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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended September 30, 2004

or

For the transition period from                     to                    

Commission file number 0-18603

INTEGRAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of class)

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K ¨

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

As of the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Common Stock of the Registrant (based upon the average bid and asked prices of the Common Stock as reported by the market makers) held by non-affiliates of the Registrant was $175,942,545.

As of November 11, 2004, 9,977,844 shares of the Common Stock of the Registrant were outstanding.

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INDEX

PART I

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INDEX (CONTINUED)

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PART I

Company Overview

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

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

Through its wholly owned subsidiaries, SAT Corporation (“SAT”) and Newpoint Technologies Inc. (“Newpoint”), the Company offers complementary ground system components and systems. This includes turnkey systems, hardware and software for satellite and terrestrial communications signal monitoring, network and ground equipment monitoring and control and satellite data processing. See Footnote 2 of the Notes to the Consolidated Financial Statements included elsewhere herein for more information regarding the acquisition of Newpoint.

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

Through its wholly owned subsidiary, Real Time Logic, Inc. (“RT Logic”), the Company designs and builds satellite communications equipment and systems, principally for military applications. This equipment is used in satellite tracking stations, control centers, spacecraft factories and range facilities. See Footnote 2 of the Notes to the Consolidated Financial Statements included elsewhere herein for more information regarding the acquisition of RT Logic.

In July 2003, the Company acquired the intellectual property rights, inventory, and certain other assets of the former Jackson & Tull Satellite Ground Systems division. The acquisition was an extension of the satellite ground systems business segment and enabled the Company to be a “turnkey” provider of full motion antennas and radio frequency (“RF”) systems used for tracking low earth orbiting satellites and launch vehicles as well as aeronautical telemetry range operations. Effective November 1, 2004, the Company disposed of the intellectual property rights, inventory and certain other assets of its Antenna Systems Division. See Footnote 2 of the Notes to the Consolidated Financial Statements included elsewhere herein for more information.

Integral Systems, Inc. is a Maryland corporation, ISO 9000 certified, and was incorporated in 1982.

Industry Background

The space industry can be broken down into the following industry sectors: infrastructure, surveillance/data collection, communications, emerging applications and support services. Both government and commercial investments fund each of these sectors. 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 U.S. Government makes up the majority of the surveillance/data collection sector of the

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space industry, making extensive use of satellites to support military operations. 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 telephone, personal communications systems, and private networks. The emerging applications sector of the space industry 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.

The Company estimates that the current worldwide command and control market represents approximately $5 billion in annual revenues. However, the Company also believes that the increasing acceptance of COTS products will lead to substantial price reductions and a subsequent decrease in the size of this market. 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 Company Solution

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

Advanced Architecture. Unlike the traditional host-based approach, the Company’s ground systems are fully distributed, consisting of a set of workstations and front-end equipment 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. The Company’s ground systems equipment is designed to be programmable, allowing a core set of hardware devices to be easily tailored to specific customer functions.

Depth of Functionality. The Company’s core product line, EPOCH IPS (Integrated Product Suite), supports satellite operations through a suite of integrated software products. This includes products for real-time satellite control and monitoring, off-line data trending, orbit analysis and database configuration. The Company’s real-time products perform daily and routine satellite operations, including commanding, telemetry processing and fault detection and correction. The trending 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 a 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. The database package defines the telemetry and command characteristics and the desired orbital elements and tolerances for each satellite.

Mixed Fleet Operations. The Company’s products are compatible with most of the world’s major manufacturer’s satellite models. This enables the company to provide a single product solution to operators who own fleets of mixed satellite models. Where previously, these operators would have several different types of ground systems for their fleet, a single, expandable system from the Company will operate the entire fleet. This reduces the end user’s costs for procurement, training, support and spare parts. It also reduces the end user’s incremental costs to add a new satellite to the fleet and provides a safer operations environment due to reduced complexity associated with a single solution.

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 antenna, RF and baseband equipment (including the Company’s own products), allowing the total system to be delivered in the most efficient configuration for each mission. The Company’s ground systems equipment products consolidate a number of functions and are both scalable and programmable to support a wide

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range of requirements. Finally, the software is supported on the most widely used computer platforms, including Sun Solaris, IBM AIX, and Windows 2000/XP.

