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)
x     ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF  THE  SECURITIES
      EXCHANGE ACT OF 1934 [FEE REQUIRED]
      For the fiscal year ended December 31, 1996.
                                      OR
o     TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
      For the transition period from __________ to __________

                       Commission File Number:   0-25590

                           Datastream Systems, Inc.
            (Exact name of registrant as specified in its charter)

      Delaware                                    57-0813674
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)

50 Datastream Plaza, Greenville, South Carolina   29605
(Address of principal executive offices)         (Zip Code)

      Registrant's telephone number, including area code: (864) 422-5001
       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value
                               (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 o
      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  the  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. o
      Aggregate  market  value of the voting stock held by  non-affiliates  of
the Registrant as of March 31, 1997:  $133,810,429(?).

      Number of shares of Common Stock outstanding as of March 31, 1997:
9,290,818

                      DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement of Datastream Systems, Inc. for
its  Annual  Meeting  of  Stockholders  scheduled  to be held June 13,  1997 are
incorporated  by  reference  into  Part III of this  Report.  Other  than  those
portions specifically  incorporated by reference herein, the Proxy Statement for
the Annual Meeting of  Stockholders  scheduled to be held on June 13, 1997 shall
not be deemed to be filed as part of this Report.



<PAGE>

                                  PART I


      "Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995:  Certain of the  statements  contained  in the body of this  Report are
forward-looking  statements  (rather than historical  facts) that are subject to
risks and  uncertainties  that could cause actual  results to differ  materially
from those described in the  forward-looking  statements.  In the preparation of
this  Report,  where such  forward-looking  statements  appear,  the Company has
sought to  accompany  such  statements  with  meaningful  cautionary  statements
identifying  important  factors  that  could  cause  actual  results  to  differ
materially from those described in the forward-looking statements. An additional
statement made pursuant to the Private Securities  Litigation Reform Act of 1995
and summarizing the principal risks and uncertainties  inherent in the Company's
business  is included  herein  under the caption  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results of  Operations  -- Safe  Harbor
Statement."  Readers of this  Report  are  encouraged  to read these  cautionary
statements carefully.

Item 1. Business.

    Datastream Systems, Inc. ("Datastream" or the "Company") develops,  markets,
sells and supports  Microsoft  Windows-based  personal computer software for the
industrial automation market. Effective use of Datastream's software saves costs
by reducing  downtime  associated with key equipment  failure,  optimizing spare
parts  inventories,  improving  purchasing  efficiencies  and  reducing  overall
maintenance  costs. In 1996,  Company currently derived over 99% of its software
unit  sales  from  Windows-based  products,  including  the  Company's  flagship
product,  MP2 for Windows,  which was named Plant  Engineering  magazine's  1994
"Product of the Year" in the Software  category.  The Company is an  established
leader in the market for "computerized  maintenance management systems" ("CMMS")
based on unit sales, having sold over 27,000 CMMS systems. Datastream's strategy
is to  maintain  its  position  in the CMMS  market  by  providing  feature-rich
software  solutions to the maintenance,  repair and operations  ("MRO") industry
and being a value-price leader in each market in which it competes.

    The Company was  incorporated  as a South  Carolina  corporation in February
1986 upon  consummation  of the acquisition of the assets and liabilities of the
Datastream  Systems  Division from a subsidiary of Wisconsin Power & Light.  The
Company  reincorporated as a Delaware corporation in January 1995. The Company's
executive offices are located at 50 Datastream Plaza, Greenville, South Carolina
29605, and its telephone number is (864) 422-5001.

    On December 31, 1996,  Datastream  acquired all of the  outstanding  capital
stock of SQL Systems Group,  B.V. ("SQL") for cash and shares of common stock of
Datastream having an aggregate value of approximately  $34 million,  $17 million
in cash,  $14 million in stock issued  pursuant to  Regulation  S, $3 million in
escrowed  stock,  and the assumption of outstanding  liabilities.  SQL (which is
based in Rotterdam,  Holland)  develops,  markets,  sells and supports high-end,
client/ server CMMS for sale  internationally  and domestically.  SQL's products
are used in businesses,  government  agencies and other  organizations to assist
these  entities in  maintaining  high-value  capital  assets such as facilities,
plants and manufacturing  production  facilities.  Like the Company's  products,
SQL's  products are designed to enable  customers to reduce  down-time,  control
maintenance expenses,  cut spare parts inventories and costs, improve purchasing
efficiency and more effectively  deploy productive  assets,  personnel and other
resources.

    SQL was  incorporated  as a Dutch  corporation  in  February  1985 to sell a
portfolio of maintenance  management  software  products.  SQL currently derives
over 75% of its revenues from sales of its R5 CAMMS product. In 1988, SQL merged
with  an  English  Subsidiary  of  Kvaerner.  During  1994,  SQL  acquired  a US
subsidiary  of Hartford  Steam  Boiler,  and during 1996,  SQL acquired a French
partner from Sirlog, a leader in the French CMMS market. SQL's executive offices
are located at Marconistraat 16, Rotterdam,  The Netherlands,  and its telephone
number is 31 10 448 0700.

    As used  herein,  except as otherwise  indicated  by the context,  the terms
"Datastream"  and "the Company" are used to refer to the  historical and current
business and operations of Datastream  Systems,  Inc. and its subsidiaries other
than SQL and the term  "SQL" is used to  refer  to the  historical  and  current
business and  operations  of SQL Group,  B.V. and it  subsidiaries.  Because the
acquisition  of SQL was  completed on the last day of 1996 and was accounted for
as a purchase,  SQL's results of  operations  will be included with those of the
Company beginning in 1997.  Accordingly,  operations data provided for SQL prior
to 1997 is give solely for providing  historical  perspective about SQL prior to
its acquisition by the Company.


Industry

    The  computerization of maintenance and repair tasks has historically lagged
behind the  computerization of other corporate  functions such as production and
finance.  Companies  have  historically  neglected  the  computerization  of the
maintenance  and  repair  functions  because  of  the  low  priority  placed  on
preventive  maintenance  management and the relative lack of knowledge about and
experience  with  the  products  and  services  available.   Historically,  most
companies adopted manual methods of monitoring their capital assets, maintaining
parts inventories, scheduling maintenance tasks and ordering repair services.

    In recent  years,  industrial  corporations  have been faced with  issues of
increasing  competitiveness,  often on a global  basis.  They have  responded by
seeking new ways to reduce  costs,  improve  efficiency  and  increase  capacity
utilization.  Structural  changes  implemented by these  companies have included
placing  emphasis  on  core  competencies  and   restructuring,   downsizing  or
eliminating  operations  that do not contribute to financial  performance.  As a
result, departments responsible for maintenance and repair tasks have been asked
to ensure  equipment  performance,  uptime and  availability  with  increasingly
diminished resources.  This pressure has forced maintenance  departments to look
for new ways to manage these  activities  such as more  effective  scheduling of
equipment downtime and maintenance personnel and controlling inventory and other
costs.  Today's  sophisticated  maintenance  departments  also  seek  to  employ
statistical  analysis  techniques  such as statistical  preventive  maintenance.
While the use of computers in maintenance  departments has lagged, this trend is
being  reversed  as  companies  emphasize  cost  reduction  to  increase  global
competitiveness  and as reductions in prices and increases in computing power of
personal computers have lead to a proliferation of these tools in industry.

    The term "computerized  maintenance  management  systems" generally includes
any  computer  software  application  designed to track,  monitor  and  maintain
histories on high value capital assets such as production equipment, spare parts
inventories,  plants  and  facilities  and to  compare  and  contrast  key asset
performance  data.  Manual methods  represent an inefficient way to perform data
collection  and   statistical   analysis.   Catastrophic   equipment   failures,
sub-optimal  equipment  performance  and  unnecessary  "preventive  repairs" are
common  occurrences  at  facilities  that do not employ  some means of  managing
maintenance  and repair  activities.  The advent of CMMS has,  however,  enabled
corporations  to increase  efficiency  and reduce costs by, among other  things,
reducing  the  probability  of  catastrophic   failures,   reducing  unscheduled
downtime,  eliminating  costly  excess  repair  parts  inventories  and allowing
maintenance tasks to be scheduled more effectively to permit maximum utilization
of resources.  The resulting incremental gains in efficiency generally translate
directly into lower operating costs.

    A 1993  benchmarking  study published by A.T. Kearney,  Inc.  indicates that
maintenance  costs range from  approximately  1% to as much as 10% or more of an
organization's sales, depending on the industry. Datastream believes its systems
can  reduce  these  costs by 10% to 20%.  In its July  1996  report,  Automation
Research  Corporation  ("ARC")  revised its  estimates  of growth in CMMS demand
upward and  reported  that  approximately  $554  million  (versus  its  previous
estimate of $486  million) was spent on CMMS  software  and related  services in
1995 and that a $1 billion  market for CMMS software will exist by the year 1998
(versus  2000),  and that a $1.3 billion market will exist by the year 2000. ARC
notes that the Compound  Annual  Growth Rate (CAGR) of demand for CMMS  software
and services is 18.9%.  The Gartner Group  projects a $1 billion market for CMMS
software  and related  services by the year 2000 and a $2 billion  market by the
year 2002. A 1994 study prepared for Datastream by Market Insight indicates that
only approximately 15% of corporate and governmental users surveyed utilize CMMS
software  to track  maintenance  functions,  and that  nearly 60% of these users
still perform such tasks manually.  Although these figures are only projections,
management believes they reflect the substantial  potential for future growth in
the use of CMMS.

    The market for CMMS software is relatively fragmented, with an estimated 200
vendors competing for market share. Datastream's sales efforts have historically
been  concentrated  at the lower end of the CMMS market,  and the Company  could
encounter  competition  in this segment  from  vendors  that have  traditionally
provided  software  for  mainframes  and  minicomputers  and are now  seeking to
convert  their  systems  for  use  in  the  personal   computer  ("PC  network")
client/server  environment.  The acquisition of SQL enables the Company to begin
to compete in the high-end segment of the CMMS market.

    Certain competitors have greater financial,  marketing,  service and support
and technical resources than the Company and SQL. In addition, as the PC network
client/server market continues to develop,  companies with significantly greater
resources than Datastream may seek to introduce products  specifically  designed
to provide CMMS solutions on PC network  client/server  systems at lower prices,
or  to  form  strategic   alliances  with   competitors  of  the  Company.   See
"--Competition."


Company Strategy

    The Company's  objective is to leverage its leadership  position in the CMMS
market by providing  feature-rich  software solutions to the MRO industry and by
being a  value-price  leader in each segment of the market in which it competes.
To achieve this  objective,  Datastream and SQL intend to continue to pursue the
following strategies:

    Enhance product offerings.  The foundation of the Company's past success has
been the innovative quality of its product offerings and the value the Company's
products  provide to its customers.  In 1993,  1994, 1995 and again in 1996, the
Company was awarded Plant Engineering  magazine's Software "Product of the Year"
for its products- SideArm for Windows, MP2 for Windows, the Personal Maintenance
Assistant,  and MaintainIt  Pro,  respectively.  MP2 for Windows  includes audit
trail, warranty tracking and statistical predictive maintenance ("SPM") features
that  are  not  commonly  available  in  competitive   products.   The  Personal
Maintenance  Assistant is based on the Apple Newton  operating system and is the
first entirely  portable,  handheld work order system that can be taken and used
at the maintenance job site.  MaintainIt Pro provides is a feature rich, easy to
use, visually attractive product that is based on the Microsoft Access database.
Unlike many  software  companies,  Datastream  provides free upgrades of Company
products  to  customers  that  subscribe  to  annual   maintenance  and  support
contracts.  During  1996,  the Company  released  Version 4.6 of MP2 for Windows
which  is  designed  to run  under  Microsoft  Windows95  operating  system;  an
entry-level product called MaintainIt Pro which is based on the Microsoft Access
database; a German Language version of MP2 for Windows; RequestLink, an Internet
work order request system; and beta versions of MP2 Professional and Enterprise,
client/server  products  that  utilize the  Microsoft  SQL Server  database.  To
satisfy  the   increasingly   sophisticated   demands  of  large   multinational
corporations,  through the acquisition of SQL, the Company now offers SQL's high
end,  Oracle-based R5 CAMMS (Computerized  Asset Management  Maintenance System)
product.

    Utilize its cost-effective telesales program to increase market share. Given
the large and  relatively  untapped  nature of the Company's  potential  market,
Datastream  seeks to gain  market  share  through its  cost-effective  telesales
efforts. The relatively  inexpensive nature of the Company's systems (which sell
for an average of $179, $3,700, and $13,400 for MaintainIt, MP2 for Windows, and
MP2  for  Windows  Client/Server,  respectively)  makes  Datastream's  telesales
approach a very  cost-effective  means of accessing the Company's  target market
and achieving  gains in market share.  The Company seeks to use its initial sale
as a platform  from which to sell the customer (or  affiliates  of the customer)
additional  products and services.  During 1996, the Company  expanded its sales
efforts through the addition of both a low-end  `channel' sales force selling to
catalogue,  retail and OEM customers, and a  geographically-dispersed,  regional
outside sales force.  During 1996,  Datastream also increased the size and scope
of its third-party  distributor network in those countries where the size of the
local market did not warrant a direct  investment.  The Company is continuing to
aggressively  add sales  personnel  to increase  the scope of its channel  sales
efforts,  telesales efforts and direct selling efforts, both domestically within
Datastream and  internationally  within SQL, and sales support personnel in both
companies to increase the scope of the international distributor network.

    Increase  applications  engineering,   training  and  support  revenues.  As
Datastream's  customers  migrate  to more  complex  CMMS  systems  (particularly
client/server  systems),  management expects that opportunities will increase to
maximize applications engineering,  training and support revenues. The extent to
which  this  migration  will  actually  occur is  dependent  upon the  continued
acceptance in the marketplace of  client/server  computing as a computing model,
the  success  of  the  Company's  client/server  offerings,   customer  spending
decisions  and  other  factors  beyond  the  control  of the  Company.  In 1996,
Datastream more than doubled the number of regional  training  classes it offers
and  substantially  increased  the  capacity  of  its  Applications  Engineering
Department,  which provides  consulting and advisory  services.  The Company has
also expanded its recently established Integration Services Group, whose mission
is  to  meet  the  sophisticated  systems  integration  needs  of  client/server
customers,  and its Customization Group, which focuses on establishing  industry
expertise in the automation of MRO  activities.  The  acquisition of SQL further
extends  the  ability of the  Company to service an  increasingly  sophisticated
customer  base.  The  Company  emphasizes  the  importance  of  product  support
concepts,  which  provide a recurring  revenue  stream and  continued  long-term
relationships with Datastream's customers.

    Penetrate international markets.  International sales of Datastream products
increased  to 13.4%  of  Datastream's  revenues  for  1996  (from  10.7% of 1995
revenues), and management believes that substantial  international demand exists
for high-quality  software products with industrial  applications.  To meet this
demand,  Datastream increased international sales in 1996 through the engagement
of distributors in Italy and Puerto Rico to complement those previously  engaged
in Australia,  South Africa and Malaysia.  In September 1996, the Company opened
an office in The Netherlands to further  penetrate the European market. In 1996,
Datastream also released a German  language  version of MP2 for Windows to serve
markets Germany,  Austria and Switzerland.  The development of a French language
version is underway and future  projects will include the  development  of other
language versions of MP2 for Windows. In addition, in December 1996, the Company
completed the  acquisition of SQL, an established  leader in the European market
for CMMS.  SQL held the largest market share of CMMS vendors in Europe with 1996
sales of  approximately  $17.3  million.  Based on a 1995 study by ARC,  SQL was
estimated to have a worldwide  market share of 6.4% and was the largest European
based CMMS vendor with an estimated European market share of 13.0%. According to
ARC, Europe accounted for 24% of the total worldwide demand for CMMS in 1995. No
vendor of CMMS holds more than 17% of the market in Europe.

    Increases in  international  sales as a percentage of revenues  represents a
positive  trend,  although  changes in the value of the foreign  currencies from
which such  revenues  are derived  relative to the United  States  dollar  could
contribute to fluctuations in Datastream's  results of operations and affect its
financial  position.  Gains and losses on  translation  to United States dollars
could influence the Company's results of operations.

    Establish new strategic alliances. Datastream seeks to leverage its position
as the  established  unit sales  leader in the CMMS market by entering  into new
strategic   relationships  with  leading  companies  in  the  MRO  and  software
industries,  thereby  opening  new sales  channels  and  enhancing  its  product
offerings.  Continuation of the Company's leadership position in the CMMS market
is  primarily  a function  of  continued  customer  acceptance  of  Datastream's
products and the effects of  competitive  pressures  experienced  by the Company
from CMMS products offered by its competitors,  as well as the Company's success
in establishing and maintaining effective strategic relationships.  In 1994, the
Company  entered  into a  cooperative  relationship  with  W.W.  Grainger,  Inc.
("Grainger"),  a $3 billion nationwide  distributor of industrial  equipment and
components  sold  through  more  than 1400  sales  representatives  and  account
specialists.  This  agreement  gives  Datastream's  customers  direct  access to
Grainger's  Electronic Catalog of over 90,000 items of industrial and commercial
equipment  and supplies for their MRO needs.  This  relationship  also  provides
Datastream  with an  additional  channel for selling its products to  Grainger's
customer base.  Datastream also recently developed a paperless work order system
that allows MP2 for Windows to operate on Apple  Computer,  Inc.'s  Apple Newton
operating  system (a  development  project  that  management  believes  could be
replicated  with other handheld  devices) and, in  coordination  with Wonderware
Software  Development  Corporation  ("Wonderware"),  completed an automated work
order system that responds to requests  from  Wonderware's  InTouch  man-machine
interface software. In 1996, Datastream signed a distribution  agreement with J.
Blackwood & Sons, Ltd.  ("Blackwood's") a $420 million distributor of industrial
equipment and components located in Australia.  In 1996, Datastream also entered
into an a  strategic  alliance  with  Deere and  Company  ("John  Deere").  This
agreement gives customers of John Deere's  industrial  division direct access to
the John Deere on-line ordering system for John Deere spare parts. Included with
each sale of  equipment  (e.g.  front end loaders,  fork lifts,  etc.) from this
division is a copy of Datastream's  MaintainIt  product that contains a complete
listing of spare parts for John Deere industrial  equipment These  relationships
and alliances provide additional and expanded channels of distribution for sales
of Datastream products.


Products

    The  Company  develops,  markets,  sells and  supports  innovative  personal
computer software for the industrial  automation market.  Datastream's  software
products  assist  customers  in  managing  high-value  plants,   facilities  and
production  equipment for increased  efficiency and productivity.  The Company's
products  are  designed  to  enable  customers  to  reduce   downtime,   control
maintenance expenses,  cut spare parts inventories and costs, improve purchasing
efficiency and more effectively  deploy productive  assets,  personnel and other
resources.  In 1996, Datastream derived over 99% of its software unit sales from
its Windows-based products, SideArm for Windows, MaintainIt, MaintainIt Pro, MP2
for Windows and MP2 for Windows Client/Server. Datastream products have garnered
Plant  Engineering  magazine's  "Product  of the  Year"  award  in the  Software
category  in each of the last  four  years:  MaintainIt  Pro in  1996,  Personal
Maintenance  Assistant in 1995,  MP2 for Windows in 1994 and SideArm for Windows
in 1993.

    In  1996,   through  the   acquisition  of  SQL,  the  Company  added  SQL's
Oracle-based R5 CAMMS product to its product mix.  Management  believes that the
addition  of this  product  will give the  Company  increased  opportunities  to
penetrate into the high-end of the CMMS market.

