<PAGE>
 
                                                                    EXHIBIT 10.3

                                 LEASE BETWEEN


                      WASHINGTON BUSINESS PARK ASSOCIATES


                                      AND


                            INTEGRAL SYSTEMS, INC.
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                        <C>  
1.   Access.............................................................................    8
2.   Accord and Satisfaction............................................................   12
3.   Amendment..........................................................................   10
4.   Applicable Law.....................................................................   13
5.   Assignment, Letting, Subletting....................................................    5
6.   Attorney's Fees....................................................................   10
7.   Binding Effect.....................................................................   11
8.   Broker's Indemnification...........................................................   13
9.   Building Services..................................................................    3
10.  Casualty...........................................................................    5
11.  Construction Conditions............................................................    7
12.  Condemnation.......................................................................    7
13.  Entire Agreement...................................................................   13
14.  Estoppel Certificate...............................................................   12
15.  Holdover Tenancy...................................................................   10
16.  Improvements and Alterations by Tenant.............................................    5
17.  Insurance; Indemnity...............................................................    3
18.  Landlord's Reserved Rights.........................................................   11
19.  Liens and Insolvency...............................................................    6
20.  Limitation of Landlord's Liability.................................................   11
21.  Notices............................................................................   11
22.  Occupancy:  Lease Commencement Date................................................    7
23.  Parking............................................................................    8
24.  Prepaid Rent and Security Deposit..................................................    3
25.  Quiet Enjoyment, Inability to Perform..............................................   10
26.  Relocation.........................................................................    6
27.  Removal of Property................................................................    9
28.  Rent...............................................................................    2
29.  Repairs............................................................................    4
30.  Riders and Attachments.............................................................   11
31.  Rules and Regulations..............................................................    8
32.  Severability.......................................................................   12
33.  Signs..............................................................................    8
34.  Subordination......................................................................   13
35.  Tenant's Default...................................................................    9
36.  Tenant's Property..................................................................    5
37.  Terms and Definitions..............................................................    1
38.  Time...............................................................................   13
39.  Uses...............................................................................    1
40.  Utilities..........................................................................    3
41.  Waiver.............................................................................   12
42.  Waiver of Subrogation..............................................................    4
</TABLE>
<PAGE>
 
                                     LEASE

This lease is made between Integral Systems, Inc., whose address is 9701-A
Philadelphia Court, Lanham, MD 20706 ("Tenant") , and WASHINGTON BUSINESS PARK
ASSOCIATES ("Landlord") on this lst day of April 1987.

1.  TERMS AND DEFINITIONS
    ---------------------

    A.    "Leased Premises" shall mean the 21,300 square feet of office, R&D and
warehouse space, as described in Exhibit A attached hereto and made a part
hereof.

    B.    "Building" shall mean the multi-tenant-building located at 5000-A
Philadelphia Way at the development in Lanham, Maryland.

    C.    "Project" shall mean the Washington Business Park, located in Lanham,
Maryland.

    D.    "Lease Commencement Date" shall mean June 15, 1987, or as may be
adjusted pursuant to paragraph 17 below.

    E.    "Lease Term" shall mean 60 months from the Lease Commencement Date.

    F.    "Base Rent" shall mean $220,110.00 (Two hundred twenty thousand one
hundred ten and 00/100 Dollars) per year, payable for the convenience of Tenant
each month in installments of $18,342.50.

    G.    "Tenant's Estimated Share of Operating Expenses" shall mean for the
first year of this lease $22,365.00, which shall be adjusted thereafter pursuant
to the terms of paragraph 3.

    H.    "Tenant's Total Square Footage" shall mean 21, 300 square feet; "Total
Building Square Footage" shall mean 100,000 square feet; "Tenant's Prorata
Share" shall mean 21.30%.

    I.    "Deposit" shall mean $22,000.00, and "Tenant's Prepaid Rent" shall
mean $-0- (which represents the last -0- month(s) of Base Rent).

    J.    "Permitted Purpose" shall mean use of the Leased Premises offices and
labs for computer and engineering services.

    K.    "The Broker of Record" shall mean  none.

    L.    "Authorized Number of Parking Spaces" shall mean 75 spaces.

    M.    IT IS UNDERSTOOD AND AGREED THAT THE LEASE DATED NOVEMBER 10, 1984
BETWEEN THE PARTIES HERETO FOR THE PREMISES AT 9701-A PHILADELPHIA COURT WILL
BECOME NULL AND VOID UPON THE COMMENCEMENT DATE OF THIS LEASE.
 
2.  USES
    ----
 
    A.    Tenant agrees continuously to use and occupy the Leased Premises for
the Permitted Purpose only, and for no other purpose. Tenant covenants to comply
with the provisions of all recorded covenants, conditions and restrictions,
including but not limited to the Declaration of Restrictive Easements and
Covenants recorded on July 14, 1975, and all building, zoning, fire and other
governmental laws, ordinances, regulations or rules applicable to the Leased
Premises and all requirements of the carriers of insurance covering the Project.
Tenant shall not do or permit anything to be done in or about the Leased
Premises, or bring or keep anything in the Leased Premises that may increase the
fire and extended coverage insurance premium upon the Building; that may injure
the Building; may constitute waste; or be a nuisance, public or private, or
menace to tenants of adjoining premises or anyone else.

                                       1
<PAGE>
 
    B.    Tenant agrees that it has determined to Tenant's satisfaction that the
Leased Premises can be used for the purpose for which they are leased and waives
any right to terminate this lease in the event the Leased Premises cannot be
used for such purposes or for any reason may not be used for such purposes
during the Lease Term.

    C.    By taking possession hereunder ON THE LEASE COMMENCEMENT DATE, Tenant
shall have acknowledged that it has examined the Leased Premises and accepts the
same as being in the condition called for by this lease.

3.  RENT
    ----
    A.    Tenant covenants and agrees to pay to Landlord during the term of this
lease (at the place specified for notice in paragraph 30 below) the Base Rent
without deduction or set off, payable for the convenience of Tenant each month,
in advance on the first day of each calendar month. Tenant also covenants and
agrees to pay to Landlord the Additional Rent as described in paragraph 3B
below. (Base Rent and Additional Rent, together with other amounts which may be
payable by Tenant to Landlord under this lease (shall sometimes be referred to
collectively as "Rent"). Rent for any fractional calendar month, at the
beginning or end of the term, shall be that proportion of the monthly
installment which the number of days during such month bears to the total number
of days in the month. Rent not paid when due shall begin to bear interest on the
date when due at a rate of 15% PER ANNUM or the lawful penalty interest allowed
in Maryland, whichever is lower.

    B.    (i) For purposes of this lease, "lease year" shall mean each
successive twelve consecutive month period, beginning from the Commencement
date.

    C.    (i) In addition to the Base Rent, the Tenant shall pay Tenant's
Prorata Share of Building Operating Costs. Building Operating Costs shall be all
expenses relating to the Building including, but not limited to, real estate
taxes, sales, franchise, business, corporation or any other taxes (except income
taxes) based on rents, Landlord's insurance (as defined in paragraph 7 below),
utilities not separately metered to individual tenants, maintenance, except
where otherwise provided, repairs, operating supplies, building services, snow
removal, landscaping, litter removal, tools, materials, labor for management and
maintenance, resurfacing, repainting and restriping of parking areas, car stops,
and security. They will not include monies spent for legal services, tax
accounting, interest, depreciation, executive salaries or expenditures of a
capital nature (except to the extent that such expenses otherwise cause a
reduction of the Building Operating Costs without a reduction of services; in
such case, that part of the capital expense attributable to the lease year under
good accounting practices shall be included in the Building Operating Costs).

          (ii) In addition to the Base Rent, the Tenant shall also pay Tenant's
Prorata Share of Project Operating Costs.  Project Operating Costs shall include
all expenses relating to that part of the Project which has been improved with
buildings owned by Landlord and for which services are rendered which are shared
in common with the Building (but not relating to the Building, other buildings
or vacant land in the Project) including, but not limited to, maintenance,
repairs, operating supplies, property management and servicing, snow removal,
landscaping, and security.  They will not include monies spent for legal
services, tax accounting, interest, depreciation, executive salaries or
expenditures of a capital nature (except to the extent that such expenses
otherwise cause a reduction of the Operating Costs without a reduction of
services; in such case, that part of the capital expense attributable to the
lease year under good accounting practices shall be included in the Operating
Costs).  (Tenant's share of Building and Project Operating Costs will sometimes
be referred to herein as "Additional Rent.")

    D.    Tenant shall pay monthly, in addition to the Base Rent, Tenant's
Estimated Share of Operating Costs which shall represent Landlord's best
estimate as to the amount of Tenant's Prorata Share of Building and Project
Operating Costs.  Exhibit D attached hereto sets forth Landlord's estimate of
the Operating Costs.  THE INFORMATION SET FORTH IN EXHIBIT D SHALL NOT BE
BINDING UPON LANDLORD AND SHALL IN NO WAY LIMIT TENANT'S OBLIGATION TO PAY
ADDITIONAL RENT AS DESCRIBED ABOVE. Annually or from time to time, after
assessing past and estimated operating cost data, the Landlord may adjust the
monthly operating cost payment provided for herein upward or downward to reflect
more accurately anticipated monthly costs.  All payments due at least 20 days
after the revision notice shall he made at the new rate.

    As of the close of each calendar year, Landlord shall compute the actual
cost of operating the Project for the previous twelve-month period (if the
Building has been operating for less than twelve months, the cost of operating

                                       2
<PAGE>
 
the Building for a year shall be determined by dividing the actual operating
costs by the number of days of actual operation and multiplying by 365).
Landlord shall deliver to Tenant notice of such cost and the amount due, if any,
from Tenant no later than April 15 of the year immediately subsequent to the
year to which such costs relate. Tenant shall reimburse Landlord within 30 days
after notice of any deficiency between estimated operating costs paid and actual
costs incurred. In the event of overpayment by Tenant, the Landlord shall apply
the excess to the next successive installments of Rent due hereunder unless
there are no further rent payments due from Tenant, in which case Landlord shall
pay such excess to Tenant within 30 days of notice.

    Landlord shal1, upon Tenant's request, deliver to Tenant a written
accounting showing how operating costs were calculated for the Building.

4.  PREPAID RENT AND SECURITY DEPOSIT
    ---------------------------------

    Tenant has this date paid to Landlord the Deposit and Tenant's Prepaid Rent
as security for performance of Tenant's obligations. In the event Tenant fully
complies with all the terms and conditions of this lease, but not otherwise, the
Deposit shall be refunded to Tenant, with interest as required by law, upon
expiration of this lease. Landlord may, but is not obligated to, apply a portion
of the Deposit to cure any default hereunder and Tenant on notice shall
replenish the amount necessary to provide the full deposit.

5.  UTILITIES
    ---------

    Tenant shall be solely responsible for and promptly pay all charges for
heat, gas, electricity and other utilities used or consumed and metered on the
Leased Premises. Landlord shall not be liable to Tenant for interruption in or
curtailment of any utility service, nor shall such interruption or curtailment
constitute a constructive eviction or grounds for rental abatement (except to
the extent Landlord may receive proceeds from rent abatement insurance for the
Demised Premises) in whole or in part

6.  BUILDING SERVICES
    -----------------

    Landlord agrees to maintain all parking and exterior areas, which
maintenance shall include lighting, gardening, cleaning, sweeping and painting.
Landlord shall maintain and repair the exterior of the Building, its structural
portions and the roof.

    Landlord shall not be liable in any event, nor shall Rent be abated, because
of interruption of Building Services, UNLESS DUE TO GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF LANDLORD.

7.  INSURANCE; INDEMNITY
    --------------------

    A.    Landlord shall secure and maintain throughout the term of this lease
insurance (the cost of which shall be a Building Operating Cost) in amounts and
form within Landlord's sole discretion:

          1)   Fire insurance with extended coverage endorsements attached in
          the amount of the full insurable value of the Building (with a $1,000
          deductible);

          2)   Comprehensive Public Liability Insurance (including bodily injury
          and property damage insurance) for the Project (not including the
          Leased Premises or other tenant occupied space);

          3)  Rental Abatement Insurance against abatement of loss of rent in
          case of fire or other casualty.

          4)   Landlord may, but is not obligated to, purchase such other
          insurance customarily purchased, from time to time, by first class
          office building owners and managers in the Washington area and treat
          the cost thereof as a Building Operating Cost.  Landlord may charge
          Tenant with any excess cost of the insurance described in this
          subparagraph due to the particular use of the Leased Premises by
          Tenant.

                                       3
<PAGE>
 
    B.    Tenant shall, at its own expense, procure and maintain throughout the
term of this lease:

          1)   Comprehensive Public Liability Insurance without deductible
          insuring Tenant's activities with respect to the Leased Premises
          against loss, damage or liability for personal injury or death,
          Lessor's damage to property or commercial loss occurring on or about
          the Leased Premises, in amounts no less than:

               (a) $1,000,000 with respect to personal injury or death to any
               one person;

               (b) $5,000,000 with respect to personal injury or death arising
               out of any one occurrence;

               (c) $1,000,000 with respect to property damage arising out of any
               one occurrence.

          2)  Workmen's Compensation Insurance in at least the statutory amounts
          with respect to any work or other operation in or about the Leased
          Premises.

    Landlord and Landlord's mortgagee shall be named as an additional insured
under such insurance and such insurance shall be primary and non-contributing
with any insurance carried by the Landlord.  The liability insurance policy
shall contain endorsements requiring 30 days' notice to Landlord prior to any
cancellation or any reduction in amount of coverage.  Tenant shall deliver to
Landlord as a condition precedent to its taking occupancy of the Leased Premises
(but not to its obligation to pay rent) a certificate or certificates evidencing
such insurance.  Tenant, as a material part of the consideration to be rendered
to Landlord, hereby waives all claims against Landlord for injury to Tenant, its
agents, employees, invitees, or third persons in or about the Lease Premises
from any cause arising at any time except the negligence or willful misconduct
of Landlord, its agents, employees or invitees.

    C.    Tenant shall indemnify and hold Landlord harmless from and against all
demands, suits, fines, liabilities, losses, damages, costs and expenses
(including legal expenses) which Landlord may incur or become liable for as a
result of any breach by Tenant, its agents, employees, officers, contractors,
invitees or licensees of the terms or covenants of this lease or any other of
the acts or omissions of Tenant, its agents, employees, officers, contractors,
invitees or licensees.

8.  WAIVER OF SUBROGATION
    ---------------------

    Tenant and Landlord each releases and relieves the other and waives its
entire right of recovery against the other for loss or damage arising out of or
incident to the perils of fire, explosion, or any other perils described in the
"extended coverage" insurance endorsement approved for use in Maryland, which
occurs in, on or about the Leased Premises, whether due to the negligence of
either party, their agents, employees, invitees or otherwise.