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 ground systems and 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 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 off-the-shelf software and programmable hardware products upon which all its delivered systems are built. In addition, because the satellite infrastructure industry is increasingly requiring compliance standards, 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 software and systems through direct sales to satellite operators and systems integrators in North America, Europe and Asia. From its headquarters in Lanham, MD, the company performs worldwide marketing, sales and services, including its direct marketing efforts with U.S. Government organizations to capitalize on the growing acceptance of COTS solutions in the government sphere. The Company’s Colorado Springs office serves as the focal point for the Company’s support of its services, products and operations provided to the U.S. Air Force. Through its wholly owned European subsidiary, Integral Systems Europe S.A.S. (“ISI Europe”) headquartered in Toulouse, France, the Company provides sales, marketing, support and engineering services to the European market.

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 such as hardware testing, pre- and post-sale software support, quality assurance, project installation management and training. The Company is ISO 9000 certified to ensure the consistent delivery of high quality products and services.

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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. The Company believes that it is uniquely positioned in the industry to offer full-function ground systems, utilizing products from its RT Logic, Newpoint and SAT subsidiaries.

Command and Control Software.

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

EPOCH IPS features a modern, distributed architecture consisting of a series of servers and user workstations interconnected via an Ethernet LAN. This approach provides better performance than traditional mini-computer based ground systems at a lower cost. The EPOCH Integrated Product Suite includes the following products:

Signal Monitoring.

The Company’s wholly owned subsidiary, SAT, offers a range of software products and turnkey systems for communications signal monitoring, including MONICS, a family of software products for stand-alone and distributed satellite transponder monitoring, and SIGMON, a turnkey system for detecting terrestrial communications interference.

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Equipment Monitoring and Control.

The Company’s wholly owned subsidiary, Newpoint, offers an integrated suite of products targeted at commercial users, including communication satellite operators, communication satellite users, and general-purpose telecommunications companies. Newpoint has two flagship products: (1) COMPASS, which provides distributed monitoring and control of networked communications systems, and (2) MERCURY, a rack-mountable smart box that provides monitoring and control of local network nodes and their associated ground equipment. Newpoint also offers a number of add-ons to their core products, including Stratus, which provides carrier management for satellite transponder operations, and Eclipse, a tool for setting up and reconfiguring the communications traffic on satellite transponders.

Telemetry, Command and Range Processing.

The Company’s wholly owned subsidiary, RT Logic, offers a comprehensive set of products for satellite ground systems. The product line incorporates programmable hardware modules and common software architecture. The suite of TELEMETRIX products support telemetry processing, commanding, ranging, and remote site interfaces for a variety of applications, including tracking stations, control centers, spacecraft and payload integration, and launch range operations. The TELEMETRIX 501, 508, and 500GT products are used in satellite control centers to process the satellite telemetry and command links. The TELEMETRIX Frequency Conversion System and TELEMETRIX 70/70 perform the RF, intermediate frequency (“IF”), and baseband processing at ground antenna sites.

Image Data Reception, Processing and Distribution.

SKYLIGHT, the Company’s first turnkey product for image data processing, provides automatic, un-manned acquisition, processing, and distribution of satellite imagery to the scientific, meteorological and military communities. The SKYLIGHT bundle of hardware and software automatically tracks satellites of interest, captures their images, performs first order data processing and distributes the processed images over the internet.

The Company also offers a military version of the SKYLIGHT system, consisting of a set of standard SKYLIGHT terminals interlinked to a central command via a commercial communication satellite network. This version allows military planners to view and process weather and related imagery data in near-real time across an entire theater of operations.

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 development of software applications to interface to and augment the 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 turnkey 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 systems development.

Customers

In general, there are four major applications for satellites: communications, military applications, remote sensing and scientific research. 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.

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Commercial Communications Satellites.

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 use a single software package to operate their satellite fleet. The Company also provides its payload monitoring systems and software to satellite operators for monitoring quality of service and identification of interfering signals. The Company’s ground equipment monitor and control software is also used by satellite operators to control the ground equipment in the control center and remote equipment sites.

The Company’s products are currently flying communications satellites from most of the major satellite manufacturers, including Boeing, Lockheed Martin, Space Systems Loral, Orbital Sciences, EADS, and Alcatel. The Company’s customers include NewSkies, Echostar, GE Americom, Loral Skynet, Shin Satellite, Binariang Satellite Systems, Asiasat, SatMex, Orbital Sciences, PanAmSat, Cable & Wireless Optus, and ChinaSat. All of these operators have purchased the Company’s products to operate their fleets of geosynchronous Earth orbit (“GEO”) communications satellites.

