##### Table of Contents

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# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# Washington, DC 20549

# FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2003

OR

|o | 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

---

DATASTREAM SYSTEMS, INC.

Incorporated pursuant
to the laws of the State of Delaware

---

Internal
Revenue Service  Employer Identification No. 57-0813674

50 DATASTREAM PLAZA,
GREENVILLE, SC 29605

(864) 422-5001

---

NOT APPLICABLE

(Former Name, Former Address,
if changed since last report)

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 ý    No o

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

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:           November 11, 2003:   20,216,129 shares, $0.01 par value.

---

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##### Table of Contents

# Datastream Systems,
Inc.

# FORM 10-Q

# Quarter ended
September 30, 2003

# Index

|              |  | Page No.
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|Item 1        |  |         
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|Item 2        |  |         
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|Item 3        |  |         
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|Item 4        |  |         
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|Item 5        |  |         
|              |  |         
|Item 6        |  |         
|              |  |         
|Signatures    |  |         
|              |  |         
|Exhibit Index |  |         

2

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##### Table of Contents

# SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

From
time to time, we make oral and written statements that may constitute forward
looking statements (rather than historical facts) as defined in the Private
Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the
SEC) in its rules, regulations and releases, including Section 27A of the
Securities Act of 1933, as amended (the Securities Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). 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 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 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. In the preparation of this Report, where such forward looking statements
appear, we have sought to accompany such statements with meaningful cautionary statements
identifying important factors that could cause actual results to differ materially from
those described in the forward looking statements. Such factors include, but are not
limited to: a highly competitive market; our ability to keep pace with rapid technological
changes and demands in our markets; volatility of our quarterly results due to increasing
sales cycles; solutions that require longer implementations and other professional
services engagements; reduced profitability due to our hosting services strategy; our
ability to generate revenue and profits from our electronic procurement solution;
significant delays in product development and our ability to be an innovator in the
industry; third party relationships on which our success is substantially dependent; third
party technologies on which our future success is substantially dependent; our ability to
detect software bugs or errors to avoid a correction to or delay in the release of our
products; our ability to manage our international operations; deterioration of economic
and political conditions; continued acceptance of the Internet for business transactions;
recruiting and retaining key employees; our ability to adequately protect our proprietary
rights; security risks and concerns that may deter use of the Internet for our
applications; fluctuations in our stock price since our initial public offering; and our
exposure to foreign exchange rate fluctuations. 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 the Companys
Form 10-K for the fiscal year ended December 31, 2002, 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.

3

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##### Table of Contents

ITEM 1. Consolidated
Financial Statements

# Datastream Systems,
Inc. and Subsidiaries Consolidated Balance SheetsAssets(unaudited)

|                                                               |  | December 31,
2002 |   | September 30,
2003 | 
|-------------------------------------------------------------- |  | ----------------- | - | ------------------ | 
|Current assets:                                                |  |                   |   |                    | 
|Cash and cash equivalents                                      |  |                   | $ | 34,721,471         | 
|Accounts receivable, net of allowance for doubtful accounts of |  |                  
|$1,396,984 and $1,393,398 in 2002 and 2003, respectively       |  |                   |   | 18,116,426         | 
|Unbilled revenue, net of allowance of                          |  |                  
|$100,000 in 2002 and 2003                                      |  |                   |   | 2,003,107          | 
|Prepaid expenses                                               |  |                   |   | 1,033,465          | 
|Inventories                                                    |  |                   |   | 26,992             | 
|Income tax receivable                                          |  |                   |   | 472,841            | 
|Deferred income taxes                                          |  |                   |   | 929,438            | 
|Other assets                                                   |  |                   |   | 1,536,663          | 
|                                                               |  |                   |   |                    | 
|Total current assets                                           |  |                   |   | 58,840,403         | 
|Investment                                                     |  |                   |   | 2,000,000          | 
|Property and equipment, net                                    |  |                   |   | 10,696,968         | 
|Deferred income taxes                                          |  |                   |   | 5,287,633          | 
|Other long term assets                                         |  |                   |   | 83,758             | 
|                                                               |  |                   |   |                    | 
|Total assets                                                   |  |                   | $ | 76,908,762         | 
|                                                               |  |                   |   |                    | 

See accompanying notes to
consolidated financial statements.

