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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q/A

Amendment No. 1



(Mark One)

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



For the quarterly period ended March 31, 2004



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



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 and former fiscal year, 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 ̈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 ̈



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: May 7, 2004: 20,045,136 shares, $0.01 par value.



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EXPLANATORY NOTE TO AMENDMENT NO. 1 ON
FORM 10-Q/A



Datastream Systems, Inc. (the
Company) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which was originally filed with the Securities and Exchange Commission on May 10, 2004 (the Quarterly Report),
to reflect the restatement of the Companys financial statements for the quarter ended March 31, 2004. The Company is also filing a Form 10-K/A for the year ended December 31, 2003 and a Form 10-Q/A for the quarter ended June 30, 2004
containing restated financial information reflecting adjustments to its previously filed financial statements.



As more fully described in Note 2 (Restatement) to the consolidated financial statements, the adjustments principally relate to improper revenue
recognition from distributor sales due to the uncertainty of collectibility, improper revenue recognition from certain customers due to the timing of receipt of evidence of an arrangement, improper expense recognition as to the timing of certain
expenses and adjustments to the goodwill impairment charge recognized in the year ended December 31, 2001 related to foreign currency adjustments.



The following items of the Form 10-Q have been modified or revised in this Amendment No. 1 to reflect the restatements:



| |  |  | Part I, Item 1. Financial Information
| | - |  | -------------------------------------



| |  |  | Part I, Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Part I, Item 4. Controls and Procedures
| | - |  | ---------------------------------------



| |  |  | Part II, Item 6. Exhibits and Reports on Form 8-K.
| | - |  | --------------------------------------------------



This Amendment No. 1 does not modify or update disclosures presented in the original Form 10-Q, except as required to reflect the effects of the
restatements. Except for disclosures affected by the restatements, Amendment No. 1 speaks as of the original filing date of the Form 10-Q on May 10, 2004 and does not modify or update disclosures in the Form 10-Q, including the nature and character
of such disclosures, to reflect events occurring or items discovered after the original filing date of the Form 10-Q. Accordingly, this Amendment No. 1 should be read in conjunction with the Companys filings made with the Securities and
Exchange Commission subsequent to the original filing date of the Form 10-Q, including any amendments to those filings.



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Datastream Systems, Inc.



FORM 10-Q/A



Quarter ended March 31, 2004

(Restated)



Index



|              |  |                                                                                                                                |  |        
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | -------
|              |  |                                                                                                                                |  | PageNo.
|Part I.       |  | Financial Information                                                                                                          |  |        
|              |  |                                                                                                                               
|              |  | Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995                                             |  | 4      
|              |  |                                                                                                                               
|Item 1.       |  | Consolidated Financial Statements (unaudited)                                                                                  |  |        
|              |  |                                                                                                                               
|              |  | Consolidated Balance Sheets (restated) - March 31, 2004 and December 31, 2003Assets                                            |  | 5      
|              |  | Liabilities and Stockholders Equity                                                                                           |  | 6      
|              |  |                                                                                                                               
|              |  | Consolidated Statements of Operations (restated) - For the three months ended March 31, 2004 and 2003                          |  | 7      
|              |  |                                                                                                                               
|              |  | Consolidated Statement of Stockholders Equity and Comprehensive Income (restated) - For the three months ended March 31, 2004 |  | 8      
|              |  |                                                                                                                               
|              |  | Consolidated Statements of Cash Flows (restated) - For the three months ended March 31, 2004 and 2003                          |  | 9      
|              |  |                                                                                                                               
|              |  | Notes to the Consolidated Financial Statements                                                                                 |  | 10     
|              |  |                                                                                                                               
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                          |  | 17     
|              |  |                                                                                                                               
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                     |  | 23     
|              |  |                                                                                                                               
|Item 4.       |  | Controls and Procedures                                                                                                        |  | 23     
|              |  |                                                                                                                               
|Part II.      |  | Other Information                                                                                                              |  |        
|              |  |                                                                                                                               
|Item 1.       |  | Legal Proceedings                                                                                                              |  | 25     
|              |  |                                                                                                                               
|Item 2.       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                               |  | 25     
|              |  |                                                                                                                               
|Item 3.       |  | Defaults Upon Senior Securities                                                                                                |  | 25     
|              |  |                                                                                                                               
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                                            |  | 25     
|              |  |                                                                                                                               
|Item 5.       |  | Other Information                                                                                                              |  | 25     
|              |  |                                                                                                                               
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                               |  | 25     
|              | 
|Signatures    |  | 27                                                                                                                            
|              | 
|Exhibit Index |  | 28                                                                                                                            



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PART I. FINANCIAL INFORMATION



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 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. 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: we did not file our Form 10-Q for the quarter ended September 30, 2004, Form 10-K for the year ended December 31, 2004, our amended Form 10-K for the
year ended December 31, 2003 or our amended Forms 10-Q for the quarters ended March 31 and June 30, 2004 by the deadlines required by the Nasdaq Hearings Panel and the Nasdaq Hearings Panel has not granted us the requested extensions; even if an
extension is granted for filing our Form 10-K for the year ended December 31, 2004, we may not be able to file such document before the deadline; we may not be able to comply with the other conditions for continued listing issued by the Nasdaq
Hearings Panel; if the Nasdaq Hearings Panel does not grant our requested filing extensions or if we cannot comply with the conditions for continued listing, our common stock may no longer be approved for trading on the Nasdaq Stock Market, which
could adversely affect the liquidity of the trading market for our common stock, and, therefore, could adversely affect the trading price of our common stock; with respect to our review of its internal controls, we cannot be certain that we will be
able to assess our internal controls were working effectively at December 31, 2004; the results of our continuing review of our financial statements and completion of our fiscal year 2004 audit; 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; engagements that require longer implementations; reduced profitability due to our hosting services strategy; our ability
to generate future revenue and profits from our Datastream 7i Buy strategy; 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;
risks unique to government contracts that may have a detrimental impact on our operating results; 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; our ability to maintain effective internal controls over financial reporting; fluctuations in
our stock price since our initial public offering; and our articles of incorporation and bylaws may inhibit a takeover that would be in the stockholders best interest. 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 including, but not limited to, the Risk Factors set forth in Managements Discussion and Analysis of Financial Condition and
Results of Operations in Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2003, 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.



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|ITEM 1. | Consolidated Financial Statements
|------- | ---------------------------------



Datastream Systems, Inc. and Subsidiaries



Consolidated Balance Sheets



Assets

(unaudited)



|                                                                                                                    |  |               |            |                  |   |           
|------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                                                                                                                    |  | March 31,2004 |            | December 31,2003
|                                                                                                                    |  | (restated)    |            | (restated)      
|Current assets:                                                                                                     |  |               |            |                  |   |           
|Cash and cash equivalents                                                                                           |  | $             | 46,113,135 |                  | $ | 45,037,099
|Accounts receivable, net of allowance for doubtful accounts of $741,274 and $747,243 in 2004 and 2003, respectively |  |               | 16,374,274 |                  |   | 17,670,267
|Unbilled revenue                                                                                                    |  |               | 1,495,928  |                  |   | 1,151,374 
|Prepaid expenses                                                                                                    |  |               | 1,407,318  |                  |   | 1,331,413 
|Income tax receivable                                                                                               |  |               |           |                  |   | 531,377   
|Deferred income taxes, net                                                                                          |  |               | 1,278,492  |                  |   | 1,278,492 
|Other assets                                                                                                        |  |               | 1,247,410  |                  |   | 1,442,348 
|                                                                                                                    |  |               |            |                  |   |           
|Total current assets                                                                                                |  |               | 67,916,557 |                  |   | 68,442,370
|Investment                                                                                                          |  |               | 501,983    |                  |   | 501,983   
|Property and equipment, net                                                                                         |  |               | 11,181,553 |                  |   | 11,238,830
|Deferred income taxes, net                                                                                          |  |               | 4,283,773  |                  |   | 4,283,773 
|Other long term assets                                                                                              |  |               | 81,472     |                  |   | 104,252   
|                                                                                                                    |  |               |            |                  |   |           
|Total assets                                                                                                        |  | $             | 83,965,338 |                  | $ | 84,571,208
|                                                                                                                    |  |               |            |                  |   |           



See
accompanying notes to consolidated financial statements.



