending or, to the best of the Executive’s knowledge, threatened against or affecting the Executive or which would adversely affect his ability to substantially perform the duties herein.

5.5 Review. The Executive has received or been given the opportunity to review the provisions of this Agreement, and the meaning and effect of each provision, with independent legal counsel of the Executive’s choosing.

5.6 Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographical and temporal scope and in all respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions.

5.7 Blue-Penciling. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable and shall be enforced. If any such court declines to so revise such covenant, the parties agree to negotiate in good faith a modification that will make such duration or scope enforceable.

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6. Dispute Resolution.

6.1 Costs of Arbitration. If either party brings an arbitration proceeding to enforce its rights under this Agreement, the substantially prevailing party (as determined by the arbitrator) shall be entitled to recover from the other party all expenses incurred by it in preparing for and in trying the case, including, but not limited to, investigative costs, court costs and reasonable attorneys’ fees.

6.2 No Jury Trial. NEITHER PARTY SHALL ELECT A TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY CONNECTED WITH A BREACH OF THIS AGREEMENT.

6.3 Personal Jurisdiction. Both parties agree to submit to the jurisdiction and venue of the state courts in the State of Maryland as to matters involving enforcement of this Agreement including any award under an arbitration proceeding.

6.4 Arbitration. SUBJECT TO THE COMPANY’S RIGHT TO SEEK INJUNCTIVE RELIEF AS SPECIFIED IN THIS AGREEMENT, ANY DISPUTE BETWEEN THE PARTIES HERETO ARISING UNDER OR RELATING TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE AMOUNT OF DAMAGES, THE NATURE OF THE EXECUTIVE’S TERMINATION OR THE CALCULATION OF ANY BONUS OR OTHER AMOUNT OR BENEFIT DUE) SHALL BE RESOLVED IN ACCORDANCE WITH THE PROCEDURES OF THE AMERICAN ARBITRATION ASSOCIATION. ANY RESULTING HEARING SHALL BE HELD IN LANHAM, MARYLAND. THE RESOLUTION OF ANY DISPUTE ACHIEVED THROUGH SUCH ARBITRATION SHALL BE BINDING AND ENFORCEABLE BY A COURT OF COMPETENT JURISDICTION.

7. Other Provisions.

7.1 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage paid, and shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, four days after the date of mailing, as follows:

(i) if to the Company, to:

Integral Systems, Inc.

5000 Philadelphia Way

Lanham, Maryland

Fax: 301-731-3183

Attention: Chief Executive Officer

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with copies to:

Gibson, Dunn & Crutcher LLP

1050 Connecticut Ave, NW

Washington, DC 20036

Fax: (202) 955-8589

Attention: Howard Adler

(ii) if to the Executive, to:

Jeffrey A. Rosolio

16009 Daven Pine Court

Darnestown, MD 20878

FAX:

Any party may by notice given in accordance with this Section to the other party designate another address or person for receipt of notices hereunder.

7.2 Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, written or oral, with respect thereto, including without limitation any severance benefits as described in the Company’s employment manual as in effect from time to time and the Change in Control Agreement and the Transition Bonus Agreement, both of which agreements are hereby terminated and shall be of no further force and effect.

7.3 Waivers and Amendments. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Executive and a duly authorized officer of the Company (each, in such capacity, a party) or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

7.4 Governing Law. This Agreement has been negotiated and is to be performed in the State of Maryland, and shall be governed and construed in accordance with the laws of the State of Maryland applicable to agreements made and to be performed entirely within such State.

7.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

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7.6 Confidentiality. Neither party shall disclose the contents of this Agreement or of any other agreement they have simultaneously entered into to any person, firm or entity, except the agents or representatives of the parties, or except as required by law.

7.7 Word Forms. Whenever used herein, the singular shall include the plural and the plural shall include the singular. The use of any gender or tense shall include all genders and tenses.

7.8 Headings. The Section headings have been included for convenience only, are not part of this Agreement, and are not to be used to interpret any provision hereof.

7.9 Binding Effect and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties, their successors, heirs, personal representatives and other legal representatives. This Agreement may be assigned by the Company to any entity which buys substantially all of the Company’s assets. However, the Executive may not assign this Agreement without the prior written consent of the Company.

7.10 Separability. The covenants contained in this Agreement are separable, and if any court of competent jurisdiction declares any of them to be invalid or unenforceable, that declaration of invalidity or unenforceability shall not affect the validity or enforceability of any of the other covenants, each of which shall remain in full force and effect.

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IN WITNESS WHEREOF, the parties, intending to be legally bound, have executed this Agreement or caused it to be executed and attested by their duly authorized officers as a document under seal on the day and year first above written.

INTEGRAL SYSTEMS, INC.
By:	/s/ Alan Baldwin
Name:	Alan Baldwin
Title:	Chief Executive Officer and President
EXECUTIVE:
/s/ Jeffrey Rosolio
	Jeffrey Rosolio

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EX-10.02

Exhibit 10.02

Integral Systems, Inc. Incentive Compensation Plan for FY 2008

AWARDS

Target Award levels will be determined at the Board’s discretion and will be based upon a percentage of each participant’s base salary.

Participant’s individual awards will be further determined by a system of goal weighting.

SECTION 1. PURPOSE OF INCENTIVE COMPENSATION PLAN (ICP)

The purpose of the Plan is to promote the success of the Company by providing to participating executives bonus incentives that qualify as performance-based compensation by:

1.1 Encouraging individual effort and group teamwork toward the achievement of overall Company objectives which include Division, Business Unit and individual goals.