4

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##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Balance
Sheets (Continued) Liabilities and
Stockholders Equity  (unaudited)

|                                                            | December 31,2002 |  | September 30,2003 |            
|----------------------------------------------------------- | ---------------- |  | ----------------- | -----------
|Current liabilities:                                        |                  |  |                   |            
|Accounts payable                                            |                  |  | $                 | 2,913,611  
|Other accrued liabilities                                   |                  |  |                   | 9,348,113  
|Income taxes payable                                        |                  |  |                   | --         
|Unearned revenue                                            |                  |  |                   | 15,105,756 
|                                                            |                  |  |                   |            
|Total liabilities                                           |                  |  |                   | 27,367,480 
|Stockholders' equity:                                       |                  |  |                   |            
|Preferred stock, $1 par value, 1,000,000 shares authorized; |                  |  |                   |            
|none issued                                                 |                  |  |                   | --         
|Common stock, $.01 par value, 40,000,000 shares authorized; |                  |  |                   |            
|21,090,200 shares issued at December 31, 2002,              |                  |  |                   |            
|21,401,695 shares issued at September 30, 2003              |                  |  |                   | 210,902    
|Additional paid-in capital                                  |                  |  |                   | 87,196,093 
|Accumulated deficit                                         |                  |  |                   | (28,761,966
|Other accumulated comprehensive loss                        |                  |  |                   | (1,877,654 
|Treasury stock, at cost;                                    |                  |  |                   |            
|1,028,600 shares at December 31, 2002,                      |                  |  |                   |            
|1,176,400 shares at September 30, 2003                      |                  |  |                   | (7,226,093 
|                                                            |                  |  |                   |            
|Total stockholders' equity                                  |                  |  |                   | 49,541,282 
|                                                            |                  |  |                   |            
|Total liabilities and stockholders' equity                  |                  |  | $                 | 76,908,762 
|                                                            |                  |  |                   |            

See accompanying notes to
consolidated financial statements.

5

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##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Statements of Operations(unaudited)Three months ended September 30, 2002 and 2003

|                                                             | September 30,2002 |   | September 30,2003
|------------------------------------------------------------ | ----------------- | - | -----------------
|Revenues:                                                    |                   |   |                  
|Software product                                             |                   | $ | 6,040,013        
|Services and support                                         |                   |   | 15,935,403       
|                                                             |                   |   |                  
|Total revenues                                               |                   |   | 21,975,416       
|Cost of revenues:                                            |                   |  
|Cost of product
revenues                                     |                   |   | 234,916          
|Cost of services and
support revenues                        |                   |   | 8,128,439        
|                                                             |                   |   |                  
|Total cost of revenues                                       |                   |   | 8,363,355        
|                                                             |                   |   |                  
|Gross profit                                                 |                   |   | 13,612,061       
|Operating expenses:                                          |                   |   |                  
|Sales and marketing                                          |                   |   | 8,347,083        
|Product development                                          |                   |   | 2,647,870        
|General and
administrative                                   |                   |   | 2,216,055        
|                                                             |                   |   |                  
|Total operating expenses                                     |                   |   | 13,211,008       
|                                                             |                   |   |                  
|Operating income                                             |                   |   | 401,053          
|Other income, net                                            |                   |   | 123,156          
|                                                             |                   |   |                  
|Income before income taxes                                   |                   |   | 524,209          
|Income tax expense                                           |                   |   | 183,476          
|                                                             |                   |   |                  
|Net income                                                   |                   | $ | 340,733          
|                                                             |                   |   |                  
|Basic net income per
share                                   |                   | $ | .02              
|                                                             |                   |   |                  
|Diluted net income
per share                                 |                   | $ | .02              
|                                                             |                   |   |                  
|Basic weighted average number of common shares outstanding   |                   |   | 20,155,027       
|                                                             |                   |   |                  
|Diluted weighted average number of common shares outstanding |                   |   | 20,517,169       
|                                                             |                   |   |                  

See accompanying notes to
consolidated financial statements.