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Datastream Systems, Inc. and Subsidiaries



Consolidated Balance Sheets (Continued)



Liabilities and Stockholders Equity

(unaudited)



|                                                                                                                                                                                                               |  |               |             |   |                  |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                               |  | March 31,2004 |             |   | December 31,2003 |  
|                                                                                                                                                                                                               |  | (restated)    |             |   | (restated)       |  
|Current liabilities:                                                                                                                                                                                           |  |               |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                               |  | $             | 2,413,052   |   |                  | $ | 3,376,454   |  
|Income taxes payable                                                                                                                                                                                           |  |               | 113,897     |   |                  |   |            |  
|Other accrued liabilities                                                                                                                                                                                      |  |               | 7,080,839   |   |                  |   | 8,411,198   |  
|Unearned revenue                                                                                                                                                                                               |  |               | 19,947,009  |   |                  |   | 18,299,952  |  
|                                                                                                                                                                                                               |  |               |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                                                              |  |               | 29,554,797  |   |                  |   | 30,087,604  |  
|Stockholders equity:                                                                                                                                                                                          |  |               |             |   |                  |   |             |  
|Preferred stock, $1 par value, 1,000,000 shares authorized; none issued                                                                                                                                        |  |               |            |   |                  |   |            |  
|Common stock, $.01 par value, 40,000,000 shares authorized; 21,537,169 shares issued and 20,065,469 outstanding at March 31, 2004 and
21,453,911 shares issued and 20,207,211 outstanding at December 31, 2003 |  |               | 215,371     |   |                  |   | 214,539     |  
|Additional paid-in capital                                                                                                                                                                                     |  |               | 90,211,142  |   |                  |   | 89,674,896  |  
|Accumulated deficit                                                                                                                                                                                            |  |               | (22,341,598 | ) |                  |   | (23,648,069 | )
|Other accumulated comprehensive loss                                                                                                                                                                           |  |               | (3,234,166  | ) |                  |   | (3,094,688  | )
|Treasury stock, at cost; 1,471,700 shares at March 31, 2004, 1,246,700 shares at December 31, 2003                                                                                                             |  |               | (10,440,208 | ) |                  |   | (8,663,074  | )
|                                                                                                                                                                                                               |  |               |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                                     |  |               | 54,410,541  |   |                  |   | 54,483,604  |  
|                                                                                                                                                                                                               |  |               |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                     |  | $             | 83,965,338  |   |                  | $ | 84,571,208  |  
|                                                                                                                                                                                                               |  |               |             |   |                  |   |             |  



See
accompanying notes to consolidated financial statements.



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Datastream Systems, Inc. and Subsidiaries



Consolidated Statements of Operations

(unaudited)



|                                                             |  |                    |            |               |   |           
|------------------------------------------------------------ |  | ------------------ | ---------- | ------------- | - | ----------
|                                                             |  | Three months ended
|                                                             |  | March 31,2004      |            | March 31,2003
|                                                             |  | (restated)         |            | (restated)   
|Revenues:                                                    |  |                    |            |               |   |           
|Software product                                             |  | $                  | 6,540,397  |               | $ | 6,421,496 
|Services and support                                         |  |                    | 16,787,222 |               |   | 16,345,238
|                                                             |  |                    |            |               |   |           
|Total revenues                                               |  |                    | 23,327,619 |               |   | 22,766,734
|Cost of revenues:                                            |  |                    |            |               |   |           
|Cost of product revenues                                     |  |                    | 487,768    |               |   | 220,730   
|Cost of services and support revenues                        |  |                    | 6,892,805  |               |   | 7,520,285 
|                                                             |  |                    |            |               |   |           
|Total cost of revenues                                       |  |                    | 7,380,573  |               |   | 7,741,015 
|                                                             |  |                    |            |               |   |           
|Gross profit                                                 |  |                    | 15,947,046 |               |   | 15,025,719
|Operating expenses:                                          |  |                    |            |               |   |           
|Sales and marketing                                          |  |                    | 7,329,302  |               |   | 7,251,272 
|Product development                                          |  |                    | 3,392,373  |               |   | 2,870,320 
|General and administrative                                   |  |                    | 3,362,544  |               |   | 3,573,117 
|                                                             |  |                    |            |               |   |           
|Total operating expenses                                     |  |                    | 14,084,219 |               |   | 13,694,709
|                                                             |  |                    |            |               |   |           
|Operating income                                             |  |                    | 1,862,827  |               |   | 1,331,010 
|Other income:                                                |  |                    |            |               |   |           
|Interest income, net                                         |  |                    | 121,296    |               |   | 119,471   
|Other income, net                                            |  |                    | 19,593     |               |   | 39,912    
|                                                             |  |                    |            |               |   |           
|Total other income                                           |  |                    | 140,889    |               |   | 159,383   
|Income before income taxes                                   |  |                    | 2,003,716  |               |   | 1,490,393 
|Income tax expense                                           |  |                    | 697,245    |               |   | 521,697   
|                                                             |  |                    |            |               |   |           
|Net income                                                   |  | $                  | 1,306,471  |               | $ | 968,696   
|                                                             |  |                    |            |               |   |           
|Basic net income per share                                   |  | $                  | 0.06       |               | $ | 0.05      
|                                                             |  |                    |            |               |   |           
|Diluted net income per share                                 |  | $                  | 0.06       |               | $ | 0.05      
|                                                             |  |                    |            |               |   |           
|Basic weighted average number of common shares outstanding   |  |                    | 20,203,696 |               |   | 20,017,239
|                                                             |  |                    |            |               |   |           
|Diluted weighted average number of common shares outstanding |  |                    | 20,482,009 |               |   | 20,237,616
|                                                             |  |                    |            |               |   |           



See
accompanying notes to consolidated financial statements.



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Datastream Systems, Inc. and Subsidiaries



Consolidated Statement of Stockholders Equity and Comprehensive Income

(unaudited)



Three months ended March 31, 2004



(restated)



|                                                     |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  
|---------------------------------------------------- |  | ----------- | ------- | ------------------------ | - | ------------------ |  | - | --------------------------------- | - |  | ------------- | ---------- | - | ------------------------ | - | ----------- | - |  | - | ---------- | -
|                                                     |  | CommonStock |         | AdditionalPaid-InCapital |   | AccumulatedDeficit |  |   | OtherAccumulatedComprehensiveLoss |   |  | TreasuryStock |            |   | TotalStockholdersEquity |  
|Balance at December 31, 2003, as previously reported |  | $           | 214,539 |                          | $ | 89,674,896         |  | $ | (24,863,981                       | ) |  | $             | (1,035,986 | ) |                          | $ | (8,663,074  | ) |  | $ | 55,326,394 |  
|Adjustments (see Note 2)                             |  |             |        |                          |   |                   |  |   | 1,215,912                         |   |  |               | (2,058,702 | ) |                          |   |            |   |  |   | (842,790   | )
|                                                     |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  
|Balance at December 31, 2003, as restated            |  |             | 214,539 |                          |   | 89,674,896         |  |   | (23,648,069                       | ) |  |               | (3,094,688 | ) |                          |   | (8,663,074  | ) |  |   | 54,483,604 |  
|Comprehensive income                                 |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  
|Net income                                           |  |             |        |                          |   |                   |  |   | 1,306,471                         |   |  |               |           |   |                          |   |            |   |  |   | 1,306,471  |  
|Foreign currency translation adjustment              |  |             |        |                          |   |                   |  |   |                                  |   |  |               | (139,478   | ) |                          |   |             |   |  |   | (139,478   | )
|                                                     |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  
|Total comprehensive income                           |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   | 1,166,993  |  
|Exercise of stock options                            |  |             | 739     |                          |   | 473,836            |  |   |                                  |   |  |               |           |   |                          |   |            |   |  |   | 474,575    |  
|Stock issued for EmployeeStock Purchase Plan         |  |             | 93      |                          |   | 62,410             |  |   |                                  |   |  |               |           |   |                          |   |            |   |  |   | 62,503     |  
|Acquisition of 225,000 shares                        |  |             |        |                          |   |                   |  |   |                                  |   |  |               |           |   |                          |   | (1,777,134  | ) |  |   | (1,777,134 | )
|                                                     |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  
|Balance at March 31, 2004                            |  | $           | 215,371 |                          | $ | 90,211,142         |  | $ | (22,341,598                       | ) |  | $             | (3,234,166 | ) |                          | $ | (10,440,208 | ) |  | $ | 54,410,541 |  
|                                                     |  |             |         |                          |   |                    |  |   |                                   |   |  |               |            |   |                          |   |             |   |  |   |            |  



See
accompanying notes to consolidated financial statements.



