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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



COMMISSION FILE NUMBER: 000-25590



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DATASTREAM SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



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



|                                    |  |           
|----------------------------------- |  | ----------
|50 DATASTREAM PLAZA, GREENVILLE, SC |  | 29605     
|(Address of principal offices)      |  | (Zip code)



(864) 422-5001

(Registrants telephone number, including area code)



NOT APPLICABLE

(Former Name, Former Address and former fiscal year, if changed since last report)



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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 ̈No  x



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



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



APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate
the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: October 31, 2005: 19,985,647 shares, $0.01 par value per share.



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##### Table of Contents

Datastream Systems, Inc.



FORM 10-Q



Quarter ended September 30, 2005



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|SAFE HARBOR STATEMENT                                                                       |  | ii
|PART I.
FINANCIAL INFORMATION                                                                 |  | 1 
|ITEM 1.
Consolidated Financial Statements                                                     |  | 1 
|Consolidated Balance Sheets                                                                   |  | 1 
|Consolidated Statements of Operations                                                         |  | 2 
|Consolidated Statements of Stockholders Equity and Comprehensive Income                      |  | 3 
|Consolidated Statements of Cash Flows                                                         |  | 4 
|Notes to Consolidated Financial Statements                                                    |  | 5 
|ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9 
|ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk                            |  | 13
|ITEM 4.
Controls and Procedures                                                               |  | 13
|PART II.
OTHER INFORMATION                                                                    |  | 14
|ITEM 1.
Legal Proceedings                                                                     |  | 14
|ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 14
|ITEM 3.
Defaults Upon Senior Securities                                                       |  | 14
|ITEM 4.
Submission of Matters to a Vote of Security Holders                                   |  | 14
|ITEM 5.
Other Information                                                                     |  | 14
|ITEM 6.
Exhibits                                                                              |  | 14
|SIGNATURE                                                                                     |  | 16



i



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##### Table of Contents

SAFE HARBOR STATEMENT

UNDER THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995



We desire to take advantage of the safe harbor provisions in the Private
Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Quarterly Report on Form 10-Q (the Report), as well as those made
in other filings with the Securities and Exchange Commission (the SEC).



Forward looking statements can be identified by our use of forward looking terminology such as may, will, expect, anticipate, estimate, believe, continue or
other similar words. Such forward looking statements are based on our managements current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those
described in the forward looking statements. Such risks and uncertainties include, but are not limited to: because our common stock is quoted on the Pink Sheets Electronic Quotation Service (the Pink Sheets), rather than being listed on
a national securities exchange or automated quotation system, there is no established public trading market for our common stock and it may be difficult to either dispose of or obtain quotations as to the price of our common stock; even if we regain
compliance with our filing requirements under the Securities Exchange Act of 1934, as amended (the Exchange Act), there can be no assurance that we will satisfy the standards for listing on the Nasdaq Stock Market (Nasdaq) or
that Nasdaq will allow our common stock to be relisted on the Nasdaq National Market or Nasdaq SmallCap Market; we may have to expend significant resources to remediate the material weaknesses at December 31, 2004 that related to the control
deficiencies identified at that time and we may be unable to maintain effective internal control over financial reporting in the future; the stability of our strategic relationships with third party suppliers and technologies; our ability to: sell
larger and more complex software solutions, successfully transition to the development of further Internet-based products, successfully manage our international operations, enhance our current products and develop new products and services that
address technological and market developments; volatility of our quarterly results due to increasing sales cycles; engagements that require longer implementations; reduced profitability due to our hosting services strategy; and our ability to
generate future revenue and profits from our Datastream 7i Buy strategy.



The
preceding list of risks and uncertainties, however, is not intended to be exhaustive, and should be read in conjunction with other cautionary statements that we make herein including, but not limited to, the Risk Factors set forth in
Managements Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2004, as well as other risks and uncertainties identified from time to time in our
SEC reports, registration statements and public announcements.



We do not have,
and expressly disclaim, any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.



ii



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. Consolidated Financial Statements



Datastream Systems, Inc. and Subsidiaries



Consolidated Balance Sheets



(Unaudited)



|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|(Dollars in thousands, except par value)                                                                                                                      |  | September 30,2005 |         |   | December 31,2004 |  
|Current assets:                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                     |  | $                 | 49,990  |   |                  | $ | 32,862  |  
|Short term investments                                                                                                                                        |  |                   | 4,687   |   |                  |   | 17,123  |  
|Accounts receivable, net of allowance for doubtful accounts of $338 and $610 at September 30, 2005 and December 31, 2004,
respectively                        |  |                   | 16,012  |   |                  |   | 19,594  |  
|Unbilled revenue                                                                                                                                              |  |                   | 1,765   |   |                  |   | 1,071   |  
|Income tax receivable                                                                                                                                         |  |                   |        |   |                  |   | 388     |  
|Prepaid expenses                                                                                                                                              |  |                   | 1,739   |   |                  |   | 1,266   |  
|Deferred income taxes                                                                                                                                         |  |                   | 1,078   |   |                  |   | 2,014   |  
|Other assets                                                                                                                                                  |  |                   | 1,446   |   |                  |   | 1,540   |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                                          |  |                   | 76,717  |   |                  |   | 75,858  |  
|Investment                                                                                                                                                    |  |                   | 537     |   |                  |   | 537     |  
|Property and equipment, net                                                                                                                                   |  |                   | 10,839  |   |                  |   | 11,407  |  
|Deferred income taxes                                                                                                                                         |  |                   | 2,668   |   |                  |   | 2,354   |  
|Other long term assets                                                                                                                                        |  |                   |        |   |                  |   | 8       |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                  |  | $                 | 90,761  |   |                  | $ | 90,164  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                                              |  | $                 | 4,502   |   |                  | $ | 5,247   |  
|Income taxes payable                                                                                                                                          |  |                   | 153     |   |                  |   |        |  
|Other accrued liabilities                                                                                                                                     |  |                   | 5,930   |   |                  |   | 7,539   |  
|Unearned revenue                                                                                                                                              |  |                   | 20,841  |   |                  |   | 20,728  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                     |  |                   | 31,426  |   |                  |   | 33,514  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                             |  |                   | 31,426  |   |                  |   | 33,514  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Preferred stock, $1 par value, 1,000,000 shares authorized; none issued                                                                                       |  |                   |        |   |                  |   |        |  
|Common stock, $0.01 par value, 40,000,000 shares authorized; 21,714,847 shares issued at September 30, 2005 and 21,590,939 shares issued
at December 31, 2004 |  |                   | 217     |   |                  |   | 216     |  
|Additional paid-in capital                                                                                                                                    |  |                   | 91,075  |   |                  |   | 90,556  |  
|Accumulated deficit                                                                                                                                           |  |                   | (16,558 | ) |                  |   | (19,676 | )
|Other accumulated comprehensive loss                                                                                                                          |  |                   | (3,243  | ) |                  |   | (2,290  | )
|Treasury stock, 1,729,200 shares at September 30, 2005 and at December 31, 2004, at cost                                                                      |  |                   | (12,156 | ) |                  |   | (12,156 | )
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Net stockholders equity                                                                                                                                      |  |                   | 59,335  |   |                  |   | 56,650  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                    |  | $                 | 90,761  |   |                  | $ | 90,164  |  
|                                                                                                                                                              |  |                   |         |   |                  |   |         |  