6

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##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Statements of Operations(unaudited)Nine months ended September 30, 2002 and 2003

|                                                             | September 30,2002 |   | September 30,2003
|------------------------------------------------------------ | ----------------- | - | -----------------
|Revenues:                                                    |                   |   |                  
|Software product                                             |                   | $ | 18,670,826       
|Services and support                                         |                   |   | 47,715,128       
|                                                             |                   |   |                  
|Total revenues                                               |                   |   | 66,385,954       
|Cost of revenues:                                            |                   |  
|Cost of product revenues                                     |                   |   | 860,455          
|Cost of services and
support revenues                        |                   |   | 23,870,626       
|                                                             |                   |   |                  
|Total cost of revenues                                       |                   |   | 24,731,081       
|                                                             |                   |   |                  
|Gross profit                                                 |                   |   | 41,654,873       
|Operating expenses:                                          |                   |   |                  
|Sales and marketing                                          |                   |   | 25,193,322       
|Product development                                          |                   |   | 7,949,168        
|General and
administrative                                   |                   |   | 7,731,330        
|                                                             |                   |   |                  
|Total operating expenses                                     |                   |   | 40,873,820       
|                                                             |                   |   |                  
|Operating income                                             |                   |   | 781,053          
|Other income (expense), net                                  |                   |   | 268,043          
|                                                             |                   |   |                  
|Income before income taxes                                   |                   |   | 1,049,096        
|Income tax expense                                           |                   |   | 365,368          
|                                                             |                   |   |                  
|Net income                                                   |                   | $ | 683,728          
|                                                             |                   |   |                  
|Basic net income per
share                                   |                   | $ | .03              
|                                                             |                   |   |                  
|Diluted net income
per share                                 |                   | $ | .03              
|                                                             |                   |   |                  
|Basic weighted average number of common shares outstanding   |                   |   | 20,152,443       
|                                                             |                   |   |                  
|Diluted weighted average number of common shares outstanding |                   |   | 20,607,078       
|                                                             |                   |   |                  

See accompanying notes to
consolidated financial statements

7

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##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Statement
of Stockholders Equity and Comprehensive Loss(unaudited)Nine months ended
September 30, 2003

|                                        |   | Common
       Stock |  | Additional
        Paid-In
          Capital |            | Accumulated
       Deficit |   | Other
        Accumulated
       Comprehensive
       Loss |   | Treasury
      Stock |            | Total
       Stockholders'
        Equity |   |            |  
|--------------------------------------- | - | ------------------- |  | -------------------------------------------- | ---------- | -------------------------- | - | ---------------------------------------------------------- | - | -------------------- | ---------- | ----------------------------------------- | - | ---------- | -
|Balance at December 31, 2002            | $ | 210,902             |  | $                                            | 87,196,093 |                            | $ | (28,761,966                                                | ) | $                    | (1,877,654 | )                                         | $ | (7,226,093 | )
|Comprehensive income                   
|Net income                              |   | --                  |  |                                              | --         |                            |   | 2,438,864                                                  |   |                      | --         |                                           |   | --         |  
|Foreign currency translation adjustment |   | --                  |  |                                              | --         |                            |   | --                                                         |   |                      | 103,067    |                                           |   | --         |  
|                                        |   |                     |  |                                              |            |                            |   |                                                            |   |                      |            |                                           |   |            |  
|Total comprehensive income              |   |                     |  |                                              |            |                            |   |                                                            |   |                      |            |                                           |   |            |  
|Exercise of stock options               |   | 2,791               |  |                                              | 1,826,440  |                            |   | --                                                         |   |                      | --         |                                           |   | --         |  
|Stock issued for Employee Stock         |   |                     |  |                                              |            |                            |   |                                                            |   |                      |            |                                           |   |            |  
|Purchase Plan                           |   | 324                 |  |                                              | 178,311    |                            |   | --                                                         |   |                      | --         |                                           |   | --         |  
|Acquisition of 147,800 shares           |   | --                  |  |                                              | --         |                            |   | --                                                         |   |                      | --         |                                           |   | (912,222   | )
|                                        |   |                     |  |                                              |            |                            |   |                                                            |   |                      |            |                                           |   |            |  
|Balance at September 30, 2003           | $ | 214,017             |  | $                                            | 89,200,844 |                            | $ | (26,323,102                                                | ) | $                    | (1,774,587 | )                                         | $ | (8,138,315 | )
|                                        |   |                     |  |                                              |            |                            |   |                                                            |   |                      |            |                                           |   |            |  

See accompanying notes to
consolidated financial statements.