1.2 Rewarding outstanding managerial performance.

1.3 Providing total direct compensation (base salary plus annual incentive), which is competitive in the Company’s relevant market sector and which is sufficient to ensure the Company’s ability to attract, retain, and motivate outstanding executives.

1.4 Focusing the attention of participants on Corporate, Division, Business Unit and Individual goals.

1.5 Engaging managers in business success by sharing the gains realized from changed behaviors.

1.6 Communicating priorities to indicate the relative importance of certain objectives and goals of the Company.

SECTION 2. DEFINITIONS AND TERMS

2.1 Accounting Terms. Except as otherwise expressly provided or the context otherwise requires, financial and accounting terms are used as defined for purposes of, and shall be determined in accordance with, generally accepted accounting principles as applied and reflected in the consolidated financial statements of the Company, prepared in the ordinary course of business.

2.2 Specific Terms. The following words and phrases as used herein shall have the following meanings unless a different meaning is plainly required by the context:

“Base Salary” in respect of any Performance Period means the aggregate base annualized salary of a Participant from the Company and all affiliates of the Company at the time Participant is selected to participate for that Performance Period, exclusive of any commissions or other Company-provided benefits or perquisites or for contributions to a plan qualifying under Section 401(k) of the Code or contributions to a cafeteria plan under Section 125 of the IRS Code.

“Bonus” means a cash payment or a payment opportunity as the context requires.

“Bookings” means awards or contracts.

“Business Unit” means any entity reporting directly to the corporate level.

“Business Unit Performance” means the specific financial and/or operating targets established for each Business U, which, if attained will trigger the granting of Business unit award component of ICP.

“Calculated Award” means the Total Performance Score multiplied by the Target Award established at the beginning of the Plan Year.

“Committee” means the Compensation Committee of the Board of Directors of Integral Systems, Inc.

“Company” means Integral Systems, Inc. and any successor, whether by merger, ownership of all or substantially all of its assets, or otherwise.

“Corporate Performance” means Integral’s annual financial and operational performance measures and specific objectives established by top management and approved by the Committee. The attainment of these performance objectives will be used in the determination of the ICP awards.

“Division Performance” means specific performance objectives established for participants with Division responsibility, with an appropriate weighting applied based on the intended focus on top management. The financial performance of the appropriate Division as defined in the ICP worksheet will be used in calculating the participant’s ICP award.

“Earned Award” means the Calculated Award which may be adjusted based on a review of a participant’s contributions and other performance criteria considered by top management with input from senior management.

“EPS” for any Year means earnings per share of the Company, as reported in the Company’s Consolidated Statement of Income set forth in the audited annual financial statements of the Company for the Year.

“Executive” means a key employee (including any officer) of the Company who is (or in the opinion of the Committee may during the applicable Performance Period become) an “executive officer” as defined in Rule 3b-7 under the Securities Exchange Act of 1934.

“ICP” means the Incentive Compensation Plan approved by the Committee on an annual basis, as amended from time to time.

“Individual Performance” means the performance objectives specifically attributable to each Participant reflective of his/her functional area and responsibilities, taking into consideration top management’s evaluation of performance in that regard.

“Operating Income” means Revenue less the sum of all allowable expenses including labor, material, overhead, SG&A and allowable Corporate allocation plus unallowable costs which include unallowable Corporate allocation plus amortization of good will and related intangibles.

“Participant” means an Executive, manager or key staff member selected to participate in the Plan by the Committee. Participants must have an ongoing opportunity to contribute significantly to the success and profitability of the Company.

“Performance Period” means the Year or Years with respect to which the Performance Targets are set by the Committee, typically the Plan Year.

“Performance Target(s)” means the specific objective goal or goals (which may be cumulative and/or alternative) that are set in writing by the Committee for each Executive for the Performance Period in respect of any one or more of the performance criteria.

“Plan Year” means any one or more fiscal years of the Company commencing on or after October 1, that represent(s) the applicable Performance Period and end(s) no later than September 30.

“Revenue” means the actual sales revenue results achieved during the Plan Year as reported in the Company’s audited Profit & Loss Statement.

“Target Award” means the established award that a participant is eligible to receive if all performance objectives are achieved at 100%. The Target Award is shown as a percentage of the Participant’s Base Salary.

“Target Performance Level” means the fully satisfied performance level at which awards will equal 100% of the Target Award established for that performance measure.

“Threshold Performance Level” means the minimum level of acceptable performance for which incentive awards will be earned for any of the established performance objectives or measures.

“Total Performance Score” means the sum of all of a Participant’s scores.

SECTION 3. ADMINISTRATION OF THE PLAN

3.1 The Committee. The Plan shall be administered by a Committee consisting of at least three members of the Board of Directors of the Company, duly authorized by the Board of Directors of the Company to administer the Plan, who (i) are not eligible to participate in the Plan and (ii) are “outside directors.”

3.2 Powers of the Committee. The Committee shall have the sole authority to establish and administer the Performance Target(s) and the responsibility of determining from among the executives and managers those persons who will participate in and receive Bonuses under the Plan, the amount of such Bonuses, and the time or times at which and the form and manner in which Bonuses will be paid and shall otherwise be responsible for the administration of the Plan, in accordance with its terms. The Committee shall have the

authority to construe and interpret the Plan and any agreement or other document relating to any Bonus under the Plan. For each Performance Period, the Committee shall determine, at the time the Performance Target(s) are set, those selected as Participants in the Plan. All powers accruing to the Committee that affect Named Officers of the Corporation shall be subject to final approval by the Board of Directors.

3.3 Requisite Action. A majority (but not fewer than two) of the members of the Committee shall constitute a quorum. The vote of a majority of those present at a meeting at which a quorum is present or the unanimous written consent of the Committee shall constitute action by the Committee.