See accompanying notes
to consolidated financial statements.



1



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##### Table of Contents

Datastream Systems, Inc. and Subsidiaries



Consolidated Statements of Operations



(Unaudited)



|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|------------------------------------------------------------ |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                             |  | Three months ended September 30, |        | Nine months ended September 30,
|(In thousands except net income per share)                   |  | 2005                             |        | 2004                            |   | 2005   |  | 2004
|Revenues:                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Software product                                             |  | $                                | 5,810  |                                 | $ | 6,394  |  | $    | 18,813 |  | $ | 19,511
|Services and support                                         |  |                                  | 18,490 |                                 |   | 16,481 |  |      | 53,933 |  |   | 50,827
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total revenues                                               |  |                                  | 24,300 |                                 |   | 22,875 |  |      | 72,746 |  |   | 70,338
|Cost of revenues:                                            |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Cost of product revenues                                     |  |                                  | 520    |                                 |   | 310    |  |      | 1,290  |  |   | 1,009 
|Cost of services and support revenues                        |  |                                  | 7,669  |                                 |   | 7,402  |  |      | 23,052 |  |   | 21,571
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total cost of revenues                                       |  |                                  | 8,189  |                                 |   | 7,712  |  |      | 24,342 |  |   | 22,580
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Gross profit                                                 |  |                                  | 16,111 |                                 |   | 15,163 |  |      | 48,404 |  |   | 47,758
|Operating expenses:                                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Sales and marketing                                          |  |                                  | 7,197  |                                 |   | 6,918  |  |      | 22,531 |  |   | 21,568
|Product development                                          |  |                                  | 3,543  |                                 |   | 3,545  |  |      | 10,479 |  |   | 10,454
|General and administrative                                   |  |                                  | 4,021  |                                 |   | 3,441  |  |      | 11,754 |  |   | 10,084
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total operating expenses                                     |  |                                  | 14,761 |                                 |   | 13,904 |  |      | 44,764 |  |   | 42,106
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Operating income                                             |  |                                  | 1,350  |                                 |   | 1,259  |  |      | 3,640  |  |   | 5,652 
|Other income:                                                |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Interest income                                              |  |                                  | 326    |                                 |   | 152    |  |      | 876    |  |   | 391   
|Other income, net                                            |  |                                  | 27     |                                 |   | 24     |  |      | 69     |  |   | 67    
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total other income                                           |  |                                  | 353    |                                 |   | 176    |  |      | 945    |  |   | 458   
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Income before income taxes                                   |  |                                  | 1,703  |                                 |   | 1,435  |  |      | 4,585  |  |   | 6,110 
|Income tax expense                                           |  |                                  | 545    |                                 |   | 561    |  |      | 1,467  |  |   | 2,282 
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Net income                                                   |  | $                                | 1,158  |                                 | $ | 874    |  | $    | 3,118  |  | $ | 3,828 
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Basic net income per share                                   |  | $                                | 0.06   |                                 | $ | 0.04   |  | $    | 0.16   |  | $ | 0.19  
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Diluted net income per share                                 |  | $                                | 0.06   |                                 | $ | 0.04   |  | $    | 0.15   |  | $ | 0.19  
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Basic weighted average number of common shares outstanding   |  |                                  | 19,984 |                                 |   | 19,932 |  |      | 19,963 |  |   | 20,052
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Diluted weighted average number of common shares outstanding |  |                                  | 20,321 |                                 |   | 20,104 |  |      | 20,208 |  |   | 20,250
|                                                             |  |                                  |        |                                 |   |        |  |      |        |  |   |       