8

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##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries

# Consolidated
Statements of Cash Flows(unaudited)Nine months ended
September 30, 2002 and 2003

|                                                    | September 30,
2002 |  | September 30,
2003
|--------------------------------------------------- | ------------------ |  | ------------------
|Cash flows from operating activities:               |                    |  |                   
|Net income                                          |                    |  | $                 
|Adjustments to reconcile net income to net cash     |                    | 
|provided by operating activities:                   |                    | 
|Depreciation                                        |                    |  |                   
|Amortization                                        |                    |  |                   
|Loss on write-down of investment, net               |                    |  |                   
|Change in allowances for doubtful accounts          |                    |  |                   
|Stock based compensation                            |                    |  |                   
|Deferred income taxes                               |                    |  |                   
|Changes in operating assets and liabilities:        |                    |  |                   
|Accounts receivable                                 |                    |  |                   
|Unbilled revenue                                    |                    |  |                   
|Prepaid expenses                                    |                    |  |                   
|Inventories                                         |                    |  |                   
|Income taxes receivable                             |                    |  |                   
|Other assets                                        |                    |  |                   
|Accounts payable                                    |                    |  |                   
|Other accrued liabilities                           |                    |  |                   
|Income taxes payable                                |                    |  |                   
|Unearned revenue                                    |                    |  |                   
|                                                    |                    |  |                   
|Net cash provided by operating activities           |                    |  |                   
|                                                    |                    |  |                   
|Cash flows from investing activities:               |                    |  |                   
|Additions to property and equipment                 |                    |  |                   
|Purchase of additional shares in investment         |                    |  |                   
|                                                    |                    |  |                   
|Net cash used in investing activities               |                    |  |                   
|                                                    |                    |  |                   
|Cash flows from financing activities:               |                    | 
|Proceeds from exercise of stock options             |                    |  |                   
|Proceeds from issuances of shares under employee    |                    | 
|stock purchase plan                                 |                    |  |                   
|Cash paid to acquire treasury stock                 |                    |  |                   
|Principal payments on long-term debt                |                    |  |                   
|                                                    |                    |  |                   
|Net cash provided by (used in) financing activities |                    |  |                   
|                                                    |                    |  |                   
|Foreign currency translation adjustment             |                    |  |                   
|                                                    |                    |  |                   
|Net increase in cash and cash equivalents           |                    |  |                   
|Cash and cash equivalents at beginning of period    |                    |  |                   
|                                                    |                    |  |                   
|Cash and cash equivalents at end of period          |                    |  | $                 
|                                                    |                    |  |                   

See accompanying notes to
consolidated financial statements.

9

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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. 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 (SEC), although the
Company believes that the disclosures made are adequate to make the information presented
not misleading. 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, 2002 filed with the SEC on March 27, 2003. Other than as indicated
herein, there have been no significant changes from the financial data published in those
reports.

Results for interim periods are not
necessarily indicative of results expected for the full year.

# 2. Segment and
Geographic Information

The Company has identified one
business segment for reporting purposes: Asset Performance Management. The Company manages
the Asset Performance Management business over geographical regions. The principal areas
of operation include the United States, Europe, Latin America and Asia. Financial
information concerning the Companys operations in different geographical regions is
as follows:

For the three months ended September
30, 2002 and 2003:

|                        | United
States |  | Europe |            | Latin
America |   | Asia       |  | Total
|----------------------- | ------------- |  | ------ | ---------- | ------------- | - | ---------- |  | -----
|September 30, 2002:     |               |  |        |            |               |   |            |  |      
|Total revenues          |               |  | $      | 13,699,689 |               | $ | 5,338,152  |  | $    
|Operating income (loss) |               |  |        | (89,558    | )             |   | 515,726    |  |      
|Total assets            |               |  |        | 51,526,223 |               |   | 13,889,109 |  |      
|September 30, 2003:     |               | 
|Total revenues          |               |  | $      | 13,759,269 |               | $ | 5,561,211  |  | $    
|Operating income        |               |  |        | 1,546,865  |               |   | 229,009    |  |      
|Total assets            |               |  |        | 54,553,283 |               |   | 17,138,362 |  |      