9.  REPAIRS
    -------

    Subject to Landlord's duty to provide the Building Services, Tenant agrees
to maintain in a neat, clean and sanitary condition and keep in good repair, the
interior of the Leased Premises. Such maintenance and repair shall be at the
sole cost of Tenant and shall include but not be limited to the maintenance and
repair of floor coverings, ceilings and walls, front and rear doors, and all
glass on the Leased Premises. Tenant shall, within 30 days after occupancy and
for the remainder of the Lease term or extensions thereof, have in force a
service contract for the maintenance of the Heating, Ventilating and/or Air
Conditioning equipment servicing the premises. If Tenant fails to maintain or
keep the Leased Premises in good repair and such failure continues for 5 days
after written notice from Landlord, Landlord may perform any such required
maintenance and repairs and the cost thereof shall be Additional Rent payable by
Tenant within 10 days of receipt of an invoice from Landlord.

10. TENANT'S PROPERTY
    -----------------

    Furnishings, trade fixtures and equipment installed by Tenant shall be the
property of Tenant subject to paragraph 25.  On termination of the lease, if
Tenant is not in default, Tenant may remove any such property and shall remove
any such property if directed by Landlord.  Tenant shall repair the Premises to
the same condition as 

                                       4
<PAGE>
 
when the term commenced, ordinary wear and tear excepted, or reimburse Landlord
for the cost of so repairing the Premises. If Tenant fails to remove such
property as required under this lease, Landlord may do so and Landlord shall not
be liable for any loss or damage to the property of Tenant which may occur
during Landlord's removal thereof.

11. IMPROVEMENTS AND ALTERATIONS BY TENANT
    --------------------------------------

    Without Landlord's prior written approval, WHICH APPROVAL SHALL NOT BE
UNREASONABLY WITHHELD NOR SHALL LANDLORD'S RESPONSE TO SUCH REQUEST BE DELAYED
BEYOND 30 DAYS FROM RECEIPT THEREOF, Tenant may not make, such additional
improvements or alterations to the Leased Premises which it may deem necessary
or desirable.  Any such improvements or alterations by Tenant shall be done, at
Tenant's expense, by a licensed contractor approved by Landlord in conformity
with plans and specifications approved by Landlord.  If requested by Landlord,
Tenant will post a bond or other security satisfactory to Landlord to protect
Landlord against liens arising from work performed for Tenant.  All work
performed shall be done in a good and workmanlike manner and with materials
(where not specifically described in the specifications) of the quality and
appearance comparable to those in the Building, and shall become the property of
the Landlord.  

12. CASUALTY
    --------

    If the Leased Premises or the Building are destroyed or damaged by fire,
earthquake or other casualty to the extent that they are untenantable in whole
or in part, then Landlord may, at Landlord's option, proceed with reasonable
diligence to rebuild and restore the Leased Premises or such part thereof as may
be destroyed or damaged, provided that within thirty days after such damage or
destruction Landlord shall in writing notify Tenant of Landlord's intention to
do so, and during the period of such rebuilding and restoration, the Rent shall
be abated in the same ratio as the square footage in the portion of the Leased
Premises rendered untenantable shall bear to the total square footage in the
Leased Premises.  If Landlord shall reasonably determine that such destruction
or damage cannot be repaired within 180 days from the date of notice, it shall
so notify Tenant within thirty days.  In such event, either Landlord or Tenant
may within 20 days after such notice, terminate this Lease.  If neither party
terminates the Lease during that 20 day period, this lease shall remain in
effect and Landlord shall diligently proceed to repair or reconstruct the Leased
Premises and Rent shall abate as set forth above.

13. ASSIGNMENT, LETTING AND SUBLETTING
    ----------------------------------

    A.    Tenant, its legal representatives and successors in interest shall
not, directly or indirectly, mortgae, pledge, assign, let or sublet or permit
the mortgaging, pledging, assigning, letting or subletting of this lease, or any
part thereof, or permit any part of or all of the Leased Premises to be used or
occupied by another, without first obtaining the written consent of Landlord
WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD NOR SHALL LANDLORD'S RESPONSE
TO SUCH REQUEST BE DELAYED BEYOND 30 DAYS FROM RECEIPT THEREOF. If Tenant is a
corporation, any transfer of this lease from Tenant by merger, consolidation,
reorganization or liquidation or any change in the ownership, or power to vote
the majority of the outstanding voting stock of Tenant shall constitute an
assignment for the purposes of this paragraph. Any such assignment made without
Landlord's approval shall be voidable by Landlord. Any approval by Landlord,
unless specifically stated therein, shall not relieve Tenant from its
obligations under this lease.

    B.    In addition to any other reasonable bases, Landlord shall be deemed to
be reasonably withholding its consent to any such assignments, letting or
subletting, if such assignment, letting or subletting would result in the
assignment, leasing or subleasing of,

          (i)  the Leased Premises to any party, business or lessee who proposes
    to conduct a business therein which is not in conformance with the
    provisions of paragraph 2 hereof; or

          (ii) less than the whole of the Leased Premises, unless to an entity
    controlled by or under common control with Tenant.

                                       5
<PAGE>
 
          (v)  the Leased Premises to a party whose financial condition and
     credit rating in Landlord's sole judgment is not equal to or better than
     that of Tenant's

          (vi) the Leased Premises to a party whose business is of a character
     which does not in Landlord's sole opinion comport with the character of the
     Building.

     D.   Within 20 days of receipt of any request by Tenant to consent to an
assignment, letting or subletting, Landlord may elect in writing to cancel this
lease as to that part of the Leased   Premises subject to the proposed
assignment, letting or subletting, and this lease shall cease as to that part of
the Leased Premises on the date which the proposed assignment, letting or
subletting was to be effective.

14. LIENS AND INSOLVENCY
    --------------------

    Tenant shall keep the Leased Premises and the Building free from any liens
arising out of any work performed, materials furnished, or obligations incurred
by Tenant.  If at any time a lien or encumbrance is filed against the Leased
Premises or the building as a result of Tenant's failure to satisfy same, Tenant
shall promptly discharge said lien or encumbrance, and if said Lien or
encumbrance has not been removed within thirty days from the date it is filed or
recorded against the Leased Premises or the building, Tenant agrees it will
deposit with Landlord in cash an amount equal to one hundred percent of the
amount of the lien of the person or concern filing the lien and shall have the
same on deposit with Landlord until said lien is discharged.  In the event
Tenant becomes insolvent, voluntarily or involuntarily bankrupt, or if a
receiver, assignee or other liquidating officer is appointed for the business or
property of the Tenant, then the Landlord shall have the right and option to
terminate this lease at any time by notice to Tenant.

15. RELOCATION
    ----------

    The Landlord shall have the right at any time, notwithstanding anything
contained herein, to relocate at Landlord's expense the Leased Premises on any
floor of the Building provided that the new location of the Leased Premises
shall be similar in dimension and that the rent for the Leased Premises shall
remain unchanged.  Should the Landlord give the Tenant written notification of
the relocation of the Leased Premises after the Tenant has commenced the
approved installation of partitioning or other improvements, the Landlord will
furnish the Tenant with similar partitioning and other improvements of equal
quality.  The relocation of the Leased Premises shall not affect any of the
other clauses or conditions of the lease.

16. CONDEMNATION
    ------------

    If the whole or any part of the Leased Premises shall be taken under power
of eminent domain or like power, or sold under imminent threat thereof to any
public authority or private entity having such power, this agreement shall
terminate as to the part of the Leased Premises so taken or sold, effective as
of the date possession is required to be delivered to such authority or entity.
Rent for the remaining term shall be reduced in the proportion that the total
square footage of the Leased Premises is reduced by the taking. If a partial
taking or sale (i) substantially reduces the area of the Leased Premises
resulting in a substantial inability of Tenant to use the Leased Premises for
Tenant's business purposes, or (ii) renders the Building commercially unviable
to Landlord (in Landlord's sole judgment), Tenant in the case of (i) and
Landlord in the case of (ii) may terminate this agreement by notice to the other
party within 30 days after the terminating party receives a written notice of
the portion to be

                                       6
<PAGE>
 
taken or sold, to be effective 180 days thereafter or when the portion is taken
or sold whichever is sooner. All condemnation awards and similar payments shall
be paid and belong to Landlord, except any amounts awarded or paid specifically
for Tenant's trade fixtures and relocation costs, provided such awards do not
reduce Landlord's award.

17. OCCUPANCY:  LEASE COMMENCEMENT DATE
    -----------------------------------

    The Leased Premises shall be ready for occupancy on such date that the
Improvements are completed substantially in accordance with the terms of
paragraph 18.A. below, subject only to items which will not materially affect
the use of the Leased Premises by Tenant for the purposes for which they are
intended.  If the Leased Premises are not ready for occupancy by the Scheduled
Lease Commencement Date (as set forth in subparagraph 1.D. above) then the Lease
Commencement Date shall be adjusted to be that date 5 days after Landlord shall
notify Tenant that the Leased Premises are ready for occupancy (subject to the
provisions which follow).

    If Landlord fails to cause the Leased Premises or any portion thereof to be
ready for occupancy at the time of the Scheduled Lease Commencement Date, (i)
neither Landlord nor Landlord's agents shall be liable for any damage, loss,
liability or expense caused thereby, nor (ii) shall this lease become void or
voidable (unless such inability continues for more than 90 days, in which case
Tenant may, upon 20 days' written notice to Landlord, terminate this lease).
LANDLORD AGREES TO USE HIS BEST EFFORTS TO PROVIDE TENANT WITH INTERIM SPACE IN
WHICH TO OPERATE SHOULD THE OCCUPANCY DATE PROVIDED HEREUNDER BE DELAYED BY MORE
THAN 15 DAYS.

18. CONSTRUCTION CONDITIONS
    -----------------------

    With respect to construction of the improvements described in Exhibit A,
attached hereto and made a part hereof ("Improvements"), it is agreed that:

    A.    Landlord shall construct the Improvements described in Exhibit A.

    B.    Landlord makes no representations or warranties as to the sufficiency
of the plans and specifications to meet the requirements of Tenant's business.
Prior to or during Landlord's construction activities, the parties may agree
upon changes in the plans and specifications.  If any change in the plans or
specifications increases the cost of work or materials or the time required for
completion of construction, Tenant shall reimburse Landlord for such increase in
cost at the time the increased cost is incurred and shall reimburse Landlord for
any loss in rent at the time the rent would have become due.

    C.    Landlord shall bear the risk of loss to the Improvements until the
term of the lease commences, but has no obligation to insure against such
losses.

    D.    Tenant may inspect the property from time to time but neither Tenant
nor its agent shall exercise any control over the persons performing
construction activities on the Project or Improvements.

    E.    Tenant, its employees, contractors, agent and invitees shall not have
any claim against Landlord for any personal injury or property damage arising
during or from construction activities.

19. RULES AND REGULATIONS
    ---------------------

    Tenant covenants that Tenant and its agents, employees, invitees, or those
claiming under Tenant will at all times observe, perform and abide by all the
general rules and regulations promulgated by Landlord from time to time.

20. PARKING
    -------

    Tenant and its employees and invitees shall have the exclusive right to use
the Authorized Number of Parking Spaces designated by Landlord pursuant to the
rules and regulations relating to parking adopted by Landlord from time to time.
Tenant agrees not to overburden the parking facilities and agrees to cooperate
with Landlord and other tenants in the use of parking

                                       7
<PAGE>
 
facilities. Landlord reserves the right in its absolute discretion to assign to
any tenant specific parking spaces for its exclusive use (provided such
assignment does not materially limit the number of spaces available for Tenant's
use). Landlord may, at its own discretion, change the location and nature of the
parking spaces available to Tenant, its employees and invitees, provided that
after such change, there shall be available to Tenant and its employees and
invitees approximately the same number of spaces as available before the change.

21. ACCESS
    ------

    Tenant shall permit Landlord to enter the Leased Premises at reasonable
times for the purpose of inspecting, altering and repairing the Leased Premises
and ascertaining compliance by Tenant with the provisions of this lease.
Landlord may also show the Leased Premises to prospective purchasers or renters
at reasonable times and upon reasonable notice, provided that Landlord shall not
unreasonably interfere with Tenant's business operations.

22. SIGNS
    -----

    All signs and symbols placed in the doors or windows or elsewhere about the
Leased Premises, or upon any other part of the Building, including building
directories, shall be subject to the approval of the Landlord PROVIDED HOWEVER
THAT LANDLORD'S RESPONSE TO SUCH REQUEST BY TENANT NOT TO BE DELAYED FOR MORE
THAN 30 DAYS FROM RECEIPT THEREOF.  Any signs or symbols which have been placed
without approval may be removed by Landlord.  Upon termination of tenancy, all
signs installed shall be removed and any damage resulting therefrom shall be
promptly repaired.

                                       8
<PAGE>
 
23. TENANT'S DEFAULT
    ----------------

    It shall be an "Event of Default" if (i) Tenant shall fail to pay when due
any monthly installment of Rent or any other charge or payment required of
Tenant hereunder (although no legal or formal demand has been made therefor);
(ii) Tenant shall violate or fail to perform any of the other conditions,
covenants or agreements herein made by Tenant, and such violation or failure
shall continue for a period of fifteen days after written notice thereof to
Tenant by Landlord; (iii) Tenant shall make a general assignment for the benefit
of its creditors or shall file a petition for bankruptcy or other
reorganization, liquidation, dissolution or similar relief; (iv) a proceeding is
filed against Tenant seeking any relief mentioned in (iii) above; (v) a trustee,
receiver or liquidator shall be appointed for Tenant or a substantial part of
its property; (vi) Tenant shall vacate or abandon the Leased Premises (an
absence of substantial activity by Tenant in the Leased Premises for more than 7
days to constitute such abandonment); or (vii) Tenant shall mortgage, assign or
otherwise encumber its leasehold interest.  If an Event of Default occurs, this
lease shall, at the option of Landlord, cease and terminate and shall operate as
a notice to quit--any notice to quit, or of Landlord's intention to re-enter,
being hereby expressly waived and Landlord may proceed to recover possession
under and by virtue of the provisions of the laws of Maryland, or by such other
proceedings, including re-entry and possession, as may be applicable.  If
Landlord elects to terminate this lease, the obligations herein contained on the
part of Landlord to be performed shall cease without prejudice, subject however,
to the right of Landlord to recover from Tenant all rental and other charges
accrued up to the time of termination or recovery of possession by Landlord,
whichever is later.  Should this lease be terminated before the expiration of
the term of this lease by reason of an Event of Default, the Leased Premises may
be relet by Landlord, for such rent and upon such terms as Landlord is able to
obtain, and, if the full Rent shall not be realized by Landlord, Tenant shall be
liable for all damages sustained by Landlord, including, without limitation, the
deficiency in Rent, reasonable attorneys' fees, other collection costs and all
expenses (including leasing fees) of placing the Leased Premises in first class
rentable condition.  Any damage or loss sustained by Landlord may be recovered
by Landlord, at Landlord's option, (i) at the time of the reletting, (ii) in
separate actions, from time to time, as said damage shall have been made more
easily ascertainable by successive relettings, (iii) be deferred until the
expiration of the term of this lease, in which event the cause of action shall
not be deemed to have accrued until the date of expiration of said term, or (iv)
if Landlord is unable to find a new tenant for the Leased Premises within sixty
days from termination of the lease, Tenant shall immediately pay Landlord the
present value (discounted at 10%) of all the Base Rent due for the remainder of
the Term (as if there had been no termination for cause) as liquidated damages
SUBJECT, HOWEVER, TO APPLICABLE LAW.  THE PROVISIONS contained in this paragraph
shall be in addition to and shall not prevent the enforcement of any claim
Landlord may have against Tenant for anticipatory breach of the unexpired term
of this lease.  All rights and remedies of Landlord under this lease shall be
cumulative and shall not be exclusive of any other rights and remedies provided
to Landlord under applicable law.