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

Datastream Systems, Inc. and Subsidiaries



Consolidated Statements of Stockholders Equity and Comprehensive Income



Nine months ended September 30, 2005

(Unaudited)



|                                              |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   |        |  
|--------------------------------------------- |  | ----------- | --- | -------------------------- | - | ------------------- |  | - | ------------------------------------ | - |  | -------------- | ------ | - | -------------------------- | - | ------- | - |  | - | ------ | -
|(Dollars in thousands)                        |  | CommonStock |     | Additional Paid-In Capital |   | Accumulated Deficit |  |   | Other Accumulated Comprehensive Loss |   |  | Treasury Stock |        |   | Total Stockholders Equity |  
|Balance at December 31, 2004                  |  | $           | 216 |                            | $ | 90,556              |  | $ | (19,676                              | ) |  | $              | (2,290 | ) |                            | $ | (12,156 | ) |  | $ | 56,650 |  
|Comprehensive income                          |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   |        |  
|Net income                                    |  |             |    |                            |   |                    |  |   | 3,118                                |   |  |                |       |   |                            |   |        |   |  |   | 3,118  |  
|Foreign currency translation adjustment       |  |             |    |                            |   |                    |  |   |                                     |   |  |                | (953   | ) |                            |   |        |   |  |   | (953   | )
|                                              |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   |        |  
|Total comprehensive income                    |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   | 2,165  |  
|Exercise of stock options                     |  |             | 1   |                            |   | 409                 |  |   |                                     |   |  |                |       |   |                            |   |        |   |  |   | 410    |  
|Tax benefit of options exercised              |  |             |    |                            |   | 23                  |  |   |                                     |   |  |                |       |   |                            |   |        |   |  |   | 23     |  
|Stock issued for Employee Stock Purchase Plan |  |             |    |                            |   | 87                  |  |   |                                     |   |  |                |       |   |                            |   |        |   |  |   | 87     |  
|                                              |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   |        |  
|Balance at September 30, 2005                 |  | $           | 217 |                            | $ | 91,075              |  | $ | (16,558                              | ) |  | $              | (3,243 | ) |                            | $ | (12,156 | ) |  | $ | 59,335 |  
|                                              |  |             |     |                            |   |                     |  |   |                                      |   |  |                |        |   |                            |   |         |   |  |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

Datastream Systems, Inc. and Subsidiaries



Consolidated Statements of Cash Flows



(Unaudited)



|                                                                                  |  |                                 |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Nine months ended September 30, |        
|(Dollars in thousands)                                                            |  | 2005                            |         |   | 2004 |  
|Cash flows from operating activities:                                             |  |                                 |         |   |      |   |        |  
|Net income                                                                        |  | $                               | 3,118   |   |      | $ | 3,828  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |        |  
|Loss on disposition of operating assets                                           |  |                                 | 38      |   |      |   | 24     |  
|Depreciation                                                                      |  |                                 | 2,399   |   |      |   | 2,255  |  
|Amortization                                                                      |  |                                 | 8       |   |      |   | 77     |  
|Changes in allowances for doubtful accounts                                       |  |                                 | (272    | ) |      |   | 749    |  
|Deferred income taxes                                                             |  |                                 | 622     |   |      |   | 1,410  |  
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |        |  
|Accounts receivable                                                               |  |                                 | 3,854   |   |      |   | 497    |  
|Unbilled revenue                                                                  |  |                                 | (694    | ) |      |   | (457   | )
|Prepaid expenses                                                                  |  |                                 | (473    | ) |      |   | (169   | )
|Income taxes receivable/payable, net                                              |  |                                 | 541     |   |      |   | 346    |  
|Other assets                                                                      |  |                                 | 94      |   |      |   | 7      |  
|Accounts payable                                                                  |  |                                 | (745    | ) |      |   | (34    | )
|Other accrued liabilities                                                         |  |                                 | (1,609  | ) |      |   | (971   | )
|Unearned revenue                                                                  |  |                                 | 113     |   |      |   | 589    |  
|Tax benefit of options exercised                                                  |  |                                 | 23      |   |      |   | 72     |  
|                                                                                  |  |                                 |         |   |      |   |        |  
|Net cash provided by operating activities                                         |  |                                 | 7,017   |   |      |   | 8,223  |  
|                                                                                  |  |                                 |         |   |      |   |        |  
|Cash flows from investing activities:                                             |  |                                 |         |   |      |   |        |  
|Purchases of short-term investments                                               |  |                                 | (35,356 | ) |      |   | (5,004 | )
|Proceeds from the sale and maturity of short-term investments                     |  |                                 | 47,792  |   |      |   |       |  
|Additions to property and equipment                                               |  |                                 | (1,869  | ) |      |   | (2,599 | )
|Purchase additional shares in investment                                          |  |                                 |        |   |      |   | (35    | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                               |  |                                 | 10,567  |   |      |   | (7,638 | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Cash flows from financing activities:                                             |  |                                 |         |   |      |   |        |  
|Proceeds from exercise of stock options                                           |  |                                 | 410     |   |      |   | 600    |  
|Proceeds from issuances of shares under employee stock purchase plan              |  |                                 | 87      |   |      |   | 111    |  
|Cash paid to acquire treasury stock                                               |  |                                 |        |   |      |   | (3,492 | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                               |  |                                 | 497     |   |      |   | (2,781 | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Foreign currency translation adjustment                                           |  |                                 | (953    | ) |      |   | (609   | )
|                                                                                  |  |                                
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 17,128  |   |      |   | (2,805 | )
|Cash and cash equivalents at beginning of period                                  |  |                                 | 32,862  |   |      |   | 34,825 |  
|                                                                                  |  |                                 |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                        |  | $                               | 49,990  |   |      | $ | 32,020 |  
|                                                                                  |  |                                 |         |   |      |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

Datastream Systems, Inc. and Subsidiaries



Notes to Consolidated Financial Statements



1. Basis of
Presentation



The interim financial information included herein is
unaudited and has been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and with Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such
unaudited information reflects all adjustments, consisting only of normal recurring accruals and other adjustments as disclosed herein, necessary for a fair presentation of the unaudited information. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes contained in the Companys Form 10-K, for the year ended December 31, 2004. Results for interim periods are not necessarily indicative of results expected for
the full year.



Certain amounts in the prior year financial statements have
been reclassified to conform to the 2005 presentation, including auction rate securities from cash and cash equivalents to short-term investments.



2. Stock Based Compensation



The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, as amended, to account for its stock-based employee compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The
Company uses the Black-Scholes option-pricing model to value the employee and director stock-based compensation plans for the pro forma disclosure shown below.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Companys employee stock options, which are issued at fair market value at the date
granted, have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.