For the nine months ended September
30, 2002 and 2003:

|                        | United
States |  | Europe |            | Latin
America |   | Asia       |   | Total
|----------------------- | ------------- |  | ------ | ---------- | ------------- | - | ---------- | - | -----
|September 30, 2002:     |               |  |        |            |               |   |            |   |      
|Total revenues          |               |  | $      | 42,143,504 |               | $ | 14,935,505 |   | $    
|Operating income (loss) |               |  |        | 385,662    |               |   | (17,362    | ) |      
|Total assets            |               |  |        | 51,526,223 |               |   | 13,889,109 |   |      
|September 30, 2003:     |               | 
|Total revenues          |               |  | $      | 43,190,927 |               | $ | 16,612,107 |   | $    
|Operating income (loss) |               |  |        | 4,411,912  |               |   | 799,273    |   |      
|Total assets            |               |  |        | 54,553,283 |               |   | 17,138,362 |   |      
|                        |               |  |        |            |              

10

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##### Table of Contents

The United States revenues include
international revenues of approximately $502,000 and $703,000 for the third quarters of
2002 and 2003, respectively, and approximately $1,540,000 and $ 1,725,000 for the first
nine months of 2002 and 2003, respectively.

# 3. 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, 2002 and 2003 is as follows:

|                               | Income |  | Shares |           | Per ShareAmount
|------------------------------ | ------ |  | ------ | --------- | ---------------
|For the three months ended:    |        |  |        |           |                
|September 30, 2002:            |        | 
|Basic net income per share     |        |  | $      | 340,733   |                
|                               |        |  |        |          
|Effect of dilutive securities: |        | 
|Stock options                  |        |  |        | --        |                
|                               |        |  |        |           |                
|Diluted net income per share   |        |  | $      | 340,733   |                
|                               |        |  |        |           |                
|September 30, 2003:            |        | 
|Basic net income per share     |        |  | $      | 1,228,664 |                
|                               |        |  |        |          
|Effect of dilutive securities: |        | 
|Stock options                  |        |  |        | --        |                
|                               |        |  |        |           |                
|Diluted net income per share   |        |  | $      | 1,228,664 |                
|                               |        |  |        |           |                
|For the nine months ended:     |        | 
|September 30, 2002:            |        | 
|Basic net income per share     |        |  | $      | 683,728   |                
|                               |        |  |        |          
|Effect of dilutive securities: |        | 
|Stock options                  |        |  |        | --        |                
|                               |        |  |        |           |                
|Diluted net income per share   |        |  | $      | 683,728   |                
|                               |        |  |        |           |                
|September 30, 2003:            |        | 
|Basic net income per share     |        |  | $      | 2,438,864 |                
|                               |        |  |        |          
|Effect of dilutive securities: |        | 
|Stock options                  |        |  |        | --        |                
|                               |        |  |        |           |                
|Diluted net income per share   |        |  | $      | 2,438,864 |                
|                               |        |  |        |           |                

Antidilutive shares totaling
3,318,203 and 1,361,734 were excluded from the diluted net income per share calculations for the
three months ended September 30, 2002 and 2003, respectively and antidilutive shares
totaling 3,058,762 and 2,860,830 were excluded from the diluted net income per share calculations for
the nine months ended September 30, 2002 and 2003, respectively.

11

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##### Table of Contents

4. Stock Option
Plans

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 fixed-plan stock options. Under this method, compensation expense is
measured on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, 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 following table illustrates the effect
on net income if the fair-value-based method had been applied for the three months and nine months ended September 30, 2002 and 2003.

|                                                 | Three months ended
|------------------------------------------------ | ------------------
|
|Net income as reported                           |                   
|Add: stock-based employee compensation expense   |                   
|included in reported net income, net of tax      |                   
|Deduct: total stock-based employee compensation  |                   
|expense determined under fair-value-based method |                   
|for all rewards, net of tax                      |                   
|                                                 |                   
|                                                 |                   
|Pro forma net income (loss)                      |                   
|                                                 |                   
|Basic net income (loss) per share:               |                   
|As reported                                      |                   
|                                                 |                   
|Pro forma                                        |                   
|                                                 |                   
|Diluted net income (loss) per share:             |                   
|As reported                                      |                   
|                                                 |                   
|Pro forma                                        |                   
|                                                 |                   

|                                                 | Nine months ended
|------------------------------------------------ | -----------------
|
|Net income as reported                           |                  
|Add: stock-based employee compensation expense   |                  
|included in reported net income, net of tax      |                  
|Deduct: total stock-based employee compensation  |                  
|expense determined under fair-value-based method |                  
|for all rewards, net of tax                      |                  
|                                                 |                  
|Pro forma net income (loss)                      |                  
|                                                 |                  
|Basic net income (loss) per share:               |                  
|As reported                                      |                  
|                                                 |                  
|Pro forma                                        |                  
|                                                 |                  
|Diluted net income (loss) per share:             |                  
|As reported                                      |                  
|                                                 |                  
|Pro forma                                        |                  
|                                                 |                  

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##### Table of Contents

# 5. Recent Accounting
Pronouncements

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal years ending after
December 15, 2002. See note 4.