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Datastream Systems, Inc. and Subsidiaries



Consolidated Statements of Cash Flows

(unaudited)



|                                                                                  |  |                    |            |   |               |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------- | - | ---------- | -
|                                                                                  |  | Three months ended |           
|                                                                                  |  | March 31,2004      |            |   | March 31,2003 |  
|                                                                                  |  | (restated)         |            |   | (restated)    |  
|Cash flows from operating activities:                                             |  |                    |            |   |               |   |            |  
|Net income                                                                        |  | $                  | 1,306,471  |   |               | $ | 968,696    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |            |   |               |   |            |  
|Depreciation                                                                      |  |                    | 740,345    |   |               |   | 812,156    |  
|Amortization                                                                      |  |                    | 9,482      |   |               |   | 9,480      |  
|Provision for doubtful accounts                                                   |  |                    | 531,328    |   |               |   | 409,582    |  
|Changes in operating assets and liabilities:                                      |  |                    |            |   |               |   |            |  
|Accounts receivable                                                               |  |                    | 764,665    |   |               |   | 509,883    |  
|Unbilled revenue                                                                  |  |                    | (344,554   | ) |               |   | (402,151   | )
|Prepaid expenses                                                                  |  |                    | (75,905    | ) |               |   | (200,600   | )
|Income taxes receivable/payable                                                   |  |                    | 645,274    |   |               |   | 803,566    |  
|Other assets                                                                      |  |                    | 208,236    |   |               |   | 269,281    |  
|Accounts payable                                                                  |  |                    | (963,402   | ) |               |   | (252,423   | )
|Other accrued liabilities                                                         |  |                    | (1,330,359 | ) |               |   | (1,322,842 | )
|Unearned revenue                                                                  |  |                    | 1,647,057  |   |               |   | 2,298,568  |  
|                                                                                  |  |                    |            |   |               |   |            |  
|Net cash provided by operating activities                                         |  |                    | 3,138,638  |   |               |   | 3,903,196  |  
|                                                                                  |  |                    |            |   |               |   |            |  
|Cash flows from investing activities:                                             |  |                    |            |   |               |   |            |  
|Additions to property and equipment                                               |  |                    | (683,068   | ) |               |   | (701,962   | )
|                                                                                  |  |                    |            |   |               |   |            |  
|Net cash used in investing activities                                             |  |                    | (683,068   | ) |               |   | (701,962   | )
|                                                                                  |  |                    |            |   |               |   |            |  
|Cash flows from financing activities:                                             |  |                    |            |   |               |   |            |  
|Proceeds from exercise of stock options                                           |  |                    | 474,575    |   |               |   | 46,659     |  
|Proceeds from issuances of shares under employee stock purchase plan              |  |                    | 62,503     |   |               |   | 79,495     |  
|Cash paid to acquire treasury stock                                               |  |                    | (1,777,134 | ) |               |   | (694,701   | )
|                                                                                  |  |                    |            |   |               |   |            |  
|Net cash used in financing activities                                             |  |                    | (1,240,056 | ) |               |   | (568,547   | )
|                                                                                  |  |                    |            |   |               |   |            |  
|Foreign currency translation adjustment                                           |  |                    | (139,478   | ) |               |   | (60,430    | )
|                                                                                  |  |                   
|Net increase in cash and cash equivalents                                         |  |                    | 1,076,036  |   |               |   | 2,572,257  |  
|Cash and cash equivalents at beginning of period                                  |  |                    | 45,037,099 |   |               |   | 34,731,362 |  
|                                                                                  |  |                    |            |   |               |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                  | 46,113,135 |   |               | $ | 37,303,619 |  
|                                                                                  |  |                    |            |   |               |   |            |  



See
accompanying notes to consolidated financial statements.



9



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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). 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, Amendment No. 1 on Form 10-K/A, and Amendment No. 2 on Form 10-K/A for the year ended December 31, 2003
filed with the SEC on March 10, 2004, March 16, 2004, and March 23, 2005, respectively. Certain amounts in the prior year financial statements have been reclassified to conform to the 2004 presentation.



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



2. Restatement



The Companys previously issued consolidated financial statements as of December 31,
2002 and 2003 and each of the years in the three-year period ended December 31, 2003, have been restated to reflect adjustments identified as a result of the Companys Audit Committee investigation into allegations of improper revenue
recognition and other financial improprieties in China and the Companys subsequent internal review of previously issued financial statements. The adjustments recognized relate primarily to revenue recognition, timing of operating expense
recognition primarily related to certain previously unadjusted audit differences, goodwill impairment and related income tax effects. The Company also restated previously issued consolidated financial statements for the quarter ended June 30, 2004.
The restatement impacts the three months ended March 31, 2003 and 2004, respectively, as described hereunder.



The Company made adjustments that increased (decreased) revenues. These revenue adjustments principally relate to reseller arrangements, fixed price services contracts, and hosting arrangements of approximately
($17,000) and $241,000 for the three months ended March 31, 2003 and 2004, respectively. A portion of these adjustments was offset by related increases or decreases in expenses as described below.



The Company made adjustments that increased (decreased) cost of services. These adjustments
primarily relate to the service revenue adjustments described above and adjustments for certain previously unadjusted audit differences of approximately ($38,000) and $36,000 for the three months ended March 31, 2003 and 2004, respectively.



The Company made adjustments that increased (decreased) general and
administrative expenses. These adjustments principally relate to bad debt expense offsetting the revenue recognition adjustments described above and certain previously unadjusted audit differences of approximately $4,000 and $216,000 for the three
months ended March 31, 2003 and 2004, respectively.



The net effect of these
adjustments to income (loss) before income taxes was an increase (decrease) of approximately $17,000 and ($11,000) for the three months ended March 31, 2003 and 2004, respectively. These adjustments had no impact to earnings per share in either
period.



Previously recorded cash balances recorded at the corporate level for
our German subsidiary were understated for unrecorded currency gains on the cash account. As a result, cash increased approximately $25,000 and $150,000 as of March 31, 2003 and 2004, respectively, with the corresponding offset recorded as a
component of accumulated other comprehensive loss.



The impact of the above
adjustments to net cash provided by operating activities was approximately ($250,000) and $18,000 for the three-month period ended March 31, 2003 and 2004, respectively. The impact on the foreign currency translation adjustment component of the
consolidated statement of cash flows was approximately ($2,000) and $237,000 for the three-month period ended March 31, 2003 and 2004, respectively.



10



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##### Table of Contents

The Companys weighted average number of common shares outstanding decreased by 131,746 and 168,656 for the three
months ended March 31, 2003 and 2004, respectively as a result of adjusting for the tax impact on assumed proceeds under the treasury stock method.



11



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##### Table of Contents

The financial results as of March 31, 2003 and 2004 and notes thereto included in this Form 10-Q/A have been restated to
include the effects of the corrections as follows:



|                                                             |  |                            |            |             |   |          |               |  |   |           
|------------------------------------------------------------ |  | -------------------------- | ---------- | ----------- | - | -------- | ------------- |  | - | ----------
|                                                             |  | For the three months ended
|                                                             |  | March 31,2004              |            | Adjustments |   |          | March 31,2004
|                                                             |  | As previouslyreported      |            |             |   |          | Restated     
|Statement of Operations Data:                                |  |                            |            |             |   |          |               |  |   |           
|Revenues:                                                    |  |                            |            |             |   |          |               |  |   |           
|Product                                                      |  | $                          | 6,456,775  |             | $ | 83,622   |               |  | $ | 6,540,397 
|Professional services and support                            |  |                            | 16,630,065 |             |   | 157,157  |               |  |   | 16,787,222
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Total revenues                                               |  |                            | 23,086,840 |             |   | 240,779  |               |  |   | 23,327,619
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Cost of revenues:                                            |  |                            |            |             |   |          |               |  |   |           
|Cost of product revenues                                     |  |                            | 487,768    |             |   |         |               |  |   | 487,768   
|Cost of professional services and support revenues           |  |                            | 6,856,993  |             |   | 35,812   |               |  |   | 6,892,805 
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Total cost of revenues                                       |  |                            | 7,344,761  |             |   | 35,812   |               |  |   | 7,380,573 
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Gross profit                                                 |  |                            | 15,742,079 |             |   | 204,967  |               |  |   | 15,947,046
|                                                             |  |                            |           
|Operating expenses:                                          |  |                            |            |             |   |          |               |  |   |           
|Sales and marketing                                          |  |                            | 7,329,302  |             |   |         |               |  |   | 7,329,302 
|Product development                                          |  |                            | 3,392,373  |             |   |         |               |  |   | 3,392,373 
|General and administrative                                   |  |                            | 3,146,682  |             |   | 215,862  |               |  |   | 3,362,544 
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Total operating expenses                                     |  |                            | 13,868,357 |             |   | 215,862  |               |  |   | 14,084,219
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Operating income                                             |  |                            | 1,873,722  |             |   | (10,895  | )             |  |   | 1,862,827 
|                                                             |  |                            |           
|Other income :                                               |  |                            |            |             |   |          |               |  |   |           
|Interest income, net                                         |  |                            | 121,296    |             |   |         |               |  |   | 121,296   
|Other income                                                 |  |                            | 19,593     |             |   |         |               |  |   | 19,593    
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Net other income                                             |  |                            | 140,889    |             |   |         |               |  |   | 140,889   
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Income before income taxes                                   |  |                            | 2,014,611  |             |   | (10,895  | )             |  |   | 2,003,716 
|Income tax expense                                           |  |                            | 701,348    |             |   | (4,103   | )             |  |   | 697,245   
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Net income                                                   |  | $                          | 1,313,263  |             | $ | (6,792   | )             |  | $ | 1,306,471 
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Basic net income per share                                   |  | $                          | 0.07       |             | $ | 0.00     |               |  | $ | 0.06      
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Diluted net income per share                                 |  | $                          | 0.06       |             | $ | 0.00     |               |  | $ | 0.06      
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Basic weighted average number of common shares outstanding   |  |                            | 20,203,696 |             |   |         |               |  |   | 20,203,696
|                                                             |  |                            |            |             |   |          |               |  |   |           
|Diluted weighted average number of common shares outstanding |  |                            | 20,650,665 |             |   | (168,656 | )             |  |   | 20,482,009
|                                                             |  |                            |            |             |   |          |               |  |   |           



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|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|------------------------------------------ |  | --------------------- | ----------- | - | ----------- | - | ---------- | ------------- |  | - | ----------- | -
|                                           |  | March 31,2004         |             |   | Adjustments |   |            | March 31,2004 | 
|                                           |  | As previouslyreported |             |   |             |   |            | Restated      | 
|Balance Sheet Data:                        |  |                       |             |   |             |   |            |               |  |   |             |  
|Assets                                     |  |                       |             |   |             |   |            |               |  |   |             |  
|Current assets:                            |  |                       |             |   |             |   |            |               |  |   |             |  
|Cash and cash equivalents                  |  | $                     | 45,963,594  |   |             | $ | 149,541    |               |  | $ | 46,113,135  |  
|Accounts receivable, net                   |  |                       | 16,374,274  |   |             |   |           |               |  |   | 16,374,274  |  
|Unbilled revenue, net                      |  |                       | 1,365,750   |   |             |   | 130,178    |               |  |   | 1,495,928   |  
|Income taxes receivable                    |  |                       | 28,155      |   |             |   | (28,155    | )             |  |   |            |  
|Prepaid expenses                           |  |                       | 1,407,318   |   |             |   |           |               |  |   | 1,407,318   |  
|Deferred income taxes                      |  |                       | 1,007,461   |   |             |   | 271,031    |               |  |   | 1,278,492   |  
|Other current assets                       |  |                       | 1,247,410   |   |             |   |           |               |  |   | 1,247,410   |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Total current assets                       |  |                       | 67,393,962  |   |             |   | 522,595    |               |  |   | 67,916,557  |  
|                                           |  |                       |            
|Investment                                 |  |                       | 501,983     |   |             |   |           |               |  |   | 501,983     |  
|Property and equipment, net                |  |                       | 11,181,553  |   |             |   |           |               |  |   | 11,181,553  |  
|Deferred income taxes, net                 |  |                       | 4,098,198   |   |             |   | 185,575    |               |  |   | 4,283,773   |  
|Other assets, net                          |  |                       | 81,472      |   |             |   |           |               |  |   | 81,472      |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Total assets                               |  | $                     | 83,257,168  |   |             | $ | 708,170    |               |  | $ | 83,965,338  |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Liabilities and Stockholders Equity       |  |                       |             |   |             |   |            |               |  |   |             |  
|Current liabilities:                       |  |                       |             |   |             |   |            |               |  |   |             |  
|Accounts payable                           |  | $                     | 2,413,052   |   |             | $ |           |               |  | $ | 2,413,052   |  
|Other accrued liabilities                  |  |                       | 7,136,891   |   |             |   | (56,052    | )             |  |   | 7,080,839   |  
|Unearned revenue                           |  |                       | 18,684,485  |   |             |   | 1,262,524  |               |  |   | 19,947,009  |  
|Income taxes payable                       |  |                       |            |   |             |   | 113,897    |               |  |   | 113,897     |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Total liabilities                          |  |                       | 28,234,428  |   |             |   | 1,320,369  |               |  |   | 29,554,797  |  
|                                           |  |                       |            
|Stockholders equity:                      |  |                       |             |   |             |   |            |               |  |   |             |  
|Preferred stock                            |  |                       |            |   |             |   |           |               |  |   |            |  
|Common stock                               |  |                       | 215,371     |   |             |   |           |               |  |   | 215,371     |  
|Additional paid-in capital                 |  |                       | 90,211,142  |   |             |   |           |               |  |   | 90,211,142  |  
|Accumulated deficit                        |  |                       | (23,550,718 | ) |             |   | 1,209,120  |               |  |   | (22,341,598 | )
|Accumulated other comprehensive loss       |  |                       | (1,412,847  | ) |             |   | (1,821,319 | )             |  |   | (3,234,166  | )
|Treasury stock                             |  |                       | (10,440,208 | ) |             |   |           |               |  |   | (10,440,208 | )
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Total stockholders equity                 |  |                       | 55,022,740  |   |             |   | (612,199   | )             |  |   | 54,410,541  |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  
|Total liabilities and stockholders equity |  | $                     | 83,257,168  |   |             | $ | 708,170    |               |  | $ | 83,965,338  |  
|                                           |  |                       |             |   |             |   |            |               |  |   |             |  



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|                                                             |  |                            |            |             |   |          |                |  |   |           
|------------------------------------------------------------ |  | -------------------------- | ---------- | ----------- | - | -------- | -------------- |  | - | ----------
|                                                             |  | For the three months ended
|                                                             |  | March 31, 2003             |            | Adjustments |   |          | March 31, 2003
|                                                             |  | As previouslyreported      |            |             |   |          | Restated      
|Statement of Operations Data:                                |  |                            |            |             |   |          |                |  |   |           
|Revenues:                                                    |  |                            |            |             |   |          |                |  |   |           
|Product                                                      |  | $                          | 6,521,646  |             | $ | (100,150 | )              |  | $ | 6,421,496 
|Professional services and support                            |  |                            | 16,262,586 |             |   | 82,652   |                |  |   | 16,345,238
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Total revenues                                               |  |                            | 22,784,232 |             |   | (17,498  | )              |  |   | 22,766,734
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Cost of revenues:                                            |  |                            |            |             |   |          |                |  |   |           
|Cost of product revenues                                     |  |                            | 220,730    |             |   |         |                |  |   | 220,730   
|Cost of professional services and support revenues           |  |                            | 7,558,285  |             |   | (38,000  | )              |  |   | 7,520,285 
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Total cost of revenues                                       |  |                            | 7,779,015  |             |   | (38,000  | )              |  |   | 7,741,015 
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Gross profit                                                 |  |                            | 15,005,217 |             |   | 20,502   |                |  |   | 15,025,719
|Operating expenses:                                          |  |                            |            |             |   |          |                |  |   |           
|Sales and marketing                                          |  |                            | 7,251,272  |             |   |         |                |  |   | 7,251,272 
|Product development                                          |  |                            | 2,870,320  |             |   |         |                |  |   | 2,870,320 
|General and administrative                                   |  |                            | 3,569,425  |             |   | 3,692    |                |  |   | 3,573,117 
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Total operating expenses                                     |  |                            | 13,691,017 |             |   | 3,692    |                |  |   | 13,694,709
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Operating income                                             |  |                            | 1,314,200  |             |   | 16,810   |                |  |   | 1,331,010 
|Other income:                                                |  |                            |            |             |   |          |                |  |   |           
|Interest income, net                                         |  |                            | 119,471    |             |   |         |                |  |   | 119,471   
|Other income                                                 |  |                            | 39,912     |             |   |         |                |  |   | 39,912    
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Net other income                                             |  |                            | 159,383    |             |   |         |                |  |   | 159,383   
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Income before income taxes                                   |  |                            | 1,473,583  |             |   | 16,810   |                |  |   | 1,490,393 
|Income tax expense                                           |  |                            | 515,845    |             |   | 5,852    |                |  |   | 521,697   
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Net income                                                   |  | $                          | 957,738    |             | $ | 10,958   |                |  | $ | 968,696   
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Basic net income per share                                   |  | $                          | 0.05       |             | $ | 0.00     |                |  | $ | 0.05      
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Diluted net income per share                                 |  | $                          | 0.05       |             | $ | 0.00     |                |  | $ | 0.05      
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Basic weighted average number of common shares outstanding   |  |                            | 20,017,239 |             |   |         |                |  |   | 20,017,239
|                                                             |  |                            |            |             |   |          |                |  |   |           
|Diluted weighted average number of common shares outstanding |  |                            | 20,369,362 |             |   | (131,746 | )              |  |   | 20,237,616
|                                                             |  |                            |            |             |   |          |                |  |   |           