The Company is also the leading provider of command and control products for U.S. military communications satellites.

Military Applications.

The Company provides ground systems software and equipment for multiple U.S. Department of Defense (“DoD”) programs. The Company’s products are used in a majority of the Air Force and Navy satellite control systems. The Company’s customers include multiple aerospace prime contractors such as Lockheed-Martin, Boeing, Honeywell, Northrop Grumman and Raytheon. The Company also sells directly to the DoD. The U.S. Air Force is the company’s largest single customer, providing 55% of the Company’s 2004 consolidated revenues. The Company is the prime contractor for the CCS-C (Command and Control Center – Consolidated) Contract to upgrade the Air Force’s satellite command and control system for the DSCS and Milstar satellites. The Company is also replacing the signal processing and antenna control systems at all of the Air Force Satellite Control Network (AFSCN) sites.

The Company’s products support the processing of telemetry, commanding, and ranging data, performing generation and reception of the RF links to and from the on-orbit satellites. In addition, the Company’s products are used to receive telemetry data from the space lift ranges during launch of military satellites and to test satellites at the place of manufacture.

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 (“GOES”) Program 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.

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Scientific Research.

The Company has supported a variety of diverse and complex scientific 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 (“APL”) to support the first NASA Discovery Mission, the Near Earth Asteroid Rendezvous Program (“NEAR”). NEAR was the first in a series of low-cost, small-planet exploratory missions designed to gather data about asteroids in the solar system. APL subsequently chose the Company to provide its command and control products for the Timed, Contour, Stereo and Messenger science satellites. The Company’s EPOCH IPS products form the core of the mission’s command and control ground system and also support the spacecraft integration and test (“I&T”).

The National Space Program Office (“NSPO”) for the Republic of China selected the Company to provide the complete multi-mission command and control system for their ROCSAT series of satellites. The Company also supports small satellite missions in the United States such as Orbital Sciences Corporation’s SeaStar and Microlab programs.

Marketing

The Company relies upon senior corporate management, project managers and senior technical staff for 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 periodically in Space News and other industry publications as well as delivering papers and exhibiting at industry conferences.

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.

U.S. Government Contracts

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 2004, 2003 and 2002 approximately 76%, 76% and 60%, respectively, of the Company’s revenues were derived from contracts or subcontracts funded by the U.S. Government.

The U.S. Air Force represented 55%, 50% and 22% of revenues, respectively, for fiscal years 2004, 2003 and 2002. The Company expects that at least 65% of its revenue for fiscal year 2005 will be derived from Air Force contracts and subcontracts. The loss of any one of these Air Force 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 Air Force contract will represent at least 20% of the Company’s fiscal year 2005 revenue. Under this contract, the Company is leading a team of subcontractors to produce a modern, consolidated command and control infrastructure for the military’s fleet of communication satellites, including Milstar, DSCS III, Advanced EHF and Wideband Gapfiller.

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NOAA, another U.S. Government agency, represented 15%, 19% and 31% of revenues, respectively, for fiscal years 2004, 2003 and 2002. The Company expects that approximately 9% of its revenue for fiscal year 2005 will be derived from NOAA contracts. The loss of any one of these NOAA contracts could significantly affect the Company’s performance. See Footnote Number 3 of the notes to the Consolidated Financial Statements included elsewhere herein for information pertaining to the NOAA contracts.

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,” which means termination without cause. 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 has been audited by the DCAA through its fiscal year ended September 30, 2002, and RT Logic has been audited by the DCAA through March 31, 2000. Newpoint, SAT, and ISI Europe are not currently subject to audits by the DCAA.

The Company’s contracts and subcontracts with U.S. 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 and are typically subject to modification or termination in the event of changes in funding. Congress usually appropriates funds on a fiscal year basis even though 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 Congress makes appropriations for future fiscal years. In addition, contractors often experience revenue uncertainties during the first quarter of the U.S. Government’s fiscal year, which begins October 1, until differences between budget requests and appropriations are resolved. Historically, Congress has funded all current 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.

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Non-U.S. Government Contracts

The Company also has contracts with commercial and international organizations. For fiscal years 2004, 2003 and 2002 approximately 24%, 24% and 40%, 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.