24. REMOVAL OF PROPERTY
    -------------------

    If, upon default by Tenant or termination of this lease, Landlord shall
enter or take possession of, the Leased Premises, Landlord shall have the right,
but not the obligation, to remove from the Leased Premises all personal
property, fixtures, furnishings and other property located therein, and to store
such property in any place selected by Landlord, including but not limited to a
public warehouse, at the expense and risk of the owners thereof, with the right
to sell such stored property UPON TEN DAYS WRITTEN NOTICE TO TENANT, AFTER IT
HAS BEEN STORED FOR a period of thirty days or more.* The proceeds of such sale
shall be applied first to the cost of such sale, second to the payment of the
charges for storage, if any, and third to the payment of any other sums of money
which may then be due from Tenant to Landlord under any of the terms hereof, the
balance, if any to be paid to Tenant.

    *   At any time within such 30 day storage period, Tenant has the right to
        cure such default and regain its property by paying Landlord for storage
        of' such property.

                                       9
<PAGE>
 
25. QUIET ENJOYMENT, INABILITY TO PERFORM
    -------------------------------------

    (a) If, and so long as, Tenant pays the Rent and keeps and performs each and
every term, covenant and condition herein contained on the part and on behalf of
Tenant to be kept and performed, Tenant shall quietly enjoy the Leased Premises
to without hindrance or molestation by Landlord, subject to the terms, covenants
and conditions of this lease and the Superior Instruments (as defined in
paragraph 38 below).

    (b) This lease and the obligations of Tenant to pay rent and perform all of
the terms, covenants and conditions on the part of Tenant to be performed shall
in no way be affected, impaired or excused because Landlord, due to Unavoidable
Delay, is (a) unable to fulfill any of its obligations under this lease, or (b)
unable to supply or delayed in supplying any service expressly or impliedly to
be supplied, or (c) unable to make or delay in making any repairs, replacements,
additions, alterations or decorations, or (d) unable to supply or delayed in
supplying any equipment or fixtures.  Landlord shall in each instance exercise
reasonable diligence to effect performance when and as soon as possible.
However, Landlord shall be under no obligation to pay overtime labor rates.

    "Unavoidable Delay" shall mean any and all delay beyond Landlord's
reasonable control, including without limitation, a delay caused by Tenant,
governmental restrictions, governmental regulations, controls, undue delays,
order of civil military or naval authority, governmental preemption, strikes,
labor disputes, lock-outs, shortage of labor or materials, inability to obtain
materials or reasonable substitutes therefore, default of any building or
construction contractor or subcontractor, Acts of God, fire, earthquake, floods,
explosions, actions of the elements, extreme weather conditions, enemy action,
civil commotion, riot or insurrection, fire or other unavoidable casualty,
delays in obtaining governmental permits or approvals or any other cause beyond
Landlord's reasonable control.

26. HOLD OVER TENANCY
    -----------------

    If (without execution of a new lease or written extension) Tenant shall hold
over after the expiration of the term of this lease, at Landlord's option,
Tenant may he deemed to be occupying the Leased Premises as a tenant from month
to month, which tenancy may be terminated as provided by law.  During such
tenancy, Tenant agrees to pay to Landlord 300% of the Rent Payable on the last
day of the term of this Lease, unless a different rate is agreed upon and to be
bound by all of the terms, covenants and conditions as herein specified, so far
as applicable.

27. ATTORNEY'S FEES
    ---------------

    In the event either party requires the services of an attorney in connection
with enforcing the terms of this lease or in the event suit is brought for the
recovery of any Rent due under this lease or for the breach of any covenant or
condition of this lease, or for the restitution of the Leased Premises to
Landlord and/or eviction of Tenant during said term or after the expiration
thereof, the party prevailing in any such legal action shall be entitled to an
award for all legal costs and expenses, including but not limited to, a
reasonable sum for attorney's fees.

28. AMENDMENT
    ---------

    This lease is the entire agreement between the parties. This lease shall not
be amended or modified except in writing signed by both parties. Failure to
exercise any right in one or more instances shall not be construed as a waiver
of the right to strict performance or as an amendment to this agreement.

29. NOTICES
    -------

    All notices required by this lease shall be in writing and shall be
effective when mailed by certified mail or delivered to Landlord at Allstate
Plaza E2, Northbrook, Illinois 60062, Attn:  Investment Department/Real Estate

                                      10
<PAGE>
 
Division, with a copy to 9700-F George Palmer Highway, Lanham, Maryland 20706,
Attn:  Robert Depew, and to Tenant at 5000-A PHILADELPHIA WAY, LANHAM, MARYLAND
20706, or to such other addresses as may hereafter be designated by either party
by written notice.

30. BINDING EFFECT
    --------------

    Subject to the provisions of paragraph 14, this Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and
pronouns in the singular number are uniformly used throughout this lease
regardless of gender, number or fact of incorporation of the parties hereto.

31. RIDERS AND ATTACHMENTS
    ----------------------

    The typewritten riders or supplemental provisions, if any, attached or added
hereto are made a part of this lease by reference and the terms thereof shall
control over any inconsistent provisions in the paragraphs of this instrument.

32. LIMITATION OF LANDLORD'S LIABILITY
    ----------------------------------

    The obligations of Landlord under this lease do not constitute personal
obligations of the individual partners, directors, officers, or shareholders of
Landlord, and Tenant shall look solely to the real estate that is the subject of
this lease, THE UNENCUMBERED VALUE OF WHICH IS PRESENTLY ESTIMATED TO BE IN
EXCESS OF 4 MILLION DOLLARS, and to no other assets of the Landlord for
satisfaction of any liability in respect of this lease and will not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or any of their personal assets for such satisfaction.

33. LANDLORD'S RESERVED RIGHTS
    --------------------------

    Without notice and without liability to Tenant, Landlord shall have the
    right to:

    a.  Change the name or street address of the Building.

    b.  Install and maintain signs on the exterior of the Building.

    c.   Make reasonable rules and regulations as, in the judgment of Landlord,
    may from time to time be needed for the safety of the tenants, the care and
    cleanliness of the Building and the preservation of good order therein.
    Tenant shall be notified in writing when each such rule and regulation is
    promulgated.

    d.   Grant utility easements or other easements to such parties, or replat,
    subdivide or make such other changes in the legal status of the Land
    underlying the building, as Landlord shall deem necessary, provided such
    grant or changes do not substantially interfere with Tenant's use of the
    Leased Premises as intended under this Lease.

    e.   Sell the Building or Project and assign this lease and the Deposit to
    the purchaser (and upon such assignment to be released from all of its
    obligations under this lease).  Tenant agrees to attorn to such purchaser,
    or any other successor or assign of Landlord through foreclosure or deed of
    foreclosure or otherwise and to recognize such person as the Landlord under
    this lease.


34. ESTOPPEL CERTIFICATE
    --------------------

    Within ten days after request therefor by Landlord, its agents, successors,
or assigns, Tenant shall deliver, in recordable form, a certificate to any
proposed mortgagee or purchaser, or to Landlord, together with a true and
correct copy of this lease, certifying (i) (if such be the case) that this lease
is in full force and effect without modification, (ii) the amount, if any, of
prepaid rent and security deposit paid by Tenant to Landlord, (iii) that
Landlord has performed all of its obligations due to be performed under this
lease and that there are no defenses,

                                      11
<PAGE>
 
counterclaims, deductions, offsets outstanding or other excuses for Tenant's
performance under this lease, and (iv) any other fact reasonably requested by
Landlord or such proposed mortgagee or purchaser, or stating those claimed by
Tenant. Tenant's failure to deliver the above described certificate in time
shall be conclusive upon Tenant: (i) that this lease is in full force and
effect, without modification except as may be represented by Landlord, (ii) that
there are no uncured defaults in Landlord's performance and Tenant has no right
of offset, counterclaim, defenses or deduction against Rent or the Landlord
hereunder, (iii) that no more than one period's Fixed Rent has been paid in
advance, and (iv) that the amount of the Security Deposit held by Landlord is as
represented by Landlord.

35. ACCORD AND SATISFACTION
    -----------------------

    No receipt and retention by Landlord of any payment tendered by Tenant in
connection with this lease will give rise to or support or constitute an accord
and satisfaction, notwithstanding any accompanying statement, instruction or
other assertion to the contrary (whether by notation on a check or in a
transmittal letter or otherwise), unless Landlord expressly agrees to an accord
and satisfaction in a separate writing duly executed by the appropriate persons.
Landlord may receive and retain, absolutely and for itself, any and all payments
so tendered, notwithstanding any accompanying instructions by Tenant to the
contrary.  Landlord will be entitled to treat any such payments as being
received on account of any item or items of Rent, interest, expense or damage
due in connection herewith, in such amounts and in such order as Landlord may
determine at its sole option.

36. SEVERABILITY
    ------------

    The parties intend this lease to be legally valid and enforceable in
accordance with all of its terms to the fullest extent permitted by Law.  If any
term hereof shall be finally held to be invalid or unenforceable, the parties
agree that such term shall be stricken from this lease, the same as if it never
had been contained herein.  Such invalidity or unenforceability shall not extend
to or otherwise affect any other term of this lease, and the unaffected terms
hereof shall remain in full force and effect to the fullest extent permitted by
law, the same as if such stricken term never had been contained herein.  The
above notwithstanding, if any provision of this lease shall be finally held to
be invalid or unenforceable, and such term substantially and adversely affects
the amount of Rent to be received by Landlord or the nature of its obligations
to Tenant or otherwise affects the economic bargain agreed to by Landlord in
this lease, Landlord shall have the additional option of terminating this lease.
Such right shall be exercised, if at all, by delivering notice to Tenant within
30 days after any final judgment declaring a provision of this lease invalid or
unenforceable, stating a date of termination no sooner than 90 days from such
notice.

37. WAIVER
    ------

    No assent or consent to changes in or waiver of any part of this Agreement
shall be deemed or taken as made, unless the same be done in writing and
attached hereon and endorsed by the Landlord.  No covenant or term of this lease
stipulated in favor of the Landlord shall be waived, except by express written
consent of the Landlord, whose forebearance or indulgence in any regard
whatsoever shall not constitute a waiver of the covenant, term or condition to
be performed by the Tenant; and until complete performance by the Tenant of the
said covenant, term or condition, the Landlord shall be entitled to invoke any
remedies available under this lease or by law despite such forebearance or
indulgence.

                                      12
<PAGE>
 
38. SUBORDINATION
    -------------

    The rights of Tenant hereunder are and shall be, at the election of any
mortgagee, subject and subordinate to the lien of any mortgage or mortgagees, or
the lien resulting from any other method of financing or refinancing, now or
hereafter in force against the Building of which the Leased Premises are a part,
and to all advances made or hereafter to be made upon the security thereof
("Superior Instruments").  If requested, Tenant agrees to execute whatever
documentation may be required to further effect the provisions of this
paragraph.

39. TIME
    ----

    Time is of the essence hereof.

40. APPLICABLE LAW
    --------------

    This agreement shall be construed according to the laws of the State of
Maryland.

41. BROKER'S INDEMNIFICATION
    ------------------------

    As part of the consideration for the granting of this lease, the Tenant
represents and warrants to the Landlord that no broker or agent negotiated or
was instrumental in negotiating or consummation of this lease except by the
Broker of Record, and Tenant agrees to indemnify Landlord against any other
loss, expense, cost or liability incurred by Landlord as a result of a claim by
any broker or finder claiming through Tenant.

42. ENTIRE AGREEMENT
    ----------------

    This lease sets forth all the covenants, promises, agreements, conditions
and understandings between Landlord and Tenant concerning the Leased Premises,
Building, and there are no covenants, promises, agreements, conditions or
understandings, either oral or written, between them other than as are herein
set forth.  Except as herein otherwise provided, no subsequent alteration,
amendment, change or addition to this lease shall be binding upon Landlord or
Tenant unless reduced to writing and signed by them.

                                      13
<PAGE>
 
     Executed as of the date first above written.


                                  LANDLORD:
                                  Washington Business Park Associates
                                  a General Partnership
                                  By Allstate Insurance Company 
WITNESSES:                            a General Partner

             /s/                  By:      /s/
----------------------                --------------------------------
                                      Authorized Signatory

             /s/                  By:      /s/
----------------------                --------------------------------
                                      Authorized Signatory


                                  LANDLORD:
                                  Washington Business Park Associates
                                  a General Partnership
                                  By Allstate Life Insurance Company
WITNESSES:                              a General Partner


             /s/                  By:      /s/
----------------------                  ------------------------------
                                        Authorized Signatory

             /s/                  By:      /s/
----------------------                  ------------------------------
                                        Authorized Signatory


                                  TENANT:
WITNESSES:                        INTEGRAL SYSTEMS, INC.


             /s/                  By:      /s/
---------------------                   ------------------------------
                                        President

             /s/                  By:      /s/
---------------------                   ------------------------------
                                        Secretary


    Where Tenant is a Corporation, this Lease shall be signed by a President or
Vice President and Secretary or Assistant Secretary of Tenant.  Any other
signatories shall require a certified corporate resolution.