    The following chart describes the evolution of the Company's CMMS systems:

                                                              Initial
                                                            Release Date
    Package/Platform               Description
MP2 (DOS)................  Predecessor of MP2 for Windows.   June 1989

SideArm (DOS)............  Predecessor of  SideArm for      December 1990
                           Windows.

SideArm for Windows......  Microsoft Windows operating     September 1993
                           environment; provides work
                           orders, work request system,
                           inventory management, basic
                           graphs and reports.

MP2 for Windows..........  Microsoft Windows operating       April 1994
                           environment; provides work
                           orders, work request system,
                           statistical process control,
                           graphs and reports, interface
                           with barcode and other
                           handheld devices, inventory
                           and purchasing, OSHA
                           regulations, training
                           management, audit trail,
                           security, FDA validation
                           specifications, access to
                           Grainger's Electronic Catalog
                           and network capability.

MaintainIt...............  Microsoft Windows operating      August 1995
                           environment; provides work
                           order scheduling, equipment
                           records, inventory, reports
                           and analysis tools.

Datastream Personal        Microsoft Windows operating      August 1995
Maintenance Assistant      environment; provides work
on Apple Newton..........  orders, work request system, 
                           statistical process control,
                           graphs and reports.

MP2 for Windows            Microsoft Windows operating     September 1995
    (Spanish language)...  environment; Spanish language
                           screens, text and documentation;  
                           provides work order scheduling, 
                           equipment records, inventory, 
                           reports and analysis tools.

MP2 for Windows            User-interface and              November 1995
  (client/server)........  functionality identical to 
                           MP2 for Windows. The client/
                           server version of MP2 for 
                           Windows is compatible with 
                           Oracle databases that reside
                           on Unix, OS/2 and DOS/Windows
                           database servers.

MP2 for Windows95 and NT   Microsoft Windows95 and NT 32    June 1996
                           bit operating environment;
                           provides the same functions
                           as MP2 for Windows 16 bit
                           operating system


                                                              Initial
                                                            Release Date
    Package/Platform               Description

MP2 for Windows            Microsoft Windows operating      September 1996
    (German language)....  environment; German language
                           screens, text and documentation;  
                           provides work order scheduling, 
                           equipment records, inventory, 
                           reports and analysis tools.

MaintainIt Pro             Microsoft Windows operating     September 1996
                           environment; provides work
                           order scheduling, equipment
                           records, inventory, reports
                           and analysis tools On the
                           Microsoft Access database

RequestLink                Internet/e-mail electronic      September 1996
                           work order request system
                           provides remote work order
                           access to Datastream products
                           through Lotus cc:Mail/Notes,
                           Microsoft Mail/Exchange, or
                           Internet mail (SMTP/POP3)

MP2 for Windows for        User-interface and               December 1996 
Microsoft SQL Server 5.0   functionality identical to 
Server 5.0 (Beta)          MP2 for Windows.
  (client/server)........  The client/server version of
                           MP2 for Windows is compatible with
                           Microsoft SQL  databases that
                           reside on Windows NT database
                           servers.

Oracle Financials 1.0      Provides data interchange       December 1996
(Beta).........            capabilities between MP2 for
                           Windows Client/Server  for 
                           Oracle  databases  with
                           Oracle Financials suite of products.

R5 CAMMS                   Oracle Designer/Developer      December 1996 (1)
                           2000, Oracle Forms 4.5, 
                           Oracle 7 database product
                           developed, marketed, sold and
                           supported by SQL.  High-end
                           multi-language, multi-platform, 
                           double-byte client/server
                           technology.

                           (1)  Originally developed in 1994 by SQL,
                           which was acquired in December
                           1996 by Datastream.



    SideArm for Windows.  SideArm for Windows is an  off-the-shelf,  maintenance
management  package that provides tools for generating  work orders,  scheduling
preventive maintenance, controlling inventory, recording equipment histories and
producing  basic charts and graphs.  It is designed for intuitive use,  enabling
unsophisticated users to begin using the software immediately upon installation.
Accordingly,  it features pull-down menus, an array of shortcuts and hot keys, a
context-sensitive  help function and a series of "quick-entry"  commands for the
more  frequently  used  functions  of  the  package.   SideArm  for  Windows  is
"multi-tasking"  (e.g.,  permits the user to work on as many as 10  functions at
once),  has enhanced  repair  parts  inventory  control  features and contains a
Service  Request  module that allows  facilities  managers to  distinguish  work
requests  from work  orders  and  thereby  enhances  the  manager's  ability  to
prioritize  tasks and  maximize  available  resources.  SideArm  for  Windows is
available in either single user or networked versions.

    The Company  continues to license and support the predecessor of SideArm for
Windows,  known as SideArm,  for use in DOS operating  environments.  Datastream
designs SideArm to be flexibly  enhanced and upgraded.  For example,  first-time
users can purchase the  single-user DOS version and upgrade to a network version
later.  Datastream  provides  conversion programs to convert DOS and SideArm for
Windows packages to MP2 for Windows.  This allows users of entry-level  packages
to seamlessly upgrade to MP2 for Windows.

    MP2 for Windows. MP2 for Windows is a full-featured,  integrated maintenance
system  that  includes  a  flexible  security  system,  sophisticated  analysis,
reporting and regulatory compliance  capabilities and a set of precise tools for
generating work orders,  tracking  equipment  histories,  managing inventory and
purchasing  functions,  maintaining complete labor records and allocating scarce
maintenance resources.  It also offers innovative audit trail, warranty tracking
and statistical predictive maintenance ("SPM") features. The SPM module analyzes
process  variables  such as  temperature,  vibration and  electrical  current to
measure trends against  established  norms.  If the variables  exceed  specified
tolerances or calculated  statistical  limits,  the software  alerts the user to
allow  necessary  repairs to be made before  equipment  failure is  experienced.
Customers report that the SPM feature reduces  corrective  maintenance  expenses
significantly and increases productivity.  In addition, the entire user's manual
for MP2 for Windows is available on the user's screen through the help function.

    MP2 for Windows offers a large number of advanced capabilities not available
in any other  Datastream  product.  These  capabilities  include a work  request
system that can request work from any workstation; a service request module that
allows the manager to track  response  times,  prioritize  service  requests and
maintain records of requests by tenant or client;  advanced  inventory  tracking
features that track  inventory by LIFO,  FIFO or weighted  average price methods
and also perform "ABC"  (inventory  assessment)  and "Economic  Order  Quantity"
analyses;  exclusive  purchasing and requisition  features for  establishing and
maintaining  pre-approved cost thresholds to monitor and control  purchasing;  a
"shadowing" feature that automatically  combines separate, but contemporaneously
scheduled  preventive  maintenance  tasks that include the same procedure;  and,
importantly,  access to  Grainger's  Electronic  Catalog.  MP2 for Windows  also
offers extensive graphic capabilities. A variety of optional add-on products are
also  available for MP2 for Windows  including (i) a Custom  Toolbox that allows
the user to  transfer  data from MP2 for Windows to  spreadsheets  and to create
custom  reports and  programs,  (ii)  customized  work order and purchase  order
capability,  (iii) networking capability, (iv) enhanced OSHA compliance features
and (v)  compatibility  with  barcode  technology.  The  barcode  option  allows
printing of labels,  entry of  equipment  readings  and meter  data,  receipt of
purchased materials, counting of physical inventory,  inventory issue and return
and work order entries.

    As with SideArm, Datastream continues to license and support the predecessor
of MP2 for Windows, called MP2, for use in DOS operating  environments.  MP2 for
Windows is compatible with Windows 95 and Windows NT operating systems.

    The Client/Server  Version of MP2 for Windows.  The Company presently offers
its flagship product, MP2 for Windows, in both "file/server" and "client/server"
configurations.  In  the  file/server  configuration,  MP2  for  Windows  allows
multiple users to share data files through access to a central file server. Each
PC network  user  controls  all  primary  functions  at the user's  workstation,
including database search and sorting functions.

    Management  believes  that  many of the  Company's  existing  customers  and
prospects have either already adopted or may adopt in the  foreseeable  future a
"client/server" computing architecture. The client/server model is recognized as
an effective and cost-efficient  approach for allowing multiple users to access,
utilize and share  large  databases.  A typical  client/server  system  features
software  operating on "client"  computers--high  performance  desktop  personal
computers using a Windows graphical user interface that controls all inquiry and
command  functions--connected  through a local area network with database server
computers that organize and manage the resident  relational  database and manage
network functions such as data storage, printing, communications,  data security
and data integrity.

    The lower  cost of  increasingly  powerful  personal  computers  has made it
possible for smaller organizations to adopt a client/server approach to managing
their CMMS  tasks.  Many  other  factors  favor the  adoption  of  client/server
solutions,   including   improvements   in   operating   systems  and   software
environments,  the adoption of  easy-to-use  graphical  interfaces  supported by
Microsoft  Windows and the broader  availability of  connectivity  software that
links personal computer  "clients" with mainframes and mini-computers to protect
an  organization's  investment in existing host systems.  Finally,  a PC network
client/server  system can be deployed on an  enterprise-wide  basis, on multiple
networks,  for  customers  that perform  maintenance  and repair  operations  at
multiple locations.

    Datastream released its client/server  version of MP2 for Windows during the
fourth quarter of 1995. The  client/server  version of MP2 for Windows  combines
the  benefits  of PC  servers  and PC  networks  with a Windows  graphical  user
interface and SQL relational database server.  Client workstations receive data,
command  and query  input from  users and  forward  this input to the  database,
perform all database  command and query  functions,  organize  selected data and
forward  data to the client for  presentation  to the user.  In a  client/server
environment, each user thus has access to a common database, enhancing corporate
database  sharing  of  inventory  and  purchasing  data,  equipment  performance
information and work standards.

    The client/server  version of MP2 for Windows is priced in the $10,000 range
and is believed by management to be comparable, in terms of functionality,  with
competitive  product  offerings  typically priced from $40,000 to $250,000.  The
graphical  user  interface  for this  product and the  application  features are
virtually  identical  to the  current  file/server  version of MP2 for  Windows,
although the  client/server  version  processes  large  customer  databases more
rapidly than the  file/server  version (a feature that  management  expects will
enhance  customer  acceptance).  Management  believes that many of the Company's
existing  file/server users may elect to adopt  client/server  technology in the
foreseeable future to take advantage of data integrity,  security,  data sharing
and performance  improvements.  As this migration continues,  management expects
opportunities  for  expanded  revenues in the form of  additional  installation,
training and customization services.

    Prior to the release of its first  client/server  version of MP2 for Windows
in  November  1995,   the  Company  did  not   participate  in  the  market  for
client/server tools and applications.  Management  recognizes that client/server
products  are more  expensive,  time-consuming  and  difficult  to  install  and
integrate into a customer's  existing system than  counterpart  products offered
for use in file/server or other computing  paradigms and that Datastream's entry
into this market  presents  challenges  in terms of market  acceptance  that the
Company  had not  previously  faced in selling  lower-priced,  easier-to-install
tools and applications. Continuing to expand its presence into the client/server
marketplace  the Company also faces all of the risks inherent in any new product
introduction, including business risks beyond the scope of management's control.

    MaintainIt  for  Windows.   MaintainIt  for  Windows  is  an  off-the-shelf,
entry-level  maintenance  system marketed  primarily to small businesses  (fewer
than  20  employees)  as an  inexpensive  alternative  to  the  Company's  other
products.  MaintainIt provides basic tools for creating work orders,  scheduling
repair  personnel  activities,   maintaining   equipment  records,   controlling
inventory functions and generating management reports and graphs. A true Windows
product,  MaintainIt  is  compatible  with  Windows  95 and is  offered  in both
single-user and networked versions.

    MaintainItPro  for  Windows.  MaintainItPro  for  Windows  was  released  in
September  1996.  MaintainItPro  is an  off-the-shelf,  entry-level  maintenance
system  marketed  primarily  to  small  to  medium  businesses  as a lower  cost
alternative to the Company's MP2 for Windows product. MaintainItPro contains all
the features of MaintainIt as well as location based  indexing,  rotating spares
inventory,  and more  extensive  graphs and report  capabilities.  MaintainItPro
operates on the Microsoft  Access  database.  MaintainItPro  is compatible  with
Windows 95 and is offered in both single-user and networked versions.

    Datastream  Personal  Maintenance  Assistant on Apple  Newton.  The Personal
Maintenance Assistant was released in August 1995. It is a product that combines
the attributes of the Apple Newton with many of the features of MP2 for Windows.
The product  enables a customer's  employees  to download  work orders and other
data to the  handheld  Apple  Newton,  convert  handwritten  notes into text and
update data fields.  These  functions  can be performed  remotely  from the shop
floor by  electronic  communication  of data to MP2 for Windows.  The product is
expected to increase accuracy and completeness of data input, reduce the need to
use printed work orders and permit remote data entry and retrieval.  The Company
may consider future  enhancement of this product to achieve  compatibility  with
other  handheld  computing  devices  and to permit  wireless  communication  and
barcode  compatibility.  The Company was awarded  Plant  Engineering  magazine's
Software "Product of the Year" for the Personal Maintenance Assistant in 1995.

    RequestLink.  RequestLink  was released in August 1995. It is a product that
provides the  opportunity to  electronically  enter work order service  requests
from remote  locations  into any of the  Datastream  CMMS  products via industry
standard  electronic  mail  (e-mail)  and  Internet  formats,   including  Lotus
cc:Mail/Notes,   Microsoft   Mail/Exchange   and   Internet   e-mail   protocols
(SMTP/POP3). RequestLink enables the customer to create a paperless work request
system in both local and wide area networks.

    R5  CAMMS  Through  its  acquisition  of SQL in  December  1996,  Datastream
acquired  the  rights  to SQL's R5 CAMMS  product . R5 CAMMS is a  portfolio  of
integrated  modules  designed to enhance the  management  of  high-value  assets
throughout  asset lifecycles and finds  applicability in diverse  industrial and
commercial applications, including process installations,  transport, utilities,
consumer products/packaging,  facilities,  telecommunications,  defense, etc. R5
addresses configuration management,  workflow management,  inventory management,
document  management,   purchasing  management,  project  management,   workflow
capacity management and financial/budgets management through its various modules
(base, assets, work, materials, purchasing, projects, inspections,  budgets, and
business  application  integration) and options (documents,  flexible reporting,
positions, systems, permits, quotations,  contracts, bar-coding,  scheduling and
asset  tracking).  Other  unique  features  include  an  outsourced  maintenance
activity  tracker,  a standard  library of frequently  executed  work orders,  a
short-term scheduling feature, a report manager, extensive security features and
on-line, context sensitive help. The R5 system is language independent, allowing
concurrent  use of multiple  languages  within one  installation.  The system is
presently  offered in twelve  languages,  including  English,  Spanish,  French,
German, Italian, Danish, Dutch,  Czechoslovakian,  Polish, Swedish, Chinese, and
Portuguese.  R5 is offers a widely scalable and flexible  platform,  having been
developed using the Oracle  Designer/Developer 2000 tool set. R5 utilizes object
oriented design,  stored procedures,  Oracle Forms 4.5 and the Oracle 7 database
to ensure database integrity and a robust, scalable, enterprise-wide application
that is interface  independent  and will run  concurrently  in native  Microsoft
Windows mode as well as on X/Motif or character based terminals.  Specific links
have been  established with Enterprise  Resource  Planning (ERP) vendors such as
Oracle,  SAP,  BAAN and Dun and  Bradstreet.  Generic  applications  integration
capabilities   support  diverse  systems  such  a  MRPII,   JIT/TQC,   financial
applications,  scheduling, document management, condition monitoring, geographic
information  systems  (GIS) and  Human  Resources.  Finally  R5  supports  OLE 2
integration with popular PC packages such as Microsoft.

    Pricing.  Datastream's entry-level package, MaintainIt, is available through
catalogs   and   directly   from  the  Company  for  $189  in  the   single-user
configuration;  networked  configurations  are  priced  at $299  for a  two-user
network  and $699 for a  ten-user  network.  One-year  maintenance  and  support
subscriptions for MaintainIt are presently  available for $79 in the single user
configuration,  $129 in the  two-user  network  version and $299 in the ten-user
network version.  Another entry-level  package,  SideArm for Windows,  sells for
$1,495 in a single-user configuration;  network versions are available in a two-
to three-user  configuration for $2,495, a four- to ten- user  configuration for
$2,995,  and an 11+- user  configuration for $3,495. A one-year  maintenance and
support  subscription  for SideArm for Windows  ranges in price from $595 in the
single user version to $1,295 for the 11+-user configuration. The DOS version of
SideArm presently sells for $995 for a single-user  configuration,  $1,990 for a
two to six user configuration and $2,990 for a seven or more user configuration.
Annual  maintenance  and  support  subscriptions  for the DOS version of SideArm
presently sell for $295 to $595 per year.  MaintainItPro  is available  directly
from the Company and through catalogs for $1,495 in a single-user configuration;
network versions are available in a two- to three-user configuration for $2,495,
a four- to ten- user  configuration for $2,995,  and an 11+- user  configuration
for $3,495.  A one-year  maintenance  and support  subscription  for SideArm for
Windows  ranges in price from $595 in the single user  version to $1,295 for the
11+-user configuration.

    MP2 for Windows  presently sells for $1,995 on a single-user  basis,  $3,995
for two to three users, $4,995 for four to ten users, $6,995 for 11 to 20 users,
$9,995 for 21 to 50 users and $11,995 for more than 50 users. Various modules of
optional  software  are  also  available.   One-year   maintenance  and  support
subscriptions  for MP2 for Windows range in price from $795 for a single user to
$2,495 for 50 or more users. In 1994, the Company introduced the MP2 for Windows
"Bundle" as a means of  packaging  an array of optional  modules and services to
increase the average sales per transaction.  The Bundle is a package of standard
and optional  features,  including  MP2 for Windows,  Barcode  Software,  Custom
Toolbox,  Custom Work Orders and Purchase Orders, OSHA regulations  database and
Network  Software.   Management  believes  that  per-transaction  revenues  have
increased since the MP2 for Windows Bundle was introduced.

    The "Professional" client/server version of MP2 for Windows sells for $4,995
for a single  seat  installation  with each seat  thereafter  selling  for $995.
Options  offered  with MP2 for Windows  Professional  client/server  include all
those offered with MP2 for Windows; pricing ranges from $494 to $1,495 depending
on the  option.  One-year  maintenance  and  support  subscriptions  for MP2 for
Windows  Professional  client/server cost $900 for the initial installation with
support for each seat thereafter  costing $180.  Support for additional  options
ranges  from $90 to $1,800  per  option  depending  on which  options  have been
purchased.  The "Enterprise"  client/server version of MP2 for Windows sells for
$14,995 for a  three-seat  installation  with each seat  thereafter  selling for
$1,995.  Options offered with MP2 for Windows Enterprise  client/server  include
all those  offered  with MP2 for  Windows;  pricing  ranges  from $495 to $9,995
depending on the option.  One-year maintenance and support subscriptions for MP2
for Windows  Enterprise  client/server  cost  $2,700 for the initial  three seat
installation  with support for each seat  thereafter  costing $360.  Support for
additional  options  ranges  from $90 to $1,800  per option  depending  on which
options have been purchased.

    The Datastream Personal  Maintenance  Assistant on Apple Newton is priced at
$1,495  (includes  Apple  Newton  with  MP2  for  Windows  Personal  Maintenance
Assistant  software  pre-loaded).  RequestLink  ranges in price  from $180 for a
five-user configuration to $1,800 for the unlimited-user version.

    List price for SQL's R5 CAMMS  product is $188,000  for a  five-module  base
configuration (base module plus asset, work, material and purchasing  management
modules)  supporting a minimum of 32 users.  Additional  modules are priced from
$14,000 - $34,000, depending on the module. Installation,  consulting, training,
and network services  generally add from 50% to 100% of the cost of the software
installation,  and an annual technical  support contract is priced at 18% of the
cost of the  software  installation.  Systems  supporting  additional  users are
priced higher.