Some of the Company’s non-U.S. Government contracts are with international organizations. For fiscal years 2004, 2003, and 2002 approximately 13%, 13% and 21%, respectively, of the Company’s revenues were derived from international organizations. Revenues from foreign sources are discussed in Footnote Number 1 of the Notes to the Financial Statements included elsewhere herein. Operations in numerous countries outside the United States carry substantial managerial, operational, legal, and political uncertainties. These operations are subject to changes in government regulations and telecommunications standards, tariffs or taxes, and other trade barriers. In addition, the Company’s agreements relating to foreign operations may be enforceable only in foreign jurisdictions so that it may be difficult for the Company to enforce its rights.

The Company currently has three contracts that are subject to currency fluctuations in foreign markets. The value of these contracts is not material. However, to mitigate currency fluctuation, the Company periodically uses foreign currency exchange contracts. (See Footnote Number 15 of the Notes to the Consolidated Financial Statements included elsewhere herein for more information.) The Company may enter into additional contracts that are subject to currency fluctuation. However, there can be no assurance that the Company will enter into foreign currency exchange contracts to mitigate currency fluctuation in the future.

In addition, various agencies and departments of the U.S. Government regulate the Company’s ability to pursue business opportunities outside the United States. Exports of space-related products, services, and technical information require licenses granted by the U.S. Government. For the Company’s products, services or technical information requiring such a license, the Company does not currently have blanket authorization for their export and cannot assure that it will be able to obtain the necessary licenses or approvals on a per transaction basis.

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. In addition, although a significant portion of the Company’s revenues are generated from the sale of its services and products in commercial markets, the Company cannot assure that it will continue to compete successfully in these markets. Many of the Company’s commercial contracts are for a fixed price. This subjects the Company to substantial risks relating to unexpected cost increases and other factors outside of its control. In addition, the Company may fail to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract.

Competition

Commercial Contracts: The Company believes it is one of four companies in the United States that comprise serious competition for the development of commercial satellite ground systems. The Company considers itself to be the leader in this field, since its systems currently are installed and operational in almost every commercial satellite operator’s facility in the world. The Company expects its dominant position to continue since new satellites procured by these operators can be controlled by its systems and software as well. The Company’s

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satellite command and control products are compatible with all of the world’s production satellite types providing a competitive edge.

Military Contracts: For military programs, the Company competes with numerous companies for satellite command and control contracts, including Lockheed Martin Corporation, Raytheon Company, L3 and Northrop Grumman. Many of these competitors are significantly larger and have greater financial resources than the Company. In addition, some of these competitors are divisions or subsidiaries of large, diversified companies that have access to the financial resources of their parent companies. Some of our competitors are also current or potential customers, teammates, or subcontractors. In addition, several smaller companies have specialized capabilities in command and control image processing. There are also a number of smaller companies which compete with our subsidiaries in the areas of signal monitoring, network monitoring, and telemetry processing.

The Company’s products also face competition from certain government off-the-shelf, or “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 has made the strategic decision after discussion with intellectual property counsel not to seek patent protection for its software, hardware, or systems. None of the Company’s software, hardware or systems are patented. 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, hardware, and systems. The Company generally registers its trademarks and the copyrights with respect to new products and new versions of its software as they are developed. 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. 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. Moreover, the Company does not have confidentiality agreements with any of its employees hired before mid-December 2000. 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. 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 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.

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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 September 30, 2004, the Company had approximately 388 employees, including employees of ISI Europe in Toulouse, France, SAT Corporation in Sunnyvale, California, Newpoint Technologies in Salem, New Hampshire and RT Logic in Colorado Springs and Denver, Colorado. Of the 388 employees, 323 are full-time professionals in engineering related disciplines.

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

Industry Segments

The Company operates in four business segments:

The Company and ISI Europe build satellite ground systems for command and control, I&T, data processing, and simulation.

Through its wholly owned subsidiary, SAT (acquired August 2000), the Company offers turnkey systems and software for satellite and terrestrial communications signal monitoring.

The Company provides equipment monitoring and control software to satellite operators and the telecommunications industry through its wholly owned subsidiary, Newpoint (acquired January 2002).

Through its wholly owned subsidiary, RT Logic (acquired October 2002), the Company manufactures satellite communications equipment and systems, principally for military applications. This equipment is used in satellite tracking stations, control centers, spacecraft factories, and range facilities.