SFAS No. 148 requires us to provide pro forma disclosure of the impact on our results of operations had we adopted the expense
measurement provisions of SFAS No. 123. SFAS No. 123 permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with our stock option plans and our employee stock purchase plan. The
pro forma impact on our results of operations had we adopted the fair value based method of SFAS No. 123 using the Black-Scholes option-pricing model is shown below (in thousands, except per share data):



|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                  |  | Three months ended September 30, |       |   | Nine months ended September 30, |  
|(Dollars in thousands except per share amounts)                                                                                   |  | 2005                             |       |   | 2004                            |   |      | 2005 |  |   | 2004   |  
|Net income as reported                                                                                                            |  | $                                | 1,158 |   |                                 | $ | 874  |      |  | $ | 3,118  |   |  | $ | 3,828  |  
|Deduct: total stock-based employee compensation expense determined under the fair-value-based method for all awards, net of
taxes |  |                                  | (396  | ) |                                 |   | (477 | )    |  |   | (1,205 | ) |  |   | (1,518 | )
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                              |  | $                                | 762   |   |                                 | $ | 397  |      |  | $ | 1,913  |   |  | $ | 2,310  |  
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Basic net income per share:                                                                                                       |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                       |  | $                                | 0.06  |   |                                 | $ | 0.04 |      |  | $ | 0.16   |   |  | $ | 0.19   |  
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                         |  | $                                | 0.04  |   |                                 | $ | 0.02 |      |  | $ | 0.10   |   |  | $ | 0.12   |  
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Diluted net income per share:                                                                                                     |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                       |  | $                                | 0.06  |   |                                 | $ | 0.04 |      |  | $ | 0.15   |   |  | $ | 0.19   |  
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                         |  | $                                | 0.04  |   |                                 | $ | 0.02 |      |  | $ | 0.09   |   |  | $ | 0.11   |  
|                                                                                                                                  |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  



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3. Segment and Geographic Information



The Company has identified one business segment for reporting purposes, Asset Performance Management, which we manage over geographical
regions. The principal areas of operation include the United States and Canada, Europe, Latin America and Asia. Financial information concerning our operations in different geographical regions as of and for the three and nine month periods ended
September 30, 2005 and 2004 is as follows:



|                                       |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|-------------------------------------- |  | ------------------------ | ------ | ------ | - | ------------- |  | ---- | ----- | ----- | - | ----- |  | - | ------
|(Dollars in thousands)                 |  | United States and Canada |        | Europe |   | Latin America |  | Asia |       | Total
|Three months ended September 30, 2005: |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|Total revenues                         |  | $                        | 15,806 |        | $ | 5,306         |  | $    | 1,627 |       | $ | 1,561 |  | $ | 24,300
|Operating income                       |  |                          | 1,153  |        |   | 140           |  |      | 28    |       |   | 29    |  |   | 1,350 
|Total assets                           |  |                          | 60,271 |        |   | 16,301        |  |      | 6,257 |       |   | 7,932 |  |   | 90,761
|                                       |  |                          |        |        |  
|September 30, 2004:                    |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|Total revenues                         |  | $                        | 13,898 |        | $ | 5,916         |  | $    | 1,715 |       | $ | 1,346 |  | $ | 22,875
|Operating income                       |  |                          | 1,080  |        |   | 118           |  |      | 34    |       |   | 27    |  |   | 1,259 
|Total assets                           |  |                          | 57,403 |        |   | 18,361        |  |      | 4,162 |       |   | 4,739 |  |   | 84,665



|                                      |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|------------------------------------- |  | ------------------------ | ------ | ------ | - | ------------- |  | ---- | ----- | ----- | - | ----- |  | - | ------
|(Dollars in thousands)                |  | United States and Canada |        | Europe |   | Latin America |  | Asia |       | Total
|Nine months ended September 30, 2005: |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|Total revenues                        |  | $                        | 46,568 |        | $ | 16,962        |  | $    | 4,382 |       | $ | 4,834 |  | $ | 72,746
|Operating income                      |  |                          | 3,069  |        |   | 392           |  |      | 83    |       |   | 96    |  |   | 3,640 
|Total assets                          |  |                          | 60,271 |        |   | 16,301        |  |      | 6,257 |       |   | 7,932 |  |   | 90,761
|                                      |  |                          |        |        |  
|September 30, 2004:                   |  |                          |        |        |   |               |  |      |       |       |   |       |  |   |       
|Total revenues                        |  | $                        | 42,574 |        | $ | 18,701        |  | $    | 4,620 |       | $ | 4,443 |  | $ | 70,338
|Operating income                      |  |                          | 5,097  |        |   | 374           |  |      | 92    |       |   | 89    |  |   | 5,652 
|Total assets                          |  |                          | 57,403 |        |   | 18,361        |  |      | 4,162 |       |   | 4,739 |  |   | 84,665



4. Reconciliation of Basic and
Diluted Net Income Per Share



Basic net income per share is computed by
dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common and potential common shares outstanding. Diluted weighted
average common shares include common shares and stock options using the treasury stock method, except when those potential common shares result in antidilution. The reconciliation of basic and diluted income per share as of September 30, 2005
and 2004 is as follows:



|                                     |  |        |       |        |        |                  |   |     
|------------------------------------ |  | ------ | ----- | ------ | ------ | ---------------- | - | ----
|(In thousands except per share data) |  | Income |       | Shares |        | Per Share Amount
|For the three months ended:          |  |        |       |        |        |                  |   |     
|September 30, 2005:                  |  |        |       |        |        |                  |   |     
|Basic net income per share           |  | $      | 1,158 |        | 19,984 |                  | $ | 0.06
|                                     |  |        |       |        |        |                  |   |     
|Effect of dilutive securities:       |  |        |       |        |        |                  |   |     
|Stock options                        |  |        |      |        | 337    |                  |   |     
|                                     |  |        |       |        |        |                  |   |     
|Diluted net income per share         |  | $      | 1,158 |        | 20,321 |                  | $ | 0.06
|                                     |  |        |       |        |        |                  |   |     
|September 30, 2004:                  |  |        |       |        |        |                  |   |     
|Basic net income per share           |  | $      | 874   |        | 19,932 |                  | $ | 0.04
|                                     |  |        |       |        |        |                  |   |     
|Effect of dilutive securities:       |  |        |       |        |        |                  |   |     
|Stock options                        |  |        |      |        | 172    |                  |   |     
|                                     |  |        |       |        |        |                  |   |     
|Diluted net income per share         |  | $      | 874   |        | 20,104 |                  | $ | 0.04
|                                     |  |        |       |        |        |                  |   |     