    All of the foregoing prices are subject to change.

Services

    Approximately  57%, 54% and 53% of the Company's revenues for 1996, 1995 and
1994,  respectively,  were derived from sales of  applications  engineering  and
support services. Management believes that the need for expertise in installing,
customizing  and  using  CMMS  systems  will  grow as  products  evolve  and the
sophistication  of  software  solutions  increases,   and  as  MRO  software  is
increasingly   employed  as  a  strategic  cost  reduction  tool.  For  example,
management  believes  that revenues from  applications  engineering  and support
services will continue to increase with the release of the client/server version
of MP2 for Windows due to the increased  complexity  and  sophistication  of the
needs of the client/server  market.  The extent to which the Company's  services
revenues  will grow is,  as noted  previously  in this  Report,  dependent  upon
continued customer acceptance of client/server tools and applications in general
and,  specifically,  the  results of the  Company's  entry into this  developing
market.  Management  believes that the integration of SQL's product mix into the
Company's  product  line will  generate  increasing  opportunities  for sales of
engineering  services  and  accelerate  the  growth of  services  revenues  as a
percentage of total revenues.  SQL generated  approximately  67%, 59% and 68% of
its revenues for 1996,  1995, and 1994,  respectively,  from sales of consulting
and support services.

    Fee-based  consulting  and  advisory  services  are offered by  Datastream's
Applications  Engineering  Department.  Applications  engineering  revenues also
include revenues from training,  installation and customization services offered
by Datastream's  Customization Group and system integration services provided by
its Integration  Services Group. Support services revenues include revenues from
maintenance and support subscriptions.

    Applications  Engineering Services.  Datastream's  Applications  Engineering
Department  provides  fee-based  consulting and advisory services and configures
and implements CMMS software licensed by the Company.  The Department's  primary
function is to provide solutions to customer-specific applications problems such
as  spare  parts  inventory  management,  meeting  regulatory  requirements  and
reducing  unplanned  equipment downtime through improved work order planning and
preventive  maintenance.  Most Applications  Engineering Department services are
performed in connection  with  installations  of MP2 for Windows systems and the
Company's sales personnel actively seek to sell a five-day package of consulting
services as part of each MP2 for Windows  license.  There are presently 65 field
engineers  assigned to the Applications  Engineering  Department.  Most of these
individuals have backgrounds in manufacturing and operations.

    The  Applications  Engineering  Department  also offers  fee-based  training
services  at  its  Greenville,  South  Carolina  headquarters,  at  its  Irvine,
California training facility,  and in frequent regional training seminars around
the country.  The Company  offered a total of 419 training  seminars in 1996 and
286 training seminars in 1995. Custom training programs are also available.

    In late  1994,  Datastream  increased  its  service  offerings  to include a
Customization  Group,  which  enhances  the  functionality  of a  system  for  a
particular   customer,   and  an  Integration  Services  Group,  which  provides
fee-based,   on-site   installation   and  systems   integration   services  for
client/server   systems.  In  1995,  the  Applications   Engineering  Department
implemented  a SWAT team  approach  that invests  whatever time is required at a
customer  tool  crib or  parts  store  room  (usually  two or  three  weeks)  to
inventory,  sort,  label and organize parts or tools,  and load  associated data
into  MP2  for  Windows.  Management  believes  that  revenues  attributable  to
customization,  integration  services and SWAT team  services  will  increase as
Datastream  continues to install  client/server  systems in the marketplace.  In
1996,  Datastream  implemented a project  management group to oversee and manage
large, project oriented installations of its software.

    SQL's  Consulting  Services  group also provides  fee-based  consulting  and
advisory  services and configures and implements CMMS software  licensed by SQL.
There are presently 50 field engineers  assigned to the SQL Consulting  Services
group. SQL is a licensee of Aladon  Reliability  Centered  Maintenance  (RCM), a
functionality-based  maintenance  approach  developed by the airline industry in
the  early  1960's.   Reliability-   centered  maintenance  is  most  useful  in
maintenance  situations where the consequences of catastrophic failure are high,
such as airline  crashes,  fuel tank farm  fires,  etc.  RCM focuses on testing,
inspection  and  redundant  systems to ensure  failure  risk is  minimized.  Six
employees of SQL are RCM-licensed at present.

    Support Services.  One-year  maintenance and support  subscriptions range in
cost from $79 for  MaintainIt to $295 for a single-user  SideArm system in a DOS
environment  to $2,495  for a  50+-user,  networked  MP2 for  Windows  system to
$19,620 for a similar 50-user networked MP2 for Windows Enterprise client/server
system. Maintenance and support services include unlimited,  toll-free access to
Datastream's   TechSupport   staff,   free  product  upgrades   (including  data
conversions),  access to Datastream's  electronic  bulletin  board,  "Datastream
OnLine" (a 24-hours a day,  7-days a week  electronic  mail  feature that allows
customers to communicate  with the Company as well as with other  customers),  a
file download and upload  service,  product forums  containing  information  and
problem solutions,  and a "chat" mode that allows customers to engage in on-line
conversations.

    Toll-free  customer  support  numbers are presently  available in the United
States as well as most Western European nations, the United Kingdom,  Canada and
Mexico.  Management  believes  that a majority of the  Company's  customer  base
presently subscribes to a Datastream maintenance and support contract.

    SQL provides  support to its  customers via a tiered  approach.  First-level
support is provided locally by the country sales office,  with back-up expertise
being  supplied  by the  corporate  help desk in  Rotterdam.  Cost for a typical
one-year  maintenance and support subscription is approximately 18% of the price
of the software installation. As of March 31, 1997, SQL employed 19 personnel in
support operations.

Customers

    Datastream markets its products as cross-industry  solutions for maintenance
and repair and spare parts inventory information management. Datastream has sold
systems to  companies in 23 standard  industrial  classification  ("SIC")  codes
representing virtually every major industry. Datastream systems are found in any
industry in which large  capital  investments  are the  norm--electric,  gas and
sanitary,  chemicals and allied products,  electronic and electrical  equipment,
health  services,  transportation,  property  management,  pulp and paper mills,
rubber  and  plastics,  oil and gas  extraction,  petroleum  refining,  food and
kindred  products,   fabricated  metals,   industry  and  commercial  machinery,
mining/quarrying  non-metals,  etc.  While the Company has a customer  base that
includes  many Fortune 500  companies,  its  low-cost,  high-value,  high-volume
pricing  strategy  is  designed  to make its  products  economical  for  smaller
companies as well.

    Datastream (exclusive of SQL) has sold over 27,000 units since inception and
has grown its installed base by over 70% annually during the period from 1989 to
1996. The broad  applicability  of the Company's  systems is demonstrated by the
diversity of the Company's customer base, which includes the following customers
currently using the Company's products in selected industries:


Aerospace/Defense

Bell Helicopter Textron
General Dynamics
McDonnell Douglas

Automotive

Dana Corporation
Eaton
Echlin/Automotive Controls
  Corp.
Harley Davidson
Lear Seating Corporation
Modine

Chemicals

Dow Chemical
DuPont
Glidden Company
Monsanto
Morton International
Rhone Poulenc

Computers, Electronics and
    Electrical

AT&T Global Information
  Solutions
Emerson Electric
Texas Instruments
Thermo Electron

Food

Cargill
Frito-Lay
Kraft Foods
Kroger
Pepsico
Pontiac Foods
Procter & Gamble
Stroh Brewery
Swiss Miss (Hunt Wesson)

General Facilities

A&S Jordan Marsh
American Greetings
Atlantic Union College
BMG Music
Cutler-Hammer,
Div. of Eaton Corp.
Family Dollar
Foster Wheeler
Gillette
Kmart
Maritz
New York University
Pillsbury Center

General Manufacturing

Bic
Caterpiller
Colgate Palmolive
Cooper Industries
Levi Strauss & Co.
Shaw Industries

Government

City of Baton Rouge, LA
Diego Garcia Naval Air Base
  (Burns & Roe)
McClellan Air Force Base
New York Department of
  Corrections
U.S. Army
U.S. Geological Survey

Healthcare

Gurwin Jewish Geriatric Center Greenville Hospital System
Gwinnett Hospital System
Indian Health Service
Memorial Sloan Kettering
Cancer Center
Mercy Medical Springfield
St. Martha's Regional Hospital
Tucson Medical

Metals

Alcoa
Alumax
American Steel
Kaiser Aluminum
Nucor Steel
Meynolds Metals

Petroleum
Chevron
Fina Oil
Mobil Chemical
Texaco
Unocal

Pharmaceuticals

Abbott Labs

Hospitality

Four Seasons Hotel--Philadelphia
Holiday Inn
Marriott
Registry Resort--Naples, FL


    The acquisition of SQL in December 1996 added the following companies to the
Company's  customer list: AT&T Wireless,  Cox California PCS, AirTouch Cellular,
Pacific Bell Mobile Services, US West Wireless, London Underground, Paris Metro,
BC Transit,  Toronto GO Transit,  London  Electricity,  Denver Metro Wastewater,
Gottenburg Energi and Port of Rotterdam.

    None of Datastream's customers generated more than 5% of its revenues in any
of the Company's  last three fiscal years,  and in 1996 none generated more than
1.5% of its  revenues.  None of SQL's  customers  generated  more than 5% of its
revenues in any of SQL's last three fiscal years.


Sales and Marketing

    Datastream continues to increase its sales and marketing efforts and staffs.
The Company  markets its products and services  through 118 sales and  marketing
professionals  (as of March 31,  1997),  including  a direct  sales  force of 66
telesales representatives with specific geographic responsibilities and a direct
outside sales force of 23 with specific geographic responsibilities.  Datastream
also uses a  computerized  sales and  marketing  software  system with  database
marketing,  telemarketing,  lead  tracking and  analysis  and  customer  support
capabilities.

    The  Company's  marketing   department  consists  of  18  employees  and  is
responsible for generating leads through  advertising,  public relations,  trade
shows and  seminars,  strategic  partnerships  and direct  mail.  The  marketing
department  is also  responsible  for product  marketing,  market  research  and
competitive analysis and provides competitive,  customer and prospect input into
the Company's product  development  efforts.  To enhance its marketing  efforts,
Datastream  sponsors a National  Users  Conference  each  year.  The  conference
provides  an  opportunity  for  decision  makers in the MRO  industry  to attend
training  sessions,  workshops and  presentations  addressing  both  maintenance
issues  generally and  Datastream  products  specifically,  and to interact with
other users and Company employees.

    The cornerstone of Datastream's sales and marketing efforts is its 66-person
telesales  team. The  relatively  inexpensive  nature of the Company's  systems,
combined with the excellent quality of product information and order fulfillment
items  generated  by  the  marketing  department,  make  Datastream's  telesales
approach a cost-effective  vehicle for accessing the Company's target market and
achieving gains in market share.  Management  routinely monitors the performance
of the  Company's  telesales  personnel  to  determine  that each  member of the
telesales  staff is  performing  acceptably.  During 1996,  the Company  greatly
expanded its Corporate  Accounts direct sales force to call on larger  accounts.
Expansion  of this group is  expected to  accelerate  during 1997 as the Company
markets its enterprise-wide CMMS solutions worldwide.

    SQL uses a  combination  of  direct  and  distributor  sales to  market  its
products.  As of March  31,  1997,  SQL had 31 sales  and  marketing  personnel,
including 27 direct sales employees working out of seven subsidiary headquarters
(The Netherlands,  United Kingdom,  Germany,  France,  Italy,  United States and
China), and a network of thirteen distributors located throughout the balance of
Europe and Latin  America.  Expansion  of this sales  force is expected to occur
during  1997  as  the  Company   continues  the  process  of  consolidating  and
integrating the SQL  acquisition.  Additionally,  the Company intends to utilize
the existing SQL  infrastructure  as a platform from which to launch its low-end
and middle-tier  Datastream products into Europe,  Latin America and the Pacific
Rim countries.


Product Development

    In its product development activities, the Company seeks to incorporate into
its products technologies already identified and embraced by the marketplace, as
opposed to expending development efforts on unproven or unaccepted technologies.
For example,  the Company's products are designed to exploit proven technologies
such as client/server  architectures,  relational  database  management systems,
graphical user interfaces and application  development tools. New opportunities,
whether  technology-,  application-  or  regulatory-driven,  are  evaluated  for
technical feasibility and market acceptance prior to any development.

    As  of  March  31,  1997,  the  Company's  product  development  department,
excluding  the SQL  development  group,  consisted  of 59  technical  employees,
including  32  software  developers  (27 of whom hold  advanced  programming  or
engineering  degrees).  Datastream's 1996 product development efforts focused on
several areas.  The first area of development  included  projects to migrate the
Company's entire product platform from the visual interface  provided by Paradox
(a  relational  database  licensed  from Borland  International,  Inc.) to a new
graphical  user  interface,   written  in  a  non-proprietary,   object-oriented
language. This effort will continue into 1997. If successful,  this project will
achieve the goal of enhancing the speed and portability of the software, provide
more direct  access to leading  database  server  products  and  facilitate  the
development of new applications and upgrades. The second area of development was
completion of an  inexpensive  Microsoft  Access based product aimed at small to
medium sized business.  This product,  called  MaintainItPro,  was introduced in
September 1996. The third area of development was an intensive effort to produce
a Microsoft SQL  Server-based  client/server  version of MP2 for Windows to meet
the increasingly sophisticated needs of large corporations.  The Beta version of
this product was completed on schedule and released to the public December 1996,
with final release  scheduled for March 31, 1997. The fourth area of development
was completion of the Company's  initial Internet  product,  an  e-mail/Internet
work order request  system called  RequestLink.  Management  believes that these
development  efforts, if successful,  will substantially  benefit the Company in
the future by making  Datastream's  products more  compatible  with a variety of
platforms  and  enhancing  the  Company's  ability to detect  and solve  product
defects.  However new product  development  efforts  present the Company  with a
variety of technical challenges. Although the Company believes that its research
and  development  staff  will be able to meet such  challenges,  there can be no
assurance  that this or any other  development  project  will be  completed in a
timely manner or will result in a product that achieves market acceptance.

    Other,  more minor areas of focus in 1996  included  translation  of MP2 for
Windows to the  German  language,  development  of the  interface  to the Oracle
Financials   suite  of  products,   and  joint   development   with   DataSphere
Technologies,  Inc. of an AutoCAD  engineering drawing application that utilizes
MP2 for Windows database capabilities.

    As of March 31, 1997, SQL's product development  department  consisted of 12
technical  employees,  assisted  by six  contract  programmers  and four  senior
consulting engineers assigned from other areas of the Company.  During 1996, SQL
development  efforts were focused on completion  of the R5.3 version  upgrade to
the R5 product,  which is scheduled  for release  late in the second  quarter of
1997.  Although  management believes that the SQL research and development staff
will be able to meet such challenges, there can be no assurance that this or any
other development project will be completed in a timely manner or will result in
a product that achieves market acceptance.

    Product  development  expenses  consist  principally of salaries and certain
other expenses related to development and  modifications  of software  products,
which are  capitalized  in  accordance  with  Statement of Financial  Accounting
Standards No. 86  ("Statement  No. 86"),  "Accounting  for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Capitalization of such costs
begins  only upon  establishment  of  technological  feasibility  as  defined in
Statement  No.  86  and  ends  when  the  resulting  product  is  available  for
distribution.  Annual  amortization of capitalized  product development costs is
provided at the greater of the ratio of current  product revenue to the total of
current and  anticipated  product  revenue or on a straight  line basis over the
estimated economic life of the software,  which is not more than eighteen months
or three years,  depending on the product.  The Company's  software  development
expenditures were approximately  $1.24 million,  $2.31 million and $4.00 million
in 1994, 1995 and 1996, respectively.  Of these amounts, the amounts capitalized
were approximately $411,000,  $573,000 and $2.61 million,  respectively.  During
December 1996, the Company took a one-time  charge of $1.804 million  related to
the  write-off of  capitalized  software  deemed  obsolete or  superseded by the
products obtained through acquisition of SQL.

    The Company's  industry is  characterized  by rapidly  changing  technology,
frequent new product  introductions  and evolving  industry  standards  that can
render Company products  obsolete or unmarketable.  The Company's future success
will depend upon its ability to enhance its current  products,  to introduce new
products that adequately  address  ethnological  and market  developments and to
meet  the  increasingly  sophisticated  needs  of  its  customers.  Furthermore,
approximately  99% of the Company's 1996 revenues were derived from sales of the
Windows versions of MP2, MaintainIt, MaintainItPro, Sidearm, and MP2 for Windows
client/server  and related  services and  support.  Accordingly,  the  Company's
financial  performance  in  the  near  term  will  depend  on  continued  market
acceptance of these products and, to a lesser extent,  on the  introduction  and
acceptance of new products,  such as the SQL Server client/server version of MP2
for Windows.


Competition

    The  current  market  for  CMMS  software  is  both  fragmented  and  highly
competitive.  Management  estimates that there are more than 200 vendors of CMMS
software  products and anticipates  that the market will continue to attract new
competitors in the future. Competition at the high end of the market (in which a
typical  transaction  size,   including  not  just  software  but  also  related
customization, integration and support services, may be as much as $1.25 million
or more) comes from large, sophisticated vendors such as Marcam Corporation, The
Indus Group,  The System Works (TSW) and several  Enterprise  Resource  Planning
(ERP) vendors such as SAP,  whose  programs  originated  with  minicomputer  and
mainframe-based programs, and which now offer enterprise-wide management systems
(including  maintenance  modules)  for  use  in the  client/server  environment.
Increasing  customer  demand for  client/server  products  may make the  Company
subject  to  increased  competition  if these  vendors  choose to  modify  their
products to offer lower-priced client/server capabilities in PC network markets.

    The Company has historically  concentrated its efforts at the low end of the
CMMS  market  in  which  typical   transaction  sizes  (including  software  and
customization,  integration, training and support services) range from $1,000 to
$10,000. In these segments,  Datastream encounters competition from a variety of
vendors,  including  companies such as CK Systems,  JB Systems and DP Solutions,
Inc., that offer  off-the-shelf CMMS applications for single users (or a limited
number of users) on personal computers and local area networks.

    In late 1995, the Company introduced a client/server  version of its MP2 for
Windows product and has sought to expand sales of its middle-tier  client/server
technology both domestically and  internationally.  This move placed the Company
into  increased   competition   with  certain  of  its   competitors  who  offer
client/server  products,  such  as PSDI  and The  Systems  Works.  Further,  the
acquisition of SQL puts the Company into direct client/server competition across
each of the product  lines  offered by PSDI and TSW,  as well as in  competition
with products  offered by Revere  Corporation and certain ERP vendors.  Although
management   believes  that  the  Company's   products  are   differentiated  by
technology, product architecture, features, functionality and value pricing, and
that the Company itself is now differentiated  from much of the competition with
respect to the ability to deliver sales,  service and support on a global basis,
there is no assurance  the Company will be  successful in its efforts to compete
in middle and upper segments of the client/server market.

    During late 1995 and  throughout  1996,  the Company also  expanded into new
segments  of  the  low-end  CMMS  market,   through  its  entry-level  products,
MaintainIt  and  MaintainIt  Pro,  which  compete  directly  with other  low-end
maintenance automation software products.