See Footnote Number 17 of the notes to the Consolidated Financial Statements included elsewhere herein for financial information regarding these segments.

Available Information

The Company’s web site address is www.integ.com.

The Company makes available free of charge on or through its internet web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material, or furnishes it to, the Commission.

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Operations of the Company and its subsidiaries are conducted in leased properties. The Company believes that it has adequate insurance coverage to protect its properties and assets. The following table describes the location, square footage and lease expiration of the Company’s existing facilities:

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.

No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended September 30, 2004.

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PART II

The Company’s common stock is traded on the NASDAQ National Market under the symbol “ISYS.” The following table sets forth for the quarters indicated the high and low sales price of the Company’s common stock and the cash dividends paid per share of common stock.

As of November 11, 2004, there were approximately 2,000 holders of record or beneficiaries of the Company’s common stock.

Prior to fiscal year 2004, the Company had not paid any cash dividends. For each of the four quarters for the year ended September 30, 2004, the Company has paid a $0.03 per share cash dividend. On December 1, 2004 the Company’s Board of Directors declared a quarterly dividend of four cents per share. The dividend will be paid on or about January 5, 2005 to shareholders on record as of December 13, 2004. The payment of future 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.”

During the fourth quarter of fiscal year 2004, the Company reacquired 2,508 shares of its stock for a total cost of $39,551.

The information required by this item regarding equity compensation plans is set forth in Item 12 of this Annual Report on Form 10-K.

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The following table presents selected consolidated financial data of the Company for the fiscal years ended September 30, 2004, 2003, 2002, 2001 and 2000. The financial data for the fiscal years ended September 30, 2000, and 2001 has been derived from the financial statements of the Company, which have been audited, by Rubino & McGeehin, Chartered, independent registered public accounting firm. The financial data for the fiscal years ended September 30, 2003 and 2002 has been derived from the financial statements of the Company, which have been audited by Ernst & Young LLP, independent registered public accounting firm. The financial data for the fiscal year ended September 30, 2004 has been derived from the financial statements of the Company, which have been audited by Grant Thornton LLP, independent registered public accounting firm, as set forth in the financial statements and notes thereto presented elsewhere herein. The following information should be read in conjunction with the Company’s financial statements and notes thereto presented elsewhere herein. See “Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 190 different satellite missions for communications, science, meteorology, and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.

The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional custom-built systems. The Company believes that it was the first to offer a comprehensive 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 most manufacturers. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites.

Through its wholly owned subsidiary, SAT, acquired in August 2000, the Company also offers turnkey systems and software for satellite and terrestrial communications signal monitoring.

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

On January 30, 2002, the Company acquired Newpoint. Newpoint provides equipment monitoring and control software to satellite operators and the telecommunications industry.

In October 2002, the Company acquired RT Logic. RT Logic manufactures satellite communications equipment and systems, principally for military applications. This equipment is used in satellite tracking stations, control centers, spacecraft factories, and range facilities.

In July 2003, the Company acquired the intellectual property rights, inventory and certain other assets of the former Jackson & Tull Satellite Ground Systems division. The acquisition was an extension of the satellite ground systems business segment and enabled the Company to be a “turnkey” provider of full motion antennas and RF systems used for tracking low earth orbiting satellites and launch vehicles as well as aeronautical telemetry range operations.

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

Contract Revenue

The Company generates revenue under three types of contracts: fixed price, cost plus, and time and material (“T&M”) contracts. 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 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 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. 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 contracts with fixed labor rates.

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 contractor.

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The percentages of revenues received by the Company from prime contracts and subcontracts for fiscal years 2004, 2003 and 2002 are as follows:

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

Sale of Software Products

Most of the Company’s contracts include the sale of proprietary software products. Sales of the Company’s software products take many forms. The Company sells (1) software only (a “Software-Only Sale”), (2) software and services together or (3) software, services and hardware together. In addition, depending on a customer’s requirements, the Company may or may not provide post-contract customer support (“PCS”).

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

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

During fiscal year 2004, the Company incurred approximately $3.7 million in Research and Development (“R&D”) costs in connection with software products.

Backlog

The Company’s estimated backlog is as follows (in thousands):

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The increase in backlog between fiscal 2004 and fiscal 2003 relates to increased bookings at both RT Logic and the Commercial division in the Ground Systems segment. The increase in backlog between fiscal 2003 and fiscal 2002 relates primarily to backlog at RT Logic.