                                      14
<PAGE>
 
                                   EXHIBIT D
      LANDLORD'S ESTIMATE OF ANNUAL BUILDING & PROJECT OPERATING EXPENSES
      -------------------------------------------------------------------

                                            Per Square Foot

          Real Estate Taxes                           $ .50
          Insurance                                     .12
          Exterior Maintenance                          .15
          Repairs and Replacement                       .05
          W.S.S.C. Front Foot Benefit                   .05
          Security Service                              .03
          Sewer and Water                               .05
          Common Building Electric Usage                .10
                                                       ----
                                                      $1.05
                                                      =====
<PAGE>
 
                    INTEGRAL SYSTEMS INC. AND SUBSIDIARIES
                      COMPUTATIONS OF EARNINGS PER SHARE


<TABLE>
<CAPTION>
                                                      YEARS ENDED SEPTEMBER 30
Basic:                                            1998            1997              1996
<S>                                        <C>                 <C>              <C>
Weighted average number of common
shares                                         5,793,433        5,718,060        5,688,126
 
Net income                                    $1,909,026       $  628,829       $  323,017
                                           ==================================================
Earnings per share                            $     0.33       $     0.11       $     0.06   
                                           ==================================================
                                                                                             
Diluted:    
Weighted average number of common                                                            
shares                                         6,232,933        5,907,613        5,828,005   
                                           ==================================================
Net income                                    $1,909,026       $  628,829       $  323,017   
                                           ==================================================
Earnings per share                            $     0.31       $     0.11       $     0.06
                                           ==================================================
</TABLE>
<PAGE>
 
                            LEASE RENEWAL AGREEMENT

              This Lease Renewal Agreement is made on this 31 day of December
1991, between Washington Business Park Associates, ("Landlord") whose address is
4601 Forbes Boulevard, Suite 100, Lanham, Maryland 20706 and Integral Systems,
Inc. ("Tenant") whose address is 5000 Philadelphia Way, Lanham, Maryland 20706
who agree as follows:

     1.   Recitals - This Lease Renewal Agreement is made with reference to the
          --------                                                             
following facts and objectives:

          a.   Landlord and Tenant entered into a written Lease dated April 1,
               1987 and amended on August 31, 1990, in which Landlord leased to
               Tenant and Tenant leased from Landlord, premises located at 5000-
               A Philadelphia Way, Lanham, Maryland 20706, described in Exhibit
               A attached to that Lease and made a part thereof ("Premises"),
               and comprising 23,500 square feet.

          b.   The term of the Lease expires on July 16, 1992.

          c.   The parties desire to renew the terms and conditions of the Lease
               as described below.

     2.   Size of Leased Premises - Effective January 1, 1992, Tenant's total
          -----------------------                                            
square footage shall remain at 23,500.

     3.   Renewal of Term - Commencing January 1, 1992, the Term of the Lease
          ---------------                                                    
shall be renewed for an additional period of 60 months so that the Term of the
Lease shall extend to and include December 31, 1996.

     4.   Tenant Improvements - Turn key per attached Exhibit B-1.
          -------------------                                     
 
     5.   Base Monthly Rent - Commencing January 1, 1992, the Base Monthly Rent
          -----------------                                                    
for the entire 23,500 s.f. space shall be (See Schedule Below).  This new Base
                                          --------------------                
Monthly Rent shall be in effect through December 31, 1996.
                                        ----------------- 
<TABLE>
<CAPTION>
                                                    Total Monthly Rent
       Months    Base Rent   Base Rent/Month  (Base Rent + Operating Expenses)
       ------    ----------  ---------------  --------------------------------
       <S>       <C>         <C>              <C>                               
        01-12    $7.50/s.f.     $14,687.50     14,687.50  +  2,742 = $17,429.50
        13-24    $7.73/s.f.     $15,137.92     15,137.92  +  operating expenses
                                                             adjusted per the lease
        25-36    $7.96/s.f.     $15,588.33     15,588.33  +  operating expenses
                                                             adjusted per the lease
        37-48    $8.20/s.f.     $16,058.33     16,058.33  +  operating expenses
                                                             adjusted per the lease
        49-60    $8.45/s.f.     $16,547.92     16,547.92  +  operating expenses
                                                             adjusted per the lease
</TABLE>

     6.   Tenant's Estimated Share of Operating Expenses - Commencing January 1,
          ----------------------------------------------                        
1992, Tenant's Estimated Share of Operating Expenses shall be $2,742.00 per
month and shall be adjusted and payable thereafter pursuant to the provisions of
the Lease. (See Exhibit D-1)

     7.   Tenant's Prorata Share - Effective January 1, 1992, Tenant's Prorata
          ----------------------                                              
Share shall remain 23.5%.

     8.   Tenant's Parking - Effective January 1, 1992, Tenant's number of
          ----------------                                                
parking space shall increase from 75 to 90.

     9.   Security Deposit - Landlord shall refund Tenant's original Security
          ----------------                                                   
Deposit of $22,000.00 at Lease Renewal Commencement.

     10.   Broker of Record - For the purposes of this renewal Broker of Record
           ----------------                                                    
shall be Smithy Braedon Companies.
<PAGE>
 
     11.  Effectiveness of Lease - Except as set forth in this Lease Renewal
          ----------------------                                            
Agreement, all the provisions of the Lease shall remain unchanged and in full
force and effect.

     Executed as a sealed instrument in two or more counterparts on the day and
year first above written.



                                        LANDLORD:                          
                                        WASHINGTON BUSINESS PARK ASSOCIATES
                                        a General Partnership              
                                        By Allstate Insurance Company      
                                        a General Partner                   

               /s/                      By:               /s/
--------------------------------           -------------------------------- 

               /s/                      By:              /s/
--------------------------------           -------------------------------- 
WITNESSES                                  AUTHORIZED SIGNATORIES


                                        LANDLORD:                          
                                        WASHINGTON BUSINESS PARK ASSOCIATES
                                        a General Partnership              
                                        By Allstate Life Insurance Company 
                                        a General Partner                   
               /s/                      By:              /s/
--------------------------------           -------------------------------- 

               /s/                      By:              /s/
--------------------------------           -------------------------------- 
WITNESSES                                  AUTHORIZED SIGNATORIES


                                        TENANT:               
                                        INTEGRAL SYSTEMS, INC. 

               /s/                      By:              /s/
--------------------------------           -------------------------------- 
               WITNESS                                   PRESIDENT
<PAGE>
 
                                  EXHIBIT B-1
                              TENANT IMPROVEMENTS

          Exhibit B-1 attached to Lease Renewal Agreement dated December 31,
                                                                         --
          1991, between Washington Business Park Associates (Landlord) and
          Integral Systems, Inc. (Tenant) is hereby agreed to as follows:

Tenant Improvements:  Landlord at Landlord's sole cost and expense, hereby
agrees to construct the Premises per the following specifications:

1.   Create a "vestibule area" on the side of the Building.

2.   Reduce main computer room from its current length of 73' to approximately
     48'. The remaining 20' of the existing main computer room floor shall
     replace the current small computer room and lab. This room shall require
     walls, windows and doors similar to its current configuration, with a
     possible addition of a third room.

3.   Construct a room between the electrical/phone room and the external power
     room to house office supplies.

4.   Replace all carpet and cove base.

5.   Re-paint all offices, halls, etc.

6.   Provide "high visibility areas", executive office, and demonstration areas
     with upgraded "VIP" finishings to include wall coverings, chair rail
     molding, and upgraded carpet.

7.   Install 2'x 2' recessed ceiling tiles in place of existing tiles
     throughout.

8.   Install parabolic lighting fixtures to reduce glare in offices throughout.

9.   Install "clean" 120 volt lines to three (3) offices in the front quadrant
     of the building.

10.  Extend conference room wall in Suite C office area to increase the room
     approximately 6' deeper.

11.  Replace damaged sheet rock panels in warehouse area where necessary.

12.  Field check mechanical systems, and Landlord replace all necessary worn
     out parts, etc. at Landlord's sole cost and expense.

13.  Extend two (2) of the three (3) window offices in the Suite C office area
     about two feet back so the rear wall is contiguous with the rear wall of
     the large window office on the southeast corner of Suite C. 
<PAGE>
 
                           WASHINGTON BUSINESS PARK

                        SCHEDULE OF OPERATING EXPENSES

                                  EXHIBIT D-1

<TABLE>
<S>                                                         <C>     
REAL ESTATE TAXES & FRONT FOOT BENEFIT                      $    .70
                                                                    
WATER & SEWER                                                    .10
                                                                    
ELECTRICITY - EXTERIOR                                           .10
                                                                    
LANDSCAPING & GROUNDS MAINTENANCE                                .20
                                                                    
LOT SWEEPING & TRASH REMOVAL                                     .04
                                                                    
REPAIRS                                                          .10
                                                                    
SECURITY                                                         .05
                                                                    
EXTERIOR MAINTENANCE                                             .05
                                                                    
INSURANCE                                                        .06 
                                                            --------
                                                                    
    TOTAL COST                                              $   1.40
                                                            -------- 
</TABLE>
<PAGE>
 
                           LEASE AMENDMENT AGREEMENT

     This Lease Amendment Agreement is made on this 31 day of August 1990,
                                                    --
between Washington Business Park Associates, ("Landlord") whose address is 4601
Forbes Boulevard, Suite 100, Lanham, Maryland 20706 and Integral Systems, Inc.
("Tenant") whose address is 5000 Philadelphia Way, Lanham, Maryland 20706 who
agree as follows:

     1.   Recitals - This Lease Amendment Agreement is made with reference to
          --------
the following facts and objectives:

          a.   Landlord and Tenant entered into a written Lease dated April 1,
               1987 in which Landlord leased to Tenant and Tenant leased from
               Landlord, premises located at 5000-A Philadelphia Way, Lanham,
               Maryland 20706, described in Exhibit A attached to that Lease and
               made a part thereof ("Premises"), and comprising 21,300 square
               feet.

          b.   The term of the Lease expires on July 16, 1992.

          c.   The parties desire to amend the terms and conditions of the Lease
               as described below.

     2.   Size of Leased Premises - Effective October 1, 1990 Tenant's total    
          -----------------------                                           
square footage is hereby increased from 21,300 square feet to 23,500 square
feet, as shown on the attached Exhibit A-1.

     3.   Base Monthly Rent - Commencing October 1, 1990, the Base Monthly Rent
          -----------------                                                    
for the entire 23,500 square foot space shall be increased from $18,342.50 per
month to $20,175.83 per month. This new Base Monthly Rent shall be in effect for
the remainder of Tenant's lease.

     4.   Tenant's Estimated Share of Operating Expenses - Commencing October 1,
          ----------------------------------------------                        
1990, Tenant's Estimated Share of Operating Expenses shall be increased from
$2,000.00 per month to $2,200.00 per month and shall be adjusted and payable
thereafter pursuant to the provisions of the Lease.

     5.   Tenant's Prorata Share - Effective October 1, 1990, Tenant's Prorata
          ----------------------                                              
Share shall be increased from 21.3% to 23.5%.

     6.   Effectiveness of Lease - Except as set forth in this Lease Amendment
          ----------------------                                              
Agreement, all the provisions of the Lease shall remain unchanged and in full
force and effect.


                                        LANDLORD:                          
                                        WASHINGTON BUSINESS PARK ASSOCIATES
                                        a General Partnership              
                                        By Allstate Insurance Company      
                                        a General Partner                   

               /s/                      By:               /s/
----------------------------------         ----------------------------------


               /s/                      By:               /s/
----------------------------------         ----------------------------------
WITNESSES                                  AUTHORIZED SIGNATORIES
<PAGE>
 
                                        LANDLORD:                          
                                        WASHINGTON BUSINESS PARK ASSOCIATES
                                        a General Partnership              
                                        By Allstate Life Insurance Company 
                                        a General Partner                   



               /s/                      By:               /s/
----------------------------------         ----------------------------------


               /s/                      By:               /s/
----------------------------------         ----------------------------------
WITNESSES                                  AUTHORIZED SIGNATORIES



                                        TENANT:               
                                        INTEGRAL SYSTEMS, INC. 



               /s/                      By:               /s/
----------------------------------         ----------------------------------
WITNESS                                                       PRESIDENT
<PAGE>
 
                           LEASE AMENDMENT AGREEMENT

     This Lease Amendment Agreement is made on the 28th day of February, 1994
between WASHINGTON BUSINESS PARK ASSOCIATES ("Landlord") whose address is 4601
Forbes Boulevard, Suite 100, Lanham, Maryland 20706 and Integral Systems, Inc.
("Tenant") whose address is 5000-A Philadelphia Way, Lanham, Maryland 20706, who
agree as follows:

     1.  Recitals - This Lease Amendment Agreement is made with reference to the
         --------                                                               
following facts and objectives:

     (a)  Landlord and Tenant entered into a written Lease dated April 1, 1987
          and amended August 31, 1990 and December 31, 1991 in which Landlord
          leased to Tenant and Tenant leased from Landlord, premises located at
          5000-A Philadelphia Way, Lanham, Maryland 20706, described in Exhibit
          A/Exhibit A-1 attached to that Lease/Lease Amendment and made a part
          thereof ("Premises") and comprising 23,500 square feet.

     (b)  The term of the lease expires on December 31, 1996.

     (c)  The parties desire to amend the terms and conditions of the Lease
          dated April 1, 1987 and amended August 31, 1990 and December 31, 1991.

     2.   Term of Lease - Commencing March 15, 1994 the Term of this Lease shall
          -------------                                                         
be amended to be a period of five (5) years so that the Term of the Lease shall
extend to and include March 14, 1999.

     3.   Size of Leased Premises - Effective March 15, 1994 Tenant's total
          -----------------------                                          
square footage is hereby amended from 23,500 square feet to 25,600 square feet
as shown on Exhibit A-2 attached to and made a part hereof.

     4.   Base Monthly Rent - Effective March 15, 1994 the Base Monthly Rent for
               ------------                                                     
the entire 25,600 square foot space shall be (See Schedule Below).  This new
Base Monthly Rent shall be in effect through December 31, 1996.

                              BASE RENT SCHEDULE
<TABLE>
<CAPTION>
                                        Monthly                Total Monthly Rent
Period                   Base Rent      Base Rent      (Base Rent + Operating Expenses)
------                   ---------      ---------      --------------------------------
<S>                      <C>            <C>            <C>
03/15/94 - 03/14/95      $ 7.96/sf      $16,981.33      16,981.33 + 2,986.67* = 19,968.00
03/15/95 - 03/14/96      $ 8.20/sf      $17,493.33      17,493.33 + Operating Exp. adjusted annually
03/15/96 - 03/14/97      $ 8.45/sf      $18,026.67      18,026.67 + Operating Exp. adjusted annually
03/15/97 - 03/14/98      $ 8.70/sf      $18,560.00      18,560.00 + Operating Exp. adjusted annually
03/15/98 - 03/14/99      $ 8.96/sf      $19,114.67      19,114.67 + Operating Exp. adjusted annually
*Operating Expenses are adjusted on a calendar year.
</TABLE>

     5.  Tenant's Estimated Share of Operating Expenses - Commencing March 15,
         -----------------------------------------------                      
1994 Tenant's Estimated Share of Operating Expenses shall be $ 2,986.67 per
month through the end of the current calendar year and shall be adjusted
annually thereafter and payable pursuant to the terms of the Lease. *Operating
Expenses are adjusted on the calendar year.

     6.  Effective March 15, 1994, "Tenant's Total Square Footage" shall be
amended to 25,600 square feet; "Total Building Square Footage" shall be amended
to 95,850 square feet; "Tenant's Prorata Share" shall be amended from 23.5% to
26.71 %.