In April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). This Statement amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133)
to improve financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. This Statement is generally effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material
effect on the Companys consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability, or an
asset in certain circumstances. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of this Statement
did not have a material effect on the Companys consolidated financial statements.

In November 2002, the FASB issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34
(FIN 45). This Interpretation elaborates on the disclosures to be made by a
guarantor about its obligations under guarantees issued. FIN 45 also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement provisions of
FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim and annual
periods ending after December 31, 2002. The adoption of FIN 45 did not have a material
effect on the Companys consolidated financial statements.

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51 (FIN 46). This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the interpretation and
sets forth additional disclosures about such interests. FIN 46 is effective for the
Companys fiscal year ending December 31, 2003. The adoption of FIN 46 is not
expected to have a material effect on the Companys consolidated financial
statements.

In July 2003, the Emerging Issues
Task Force (EITF) reached a consensus on EITF 03-5, Applicability of AICPA SOP 97-2
to Non-Software Deliverables. EITF 03-5 provides accounting guidance on whether
non-software deliverables (e.g., non-software related equipment or services) included in
an arrangement that contains software are within the scope of SOP 97-2. In general, any
non-software deliverable is within the scope of 97-2 if the software deliverable is
essential to its functionality. Companies are required to adopt this consensus in the first
reporting period (annual or interim) beginning after ratification by the Financial
Accounting Standard Board, which occurred on August 31, 2003. The Company believes the adoption of EITF 03-5 in the fourth quarter of 2003 will not have a
material effect on the Companys financial position or results of operations.

The EITF recently reached a consensus
on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides accounting guidance for customer solutions where
delivery or performance of products, services and/or performance may occur at different
points in time or over different periods of time. Companies are required to adopt this
consensus for fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did
not have a material impact on the Companys financial position or results of
operations

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##### Table of Contents

# 6. Commitments and
Contingencies

The Company is 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.

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##### Table of Contents

This Report contains certain
forward-looking statements with respect to the Companys operations, industry,
financial condition and liquidity. These statements reflect the Companys assessment
of a number of risks and uncertainties. The Companys 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 the Companys business is included in 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 such statement carefully.

# Overview

For over seventeen years, Datastream
has been a leading provider of asset management software and services to enterprises
worldwide, including more than 65 percent of the Fortune 500. Datastreams flagship
product, Datastream 7i, delivers a complete Asset Performance Management
infrastructure by combining an Internet architecture with broad enterprise asset
management functionality, integrated procurement, advanced analytics and multi-site
capability. Because Datastream 7i is completely designed and built around the flexibility,
speed and reliability of the Internet, customers achieve organizational transparency of
asset performance in a manner unique to the marketplace.

# Results of Operations

Total
Revenues. Total revenues increased 2% to $22,389,065 in the third quarter of 2003 from
$21,975,416 in the third quarter of 2002. Total revenues increased 3% to $68,561,856 for
the first nine months of 2003 from $66,385,954 for the first nine months of 2002. For the three and nine month periods, the increase is due
principally to the transition to Datastream 7i, which has a larger average deal size and
greater market demand due to advanced functionality, an increase in support renewal
contracts, and the increased number of hosted customers. International revenues were
approximately $9,333,000 (42% of total revenues) in the third quarter of 2003 and
approximately $8,778,000 (40% of total revenues) in the third quarter of 2002.
International revenues were approximately $27,096,000 (40% of total revenues) for the
first nine months of 2003 and approximately $25,782,000 (39% of total revenues) for the
first nine months of 2002. See Note 2 to the consolidated financial statements.

Software
product revenues increased 3% to $6,210,698 (28% of total revenues) in the third quarter
of 2003 from $6,040,013 (27% of total revenues) in the third quarter of 2002, as a result
of the market success of Datastream 7i, which has a larger average deal size. Software
product revenues increased 2% to $19,003,979 (28% of total revenues) for the first nine
months of 2003 from $18,670,826 (28% of total revenues) for the first nine months of 2002.