    Management  believes that while some  competitors,  particularly at the high
end of the market, are large,  publicly-held  companies, the majority of vendors
in the industry are small,  privately-held  companies,  and that most new market
entrants will fall into this category.  The emergence and  establishment  of new
competitors  in the market  may  adversely  impact  Datastream's  market  share.
Moreover,   many  potential  customers  develop  their  own  system  internally,
utilizing methods such as spreadsheets and word processors to track repair parts
inventory and equipment, although the trend in the industry is toward purchasing
third-party   maintenance   software   rather  than   developing  such  products
internally.  A certain  percentage  of the  Company's  revenues are derived from
sales to large  corporations  whose  internally  developed  systems did not meet
management's expectations,  did not succeed in sufficiently reducing maintenance
budgets or lacked the capacity to adequately  track  historical  data or provide
other necessary or desirable equipment-related information.

    Datastream's  products  compete on the basis of  quality,  price,  technical
support and service,  application features and ease-of-use.  Management believes
that the Company's  products  compete  favorably  with respect to these factors.
However,  certain of the Company's existing competitors,  as well as a number of
potential  market  entrants,  have  greater  financial,  marketing,  service and
support and technical  resources than the Company.  The Company,  including SQL,
will be required to make  continued  investment in product  development  to meet
competitive  pressures.  There can be no  assurance  that the Company  will have
sufficient  resources to make those investments or that the Company will be able
to make the technical advances  necessary to continue to compete  effectively in
the future.


Proprietary Rights and Licenses

    The Company claims that title to and ownership of the software  developed by
it and SQL resides  exclusively  with those  companies.  The Company relies on a
combination of trade secret,  copyright and trademark  laws,  nondisclosure  and
licensing agreements,  the contractual  provisions in "shrink-wrap" licenses and
other contractual  provisions and technical measures to protect its intellectual
property  rights.  There can be no  assurance  that  these  protections  will be
adequate  to protect  the  Company's  intellectual  property  rights or that the
Company's  competitors will not independently develop software products that are
superior to the Company's  products.  Existing  copyright  laws provide  limited
protection  to  the  Company  in  prohibiting   competitors  from  independently
producing  software  products  that are  substantially  similar to  Datastream's
products.  Neither  Datastream  nor SQL  currently  holds any patents or has any
patent applications pending.

    Although  in  limited  instances  involving  large  sales  the  Company  may
specifically  negotiate license  agreements that are signed by both the licensee
and the Company,  in the substantial  majority of sales,  Datastream relies on a
"shrink-wrap"  license for protection against  unauthorized use of the Company's
products.  Certain provisions of these licenses,  including restrictions on use,
copying,  transfer and disclosure of the licensed program,  may be unenforceable
under the laws of certain jurisdictions. In addition, through the acquisition of
SQL and based upon its internal expansion efforts, the Company is increasing the
sales  of  its  products   internationally.   This  entails  certain  additional
intellectual  property  risks in that the laws of some foreign  countries do not
protect the  Company's  proprietary  rights to the same extent as do the laws of
the United States.  Although the Company believes that its products,  trademarks
and other  proprietary  rights do not infringe  upon the  proprietary  rights of
third  parties,  there can be no  assurance  that such  parties  will not assert
infringement claims against the Company. Any such claim made against the Company
or SQL, with or without merit,  could be time-consuming and expensive to defend.
The loss of proprietary  technology or a successful claim against the Company or
SQL could have a material  adverse effect on the Company's  financial  condition
and results of operations.

Employees

    The Company has recently experienced  substantial growth in the scope of its
operations  and the  number  of its  employees.  This  growth  has  resulted  in
increased levels of responsibility for management personnel.  To meet its growth
objectives,  Datastream  will be required  to devote  significant  resources  to
enhance its  existing  products  and develop  new ones,  manage the  anticipated
development of its international operations and establish and manage cooperative
relationships such as its relationship with Grainger.  There can be no assurance
that the  management  skills and systems  currently in place will be adequate to
keep pace with the Company's growth objectives.

    In  addition,  Datastream's  continued  success  depends on the  services of
several key executive,  sales and marketing and technical employees. The loss of
the services of these personnel,  particularly those of Larry G. Blackwell,  the
Company's  founder,  Chairman,  Chief  Executive  Officer and President,  or the
Company's inability to attract and retain other qualified management,  sales and
marketing and technical  employees,  could have a material adverse effect on the
Company's business and results of operations.

    As of March 31, 1997, the Company employed 318 persons on a full-time basis,
including   118  sales  and  marketing   personnel,   105  service  and  support
representatives,  36  administrative  personnel  and 59  employees  involved  in
product research and development.  None of Datastream's employees is represented
by a  labor  organization  and the  Company  is not a  party  to any  collective
bargaining  agreement  . As of March 31,  1997,  SQL  employed  132 persons on a
full-time  basis,  including 31 sales and  marketing  personnel,  69 service and
support  representatives,  20 administrative personnel and 12 employees involved
in product research and development.  Management considers relations between the
both the Company and its employees, and SQL and its employees to be very good.


Trademarks

    Datastream(R),  Datastream Systems(R),  MaintainIt(R),  SideArm(R),  MP2(R),
Personal Maintenance Assistant(R),  The Maintenance Journal(R) and The Leader in
Maintenance Software(R) are registered trademarks of the Company. Grainger(R) is
a  registered  trademark  of  W.W.  Grainger,  Inc.  ORACLE(R)  is a  registered
trademark of Oracle Systems  Corporation.  OS/2(R) is a registered  trademark of
IBM Corporation.  Paradox(R) is a registered trademark of Borland International,
Inc.  Windows(R)  and  Windows(R)  95 are  registered  trademarks  of  Microsoft
Corporation.  Apple(R)  is  a  registered  trademark  of  Apple  Computer,  Inc.
Wonderware(R)  is a registered  trademark  of  Wonderware  Software  Development
Corporation. AutoCAD(R) is a registered trademark of AutoCAD Corporation, Inc.


Item 2.  Properties.

    To accommodate  continuing  growth,  the Company  purchased a 125,000 square
foot  headquarters  building  located in Greenville,  South Carolina in December
1995 for $3.46 million in cash.  Principal  operations  were moved and occupancy
was assumed in April 1996. The Company also has under lease  approximately  3000
square feet of space in Irvine, CA (lease  expiration March 2000)  approximately
1000 square feet of space in Monterrey,  Mexico (lease expiration May 1997), and
approximately  500 square feet of space in Sydney,  Australia (lease  expiration
September 1997).

    SQL has under lease  approximately  12,000 square feet of space to house its
headquarters operations in Rotterdam, The Netherlands (lease expiration November
1997), approximately 5,000 square feet of space in Minneapolis, Minnesota (lease
expiration  October 1997),  approximately  4,000 square feet of space in Slough,
Great Britain (lease expiration March 2007),  approximately 2,000 square feet of
space in Paris,  France (lease expiration  September 2001),  approximately 3,250
square  feet of  space  in  Grenoble,  France  (lease  expiration  March  1999),
approximately  1,500  square  feet  of  space  in  Dussledorf,   Germany  (lease
expiration  October  1997),  approximately  1,000 square feet of space in Milan,
Italy  (lease  expiration  June  1997),  and six other 500 square  foot  offices
throughout the United States all with annual leases.


Item 3.  Legal Proceedings.

    Datastream is occasionally involved in litigation relating to claims arising
out of its operations in the normal course of business.  Neither  Datastream nor
SQL  is  currently   engaged  in  any  legal   proceedings  that  are  expected,
individually  or in the  aggregate,  to have a  material  adverse  effect on the
Company.


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

    Not applicable.


<PAGE>

                                    PART II


Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters.

    The Common  Stock of the  Company is traded on the  Nasdaq  National  Market
under the symbol DSTM. The Company has never declared or paid any cash dividends
on its Common Stock.  However,  in anticipation of its secondary public offering
in October 1995, the Company declared a two-for-one stock split, effected in the
form of a one-for-one share dividend,  effective September 12, 1995. The Company
anticipates  that all of its earnings will be retained for the  development  and
expansion  of the  Company's  business and does not  anticipate  paying any cash
dividends in the foreseeable future. The chart below sets forth the high and low
stock prices for each quarter  since the  completion  of the  Company's  initial
public offering in March 1995.

    Quarter Ended              High                 Low

    March 31, 1995(1)          11.38                10.00
    June 30, 1995              13.00                10.00
    September 30, 1995         26.25                15.75
    December 31, 1995          26.50                14.75

    March 31, 1996             23.50                16.25
    June 30, 1996              36.50                23.25
    September 30, 1996         35.00                24.25
    December 31, 1996          30.00                17.00

    March 31, 1997             24.50                15.75


(1)For the period  from  March 29,  1995,  the first day on which the  Company's
   common stock was publicly traded, through March 31, 1995.

    The closing price of a share of the Company's Common Stock on April 11, 1997
was $19.25. As of April 11, 1997, the Company had 157 shareholders of record and
approximately 5,000 beneficial owners of its Common Stock.


Item 6.  Selected Financial Data.

                                     For the year ended December 31,

                                  1992     1993     1994     1995     1996
                                  ----    -----     -----    -----    ----
                             
(in thousands, except operating 
 and per share data)

Statement of Operations Data:
Total revenues.........         $4,104   $5,878  $10,374  $20,346   $32,466
Total cost of revenues (1)       1,368    1,704    3,136    5,218    11,507
                               -------  -------  -------  -------  --------
Gross profit...........          2,736    4,174    7,238   15,128    20,959
Total operating expenses (2)     2,265    3,360    4,813    9,216    47,758
                               -------  -------  -------  -------  --------
Operating income (loss).......     471      814    2,425    5,912  (26,799)
Net other income..............      18       13       42    1,176     2,370
                               -------  -------  -------  -------  --------

Income  (loss)  before income      489      827    2,467    7,088  (24,429)
taxes                                                       
Income taxes.................      196      320      915    2,742     3,581
                               -------  -------  -------  -------  --------
Net income (loss)............  $   293  $   507 $  1,552 $  4,346 $(28,010)
                               =======  ======= ======== ======== ========= 
Net income (loss) per share    $   .06  $   .10 $    .30 $    .61 $  (3.16)
                               =======  ======= ======== ======== ========= 

Weighted  average  number  of
common and common  equivalent    5,183    5,183    5,183    7,183     8,843
shares outstanding...............

Operating Data:
Software units sold at
period-end (cumulative).....     3,436    5,252    7,332   11,964    24,787
  

                                           As of December 31,
                               
                                 1992     1993      1994      1995     1996
                                 ----     ----      ----      ----     ----
Balance Sheet Data:
Working Capital.............    $ 603     $662    $1,569   $19,965  $13,633
Total Assets................    2,189    2,978     5,790    50,692   57,577
Long-term debt, less           
current portion.............       28       68        46        22    2,893
Total stockholders' equity..      309      564       916    46,034   33,125

(1)In 1996,  includes $1,804 of capitalized  software written off as a result of
   the  acquisition  of SQL (see  note 1(i) of notes to  consolidated  financial
   statements).

(2)In 1996,  includes  $33,600 of in-process  research and development  acquired
   and written off as part of the acquisition of SQL (see note 2 of the notes to
   consolidated financial statements).


Item 7.  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations.

    The following  discussion  should be read in conjunction  with the "Selected
Financial  Data" and the Financial  Statements  and Notes thereto of the Company
included herein.


Overview

    Datastream was  incorporated  in 1986 to develop,  market,  sell and support
software products for the industrial  automation  market. The Company's revenues
have grown each calendar year since  inception.  Excluding the one-time  charges
related to the acquisition of SQL, Datastream has been profitable in each of the
last six years and has  experienced  a compounded  annual growth rate of 154% in
revenues and 198% in earnings during that period.
    The  Company  offers a family of CMMS  products to the MRO  industry.  These
products  currently  consist of MP2 (DOS)  (released  June 1989),  SideArm (DOS)
(released December 1990), SideArm for Windows (released September 1993), MP2 for
Windows (released April 1994), MaintainIt (released August 1995), the Datastream
Personal  Maintenance  Assistant on Apple Newton (released August 1995), MP2 for
Windows  Client/Server-  Oracle (released November 1995), MP2 for Windows 95 and
NT (released June 1996),  MaintainIt Pro 3.0 (released  September 1996), and MP2
for Windows  Client/Server  - Microsoft SQL Server  (released in Beta,  December
1996). To enable more rapid  international  expansion,  Datastream  introduced a
Spanish  language  version  of MP2 for  Windows in  September  1995 and a German
language  version of MP2 for Windows in September  1996.  Through the  Company's
acquisition  of SQL in December 1996, the Company now also offers SQL's R5 CAMMS
product. Datastream and SQL support their software products through applications
engineering and support services.  The Company  recognizes revenue in accordance
with SOP 91-1,  "Software  Revenue  Recognition." See Note 1(c) of the Company's
Financial Statements for additional information concerning the Company's revenue
recognition policies.

    Until 1995, the Company  concentrated its resources on developing  Microsoft
DOS/Windows  compatible  software for use on standalone  computers or PC network
systems.   Recently,   development   efforts   have   focused   on   introducing
enterprise-wide  Windows  client/server  products for Oracle and  Microsoft  SQL
Server.  Product  development costs consist  principally of salaries and certain
other expenses  related to development and  modification  of software  products,
which are  capitalized  in  accordance  with  Statement of Financial  Accounting
Standards No. 86  ("Statement"),  "Accounting for the Costs of Computer Software
to Be Sold, Leased or Otherwise  Marketed."  Capitalization of such costs begins
only upon establishment of technological feasibility as defined in the Statement
and ends when the  resulting  product  is  available  for  distribution.  Annual
amortization of capitalized product development costs is provided at the greater
of the ratio of current  product revenue to the total of current and anticipated
product revenue or on a straight line basis over the estimated  economic life of
the software,  which is not more than eighteen months or three years,  depending
on the product.

    Revenues from sales outside the United  States were  negligible  until 1994,
when  international  revenues  reached  7.2% of  total  revenues.  International
revenues  increased  to 10.7%  of total  revenues  in 1995,  and  13.4% in 1996.
Management  expects that  international  revenues will continue to increase as a
percentage of total  revenues,  primarily as a result of the acquisition of SQL,
but also due to  Datastream's  own internal  expansion  efforts.  On a pro forma
basis,  1996  revenues  adjusted  for  the  inclusion  of SQL  would  have  been
approximately $49.2 million.  Of that figure,  approximately 37% would have been
derived from  international  sources.  As the Company begins to accept increased
payments in foreign currency,  changes in the values of these foreign currencies
relative  to the  United  States  dollar may  affect  the  Company's  results of
operations and affect its financial position.  In addition,  gains and losses on
currency  translations could contribute to fluctuations in the Company's results
of operations.

    Because the Company  consummated  the  acquisition of SQL on the last day of
fiscal 1996and was accounted for as a purchase,  SQL's results of operations for
the year are not included in the  Company's  results.  For 1996,  SQL  generated
revenues of  approximately  $17.3 million and a net loss of  approximately  $5.9
million. The Company's efforts to integrate and rationalize SQL's operations are
well  underway,  and  (although  no  assurance  to  this  effect  can be  given)
management  believes it can manage SQL to  profitability in 1997.  However,  the
acquisition  of SQL has  impacted  and will  continue  to impact  the  reporting
control and management  capabilities of the Company in 1997. See "-`Safe Harbor'
Statement - Impact of SQL Acquisition".

Results of Operations

    The following  tables set forth  statement of operations  data for the three
years ended December 31, 1994, 1995 and 1996, the percentage change in such data
from period to period for each of the  corresponding  periods and the percentage
that such data bears to total revenues for each period.


<PAGE>





                                 Year Ended December 31,    Percent Change
                                1994      1995      1996    94-95   95-96
                                   (in thousands, except per share data)

Statement of Operations Data:
Revenues:
    Product.................... $4,859  $9,343   $14,018      92.3%  50.0%
    Applications engineering..   3,084   6,660    12,326     116.0   85.1
    Support....................  2,431   4,343     6,122      78.7   41.0
                               -------  ------    ------     -----  -----

       Total revenues.......... 10,374  20,346    32,466      96.1   59.6

Cost of revenues:
    Cost of product revenues...    822   1,136     1,879      38.2   65.5
    Cost of applications-......
       engineering revenues....  1,857   3,383     6,729      82.2   98.9
    Cost of support revenues...    457     699     1,095      53.0   56.5
    Write-off of capitalized 
       software................     -       -      1,804        -     N/M
                                ------  ------    ------     -----  -----


       Total cost of revenues..  3,136   5,218    11,507      66.4  121.0

Gross Profit...................  7,238  15,128    20,959     109.0   38.5
 
Operating expenses:
    Sales and marketing........  2,736   5,216     9,399      90.6   80.2
    Product development........    830   1,741     1,390     109.8  (20.1)
    General and administrative.  1,247   2,259     3,369      81.2   49.1
    Write-off of in-process 
      research & development..      -       -     33,600       -      N/M
                                 -----   -----   -------     -----  -----

       Total operating expenses  4,813   9,216    47,758      91.5  418.2
                                         -----    ------     -----  -----


Operating income(loss).........  2,425   5,912   (26,799)    143.8  (553.3)
Net other income...............     42   1,176     2,370   2,700.0   101.5
                                 -----   -----   -------   -------   -----

Income(loss) before income taxes 2,467   7,088   (24,429)    187.3  (444.7)
Income taxes...................    915   2,742     3,581     199.7    30.6
                                 -----   -----     -----     -----  ------

Net income(loss) ..............$ 1,552  $ 4,346 $(28,010)    180.0  (744.5)
                                ======   ======  =======     =====  =======
Net income(loss) per share.....$   .30  $   .61 $  (3.16)    103.3% (618.0)%
                               =======  ======= =========    ====== ========


<PAGE>




                                                  Year Ended December 31,
Statement of Operations Data:                    1994     1995      1996
                                                 ----     ----      ----
Revenues:
    Product...................................    46.9%   46.0%    43.2%
    Applications engineering..................    29.7    32.7     38.0
    Support...................................    23.4    21.3     18.8
                                                ------  ------    -----

       Total revenues.........................   100.0   100.0    100.0

Cost of revenues:
    Cost of product revenues..................     7.9     5.6      5.8
    Cost of applications engineering revenues.    17.9    16.6     20.7
    Cost of support revenues..................     4.4     3.4      3.4
    Write off of capitalized software.........     -         -      5.6
       Total cost of revenues.................    30.2    25.6     35.5
                                                  ----    ----     ----

Gross Profit..................................    69.8    74.4     64.5

Operating expenses:
    Sales and marketing.......................   26.4     25.6     28.9
    Product development.......................    8.0      8.6      4.3
    General and administrative................   12.0     11.1     10.4
    Write off of in-process research 
      and development                              -        -     103.5

       Total operating expenses...............   46.4     45.3    147.1
                                                 ----     ----    -----

Operating income(loss)........................   23.4     29.1    (82.6)
Net other income..............................     .4      5.8      7.3
                                                -----    -----    -----

Income(loss) before income taxes..............   23.8     34.9    (75.3)
Income taxes..................................    8.8     13.5     11.0
                                                -----    -----     ----

Net income(loss)..............................   15.0%    21.4%   (86.3)%
                                                 ====    ==== =   ======


1996 Compared to 1995 and 1995 Compared to 1994

    Total  Revenues.  Total revenues for 1996 increased  59.6% to  approximately
$32.5 million from  approximately  $20.3 million in 1995,  due  principally to a
number of factors.  These factors include continued  acceptance of the Company's
products in the industrial automation market,  expansion of the Company's sales,
applications   engineering   and  technical   support   service   organizations,
introduction of MP2 for Windows95/NT in June 1996, introduction of MaintainItPro
in September 1996,  increased  demand for the  client/server  version of MP2 for
Windows in the industrial automation market, and the addition of sales personnel
and  marketing  resources to support the  Company's  telesales  and direct sales
programs. Total revenues for 1995 increased 96.1% to approximately $20.3 million
from approximately $10.4 million in 1994, due principally to introduction of the
client/server version of MP2 for Windows in September 1995, increased demand for
MP2 for  Windows  in the  industrial  automation  market,  and  introduction  of
MaintainIt in September 1996.  International  revenues were  approximately  $4.4
million , or 13.4% of total  revenues in 1996,  compared to  approximately  $2.2
million,  or 10.7%  of total  revenues,  in 1995  and $1.8  million,  or 7.2% of
revenues  in 1994.  Management  anticipates  that  international  revenues  will
continue  to  increase  as a  percentage  of total  revenues  as a result of the
expansion of Datastream's international sales efforts and sales of SQL's product
to its customer base, which is predominantly international in nature.