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##### Table of Contents

|                                     |  |        |       |        |        |                 |   |     
|------------------------------------ |  | ------ | ----- | ------ | ------ | --------------- | - | ----
|(In thousands except per share data) |  | Income |       | Shares |        | Per ShareAmount
|For the nine months ended:           |  |        |       |        |        |                 |   |     
|September 30, 2005:                  |  |        |       |        |        |                 |   |     
|Basic net income per share           |  | $      | 3,118 |        | 19,963 |                 | $ | 0.16
|                                     |  |        |       |        |        |                 |   |     
|Effect of dilutive securities:       |  |        |       |        |        |                 |   |     
|Stock options                        |  |        |      |        | 245    |                 |   |     
|                                     |  |        |       |        |        |                 |   |     
|Diluted net income per share         |  | $      | 3,118 |        | 20,208 |                 | $ | 0.15
|                                     |  |        |       |        |        |                 |   |     
|September 30, 2004:                  |  |        |       |        |        |                 |   |     
|Basic net income per share           |  | $      | 3,828 |        | 20,052 |                 | $ | 0.19
|                                     |  |        |       |        |        |                 |   |     
|Effect of dilutive securities:       |  |        |       |        |        |                 |   |     
|Stock options                        |  |        |      |        | 198    |                 |   |     
|                                     |  |        |       |        |        |                 |   |     
|Diluted net income per share         |  | $      | 3,828 |        | 20,250 |                 | $ | 0.19
|                                     |  |        |       |        |        |                 |   |     



Antidilutive stock options totaling
2,134,843 and 2,888,709 shares were excluded from the diluted net income per share calculations for the three months ended September 30, 2005 and 2004, respectively. Antidilutive shares totaling 2,697,382 and 2,764,434 were excluded from the
diluted net income per share calculations for the nine months ended September 30, 2005 and 2004, respectively.



5. Commitments and Contingencies



The Company believes that it may incur liabilities resulting from its common stock being delisted from the Nasdaq National Market effective July 7, 2005. Currently,
there are no such liabilities outstanding and any such amounts that the Company may incur cannot be reasonably estimated at this time.



The Company is also occasionally involved in claims arising out of its operations in the normal course of business. No such current claims are expected, individually or
in the aggregate, to have a material adverse effect on the Company.



6.
Recent Accounting Pronouncements



In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS
123R supercedes Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123 requires the measurement of all share-based payments to
employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in the Companys consolidated statements of operations. The accounting provisions of SFAS 123R are effective for annual
periods beginning after June 15, 2005. The Company is required to adopt SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition.
See Note 2 for the pro forma net income and net income per share amounts as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. The
Company is currently assessing the impact of the adoption of SFAS 123R.



In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153), which requires a nonmonetary exchange of assets be
accounted for at fair value, recognizing any gain or loss, if the exchange meets a commercial substance criterion and fair value is determinable. The commercial substance criterion is assessed by comparing the entitys expected cash flows
immediately before and after the exchange. This eliminates the similar productive assets exception, which accounts for the exchange of assets at book value with no recognition of gain or loss. SFAS No. 153 will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on its financial statements.



In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair
value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not anticipate that the adoption of FIN 47 will have a material impact on its financial statements.



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##### Table of Contents

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which provides guidance
on the accounting for, and reporting of, accounting changes and error corrections. SFAS No. 154 requires retrospective application to the prior periods financial statements of voluntary changes in accounting principles and changes
required by an accounting pronouncement in the event the pronouncement does not include specific transition provisions. SFAS No. 154 shall be effective for accounting changes made in fiscal years beginning after December 15, 2005. The
adoption of SFAS No. 154 is not expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows.



EITF Issue No. 04-10, Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds
allows operating segments that do not meet the quantitative thresholds to be aggregated only if (1) the aggregation is consistent with the objective and basic principles of SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, (2) the segments have similar economic characteristics and (3) the segments share a majority of the aggregation criteria (a)-(e) listed in paragraph 17 of SFAS No. 131. Prior to EITF Issue
No. 04-10, segments could only be aggregated if they met the first two requirements and all of the aggregation criteria in (a)-(e) listed in paragraph 17 of SFAS No. 131. EITF Issue No. 04-10 was ratified on October 13,
2004, but has not yet been adopted. It is expected to be adopted during and be effective for our fiscal year ending December 31, 2005. The Company does not believe that EITF Issue No. 04-10 will have an impact on the way we currently
present our segments in accordance with SFAS No. 131.



7. Subsequent
Events



In October 2005, the Company commenced an initiative to improve
profitability in Europe by changing its staffing structure. Although this change is not final, the Company estimates that the effect of such a change will result in $1.0 million to $1.5 million in non-recurring expenses in the fourth quarter of
2005.



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##### Table of Contents

ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This Report contains certain forward-looking statements with respect to our operations, industry, financial condition and liquidity. These statements reflect our
assessment of a number of risks and uncertainties. The actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth in this Report. An additional statement made
pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in our business is included prior to Part I of this Report under the caption Safe Harbor
Statement Under the Private Securities Litigation Reform Act of 1995. Readers of this Report are encouraged to read the statement carefully.