Services
and support revenues increased 2% to $16,178,367 (72% of total revenues) in the third
quarter of 2003 from $15,935,403 (73% of total revenues) in the third quarter of 2002.
Services and support revenues increased 4% to $49,557,877 (72% of total revenues) for the
first nine months of 2003 from $47,715,128 (72% of total revenues) for the first nine
months of 2002. For both periods, support revenue increased due to increased software
license deal size, an increase in average customer support renewal revenue, and an
increase in the number of hosted customers. The increase in support revenue was partially
offset by a decrease in service revenue due to general economic conditions and increased
competition by third party service providers.

Cost
of Revenues. Cost of revenues decreased 10% to $7,490,607 (33% of total revenues) in
the third quarter of 2003, as compared to $8,363,355 (38% of total revenues) in the third
quarter of 2002. Cost of revenues decreased 6% to $23,202,692 (34% of total revenues) for
the first nine months of 2003, as compared to $24,731,081 (37% of total revenues) for the
first nine months of 2002. The decrease in cost of revenues for the three and nine month
periods ending September 30, 2003 is due to decreased service revenues and overall
reductions in internal and third party service costs.

Sales
and Marketing Expenses. Sales and marketing expenses decreased 16% to $7,005,412 (31%
of total revenues) in the third quarter of 2003 from $8,347,083 (38% of total revenues) in
the third quarter of 2002. Sales and marketing expenses decreased 12% to $22,231,766 (32%
of total revenues) for the first nine months of 2003 from $25,193,322 (38% of total
revenues) for the first nine months of 2002. The decrease in sales and marketing expenses
is due to cost savings resulting from lower advertising and marketing expenditures and lower
sales commissions.

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##### Table of Contents

Product
Development Expenses. Total product development expenditures increased 27% to
$3,360,052 (15% of total revenues) in the third quarter of 2003 from $2,647,870 (12% of
total revenues) in the third quarter of 2002. Total product development expenditures
increased 16% to $9,250,362 (13% of total revenues) for the first nine months of 2003 from
$7,949,168 (12% of total revenues) for the first nine months of 2002. The increase in
total product development expense is a result of increased investment in asset performance
management functionality, mobile solutions, web services, and new database platforms for Datastream 7i.

General
and Administrative Expenses. General and administrative expenses increased 23% to
$2,726,454 (12% of total revenues) in the third quarter of 2003 from $2,216,055 (10% of
total revenues) in the third quarter of 2002 due primarily to increased write-offs of doubtful accounts during the
third quarter of 2003 and a reduction in foreign currency gains on transactions denominated in a foreign currency
due to fluctuating currency rates. General and administrative expenses
increased 15% to $8,923,406 (13% of total revenues) for the first nine months of 2003 from
$7,731,330 (12% of total revenues) for the first nine months of 2002. The increase for the
nine month period ended September 30, 2003 compared to the nine month period ended September 30, 2002 is due to an
increase in medical claims, the transition of personnel to administration and a reduction in foreign currency gains on transactions
denominated in a foreign currency due to fluctuating currency rates.

Other
income (expense), net. Other income (expense), net decreased 32% to $83,713 in the
third quarter of 2003 from $123,156 in the third quarter of 2002 due to lower yields on cash and cash eqivalents. Other income (expense),
net changed significantly to ($1.2) million for the first nine months of 2003 from
$268,043 for the first nine months of 2002. The decrease was due to a write down of the
Companys long-term investment in the second quarter of 2003 and lower yields on cash and cash equivalents.

Tax
Rate. The Companys effective tax rate was 35% for the three months and nine
months ended September 30, 2003 and September 30, 2002.

Net
income. Net income increased to $1.2 million (5% of total revenues) in the third
quarter of 2003 from a net income of $340,733 (2% of total revenues) in the third quarter
of 2002. Net income improved to $2.4 million (4% of total revenues) for the first nine
months of 2003 from a net income of $683,728 (1% of total revenues) for the first nine
months of 2002. The improvement for both periods is attributed to increased Datastream 7i
revenues and decreased cost of services and sales and marketing expenditures.