3.4 Express Authority (and Limitations on Authority) to Change Terms and Conditions of Bonus. Without limiting the Committee’s authority under other provisions of the Plan, the Committee shall have the authority accelerate a Bonus (after the attainment of the applicable Performance Target(s)) and to waive restrictive conditions for a Bonus (including any forfeiture conditions, but not Performance Target(s)), in such circumstances as the Committee deems appropriate.

SECTION 4. BONUS PROVISIONS.

4.1 Provision for Bonus. Each Participant may receive a Bonus if and only if the Performance Threshold(s) established by the Committee are attained. The applicable Performance Period and Performance Target(s) shall be determined by the Committee consistent with the terms of the Plan. Notwithstanding the fact that the Performance Target(s) have been attained, the Company may pay a Bonus of more than or less than the amount determined by the formula or standard established, or may pay no Bonus at all, unless the Committee otherwise expressly provides by written contract or other written commitment.

4.2 Selection of Performance Target(s). The specific Performance Target(s) must be established by the Committee in advance of the deadlines applicable. At the time the Performance Target(s) are selected, the Committee shall provide, in terms of an objective formula or standard for each Participant, and for any person who may become a Participant after the Performance Target(s) are set, the method of computing the specific amount that will represent the maximum amount of Bonus payable to the Participant if the Performance Target(s) are attained.

4.3 Selection of Participants. For each Performance Period, the Committee shall determine, at the time the Performance Target(s) are set, those executives, managers and key staff who will participate in the Plan.

4.4 Effect of Mid-Year Commencement of Service. If services as a Participant commence after the adoption of the Plan and the Performance Target(s) are established for a Performance Period, the Committee may grant a Bonus that is proportionately adjusted based on the period of actual service during the Year; the amount of any Bonus paid to such person shall not exceed that proportionate amount of the applicable maximum individual bonus.

4.5 Changes Resulting From Accounting Changes. If, after the Performance Target(s) are established for a Performance Period, a change occurs in the applicable accounting principles or practices, the amount of the Bonuses paid under this Plan for such Performance Period shall be determined without regard to such change.

4.6 Committee Discretion to Determine Bonuses. The Committee has the sole discretion to determine the standard or formula pursuant to which each Participant’s Bonus shall be calculated (in accordance with Section 4.2), whether all or any portion of the amount so calculated will be paid, and the specific amount (if any) to be paid to each Participant, subject in all cases to the terms, conditions and limits of the Plan and of any other written commitment authorized by the Committee. To this same extent, the Committee may at any time establish additional conditions and terms of payment of Bonuses (including but not limited to the achievement of other financial, strategic or individual goals, which may be objective or subjective) as it may deem desirable in carrying out the purposes of the Plan and may take into account such other factors as it deems appropriate in administering any aspect of the Plan.

4.7 Committee Certification. No Participant shall receive any payment under the Plan unless the Committee has certified, by resolution or other appropriate action in writing, that the amount thereof has been accurately determined in accordance with the terms, conditions and limits of the Plan and that the Performance Target(s) and any other material terms previously established by the Committee or set forth in the Plan were in fact satisfied.

SECTION 5. GENERAL PROVISIONS

5.1 No Right to Bonus or Continued Employment. Neither the establishment of the Plan nor the provision for or payment of any amounts hereunder nor any action of the Company (including, for purposes of this Section 5.1, any predecessor or subsidiary), the Board of Directors of the Company or the Committee in respect of the Plan, shall be held or construed to confer upon any person any legal right to receive, or any interest in, a Bonus or any other benefit under the Plan, or any legal right to be continued in the employ of the Company. The Company expressly reserves any and all rights to discharge an Participant in its sole discretion, without liability of any person, entity or governing body under the Plan. The Company shall have no obligation to pay any Bonus hereunder nor to pay the maximum amount so calculated or any prorated amount based on service during the period, unless the Committee otherwise expressly provides by written contract or other written commitment.

5.2 Discretion of Company, Board of Directors and Committee. Any decision made or action taken by the Company or by the Board of Directors of the Company or by the Committee arising out of or in connection with the creation, amendment, construction, administration, interpretation and effect of the Plan shall be within the absolute discretion of such entity and shall be conclusive and binding upon all persons. No member of the Committee shall have any liability for actions taken or omitted under the Plan by the member or any other person.

5.3 Absence of Liability. A member of the Board of Directors of the Company or a member of the Committee of the Company or any officer of the Company shall not be liable for any act or inaction hereunder, whether of commission or omission.

5.4 No Funding of Plan. The Company shall not be required to fund or otherwise segregate any cash or any other assets which may at any time be paid to Participants under the Plan. The Plan shall constitute an “unfunded” plan of the Company. The Company shall

not, by any provisions of the Plan, be deemed to be a trustee of any property, and any obligations of the Company to any Participant under the Plan shall be those of a debtor and any rights of any Participant or former Participant shall be no greater than those of a general unsecured creditor.

5.5 Non-Transferability of Benefits and Interests. Except as expressly provided by the Committee, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action be void and no such benefit shall be in any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any Participant or former Participant. This Section 5.5 shall not apply to an assignment of a contingency or payment due after the death of the Participant to the deceased Participant’s legal representative or beneficiary.

5.6 Law to Govern. All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Maryland.

SECTION 6. AMENDMENTS, SUSPENSION OR TERMINATION OF PLAN

The Board of Directors or the Committee may from time to time amend, suspend or terminate in whole or in part, and if suspended or terminated, may reinstate, any or all of the provisions of the Plan.