Overview



We provide asset performance management software and services to enterprises worldwide, including more than 60 percent of the Fortune 500. Through asset performance management, customers can maintain, manage,
and improve the performance of their capital asset infrastructure, such as manufacturing equipment, fleet, and facilities.



Through the 1990s, we grew rapidly and became profitable. In 1999, we determined that we needed to address opportunities presented by the growing presence of the
Internet, and we invested heavily in Internet technologies and services in the following years. As a result, we were not profitable from the first quarter of 2000 to the third quarter of 2001. We returned to profitability in the fourth quarter of
2001, the same quarter we released our new Internet products, which established the foundation of our current flagship product, Datastream 7i.



We have been profitable annually since 2002 as a result of the strength of our flagship product and cost reduction initiatives, and we expect to continue to be profitable
in 2005. Growth in profits for a software company is tied to license revenues. License revenues typically result in subsequent service and support revenues. Growth in profits is also tied to product quality, functionality and performance, and we can
achieve this by only continuing to invest in our product offering.



When we
sell to a customer, we typically commit to an arrangement consisting of application licenses, services and support. We will also sell services to host the licensed application. We have seen an upward trend in average deal size in the past several
years, as we have migrated to selling larger enterprise deals. An increase in average deal size typically increases the length of an average sales cycle. Potential customers spend significant time and resources determining which software to
purchase. This requires us to spend substantial time, effort and money educating and convincing prospective customers to purchase our software. A customers decision to license our software generally involves evaluation by a number of the
customers personnel in various functional and geographic areas. Due to these and other factors, our sales cycle may continue to be extended. Since the sales cycle can be unpredictable and can be affected by events beyond our control, we cannot
always forecast the timing or amount of specific sales, and sales may vary from quarter to quarter. We expect to continue to experience a decline in the large number of relatively small orders that have been a staple of our marketing and sales
efforts in the past.



We typically see weaker service revenues in the third and
fourth quarters of our calendar year due to lower utilization from Europe in the summer and fewer available billable days in November and December due to holidays and customer site shutdowns. The first and third quarters have traditionally been
weaker for license sales, but this has become harder to predict given larger deal sizes and less predictable sales cycles associated with Datastream 7i. This seasonality may cause our results to vary from quarter to quarter.



Restatements: Internal Control Over Financial Reporting and Other Developments



We filed Amendment No. 2 to our Annual Report on Form 10-K for the
year ended December 31, 2003, which was originally filed with the Securities and Exchange Commission on March 10, 2004 (the Annual Report), to reflect the restatement of our financial statements for the fiscal years ended
December 31, 2001, 2002 and 2003. We also filed two Forms 10-Q/A containing restated financial information reflecting adjustments to our previously filed financial information in our Forms 10-Q for the quarters ended March 31 and
June 30, 2004.



The net effect of the adjustments related to the
restatements was an increase in earnings of $0.06 per share or approximately $1,081,000 for the fiscal year ended 2001 and a decrease to earnings per share of $0.01 or approximately $376,000 in 2003. There was no impact to earnings per share for the
approximate adjustment of $23,000 for the year ended December 31, 2002. Please see Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our annual report on Form 10-K for the
year ended December 31, 2004 for a discussion of the restatements.



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##### Table of Contents

We determined that internal control deficiencies existed at December 31, 2004 that were indicative of material
weaknesses in our internal control over financial reporting. See Managements Report on Internal Control Over Financial Reporting under Item 8. Financial Statements and Supplementary Data of our Form 10-K for fiscal year 2004.
In addition, we have previously identified risks in China of potential fines, penalties or other liabilities as a result of the Audit Committees investigation of our Chinese operations. We believe that such risks have been substantially
mitigated and in July 2005 our China subsidiary was re-registered with the appropriate authorities in China. There are no additional liabilities outstanding and any additional amounts that we may incur cannot be reasonably estimated at this time.



On July 6, 2005, we received a decision from the Nasdaq Listing and
Hearing Review Council, dated July 5, 2005, reversing the decision of the Nasdaq Listing Qualifications Panel to grant our request to extend to July 29, 2005, the filing deadline for our Form 10-K for the fiscal year ended
December 31, 2004 and Form 10-Q for the quarter ended March 31, 2005. In addition, the Listing Council remanded the matter to the Panel with instruction to immediately delist our securities from The Nasdaq Stock Market (Nasdaq)
because we had failed to satisfy the requirements of Marketplace Rule 4310(c)(14). Marketplace Rule 4310(c)(14) requires that a listed company file with Nasdaq all reports and other documents filed or required to be filed with the SEC. Our common
stock was delisted from Nasdaq effective with the open of business on July 7, 2005.



In October 2005, the Company commenced an initiative to improve profitability in Europe by changing its staffing structure. Although this change is not final, the Company estimates that the effect of such a change
will result in $1.0 million to $1.5 million in non-recurring expenses in the fourth quarter of 2005.



New Independent Accountants



On
September 29, 2005, we dismissed KPMG LLP as our principal accountants. The Audit Committee of our Board of Directors (Audit Committee) made the decision to dismiss KPMG and that decision was approved, ratified and adopted by
our Board of Directors. On October 3, 2005, we engaged BDO Seidman, LLP (BDO) as our new independent registered public accounting firm for the fiscal year ending December 31, 2005, and to perform procedures related to the
financial statements included in our quarterly reports on Form 10-Q, beginning with the quarter ended March 31, 2005. The Audit Committee made the decision to engage BDO and that decision was approved, adopted and ratified by our Board of
Directors. See Item 4.01 Changes in Registrants Certifying Accountant in our Form 8-K/A filed with the SEC on October 6, 2005.