    Product revenues increased 50.0% to approximately $14.0 million in 1996 from
approximately  $9.3 million in 1995, and 92.3% to approximately  $9.3 million in
1995 from  approximately $4.9 million in 1994. These increases are due to growth
in the number of  software  units sold,  and an increase in the average  selling
price of the systems sold.  As a percentage of revenues,  revenues from software
products decreased to 43.2% in 1996 from 46.0% in 1995 and 46.9% in 1994.

    Applications  engineering  revenues  increased 85.1% to approximately  $12.3
million  in 1996  from  approximately  $6.7  million  in  1995,  and  116.0%  to
approximately  $6.7  million in 1995 from  approximately  $3.1  million in 1994.
These  increases   generally  reflect  increased   installation,   training  and
integration   services  provided  to  support  increased  product  sales.  As  a
percentage  of  revenues,   revenues  from  applications   engineering  services
increased  to 38.0% in 1996  from  32.7% in 1995 and  29.7% in 1994.  Management
expects  this trend to  continue,  partly as a result of sales of high-end  CMMS
systems by SQL.

    Technical support services  increased 41.0% to approximately $6.1 million in
1996 from  approximately  $4.3 million in 1995, and 78.7% to approximately  $4.3
million in 1995 from approximately $2.4 million in 1994. These increases reflect
an increase in the type and  variety of services  offered as well as  additional
services provided to a larger installed  customer base. As a percentage of total
revenues,  revenues from technical  support services  decreased to 18.8% in 1996
from 21.3% in 1995 and 23.4% in 1994.

    Cost of Revenues. Cost of product revenues as a percentage of total revenues
increased to 5.8% in 1996 from 5.6% in 1995,  and decreased to 5.6% in 1995 from
7.9% in 1994.  The  increase  as a  percentage  of  revenues  in 1996  from 1995
principally  reflects increased  amortization of capitalized software costs as a
percentage  of product  costs.  The decrease as a percentage of revenues in 1995
from 1994  principally  reflects  decreased  costs  associated with printing and
replication of the Company's  software products and volume discounts realized on
shipping costs. Cost of product revenues is expected to decrease as a percentage
of revenues  in 1997 for two  reasons  related to the  acquisition  of SQL,  the
write-off  of  approximately  $1.8  million  in  capitalized  software  rendered
obsolete or redundant upon the  acquisition of SQL and the smaller  component of
product cost reflected in SQL's product revenues.

    Cost of applications engineering services increased as a percentage of total
revenues to 20.7% in 1996 from 16.6% in 1995 and decreased to 16.6% in 1995 from
17.9% in 1994.  The increase as a  percentage  of revenues in 1996 from 1995 was
due primarily to lower  utilization of application  engineers  during the second
half of the year  resulting from increased  hiring to support  planned  services
growth.  The  decrease  as a  percentage  of  revenues in 1995 from 1994 was due
primarily to increased  utilization  of engineers  providing  services and fewer
sales of third  party  hardware,  offset in part by  higher  customer-reimbursed
travel expenses.  Cost of application  engineering services revenues is expected
to increase as a percentage of revenues in 1997 due to the acquisition of SQL.

    Cost of technical  support  services as a percentage  of total  revenues was
3.4%, 3.4% and 4.4% in 1996, 1995 and 1994, respectively. The decrease from 1994
to 1995 as a percentage of revenues reflects the cost efficiencies achieved from
providing  support  services to a larger customer base, and improved  quality of
the software and associated  documentation.  Cost of technical  support services
revenues is expected to increase as a percentage  of revenues in 1998 due to the
acquisition of SQL.

    Cost of revenue includes a $1.8 million  write-off of capitalized  software,
5.6% of total revenues,  which became obsolete as a result of the acquisition of
SQL (see note 1(i) to the consolidated financial statements) .

    Sales  and  Marketing  Expenses.  Sales  and  marketing  expenses  for  1996
increased 80.2% to approximately $9.4 million from approximately $5.2 million in
1995, and 90.6% to 5.2 million in 1995 from  approximately $2.7 million in 1994.
As a percentage of total revenues,  these expenses were 28.9% in 1996,  25.6% in
1995 and 26.4% in 1994.  The increase as a  percentage  of revenues in 1996 from
1995 was due primarily to increased  commissions and sales travel expenses.  The
decrease  as a  percentage  of  revenue in 1995 from 1994 was due  primarily  to
increased productivity of the Company's sales and marketing staffs combined with
increased market acceptance of the Company's products.

    Product  Development  Expenses.  Total expenditures on product  development,
including capitalized expenses,  increased to approximately $4.0 million in 1996
from  approximately $2.3 million in 1995, and from approximately $1.2 million in
1994. The increases were primarily due to the hiring of additional employees and
third party  consultants  to work on the Company's  file/server,  client/server,
MaintainIt/Pro and foreign language products.  The Company capitalized  software
expense  of  approximately   $2.6  million,   $.6  million,   and  $.4  million,
respectively,  in 1996, 1995 and 1994, which represented  65.2%, 24.8% and 33.1%
of  total  expenditures  for  product  development  in the  respective  periods.
Capitalization  of software  expense is expected to decrease as a percentage  of
total  development  expense in 1997 because the majority of projects  qualifying
for capitalization  have been released or will be released for revenue shipments
in early 1997. Net product  development  expenditures  were  approximately  $1.4
million, $1.7 million and $.8 million in 1996, 1995 and 1994, respectively.  Net
product  development  expenses as a percentage of revenues  were 4.3%,  8.6% and
8.0% in 1996, 1995 and 1994,  respectively.  Amortization of capitalized product
development costs is charged to cost of product sales and totaled  approximately
$.5 million,  $.3 million and $.2 million in 1996, 1995 and 1994,  respectively.
Management  believes that these capitalized  software assets will be recoverable
out of future product sales.

    General and Administrative  Expenses.  General and  administrative  expenses
include the cost of the  Company's  finance,  human  resources  and  information
services.  General and administrative  expenses increased 49.1% to approximately
$3.4  million  in 1996  from  $2.3  million  in  1995,  and  increased  81.2% to
approximately  $2.3 million in 1995 from approximately $1.3 million in 1994, due
primarily  to  increased   administrative  personnel  required  to  support  the
Company's  growth,  increased  reserves and increased  expenses  associated with
being  a  public  company.  As a  percentage  of  total  revenues,  general  and
administrative expenses were 10.4% in 1996, 11.1% in 1995 and 12.0% in 1994. The
steady decline from 1994 to 1996 indicates that the Company has managed a larger
revenue  base  without  commensurate  increases  in general  and  administrative
expenses.

    Write-off of in-process research and development costs. The company expensed
$33.6 million of in-process research and development  acquired in as part of the
acquisition  of SQL. This one-time  charge  resulted in the Company  reporting a
loss in 1996 (see note (2) to the consolidated financial statements).

    Other Income/Expense. Other income/expense increased $1.2 million in 1996 to
approximately  $2.4  million  from  approximately  $1.2  million  in  1995,  and
approximately  $42,000 in 1994, due to the interest earned on higher  investment
balances  realized upon  completion  of two public  offerings of Common Stock in
April 1995 and October 1995, respectively.

    Income Taxes. The Company's  effective income tax rate for 1996 decreased to
(14.6)% due to the tax treatment of the acquisition  related costs.  Without the
effect of the acquisition,  the Company's effective tax rate for 1996 would have
decreased to 36.8% due principally to increased product development tax credits.
The Company's  effective  income tax rate increased to 38.7% for 1995 from 37.1%
for 1994, due principally to decreased product development tax credits in 1995.

    Net Income(loss). The Company's net income decreased 86.3% in 1996 to a loss
of approximately  $(28.0) million or $(3.16) per share, from approximately $4.35
million,   or  $.61  per  share  in  1995,  and  increased  180.0%  in  1995  to
approximately  $4.35  million,  or $.61  per  share,  from  approximately  $1.55
million,  or $.30 per share, in 1994. The loss in 1996 is directly  attributable
to the  one-time  write-off of costs  associated  with the  acquisition  of SQL.
Before accounting for the one time charges associated with the acquisition,  the
Company's net income increased 64% to $7.1 million in 1996.


Quarterly Results

    General. Many software companies experience seasonal variations in revenues.
The Company has experienced  eighteen  consecutive  quarters of increasing total
revenues.  Although  this  growth does not reflect  seasonal  variations  in the
Company's  operating  results,  the Company  believes that its future results of
operations may be subject to quarterly  variations.  Datastream has historically
experienced  an increase in revenues in the quarter (Q2 1996 and Q3 1995) during
which the Company holds its annual  Technical  User Group  Conference.  The next
such  conference  is  presently  scheduled  to be held in May 1997  (although no
assurance of such an increase in 1997 can be given).

    The  following  table  presents  certain   unaudited   quarterly   financial
information  for each of the eight  quarters  through the quarter ended December
31, 1996. In the opinion of management,  this  information  has been prepared on
the same basis as the audited financial  statements  appearing elsewhere in this
Form  10-K  Report  and all  necessary  adjustments  (consisting  only of normal
recurring adjustments) have been included in the amounts stated below to present
fairly the unaudited quarterly results when read in conjunction with the audited
financial  statements of the Company and notes thereto.  The Company's quarterly
results have in the past been subject to  fluctuations,  and thus the  operating
results for any quarter are not necessarily indicative of results for any future
period. All amounts shown (except per share amounts) are expressed in thousands.


<PAGE>






                                             Quarter
                                              Ended


                                1995                       1996
                                -----                      ----
                      March  June   Sept.  Dec.      March  June  Sept.  Dec.
                       31,   30,     30,    31,       31,   30,    30,    31,

Revenues:
  Product............ $1,597 $2,308 $2,432 $3,006    $3,073 $3,259 $3,652 $4,034
  Applications          
    engineering....    1,268  1,358  1,926  2,108     2,489  2,813  3,070  3,954
  Support............    884    985  1,195  1,279     1,340  1,632  1,543  1,607
                       -----  -----  -----  -----     -----  -----  -----  -----
   Total revenues....  3,749  4,651  5,553  6,393     6,902  7,704  8,265  9,595
Cost of revenues:
  Cost of product   
    revenues.........    201    247    341    347       361    491    473    554
  Cost of applications
    engineering revenues 584    751    957  1,091     1,177  1,443  1,716  2,393
  Cost of support
    revenues............ 138    160    173    228       265    261    258    311
  Write off of          
    capitalized software   -      -      -      -         -      -      -  1,804

  Total cost of
    revenues............ 923  1,158  1,471  1,666     1,803  2,195  2,447  5,062
                       -----  -----  -----  -----     -----  -----  -----  -----
Gross profit.........  2,826  3,493  4,082  4,727     5,099  5,509  5,818  4,533
Operating expenses:
  Sales and marketing  1,069  1,119  1,296  1,732     2,128  2,234  2,269  2,768
  Product development    228    426    465    622       417    301    358    314
  General and
    administrative....   540    569    497    653       628    867    805  1,068
  Write off of
    in-process research 
    and development        -      -      -      -         -      -      - 33,600
                       -----  -----  -----  -----     -----  -----  -----  -----
Total operating
expenses.............  1,837  2,114  2,258  3,007     3,173  3,402  3,432 37,750
                       -----  -----  -----  -----     -----  -----  -----  -----
Operating income(loss)   989  1,379  1,824  1,720     1,926  2,107 2,385(33,217)
Net other income.....     94    200    271    611       576    581   590    623
                       -----  -----  -----  -----     -----  -----  -----  -----
Income(loss) before 
  income taxes.........1,083  1,579  2,095  2,331     2,502  2,687 2,976(32,594)
Income taxes.........    428    637    836    841       963    103 1,146    436
                       -----  -----  -----  -----     -----  ----- -----  ------
                         
Net income (loss)....  $ 655  $ 942 $1,259 $1,490  $1,539 $1,651 $1,830$(33,030)
                       -----  -----  -----  -----   -----  -----  ----- --------
                         655    942  1,259  1,490   1,539  1,651 $1,830$(33,030)
                       =====  =====  =====  =====   =====   ===== ===== ========

Net income(loss) per
share................  $ .13 $ .13  $ .17   $ .17   $ .18  $ .19  $ .21 $ (3.74)
                       =====  =====  =====  =====   =====   ===== ===== ========


  The table below sets forth the  percentage  relationship  of certain  items to
total  revenues with regard to the Company's  results of operations  for each of
the eight quarters through the quarter ended December 31, 1996.


                                           Quarter
                                            Ended


                               1995                       1996
                               -----                      ----
                      March   June   Sept  Dec   March  June  Sept  Dec.
                        31,    30,    30,   31,    31,    30,   30,   31,
                                              
Revenues:
  Product............  42.6% 49.6% 43.8% 47.0%    44.5% 42.3% 44.2% 42.0%
  Applications         33.8  29.2  34.7  33.0     36.0  36.5  37.2  41.2
    engineering......
  Support............
                          23.6 21.2  21.5 20.0     19.5  21.2  18.6  16.8
                          ---- ----  ---- ----     ----  ----  ----  ----
   Total revenues....    100.0100.0 100.0100.0    100.0 100.0 100.0 100.0
Cost of revenues:
  Cost   of    product     5.4  5.3   6.1  5.4      5.2   6.4   5.7   5.8
revenues.............
  Cost              of
applications              15.5 16.2  17.2 17.1     17.1  18.7  20.8  24.9
engineering
   revenues..........
  Cost   of    support
revenues.............      3.7  3.4   3.1  3.6     3. 8   3.4   3.1   3.2
  Write-off         of
capitalized software.       -    -     -    -       -      -     -   18.7
                           ---- ----  ---- ----     ----  ----  ----  ----
   Total    cost    of                                      
revenues.............     24.6 24.9  26.5 26.1    26.1.  28.5   29.6  52.6
                           ---- ----  ---- ----     ----  ----  ----  ----
Gross profit.........     75.4 75.1  73.5 73.9     73.8  71.5  70.4  47.4
Operating expenses:
  Sales and marketing     28.5 24.0  23.3 27.1     30.8  29.0  27.5  28.9
  Product development      6.1  9.2   8.4  9.7      6.0   3.9   4.3   3.3
  General          and
administrative.......     14.4 12.2   9.0 10.2      9.1  11.3   9.8  11.1
  Write-off         of
in-process research
                  and       -    -    -    -         -    -      -  351.2
                          ---- ----  ---- ----     ----  ----  ----  ----
development
   Total     operating
expenses.............     49.0 45.4  40.7 47.0     46.0  44.2  41.5 394.5
                          ---- ----  ---- ----     ----  ----  ---- -----
Operating income(loss)    26.4 29.7  32.8 26.9     27.9 27..3  28.9(347.1)
Net other income.....
                           2.5  4.3   4.9  9.6      8.3   7.5   7.1   6.5
                         ---- ----  ---- ----     ----  ----  ----  ----
Income(loss)    before    28.9 34.0  37.7 36.5     36.3  34.9  36.0(340.6)
income taxes.........
Income taxes.........
                          11.4 13.7 15.1 13.1      14.0  13.5 13.9   4.5
                          ---- ----  ---- ----     ----  ----  ----  ----

Net income(loss).....
                         17.5% 20.3% 22.6% 23.4%   22.3% 21.4% 22.2% (345.1)%
                         ====  ====  ====  ====    ====  ====  =====  ======


<PAGE>





                                      44

Liquidity and Capital Resources

    Since its  inception,  the Company has  financed  its  operations  through a
combination of private equity  financing,  bank loans and lines of credit,  and,
beginning in 1988,  through cash flows from  operations.  In 1994, 1995 and 1996
operating  activities generated cash totaling  approximately $2.5 million,  $2.8
million and $6.2 million,  respectively,  primarily  related to increases in net
income, in 1994 and 1995 and increases in net income before acquisition  related
charges in 1996.

    In 1994,  1995 and 1996, the Company used cash from investing  activities of
approximately $1.5 million,  $41.5 million and $2.1 million primarily related to
the  purchase  of  short-term  investments,  additions  to  property,  plant and
equipment and additions to capitalized  software  development costs. The Company
completed  its initial  public  offering in April 1995,  raising net proceeds of
approximately  $13.6  million,  and a second  public  offering in October  1995,
raising net  proceeds of  approximately  $25.1  million.  The  proceeds of these
offerings were invested in U.S. government securities.

    The Company  maintains a bank line of credit that provides for borrowings of
70% of accounts receivable less than 60 days aged up to $1.0 million.  This line
expires on May 31, 1997. No borrowings were outstanding under the line of credit
at December 31, 1996.

    The  acquisition of SQL was completed for $31 million,  $17 million in cash,
$14 million in stock  issued  pursuant to  Regulation  S, $3 million in escrowed
stock, and assumption of outstanding liabilities. Following the acquisition, SQL
long-term debt totaling approximately $2.7 million was repaid by the Company and
additional working capital infusions of approximately $2.5 million were required
to sustain SQL's  operations  and pay current  liabilities.  Approximately  $1.7
million of SQL's  long-term  debt remains,  of which  approximately  $800,000 is
scheduled to be repaid by the end of 1997.

    The  Company's  principal  commitments  as of December  31,  1996  consisted
primarily of leases on its headquarters facilities and operating equipment,  and
there  were no  material  commitments  for  capital  expenditures.  The  Company
believes that its current cash balances,  availability  under its line of credit
and cash flow from  operations and the proceeds of its public  offerings will be
sufficient  to meet its working  capital and  capital  expenditure  needs for at
least the next 12 months.


Inflation

    The Company  believes that  inflation  has not had a material  impact on the
Company's  operating  results and does not expect  inflation  to have a material
impact on the Company's operating results in 1996.

"Safe Harbor" Statement

    The  following  "Safe  Harbor  Statement"  is made  pursuant  to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained in
the body of this Report are  forward-looking  statements (rather than historical
facts)  that are  subject to risks and  uncertainties  that could  cause  actual
results  to  differ  materially  from  those  described  in the  forward-looking
statements.  With respect to such forward-looking  statements, the Company seeks
the  protections  afforded by the Private  Securities  Litigation  Reform Act of
1995. The list set forth below is intended to identify  certain of the principal
factors  that  could  cause  actual  results  to differ  materially  from  those
described in the  forward-looking  statements  included elsewhere herein.  These
factors  are  not  intended  to  represent  a  complete  list of all  risks  and
uncertainties  inherent  in the  Company's  business,  and  should  be  read  in
conjunction  with the more detailed  cautionary  statements  included  elsewhere
herein.

    Competition.  The current  market for CMMS software is both  fragmented  and
highly  competitive,  and  management  expects  competition  to intensify as new
companies  enter the market and existing  ones expand their product  lines.  The
Company  has entered  into new  markets at the low end of the market  and,  more
importantly,  at the high end of the market through both its  introduction of an
internally developed  client/server  product line and through the acquisition of
SQL systems. Management expects the Company to face increased competition across
all  products  lines in 1997.  The  Company's  future  performance  is partially
dependent  upon the  Company's  ability  to respond  to  technological  changes,
evolving standards and its competitors'  innovations.  Certain  competitors have
greater financial,  marketing,  service and support and technical resources than
Datastream and SQL.