EX-10.05

Exhibit 10.05

INTEGRAL SYSTEMS, INC.

TERM SHEET FOR 2008 STOCK INCENTIVE PLAN

NONQUALIFIED STOCK OPTIONS

FOR GOOD AND VALUABLE CONSIDERATION, Integral Systems, Inc. (the “Company”), hereby grants to Participant named below the nonqualified stock option (the “Option”) to purchase any part or all of the number of shares of its common stock, $.01 par value per share (the “Common Stock”), that are covered by this Option, as specified below, at the Exercise Price per share specified below and upon the terms and subject to the conditions set forth in this Term Sheet, the Integral Systems, Inc. 2008 Stock Incentive Plan (the “Plan”) and the Standard Terms and Conditions (the “Standard Terms and Conditions”) promulgated under such Plan, each as amended from time to time. This Option is granted pursuant to the Plan and is subject to and qualified in its entirety by the Standard Terms and Conditions.

Name of Participant:
Social Security Number:
Grant Date:
Number of Shares of Common Stock covered by Option:
Exercise Price Per Share:	$
Expiration Date:
Vesting Schedule:

This Option is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. By accepting this Term Sheet, Participant acknowledges that he or she has received and read, and agrees that this Option shall be subject to, the terms of this Term Sheet, the Plan and the Standard Terms and Conditions.

INTEGRAL SYSTEMS, INC.
	Participant Signature
By
Title:	Address (please print):

INTEGRAL SYSTEMS, INC.

STANDARD TERMS AND CONDITIONS FOR

NONQUALIFIED STOCK OPTIONS

These Standard Terms and Conditions apply to any Options granted under the Integral Systems, Inc. 2008 Stock Incentive Plan (the “Plan”), which are identified as nonqualified stock options and are evidenced by a Term Sheet or an action of the Committee that specifically refers to these Standard Terms and Conditions.

1. TERMS OF OPTION

Integral Systems, Inc. (the “Company”), has granted to the Participant named in the Term Sheet provided to said Participant herewith (the “Term Sheet”) a nonqualified stock option (the “Option”) to purchase up to the number of shares of the Company’s common stock (the “Common Stock”), set forth in the Term Sheet, at the purchase price per share and upon the other terms and subject to the conditions set forth in the Term Sheet, these Standard Terms and Conditions (as amended from time to time), and the Plan. For purposes of these Standard Terms and Conditions and the Term Sheet, any reference to the Company shall include a reference to any Subsidiary.

2. NON-QUALIFIED STOCK OPTION

The Option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and will be interpreted accordingly.

3. EXERCISE OF OPTION

The Option shall not be exercisable as of the Grant Date set forth in the Term Sheet. After the Grant Date, to the extent not previously exercised, and subject to termination or acceleration as provided in these Standard Terms and Conditions and the Plan, the Option shall be exercisable to the extent it becomes vested, as described in the Term Sheet, to purchase up to that number of shares of Common Stock as set forth in the Term Sheet provided that (except as set forth in Section 4.A below) Participant remains employed with the Company or is otherwise providing services to the Company and does not experience a termination of employment and other service. The vesting period and/or exercisability of an Option may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis, provided that the Committee may take into consideration any accounting consequences to the Company.

To exercise the Option (or any part thereof), Participant shall deliver to the Company a “Notice of Exercise” on a form specified by the Committee, specifying the number of whole shares of Common Stock Participant wishes to purchase and how Participant’s shares of Common Stock should be registered (in Participant’s name only or in Participant’s and Participant’s spouse’s names as community property or as joint tenants with right of survivorship).

The exercise price (the “Exercise Price”) of the Option is set forth in the Term Sheet. The Company shall not be obligated to issue any shares of Common Stock until Participant shall have paid the total Exercise Price for that number of shares of Common Stock. The Exercise Price may be paid in cash or by certified or cashiers’ check or by such other method as permitted by the Committee.

Fractional shares may not be exercised. Shares of Common Stock will be issued as soon as practical after exercise. Notwithstanding the above, the Company shall not be obligated to deliver any shares of Common Stock during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any federal, state or other applicable laws.

4. EXPIRATION OF OPTION

Except as provided in this Section 4, the Option shall expire and cease to be exercisable as of the Expiration Date set forth in the Term Sheet.

A. If the Participant’s employment and other service terminates by reason of death or disability (as determined by the Committee in good faith), the Participant (or the Participant’s estate, beneficiary or legal representative) may exercise the Option, to the extent otherwise exercisable on the date of your disability or death, until the earlier of (1) the twelve-month anniversary of the date of such termination of employment and service and (2) the Expiration Date.

B. If the Participant’s employment and other service terminates for any reason other than death or disability, the Participant may exercise any Options that are vested and exercisable at the time of such termination of employment and other service until the earlier of (1) the 90-day anniversary of the date of such termination of employment and other service and (2) the Expiration Date. Any portion of the Option that is not vested and exercisable at the time of such a termination of employment and other service shall be forfeited and canceled as of the date of termination of employment.

5. CHANGE IN CONTROL

A. Notwithstanding any other provision of the Term Sheet or these Terms and Conditions to the contrary, to the extent the Options have not previously vested or been forfeited, in the event of a Change in Control, the Options shall fully vest and become exercisable to the extent the Options are not assumed by the acquiror or successor entity (as applicable) in connection with such Change in Control.