# Financial Condition

Consolidated total assets were $81.7
million at September 30, 2003, an increase of approximately $4.8 million, or 6% from $76.9
million at December 31, 2002. The increase was primarily due to a $7.7 million increase in
cash and cash equivalents partially offset by a $2.0 million reduction in accounts
receivable and unbilled revenue as a result of improved collections on customer accounts
and a $1.5 million write-down in the carrying value of the Companys long-term investment
in the second quarter of 2003.

Consolidated total liabilities were
$28.6 million at September 30, 2003, an increase of approximately $1.2 million, or 4% from
$27.4 million at December 31, 2002. The increase was primarily due to a $1.5 million
increase in unearned revenue as a result of increased support renewals and a $460,000 increase in income
taxes payable due to a higher net income, offset by a decrease in other accrued
liabilities primarily as a result of approximately $500,000 of accrued expenses for
corporate building renovations at December 31, 2002, which has since been paid.

Cash and cash equivalents increased
31% to $42.5 million at September 30, 2003 compared to $32.4 million at September 30,
2002. Cash and cash equivalents increased 22% at September 30, 2003 compared to $34.7 million at December
31, 2002. Cash continues to improve as a result of increased sales, improved collections
on accounts receivable, improved days sales outstanding and decreased operating expenses.

Cash
provided by operations increased 1% to $9.6 million at September 30, 2003 from $9.5
million at September 30, 2002. The increase was primarily a result of decreased operating
costs and increased collections on accounts receivable and unbilled revenue.

Net cash used in investing activities
increased 121% to $3.1 million for the nine months ended September 30, 2003 compared to
approximately $1.4 million for the nine months ended September 30, 2002. The increase was
primarily due to building renovations at corporate headquarters during the first nine months of
2003 and the purchase of information technology for internal use.

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##### Table of Contents

# Liquidity
and Capital Resources

The Company has funded its operating
activities primarily with cash generated from operations. The Company ended its third
quarter of 2003 with $42.5 million in cash and cash equivalents, which are defined as
highly liquid securities with maturities of 90 days or less.

On August 15, 2003, the Company
announced that its board of directors had authorized a plan to repurchase up to 1,000,000
shares of the Companys outstanding common stock. This plan expires August 15, 2005.
Subject to availability, the repurchases may be made from time to time in the open market
or otherwise at prices that the Company deems appropriate. The repurchased shares are
classified as treasury shares on the balance sheet and are reported at cost. The shares
may be used, when needed, for general corporate purposes, including the grant of stock
options. The Company repurchased 22,000 shares for $190,920 under the current plan during
the third quarter of 2003. The aggregate number of shares repurchased under all prior and
current plans was 1,176,400 as of September 30, 2003.

As of September 30, 2003, the Company
had no long-term debt commitments and no material commitments for capital expenditures.
The Company believes that its current cash balances and cash flows from operations will be
sufficient to meet its working capital and capital expenditure needs for the next 12
months.

# Critical Accounting
Polices

Critical accounting policies are
defined as those that are reflective of significant judgments and uncertainties, and
potentially result in materially different results under different assumptions and
conditions. The Companys critical accounting policies include revenue recognition,
income taxes, and allowance for doubtful accounts. For a detailed discussion on the
application of these and other accounting policies, see the Companys Form 10-K filed
for the year ended December 31, 2002.

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##### Table of Contents

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 3. | Quantitative and Qualitative Disclosures about Market RiskThe Company did not experience any material changes in market risk in the third quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|ITEM 4. | Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2003.
Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of
September 30, 2003, the Company's disclosure controls and procedures wer effective to provide reasonable assurance that the information required to
be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in the Company's internal controls over financial reporting during the
quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.

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##### Table of Contents

|PART II. | OTHER INFORMATION                                                                                                                                                                                                                                                                                                                        
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1.  | Legal Proceedings
The Company is  occasionally  involved in legal  proceedings  and other 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's consolidated financial statements.
|ITEM 2.  | Changes in Securities and Use of Proceeds
None                                                                                                                                                                                                                                                                                           
|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 and Reports on Form 8-K                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                                          

|
|
|
|
|
|
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# SIGNATURES

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.

|Date: November 12, 2003 | Datastream Systems, Inc./s/ C. Alex Estevez
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
|----------------------- | --------------------------------------------------------------------------------------------------------------------------------

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# EXHIBIT INDEX

|Exhibit Number | Description                                                                                                                                     
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------
|31.1           | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              
|31.2           | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              
|32.1           | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2           | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

21

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