    Effects  of  Technological  Change  and Risks of  Product  Development.  The
Company's industry is characterized by rapidly changing technology, frequent new
product  introductions  and evolving  industry  standards.  Datastream's  future
success will depend upon its ability to enhance its current products and develop
new ones that  address  technological  and market  developments.  Certain of the
Company's  software  research  and  development   efforts  are   technologically
challenging, and there can be no assurance that these efforts will be successful
or that the resulting products will achieve market acceptance.

    Dependence  on a  Limited  Number  of  Products.  Approximately  99%  of the
Company's  1995  revenues  were  derived  from sales of the Windows  versions of
SideArm,  MP2, MaintainIt and MP2 for Windows client/server and related services
and support.  Accordingly,  the Company's  financial  performance will depend on
continued market acceptance of these products and of the  client/server  version
of MP2 for  Windows.  Any  factor  adversely  affecting  sales of the  Company's
products,  such as delays in development,  significant software flaws,  negative
product evaluations or incompatibility with significant hardware platforms could
have a material adverse effect on the Company's results of operations.

    Risks Associated with International Sales.  International sales increased to
13.4% of the  Company's  1996  revenues  (from  10.7% in 1995),  and  management
expects that an  increasing  portion of the  Company's  total  revenues  will be
derived from international  operations conducted in foreign currencies.  Changes
in  the  value  of  these  currencies   relative  to  the  dollar  could  affect
Datastream's results of operations and financial position,  and gains and losses
on currency  translations  could  contribute  to  fluctuations  in the Company's
results of operations.

    Fluctuations in Quarterly Results.  The Company generally operates with very
little  backlog,  and a  significant  portion of  Datastream's  revenues  in any
quarter  results from a large number of relatively  small orders received during
that period.  Accordingly,  the Company is subject to fluctuations in the number
of  overall  orders  in any given  period,  which is in turn  influenced  by the
overall  level of  economic  and  industrial  activity.  Datastream  establishes
expense levels based in part on its  expectations as to future net sales. If the
Company's revenues are below  expectations,  operating results may be materially
adversely  affected.  No assurance can be given that the Company will be able to
maintain profitability on a quarterly or annual basis in the future.

    Impact of SQL  Acquisition  The  acquisition  of SQL has  impacted  and will
continue to impact the  reporting,  control and management  capabilities  of the
Company in 1997. While management  believes it fully understands and can address
the challenges  encountered during the integration  process, a number of aspects
of SQL's business cause management to recognize that it cannot provide assurance
concerning the Company's  ability to maintain  revenue or earnings growth in the
future at the same levels that have been  achieved  historically.  These aspects
include the global scope of SQL operations, the fact this is the Company's first
major acquisition,  the differences encountered in the high-end markets in which
SQL  competes,   the  seasonality  of  SQL's  revenues,  and  the  fact  that  a
disproportionate  share of SQL's sales occur at the end of each quarter and that
the  dollar  amount of an SQL  transaction  is  substantially  greater  than the
historical dollar amount of an average Datastream transaction.

    As noted above,  this brief summary of certain of the principal factors that
may  potentially  influence  the Company's  results of operations  and financial
conditions is not intended to be  exhaustive,  and should be read in conjunction
with other cautionary statements made herein and in the Company's publicly-filed
reports.



Item 8.  Financial Statements and Supplementary Data.

    The financial statements and supplementary financial information required by
this  item are filed as part of this  Report  on Form 10-K on pages F-1  through
F-16 and pages S-1 through S-2 immediately  preceding the signature page to this
Report.


Item 9. Changes in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

    Not applicable.



<PAGE>


                                   PART III

Item 10.  Directors and Executive Officers of the Registrant.

    The  information  required  by this item is  incorporated  by  reference  to
information  to be included  under the caption  "Election  of  Director-Director
Nominee Biographical  Information,"  "-Executive Officers" and "-Compliance with
Section  16(a)  of the  Securities  Exchange  Act  of  1934"  of  the  Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on June 13, 1997.

Item 11.  Executive Compensation.

    The  information  required  by this item is  incorporated  by  reference  to
information to be included under the captions  "Election of  Director-Additional
Information    Concerning    the   Board   of    Directors"    and    "Executive
Compensation-Executive  Compensation  Tables" in the Company's  definitive Proxy
Statement for the Annual Meeting of Shareholders to be held
on June 13, 1997.


Item 12.  Security Ownership of Certain Beneficial Owners and Management.

    The  information  required  by this item is  incorporated  by  reference  to
information  to be included  under the caption  "Beneficial  Ownership of Common
Stock" in the Company's  definitive  Proxy  Statement for the Annual  Meeting of
Shareholders to be held on June 13, 1997.


Item 13.  Certain Relationships and Related Transactions.

    The  information  required  by this item is  incorporated  by  reference  to
information     to    be    included     under    the     caption     "Executive
Compensation-Compensation Committee Interlocks and Insider Participation" in the
Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 13, 1997.

                                    PART IV

Item  14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

    (a)The following documents are filed as part of this Report:

      1. Financial Statements

         o Independent Auditors' Report.
         o Consolidated Balance Sheets as of December 31, 1995 and 1996.
         o Consolidated  Statements of Operations for the Years Ended December
           31, 1994, 1995 and 1996.
         o Consolidated  Statements of Stockholders'  Equity for the Years Ended
           December 31, 1994, 1995 and 1996.
         o Consolidated  Statements of Cash Flows for the Years Ended December
31, 1994, 1995 and                                    1996.
         o Notes to Consolidated Financial Statements.






      2. Financial Statement Schedules:

         o Independent Auditors' Report.
         o Allowance for Doubtful Accounts Receivable.

         All other  schedules  for  which  provision  is made in the  applicable
         accounting  regulations of the  Securities and Exchange  Commission are
         not required under the related  instructions  or are  inapplicable  and
         therefore have been omitted.



      3. Exhibits:

      Exhibit
      Number      Description

      2.1*              SQL Systems Group, B.V. Share Purchase Agreement

      3.1*              Amended and Restated  Certificate of  Incorporation of
                  the Registrant.

      3.2*              By-laws of the Registrant.

      4.1*              See  Exhibits  3.1  and  3.2  for  provisions  of  the
                  Amended  and  Restated   Certificate  of  Incorporation  and
                  By-Laws  of the  Registrant  defining  rights of  holders of
                  Common Stock of the Registrant.

      4.2*              Specimen Stock Certificate.

      10.1+       1995 Stock  Option  Plan of the  Registrant  and form of Stock
                  Option Agreement (as amended and restated effective  September
                  12, 1995).

      10.2*       Stock  Option Plan for  Directors  and form of Stock  Option
                  Agreement.

      10.3*       License  Agreement  Pertaining to Grainger  Approved  Access
                  Software  dated  December 27, 1994,  between the  Registrant
                  and W. W. Grainger, Inc.

      10.3(a)+          Addendum to License  Agreement  dated March 15,  1995,
                  between the Registrant and W. W. Grainger, Inc.

      10.4*       401(k) Retirement Plan of the Registrant.

      10.5        Employee  Stock  Purchase Plan of the Registrant (as amended
                  and restated effective October 12, 1995).

      11          Statement re: Computation of Per Share Earnings

      21          Subsidiaries of the Registrant.

      23.1        Consent of KPMG Peat Marwick LLP.

      24**        Power of Attorney.

---------------
*   Incorporated  herein by  reference  to exhibit  of the same  number in the
    Form S-1 Registration Statement of the Registrant (Reg. No. 33-89498).

+   Incorporated  herein by  reference  to exhibit  of the same  number in the
    Form S-1  Registration Statement of the Registrant (Reg. No. 33-96834).

**  See the signature page hereto.

    NOTE:  Exhibits  10.1,  10.2,  10.4 and 10.5 are identified as "management
    contracts" under Item 601 of Regulation S-K.


<PAGE>






                          Independent Auditors' Report


The Board of Directors
Datastream Systems, Inc.:

We have  audited the  accompanying  consolidated  balance  sheets of  Datastream
Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the  three-year  period  ended  December  31,  1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Datastream Systems,
Inc.  and  subsidiaries,  as of December  31, 1995 and 1996,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.




Greenville, South Carolina                      KPMG Peat Marwick LLP
March 28, 1997



<PAGE>


                   DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                           December 31, 1995 and 1996

              Assets                                           1995       1996
              ------                                           ----       ----
Current assets:
   Cash and cash equivalents                           $  1,184,092    6,315,719
   Accounts receivable, net of allowance 
     for doubtful accounts
     of $244,475 and $835,000 in 1995 and 
     1996, respectively                                   4,589,254   11,725,928
   Investments held to maturity                          17,335,907   13,011,856
   Accrued interest receivable                              309,375      221,827
   Prepaid expenses                                         162,779      586,647
   Inventories                                              250,931      324,018
   Deferred income taxes                                    181,000      395,000
   Other assets                                             110,127    1,961,496
         Total current assets                            24,123,465   34,542,491

Investments held to maturity                             20,319,024    4,547,220

Property and equipment, net                               5,297,062    8,692,323

Goodwill                                                         -     7,636,748

Capitalized software development costs, net of accumulated
   amortization of $987,261 and $1,197,177 in 1995 and
   1996, respectively                                       952,618    2,158,436
                                                         ----------    ---------

         Total assets                                  $ 50,692,169   57,577,218
                                                         ==========   ==========

   Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable                                        199,428     4,403,205
   Other accrued liabilities                               431,484     9,139,078
   Income taxes payable                                    699,201       743,707
   Current portion of long-term debt                        20,000     1,507,274
   Unearned revenue                                      2,808,348     5,116,007
                                                         ---------     ---------
         Total current liabilities                       4,158,461    20,909,271

Long-term debt, less current portion                        21,667     2,892,743
Deferred income taxes                                      478,000       650,000
                                                         ---------     ---------
         Total liabilities                               4,658,128    24,452,014
                                                        ----------    ----------
Commitments

Stockholders' equity:
   Preferred stock $1 par value, 1,000,000 shares 
      authorized; none issued                                 -             -
   Common stock, $.01 par value, 15,000,000 shares
      authorized;  8,405,488 and 9,126,789 shares 
      issued and outstanding at December 31, 1995 
      and 1996, respectively                                84,055        91,268
   Additional paid-in capital                           40,738,355    55,832,034
   Retained earnings (deficit)                           5,211,631  (22,798,098)
                                                        ----------   -----------
         Total stockholders' equity                     46,034,041    33,125,204
                                                        ----------    ----------
 
         Total liabilities and stockholders' equity   $ 50,692,169    57,577,218

See accompanying notes to consolidated financial statements.


<PAGE>


                   DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                  Years ended December 31, 1994, 1995 and 1996


                                              1994           1995          1996
                                              ----           ----          ----
Revenues:
   Product                             $ 4,858,647      9,342,978     14,018,478
   Applications engineering              3,083,692      6,659,998     12,325,593
   Support                               2,431,244      4,343,008      6,122,332

      Total revenues                    10,373,583     20,345,984     32,466,403
                                        ----------     ----------    -----------

Cost of revenues:
   Cost of product revenues                821,845      1,135,779      1,879,258
   Cost of applications 
    engineering revenues                 1,856,936      3,382,730      6,729,072
   Cost of support revenues                457,103        699,544      1,094,745
   Write-off of capitalized software            -              -       1,803,637

         Total cost of revenues          3,135,884      5,218,053     11,506,712
                                          ----------    ----------   -----------

      Gross profit                       7,237,699     15,127,931     20,959,691

Operating expenses:
   Sales and marketing                   2,736,403      5,216,009      9,398,675
   Product development                     829,625      1,740,895      1,390,325
   General and administrative            1,246,723      2,259,172      3,369,338
   Write-off of in-process research 
       and development                           -             -      33,600,000
                                        ----------     ----------    -----------

      Total operating expenses           4,812,751      9,216,076     47,758,338
                                        ----------     ----------    -----------

      Operating income (loss)            2,424,948      5,911,855   (26,798,647)

Other income (expense):
   Interest and other income                48,230      1,181,974      2,374,158
   Interest expense                        (6,114)        (5,770)        (4,240)

      Net other income                      42,116      1,176,204      2,369,918
                                        ----------     ----------    -----------

      Income (loss) before income taxes  2,467,064      7,088,059   (24,428,729)



      Net income (loss)               $  1,552,064      4,346,059   (28,009,729)
                                        ==========     ==========    ===========

      Net income (loss) per share     $        .30            .61         (3.16)
                                        ==========     ==========    ===========

      Weighted average number of common and
         common equivalent 
         shares outstanding              5,183,036      7,182,878      8,842,761





See accompanying notes to consolidated financial statements.



<PAGE>


                   DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity

                  Years Ended December 31, 1994, 1995 and 1996

                                                         Unrealized Net
                                                         Gain (Loss) on    Total
                                    Additional  Retained   Investments    Stock-
                               Common  Paid-In  Earnings     Available  holders'
                               Stock   Capital  (Deficit)  for Sale, Net  Equity


Balance at December 31, 1993  $  34,700  19,300    501,511     8,237     563,748

   Net income                       -       -    1,552,064       -     1,552,064

   Increase in the redemption value
      of common stock warrants      -       -   (1,188,003)      -   (1,188,003)

   Unrealized net loss on investments
      available for sale, net of
      income tax                    -       -          -     (11,724)   (11,724)
                                -------  -------  --------  --------   ---------

Balance at December 31, 1994     34,700  19,300    865,572    (3,487)    916,085

   Net income                       -       -    4,346,059        -    4,346,059


   Unrealized net gain on investments
      available for sale, net of
      income tax                    -       -          -       3,487       3,487

   Issuance of common shares in initial
      public offering, net of offering
      costs of $387,787          20,000  13,540,213    -         -    13,560,213

   Exercise of redeemable stock
      warrants                   17,212   2,048,337    -         -     2,065,549

   Issuance of common shares in
      public offering, net of offering
      costs of $225,064          12,143  25,130,505    -         -    25,142,648
                                -------  ----------  ------   ------  ----------

Balance at December 31, 199      84,055  40,738,355 5,211,631    -    46,034,041

   Net loss                         -        -    (28,009,729)   -  (28,009,729)

   Exercise of stock options      1,164     921,926       -       -      923,090

   Tax benefit of options
       exercised                    -       115,000       -       -      115,000

   Stock issued for Employee Stock
      Purchase Plan                  38      62,764       -       -       62,802

   Stock issued in acquisition    6,011  13,993,989       -       -   14,000,000
                                 ------  ----------  --------  -----  ----------

Balance at December 31, 1996  $  91,268  55,832,034 (22,798,098)  -   33,125,204
                               ========  ==========  ==========  ===  ==========


See accompanying notes to consolidated financial statements.


<PAGE>


                   DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                  Years ended December 31, 1994, 1995 and 1996

                                                  1994         1995       1996
                                                  ----         ----       ----
Cash flows from operating activities:
   Net income (loss)                       $1,552,064    4,346,059  (28,009,729)
   Adjustments to reconcile  net income (loss) to net cash provided by operating
     activities:
       Depreciation                           207,268      355,263      948,460
       Amortization of capitalized software
         development costs                    160,379      258,119      500,065
       Accretion of investment discount, net        -     (337,045)    (576,431)
       (Gain) loss on disposal of equipment    (6,450)      54,788       19,378
       Provision for doubtful accounts         30,000      149,075      590,525
       Deferred income taxes                  115,000       44,000      (42,000)
       Write-off of in-process 
          research and development                  -          -     33,600,000
       Write-off of capitalized software            -          -      1,803,637
       Changes in operating assets and liabilities, net of
         effects of acquisition:
            Accounts receivable              (706,943)  (3,087,227)  (4,420,619)
            Accrued interest receivable       (18,393)    (290,982)      87,548
            Prepaid expenses                  (38,360)    (103,687)    (190,238)
            Inventories                       (69,991)    (171,258)     (73,087)
            Other assets                       23,871      (84,163)    (111,384)
            Accounts payable                  (79,231)      78,944      642,429
            Other accrued liabilities         (30,684)     336,179      529,394
            Income taxes payable              612,382       25,843     (242,082)
            Unearned revenue                  702,278    1,233,298    1,117,436
                                            ---------   ---------    ----------
              Net cash provided by 
                    operating activities    2,453,190    2,807,206    6,173,302
                                            ---------    ---------    ---------


Cash flows from investing activities:
   Purchase of investments                  (1,031,924)(41,105,386) (36,079,529)
   Proceeds from sale and maturities 
      of investments                           596,265   4,801,648   56,751,813
   Additions to property and equipment        (720,411  (4,647,262)  (3,765,805)
   Proceeds from the sale of equipment          15,750       6,205        9,135
   Capitalized software development costs     (388,498)   (541,953)  (2,609,521)
   Cash paid for acquisition, net of cash acquired  -           -   (16,428,660)
                                             ---------   ----------  ----------
     Net cash used in investing activities  (1,528,818) (41,486,748) (2,122,567)
                                             =========   ==========   =========
Cash flows from financing activities:
   Net proceeds from initial public
      offering of common stock                     -     13,560,213         -
   Net proceeds from secondary
       public offering of stock                    -     25,142,648         -
   Proceeds from exercise of stock warrants        -         35,463         -
   Proceeds from exercise of stock options 
       and related tax benefit                     -            -     1,038,090
   Proceeds for stock issuances under 
        employee purchase plan                     -            -        62,802
   Principal payments on long-term debt        (43,183)     (26,667)    (20,000)
   Principal payments on capital 
        lease obligations                       (2,639)         -           -
              Net cash provided by (used in)
                financing activities           (45,822)  38,711,657   1,080,892
                                              ---------  ----------  ----------

Net increase in cash and cash equivalent       878,550       32,115   5,131,627
Cash and cash equivalents at beginning of year 273,427    1,151,977   1,184,092
                                              --------    ---------  ----------
Cash and cash equivalents at end of year   $ 1,151,977    1,184,092   6,315,719
                                             =========    =========   ==========

Supplemental  disclosures  of cash flow  information:  Cash paid during the year
   for:
     Interest                                 $ 6,115         5,770       4,240
     Income taxes                           $ 111,743     2,800,520   3,750,082
                                              =======     =========   =========


Supplemental disclosure of non-cash activities:
   Unrealized net gain (loss) on investments available
     for sale, net of income taxes          $ (11,724)        3,487          -
                                             =========    =========    =========
See accompanying notes to consolidated financial statements.


<PAGE>

(1)  Summary of Significant Accounting Policies

     (a) Organization and Basis of Presentation

         Datastream  Systems,  Inc. (the  "Company" or  "Datastream")  develops,
         markets,  sells and supports Microsoft  Windows-based personal computer
         software for the industrial  automation market.  Datastream's  software
         enables  users to schedule  preventive  maintenance,  record  equipment
         maintenance  histories,  organize and control spare parts  inventories,
         schedule equipment and parts inventory purchases and deploy maintenance
         personnel.  In addition to its U.S. operations,  the Company has direct
         sales or  distribution  offices in the United  Kingdom,  Latin America,
         Malaysia, Australia and South Africa.

         On December 31, 1996, the Company  acquired SQL Group,  B.V. (SQL) (see
         note 2).

     (b) Consolidation Policy

         The  consolidated   financial   statements   include  the  accounts  of
         Datastream  Systems,  Inc.  and  its  wholly  owned  subsidiaries.  All
         significant   intercompany   accounts   and   transactions   have  been
         eliminated.