B. For purposes hereof, a “Change in Control” means the occurrence of any of the following:

(1) Any person or group (within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than the Company or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the beneficial owner (within the meaning of Rule 13(d)(3) under the Exchange Act), directly or indirectly, of securities representing 50% or more of the combined voting power of the Company’s then-outstanding securities entitled generally to vote for the election of directors;

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(2) The Company’s stockholders approve an agreement to merge or consolidate with another corporation (other than a majority-controlled subsidiary of the Company) unless the Company’s stockholders immediately before the merger or consolidation are to own more than 50% of the combined voting power of the resulting entity’s voting securities entitled generally to vote for the election of directors;

(3) The Company’s stockholders approve an agreement (including, without limitation, an agreement of liquidation) to sell or otherwise dispose of all or substantially all of the business or assets of the Company; or

(4) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the Effective Date whose election or nomination for election by the Company’s stockholders is approved by a vote of at least a majority of directors then constituting the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for direction, without objection to such nomination) shall be, for purposes of these Standard Terms and Conditions, considered as though such person were a member of the Incumbent Board (excluding, however, for this purpose any Board member whose initial assumption as a member of the Board occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of any person or persons other than the Incumbent Board).

However, no Change in Control shall be deemed to have occurred by a reason of (a) any event involving a transaction in which the Participant or a group of persons or entities with whom or with which the Participant acts in concert, acquire(s), directly or indirectly, 50% or more of the combined voting power of the Company’s then-outstanding voting securities or the business or assets of the Company; or (b) any event involving or arising out of a proceeding under Title 11 of the United States Code or the provisions of any future United States bankruptcy law, an assignment for the benefit of creditors or an insolvency proceeding under state or local law.

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A Change in Control shall be deemed to occur, (I) with respect to a Change in Control pursuant to subparagraph (1) above, on the date any person or group first becomes the beneficial owner, directly or indirectly, of securities representing 50% or more of the combined voting power of the Company’s then-outstanding securities entitled generally to vote for the election of directors, (II) with respect to a Change in Control pursuant to subparagraph (2) or (3) above, on the date of stockholder approval, or (III) with respect to a Change in Control pursuant to subparagraph (4) above, on the date members of the Incumbent Board first cease to constitute at least a majority of Board.

6. RESTRICTIONS ON RESALES OF OPTION SHARES

The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by Participant and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers.

7. INCOME TAXES

To the extent required by applicable federal, state, local or foreign law, the Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied.

8. NON-TRANSFERABILITY OF OPTION

The Participant may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by the Participant during his or her lifetime. The Company may cancel the Participant’s Option if the Participant attempts to assign or transfer it in a manner inconsistent with this Section 8.

9. THE PLAN AND OTHER AGREEMENTS

In addition to these Terms and Conditions, the Option shall be subject to the terms of the Plan, which are incorporated into these Standard Terms and Conditions by this reference. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan.

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The Term Sheet, these Standard Terms and Conditions and the Plan constitute the entire understanding between the Participant and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded.

10. LIMITATION OF INTEREST IN SHARES SUBJECT TO OPTION

Neither the Participant (individually or as a member of a group) nor any beneficiary or other person claiming under or through the Participant shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to the Term Sheet or these Standard Terms and Conditions except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. Nothing in the Plan, in the Term Sheet, these Standard Terms and Conditions or any other instrument executed pursuant to the Plan shall confer upon the Participant any right to continue in the Company’s employ or service nor limit in any way the Company’s right to terminate the Participant’s employment and other service at any time for any reason.

11. GENERAL

In the event that any provision of these Standard Terms and Conditions is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of these Standard Terms and Conditions shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision.

The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of these Standard Terms and Conditions, nor shall they affect its meaning, construction or effect.

These Standard Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns.

These Standard Terms and Conditions shall be construed in accordance with and governed by the laws of the State of Maryland, without regard to principles of conflicts of law.

All questions arising under the Plan or under these Standard Terms and Conditions shall be decided by the Committee in its total and absolute discretion.

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EX-10.06

Exhibit 10.06

INTEGRAL SYSTEMS, INC.

TERM SHEET FOR 2008 STOCK INCENTIVE PLAN

INCENTIVE STOCK OPTIONS

FOR GOOD AND VALUABLE CONSIDERATION, Integral Systems, Inc. (the “Company”), hereby grants to Participant named below the incentive stock option (the “Option”) to purchase any part or all of the number of shares of its common stock, $.01 par value per share (the “Common Stock”), that are covered by this Option, as specified below, at the Exercise Price per share specified below and upon the terms and subject to the conditions set forth in this Term Sheet, the Integral Systems, Inc. 2008 Stock Incentive Plan (the “Plan”) and the Standard Terms and Conditions (the “Standard Terms and Conditions”) promulgated under such Plan, each as amended from time to time. This Option is granted pursuant to the Plan and is subject to and qualified in its entirety by the Standard Terms and Conditions.

Name of Participant:
Social Security Number:
Grant Date:
Number of Shares of Common Stock covered by Option:
Exercise Price Per Share:	$
Expiration Date:
Vesting Schedule:

This Option is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. By accepting this Term Sheet, Participant acknowledges that he or she has received and read, and agrees that this Option shall be subject to, the terms of this Term Sheet, the Plan and the Standard Terms and Conditions.

INTEGRAL SYSTEMS, INC.
	Participant Signature
By
Title:	Address (please print):

INTEGRAL SYSTEMS, INC.

STANDARD TERMS AND CONDITIONS FOR

INCENTIVE STOCK OPTIONS

These Standard Terms and Conditions apply to any Options granted under the Integral Systems, Inc. 2008 Stock Incentive Plan (the “Plan”), which are identified as incentive stock options and are evidenced by a Term Sheet or an action of the Committee that specifically refers to these Standard Terms and Conditions.