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 75% of backlog as of September 30, 2004 will be completed during fiscal year 2005. Estimated backlog includes contract options through June 30, 2011 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 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.

Critical Accounting Policies

The Company believes the following accounting policies are critical to the understanding of the Company’s financial condition and results of operations.

Revenue Recognition

The Company provides services under fixed price contracts for which revenue is generally recognized using the percentage of completion method based on the relationship of actual costs incurred to total costs estimated over the duration of the contract. These estimates regarding costs underlie the Company’s determinations as to overall contract profitability and the timing of revenue recognition. If the Company does not accurately estimate the resources required or the scope of the work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then actual results may differ from projected results and losses on contracts may need to be recognized.

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

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Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of individual accounts receivable balances, including the credit worthiness of each customer and the period in which customers’ financial condition deteriorate and they are no longer able to pay the balances owed to the Company.

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

Goodwill and Other Intangible Assets

The Company’s acquisitions of other companies have resulted in the acquisition of certain intangible assets and goodwill. Goodwill is subject to impairment to the extent the Company’s operations experience significant negative results. These negative results can be the result of the Company’s individual operations or negative trends in the Company’s industry or in the general economy, which impact the Company. To the extent the Company’s goodwill is determined to be impaired, then these balances are written down to their estimated fair value on the date of the impairment. The Company conducts an annual review for impairment and determining when and if an impairment has occurred involves a significant amount of judgment. Management bases its judgment on a number of factors including viability of the businesses acquired, their integration into the Company’s operations, the market in which those businesses operate and their projected future results, cash flow projections, and numerous other factors. The results reported in any given period could be impacted by management’s determination as to when an impairment has occurred.

Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force reached consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides a model for how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The model requires that revenue arrangements with multiple deliverables should be divided into separate units of accounting if the arrangements meet certain criteria. EITF 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company’s implementation of the guidance contained in EITF 00-21 did not have a material effect on its financial condition, results of operations, or liquidity.

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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, 2004, 2003 and 2002:

Revenue

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

For the fiscal years ended September 30, 2004, 2003, and 2002, the Company’s revenues were generated from the following sources:

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FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003

On a consolidated basis, revenue increased 9.4%, or $7.7 million, to $90.3 million for the fiscal year 2004, from $82.6 million for fiscal year 2003. Revenue for fiscal years 2004 and 2003 for each of the Company’s segments is shown in the following table:

Revenue increased on a year-to-year basis for all of the Company’s operating segments. Revenue increases in the Company’s Satellite Ground Systems segment pertain to increased sales volume as a result of the Company’s contract awards with the U.S. Air Force (specifically the CCS-C and SCNC programs) that were made in the Spring of 2002. Revenue from this segment’s Air Force customer increased approximately $7.1 million, more than offsetting revenue decreases of $1.7 million from NOAA and revenue decreases of $3.5 million in revenue from the segment’s I&T(Integration & Test) division. During the fourth quarter of fiscal year 2004, the Company disbanded the I&T division and merged its operations with the segment’s Government and Commercial divisions. The remaining revenue increase from the segment (approximately $1.3 million) is primarily attributable to increased revenue from the segment’s Antenna division that earned revenue for a full twelve-month period in fiscal year 2004 as compared to only five months in fiscal year 2003.

Revenue levels for SAT and Newpoint were up 34.6% and 17.0% respectively in fiscal year 2004 compared to fiscal year 2003 and generally relate to increased bookings and increased shipments of new orders. Both SAT and Newpoint sell primarily to commercial satellite operators and commercial satellite users where market conditions have been depressed during the past few years. The Company believes that these markets are beginning to economically improve, as evidenced by the revenue increases in fiscal year 2004, and if this improvement continues, the Company believes that both SAT and Newpoint should be able to post continued revenue gains in future fiscal periods. The Company is also currently proposing both SAT and Newpoint products on several outstanding government bids.

The revenue generated by RT Logic for fiscal year 2004 was the highest annual revenue in that subsidiary’s history and is 13.4% greater than the revenue posted in fiscal year 2003.

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 the product. By contrast, gross margins on equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 40%. These definitions and ratios generally apply across all segments.