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3. Segment and Geographic Information



We have 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 is as follows:



|                 |  |                         |            |        |   |              |  |      |           |       |   |           |  |   |           
|---------------- |  | ----------------------- | ---------- | ------ | - | ------------ |  | ---- | --------- | ----- | - | --------- |  | - | ----------
|                 |  | (restated)             
|                 |  | United States andCanada |            | Europe |   | LatinAmerica |  | Asia |           | Total
|March 31, 2004:  |  |                         |            |        |   |              |  |      |           |       |   |           |  |   |           
|Total revenues   |  | $                       | 13,570,395 |        | $ | 6,429,114    |  | $    | 1,538,632 |       | $ | 1,789,478 |  | $ | 23,327,619
|Operating income |  |                         | 1,667,682  |        |   | 128,582      |  |      | 30,773    |       |   | 35,790    |  |   | 1,862,827 
|Total assets     |  |                         | 58,149,229 |        |   | 17,074,266   |  |      | 3,585,593 |       |   | 5,156,250 |  |   | 83,965,338
|                 |  |                         |            |        |  
|March 31, 2003:  |  |                         |            |        |   |              |  |      |           |       |   |           |  |   |           
|Total revenues   |  | $                       | 14,620,791 |        | $ | 5,525,195    |  | $    | 1,317,721 |       | $ | 1,303,027 |  | $ | 22,766,734
|Operating income |  |                         | 1,168,091  |        |   | 110,504      |  |      | 26,354    |       |   | 26,061    |  |   | 1,331,010 
|Total assets     |  |                         | 53,481,884 |        |   | 13,625,249   |  |      | 5,142,788 |       |   | 6,231,279 |  |   | 78,481,200



In 2003, we changed the methodology
used to determine the intercompany pricing between our US Operations and our foreign affiliates from a comparable uncontrolled transaction method (CUT Method) to a comparable profits method (CPM Method). The CUT Method
evaluates whether the amount charged for a controlled transfer of intangible property is consistent with an arms length transaction by reference to the amount charged in a comparable uncontrolled transaction. The CPM Method evaluates the
arms length character of a controlled transaction based upon objective measures of profitability derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances.



In 2003, we applied additional control procedures to the foreign affiliate operations. More
specifically, we provided significant direction to the foreign affiliates regarding markets and customers to target, we assisted the foreign affiliates in managing capital and other resources, and centralized in the U.S. certain management and
administrative functions formerly performed by the foreign affiliates. As a result of these operational changes, our foreign subsidiaries made fewer operating decisions and undertook fewer risks than they did before we instituted these changes. As a
result, a new transfer pricing method was applied.



In accordance with section
482 of the U.S. Internal Revenue Code and the regulations thereunder, we engaged a third party to determine a new arms length pricing method to apply to our foreign affiliates. The objective measures of profitability used in the CPM method is
commonly used by companies in the software/hardware distribution business all over the world. The result was a change from an intercompany charge for the licensing of the software to a set profitability margin based on comparable company profits.



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 March 31, 2004 and 2003 is as follows:



|                               |  |            |           |        |            |                 |   |    
|------------------------------ |  | ---------- | --------- | ------ | ---------- | --------------- | - | ---
|                               |  | (restated)
|                               |  | Income     |           | Shares |            | Per ShareAmount
|For the three months ended:    |  |            |           |        |            |                 |   |    
|March 31, 2004:                |  |            |           |        |            |                 |   |    
|Basic net income per share     |  | $          | 1,306,471 |        | 20,203,696 |                 | $ | .06
|                               |  |            |           |        |            |                 |   |    
|Effect of dilutive securities: |  |            |           |        |            |                 |   |    
|Stock options                  |  |            |          |        | 278,313    |                 |   |    
|                               |  |            |           |        |            |                 |   |    
|Diluted net income per share   |  | $          | 1,306,471 |        | 20,482,009 |                 | $ | .06
|                               |  |            |           |        |            |                 |   |    
|March 31, 2003:                |  |            |           |        |            |                 |   |    
|Basic net income per share     |  | $          | 968,696   |        | 20,017,239 |                 | $ | .05
|                               |  |            |           |        |            |                 |   |    
|Effect of dilutive securities: |  |            |           |        |            |                 |   |    
|Stock options                  |  |            |          |        | 220,377    |                 |   |    
|                               |  |            |           |        |            |                 |   |    
|Diluted net income per share   |  | $          | 968,696   |        | 20,237,616 |                 | $ | .05
|                               |  |            |           |        |            |                 |   |    



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##### Table of Contents

Antidilutive shares totaling 2,414,925 and 3,170,200 were excluded from the diluted net income per share calculations for
the three months ended March 31, 2004 and 2003, respectively.



5. 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 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 following table illustrates the effect on net income if the fair-value-based method had been applied for the three months ended March 31, 2004 and 2003.



|                                                                                                                              |  |                    |           |   |               |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------- | - | -------- | -
|                                                                                                                              |  | (restated)         |          
|                                                                                                                              |  | Three months ended |          
|                                                                                                                              |  | March 31,2004      |           |   | March 31,2003 |  
|Net income as reported                                                                                                        |  | $                  | 1,306,471 |   |               | $ | 968,696  |  
|Deduct: total stock-based employee compensation expense determined under fair-value-based method for all awards, net of taxes |  |                    | (769,406  | ) |               |   | (607,230 | )
|                                                                                                                              |  |                    |           |   |               |   |          |  
|Pro forma net income                                                                                                          |  | $                  | 537,065   |   |               | $ | 361,466  |  
|                                                                                                                              |  |                    |           |   |               |   |          |  
|Basic net income per share:                                                                                                   |  |                    |           |   |               |   |          |  
|As reported                                                                                                                   |  | $                  | .06       |   |               | $ | .05      |  
|                                                                                                                              |  |                    |           |   |               |   |          |  
|Pro forma                                                                                                                     |  | $                  | .03       |   |               | $ | .02      |  
|                                                                                                                              |  |                    |           |   |               |   |          |  
|Diluted net income per share:                                                                                                 |  |                    |           |   |               |   |          |  
|As reported                                                                                                                   |  | $                  | .06       |   |               | $ | .05      |  
|                                                                                                                              |  |                    |           |   |               |   |          |  
|Pro forma                                                                                                                     |  | $                  | .03       |   |               | $ | .02      |  
|                                                                                                                              |  |                    |           |   |               |   |          |  



The Company uses the Black Scholes
option-pricing model to value the employee and director stock-based compensation plans. The following assumptions were used for grants and purchase rights valued during the quarter ended March 31, 2004 and 2003: an expected dividend rate of 0% and
0%, an expected volatility of 88.5% and 92.2%, a risk-free rate of 2.60% and 3.55% and an expected life of 4.5 years and 8.8 years, respectively.



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s consolidated financial statements.



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



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.



Restatement



We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which was originally filed
with the Securities and Exchange Commission on May 10, 2004 (the Quarterly Report), to reflect the restatement of our financial statements for the quarter ended March 31, 2004. We are also filing a Form 10-K/A for the year ended December
31, 2003 and a Form 10-Q/A for the quarter ended June 30, 2004 containing restated financial information reflecting adjustments to its previously filed financial statements.



As described in Note 2 (Restatement) to the consolidated financial statements, the adjustments principally relate to improper revenue
recognition from distributor sales due to the uncertainty of collectibility, improper revenue recognition from certain customers due to the timing of receipt of evidence of an arrangement, improper expense recognition as to the timing of certain
expenses and adjustments to the goodwill impairment charge recognized in the year ended December 31, 2001 related to foreign currency adjustments.