Results of Operations

(Dollars in thousands unless otherwise
noted)



Three Months Ended September 30, 2005 Compared to Three
Months Ended September 30, 2004



Revenues. Total revenues
increased 6% to $24,300 in the third quarter of 2005 from $22,875 in the third quarter of 2004. Higher revenues for services and support were offset by lower revenues for software products in the quarter ended September 30, 2005 as compared to
the same period in the prior year.



Revenues from the United States and Canada
increased 14% and international revenues decreased 5%, in the third quarter of 2005 as compared to the same period in 2004. See Note 3 to the consolidated financial statements for segment and geographical information.



Software product revenues, historically weak in the third fiscal quarter, decreased 9% to
$5,810 (24% of total revenues) in the third quarter of 2005 from $6,394 (28% of total revenues) in the third quarter of 2004. An 18% increase in software product revenues in the United States and Canada was more than offset by a 45% decrease in
international software product revenues. Our software products in the United States and Canada, continuing a trend from the first and second fiscal quarters, did well competitively during the quarter winning large dollar contracts. We do not,
however, know whether this trend will continue in future periods. Conversely, international sales declined with fewer large dollar contracts in 2005, particularly in Europe, as compared with the same period in the prior year. We do not have
visibility to international license revenue in future periods.



Professional
services and support revenues increased 12% to $18,490 (76% of total revenues) in the third quarter of 2005 from $16,481 (72% of total revenues) in the third quarter of 2004. Services revenues increased 15% and 9% in the United States and Canada and
internationally, respectively. Service revenues, which are generally delivered after a license is sold, increased as the result of higher software product revenues year to date in the United States and Canada and in the second quarter
internationally in 2005. Support revenues increased 11% in the third quarter of 2005 from the third quarter of 2004 principally as the result of the increase in license revenues in the United States and Canada.



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##### Table of Contents

Cost of Revenues. Cost of revenues increased 6% to $8,189 (34% of total revenues) in the third quarter of 2005, as
compared to $7,712 (34% of total revenues) in the third quarter of 2004. The cost of software product, services, and support increased 68%, 3% and 6%, respectively, in the quarter ended September 30, 2005 versus the same period in 2004. Product
software costs rose to $520 in the third quarter of 2005 from $310 in the third quarter of 2004 primarily as the result of an increase in royalty expense. The increase in cost of services was primarily due to an increase in costs associated with
hosting services. Support costs increased as a function of the increase in support revenues.



Sales and Marketing Expenses. Sales and marketing expenses increased 4% to $7,197 (30% of total revenues) in the third quarter of 2005 from $6,918 (30% of total revenues) in the third quarter of 2004. Our sales
and marketing expenses increased due to higher commissions incurred as the result of higher sales order volumes in the third quarter of 2005 versus the same period in 2004.



General and Administrative Expenses. General and administrative expenses increased 17% to $4,021 (17% of total revenues) in the third
quarter of 2005 from $3,441 (15% of total revenues) in the third quarter of 2004 due primarily to accounting and legal fees and related expenses of approximately $869 which we believe will be non-recurring. Additional fees are expected to continue
through the fourth fiscal quarter as we remediate internal control deficiencies and become current with our SEC filings.



Tax Rate. Our effective tax rate was 32% for the quarter ended September 30, 2005.



Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004



Revenues. Total revenues increased 3% to $72,746 in the nine months ended
September 30, 2005 from $70,338 in the nine months ended September, 30, 2004. Higher revenues for services and support were slightly offset by lower software product revenues in the nine months ended September 30, 2005 as compared to the
same period in the prior year.



Revenues from the United States and Canada
increased 9% and international revenues decreased 6% in the nine months ended September 30, 2005 as compared to the same period in 2004. See Note 3 to the consolidated financial statements for segment and geographical information.



Software product revenues decreased 4% to $18,813 (26% of total revenues) from $19,511
(28% of total revenues) in the nine months ended September 30, 2005 versus the same period in 2004. The United States and Canada had a 9% increase in software product revenues that was more than offset by a 22% decline in international software
product revenues. Our software products in the United States and Canada did well competitively during the first nine months of 2005 winning large dollar contracts. International software product sales were less consistent as an increase in large
dollar contracts in the second quarter was more than offset by a decline in large dollar contracts in the first and third quarters of 2005, as compared with the same periods in the prior year.



Professional services and support revenues increased 6% to $53,933 (74% of total revenues) in
the first nine months of 2005 from $50,827 (72% of total revenues) over the same period in the prior year. Our revenues from services and support both increased 6% in the nine months ended June 30, 2005 versus the same period in 2004. Services
revenues increased 17% in the United States and Canada and were somewhat offset by a decline in international service revenues of 6%. Service revenues, which are generally delivered after a license is sold, increased in the United States and Canada
as the result of higher software product revenues in the first nine months of 2005. Conversely, international service revenues declined primarily as the result of lower software sales in the first and third quarters, which resulted in fewer services
being delivered year to date 2005 as compared with the same period in 2004. Support revenues increased 6% in the first nine months of 2005 from the prior year period principally as the result of higher software product sales in the United States and
Canada.



Cost of Revenues. Cost of revenues increased 3% to $24,342 (33%
of total revenues) in the nine months ended September 30, 2005 as compared to $22,580 (32% of total revenues) in the same period during of 2004. The cost of software product, services, and support increased 28%, 8% and 4%, respectively, in the
nine months ended September 30, 2005 versus the same period in 2004. Software product costs rose to $1,290 in the first nine months of 2005 from $1,009 in the same period in 2004 primarily as the result of an increase in royalty expense. The
increase in cost of services was primarily due to an increase in costs associated with hosting services, customer reimbursed travel costs and increased third-party contractor costs used to deliver services. Support costs increased as a function of
the increase in support revenues.



Sales and Marketing Expenses. Sales
and marketing expenses increased 4% to $22,531 (31% of total revenues) in the nine months ended September 30, 2005 from $21,568 (31% of total revenues) in the nine months ended September 30, 2004. Our sales and marketing expenses increased
due to higher commissions incurred because of higher year-to-date sales order volumes and the expansion of marketing and sales activities such as conferences and trade shows, particularly in the second quarter of 2005, versus the same period in
2004.