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During fiscal year 2004, cost of revenue increased by 8.0%, or $4.4 million, compared to fiscal year 2003, increasing from $55.4 million to $59.8 million. Gross margin increased from $27.2 million to $30.5 million, an increase of $3.3 million, or 12.2%, during the periods being compared. Cost of revenue and gross margin for fiscal years 2004 and 2003 for each of the Company’s segments are shown in the following table:

Gross margin increased for all operating segments on a year-to-year basis. However, cost of revenue increases for the Company’s Satellite Ground Systems segment were disproportionately greater than the revenue increases during the periods compared, resulting in a lower gross margin percentage for this segment for the current fiscal year compared to last fiscal year (20.8% compared to 21.7%). The lower gross margin percentage for the segment is primarily attributable to contract overruns in the segment’s newly established Antenna division. Specifically, several Antenna division contracts were under-priced and under-bid, primarily with respect to direct material and equipment costs. During fiscal year 2004, this division recorded $1.8 million of direct material and equipment costs compared to revenue of only $2.0 million leaving virtually no funding to cover direct labor and associated indirect costs. During fiscal year 2004 in its entirety, the Antenna division posted a gross margin deficit of $1.2 million compared to a gross profit of approximately $100,000 during fiscal year 2003.

This segment’s Product division also experienced a decline in gross margin of $600,000 between fiscal year 2004 and fiscal year 2003 as a result of decreased license revenues and increased product expenses. The segment’s I&T division posted a $1.1 million decrease in gross margin during the periods being compared as result of decreased revenues. This division was disbanded during the fourth quarter of fiscal year 2004.

The segment’s Government division more than offset the negative performance of the segment’s Antenna, Product and I&T divisions, recording increased gross margins from its Air Force customer in fiscal year 2004 of $3.1 million on increased revenues of $7.1 million. These increases principally resulted from increased equipment and software deliveries on the fixed price portion of the Company’s CCS-C contract with the Air Force. The Company typically experiences higher margins on its fixed price work than it does on its cost reimbursable contracts.

The increases in gross margin at SAT and Newpoint relate to increased revenue available to cover fixed costs and the effects of cost cutting measures implemented during the prior fiscal year. Gross margin as a percentage of revenue at SAT increased to 42.4% from 40.9% while gross margin as a percentage of revenue at Newpoint increased to 55.2% from 24.0% on a year-to-year basis.

During the current fiscal year, the Space Communication Systems (RT Logic) segment’s gross margin percentage against revenue was flat at 53.7% compared to 53.6% for last fiscal year. However, gross margin increased by

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approximately $1.7 million as a result of increased revenue. The segment’s gross margin dollar performance is the highest in its history and contributed to a record year for operating income for that segment.

Operating Expenses

Operating Expenses for fiscal year 2004 and 2003 for each of the Company’s segments are shown in the following table:

In the Company’s Satellite Ground Systems segment, Selling, General & Administrative (“SG&A”) expenses increased by approximately $1.5 million during the periods being compared. The increase principally relates to increased marketing and proposal costs related to new Air Force opportunities coupled with increased management and administrative costs needed to operate a considerably larger business base. As a percentage of revenue, SG&A for this segment represented 13.1% of revenue in the current period compared to 11.3% of revenue during fiscal year 2003. R&D expenses for this segment in both fiscal years primarily relate to the segment’s SKYLIGHT product. Product amortization has increased by approximately $60,000 during fiscal year 2004 as compared to fiscal year 2003 due to higher capitalized development costs related to the Company’s EPOCH product line.

At SAT, period-to-period SG&A costs are down approximately $60,000 due to cost cutting measures implemented by the Company in the 2003 fiscal year. SAT also recovered $56,000 of bad debts provided for in prior years during fiscal year 2004, further contributing to the improvement in year-to-year SG&A costs.

R&D expenses at SAT have decreased from $1.1 million to $850,000 in the periods compared. The decrease in current period R&D expenses resulted from the more effective utilization of the segment’s engineering staff on

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direct contracts as opposed to R&D efforts. Product amortization was $600,000 in both fiscal year 2004 and fiscal year 2003.

Newpoint’s current period SG&A expenses decreased approximately $145,000 compared to fiscal year 2003, resulting from prior year cost cutting efforts. The $180,000 increase in R&D spending at Newpoint resulted from new product undertakings at this segment.

R&D expenses at RT Logic increased from $1.4 million in fiscal year 2003 to $2.2 million in fiscal year 2004 as a result of new product undertakings, consistent with RT Logic’s fiscal year 2004 plan.