This Amendment No. 1 does not modify or update disclosures presented in the original form 10-Q, except as required to reflect the effects of the restatements. Except for
disclosures affected by the restatements, Amendment No. 1 speaks as of the original filing date of the Form 10-Q on May 10, 2004 and does not modify or update disclosures in the Form 10-Q, including the nature and character of such disclosures, to
reflect events occurring or items discovered after the original filing date of the Form 10-Q. Accordingly, this Amendment No. 1 should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the
original filing date of the Form 10-Q, including any amendments to those filings.



The restatement is the result of the Companys Audit Committee independent investigation into allegations of improper reseller revenue, revenue recognition and other financial improprieties in China. Initially, we determined that
certain control deficiencies existed at our Chinese subsidiary. These deficiencies included a lack of oversight and local knowledge of revenue recognition with respect to revenue from resellers in accordance with U.S. generally accepted accounting
principles, inadequate retention of documentation of the financial stability of the Companys resellers and an inadequate control structure and management oversight for its Chinese subsidiary.



Due to the control deficiencies we noted in China, we also reviewed revenue recognition
policies and procedures for certain other international regions including other countries in Asia-Pacific and Latin America. We concluded that revenues generated from certain resellers in our Asia-Pacific and Latin American operations should have
been recognized upon cash receipt rather than on an accrual basis as a result of the uncertainty of collectibility in 2001 to 2004. We also concluded that our Latin American operations had improperly recognized revenue prematurely in light of the
late timing of the receipt of evidence of an arrangement as required by Company policy and U.S. generally accepted accounting principles.



During our expanded review we noted that certain expenses in Europe were recorded in periods prior or subsequent to the period in which the liability was incurred. In
addition, previously recorded cash balances recorded at the corporate level for our German subsidiary were understated for unrecorded currency gains on the cash account. Other miscellaneous adjustments noted in the United States were made during the
course of our review. These adjustments were primarily related to certain prior year audit differences that we have now decided to record.



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The net effect of these adjustments to income before income taxes was an increase of $17,000 for the quarter ended March
31, 2003 and a decrease of approximately $11,000 for quarter ended March 31, 2004. These adjustments had no impact to earnings per share in either period.



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.



Growth in profits for a software company is strongly tied to license revenues. License revenues typically result in subsequent service and support revenues. We intend to
grow license revenue by increasing the size of our direct sales force and improving their productivity. Growth in profits is also strongly tied to product quality, functionality and performance, and we can only achieve this by 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 also often sell services to host the licensed application. During the first quarter of 2004, we experienced higher support revenue per customer than the first quarter of 2003,
which was an important factor in our profitability. Our support revenue is a key source of recurring revenue and profitability in our business.



Our gross margin, which measures net revenues less cost of goods sold as a percentage of total revenues, improved in the first quarter of 2004 compared to the first
quarter of 2003 because of reduced services costs and increased support revenue as a percentage of our total revenues. Our operating margin, which measures operating income as a percentage of total revenues, improved in the first quarter of 2004
compared to the first quarter of 2003 due largely to higher productivity in services and support, leading to higher gross margins. Our cost structure primarily consists of salaries, wages, and benefits provided to our employees.



Traditionally, a significant portion of our revenue in any quarter had been the result of a
large number of relatively small orders received during the period. We expect the average size of our license sales transactions, however, to continue to increase in the coming years. 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 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 customer transactions, and sales may vary from quarter to quarter. We expect to experience a
decline in the large number of relatively small orders that had been a staple of our marketing and sales efforts in the past.



We typically see reduced service revenues in the third and fourth quarters of our calendar year due to lower utilization of our services from Europe in the summer and
fewer available billable days in the November and December months 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 deals
sizes and less predictable sales cycles associated with Datastream 7i. This seasonality, combined with the extended sales cycles, may cause our results to vary from quarter to quarter.



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Results of Operations



Total Revenues. Total revenues increased 2% to $23,327,619 in the first quarter of 2004 from $22,766,734 in the first quarter of 2003. The increase is due to an
increase in support renewal contracts, an increase in application hosting revenue due to an increased number of hosted customers and an increase in product sales through resellers in Asia and Latin America. International revenues, which include
Canada, were approximately $10,421,000 (45% of total revenues) in the first quarter of 2004 and approximately $8,709,000 (38% of total revenues) in the first quarter of 2003. The increase in international revenues as a percentage of total revenues
is due to favorable foreign currency translation adjustments, as well as an increase in Datastream 7i revenue in Europe. United States revenues decreased as a result of a decline in service revenues due to increased competition from third party
service providers. See Note 3 to the consolidated financial statements.



Software product revenues increased 2% to $6,540,397 (28% of total revenues) in the first quarter of 2004 from $6,421,496 (28% of total revenues) in the first quarter of 2003 as a result of increasing sales cycles related to Datastream 7i
deals.



Professional services and support revenues increased 3% to $16,787,222
(72% of total revenues) in the first quarter of 2004 from $16,345,238 (72% of total revenues) in the first quarter of 2003. Support revenue increased due to an increase in average customer support renewal revenue, customer support renewal rates in
excess of the quarter ended March 31, 2003, 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 increased competition from third party service providers.



Cost of Revenues. Cost of revenues decreased 6% to $7,380,573 (32% of
total revenues) in the first quarter of 2004, as compared to $7,741,015 (34% of total revenues) in the first quarter of 2003. The decrease in cost of revenues is primarily due to decreased reimbursed service costs and overall reductions in internal
and third party service expenditures.



Sales and Marketing Expenses.
Sales and marketing expenses increased 1% to $7,329,302 (31% of total revenues) in the first quarter of 2004 from $7,251,272 (32% of total revenues) in the first quarter of 2003. The slight increase in sales and marketing expenses is due to
increased expenditures related to conferences and tradeshows and employee-related costs.



Product Development Expenses. Total product development expenditures increased 18% to $3,392,373 (15% of total revenues) in the first quarter of 2004 from $2,870,320 (13% of total revenues) in the first quarter
of 2003. The increase in total product development expense is a result of increased investment in asset performance management functionality, mobile solutions, and web services.



General and Administrative Expenses. General and administrative expenses decreased 6% to $3,362,544 (14% of total revenues) in the
first quarter of 2004 from $3,573,117 (16% of total revenues) in the first quarter of 2003 due primarily to decreased professional fees and salary and related expenses, as well as a decrease in bad debt expense as a result of improved days sales
outstanding. General and administrative expenses may increase as we incur costs related to the implementation of our compliance with Section 404 of the Sarbanes-Oxley Act of 2002.



Tax Rate. Our effective tax rate was 35% for each of the quarters ended March 31, 2004 and March 31, 2003.



Net income. Net income increased to $1.3 million (6% of total revenues) in the first
quarter of 2004 from net income of $1.0 million (4% of total revenues) in the first quarter of 2003. The improvement is attributed to increased support revenues and decreased cost of services and general and administrative expenditures.



Financial Condition



Consolidated total assets were $84.0 million at March 31, 2004, a decrease of approximately $0.6 million or 1% from $84.6 million at
December 31, 2003. The decrease was primarily due to an approximate $1.3 million reduction in accounts receivable and unbilled revenue as a result of improved collections on customer accounts and a $0.5 million reduction in income tax receivable and
deferred income taxes due to current tax provisions partially offset by a $1.1 million increase in cash and cash equivalents.



Consolidated total liabilities were $29.6 million at March 31, 2004, a decrease of approximately $0.5 million or 2% from $30.1 million at December 31, 2003. The decrease
was primarily due to a $2.3 million decrease in accounts payable and accrued liabilities due to the timing of payments offset by an increase of $1.6 million in unearned



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revenue as a result of an increase in average customer support renewal revenue, an increase in the rate of customer renewals, and an increase in the number
of hosted customers.



Cash and cash equivalents increased 24% to $46.1 million
at March 31, 2004 compared to $37.3 million at March 31, 2003. Cash and cash equivalents increased 2% at March 31, 2004 compared to $45.0 million at December 31, 2003. Cash improved due to improved profitability, higher deferred revenue, and
improved collections on accounts receivable.



Liquidity and Capital
Resources



We have funded our operating activities primarily with cash
generated from operations. We ended the first quarter of 2004 with $46.1 million in cash and cash equivalents, which are defined as highly liquid securities with maturities of 90 days or less.