     (c) Revenue Recognition

         The Company's  revenue,  which  consists  primarily of fees for product
         sales,   applications   engineering  and  support,   is  recognized  in
         accordance  with AICPA  Statement of Position 91-1,  "Software  Revenue
         Recognition" as there are no significant vendor  obligations  remaining
         and  collection  of the related  receivable  is  probable.  The Company
         accounts for  insignificant  vendor  obligations by accruing such costs
         and recognizing them ratably on completion of performance. Revenue from
         product  sales  is   recognized   upon  shipment  of  the  product  and
         fulfillment  of acceptance  terms,  if any.  Revenue from  applications
         engineering is recorded as services are provided.  Revenue from support
         is  deferred  and  recognized  ratably  over the  terms of the  support
         agreements,  generally  one year.  In  instances  where the  support is
         included  with the  product  sale,  the support  fee is  unbundled  and
         recognized ratably over the support period.

         The Company  continually  evaluates  its  obligations  with  respect to
         warranties,  returns  and  refunds.  Based  on  historical  trends  and
         management's   evaluation   of  current   conditions,   any   potential
         obligations  that are inherent in the accounts  receivable  balance are
         adequately  provided for through the allowance  for doubtful  accounts.
         The  Company  may  in  certain  circumstances  grant  discounts  when a
         purchase order is received. The discounts are recognized in the product
         revenue at the time of shipment.

     (d) Cash Equivalents

         The Company  considers all highly liquid  investments  with an original
         maturity of three months or less to be cash equivalents.



<PAGE>


(1)  Summary of Significant Accounting Policies, Continued

     (e) Concentration of Credit Risk

         Financial   instruments  which   potentially   expose  the  Company  to
         concentrations  of credit  risk  consist  primarily  of trade  accounts
         receivable.  The Company has not experienced significant losses related
         to receivables  from  individual  customers or groups of customers in a
         particular  industry  or  geographic  area.  As  a  result,  management
         believes no  additional  credit risk  beyond the amounts  provided  for
         estimated  future  collection  losses  is  inherent  in  the  Company's
         accounts receivable.

     (f) Investment Securities

         The Company  classifies its investment  securities as  held-to-maturity
         securities,  trading  securities or available for sale  securities,  as
         appropriate.

         Since the Company's investments in 1995 and 1996 consisted of short and
         long-term  government  securities  which the Company intends to hold to
         maturity,  the  portfolio  has  been  classified  as  held-to-maturity,
         current and noncurrent,  depending upon the specific  maturity date and
         is carried at amortized cost. Interest income is recorded on an accrual
         basis.

         Previously, the Company's investment securities were short-term or held
         in a  managed  account  and were sold  periodically.  As such they were
         classified as available  for sale and were recorded as current  assets.
         Investments  designated  as  available  for sale are recorded at market
         value.  Changes in the market value of  investments  available for sale
         are included in  stockholders'  equity as  unrealized  holding gains or
         losses net of the related tax effect.  Unrealized losses on investments
         available  for sale,  reflecting  a decline in value judged to be other
         than  temporary,  are  charged  to income in the  statement  of income.
         Realized gains or losses on investments available for sale are computed
         on the specific identification basis.

      (g)   Inventories

         Inventories are stated at the lower of cost (first-in, first-out) basis
         or market (net realizable  value).  Substantially  all of the Company's
         inventory is software related product.

     (h) Property and Equipment

         Property and equipment are recorded at cost.  Depreciation  is computed
         under the  straight-line  method over the  estimated  useful  lives for
         financial reporting and under the accelerated and modified  accelerated
         cost recovery  systems for income tax reporting.  The estimated  useful
         lives generally assigned by the Company are as follows:

           Building                                 40 years
           Computer equipment                   3 to 5 years
           Furniture and fixtures                    5 years
           Automobiles                               5 years


<PAGE>


(1)  Summary of Significant Accounting Policies, Continued

     (i) Capitalized Software Development Costs

         Capitalized  software development costs consist principally of salaries
         and certain other expenses related to development and  modifications of
         software products and are capitalized in accordance with the provisions
         of Statement of Financial  Accounting Standards No. 86, "Accounting for
         the  Costs of  Computer  Software  to be  Sold,  Leased,  or  Otherwise
         Marketed".  Capitalization of such costs begins only upon establishment
         of  technological  feasibility,  which is  defined  by the  Company  as
         completion  of a  working  model  of the  software  and  ends  when the
         resulting product is available for sale.

         Amortization of capitalized software development costs is provided on a
         product-by-product  basis and begins when the product is available  for
         sale.  Annual  amortization is the greater of the amount computed using
         the  ratio of  current  product  revenue  to the total of  current  and
         anticipated  product  revenue  or  the  straight-line  basis  over  the
         remaining  estimated  economic life of the software,  which is not more
         than three years. The ongoing  assessment of the realizability of these
         costs requires  considerable  judgment as to anticipated future product
         revenues,  related estimated economic life, and changes in hardware and
         software  technology.  Amortization  of software  development  costs is
         included in cost of product revenues in the accompanying  statements of
         income.

         During  the years  ended  December  1994,  1995 and 1996,  total  costs
         incurred (excluding  amortization of capitalized  software  development
         costs) for software development activities were $1,240,786,  $2,314,003
         and $3,999,845,  respectively;  total capitalized  software development
         costs  were  $411,161,  $573,108  and  $2,609,520,   respectively;  and
         amortization of capitalized costs was $160,379,  $258,119 and $500,065,
         respectively.

         In  connection  with the  acquisition  of SQL (see note 2), the Company
         acquired  software  technology  valued at $900,000.  In  addition,  the
         Company wrote-off $1,803,637 of its existing capitalized software which
         became obsolete as a result of the SQL acquisition.

     (j) Goodwill

         Goodwill  resulting  from the  acquisition  of SQL (see note 2) will be
         amortized using the straight-line method over its estimated useful life
         of seven years.

         The  recoverability  of goodwill  will be  periodically  reviewed  when
         events  or  circumstances  warrant.  Impairment,  determined  when  the
         carrying  value of an asset  cannot  be  recovered  over its  remaining
         useful life from  undiscounted  future cash flows, will be measured and
         recognized  when the  fair  value is less  than  the  asset's  carrying
         amounts.

     (k) Stock Option Plan

         In October 1995,  the  Financial  Accounting  Standards  Board issued
         Statement of Financial  Accounting Standards No. 123, "Accounting for
         Stock-Based   Compensation."  Statement  No.  123  is  effective  for
         fiscal years  beginning  after  December 15, 1995.  Statement No. 123
         requires  that an entity  recognize in its financial  statements  the
         costs  (determined  by a fair  value  based  method)  related  to its
         employee  stock-based  compensation  plans,  such as stock option and
         stock purchase plans.


<PAGE>


(1)  Summary of Significant Accounting Policies, Continued

         Alternatively,  Statement  No. 123 also  allows an entity to continue
         to apply the  provisions  of APB Opinion No. 25 and provide pro forma
         net  income  and,  if  earnings  per  share is  presented,  pro forma
         earnings per share  disclosures for employee stock option grants made
         in 1995 and future years as if the  fair-value-based  method  defined
         in  Statement  No. 123 had been  applied.  The Company has elected to
         continue  to apply the  provisions  of APB Opinion No. 25 and provide
         the pro forma disclosure provisions of Statement No. 123.

     (l) Income Taxes

         The Company records income taxes using the asset and liability  method.
         Deferred tax assets and  liabilities  are recognized for the future tax
         consequences   attributable   to  differences   between  the  financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases.  Deferred tax assets and liabilities are measured
         using  enacted  tax rates  expected  to apply to taxable  income in the
         years in which those temporary differences are expected to be recovered
         or settled.  The effect on  deferred  tax assets and  liabilities  of a
         change in tax rates is recognized in income in the period that includes
         the enactment date.

     (m) Net Income (Loss) Per Share

         Net income  (loss) per share is computed by dividing net income  (loss)
         by the weighted average number of common and common  equivalent  shares
         outstanding.  Weighted  average  common  and common  equivalent  shares
         include common  shares,  stock options using the treasury stock method,
         and the assumed exercise of the outstanding warrants to purchase common
         stock.

      (n)   Stock Split

         On February 7, 1995, the Company's stockholders approved an approximate
         32-for-one  stock  split,  effected  in the  form of a stock  dividend.
         Effective September 12, 1995, the Company's Board of Directors declared
         a two for one stock split effected in the form of a stock dividend. All
         share,  per share and  conversion  amounts  relating  to common  stock,
         warrants  and stock  options  included  in the  accompanying  financial
         statements and notes have been restated to reflect these stock splits.

     (o) Foreign Currency Translation

         The financial  statements of subsidiaries outside the United States are
         generally measured using the local currency as the functional currency.
         Assets and  liabilities  of these  subsidiaries  are  translated at the
         rates of exchange at the balance sheet date.  Revenues and expenses are
         translated at the average rate of exchange during the period.

     (p) Use of Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.


 (2) Acquisition

     On December 31,  1996,  the Company  acquired all of the capital  stock and
     equity  interests of SQL for a total purchase  price of $42.1 million.  The
     purchase  price  consisted of  $17,000,000  in cash,  $14,000,000 of common
     stock (601,105 shares valued at $22.62 per share) and the assumption of net
     tangible  liabilities and costs incurred of $11.1 million.  At December 31,
     1996, an additional  $3 million of common stock  (150,276  shares at $22.62
     per share)  was being  held in escrow  pending  the  resolution  of certain
     matters,  which are expected to be determined during 1997. The value of any
     subsequently issued shares will be allocated to goodwill and amortized over
     its remaining  useful life.  SQL is a computerized  maintenance  management
     software vendor in Europe. The acquisition has been accounted for using the
     purchase method.  The purchase price has been allocated to the tangible and
     intangible  assets purchased and the liabilities  assumed based on the fair
     values on the date of acquisition as follows:

        Total purchase price $ 31,000,000 Net tangible  liabilities  assumed and
        costs incurred:
           Current assets                                            5,851,534
           Furniture, fixtures, and equipment                          606,428
           Current liabilities                                     (11,668,049)
           Acquisition costs                                          (965,000)
           Acquisition related liabilities                          (1,625,000)
           Long-term debt, less current portion                     (3,336,661)
                                                                    ----------
                                                                   (11,136,748)

        Excess cost over fair value of net tangible
           liabilities assumed and costs incurred                 $ 42,136,748
                                                                    ==========

         Excess cost over  fair-value  of net tangible  liabilities  assumed has
           been allocated to:
              Software technology                                 $    900,000
              Goodwill                                               7,636,748
              In-process research and development                   33,600,000
                                                                    ----------
 
                                                                  $ 42,136,748

     The in-process research and development of $33,600,000  represents the fair
     value of in-process development projects that had not reached technological
     feasibility and had no probable  alternative future uses, which the Company
     expensed at the date of the acquisition.

     In  conjunction  with the  acquisition,  the Company  recorded  acquisition
     related  liabilities of  approximately  $1,625,000 to cover the anticipated
     cost of  combining  its  existing  business  with the  business of SQL. The
     liabilities  are included in the purchase  price  allocation and consist of
     the costs of a plan to  involuntarily  terminate and relocate  employees of
     SQL and the costs of a plan to exit certain activities of SQL.


<PAGE>


(2)  Acquisition, Continued

     The  following  unaudited  pro forma  information  presents  the results of
     operations of the Company as though the aforementioned acquisition occurred
     as of the beginning of the year in which the  acquisition  occurred and the
     immediately preceding year. The pro forma adjustments (i) reflect increased
     amortization  expense related to the acquired  assets and reduced  interest
     income related to investments used as part of the  consideration,  and (ii)
     exclude the non-recurring  charges for in-process  research and development
     and the write-off of capitalized software.

                                                       1995          1996
                                                       ----          ----

        Total revenue                            $ 35,299,000    49,216,000
        Operating income (loss)                     4,285,000      (764,000)
        Net income (loss)                           2,523,000    (2,910,000)
        Earnings per share (loss)                         .32          (.30)


(3)  Investment Securities

     The amortized cost, gross  unrealized  gains,  gross unrealized  losses and
     market value of  held-to-maturity  securities at December 31, 1995 and 1996
     are as follows:

                                                 Gross       Gross
                                      Amortized  Unrealized  Unrealized   Market
                                      Cost       Gains       Losses       Value

        December 31, 1995

        Held-to-maturity:
           U.S. Treasury Securities $37,654,931    173,489   (1,616)  37,826,804
                                    ===========    =======   =======  ==========
        December 31, 1996

        Held-to-maturity:
           U.S. Treasury Securities $17,559,076    176,211   (4,668)  17,730,619
                                    ===========    =======   =======  ==========

     In   December   1996,   the  Company   sold   investments   classified   as
     held-to-maturity  with an amortized  cost of  $10,155,487  and recognized a
     gain of $24,218. The proceeds from this sale and the proceeds from maturing
     held-to-maturity  investments  represented the cash  consideration  for the
     Company's acquisition of SQL (see note 2).



<PAGE>


(3)  Investment Securities, Continued

     The  amortized  cost and market value of  investments  held-to-maturity  at
     December 31, 1996, by contractual maturities are shown below:

                                                           Amortized     Market
                                                             Cost         Value
        Due in one year or less                        $  13,011,856  13,167,113
        Due after one year through five years              4,547,220   4,563,506
                                                         -----------  ----------

                                                       $  17,559,076  17,730,619

     Proceeds  from the sale of available for sale  securities  were $15,462 and
     $236,379 in 1994 and 1995, respectively,  and gross realized gains included
     in income were insignificant in both years.


(4)  Fair Value of Financial Instruments

     The  fair  value of  financial  instruments  is the  amount  at  which  the
     instrument  could be exchanged  in a current  transaction  between  willing
     parties.

     At December 31, 1995 and 1996, the carrying value of financial  instruments
     such as cash  and  cash  equivalents,  accounts  receivable,  and  accounts
     payable  approximated their fair values, based upon the short maturities of
     these instruments.

     The  fair  value  of  the  Company's  long-term  debt  is  estimated  using
     discounted cash flow analysis,  based on the Company's current  incremental
     borrowing rates for similar types of borrowing  arrangements.  The carrying
     value of such  instruments  approximated  their fair value at December  31,
     1995 and 1996.

     The fair values of investment  securities  presented in note 3 are based on
     quoted  market   prices  at  the  reporting   date  for  those  or  similar
     investments.


(5)  Property and Equipment

     Property and equipment consisted of the following at December 31:
                                                             1995        1996

        Land                                           $    450,000      465,981
        Building                                          3,009,509    4,371,113
        Computer equipment                                2,152,780    4,719,340
        Furniture and fixtures                              562,073      930,226
                                                         ----------   ----------

                                                          6,174,362   10,486,660
        Accumulated depreciation                            877,300    1,794,337
                                                         ----------   ----------

                                                       $  5,297,062    8,692,323
                                                         ==========   ==========




<PAGE>


(6)  Other Accrued Liabilities

     Other accrued liabilities consisted of the following at December 31:
                                                             1995        1996

        Accrued salaries and commission                 $   265,000    1,231,565
        Sales and payroll taxes payable                      22,761    1,449,468
        Accrued acquisition costs                                -     1,373,316
        Acquisition related liabilities (see note 2)             -     1,625,000
        Warranty reserve                                         -     1,500,000
        Other accrued liabilities                           143,723    1,959,729
                                                          ---------   ----------
                                                        $   431,484    9,139,078
                                                          =========   ==========

(7)  Long-term Debt

     Long-term debt as of December 31, 1995 and 1996 consists of the following:

                                                              1995        1996
        Note  payable  in  monthly  payments  of
           $1,667,  plus  interest at prime plus
           .5%      through      March     1998;
           collateralized by equipment                  $    41,667       21,667

        Subordinated  note  payable in bi-annual
           payments of $127,300,  plus  interest
           at 7% through December 2000                           -       765,136

        Subordinated   note  payable  in  annual
           payments of $108,795,  plus  interest
           at 6.5% through December 2002                         -       870,356

        Subordinated   note  payable  in  annual
           payment of $48,150,  plus interest at
           6.5% through December 2002                            -       481,513

        Subordinated   note  payable  in  annual
           payments  of $57,320,  plus  interest
           at 10% through August 2004                            -       515,907

        Subordinated   note  payable  in  annual
           payments of 11,465,  plus interest at
           10% through April 2000                                -        51,591

        Subordinated   note  payable  in  annual
           payments  of $34,394,  plus  interest
           at 10% through April 2000                             -       171,979


<PAGE>


(7)  Long-term Debt, Continued

                                                              1995        1996

        Note payable in bi-annual  payments of $204,643,  plus  interest at 5.3%
           through October 1999; collateralized
           by receivables and stock                              -     1,433,075

        Note payable in annual payments of $8,598, plus interest at 6.5% through
           July 2004; collateralized by
           intellectual property rights                          -        68,788

        Subordinated   note  payable  in  annual
           payments of $3,572,  plus interest at
           6.5% through December 2002                            -        20,005
                                                          ---------   ----------
                                                            41,667     4,400,017
              Less current portion                         (20,000)  (1,507,274)
                                                          ---------   ----------

        Long-term debt, less current portion            $   21,667     2,892,743
                                                          =========   ==========


     At December 31, 1996,  approximately  $4,379,000  of total  long-term  debt
     represented  debt assumed in the SQL  acquisition  (see note 2). In January
     and  February of 1997,  approximately  $2,725,000  of the assumed  debt was
     repaid  by the  Company.  After  giving  effect to the  repayments  made in
     January  and  February  of 1997 that were before  scheduled  maturity,  the
     remaining annual  maturities of long-term debt in the five years subsequent
     to December 31, 1996 are as follows:


           1997                                          $    715,017
           1998                                               241,334
           1999                                               239,667
           2000                                               239,667
           2001                                               239,667
                                                           ----------

              Total                                      $  1,675,352
                                                           ==========



(8)  Line of Credit

     The Company maintains a $1,000,000 unsecured bank line of credit payable on
     demand.  Borrowings  bear  interest at the bank's prime rate. No borrowings
     were outstanding under the line of credit at December 31, 1995 and 1996.




<PAGE>


(9)  Income Taxes

     Income tax expense for the years ended December 31, 1994,  1995 and 1996 is
     as follows:

                                                    Current   Deferred     Total

        1994:
           Federal                               $ 659,000     95,000    754,000
           State                                   141,000     20,000    161,000
                                                 ---------   --------  ---------

              Total                            $   800,000    115,000    915,000
                                                 =========   ========  =========

        1995:
           Federal                               2,346,000     47,000  2,393,000
           State                                   352,000     (3,000)   349,000
                                                 ---------   --------  ---------

              Total                            $ 2,698,000     44,000  2,742,000
                                                 =========   ========  =========

        1996:
           Federal                             $ 3,230,000    (30,000) 3,200,000
           State                                   393,000    (12,000)   381,000
                                                 ---------   --------  ---------

              Total                            $ 3,623,000    (42,000) 3,581,000
                                                 =========   ========  =========

     Income tax  expense  differed  from the amounts  computed  by applying  the
     Federal income tax rate of 34% as a result of the following:

                                                     1994       1995       1996
                                                     ----       ----       ----

        Computed "expected" tax expense (benefit)$ 839,000 2,410,000 (8,306,000)
        Increase (decrease) in income taxes 
         resulting from:
           State and local income taxes, net of
              Federal income tax benefits         106,000    230,000     251,000
           In process research and development         -          -   11,424,000
           Credit for increasing research 
              activities                          (71,000)        -           -
           Other, net                              41,000    102,000     212,000
                                                 --------  ---------  ----------


        Actual tax expense                        915,000  2,742,000   3,581,000
                                                 ========  =========  ==========



<PAGE>


(9)  Income Taxes, Continued

     Deferred income taxes reflect the net tax effects of temporary  differences
     between  the  carrying  amounts of assets  and  liabilities  for  financial
     reporting   purposes  and  the  amounts  used  for  income  tax   purposes.
     Significant  components  of the  Company's  deferred  income tax assets and
     liabilities are as follows:

                                                          1995        1996

        Deferred tax assets:
           Accrued expenses and allowances            $ 181,000     395,000
                                                        -------     -------

        Deferred tax liabilities:
           Tax over book depreciation                   123,000     189,000
           Software development costs capitalized for
              financial reporting                       355,000     461,000
                                                        -------     -------

        Total deferred tax liabilities                  478,000     650,000
                                                        -------     -------

        Net deferred tax liabilities                  $ 297,000     255,000
                                                        =======     =======


     Management  believes that a valuation allowance is not necessary based upon
     the level of  historical  taxable  income  and the  projections  for future
     taxable income over the periods during which the temporary  differences are
     deductible.