     7.  Tenant's Parking Spaces - Effective March 15, 1994 Tenant's number of
         -----------------------                                              
parking spaces shall be amended from 90 to 97.

     8.  Right of First Offer - Tenant is hereby given the Right of First Offer
         --------------------                                                  
on any contiguous space to the backside of the new 2,100 s.f. expansion as
referenced in this Amendment. Tenant shall have fifteen (15) days from receipt
of written notice from Landlord that said space is being seriously considered by
another company to execute 
<PAGE>
 
a lease amendment agreement that will commence within sixty (60) days. The Base
Rent for said space shall be reflective of the amortized costs of Tenant
Improvements over the desired term.

     9.  Tenant's Build Out - Landlord to provide Tenant Improvements as shown 
         ------------------    
on Exhibit A-2 attached to and made a part hereof. In addition Landlord to
supply the following: (i) replace existing "MNC Financial" sign on front door of
Suite C with Integral Marketing Inc., (ii) provide a new picnic table in front
of building; and (iii) re-key all new and existing perimeter doors with Platinum
Key System.

     10. Mechanical Systems - Installation - The mechanical system consists of
         ---------------------------------                                    
heating, ventilation and air conditioning equipment, supply and return ducts,
supply air diffusers, flexible ducts, and related controls such as wall-mounted
thermostats.

     The mechanical system installation i.e. the workmanship is guaranteed for
one year from the date of occupancy, and the equipment has been
serviced/repaired as necessary and is in optimum working condition.

     Mechanical System - Repairs & Maintenance - In order to comply with the
     -----------------------------------------                              
Lease Agreement and preserve the integrity of the mechanical system, it is your
responsibility under the Lease to retain the services of a reputable mechanical
contractor to provide regular preventive maintenance upon Lease Commencement.
Any major component failure during the first year shall be repaired/replaced by
Landlord provided Tenant has a maintenance agreement in effect. After the first
year, Tenant shall be responsible for the repairs and maintenance of the HVAC
system (please refer to Lease Exhibit E, HVAC Maintenance Schedule, also
attached). A copy of your executed maintenance contract should be forwarded to
Washington Business Park within thirty (30) days of occupancy.

     11. Effectiveness of Lease - Except as set forth in this Lease Amendment
         ----------------------                                              
Agreement dated February 28/th/, 1994, all the provisions of the Lease shall
remain unchanged and in full force and effect.

                                      LANDLORD:                             
                                      WASHINGTON BUSINESS PARK ASSOCIATES   
                                      a General Partnership                 
                                      By:Allstate Insurance Company         
                                        a General Partner                    

_______________________________       By: _______________________________
                                      

_______________________________       By: _______________________________
WITNESSES                                 AUTHORIZED SIGNATORIES

                                      WASHINGTON BUSINESS PARK ASSOCIATES
                                      a General Partnership
                                      By:Allstate Life Insurance Company
                                        a General Partner

_______________________________       By: _______________________________ 
                                      
_______________________________       By: _______________________________ 
WITNESSES                                 AUTHORIZED SIGNATORIES

                                      TENANT:
                                      INTEGRAL SYSTEMS, INC.

_______________________________       By: _______________________________ 
WITNESS                                    PRESIDENT
<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                  FORM 10-KSB

(Mark One)
     X         ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
   -----                                                  
                       SECURITIES EXCHANGE ACT OF 1934

                 For the fiscal year ended September 30, 1998
                                           ------------------

                                       or

   _____       TRANSITION REPORT UNDER 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.
--------------------------------------------------------------------------------
                (Name of small business issuer in its charter)

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


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


Issuer's telephone number  (301) 731-4233
                           -----------------------------------------------------

        Securities registered under Section 12(b) of the Exchange Act:


        Title of each class            Name of each exchange on which registered

___________________________________    _________________________________________

___________________________________    _________________________________________
 
        Securities registered under Section 12(g) of the Exchange Act:


                                    Common
--------------------------------------------------------------------------------
                               (Title of class)

                                        
________________________________________________________________________________
                               (Title of class)


Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 _______
                       --                  

Check if there is no disclosure of delinquent fliers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]

As of November 30, 1998, the aggregate market value of the Common Stock of the
Registrant (based upon the average bid and ask prices of the Common Stock as
reported by the market makers) held by non-affiliates of the Registrant was
$109,501,331.

As of November 30, 1998, 5,856,456 shares of the Common Stock of the Registrant
were outstanding.

For the year ended September 30, 1998, the Registrant's revenues were
$28,035,506.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  Yes[_]  No [X]

                                       1
<PAGE>
 
                                    PART 1


     The Business section, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this Form 10-KSB contain
certain statements that are not historical facts which are "forward-looking
statements," and can be identified by the use of forward-looking terminology
such as "believes,"  "expects," "may," "will," "should," or "anticipates," the
negatives thereof or other variations thereon or comparable terminology, and
include statements as to the intent, belief or current expectations of Integral
Systems, Inc. (the "Company") and its directors, officers and management with
respect to future operations, performance or position of the Company.   These
forward-looking statements are predictions.  No assurances can be given that the
future results indicated, whether expressed or implied, will be achieved.  The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements.  While sometimes presented with numerical
specificity, these forward-looking statements are based upon a variety of
assumptions relating to the business of the Company, which although considered
reasonable by the Company, may not be realized.  Because of the number and range
of the assumptions underlying the Company's forward-looking statements, many of
which are subject to significant uncertainties and contingencies beyond the
reasonable control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this document.  These forward-looking statements are based on
current information and expectation, and the Company assumes no obligation to
update.  Therefore, the actual experience of the Company and results achieved
during the period covered by any particular forward-looking statement may differ
substantially from those anticipated.  Consequently, the inclusion of forward-
looking statements should not be regarded as a representation by the Company or
any other person that these estimates will be realized, and actual results may
vary materially.  There can be no assurance that any  of these expectations will
be realized or that any of the forward-looking statements contained herein will
prove to be accurate.

ITEM 1.  BUSINESS
         --------

COMPANY OVERVIEW

     The Company builds satellite ground systems for command and control,
integration and test, data processing, and simulation. Since its inception in
1982, the Company has provided ground systems for over 100 different satellite
missions for communications, science, meteorology and earth resource
applications. The Company has an established domestic and international customer
base that includes government and commercial satellite operators, spacecraft and
payload manufacturers and aerospace systems integrators.

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

     For over 15 years, the Company has provided flexible, reliable and
affordable ground system solutions. This has allowed the Company to stay ahead
of the competition and perform well in an industry that has traditionally been
dominated by much larger aerospace firms. The Company believes that it has a
unique combination of competitive advantages, including the following:

     .    Experience.  More experience with different types of satellites and
          operational scenarios than any competitor.

     .    Technology. Internationally recognized and proven COTS products that
          were first to market and that continue to lead the competition in
          functionality.

     .    Capabilities. Turnkey systems for customers who need a comprehensive
          range of products and services.

                                       2
<PAGE>
 
     .    Delivery schedule and price. Ability to deliver systems faster and at
          a lower cost than the competition.

     Through its wholly owned subsidiary Integral Marketing, Inc., ("IMI") the
Company acts as a manufacturers' representative, selling electronic test
instrumentation and equipment to customers primarily in Maryland, Virginia and
the District of Columbia. For a discussion of the Company's business segments,
see Note 12 to the Consolidated Financial Statements.

     Integral Systems Inc. is a Maryland corporation incorporated in 1982.

INDUSTRY BACKGROUND

     The space industry can be broken down into several industry sectors: (i)
infrastructure, (ii) communications, (iii) emerging applications, and (iv)
support services. Each of these sectors is funded by both government and
commercial investments. Space infrastructure encompasses the development,
manufacture and procurement of hardware and related systems for both space
assets (i.e., satellites and payloads) and ground assets (i.e., satellite ground
systems). The Company's business is focused in the ground system component of
the infrastructure sector. The communications sector of the space industry
includes revenue generated by satellite systems for commercial
telecommunications services and government and military communications.
Satellite technology has become critical to supporting many aspects of
telecommunications infrastructure, including long-distance telephony, personal
communications systems and private networks. The emerging applications market
includes space technologies utilized for new applications such as global
positioning systems and remote sensing. Support services for the space industry
include technical support, engineering, finance and consulting which facilitate
growth in space-related markets.

     According to a recent study by SpaceVest, space industry revenues will
exceed $95 billion in 1998 and will grow at a rate of approximately 10% per
year. Industry growth is supported by a study recently cited in Space News
predicting that nearly 1,700 satellites will be launched over the next 10 years.
The 1998 space infrastructure revenues are expected to be approximately $53
billion, comprising over half of the total space market. The ground sector,
which includes ground equipment, installations and operations, currently
accounts for approximately $25 billion of total space infrastructure revenues.
The ground sector is almost as large as all other sectors of the space
infrastructure market combined.

     The Company estimates that the current worldwide command and control market
represents approximately $4 billion. However, the Company also believes that the
increasing acceptance of COTS products will lead to substantial price reductions
and a subsequent decrease in market volume. The Company believes that its COTS
software products leave it well positioned to capitalize on this market trend,
resulting in an increase in both its revenues and market share.

     The space industry exhibits certain general characteristics. First, the
space industry is by nature global. There is a trend towards privatization and
deregulation in the communications and space industries which has engendered
numerous opportunities for private concerns to become players in these
traditionally government dominated markets. Opportunities in the space industry
have also been generated by the rapid growth in the information technology
industry.

     Second, there is an increasing demand for satellite-based applications.
Improvements in space and communications technologies have resulted in modern
communications satellites with power, capacity, switching capabilities and
longevity significantly greater than those of their predecessors. These
improvements in performance, together with satellites' inherent geographic
coverage and technical advantages, have made satellite-based communications
increasingly competitive with other communications technologies, broadening the
market for satellite support services.

     Third, government and business organizations also are increasingly
demanding that satellite ground systems be designed for interoperability with
computer hardware and software products and that such products be usable with
existing legacy systems. In addition, concerns over excessive development costs
and the rapid pace of technological change have led both government and business
organizations to demand flexible systems created by adapting COTS software and
hardware, rather than systems that have been built to customized specifications.
This emphasis on

                                       3
<PAGE>
 
system flexibility using readily available commercial products creates extensive
opportunities for flexible COTS products and for systems integration.

THE COMPANY SOLUTION

     The Company offers satellite ground systems that provide low-cost,
efficient and flexible operations. The principal characteristics of the
Company's approach are as follows:

     Open Systems and Ease of Integration.  The Company's family of products
addresses the dynamic environment of satellite operation through a commitment to
open systems architecture. The Company's products are implemented as open
systems with full adherence to industry hardware and software standards. The
Company's software can be rehosted to virtually any UNIX platform. A Windows NT
version is currently slated for release in 1999. The open architecture of the
Company's products allows interoperability with existing systems. Although the
Company's software components are typically sold as bundled products, they may
be purchased and operated separately or integrated with existing command and
control software.

     Advanced Architecture.  Unlike the traditional host-based approach, the
Company's ground systems are fully distributed, consisting of a set of
workstations all communicating via a local area network ("LAN") backbone. Any
software function can be performed on any workstation, eliminating the host
computer bottleneck and allowing the processing and network loading to be fine-
tuned by reallocation of logical processes to physical hardware. This approach
also provides more reliable operations by eliminating single points of failure.

     Depth of Functionality. The Company's command and control software supports
all aspects of satellite operation through a bundle of four inter-operable
software products: (i) a real-time package; (ii) an off-line package; (iii) an
orbit analysis package; and (iv) a database package. The Company's real-time
package performs daily and routine satellite operations, including commanding,
telemetry processing and fault detection and correction. The off-line package
supports sustaining engineering functions, including trending and statistical
analysis of data archived by the real-time system. The orbit analysis package
performs orbit determination and prediction functions to monitor and control the
position of the satellite in space. The database package tailors the performance
of the other three packages, which are general in scope, to the specific
requirements of each satellite mission. That is, the database defines the
telemetry and command characteristics and the desired orbital elements and
tolerances.

     Flexibility/Adaptability. A critical element to achieving initial operator
acceptance of a new system and facilitating rapid implementation is the ability
of the Company's software to serve the needs of particular satellite systems.
All of the Company's software is database driven, allowing it to support
satellite design changes or different series of satellites, without modifying
the underlying software. Similarly, the software also supports a wide range of
COTS hardware, including antenna, RF and baseband equipment, allowing the total
system to be delivered in the most efficient configuration for each mission.
Finally, the software is platform independent and can run on any UNIX computer,
with a Windows NT capability slated for release in 1999. This platform
independence makes it possible for the Company and its customers to take full
advantage of rapidly declining computer costs.

     Superior Price/Performance.  The Company seeks to achieve superior
price/performance by providing comprehensive solutions within the budgetary
needs of its customers. The Company believes that its COTS software products
provide advanced yet cost-effective solutions for satellite operators. These
COTS software products eliminate the need for expensive development services,
thereby substantially reducing the overall cost of a ground system. The
Company's database driven software allows satellites to be added over time which
permits the initial system acquisition costs to be amortized over years of
operations. The Company believes its software products exceed industry
expectations in functionality, technical sophistication and ease of use.

COMPANY STRATEGY

     The Company is currently a leading provider of satellite command and
control systems, providing systems for a wide variety of satellites. The Company
intends to extend its leadership and to expand its market share in world command
and control solutions for users of all satellite types. Primary elements of the
Company's strategy include:

     Technological Leadership.  The Company intends to continue to commit
substantial resources to further develop the next generation of its EPOCH and
OASYS off-the-shelf products. For example, the products are currently being re-
engineered to operate under the Windows NT operating system to take advantage of
the tremendous third-party product base available on NT platforms, and to
eliminate the risk of UNIX becoming 

                                       4
<PAGE>
 
obsolete. The Company anticipates that it will have migrated most of its
software solutions to the Windows NT platform in 1999. In addition, because the
satellite infrastructure industry is increasingly requiring standards
compliance, the Company intends to adhere to existing and future industry
standards and participate in the further development of such standards.

     Strategic Alliances and Partnerships. In addition to its own development
and marketing organization, the Company has and will continue to establish
partnerships with select third parties, primarily satellite and hardware
manufacturers, to assist the Company in successfully integrating its software
products, implementing total solution command and control systems and developing
customer relationships.

     Integration with Complementary Products.  The Company believes that its
ability to offer command and control software products that can integrate
seamlessly with all satellite types and ground system components is a key
competitive advantage. The Company also intends to integrate its software
products with complementary products, including visualization tools, scheduling
engines and decision support aids in order to maintain its competitive advantage
and provide maximum flexibility for its customers.

     Sales, Support, Service and Marketing Organizations. The Company currently
sells and supports its command and control software through direct sales to
satellite operators and systems integrators in North America, Europe and Asia.
The Company plans to invest significantly in expanding its sales, support and
service capabilities in these geographic regions while simultaneously gaining
entry into emerging markets in South America and Africa. The Company also
intends to augment its direct marketing efforts with U.S. Government
organizations to capitalize on the growing acceptance of COTS solutions in the
government sphere.