1. TERMS OF OPTION

Integral Systems, Inc. (the “Company”), has granted to the Participant named in the Term Sheet provided to said Participant herewith (the “Term Sheet”) an incentive stock option (the “Option”) to purchase up to the number of shares of the Company’s common stock (the “Common Stock”), set forth in the Term Sheet, at the purchase price per share and upon the other terms and subject to the conditions set forth in the Term Sheet, these Standard Terms and Conditions (as amended from time to time), and the Plan. For purposes of these Standard Terms and Conditions and the Term Sheet, any reference to the Company shall include a reference to any Subsidiary.

2. INCENTIVE STOCK OPTION

The Option is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), and will be interpreted accordingly. Section 422 of the Code provides, among other things, that the Participant shall not be taxed upon the exercise of a stock option that qualifies as an incentive stock option provided the Participant does not dispose of the shares of Common Stock acquired upon exercise of such option until the later of two years after such option is granted to the Participant and one year after such option is exercised. Notwithstanding anything to the contrary herein, Section 422 of the Code provides that incentive stock options (including, possibly, the Option) shall not be treated as incentive stock options if and to the extent that the aggregate fair market value of shares of Common Stock (determined as of the time of grant) with respect to which such incentive stock options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and its subsidiaries) exceeds $100,000, taking options into account in the order in which they were granted. Thus, if and to the extent that any shares of Common Stock issued under a portion of the Option exceeds the foregoing $100,000 limitation, such shares shall not be treated as issued under an incentive stock option pursuant to Section 422 of the Code and shall be treated as nonqualified stock options.

3. EXERCISE OF OPTION

The Option shall not be exercisable as of the Grant Date set forth in the Term Sheet. After the Grant Date, to the extent not previously exercised, and subject to termination or acceleration as provided in these Standard Terms and Conditions and the

Plan, the Option shall be exercisable to the extent it becomes vested, as described in the Term Sheet, to purchase up to that number of shares of Common Stock as set forth in the Term Sheet provided that (except as set forth in Section 4.A below) Participant remains employed with the Company or is otherwise providing services to the Company and does not experience a termination of employment and other service. The vesting period and/or exercisability of an Option may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis, provided that the Committee may take into consideration any accounting consequences to the Company.

To exercise the Option (or any part thereof), Participant shall deliver to the Company a “Notice of Exercise” on a form specified by the Committee, specifying the number of whole shares of Common Stock Participant wishes to purchase and how Participant’s shares of Common Stock should be registered (in Participant’s name only or in Participant’s and Participant’s spouse’s names as community property or as joint tenants with right of survivorship).

The exercise price (the “Exercise Price”) of the Option is set forth in the Term Sheet. The Company shall not be obligated to issue any shares of Common Stock until Participant shall have paid the total Exercise Price for that number of shares of Common Stock. The Exercise Price may be paid in cash or by certified or cashiers’ check or by such other method as permitted by the Committee.

Fractional shares may not be exercised. Shares of Common Stock will be issued as soon as practical after exercise. Notwithstanding the above, the Company shall not be obligated to deliver any shares of Common Stock during any period when the Company determines that the exercisability of the Option or the delivery of shares hereunder would violate any federal, state or other applicable laws.

4. EXPIRATION OF OPTION

Except as provided in this Section 4, the Option shall expire and cease to be exercisable as of the Expiration Date set forth in the Term Sheet.

A. If the Participant’s employment and other service terminates by reason of death or disability (as determined by the Committee in good faith), the Participant (or the Participant’s estate, beneficiary or legal representative) may exercise the Option, to the extent otherwise exercisable on the date of your disability or death, until the earlier of (1) the twelve-month anniversary of the date of such termination of employment and service and (2) the Expiration Date.

B. If the Participant’s employment and other service terminates for any reason other than death or disability, the Participant may exercise any Options that are vested and exercisable at the time of such termination of employment and other service until the earlier of (1) the 90-day anniversary of the date of such termination of employment and other service and (2) the

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Expiration Date. Any portion of the Option that is not vested and exercisable at the time of such a termination of employment and other service shall be forfeited and canceled as of the date of termination of employment.

5. CHANGE IN CONTROL

A. Notwithstanding any other provision of the Term Sheet or these Terms and Conditions to the contrary, to the extent the Options have not previously vested or been forfeited, in the event of a Change in Control, the Options shall fully vest and become exercisable to the extent the Options are not assumed by the acquiror or successor entity (as applicable) in connection with such Change in Control.

B. For purposes hereof, a “Change in Control” means the occurrence of any of the following:

(1) Any person or group (within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than the Company or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the beneficial owner (within the meaning of Rule 13(d)(3) under the Exchange Act), directly or indirectly, of securities representing 50% or more of the combined voting power of the Company’s then-outstanding securities entitled generally to vote for the election of directors;

(2) The Company’s stockholders approve an agreement to merge or consolidate with another corporation (other than a majority-controlled subsidiary of the Company) unless the Company’s stockholders immediately before the merger or consolidation are to own more than 50% of the combined voting power of the resulting entity’s voting securities entitled generally to vote for the election of directors;

(3) The Company’s stockholders approve an agreement (including, without limitation, an agreement of liquidation) to sell or otherwise dispose of all or substantially all of the business or assets of the Company; or

(4) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the Effective Date whose election or nomination for election by the Company’s stockholders is approved by a vote of at least a majority of directors then constituting the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for direction, without objection to such

3

nomination) shall be, for purposes of these Standard Terms and Conditions, considered as though such person were a member of the Incumbent Board (excluding, however, for this purpose any Board member whose initial assumption as a member of the Board occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of any person or persons other than the Incumbent Board).