(10) Redeemable Common Stock Warrants

     At December 31, 1994,  the Company had  outstanding  common stock  warrants
     which  granted to the  warrants  holder the right to  purchase a  specified
     number of shares equal to  approximately  33.25% of the total common shares
     then  outstanding.  Such shares totaled  1,730,038 at $.058825 per share at
     December 31, 1994.

     Prior to the initial public offering (note 13), the warrants holder had the
     option to  require  the  Company  to  purchase,  at a price  determined  in
     accordance with provisions of the agreement,  any part or all of either the
     warrants or common  stock  issued upon any  exercise  of the  warrants.  At
     December 31, 1994,  the aggregate cost to repurchase the warrants or common
     shares sold under the warrants,  net of the proceeds of the exercise of the
     warrants, was $2,030,086.

     In conjunction with the initial public offering, the warrants holder of all
     redeemable  common stock warrants  exercised  such warrants,  at a price of
     .058825,  by the  exchange of 8,842  shares of common  stock at the initial
     public offering price, and the payment of approximately $35,500 in cash.





<PAGE>


(11) Employee Savings and Retirement Plan

     Effective  September 1, 1992, the Company  established a 401(k)  Retirement
     Plan under Section 401(k) of the Internal  Revenue Code. The Plan is funded
     in  part  from  employee   voluntary   contributions   with  the  Company's
     contribution  equal to one-half of the employee's  contribution up to 3% of
     their compensation.  The Plan provides for voluntary employee contributions
     of up to 15% of their total compensation.

     The  Company's  contributions  to the Plan totaled  approximately  $60,000,
     $79,000, and $135,000 in 1994, 1995 and 1996, respectively.

(12) Stock Compensation Plans

     1995 Stock Option Plan

     On September  12,  1995,  the Company  amended and restated the  Datastream
     Systems,  Inc.  1995 Stock Option Plan (the "1995 Plan") to provide for the
     grant  of both  incentive  and  non-qualified  options  to  purchase  up to
     1,000,000  shares of the Company's  common stock. On December 26, 1996, the
     Company's Board of Director's authorized an additional 750,000 shares to be
     added to the 1,000,00 share limit available under the 1995 Plan, subject to
     stockholder approval. Such options will vest incrementally over a period of
     one to five years and will expire either five or ten years from the date of
     grant,  depending on the terms of the option. Options are not to be granted
     at less than the fair market  value of the  underlying  shares at the grant
     date.  Incentive  options granted to a participant who is an over 10% owner
     shall not be  granted  at less than  110% of the fair  market  value of the
     underlying shares at the grant date.

     A summary of activity in the 1995 Plan during the periods  indicated  is as
     follows:

                                                   Number of Weighted-Average
                                                    Shares    Exercise Price
        Stock options outstanding:
           Balance at December 31, 1994                   -    $      -
           Granted                                   843,900       11.62
           Terminated                                (23,700)       8.12
                                                    --------

           Balance at December 31, 1995              820,200       11.72
           Granted                                   119,650       24.63
           Exercised                                (111,907)       7.95
           Forfeited                                 (53,556)      15.10
                                                    --------

           Balance at December 31, 1996              774,387   $   13.49
                                                    ========     =======


<PAGE>


(12) Stock Compensation Plans, Continued

     The following table summarizes  information about stock options outstanding
     under the 1995 Plan at December 31, 1996:

                          Options outstanding           Options exerciseable
                       ---------------------------   ---------------------------
                                  Weighted Average                Weighted -
        Range of         Number       Remaining       Number        Average
     Exercise Prices  outstanding  Contractual Life Exerciseable  Exercise Price

   $ 7.50   -  8.25      392,886       8.1 years      69,554     $  7.61
    18.75   - 20.77      287,751       8.7            88,627       18.89
    23.25   - 30.50       93,750       9.6                -           -
                        --------                    --------
     7.50   - 30.50      774,387       8.5           158,181       13.93
                        ========                    ========


     No options were exercisable at December 31, 1995.

     The per share  weighted-average  fair value of stock options  granted under
     the 1995 Plan  during  1995 and 1996 was  $9.00  and  $10.24 on the date of
     grant  using the Black  Scholes  option-pricing  model  with the  following
     weighted-average  assumptions:  1995  -  expected  dividend  yield  of  0%,
     expected  volatility of 62.41%,  risk-free  interest rate of 7.07% , and an
     expected life of 10 years;  1996 - expected  dividend yield of 0%, expected
     volatility of 62.41%,  risk-free  interest  rate of 7.01%,  and an expected
     life of 10 years.

     Stock Option Plan for Directors

     In  February  1995,  the  Company  established  the Stock  Option  Plan for
     Directors  (the   "Directors   Plan")  which  provides  for  the  grant  of
     non-qualified  stock  options to  purchase  up to 100,000  shares of Common
     Stock to directors  who are not  employees of the Company.  Under the Plan,
     eligible directors  automatically  receive options to purchase, at the fair
     market  value of a share on the date of grant,  (i) 4,500  shares of Common
     Stock upon the  commencement  of their  service as a director  and (ii) 500
     shares of Common Stock  annually in connection  with each annual meeting of
     stockholders.  Automatic  grants of options  to  purchase  4,500  shares of
     common  stock at $7.50 per share  were made to each of the  Company's  four
     non-management  directors upon consummation of the Company's initial public
     offering (see note 13).

     A summary of activity in the Director's  Plan during the periods  indicated
     are as follows:

                                                    Number of   Weighted-Average
                                                     Shares     Exercise Price
        Stock options outstanding:
           Balance at December 31, 1994                   -     $     -
           Granted                                    18,000        7.50
                                                    --------

           Balance of December 31, 1995               18,000        7.50
           Granted                                     2,000       19.50
           Exercised                                  (4,500)       7.50
                                                    --------

           Balance at December 31, 1996               15,500    $   8.98
                                                    ========      ======



<PAGE>


(12) Stock Compensation Plans, Continued

     The following table summarizes  information about stock options outstanding
     under the Director's Plan at December 31, 1996:

                          Options outstanding         Options exerciseable
                         ------------------------   -------------------------
                                  Weighted Average                Weighted -
   Range of          Number       Remaining         Number        Average
   Exercise Prices   outstanding  Contractual Life  Exerciseable  Exercise Price

   $ 7.50                 13,500        8.1 years     13,500     $  7.50
    19.50                  2,000        9.0               -           -
                        --------                    --------
     7.50  - 19.50        15,500        8.2           13,500        7.50
                        ========                    ========


     No options were exercisable at December 31, 1995.

     The per share  weighted-average  fair value of stock options  granted under
     the Director's Plan during 1995 and 1996 was $5.88 and $6.74 on the date of
     grant  using the Black  Scholes  option-pricing  model  with the  following
     weighted-average  assumptions:  1995  -  expected  dividend  yield  of  0%,
     expected  volatility of 62.41%,  risk-free  interest rate of 7.56% , and an
     expected life of 10 years;  1996 - expected  dividend yield of 0%, expected
     volatility of 62.41%,  risk-free  interest  rate of 5.63%,  and an expected
     life of 10 years.

     Employee Stock Purchase Plan

     On September 12, 1995, the Company established the Datastream Systems, Inc.
     Employee  Stock  Purchase  Plan (the  "Purchase  Plan").  The Purchase Plan
     permits  eligible  employees  to  elect  to  contribute  up to 15% of their
     regular  compensation  through payroll  deductions,  toward the purchase of
     common  stock at 85% of the fair market value of a share on either the date
     the right is granted (the first day of each semi-annual period) or the date
     it is exercised  (the last day of such  period),  whichever  is lower.  The
     Purchase  Plan is  intended  to comply  with  Section  423 of the  Internal
     Revenue  Code of 1986,  as amended.  The Board of  Directors  has  reserved
     100,000 shares of common stock for future issuance pursuant to the Purchase
     Plan. Under the Plan, the Company sold 3,789 shares in 1996. No shares were
     sold under the Plan in 1995.

     Under  Statement No. 123,  compensation  expense for the Purchase Plan is
     determined  based  on the  discount  percentage  at  which  the  stock is
     purchased.

     The Company  applies APB Opinion No. 25 in  accounting  for its three Plans
     and,  accordingly,  no compensation  cost has been recognized for its stock
     options or for stock  purchased  under the Purchase  Plan in the  financial
     statements.  Had the Company determined compensation cost based on the fair
     value  at the  grant  date for  stock  options  or  based  on the  discount
     percentage  under the Plan Purchase under  Statement No. 123, the Company's
     net income  would  have been  reduced  to the pro forma  amounts  indicated
     below:





<PAGE>


(12) Stock Compensation Plans, Continued

                                                          1995           1996
                                                          ----           ----

         Net income (loss)   As reported            $  4,346,059   $(28,009,729)
                             Pro forma                 3,452,499    (29,807,110)


         Net income (loss)   As reported            $       .61    $      (3.16)
            per share        Pro forma                      .48           (3.37)


     Pro  forma net  income  reflects  only  options  granted  in 1995 and 1996.
     Compensation  cost related to the 1995 Plan is reflected  over the options'
     vesting period of one to five years. No options were granted prior to 1995.


 (13)                        Public Offerings of Common Stock

     On April 5,  1995,  the  Company  closed its  initial  public  offering  of
     3,266,000 shares of common stock,  1,266,000 of which were sold by existing
     shareholders,  for $7.50 per share.  The Company  invested the net proceeds
     from the offering in U.S. Government securities.

     On October 4, 1995,  the  Company  closed  its second  public  offering  of
     2,000,000 shares of common stock,  1,085,670 of which were sold by existing
     shareholders,  for $22.25 per share.  The Company invested the net proceeds
     from the offering in U.S.  Government  securities.  In conjunction with the
     second   offering,   on  October  17,  1995,  the  Company  closed  on  the
     over-allotment  option  of  300,000  shares of common  stock.  The  Company
     invested the net proceeds from the over-allotment option in U.S. Government
     securities.


 (14) Leases

     As Lessee

     The Company leases office space, automobiles and equipment under agreements
     which have been  classified  as operating  leases for  financial  reporting
     purposes.

     At December 31, 1996, the  approximate  future minimum lease payments under
     noncancelable  operating  leases that expire at various  dates through 2001
     are as follows:

        1997                                             $   945,289
        1998                                                 410,585
        1999                                                 206,262
        2000                                                  94,009
        2001                                                  93,955
                                                           ---------

                                                         $ 1,750,100

     Rent expense for the years ended  December 31, 1994,  1995 and 1996 totaled
     $123,615, $174,193, and $307,534, respectively.



<PAGE>


(14) Leases, Continued

     As Lessor

     The  Company  leases  a  portion  of its  building  and  related  leasehold
     improvements to outside parties under noncancelable operating leases.

     At December 31, 1996,  the  approximate  future minimum rental income under
     noncancelable operating leases that expire through 1998 are as follows:

        1997                                             $   350,921
        1998                                                 161,448
                                                           ---------

                                                         $   512,369

     Rental income  (included in other income in the  accompanying  statement of
     operations) amounted to $88,415 for the year ended December 31, 1996. There
     was no rental income in the years ended December 31, 1994 and 1995.


(15) Foreign Revenues

     Foreign  revenues for the year ended December 31, 1994,  1995 and 1996 were
     approximately $750,000, $2,180,000, and $4,354,000, respectively.



<PAGE>












                             Independent Auditors' Report

The Board of Directors
Datastream Systems, Inc.:

Under date of March 28, 1997, we reported on the consolidated  balance sheets of
Datastream Systems,  Inc. and Subsidiaries as of December 31, 1995 and 1996, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for each of the years in the  three-year  period  ended  December 31,
1996,  which  are  included  herein.  In  connection  with  our  audits  of  the
aforementioned  consolidated  financial statements,  we also audited the related
accompanying  consolidated  financial  statement schedule listed in Item 14(a)2.
The  consolidated  financial  statement  schedule is the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
consolidated financial statement schedule based on our audits.

In our  opinion,  such  schedule,  when  considered  in  relation  to the  basic
consolidated  financial  statements taken as a whole,  presents  fairly,  in all
material respects, the information set forth therein.





Greenville, South Carolina                KPMG Peat Marwick LLP
March 28, 1997










<PAGE>


                               Datastream Systems, Inc.

                      Allowance for Doubtful Accounts Receivable







                               Balance at      Amounts                Balance at
                              Beginning of   Charged to                   End of
      Description                 Year    Bad Debt Expense  Deductions     Year

Allowance for doubtful accounts receivable:

      Year ended December 31,
         1994                  $ 65,400         30,000            -       95,400
                                 ======       ========      ========    ========

      Year ended December 31,
         1995                  $ 95,400        149,075            -      244,475
                                 ======       ========      ========    ========
      Year ended December 31,
         1996                 $ 244,475       590,525             -      835,000
                                 ======       ========      ========    ========

<PAGE>

                                  SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        Datastream Systems, Inc.


Date:  March 29, 1996                   By: /s/ Larry G. Blackwell
                                          -----------------------------

                                            Larry G. Blackwell
                                            Chairman  of the Board,  President
                                            and Chief Executive Officer


                               POWER OF ATTORNEY

   KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature  appears on
the signature page to this Registration Statement constitutes and appoints Larry
G.  Blackwell  and  Daniel H.  Christie  and each of them,  his true and  lawful
attorneys-in-fact   and   agents,   with   full   power  of   substitution   and
resubstitution,  for  him  and in his  name,  place  and  stead,  in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement,  and to file the same, with all exhibits hereto,
and other  documents in connection  therewith,  with the Securities and Exchange
Commission, and grants unto said attorneys-in-fact and agents, and each of them,
full  power  and  authority  to do and  perform  each and  every  act and  thing
requisite and  necessary to be done in and about the  premises,  as fully to all
intents and  purposes as he might or could do in person,  hereby  ratifying  and
confirming all that said  attorneys-in-fact  and grants or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.

   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
Report  has  been  signed  below  by the  following  persons  in the  capacities
indicated on March 29, 1996.

               Signature                                 Title

      /s/ LARRY G. BLACKWELL           Chairman of the Board, President and
          ------------------           Chief Executive Officer (principal
          Larry G. Blackwell           executive officer)

      /s/ DANIEL H. CHRISTIE           Chief Financial Officer (principal
          ------------------           financial and accounting officer)
          Daniel H. Christie

      /s/ KENNETH D. TRACY             Director
          ------------------ 
          Kenneth D. Tracy

      /s/ RICHARD T. BROCK             Director
          ------------------ 
          Richard T. Brock

      /s/ JOHN M. STERLING, JR         Director
          ------------------ 
          John M. Sterling, Jr.

      /s/ IRA D. COHEN                 Director
          ------------------   
          Ira D. Cohen


<PAGE>



                                 EXHIBIT INDEX
      Exhibit                                                     Page No. of
      Number      Description                                     SEC Original

      2.1*        SQL Systems Group, B.V. Share Purchase Agreement      N/A

      3.1*        Amended and Restated Certificate of Incorporation
                  of the Registrant.                                    N/A

      3.2*        By-laws of the Registrant.                            N/A

      4.1*        See Exhibits 3.1 and 3.2 for provisions of the
                  Amended and Restated Certificate of Incorporation 
                  and By-Laws of the Registrant defining rights of
                  holders of Common Stock of the Registrant.            N/A

      4.2*        Specimen Stock Certificate.                           N/A

      10.1U       1995 Stock Option Plan of the Registrant and 
                  form of Stock Option Agreement (as amended and 
                  restated effective September 12, 1995).               N/A

      10.2*       Stock Option Plan for Directors and form of Stock     N/A
                  Option Agreement.

      10.3*       License Agreement Pertaining to Grainger Approved 
                  Access Software dated December 27, 1994, between 
                  the Registrant and W. W. Grainger, Inc.               N/A

      10.3(a)U    Addendum to License Agreement dated March 15, 1995,   N/A
                  between the Registrant and W. W. Grainger, Inc.

      10.4*       401(k) Retirement Plan of the Registrant.             N/A

      10.5        Employee Stock Purchase Plan of the Registrant 
                  (as amended and restated effective 
                   October 12, 1995).                                   N/A

      11          Statement re: Computation of Per Share Earnings

      21          Subsidiaries of the Registrant.

      23.1        Consent of KPMG Peat Marwick LLP.

      24**        Power of Attorney.                                   N/A
---------------
*   Incorporated  herein by  reference  to exhibit  of the same  number in the
    Form S-1 Registration Statement of the Registrant (Reg. No. 33-89498).

U   Incorporated  herein by  reference  to exhibit  of the same  number in the
    Form S-1  Registration Statement of the Registrant (Reg. No. 33-96834).

**  See the signature page hereto.

    NOTE:  Exhibits  10.1,  10.2,  10.4 and 10.5 are identified as "management
    contracts" under Item 601 of Regulation S-K



<PAGE>


                                                EXHIBIT  11




<PAGE>


                  Datastream Systems, Inc. and Subsidiaries
                 Computation of Historical Earnings Per Share


Income per share calculations:


Year ended December 31,
                                        1994           1995           1996
                                        ----           ----           ----


Net income                    $     1,552,064     4,346,059    (28,009,729)
                                    =========     =========    ============

Weighted average number of common and common equivalent shares are as follows:

Weighted average common
shares outstanding                  3,469,962     6,502,237       8,490,631


Shares issued from assumed
exercise of options and
warrants (1)                        1,713,074       680,641         352,130

Weighted average number
of common and common
equivalent shares
outstanding                         5,183,036     7,182,878       8,842,761


Per share data:
Net income per share          $          0.30          0.61          (3.16)

(1)   Shares issued from assumed exercise of options and warrants include the 
number of incremental shares which would result from applying the treasury stock
method for options and warrants.  (APB 15, paragraph and Staff Accounting 
Bullentin No. 38)


<PAGE>



                                                       EXHIBIT  21




                      LIST OF SUBSIDIARIES OF THE COMPANY


o  Datastream Systems International, Inc.
o  Datastream Systems de Mexico, S. de R.L. de C.V.
o  SQL Systems Group, B.V.
o  SQQL Rapier France, SA
o  SQL Systems Deutschland, GmbH
o  SQL Rapier France, Sarl
o   SQL Products, BV
o  SQL Products, NV
o  Asystum Participations, BV
o  SQL System Participaties, BV
o  SQL Systems (UK), Ltd.
o  Sirlog, SA
o  SQL Systems, BV
o  SQL Systems, Inc.




<PAGE>


                                                EXHIBIT  23.1






                        INDEPENDENT AUDITORS' CONSENT

The Board of Directors
DataStream Systems, Inc.:

We consent to incorporation  by reference in the Registration  Statement on Form
S-8 of DataStream Systems, Inc. of our reports dated March 28, 1997, relating to
the consolidated balance sheets of DataStream Systems,  Inc. and Subsidiaries as
of  December  31,  1995 and 1996,  and the related  consolidated  statements  of
operations,  stockholders'  equity,  and cash flows for each of the years in the
three-year period ended December 31, 1996, and related  schedule,  which reports
appear in the  December  31,  1996  annual  report  on Form  10-K of  DataStream
Systems, Inc.




Greenville, South Carolina                            KPMG Peat Marwick LLP
April 8, 1997