     In addition to expanding its market share in its core business, the Company
intends to draw on its capabilities and reputation in the command and control
area to develop opportunities in related areas. The key aspects of this growth
strategy are as follows:

     New Suite of Off-the-Shelf Applications. The Company intends to broaden its
COTS line beyond command and control to include other applications currently
utilizing customized solutions. These applications, which include payload data
processing, payload integration and test ("I&T") and ground equipment monitoring
and control, have overlapping functionality with the Company's command and
control applications and provide significant market growth opportunities. To
date, the Company is building or has delivered twelve payload data processing
systems, six satellite payload I&T systems and several monitoring and control
systems.

     Professional Services Capabilities.  The Company believes that providing
comprehensive services and a high level of customer support is critical to its
ability to maintain its leading position in command and control systems and to
expand into new markets. Therefore, the Company intends to expand its
professional services organization in areas including hardware testing, pre- and
post-sale software support, quality assurance, project installation management
and training. For example, the Company is implementing an ISO 9000 compliance
program and anticipates certification by late 1999.

     Strategic Acquisitions.  Management may, at some time, determine to
selectively pursue acquisitions of businesses, products or technologies that
enhance its competitive position more efficiently than through in-house
development. The Company has not acquired any businesses to date and has no
agreements or understandings to do so at this time.

PRODUCTS

     Most of the Company's sales involve a combination of COTS software and
hardware products together with development services for mission specific
requirements and system integration as summarized below.

  Command and Control Software.

     EPOCH 2000, the Company's COTS software solution for satellite command and
control, is designed to operate a variety of satellites with a minimum of
personnel. EPOCH 2000's success has placed the Company at the forefront of
replacing antiquated satellite control centers with smaller systems that can fly
multiple satellites produced by any manufacturer.  EPOCH 2000's open
architecture, in combination with a graphical user interface and automated
monitoring and control features, allow operators to monitor and control both
their satellites and 

                                       5
<PAGE>
 
ground systems.

     EPOCH features a modern, distributed architecture consisting of a series of
user workstations interconnected via an Ethernet LAN. This approach provides
better performance than traditional mini-computer based ground systems at a
lower cost.  EPOCH provides end-to-end satellite command and control
capabilities, including telemetry processing and display, commanding and command
verification ("CV"), ground station automation, alarm/event processing and data
archive and retrieval.. These functions are driven by the EPOCH database,
allowing the system to support multiple satellites solely through database
updates, without modifying the run-time software. This results in lower
maintenance and operations costs throughout the lifecycle.

     The typical EPOCH installation consists of a front-end processor which
provides the interface to the front-end hardware (e.g., bit syncs, command
encoders) and a series of user analysis workstations, all interconnected via the
LAN.  The front end processor executes a real-time version of UNIX and services
all the time-critical requirements. The analyst stations provide the mechanism
for users to control and monitor the satellite and the ground equipment. With
this approach, the processing burden is distributed across the network. The
system can be expanded indefinitely (up to the capacity of the network) by
adding new workstation nodes. Even the network capacity limitations can be
overcome by dividing the system into subnets inter-connected by bridges and
routers. Thus, additional users can be accommodated during peak loads with no
degradation in system response times.

     Functionally, the software addresses all of the requirements for real-time
satellite control, including:

     Telemetry Processing. The EPOCH software provides end-to-end telemetry
processing support, including frame decommutation, engineering unit ("EU")
conversion and limits checking.

     Commanding. EPOCH provides full support for satellite commanding and CV.
The commanding software is mnemonic-based; the user can transmit a command to
the satellite by typing in the mnemonic from a pull-down list arranged
alphabetically or by spacecraft subsystem.

     Automation.  Routine satellite and ground system control procedures can be
fully automated via the EPOCH Satellite Test and Operations Language ("STOL").
STOL allows frequently used command and configuration sequences to be stored in
ASCII procedure files for automatic execution.

     Alarms/Events.  EPOCH provides a centralized alarm/events processor for
detecting and optionally correcting the following conditions: command or
telemetry verification failure, telemetry out-of-limits condition, front-end
processor failure or network communication problems.

     Data Archive and Retrieval.  A built-in archive capability provides a
permanent record of all significant ground system activity for long-term
trending and analysis.

     OASYS, the Company's mission-planning software, provides full spectrum
support for spacecraft orbit determination and control, including measurement
set reductions, orbit determination, ephemeris propagation, maneuver planning
and orbit events/reports. OASYS allows the user to manage a single spacecraft or
a fleet in any Earth orbit, including low Earth, geosynchronous and Molniya-type
orbits.

     ABE, the Company's offline analysis package, provides trending and
statistical analysis of the information recorded in the real-time EPOCH
archives. ABE supports automatic data extraction of key data, along with 
summary-level statistics (i.e., daily and seasonal minimums and maximums),
advanced statistical processing techniques (i.e., covariance, convolution and
regression) and graphical data visualization.

     All of these applications are tailored to specific customer requirements
through a fourth package, the database. The database application is based on a
commercial package for Relational Data Base Management System ("RDBMS"), with
a top-level user interface and functional extensions developed by the Company.
The database provides "fill-in-the-blank" menu edit forms allowing the operator
to specify every relevant operational characteristic and threshold for the
satellite, its orbit and the associated ground equipment.

                                       6
<PAGE>
 
     LEO-T, the Low Earth Orbiting Terminal, is a new product developed by the
Company as an extension of its existing command and control products. The LEO-T
software provides fully automated, un-manned, remote operations of satellite
ground stations, also known as telemetry, tracking, and control ("TT&C") sites,
for Low Earth Orbit ("LEO") satellites. The chief difference between LEO-T and
the other COTS software products is that LEO-T involves the monitoring and
control of the ground equipment, rather than satellites themselves. The software
controls antenna positioning and tracking, RF and baseband setup, communications
path switching and management of redundant equipment. The software also provides
a mechanism for transferring data between the tracking sites and the central
satellite control facility.

  Development Services and Systems Integration.

     The Company provides services to support mission-specific requirements for
both government and commercial customers. Most of the Company's ground system
contracts have a service component. Depending on the application, the services
may include tailoring of COTS software products, integration of third-party
hardware and software and/or custom software development. The Company also
provides post-delivery warranty and maintenance service for most of its systems.
The Company believes that its expertise and experience in satellite systems and
operations, computer software and hardware, engineering/mathematical analysis
and end-user applications allow it to provide ground systems that exceed
traditional expectations on system performance, cost and implementation
schedule. The Company's experience, together with its innovative COTS software
products and software tools, reduce the risks and lead time associated with
ground system development.

  Applications.

     The Company believes that it has strengthened its position in the
marketplace by developing a business base in certain critical application areas
that offer continued growth potential. The Company provides products and
services in different combinations in order to deliver systems for the following
applications:

     Command and Control. The Company's EPOCH 2000 product line provides the
complete spectrum of capabilities for operating satellites from any
manufacturer. The Company sells the EPOCH 2000 software as a stand-alone product
or bundled as a turnkey system with third-party hardware (e.g. antenna, RF,
baseband and computer equipment).

     Integration and Test. The Company provides I&T systems for the spacecraft
bus and payload. The I&T systems are based on the EPOCH 2000 product line and
software tools developed by the Company for data visualization and analysis for
payload I&T.

     Station Automation. The Company has recently extended the EPOCH 2000
product line to include a new product, called the LEO-T. The LEO-T software
provides fully automated un-manned operations of remote tracking stations for
LEO satellites.

     Data Processing. The Company offers software tools and custom development
services for satellite payload data acquisition and processing. The Company's
principal work in this area has been for meteorological satellites.

     Simulation. The Company builds satellite simulators which are used for
ground system checkout, training, spacecraft anomaly resolution and flight
software validation.


CUSTOMERS

     In general, there are three major applications for satellites:
communications, remote sensing and science. The Company has customers in each of
these areas. The Company believes that the combination of its proven COTS
software products and its strength as a systems integrator has positioned it to
serve as an end-to-end provider of total solutions for all of these
applications.

  Communications.

                                       7
<PAGE>
 
     The Company provides satellite command and control products for a variety
of communications satellites. One of the principal advantages that the Company's
products offer in the commercial sector is the ability to operate fleets of
satellites from multiple vendors. This capability allows operators to reduce
costs by consolidating their control centers and using a single software package
to operate their satellites.

     The Company's products are currently flying communications satellites from
most of the major satellite manufacturers, including Hughes Space and
Communications Company, Lockheed Martin Corporation, Loral Space &
Communications Ltd. and Aerospatiale. The Company's customers include GE
Americom, Loral Skynet, Shinawatra Satellite Public Company Ltd. and China
Telecommunications Broadcast Satellite Corporation. All of these operators have
purchased the Company's products to operate their fleets of geosynchronous Earth
orbit ("GEO") communications satellites.

     Remote Sensing and Meteorology.

     The Company builds command and control systems as well as payload and image
data processing systems for meteorological satellites. Since its inception, the
Company has provided ground systems for the U.S. National Oceanic and
Atmospheric Administration ("NOAA"), including both their Geostationary
Operational Environmental Satellite Program ("GOES") and the Television Infrared
Observational Satellite ("TIROS") programs. The Company's systems support
mission operations, instrument data processing, simulation and flight software
validation. The Company also built the complete command and control system for
the U.S. Air Force Defense Meteorological Satellite Program ("DMSP"), whose
operations were recently transitioned to civilian control under NOAA's aegis.
Since 1982, the Company has also been under contract to provide the DMSP program
with satellite simulators used for training, ground system checkout and flight
software analysis.

     High-performance ground systems are required to support Earth resource
satellites that provide military and civilian customers with accurate image
data. The Company has provided such command and control subsystems to Space
Imaging/EOSAT and other operators.

     The Company's DOMSAT receive station ("DRS") is a PC-based product that
receives real-time environmental information via satellite from ground-based
data collection platforms and provides integrated capability for data management
and analysis. The Company has sold over 70 DRS systems in the U.S. for a variety
of government and commercial applications. Customers include the U.S. Geological
Survey, the U.S. Army Corps of Engineers, the State of Louisiana and the City of
Colorado Springs, Colorado.

  Scientific Research.

     The Company has supported a variety of diverse and complex science
missions. The Company has supported more than a dozen missions for the National
Aeronautics and Space Administration ("NASA"), including the Small Explorer
("SMEX") missions, International Solar-Terrestrial Physics ("ISTP") missions, 
X-ray Timing Explorer ("XTE") and Tropical Rainfall Measuring Mission ("TRMM").
Projects range from the development of distributed command and control systems
to validation of complex embedded flight software.

     The Company was selected by the Johns Hopkins University Applied Physics
Laboratory to support the first NASA Discovery Mission, the Near Earth Asteroid
Rendezvous Program ("NEAR").  NEAR is the first in a series of low-cost,
small-planet exploratory missions designed to gather data about asteroids in the
solar system. The Company's EPOCH 2000 product forms the core of the mission's
command and control ground system and also supports the spacecraft I&T.

     The National Space Program Office ("NSPO") for the Republic of China
selected the Company to provide the complete command and control system for
their ROCSAT-1 satellite. As a subcontractor to AlliedSignal, the Company
provided the control center software, baseband hardware and system engineering
and integration support. The Company also supports small satellite missions in
America such as Orbital Sciences Corporation's SeaStar and Microlab programs.

MARKETING

                                       8
<PAGE>
 
     The Company relies upon senior corporate management, project managers and
senior technical staff to carry out its marketing program, including the
development and execution of marketing plans, proposal presentations and the
performance of related tasks. These individuals collect information concerning
requirements of current and potential customers in the course of contract
performance and formal and informal briefings, from published literature and
through participation in professional and industry organizations. Senior
management evaluates this information, identifies potential business
opportunities and coordinates proposal efforts. The primary source of business
in the Company's existing markets is by referral from existing customers.
Additionally, the Company advertises extensively in Space News Magazine and
other industry publications.

     The Company seeks business believed to be of long-term benefit based on
considerations such as technical sophistication, favorable market positioning
and potential product spin-offs. One of the Company's primary marketing
strategies is to anticipate and understand the changing needs of its customers
and then to be prepared to meet those needs as they arise in new programs or in
new program functions. This approach to marketing is mirrored in the Company's
products that are highly adaptable to growth and change in the requirements of
each user.

CONTRACT REVENUE

     The Company earns revenues from sales of its products and services through
contracts that are funded by the U.S. Government as well as commercial and
international organizations. The Company may be either a prime contractor
directly to the end-user of its products and services or it may act as a
subcontractor under a contract with another company.

     The percentages of revenues received by the Company from prime contracts
and subcontracts for fiscal years 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                  FISCAL YEAR
               CONTRACT SOURCE               1998             1997
               ---------------               ----             ----
               <S>                           <C>              <C>  
               Prime Contract                68%              79%
                Subcontract                  32%              21%
</TABLE>

     For a given contract, the revenue mix may include the Company's COTS
software products, pass-through of third-party hardware and software, and
services provided by the Company or its subcontractors. The Company, through its
wholly owned subsidiary IMI, earns commission revenue by representing a number
of electronic product manufacturers in Maryland, Virginia and the District of
Columbia, principally in space-related markets.

     The Company generates revenue under three types of contracts: cost plus,
fixed price and time and material ("T&M") contracts. Under a cost plus contract,
the Company is reimbursed for allowable costs within the contractual terms and
conditions and is 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
fixed price contract, the Company is paid a stipulated price for services or
products and bears the risk of increased or unexpected costs. Revenue under a
fixed price contract is recognized using the percentage of completion method of
accounting based on costs incurred in relation to total estimated costs. Under a
T&M contract, the Company receives fixed hourly rates intended to cover salary
costs attributable to work performed on the contract and related overhead
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. A significant amount of the Company's revenue is
earned under cost plus contracts. To date, the vast majority of contracts for
the purchase of the Company's COTS software products have been fixed priced in
nature, either firm fixed price contracts or T&M fixed labor rate contracts.

     The following table summarizes the percentage of revenues attributable to
each contact type for the period indicated:

<TABLE>
<CAPTION>
                                             FISCAL YEAR     FISCAL YEAR
                    CONTRACT TYPE                1998            1997  
                    -------------                ----            ----   
                    <S>                      <C>             <C>
</TABLE> 

                                       9
<PAGE>
 
<TABLE> 
                <S>                              <C>             <C> 
                     Cost Plus                   41%             51%
                    Fixed Price                  56%             46%
                Time and Materials                3%              3%
</TABLE>

     Based on recent trends, the Company believes that the relative percentage
of cost plus contracts will decline in future fiscal periods.