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##### Table of Contents

General and Administrative Expenses. General and administrative expenses increased 17% to $11,754 (16% of total
revenues) in the nine months ended September 30, 2005 from $10,084 (14% of total revenues) in the same period in 2004 due primarily to accounting and legal fees and related expenses of approximately $2,475 which we believe will be
non-recurring. Additional fees are expected to continue into the fourth fiscal quarter as we remediate internal control deficiencies and become current with our SEC filings.



Tax Rate. Our effective tax rate was 32% for the nine months ended September 30, 2005.



Capital Resources, Financing and Liquidity



We have funded our operating activities primarily with cash generated from operations. We
ended the third quarter of 2005 with $54.7 million in cash and cash equivalents and short-term investments, an increase of $4.7 million from December 31, 2004. As of September 30, 2005, we had no long-term debt commitments and no material
commitments for capital expenditures. We believe that our current cash balances and cash flows from operations will be sufficient to meet our working capital and capital expenditure needs for the next 12 months.



Cash Flows



Cash provided by operations decreased 15% to approximately $7.0 million for the nine months ended September 30, 2005 from approximately
$8.2 million for the nine months ended September 30, 2004. The decrease was primarily due to expenses related to the aforementioned restatement of financial results and related accounting matters in 2005 somewhat offset by declining accounts
receivable balances, which we achieved through an emphasis on reducing the period of time customer balances remain outstanding.



Net cash provided in investing activities was approximately $10.6 million for the nine months ended September 30, 2005 compared to approximately $7.6 million used in
the nine months ended September 30, 2004. The increase from the prior period was primarily due to the net proceeds of $12.4 million from the liquidation of short-term securities in 2005 versus purchases of $5.0 million in the same period in
2004.



Net cash provided in financing activities was approximately $0.5 million
for the nine months ended September 30, 2005 compared to approximately $2.8 million used in the nine months ended September 30, 2004. The change was primarily due to approximately $3.5 million used to repurchase shares of our common stock
during the first, second and third quarters of 2004.



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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk



There were no material changes during the quarter ended September 30, 2005 to the material risk disclosed in Part II, Item 7A of our annual report on Form 10-K for the year ended December 31, 2004.



ITEM 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of September 30, 2005. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis.



Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2005, because of the material
weaknesses in internal control over financial reporting discussed in the fiscal 2004 Form 10-K.



Because of the material weaknesses in internal control over financial reporting described in the fiscal 2004 Form 10-K, we performed additional analyses and other post-closing procedures to ensure that our
consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes the consolidated financial statements
included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.



Changes in Internal Control Over Financial Reporting



There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.



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PART II. OTHER INFORMATION



ITEM 1. Legal Proceedings



We are
occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. No such current claims are expected, individually or in the aggregate, to have a material adverse effect on our consolidated
financial statements.



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



Issuer Purchases of Equity Securities



|                                 |  |                                |  |                           |  |                                                                                  |  |                                                                           
|-------------------------------- |  | ------------------------------ |  | ------------------------- |  | -------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|Period                           |  | Total Numberof SharesPurchased |  | AveragePricePaid PerShare |  | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms (1) |  | Maximum Numberof Shares that MayYet Be Purchased Underthe Plans orPrograms
|July 1  July 31, 2005           |  |                               |  |                          |  |                                                                                 |  | 425,200                                                                   
|August 1  August 31, 2005       |  |                               |  |                          |  |                                                                                 |  |                                                                          
|September 1  September 30, 2005 |  |                               |  |                          |  |                                                                                 |  |                                                                          
|                                 |  |                                |  |                           |  |                                                                                  |  |                                                                           
|Total                            |  |                               |  |                          |  |                                                                                 |  |                                                                          
|                                 |  |                                |  |                           |  |                                                                                  |  |                                                                           

---

|(1) | The latest repurchase program was announced August 15, 2003. Under this plan, the board of directors authorized the repurchase of up to 1,000,000 shares of our Common Stock.
This plan expired on August 15, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 3. Defaults Upon Senior Securities



None



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



None



ITEM 5. Other Information



None



ITEM 6. Exhibits



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10             |  | Form of Indemnification Agreement, dated September 15, 2005, between the Company and each of Larry G. Blackwell, Richard T. Brock, Ira D. Cohen, Robert C. Davis, James C. Ryan, Jr., James R.
Talton, Jr., C. Alex Estevez, Javier Buzzalino, John M. Sterling III, Bradley T. Stevens, J. Patrick Ovington, and Lora Ramsey (incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004).
|               | 
|11             |  | Consolidated Earnings Per Share Computation (included in Note 4 of the Notes to Consolidated and Condensed Financial Statements included in Part I, Item 1 of this report)                                                                                                                                                                                                                                                                                        
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                              
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                              
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350                                                                                                                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                    
|32.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350



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SIGNATURE



Pursuant to the requirements 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: November 8, 2005 |  | /s/ C. Alex Estevez                  
|                       |  | C. Alex Estevez                      
|                       |  | President and Chief Financial Officer



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10            |  | Form of Indemnification Agreement, dated September 15, 2005, between the Company and each of Larry G. Blackwell, Richard T. Brock, Ira D. Cohen, Robert C. Davis, James C. Ryan, Jr., James R.
Talton, Jr., C. Alex Estevez, Javier Buzzalino, John M. Sterling III, Bradley T. Stevens, J. Patrick Ovington, and Lora Ramsey (incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004).
|              | 
|11            |  | Consolidated Earnings Per Share Computation (included in Note 4 of the Notes to Consolidated and Condensed Financial Statements in Part I, Item 1 of this report)                                                                                                                                                                                                                                                                                                 
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                              
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                              
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350                                                                                                                                                                                                                                                                                                                   
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350