On August 15, 2003, we announced that the board of directors had authorized a plan to
repurchase up to 1,000,000 shares of our 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 management 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. We repurchased 225,000 shares for $1.8
million during the first quarter of 2004, and 317,300 shares overall for $2.5 million under the current plan. The aggregate number of shares repurchased under all prior and current plans was 1,471,700 as of March 31, 2004.



Cash provided by operations decreased 21% to $3.1 million for the three months ended March
31, 2004 from $3.9 million at March 31, 2003. The decrease was primarily a result of payments on accounts payable.



Net cash used in investing activities decreased 3% to $0.6 million for the three months ended March 31, 2004 compared to approximately $0.7 million for the three months
ended March 31, 2003. The decrease was primarily due to building renovations at our corporate headquarters that occurred during the first quarter of 2003.



Net cash used in financing activities increased 100% to $1.2 million for the three months ended March 31, 2004 compared to approximately $0.6 million for the three months
ended March 31, 2003. The increase was primarily due to an increase of approximately $1.1 million used to repurchase shares of our Common Stock during the first quarter of 2004 compared to the first quarter of 2003, partially offset by an increase
of $0.4 million in proceeds from the exercise of stock options.



As of March
31, 2004, 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.



Critical Accounting Estimates and Polices



In preparation of our financial statements we make estimates and
assumptions that can significantly affect the reported amounts of net income and the value of certain assets and liabilities. Our critical accounting estimates are those that are material due to the level of subjectivity and judgment necessary to
account for matters that are either highly uncertain or highly susceptible to change and have a material effect on our financial condition or operating performance. We believe critical accounting estimates related to revenue recognition, income
taxes and allowance for doubtful accounts receivable encompass critical judgments and our accounting policies provide a basis upon which management considers significant judgments and uncertainties; however, each of these judgments and estimates may
potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these and other accounting policies, see Note 1 in the notes to the consolidated financial statements included in
Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2003.



Revenue Recognition - The majority of our software license arrangements include additional elements such as professional services, post contract support and/or hosting services and therefore, are considered multiple element
arrangements. In addition, arrangements entered into with a customer within a close proximity of time (usually within three months) are evaluated together to determine if they collectively are a multiple element arrangement.



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We account for multiple element arrangements by allocating the total contract fee to the various elements based on
vendor-specific objective evidence of fair value (VSOE) of each undelivered element of the arrangement. We account for the license element according to the residual method provided by SOP 98-9. We determine VSOE for the professional
services element based on separate sales of professional services that are not negotiated as part of a multiple element arrangement. We determine VSOE for the post contract support and hosting elements based on either the renewal rate stated in the
contract for certain products or renewals of post contract support and hosting arrangements.



Product Revenues - We generally recognize product revenues when a non-cancelable license agreement has been signed, the product has been delivered, the fees are fixed or determinable, collectibility is probable
and VSOE exists for all undelivered elements in an arrangement. Fees are generally considered fixed or determinable upon receipt of a signed license agreement. Management sets payment terms depending on market and customer specific conditions. If
payment terms on license fees extend beyond a period of time that is out of our historical collection period for each geographic region, then revenue is recognized as payments are due. Our products are off-the-shelf products because they can be used
by our customers with little or no customization.



Professional Services
- Our professional service offerings are primarily related to providing installation, implementation, integration, training and project management services. These services are sold principally on a time and materials basis or in some cases at a
fixed price. Time and material projects are distinguished from fixed price agreements in that the price of the services are quoted based on days incurred on the project or some other measure of time such as hours, weeks or months. Fixed price
service contracts are defined as any contract entered into for a pre-determined total price regardless of the number of days actually needed to complete the project. Time and material service revenue is recognized as the services are performed.
Fixed price services are recognized based on the proportional performance method. The measure of performance is based on the relationship between the hours incurred to date versus the total estimated hours to complete (an input method). The
resulting percentage complete is used to determine the percentage of revenue of the contract to be recognized. We do not use the output method because it is difficult to establish and reasonably estimate outputs. We believe that the input method is
better in our case because we have a history of accurate estimates, we update estimates frequently (at least quarterly), we regularly monitor and recognize variances, and we have the ability to track costs. Losses on fixed-price contracts are
recognized during the period in which the loss first becomes evident. Contract losses are determined to be the amount by which the estimated total costs of the contract exceeds the total fixed price of the contract.



Our service elements are not essential to the functionality of our software and are accounted
for separately as evidenced by the following:



| |  |  | Services provided together with our products do not include significant alterations to the features or functionality of the software.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complex interfaces are not necessary for the software to function in the customers environment.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | The timing of the payment for the software is not coincident with the performance of the services.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Customer payment is not dependent upon milestones or customer acceptance.
| | - |  | -------------------------------------------------------------------------



| |  |  | These services are available from other vendors.
| | - |  | ------------------------------------------------



| |  |  | These services do not carry significant degrees of risk or unique acceptance criteria.
| | - |  | --------------------------------------------------------------------------------------



| |  |  | We are experienced providers of the services.
| | - |  | ---------------------------------------------



We have not historically entered into any multiple element arrangements in which the services were considered essential to the functionality of the software.



Support and Hosting Revenues - We recognize support revenues, which consist of fees
for ongoing support and product updates, ratably over the term of the contract support period, typically one year. The amount of support revenue invoiced but not yet recognized is recorded as unearned revenue in the accompanying consolidated balance
sheets. We determine VSOE of support using either the stated contract renewal rate or the support renewal rate when sold separately.



Certain of our customers purchase our hosting services. A customer must purchase a perpetual license for our product before a customer can utilize our hosting services.
Our hosted customers have the contractual right to take possession of the software at any time during the hosted period and either host the product internally or contract with a third party vendor. The customer has the right to choose not to renew
their hosting arrangement with us upon its expiration and deploy the software internally or contract with another party unrelated to us to



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host the software. For the vast majority of our hosted products, the customer could self-host and any penalties to do so are not material as defined in EITF
00-03 and the arrangement is accounted for under SOP 97-2. We account for the license element according to the residual method provided by SOP 98-9 upon delivery of the license element to the customer. We recognize the portion of the arrangement fee
allocated to the hosting element ratably over the term of the arrangement.



In
certain limited instances involving one of our stand alone products, the hosted customer may incur significant penalties upon electing to terminate our hosting services. In those instances, we recognize all revenues related to the sale over the
period of the expected life of the product since the customer has paid a nonrefundable upfront fee (software license).



Reseller Arrangements - The majority of our sales through resellers are generated from our European, Asian and Latin American operations. We recognize revenue from
resellers on the accrual basis only if financial stability can be determined, payment is not contingent on end user payment to the reseller and other criteria of SOP 97-2 are met. If financial stability cannot be determined and properly documented
or if payment from the distributor is contingent, then revenue is recognized upon cash receipt.



Product Warranties and Returns- Our standard agreements do not contain product return rights. We provide a standard warranty of 30 days from the date of sale. We continually evaluate our obligations with
respect to warranties, returns and refunds. We do not maintain any reserves with respect to warranty based on the history of performance of our software. We may, in certain circumstances, grant discounts for product sales. The discounts are
recognized as a reduction of product revenue. Our allowance for doubtful accounts includes an insignificant amount for product returns and refunds. We do not maintain any reserves with respect to warranty based on the history of the performance of
our software.



Income Taxes -We account for income taxes under the
asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. We recognize deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Changes in
deferred tax assets and liabilities are recorded in the provision for income taxes. As of March 31, 2004 and 2003, we had approximately $5.6 million and $6.3 million, respectively, in deferred tax assets, net of valuation allowances.



We evaluate the realizability of our deferred tax assets on a regular basis for each taxable
jurisdiction. In making this assessment, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers all available evidence, both positive and negative in making this assessment. Positive evidence supporting the
realizability of our deferred tax assets include: our strong earnings history prior to operating losses realized in 2001, the ability to carryback losses to prior years, positive results in recent years, projections of future taxable income in 2004,
the existence of significantly appreciated net assets and the availability of prudent and feasible tax planning strategies to accelerate taxable amounts.



Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2004.



In the future, if we determine that we expect to realize deferred tax assets in excess of the recorded net amounts, a reduction in the
deferred tax asset valuation allowance would decrease income tax expense in the period such determination is made. Alternatively, if we determine that we no longer expect to realize a portion of our net deferred tax assets, an increase in the
deferred tax asset valuation allowance would increase income tax expense in the period such determination is made.



Allowance for Doubtful Accounts Receivable - We maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of our
customers to make required payments. In determining the allowance for doubtful accounts receivable, we review the rolling twelve month average of account write-offs, customer specific account risks and geographic specific factors that may impact
international accounts. These



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factors combine to establish the allowance for doubtful accounts balance. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required.