U.S. GOVERNMENT CONTRACTS

     Company revenues from U.S. Government contracts are derived from a
combination of contracts with the U.S. Government and subcontracts with other
companies that have prime contracts with the U.S. Government. For fiscal years
1998 and 1997, approximately 65% and 67%, respectively, of the Company's
revenues were derived from contracts or subcontracts funded by the U.S.
Government.

     NOAA, one agency, represented 43% and 41% of revenues, respectively, for
fiscal years 1998 and 1997.  The Company expects that at least 43% of its
revenue for fiscal year 1999 will be derived from NOAA contracts. The loss of
any one of these NOAA contracts could significantly affect the Company's
performance. Similarly, the expiration, or termination for convenience, of any
major contract could significantly affect the Company's performance if not
renewed or replaced by contracts of similar value. It is estimated that the
single largest NOAA contract will represent approximately 18% of the Company's
fiscal year 1999 revenue. This contract is to develop the ground system used to
operate the next generation of geosynchronous weather satellites at NOAA.

     U.S. Government contracts are awarded by formal advertising or procurement
by negotiation. Negotiated procurements may, but do not necessarily, involve the
solicitation of competitive proposals. If competitive proposals are solicited,
the U.S. Government selects the proposal most advantageous to it and then
conducts negotiations with the selected bidder.

     Many of the U.S. Government programs in which the Company participates as a
contractor or subcontractor extend for several years but are funded only on an
annual basis. Accordingly, the Company's contracts and subcontracts are subject
to termination, reduction or modification in the event of changes in the
government's requirements or budgetary constraints. Additionally, when the
Company participates in a project as a subcontractor, it is subject to the risk
that the prime contractor may fail or be unable to perform the prime contract.

     All of the Company's U.S. Government contracts and subcontracts are also
subject to termination for "convenience." Should a contract be so terminated,
the Company would be reimbursed for allowable costs to the date of termination
and would be paid a proportionate amount of the stipulated profits or fees
attributable to the work actually performed.

     The Company's books and records are subject to audit by the Defense
Contract Audit Agency (DCAA). Such audits can result in adjustments to contract
costs and fees. Although the Company thus far has not been required to make any
material audit adjustments, the possibility that such adjustments will be
required always exists. Management is of the opinion that any such audit
adjustments would not have a material adverse effect on the financial position
or results of operations of the Company.

     The Company's contracts and subcontracts with federal government agencies
are subject to competition and awarded on the basis of technical merit,
personnel qualifications, experience and price. The Company's business,
financial condition and results of operations could be materially affected by
changes in procurement policies, a reduction in funds available for the services
provided by it and other risks generally associated with federal government
contracts. New government contract awards also are subject to protest by
competitors at the time of award that can result in the re-opening of the
competition or evaluation process, or the award of a contract to a competitor.
The Company considers such bid protests to be a customary element in the process
of procuring government contracts.

     In addition to the right to terminate, U.S. Government contracts are
conditioned upon the continuing availability of congressional appropriations.
Congress usually appropriates funds on a fiscal year basis even though

                                      10
<PAGE>
 
contract performance may take several years. Consequently, at the outset of a
major program, the contract is usually incrementally funded, and additional
funds are normally committed to the contract by the procuring agency as
appropriations are made by Congress for future fiscal years. In addition,
contractors often experience revenue uncertainties during the first quarter of
the government's fiscal year (beginning October 1) until differences between
budget requests and appropriations are resolved. To date, Congress has funded
all years of the multi-year major program contracts for which the Company has
served as prime contractor or a subcontractor, although there can be no
assurance that this will be the case in the future.


NON-U.S. GOVERNMENT CONTRACTS


  In addition to having contracts with the U.S. Government, the Company also has
contracts with commercial and international organizations. For fiscal years 1998
and 1997, approximately 35% and 33%, respectively, of the Company's revenues
were derived from non-U.S. Government contracts. These contracts are typically
with commercial satellite operators, satellite manufacturers, aerospace systems
integrators and foreign governments.


  Most of the Company's non-U.S. Government contracts are awarded competitively
and are performed on a fixed price basis. Typically, these contracts are for
turnkey systems that are delivered by the Company in six to eighteen months.
Payment is most often based on delivery milestones established in the Company's
contract. In addition, the contracts may include a system warranty period that
lasts one to two years. The Company also offers extended support for the system
on a fixed price or T&M basis.


  For certain of the Company's non-U.S. Government contracts, the Company often
has terms in its contracts under which the customer can enforce performance of
the Company or seek damages in case the Company does not perform as agreed to in
the contract. Contracts may require the Company to post a performance bond,
establish an irrevocable letter of credit or agree to pay liquidated damages in
the event of late delivery.


BACKLOG


  The Company's estimated backlog is as follows:


<TABLE>
<CAPTION>
                                                SEPTEMBER 30, 1998          SEPTEMBER 30, 1997
                                            --------------------------  ---------------------------
 <S>                                        <C>                         <C>
     Outstanding Commitments (1).........            $17,389,358                  $14,010,477
     General Commitments (2).............             25,212,281                   12,490,050
                                                     -----------                  -----------
             Total.......................            $42,601,639                  $26,500,527
                                                     ===========                  ===========
</TABLE>

--------------
(1)  Represents orders that are firm and funded.
(2)  Represents orders that are firm but not yet funded and contracts awarded
     but not yet signed.

  Under outstanding commitments, the Company agrees to provide specific
services, frequently over an extended period of time, with continued performance
of those services contingent upon the customer's year-to-year decision to fund
the contract.

  General commitments consist of contract options and sole source business that
management believes likely to be exercised or awarded in connection with
existing contracts. Contract options are the Company's contractual agreement to
perform specifically defined services only in the event the customer thereafter
requests the Company to do so. Sole source business refers to contract work
which the Company reasonably expects to be awarded based on its unique expertise
in a specific area or because it has previously done all such work in that area
for the customer or prime contractor who will award the contract. The Company
estimates that 55% of backlog as of September 30, 1998 will be completed during
fiscal year 1999. Estimated backlog includes contract options through September
30, 2002, including general commitments.

  Many of the Company's 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 the Company's contract backlog. The Company's total
contract backlog represents management's estimate of the aggregate unearned
revenues expected to be earned by the Company over the life of all of its
contracts, including option periods. Because many factors affect the scheduling
of projects, there can be no assurance as to when revenues will be realized on
projects included in the 

                                      11
<PAGE>
 
Company's backlog. In addition, although contract backlog represents only
business which is considered to be firm, there can be no assurance that
cancellations or scope adjustments will not occur. The majority of backlog
represents contracts under the terms of which cancellation by the customer would
entitle the Company to all or a portion of its costs incurred and potential fees
to the date of cancellation.

  However, the Company also believes that backlog is not necessarily indicative
of future revenues. The Company's backlog typically is subject to large
variations from quarter to quarter as existing contracts are renewed or new
contracts are awarded. Additionally, all U.S. Government contracts included in
backlog may be terminated at the convenience of the government.

COMPETITION

  The Company experiences significant competition in all of the areas in which
it does business. The Company believes it is one of four companies in the United
States which derive the major portion of their revenue from the development of
satellite ground systems. The Company competes with numerous companies having
similar capabilities, some of which are larger and have considerably greater
financial resources, including Lockheed Martin Corporation,  Loral Space &
Communications Ltd., Orbital Sciences Corporation, AlliedSignal, Computer
Sciences Corporation, Alcatel Espace, Matra Marconi Space and Aerospatiale. Many
of these competitors are significantly larger and have greater financial
resources than the Company, and some of these competitors are divisions or
subsidiaries of large, diversified companies that have access to the financial
resources of their parent companies. In addition, several smaller companies have
specialized capabilities in similar areas. In general, the markets in which the
Company competes are not dominated by a single company; instead, a large number
of companies offer services that overlap and are competitive with those offered
by the Company. There can be no assurance that the Company will be able to
compete successfully.

  Because its command and control business is specialized and the Company is a
leader in COTS software products, the market for this business is somewhat less
competitive. In the command and control software market, the Company competes
against other companies in the space industry. The Company's products also face
competition from certain Government off the Shelf (GOTS) products for satellite
command and control. In its other business areas, ground equipment and systems
integration, the Company competes against systems integrators and product
manufacturers.

  The Company believes that the principal competitive factors in the businesses
in which it operates are technical understanding, management capability, past
contract performance, personnel qualifications and price.

  The Company principally obtains contracts and subcontracts through competitive
procurements offered by the U.S. Government or commercial enterprises. Because
of its size, the Company often joins with a larger company in pursuing major
procurements. It is not unusual for the Company to compete with a company for a
contract while simultaneously joining with the same company in pursuit of
another contract.

  It is not possible to predict how the Company's competitive position may be
affected by changing economic or competitive conditions, customer requirements
or technological developments.

PROPRIETARY RIGHTS

  The Company regards its products as proprietary trade secrets and confidential
information. The Company relies on a combination of common law copyright and
trade secret laws, third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. There can
be no assurance, however, that in spite of these precautions, an unauthorized
third party will not obtain and use information that the Company considers
proprietary. To date, the Company has not registered any of its copyrights or
trademarks. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competitors will not
independently develop software products that are substantially equivalent or
superior to the Company's products. None of the Company's software is patented.
The Company believes that it has all necessary rights to market its products,
although there can be no assurance third parties will not assert infringement
claims in the future.

  The Company believes that, due to the nature of its products, the skill of
personnel, knowledge and experience 

                                      12
<PAGE>
 
of management, and familiarity with the operation of the Company's products are
more important in maintaining a leadership position in the industry than the
protection of intellectual property rights.

EMPLOYEES

  The Company believes that its employees and their knowledge and capabilities
are a major asset. The Company has been successful in attracting and retaining
employees skilled in its core business competencies. The Company intends to
continue to employ highly skilled personnel, as well as personnel knowledgeable
concerning the needs and operations of its major customers.

  As of December 8, 1998, the Company employed approximately 184 employees of
whom 180 are full-time employees and 148 of whom are considered professionals in
engineering related disciplines.  Of the engineering professionals, 94% have
undergraduate degrees in a scientific discipline and 45% of those have advanced
degrees in a scientific discipline. Approximately 86% of the engineering staff
have at least seven years experience.

  The Company believes that its relations with its employees are good. None of
the Company's employees are covered by collective bargaining agreements.

  There is significant competition for employees with the computer, engineering
and information technology skills required to perform the services the Company
offers. The Company's success will depend in part upon the Company's ability to
attract, retain, train and motivate highly skilled employees.

RESEARCH AND DEVELOPMENT

  The Company is continually engaged in research and development activities both
to improve its existing software products as well as probe additional product
areas for the future growth and development of the Company.  Currently, the
Company is focusing its research and development efforts primarily on developing
and improving the user interface systems for its COTS software products.  In
fiscal years 1998 and 1997, total capitalized software development expenditures
were $693,309 and $816,730 respectively.

ENVIRONMENT

  No material effects on the Company's expenditures, earnings, or competitive
position are anticipated as a result of compliance with federal, state, and
local provisions which have been enacted or adopted regulating the discharge of
material into the environment, or otherwise related to the protection of the
environment.

FINANCING

  The Company has access to a general line of credit facility through which it
can borrow up to $3.0 million. Borrowings under the line of credit bear interest
at the Eurodollar Rate plus 1.9% per annum. Any accrued interest is payable
monthly. The line of credit is secured by the Company's billed and unbilled
accounts receivable. The line also has certain financial covenants, including
minimum net worth and liquidity ratios. The line expires February 28, 1999. At
September 30, 1998 and 1997, the Company had outstanding balances of zero
dollars and $500,000, respectively, under such line of credit.

  The Company also has access to a $2.0 million equipment lease line of credit
under which it had $1,150,000 and zero dollars outstanding as of September 30,
1998 and 1997 respectively.  The balance is payable over 36 months and bears
interest at a rate of 8.8% per annum. The unused portion of the line of credit
will be used to finance future equipment purchases under substantially similar
terms.

   See Footnote Numbers 5 and 7 of the notes to the Financial Statements for
further information regarding these matters.

FINANCIAL INFORMATION IN INDUSTRY SEGMENTS

   During the year ended September 30, 1998, the Company's operations included
two reportable segments: 

                                      13
<PAGE>
 
Satellite ground systems and electronic test instrumentation and equipment
marketing.

   The Company provides satellite ground systems - computer systems for
satellite command and control, data processing, simulation, and flight software
validation.  Customers for these systems include US Government organizations
such as National Aeronautics and Space Administration (NASA), the National
Oceanic and Atmospheric Administration (NOAA), and the US Air Force, as well as
commercial satellite operators, both domestic and foreign.

  Through its wholly-owned subsidiary, Integral Marketing, Inc. (IMI), the
Company acts as a manufacturer's representative, selling electronic test
instrumentation and equipment to customers primarily in Maryland, Virginia and
the District of Columbia.  (The Company's other wholly-owned subsidiary,
InterSys, Inc. provides consulting services for satellite design and
procurement, but is presently inactive.)

   See Footnote Number 12 of the notes to the Financial Statements for financial
information regarding these segments.

                                      14
<PAGE>
 
ITEM 2.   PROPERTIES
          -----------

  The Company's headquarters occupies approximately 25,600 square feet at 5000
Philadelphia Way, Lanham, Maryland 20706. The lease expires March 15, 1999, and
the annual lease cost for this lease is approximately $226,000, excluding
operating expenses of approximately $43,520. During fiscal year 1997 the Company
contracted for an additional 17,638 square feet of space at 4200 Forbes Blvd.
Lanham, Maryland 20706. This second lease expires April 15, 1999 and has an
annual lease cost, excluding operating expenses, of approximately $148,000. The
Company believes that adequate additional suitable space will be available as
required.

  The Company is currently renegotiating its lease with its headquarters
landlord to both expand its space and extend the term of its lease.

  The Company believes that it has adequate insurance coverage to protect its
properties and assets.

ITEM 3.   LEGAL PROCEEDINGS
          ---------------- 

  The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, would be likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.