However, no Change in Control shall be deemed to have occurred by a reason of (a) any event involving a transaction in which the Participant or a group of persons or entities with whom or with which the Participant acts in concert, acquire(s), directly or indirectly, 50% or more of the combined voting power of the Company’s then-outstanding voting securities or the business or assets of the Company; or (b) any event involving or arising out of a proceeding under Title 11 of the United States Code or the provisions of any future United States bankruptcy law, an assignment for the benefit of creditors or an insolvency proceeding under state or local law.

A Change in Control shall be deemed to occur, (I) with respect to a Change in Control pursuant to subparagraph (1) above, on the date any person or group first becomes the beneficial owner, directly or indirectly, of securities representing 50% or more of the combined voting power of the Company’s then-outstanding securities entitled generally to vote for the election of directors, (II) with respect to a Change in Control pursuant to subparagraph (2) or (3) above, on the date of stockholder approval, or (III) with respect to a Change in Control pursuant to subparagraph (4) above, on the date members of the Incumbent Board first cease to constitute at least a majority of Board.

6. RESTRICTIONS ON RESALES OF OPTION SHARES

The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by Participant and other optionholders and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers.

7. INCOME TAXES

To the extent required by applicable federal, state, local or foreign law, the Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or disposition of shares issued as a result of an Option exercise. The Company shall not be required to issue shares or to recognize the disposition of such shares until such obligations are satisfied.

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If you make a disposition (as that term is defined in section 424(c) of the Code) of any shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option within two (2) years of the grant date or within one (1) year after the shares of Common Stock are transferred to you pursuant to your exercise of the Option, you agree to notify the Stock Option Committee of such disposition in writing within one week of the transfer. Notification must include the disposition date, the number of shares disposed of and the aggregate and price per share received.

8. NON-TRANSFERABILITY OF OPTION

The Participant may not assign or transfer the Option to anyone other than by will or the laws of descent and distribution and the Option shall be exercisable only by the Participant during his or her lifetime. The Company may cancel the Participant’s Option if the Participant attempts to assign or transfer it in a manner inconsistent with this Section 8.

9. THE PLAN AND OTHER AGREEMENTS

In addition to these Terms and Conditions, the Option shall be subject to the terms of the Plan, which are incorporated into these Standard Terms and Conditions by this reference. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan.

The Term Sheet, these Standard Terms and Conditions and the Plan constitute the entire understanding between the Participant and the Company regarding the Option. Any prior agreements, commitments or negotiations concerning the Option are superseded.

10. LIMITATION OF INTEREST IN SHARES SUBJECT TO OPTION

Neither the Participant (individually or as a member of a group) nor any beneficiary or other person claiming under or through the Participant shall have any right, title, interest, or privilege in or to any shares of Common Stock allocated or reserved for the purpose of the Plan or subject to the Term Sheet or these Standard Terms and Conditions except as to such shares of Common Stock, if any, as shall have been issued to such person upon exercise of the Option or any part of it. Nothing in the Plan, in the Term Sheet, these Standard Terms and Conditions or any other instrument executed pursuant to the Plan shall confer upon the Participant any right to continue in the Company’s employ or service nor limit in any way the Company’s right to terminate the Participant’s employment and other service at any time for any reason.

11. GENERAL

In the event that any provision of these Standard Terms and Conditions is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of these Standard Terms and Conditions shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision.

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The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of these Standard Terms and Conditions, nor shall they affect its meaning, construction or effect.

These Standard Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors and assigns.

These Standard Terms and Conditions shall be construed in accordance with and governed by the laws of the State of Maryland, without regard to principles of conflicts of law.

All questions arising under the Plan or under these Standard Terms and Conditions shall be decided by the Committee in its total and absolute discretion.

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EX-10.07

Exhibit 10.07

THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is entered into and made effective as of February 29, 2008, by and between FURSA ALTERNATIVE STRATEGIES LLC, a Delaware limited liability company (“Seller”), and INTEGRAL SYSTEMS, INC., a Maryland corporation (“Buyer”).

WHEREAS, Seller is a registered investment adviser that beneficially owns, on behalf of affiliated investment funds (the “Seller Affiliates”) and separately managed accounts over which it exercises discretionary authority (the “Accounts”), 1,064,972 shares of common stock, par value $0.01 per share, of Buyer (the “Shares”).

WHEREAS, Seller desires to sell, assign, transfer and convey, on its own behalf and on behalf of the Seller Affiliates and Accounts for which it beneficially owns the Shares, all right, title and interest in and to the Shares to Buyer, and Buyer desires to purchase the Shares on the terms and subject to the conditions set forth in this Agreement.

NOW THEREFORE, in consideration of the promises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below), Seller shall assign, transfer and convey to Buyer, and Buyer shall receive and accept from Seller (the “Transfer”), all of Seller’s right, title and interest in and to the Shares (which includes all right, title and interest of the Seller Affiliates and Accounts in and to the Shares). At or prior to the Closing, Seller shall deliver to Buyer certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers), for transfer to Buyer. At the Closing, Buyer shall deliver $23,429,384, which amount represents an aggregate purchase price of $22.00 per Share (the “Purchase Price”), by wire transfer of immediately available funds in accordance with Seller’s written wire instructions delivered to Buyer at or prior to the Closing.

2. Closing. The completion of the Transfer and the payment of the Purchase Price by Buyer (the “Closing”) shall occur at 10:00 a.m., local time, on March 3, 2008, or at such other date and time, and at such place as shall be mutually agreed upon by Buyer and Seller, either orally or in writing, subject to the satisfaction (or waiver) of the conditions set forth in Sections 4 and 5 of this Agreement. The date of the Closing is sometimes referred to in this Agreement as the “Closing Date.”

3. Representations and Warranties of Seller. To induce Buyer to enter into this Agreement, Seller hereby represents and warrants to Buyer that:

(a) Seller is a validly existing limited liability company in good standing under the laws of the State of Delaware with the requisite limited liability company power and authority to (i) own its properties and conduct its business and (ii) enter into this Agreement and perform its obligations hereunder; Seller is registered as an “investment adviser” under the Investment Advisers Act of 1940, as amended.

(b) This Agreement has been duly executed by Seller and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

(c) The resolutions of Seller attached hereto as Exhibit A are true and complete copies of the resolutions duly and validly adopted by the sole member of Seller, and such resolutions are now in full force and effect have not been modified, amended, revoked or superseded in any respect and are the only resolutions relating to the transactions contemplated by this Agreement.

(d) The execution and performance of this Agreement does not violate any law applicable to Seller, conflict with any agreement to which Seller is a party or is bound thereby, any court order or judgment addressed to Seller, or the constituent documents of Seller.

(e) Seller beneficially owns the Shares, on behalf of the Seller Affiliates and Accounts, free and clear of all liens, claims, preemptive rights, pledges, charges, commitments, conditions, restrictions, encumbrances, proxies or voting or other agreements (collectively, “Liens”), other than such Liens as are set forth in Exhibit B hereto, all of which will be resolved and discharged as of the Closing, and other than such Liens, no other party has any ownership or other interests in and to the Shares; at the Closing, Buyer will acquire good and valid title to the Shares, free and clear of all Liens.

(f) Seller has full discretionary authority to sell the Shares on behalf of the Seller Affiliates and Accounts for which it beneficially owns the Shares and has the legal authority to enter into, deliver and perform its obligations under this Agreement; no consent of any Seller Affiliate, Account or any third party, and no filing with any person, that has not previously been obtained or made is required for Seller to enter into, deliver and perform its obligations under, this Agreement.

(g) Seller acknowledges that it is not relying upon any representations or warranties or other disclosures, express or implied, whether prior to the date hereof or contemporaneous with the execution of this Agreement, of Buyer or any of its advisors or representatives. Seller acknowledges that Buyer may be in possession of information regarding Buyer and the Shares that has not been disclosed to Seller that might be material to Seller’s decision to sell the Shares and Seller is capable of understanding and appreciating, and does understand and appreciate, the significance of any such undisclosed information. Seller represents that it will not pursue any claim against Buyer based on or relating to Buyer’s possession of any such undisclosed information. Seller understands and agrees that Buyer’s agreement to purchase the Shares from Seller is conditioned on Seller’s acknowledgments and representations set forth in this Section 3.

4. Conditions to Seller’s Obligation to Close. The obligation of Seller to sell the Shares to Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Buyer at or prior to the Closing Date, provided that these conditions are for Seller’s sole benefit and may be waived by Seller at any time in its sole discretion by providing Buyer with prior written notice thereof.

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5. Conditions to Buyer’s Obligation to Close. The obligation of Buyer to purchase the Shares from Seller at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for Buyer’s sole benefit and may be waived by Buyer at any time in its sole discretion by providing Seller with prior written notice thereof: (a) Seller shall have delivered the Shares in accordance with Section 1; and (b) the representations and warranties of Seller shall be true, correct and complete in all material respects as of the date when made and as of the Closing Date as though made at that time, (c) Seller shall have complied with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Seller at or prior to the Closing Date, (d) Buyer shall have received, in form satisfactory to it, any consents required to be given in respect of the Transfer under the Amended and Restated Revolving Line of Credit Loan Agreement, dated as of September 28, 2007, by and among Bank of America, N.A., as lender, and the borrowers identified therein, and (e) Buyer shall have received evidence, satisfactory to it, that all Liens on the Shares have been resolved and discharged in full.

6. Further Acts. Each party shall do and perform all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement.

7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to the subject matter hereof.

8. Miscellaneous. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, may not be assigned by one party without the consent of the other party and may not be amended except in a writing signed by both parties. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of Maryland, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Maryland or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Maryland. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which taken together will constitute one and the same instrument.

[Signature Page Follows]

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The parties have executed this Agreement effective as of the date first written above.

FURSA ALTERNATIVE STRATEGIES LLC
By:	/s/ THOMAS J. LYNCH
	Thomas J. Lynch
	Chief Executive Officer
INTEGRAL SYSTEMS, INC.
By:	/s/ ALAN W. BALDWIN
	Alan W. Baldwin
	Chief Executive Officer and President

Signature Page

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Alan W. Baldwin, certify that:

1. I have reviewed this Form 10-Q of Integral Systems, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

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

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

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

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

Date: May 7, 2008	/s/ ALAN W. BALDWIN
	Alan W. Baldwin
	Chief Executive Officer and President
	Integral Systems, Inc.

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, William M. Bambarger, certify that:

1. I have reviewed this Form 10-Q of Integral Systems, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

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

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

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

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

Date: May 7, 2008	/s/ WILLIAM M. BAMBARGER
	William M. Bambarger
	Chief Financial Officer and Treasurer
	Integral Systems, Inc.

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 Interim Report of Integral Systems, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan W. Baldwin the Chief Executive Officer and President 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/ ALAN W. BALDWIN

Alan W. Baldwin

Chief Executive Officer and President

Date: May 7, 2008

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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 Interim Report of Integral Systems, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William M. Bambarger, the Chief Financial Officer and Treasurer 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/ WILLIAM M. BAMBARGER

William M. Bambarger

Chief Financial Officer and Treasurer

Date: May 7, 2008

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