The above is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United
States of America, with no need for managements judgment in their application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result.



|ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------



The Company did not experience any material changes in market risk in the first quarter of 2004.



|ITEM 4. | Controls and Procedures
|------- | -----------------------



As previously disclosed in a Current Report on Form 8-K which we filed on February 23, 2005 and as described in Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to our financial statements, we have determined that certain internal control deficiencies existed at our Chinese subsidiary, including a lack of oversight and local knowledge of revenue recognition
with respect to revenue from resellers in accordance with U.S. generally accepted accounting principles, inadequate retention of documentation of the financial stability of our resellers and an inadequate control structure and management oversight
for our Chinese subsidiary. In addition, we have determined that certain internal control deficiencies existed in our Asia-Pacific and Latin American operations. These deficiencies included lack of management oversight and insufficient training of
international accounting personnel in regards to revenue recognition rules applicable to our industry. The internal control deficiencies at our Chinese subsidiary and our Asia-Pacific and Latin American operations resulted in the improper
recognition of revenues generated from certain resellers in our Asia-Pacific and Latin American operations on an accrual basis rather than upon cash receipt; with respect to our Latin American operations, the premature and improper recognition of
revenue in light of the late timing of the receipt of evidence of an arrangement as required by our policy and U.S. generally accepted accounting principles; and certain liabilities were recorded in periods prior or subsequent to the period in which
the liability was incurred. In addition, we have also determined that the amount of the goodwill impairment charge for the year ended December 31, 2001 was incorrect due to not properly accounting for foreign exchange translation relating to the
foreign goodwill. This error also impacted years prior to 2001, the amounts of which have been recorded in the beginning balances of stockholders equity in the fiscal year 2001. Based on the impact of the foregoing to our financial statements,
we determined to restate our financial statements for fiscal years ended December 31, 2001, 2002, and 2003, as well as quarterly financial statements for the quarters ended March 31, 2004 and June 30, 2004.



Management has determined that the internal control deficiencies that made these restatements
necessary are indicative of a material weakness, as defined by the Public Company Accounting Oversight Boards Auditing Standard No. 2. The Public Company Accounting Oversight Board has defined a material weakness as a significant
deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has reviewed the
internal control deficiencies with our Audit Committee; has discussed them with our independent registered public accounting firm, KPMG LLP; and has advised our Audit Committee that the deficiencies are indicative of a material weakness in our
internal control over financial reporting.



In order to remediate the reseller
revenue and evidence of an arrangement internal control deficiencies, management has implemented the following measures as of the date of filing of this Form 10-Q/A:



China Operations



| |  |  | The separation from employment of personnel in China that may have been involved in improper revenue recognition,
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Lowered the threshold of license revenue that must be reviewed by corporate headquarters,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Hired additional accounting personnel,
| | - |  | --------------------------------------



| |  |  | Reassigned an executive from the U.S. headquarters to manage our Asia-Pacific operations, including those in China, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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| |  |  | Required maintenance of documentation of the assessment of financial stability of all distributors along with payment history and reviewing agreements and business practices for
indications of contingent revenues. If financial stability cannot be determined and properly documented or if payment from the distributor is contingent, then revenue is recognized upon cash receipt. In markets where revenue is contingent per
written agreement or business practices and history indicates that revenue is contingent from distributors, we now recognize distributor revenue upon cash receipt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Reseller Operations in Asia-Pacific and Latin America Regions



| |  |  | Hired additional accounting personnel,
| | - |  | --------------------------------------



| |  |  | Required maintenance of documentation of the assessment of financial stability of all distributors along with payment history and reviewing agreements and business practices for
indications of contingent revenues. If financial stability cannot be determined and properly documented or if payment from the distributor is contingent, then revenue is recognized upon cash receipt. In markets where revenue is contingent per
written agreement or business practices and history indicates that revenue is contingent from distributors, we now recognize distributor revenue upon cash receipt, and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reassigned an executive from the U.S. headquarters to manage our Asia-Pacific operations.
| | - |  | -----------------------------------------------------------------------------------------



Latin America Operations



| |  |  | Replaced departed accounting personnel;
| | - |  | ---------------------------------------



| |  |  | Lowered the threshold of license revenue that must be reviewed by corporate headquarters;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Implemented guidelines surrounding proper revenue recognition policies, including what constitutes proper and timely evidence of an arrangement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Restructured management reporting structure, as well as identification of quarterly risks through a more formal process and documenting those assessments; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Engaged outside consultants to supplement our internal accounting personnel.
| | - |  | ----------------------------------------------------------------------------



We have furthermore moved to cash basis revenue recognition for reseller transactions at our Chinese subsidiary and in our Asia-Pacific and Latin American operations
where appropriate.



To remediate the internal control deficiency related to
improper expense recognition, management has put in place several levels of review related to the reconciliations of balance sheets accounts at the regional and corporate level.



Evaluation of Disclosure Controls and Procedures



Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2004. In light of the issues referenced above, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures
were not effective at a reasonable assurance level as of March 31, 2004, due to the existence of the internal control deficiencies described above.



Changes in Internal Controls Over Financial Reporting



There were no changes in internal controls over financial reporting that occurred during the quarter ended March 31, 2004 that materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting. Subsequent to the quarter ended September 30, 2004, we have implemented the remedial measures outlined above to address the identified material weakness in connection with
the preparation of our financial statements included in this Amendment No. 1 to Form 10-Q for the quarter ended March 31, 2004. In addition, subsequent to the quarter ended March 31, 2004, we have been conducting a thorough review and evaluation of
our internal controls as part of our preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We have dedicated substantial resources to the review of our control processes and procedures.



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We cannot assure that we will be able to correct the internal control deficiencies described above in a timely manner,
and we have determined that we will not be able to file managements annual report on internal control over financial reporting for the year ended December 31, 2004 by the required deadline. When managements annual report on internal
control over financial reporting is filed, it may contain a finding that a material weakness or material weaknesses existed as of December 31, 2004. In addition, we cannot assure that our independent registered public accounting firm will be able to
issue an unqualified attestation report.



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, Use of Proceeds and Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------



Issuer Purchases of Equity Securities



|                               |  |                               |  |                          |      |                                                                                |         |                                                                           |        
|------------------------------ |  | ----------------------------- |  | ------------------------ | ---- | ------------------------------------------------------------------------------ | ------- | ------------------------------------------------------------------------- | -------
|Period                         |  | TotalNumberof SharesPurchased |  | AveragePricePaidPerShare |      | Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms (1) |         | MaximumNumber ofShares that May Yet BePurchased Underthe Plans orPrograms
|January 1 - January 31, 2004   |  |                              |  |                          |     |                                                                                |        |                                                                           | 907,700
|February 1 - February 29, 2004 |  | 19,000                        |  | $                        | 8.43 |                                                                                | 19,000  |                                                                           | 888,700
|March 1 - March 31, 2004       |  | 206,000                       |  | $                        | 7.85 |                                                                                | 206,000 |                                                                           | 682,700
|                               |  |                               |  |                          |      |                                                                                |         |                                                                           |        
|Total                          |  | 225,000                       |  | $                        | 7.90 |                                                                                | 225,000 |                                                                           | 682,700
|                               |  |                               |  |                          |      |                                                                                |         |                                                                           |        



|(1) | The current 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 Common Stock of the
Company. The plan expires 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 and Reports on Form 8-K
|------- | --------------------------------



|(a) | Exhibits
|--- | --------



|     |  |                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive 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



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|     |  |                                                                                                                                                
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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



|(b) | Reports on Form 8-K
|--- | -------------------



The Company furnished a Current Report on Form 8-K pursuant to Item 12 on February 4, 2004 to announce its financial results for the quarter and fiscal
year ended December 31, 2003.



The Company filed a Current
Report on Form 8-K pursuant to Item 5 on March 9, 2004 to announce the appointment of James C. Ryan, Jr. to the board of directors, effective March 8, 2004.



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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.



|                     |  |  |  |                                      
|-------------------- |  |  |  | -------------------------------------
|                     |  |  |  | Datastream Systems, Inc.             
|                     |  | 
|Date: March 23, 2005 |  |  |  | /s/ C. Alex Estevez                  
|                     |  |  |  | C. Alex Estevez                      
|                     |  |  |  | President and Chief Financial Officer



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EXHIBIT INDEX



|               |  |                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                        
|31.1           |  | Certification of Chief Executive 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, as required by 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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