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

  The Annual Meeting of Shareholders was held on July 22, 1998. The following
matters were voted on by shareholders, and received the votes indicated.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------ 
DIRECTOR                      FOR                 AGAINST               ABSTAIN           BROKER NON-VOTES
------------------------------------------------------------------------------------------------------------
<S>                           <C>                 <C>                   <C>               <C>
Dominic A. Laiti               5,616,474               0                  196,902                 0
------------------------------------------------------------------------------------------------------------ 
Robert P. Sadler               5,616,474               0                  196,902                 0
------------------------------------------------------------------------------------------------------------ 
Thomas L. Gough                5,616,474               0                  196,902                 0
------------------------------------------------------------------------------------------------------------ 
R. Doss McComas                5,616,474               0                  196,902                 0
------------------------------------------------------------------------------------------------------------ 
Steven R. Chamberlain          5,616,474               0                  196,902                 0
------------------------------------------------------------------------------------------------------------
Bonnie K. Wachtel              5,616,474               0                  196,902                 0
-------------------------------------------------------------------------------------------------------------
</TABLE>

     2.   The shareholders ratified the appointment of Rubino & McGeehin,
          Chartered as independent accountants to the Company for the fiscal
          year ending September 30, 1998, as follows:


<TABLE>
<CAPTION>
          -----------------------------------------------------------------------------------------------------
                                        FOR                  AGAINST                ABSTAIN
          -----------------------------------------------------------------------------------------------------
          <S>                         <C>                    <C>                    <C>
          TOTAL                       5,620,784                9,300                   183,292
          ------------------------------------------------------------------------------------------------------
</TABLE>

     3.   The shareholders did not approve a proposed amendment to the Articles
          of Amendment and Restatement of the Articles of Incorporation that
          would have provided for a staggered Board of Directors and that would
          have provided that directors be removed only for cause and then only
          by the affirmative vote of at least sixty-seven percent of the holders
          of the aggregate combined voting power of all classes of capital stock
          entitled to vote. The vote was as follows:

<TABLE>
<CAPTION>
          -------------------------------------------------------------------------------------------------------- 
                                        FOR                  AGAINST                ABSTAIN
          --------------------------------------------------------------------------------------------------------
          <S>                         <C>                    <C>                    <C>
          TOTAL                       3,588,532                536,920               1,687,924
          ------------------------------------------------------------------------------------------------------
</TABLE>


     4.   The shareholders did not approve a proposed amendment to the Articles
          of Amendment and Restatement of the Articles of Incorporation which
          would have provided for the authorization 

                                      15
<PAGE>
 
          of 1,000,000 shares of series preferred stock, par value $0.01, and
          would have vested in the Board of Directors the power to classify or
          reclassify such stock in one or more series. The vote was as follows:

<TABLE>
<CAPTION>
          -----------------------------------------------------------------------------------------------------
                               FOR                  AGAINST                ABSTAIN
          -----------------------------------------------------------------------------------------------------
          <S>                  <C>                  <C>                    <C>
          TOTAL                3,487,782                601,720              1,723,874
          ------------------------------------------------------------------------------------------------------
</TABLE>

     5.   The shareholders approved a proposed amendment to the Company's 1988
          Stock Option Plan, as amended and restated January 1, 1994, which
          authorized an increase in the number of shares of the Company's common
          stock, par value $0.01, available for issuance thereunder by 600,000
          shares and which allows for a "cashless" exercise of stock options
          issued after such amendment:

<TABLE>
<CAPTION>
          --------------------------------------------------------------------------------------------------------
                               FOR                  AGAINST                ABSTAIN
          --------------------------------------------------------------------------------------------------------
          <S>                  <C>                  <C>                    <C>
          TOTAL                3,646,182              450,020              1,717,174
          --------------------------------------------------------------------------------------------------------
</TABLE>

                                      16
<PAGE>
 
                                    PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S
          ---------------------------------------------------------------
          MATTERS
          -------


  The following table sets forth the high and low prices of the Common Stock as
reported by The Nasdaq National Market, where the Common Stock trades under the
Symbol "ISYS." The prices reported have been adjusted to give retroactive
effect to changes resulting from stock dividends and stock splits.

 
              1998 FISCAL YEAR                      HIGH            LOW
             -----------------                     -----            ---

               First Quarter                        7.06             4.88
               Second Quarter                      16.00             6.59
               Third Quarter                       17.00            11.69
               Fourth Quarter                      18.50            10.63


              1997 FISCAL YEAR                      HIGH              LOW
             -------------------                   -----            ------
 
               First Quarter                        5.17             3.25
               Second Quarter                       5.08             3.66
               Third Quarter                        5.58             3.58
               Fourth Quarter                       6.00             4.50

   As of September 30, 1998, there were approximately 1,306 holders of record of
the Company's Common Stock.

  Historically, the Company has not paid any cash dividends, nor does the
Company anticipate declaring or paying cash dividends in the foreseeable future.
Instead, the Company intends to invest earnings in the operations, development
and growth of its business. The payment of future dividends on the Common Stock
and the rate of such dividends, if any, will be determined in light of any
applicable contractual restrictions limiting the Company's ability to pay
dividends, the Company's earnings, financial condition, capital requirements and
other factors deemed relevant by the Board of Directors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

  On October 1, 1998, the Company indefinitely postponed its secondary offering
and withdrew its registration statement on Form S-1 filed with the Securities
and Exchange Commission on July 2, 1998, as amended on July 13, 1998, due to
adverse market conditions.

                                      17
<PAGE>
 
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------


                        COMPARISON OF FISCAL YEAR 1998
                        ------------------------------
                              TO FISCAL YEAR 1997
                              -------------------


OVERVIEW

  Integral Systems, Inc. builds satellite ground systems for command and
control, integration and test, data processing, and simulation.  Since its
inception in 1982, the Company has provided ground systems for over 100
different satellite missions for communications, science, meteorology, and earth
resource applications.  The Company has an established domestic and
international customer base that includes government and commercial satellite
operators, spacecraft and payload manufacturers, and aerospace systems
integrators.

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

     The components of the Company's income statement as a percentage of revenue
are depicted in the following table for the fiscal years ended September 30,
1998 and September 30, 1997:

<TABLE>
<CAPTION>
                                                             % OF                                       % OF
                                      1998                 REVENUE                1997                 REVENUE
                             -----------------------  ------------------  ---------------------  -------------------
                                 (IN THOUSANDS)                              (IN THOUSANDS)
<S>                          <C>                      <C>                 <C>                    <C>
Revenue                              $28,036                100.0               $20,059                 100.0
Cost of revenue                       20,677                 73.8                16,020                  79.9
                                     -------                -----               -------                 -----
                               
Gross margin                           7,359                 26.2                 4,039                  20.1
SG&A                                   3,047                 10.9                 2,303                  11.5
Offering Expenses                        378                  1.4                     0                   0.0
Prod. amortization                       660                  2.4                   660                   3.3
                                     -------                -----               -------                 -----
                               
Income from operations                 3,274                 11.7                 1,076                   5.3
Other income (exp.) net                 -167                  -.6                   -64                   -.3
                                     -------                -----               -------                 -----
                               
Income before taxes                    3,107                 11.1                 1,012                   5.0
Income taxes                           1,198                  4.3                   383                   1.9
                                     -------                -----               -------                 -----
                               
Net income                             1,909                  6.8                   629                   3.1
                                     =======                =====               =======                 =====
</TABLE>

                                      18
<PAGE>
 
REVENUE


   The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations.  The
Company, through its wholly-owned subsidiary IMI, earns commission revenue by
representing a number of electronic product manufacturers in Maryland, Virginia
and the District of Columbia, principally in space related markets.

   Internally, the Company classifies revenues in two separate categories on the
basis of the contracts' procurement and development requirements: (i) contracts
which require compliance with Government procurement and development standards
("Government Services") are classified as government revenue, and (ii) contracts
conducted according to commercial practices ("Commercial Products and Services")
are classified as commercial revenue, regardless of whether the end customer is
a commercial or government entity.  Sales of the Company's COTS products  are
classified as Commercial Products and Services revenue.  IMI sales of third-
party hardware and software are also classified as Commercial Products and
Services revenue.

   For the fiscal years ended September 30, 1998 and 1997 the Company's revenues
were generated from the following sources:


   REVENUE TYPE                          1998                 1997
   ------------                         ------               ------  

   COMMERCIAL PRODUCTS & SERVICES
   Commercial Users                        35%                  33%
   U.S. Government Users                    8                   10
                                          ----                 ----
      Subtotal                             43                   43
                                          ----                 ----
 
   GOVERNMENT SERVICES
   NOAA                                    43                   41
   NASA                                     5                    9
   Other U.S. Government Users              9                    7
                                          ----                 ----
      Subtotal                             57                   57
                                          ----                 ----
 
     Total                                100%                 100%
                                          ====                 ====

  Based on the Company's revenue categorization system, the Company classified
43% of its revenue as Commercial Products and Services revenue with the
remaining 57% classified as Government Services revenue for both the fiscal
years ended September 30, 1998 and 1997.  By way of comparison, if the revenues
were classified strictly according to end-user (independent of the Company's
internal revenue categorization system), the U.S. Government would account for
65% and 67% of the total revenues for fiscal years 1998 and 1997, respectively.

   On a consolidated basis, revenue increased 39.8%, or $7.9 million, to $28.0
million for fiscal year 1998, from $20.1 million for fiscal year 1997.  The
increase was principally due to increases in both the Company's Government
Services revenues and the Company's Commercial Products and Services revenues,
the latter reflecting an expanding market acceptance for and sales of the
Company's EPOCH product line and related services.

COST OF REVENUE/GROSS MARGIN

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

  Gross margins on contract revenues vary depending on the type of product or
service provided.  Generally, license revenues (related to the sale of the
Company's COTS products) have the greatest gross margins because of the minimal
associated marginal costs to produce.  By contrast, gross margins rates for
equipment and subcontract pass-throughs seldom exceed 15%.  Engineering service
gross margins typically range between 20% and 30%, while gross margins for IMI
vary considerably depending on sales volume achieved.

                                      19
<PAGE>
 
  During fiscal year 1998, cost of revenue increased to $20.7 million from $16.0
million in fiscal year 1997 due primarily to increases in direct labor and
related overhead costs necessary to staff the Company's new contracts and
revenue growth.  Cost of revenue expressed as a percentage of revenues, declined
to 73.8% for fiscal year 1998 from 79.9% for fiscal year 1997 primarily due to a
lower percentage of equipment and subcontract costs in the fiscal year 1998 cost
of revenue mix.

  The Company's gross margin increased 82.2%, or $3.4 million, to $7.4 million
for fiscal year 1998 from $4.0 million for fiscal year 1997.  The increase was
principally due to margin percentage improvements in all of the Company's
revenue components (i.e. licenses, engineering services, pass-throughs and IMI)
coupled with revenue growth.  Most notably, engineering services margins
increased considerably due to the virtual elimination of project overruns that
adversely affected margins during fiscal year 1997.  As a result of the
foregoing factors, gross margin as a percentage of revenue was 26.2% during
fiscal year 1998 compared to 20.1% for fiscal year 1997.

OPERATING EXPENSES/ INCOME FROM OPERATIONS

   Selling, General & Administrative expenses (SG&A) increased to approximately
$3.0 million in fiscal year 1998 from $2.3 in fiscal year 1997.  The change was
primarily due to increases in the Company's selling and marketing infrastructure
costs combined with increased bid and proposal expenses.  As a percentage of
revenue, however, SG&A accounted for only 10.9% of revenue in fiscal year 1998
compared to 11.5% in the preceding fiscal year.  Product amortization was
$660,000 for both fiscal years 1998 and 1997.

   During fiscal year 1998, the Company charged approximately $380,000 to
operating expense in connection with its decision to indefinitely postpone a
secondary public offering that was registered with the Securities and Exchange
Commission (SEC) in July 1998 on Form S-1 and subsequently withdrawn in
September 1998.

   Income from operations increased 204.3% to $3.3 million for fiscal year 1998
from $1.1million for fiscal year 1997 primarily due to increases in gross margin
dollars described above.  As a percentage of revenue, income from operations
increased to 11.7% for fiscal year 1998 from 5.3% for the prior year.  This
increase was principally the result of improved gross margin rates combined with
lower percentages of SG&A and product amortization as a function of revenue.

   The Company's effective tax rate was 38.6% and 37.8% for fiscal years 1998
and 1997 respectively.

OUTLOOK

  The Company's strong fiscal year results represent a continued trend from
prior fiscal years of increased sales and profitability on those sales.  At this
time the Company has a significant backlog of work to be performed, as well as
potential contract awards it believes are probable based on proposals in the
pipeline.  Management believes that operating results for future periods will
continue to improve based on the following assumptions:

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

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

     .    Sales from its IMI subsidiary will continue to grow

                                      20
<PAGE>
 
                        LIQUIDITY AND CAPITAL RESOURCES
                        -------------------------------

   Since the Company's inception in 1982, it has been profitable on an annual
basis and has generally financed its working capital needs through internally
generated funds, supplemented by borrowings under the Company's general line of
credit facility with a commercial bank and the proceeds from the Company's
initial public offering in 1988.

   For fiscal year 1998, the Company generated approximately $2.6 million of
cash from operating activities and used approximately $800,000 for investing
activities, including approximately $690,000 for newly capitalized software
development costs.  During fiscal year 1998, the Company also purchased
approximately $110,000 of fixed assets (principally new computers and equipment)
and procured an additional $800,000 of electronic equipment under capital lease.

   The Company has access to a general line of credit facility through which it
can borrow up to $3.0 million.  Borrowings under the line of credit bear
interest at the Eurodollar Rate plus 1.9% per annum.  Any accrued interest is
payable monthly.  The line of credit is secured by the Company's billed and
unbilled accounts receivable.  The line also has certain financial covenants,
including minimum net worth and liquidity ratios.  The line expires February 28,
1999.  At September 30, 1998, the Company had no amounts outstanding under the
line of credit.

   The Company also has access to a $2.0 million equipment lease line of credit
under which it had $1,150,000 outstanding as of September 30, 1998.  The balance
is payable over 36 months and bears interest at a rate of 8.8% per annum. The
unused portion of the line of credit will be used to finance future equipment
purchases under substantially similar terms.

   The Company currently anticipates that its current cash balances, amounts
available under its credit facilities and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months.  The Company
believes that inflation did not have a material impact on the Company's revenues
or income from operations in fiscal years 1998 and 1997 to date.

YEAR 2000 COMPLIANCE

  Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field.  To distinguish 21st
century dates from 20th century dates, these date code fields must be able to
accept four digit entries. The Company has evaluated its information technology
infrastructure and its software products for Year 2000 compliance. The Company
does not expect that the cost to modify its information technology
infrastructure or its software products to be Year 2000 compliant will be
material to its business, financial condition or results of operations. The
Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance. No assurance can be
given, however, that unanticipated or undiscovered Year 2000 compliance problems
would not have a material adverse effect on the Company's business, financial
condition or results of operations.

  In addition, the Company has limited information concerning the compliance
status of its suppliers.  Although the Company is not dependent on any one
supplier or any group of suppliers, in the event that any of the Company's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's business, financial condition or results of operations
could be materially adversely affected.

FORWARD LOOKING STATEMENTS

  Certain of the statements contained in this section, including those under the
headings "Outlook" and "Liquidity and Capital Resources" are forward-looking.
In addition, from time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters.  While the Company believes that
these statements are and will be accurate, a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's statements.
The Company's business is dependent upon general economic conditions and upon
various conditions specific to its industry, and future trends cannot be
predicted with certainty.  Particular risks and uncertainties that may effect
the Company's business including the following:

                                      21
<PAGE>
 
     .    The presence of competitors with greater financial resources and their
          strategic response to the Company's new services.

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

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

     .    Changes in activity levels in the Company's core markets.

                                      22