The current period amortization expenses for both Newpoint and RT Logic relate to the amortization of intangible assets that were acquired at the time of each company’s acquisition by the Company.

Income from Operations

Income from Operations for fiscal year 2004 and 2003 for each of the Company’s segments is shown in the following table:

Income from operations during the periods compared decreased by approximately $1.6 million in the Company’s Satellite Ground Systems segment principally as a result of increased operating expenses described above. Operating income for the segment decreased by approximately $1.5 million as a result of operating losses posted by the segment’s Antenna division.

SAT’s operating loss decreased considerably for the periods compared as this segment posted higher revenues and reduced current period operating expenses.

Newpoint posted a modest operating profit of approximately $6,000 for the current fiscal year compared to operating losses of approximately $915,000 for fiscal year 2003, resulting from increased revenues coupled with higher gross margins that were the result of prior period cost cutting measures.

RT Logic’s operating income increased $1.4 million or 18.8% in fiscal year 2004 over last fiscal year’s results. RT Logic operating income is the highest in that subsidiary’s history and was achieved despite additional R&D spending of $840,000 in fiscal year 2004 and primarily relates to $1.7 million of gross margin increases and amortization decreases of approximately $510,000.

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Other Income/Expense

During fiscal year 2003, the Company recorded other expense of approximately $1.4 million related to its investment in the common stock of Loral Space and Communications Ltd (“LOR”). LOR filed a voluntary petition for bankruptcy under Chapter 11 of the Federal Bankruptcy Code on July 15, 2003. As a result of this filing, the Company believed that its investment in this entity had been permanently impaired and accordingly wrote down its carrying value to approximately $50,000 as of September 30, 2003. No such impairment occurred in fiscal year 2004.

The Company recorded approximately $46,000 of gains on the sale of marketable equity securities during fiscal year 2004 compared to $140,000 of such gains last fiscal year.

During fiscal year 2004, the Company also recorded $615,000 of interest income compared to $590,000 of interest income recorded for fiscal year 2003.

The changes in miscellaneous expense between the periods being compared are considered immaterial.

Income Before Income Taxes/Net Income

Income before income taxes increased by approximately $2.7 million to $10.6 million from $7.9 million during the periods compared, principally due to operating income improvements from the Company’s wholly-owned subsidiaries and the lack of a current year impairment charge. These gains were partially offset by decreases in operating income posted in the Company’s Satellite Ground Systems segment, more specifically the segment’s Antenna division.

The Company’s effective tax rate was 36.2% and 36.3% for fiscal years 2004 and 2003, respectively.

As a result of the above, net income increased to approximately $6.8 million during fiscal year 2004 from approximately $5.0 million during fiscal year 2003.

Fiscal year 2004 revenue, operating income, net income and earnings per share were Company historic annual records, exceeding prior records posted in fiscal year 2003 by 9%, 18%, 35% and 31%, respectively.

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

On a consolidated basis, revenue increased 62%, or $31.7 million, to $82.6 million for fiscal year 2003, from $50.9 million for fiscal year 2002. Revenue for fiscal years 2003 and 2002 for each of the Company’s segments is shown in the following table:

Revenue increases in the Company’s Satellite Ground Systems segment relate to increased sales volume as a result of the Company’s contract awards with the U.S. Air Force (specifically the CCS-C and SCNC programs) that were

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made in the Spring of 2002. Revenue levels for SAT and Newpoint were down 9.6% and 5.0% respectively, in fiscal year 2003 compared to fiscal year 2002 primarily as a result of decreased backlog of orders, decreased bookings of new orders and overall poor market conditions in the commercial satellite market. Newpoint revenue for fiscal year 2002 represented only an eight-month period, as the Company did not acquire this entity until January 30, 2002.

RT Logic was acquired subsequent to September 30, 2002, so the Company reported no revenue for the Space Communication Systems segment for fiscal year 2002.

Cost of Revenue/Gross Margin

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 40%. These definitions and ratios generally apply across all segments.

During fiscal year 2003, cost of revenue increased by 47.2%, or $17.7 million, compared to fiscal year 2002, increasing from $37.6 million during fiscal year 2002 to $55.4 million during fiscal year 2003. Gross margin increased from $13.3 million to $27.2 million, an increase of $13.9 million, or 105%, during the periods compared. Cost of revenue and gross margin for fiscal years ended 2003 and 2002 for each of the Company’s segments are shown in the following table: