##### Table of Contents

---

# UNITED STATES

# SECURITIES AND EXCHANGE
COMMISSION

# Washington, DC 20549

# FORM 10-Q

(Mark One)

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

For
the quarterly period ended March 31, 2004

OR

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

For the transition
period from ________________to_________________

COMMISSION FILE NUMBER:
000-25590

---

DATASTREAM SYSTEMS, INC.

Incorporated pursuant
to the laws of the State of Delaware

---

Internal
Revenue Service  Employer Identification No. 57-0813674

50 DATASTREAM PLAZA,
GREENVILLE, SC 29605

(864) 422-5001

---

NOT APPLICABLE

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ý    No o

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

APPLICABLE  ONLY TO CORPORATE  ISSUERS:  Indicate  the number of shares  outstanding  of each of the issuers  classes of common
stock, as of the latest practicable date: May  7, 2004:    20,045,136 shares, $0.01 par value.

---

---

---

# Datastream Systems,
Inc.

# FORM 10-Q

# Quarter ended
March 31, 2004

# Index

|              |                                                                                       | Page No.
|------------- | ------------------------------------------------------------------------------------- | --------
|              | Part I  Financial Information                                                        |         
|              | "Safe Harbor" Statement under the Private Securities                                  |         
|              | Litigation Reform Act of 1995                                                         | 3       
|Item 1        | Consolidated Financial Statements (unaudited)                                        
|              | Consolidated Balance Sheets - March 31, 2004 and December 31, 2003                    |         
|              | Assets                                                                                | 4       
|              | Liabilities and Stockholders Equity                                                  | 5       
|              | Consolidated Statements of Operations -                                               |         
|              | For the three months ended March 31, 2004 and 2003                                    | 6       
|              | Consolidated Statement of Stockholders Equity and Comprehensive Income -             |         
|              | For the three months ended March 31, 2004                                             | 7       
|              | Consolidated Statements of Cash Flows -                                               |         
|              | For the three months ended March 31, 2004 and 2003                                    | 8       
|              | Notes to the Consolidated Financial Statements                                        | 9       
|Item 2        | Managements Discussion and Analysis of Financial Condition and Results of Operations | 12      
|Item 3        | Quantitative and Qualitative Disclosures About Market Risk                            | 16      
|Item 4        | Controls and Procedures                                                               | 16      
|              | Part II  Other Information                                                          
|Item 1        | Legal Proceedings                                                                     | 17      
|Item 2        | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      | 17      
|Item 3        | Defaults Upon Senior Securities                                                       | 17      
|Item 4        | Submission of Matters to a Vote of Security Holders                                   | 17      
|Item 5        | Other Information                                                                     | 17      
|Item 6        | Exhibits and Reports on Form 8-K                                                      | 17      
|Signatures    |                                                                                       | 19      
|Exhibit Index |                                                                                       | 20      

2

---

##### Table of Contents

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

From
time to time, we make oral and written statements that may constitute forward
looking statements (rather than historical facts) as defined in the Private
Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the
SEC) in its rules, regulations and releases, including Section 27A of the
Securities Act of 1933, as amended (the Securities Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). We desire to
take advantage of the safe harbor provisions in the Private Securities
Litigation Reform Act of 1995 for forward looking statements made from time to time,
including, but not limited to, the forward looking statements made in this Quarterly
Report on Form 10-Q (the Report), as well as those made in other filings with
the SEC.

Forward
looking statements can be identified by our use of forward looking terminology such as
may, will, expect, anticipate,
estimate, believe, continue or other similar words.
Such forward looking statements are based on 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: 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 and other professional
services engagements; 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; 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 herein including, but not
limited to, the Risk Factors set forth in Managements Discussion
and Analysis of Financial Condition and Results of Operations in our
Form 10-K for the fiscal year ended December 31, 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.

3

---

##### Table of Contents

ITEM 1. Consolidated
Financial Statements

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

|                                                               | March 31,
2004 |  | December 31,
2003 |           
|-------------------------------------------------------------- | -------------- |  | ----------------- | ----------
|Current assets:                                                |                |  |                   |           
|Cash and cash equivalents                                      |                |  | $                 | 45,963,594
|Accounts receivable, net of allowance for doubtful accounts of |                | 
|$741,274 and $995,421 in 2004 and 2003, respectively           |                |  |                   | 16,374,274
|Unbilled revenue                                               |                |  |                   | 1,365,750 
|Prepaid expenses                                               |                |  |                   | 1,407,318 
|Income tax receivable                                          |                |  |                   | 28,155    
|Deferred income taxes, net                                     |                |  |                   | 1,007,461 
|Other assets                                                   |                |  |                   | 1,247,410 
|                                                               |                |  |                   |           
|Total current assets                                           |                |  |                   | 67,393,962
|Investment                                                     |                |  |                   | 501,983   
|Property and equipment, net                                    |                |  |                   | 11,181,553
|Deferred income taxes, net                                     |                |  |                   | 4,098,198 
|Other long term assets                                         |                |  |                   | 81,472    
|                                                               |                |  |                   |           
|Total assets                                                   |                |  | $                 | 83,257,168
|                                                               |                |  |                   |           

See accompanying notes to
consolidated financial statements.

4

---

##### Table of Contents

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

|                                                                          | March 31,
2004 |  | December 31,
2003 |            
|------------------------------------------------------------------------- | -------------- |  | ----------------- | -----------
|Current liabilities:                                                      |                |  |                   |            
|Accounts payable                                                          |                |  | $                 | 2,413,052  
|Other accrued liabilities                                                 |                |  |                   | 7,136,891  
|Unearned revenue                                                          |                |  |                   | 18,684,485 
|                                                                          |                |  |                   |            
|Total liabilities                                                         |                |  |                   | 28,234,428 
|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    
|Additional paid-in capital                                                |                |  |                   | 90,211,142 
|Accumulated deficit                                                       |                |  |                   | (23,550,718
|Other accumulated comprehensive loss                                      |                |  |                   | (1,412,847 
|Treasury stock, at cost;                                                  |                | 
|1,471,700 shares at March 31, 2004, 1,246,700 shares at December 31, 2003 |                |  |                   | (10,440,208
|                                                                          |                |  |                   |            
|Total stockholders equity                                                |                |  |                   | 55,022,740 
|                                                                          |                |  |                   |            
|Total liabilities and stockholders equity                                |                |  | $                 | 83,257,168 
|                                                                          |                |  |                   |            

See accompanying notes to
consolidated financial statements.

5

---

##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Statements of Operations
(unaudited)Three months ended March 31, 2004 and 2003

|                                                             | March 31,
2004 |  | March 31,
2003 |           
|------------------------------------------------------------ | -------------- |  | -------------- | ----------
|Revenues:                                                    |                |  |                |           
|Software product                                             |                |  | $              | 6,456,775 
|Services and support                                         |                |  |                | 16,630,065
|                                                             |                |  |                |           
|Total revenues                                               |                |  |                | 23,086,840
|Cost of revenues:                                            |                | 
|Cost of product revenues                                     |                |  |                | 487,768   
|Cost of services and support revenues                        |                |  |                | 6,856,993 
|                                                             |                |  |                |           
|Total cost of revenues                                       |                |  |                | 7,344,761 
|                                                             |                |  |                |           
|Gross profit                                                 |                |  |                | 15,742,079
|Operating expenses:                                          |                | 
|Sales and marketing                                          |                |  |                | 7,329,302 
|Product development                                          |                |  |                | 3,392,373 
|General and administrative                                   |                |  |                | 3,146,682 
|                                                             |                |  |                |           
|Total operating expenses                                     |                |  |                | 13,868,357
|                                                             |                |  |                |           
|Operating income                                             |                |  |                | 1,873,722 
|Other income:                                                |                | 
|Interest income, net                                         |                |  |                | 121,296   
|Other income, net                                            |                |  |                | 19,593    
|                                                             |                |  |                |           
|Total other income                                           |                |  |                | 140,889   
|                                                             |                |  |                |           
|Income before income taxes                                   |                |  |                | 2,014,611 
|Income tax expense                                           |                |  |                | 701,348   
|                                                             |                |  |                |           
|Net income                                                   |                |  | $              | 1,313,263 
|                                                             |                |  |                |           
|Basic net income per share                                   |                |  | $              | .07       
|                                                             |                |  |                |           
|Diluted net income per share                                 |                |  | $              | .06       
|                                                             |                |  |                |           
|Basic weighted average number of common shares outstanding   |                |  |                | 20,203,696
|                                                             |                |  |                |           
|Diluted weighted average number of common shares outstanding |                |  |                | 20,650,665
|                                                             |                |  |                |           

See accompanying notes to
consolidated financial statements.

6

---

##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries Consolidated Statement
of Stockholders Equity and Comprehensive Income(unaudited)Three months ended March 31, 2004

|                                              | Common
Stock |  | Additional
Paid-In
Capital |         | Accumulated
Deficit |   | Other
Accumulated
Comprehensive
Loss |  | Treasury
Stock |             | Total
Stockholders
Equity |  
|--------------------------------------------- | ------------ |  | -------------------------- | ------- | ------------------- | - | ------------------------------------ |  | -------------- | ----------- | -------------------------- | -
|Balance at December 31, 2003                  |              |  | $                          | 214,539 |                     | $ | 89,674,896                           |  | $              | (24,863,981 | )                          | $
|Comprehensive income                          |              | 
|Net income                                    |              |  |                            | --      |                     |   | --                                   |  |                | 1,313,263   |                            |  
|Foreign currency translation adjustment       |              |  |                            | --      |                     |   | --                                   |  |                | --          |                            |  
|                                              |              |  |                            |         |                     |   |                                      |  |                |             |                            |  
|Total comprehensive income                    |              |  |                            | 936,402 |                    
|Exercise of stock options                     |              |  |                            | 739     |                     |   | 473,836                              |  |                | --          |                            |  
|Stock issued for Employee Stock Purchase Plan |              |  |                            | 93      |                     |   | 62,410                               |  |                | --          |                            |  
|Acquisition of 225,000 shares                 |              |  |                            | --      |                     |   | --                                   |  |                | --          |                            |  
|                                              |              |  |                            |         |                     |   |                                      |  |                |             |                            |  
|Balance at March 31, 2004                     |              |  | $                          | 215,371 |                     | $ | 90,211,142                           |  | $              | (23,550,718 | )                          | $
|                                              |              |  |                            |         |                     |   |                                      |  |                |             |                            |  

See accompanying notes to
consolidated financial statements.

7

---

##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries

# Consolidated Statements of Cash Flows(unaudited)Three months ended March 31, 2004 and 2003

|                                                                     | March 31,
2004 |  | March 31,
2003 |           
|-------------------------------------------------------------------- | -------------- |  | -------------- | ----------
|Cash flows from operating activities:                                |                |  |                |           
|Net income                                                           |                |  | $              | 1,313,263 
|Adjustments to reconcile net income to net cash                      |                | 
|provided by operating activities:                                    |                | 
|Depreciation                                                         |                |  |                | 740,345   
|Amortization                                                         |                |  |                | 9,482     
|Provision for doubtful accounts                                      |                |  |                | 283,150   
|Deferred income taxes                                                |                |  |                | 221,844   
|Changes in operating assets and liabilities:                         |                | 
|Accounts receivable                                                  |                |  |                | 764,665   
|Unbilled revenue                                                     |                |  |                | (276,210  
|Prepaid expenses                                                     |                |  |                | (75,905   
|Income taxes receivable/payable                                      |                |  |                | 677,875   
|Other assets                                                         |                |  |                | 208,236   
|Accounts payable                                                     |                |  |                | (963,402  
|Other accrued liabilities                                            |                |  |                | (1,356,309
|Unearned revenue                                                     |                |  |                | 1,841,946 
|                                                                     |                |  |                |           
|Net cash provided by operating activities                            |                |  |                | 3,388,980 
|                                                                     |                |  |                |           
|Cash flows from investing activities:                                |                | 
|Additions to property and equipment                                  |                |  |                | (683,068  
|                                                                     |                |  |                |           
|Net cash used in investing activities                                |                |  |                | (683,068  
|                                                                     |                |  |                |           
|Cash flows from financing activities:                                |                | 
|Proceeds from exercise of stock options                              |                |  |                | 474,575   
|Proceeds from issuances of shares under employee stock purchase plan |                |  |                | 62,503    
|Cash paid to acquire treasury stock                                  |                |  |                | (1,777,134
|                                                                     |                |  |                |           
|Net cash used in financing activities                                |                |  |                | (1,240,056
|                                                                     |                |  |                |           
|Foreign currency translation adjustment                              |                |  |                | (376,861  
|                                                                     |                |  |                |           
|Net increase in cash and cash equivalents                            |                |  |                | 1,088,995 
|Cash and cash equivalents at beginning of period                     |                |  |                | 44,874,599
|                                                                     |                |  |                |           
|Cash and cash equivalents at end of period                           |                |  | $              | 45,963,594
|                                                                     |                |  |                |           

See accompanying notes to
consolidated financial statements.

8

---

##### Table of Contents

# Datastream Systems,
Inc. and Subsidiaries

# Notes to Consolidated
Financial Statements

# 1. Basis of Presentation

The interim financial information
included herein is unaudited. Certain information and footnote disclosures normally
included in the consolidated financial statements have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC). 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 and Form
10-K/A for the year ended December 31, 2003 filed with the SEC on March 10, 2004 and March
16, 2004, respectively. Certain amounts in the prior year
financial statements have been reclassified to conform to the 2004 presentation. These
reclassifications had no impact on stockholders equity or net income as previously
reported.

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

# 2. Segment and Geographic
Information

The Company has identified one
business segment for reporting purposes: Asset Performance Management. The Company manages
the Asset Performance Management business over geographical regions. The principal areas
of operation include the United States and Canada, Europe, Latin America and Asia.
Financial information concerning the Companys operations in different geographical
regions is as follows as of and for the three months ended March 31, 2004 and 2003:

|                        | United
States and
Canada |  | Europe |            | Latin
America |   | Asia       |  | Total
|----------------------- | ------------------------ |  | ------ | ---------- | ------------- | - | ---------- |  | -----
|March 31, 2004:         |                          | 
|Total revenues          |                          |  | $      | 13,607,211 |               | $ | 6,337,770  |  | $    
|Operating income (loss) |                          |  |        | 1,676,532  |               |   | 304,284    |  |      
|Total assets            |                          |  |        | 57,573,600 |               |   | 17,006,394 |  |      
|March 31, 2003:         |                          |  |        |            |               |   |            |  |      
|Total revenues          |                          |  | $      | 14,615,451 |               | $ | 5,481,123  |  | $    
|Operating income (loss) |                          |  |        | 1,301,073  |               |   | 321,216    |  |      
|Total assets            |                          |  |        | 53,275,721 |               |   | 13,644,018 |  |      



# 3.    
          Reconciliation of Basic and Diluted Net Income Per Share

Basic net income per share is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net income by the
weighted average number of common and potential common shares outstanding. Diluted
weighted average common shares include common shares and stock options using the treasury
stock method, except when those potential common shares result in antidilution. The
reconciliation of basic and diluted income per share as of March 31, 2004 and 2003 is as
follows:

9

---

##### Table of Contents

|                                             | Income |  | Shares |           | Per Share
Amount | 
|-------------------------------------------- | ------ |  | ------ | --------- | ---------------- | 
|For the three months ended:                  |        |  |        |           |                  | 
|March 31, 2004:                              |        | 
|Basic net income per share                   |        |  | $      | 1,313,263 |                  | 
|                                             |        |  |        |          
|Effect of dilutive securities: Stock options |        |  |        | --        |                  | 
|                                             |        |  |        |           |                  | 
|Diluted net income per share                 |        |  | $      | 1,313,263 |                  | 
|                                             |        |  |        |           |                  | 
|March 31, 2003:                              |        | 
|Basic net income per share                   |        |  | $      | 957,738   |                  | 
|                                             |        |  |        |          
|Effect of dilutive securities: Stock options |        |  |        | --        |                  | 
|                                             |        |  |        |           |                  | 
|Diluted net income per share                 |        |  | $      | 957,738   |                  | 
|                                             |        |  |        |           |                  | 

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.

# 4. Stock Option Plans

The Company applies the
intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, as amended, to account for
its 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.

|                                                 | Three months ended
|------------------------------------------------ | ------------------
|
|Net income as reported                           |                   
|Deduct: total stock-based employee compensation  |                   
|expense determined under fair-value-based method |                   
|for all awards                                   |                   
|                                                 |                   
|                                                 |                   
|Pro forma net income                             |                   
|                                                 |                   
|Basic net income per share:                      |                   
|As reported                                      |                   
|                                                 |                   
|Pro forma                                        |                   
|                                                 |                   
|Diluted net income per share:                    |                   
|As reported                                      |                   
|                                                 |                   
|Pro forma                                        |                   
|                                                 |                   

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.

10

---

##### Table of Contents



# 5. 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.

11

---

##### Table of Contents

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

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

# Overview

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.

# Results of Operations

Total Revenues. Total revenues
increased 1% to $23,086,840 in the first quarter of 2004 from $22,784,232 in the first
quarter of 2003. The slight increase is due to an increase in support renewal contracts
and an increase in application hosting revenue due to an increased number of hosted
customers. International revenues, which include Canada, were approximately $10,144,000 (44% of total revenues)
in the first quarter of 2004 and approximately $8,662,000 (38% of total revenues) in the
first quarter of 2003. The increase in international revenues as a

12

---

##### Table of Contents

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 2 to the consolidated financial statements.

Software product revenues decreased 1% to $6,456,775
(28% of total revenues) in the first quarter of 2004 from $6,521,646 (29% 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 2% to $16,630,065 (72% of total revenues) in the first quarter of 2004 from
$16,262,586 (71% 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 $7,344,761 (32% of total revenues) in the first quarter of 2004, as
compared to $7,779,015 (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 (32% 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 12% to $3,146,682 (14% of total revenues) in
the first quarter of 2004 from $3,569,425 (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 34.8% and 35.0% for the first quarter 2004 and 2003, respectively.

Net income. Net income increased to
$1.3 million (6% of total revenues) in the first quarter of 2004 from net income of
$957,738 (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 $83.3
million at March 31, 2004, a decrease of approximately $781,000 or 1% from $84.0 million
at December 31, 2003. The decrease was primarily due to an $800,000 reduction in accounts
receivable and unbilled revenue as a result of improved collections on customer accounts
and a $900,000 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
$28.2 million at March 31, 2004, a decrease of approximately $478,000, or 2% from $28.7
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 $1.8 million in deferred 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
23% to $46.0 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 $44.9 million at December
31, 2003. Cash improved due to improved profitability, higher deferred revenue, and
improved collections on accounts receivable.

13

---

##### Table of Contents

# Liquidity
and Capital Resources

We have funded our operating
activities primarily with cash generated from operations. We ended the first
quarter of 2004 with $46.0 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 13% to $3.4 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 $683,068 for the three months ended March 31, 2004 compared to approximately
$701,962 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  118% to  $1.2 million for the three  months  ended March 31, 2004  compared to
approximately  $568,547  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 $427,916 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
our Form 10-K for the fiscal year ended December 31, 2003.

Revenue Recognition - Our revenues consist primarily of fees for product sales, professional services, hosting and customer support.

Product Revenues - We generally  recognize product revenues when a non-cancelable  license  agreement has been signed,  the product has
been shipped,  the fees are fixed or determinable,  collectibility is probable and vendor-specific  objective evidence (VSOE) of fair
value  exists  to  allocate  the  total  fee to the  multiple  elements  of an  arrangement.  Fees are  generally  considered  fixed or
determinable  upon receipt of a signed license agreement and completion of negotiations.  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 received.

The amount of product  revenues  recognized is determined  based on the residual amount of the multiple  element contract value that is
not assigned to other elements  based on VSOE of those  elements.  If acceptance

14

---

##### Table of Contents

terms for the licensed  product  exist,  we recognize
revenue upon customer  acceptance or the  expiration of the  acceptance  period.  If it is determined  that  professional  services are
essential to the functionality of the product as delivered, then product revenue is recognized as the services are performed.

Support  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.  Support VSOE is either the stated contract renewal rate or the
support renewal rate as a percentage of the past product sales if there is no stated contract renewal rate.

Professional  Services  Revenues - Professional services
revenues are primarily related to implementation, integration and training services
performed on a time-and-materials basis or a fixed fee arrangement under separate service arrangements.   On time
and material and fixed-price projects, revenue is generally recognized as the services are performed. For our
fixed-price engagements we recognize revenue based on the relationship of incurred labor hours to our estimate of
the total labor hours we expect to incur over the term of the contract. Based on our historical experience of
estimating the total effort required to complete fixed-price contracts, we believe this methodology achieves a
reliable measure of the revenue from the consulting services that we provide to our customers.  Significant
management judgments and estimates must be made and used in connection with the revenue recognized in any
accounting period. These judgments and estimates include an estimate as to the total effort required to complete
the project. If we made different judgments or utilized different estimates, the amount and timing of our revenue
for any period could be materially different. 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.

Revenues from hosted software service arrangements are recognized ratably over the term of the hosting arrangement.  Hosting services VSOE
is either the stated contract renewal rate or the renewal rate as a percentage of the past product sales if there is no
stated contract renewal rate.  Professional services VSOE is based on the day rate we are able to negotiate when services are
sold separate from a contract.  Reimbursed expenses are recorded gross as revenue with an offsetting amount recorded to
service cost of sales.

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.  Based on historical  trends and  managements
evaluation of current  conditions,  any  potential  obligations  that are inherent in the accounts  receivable  balance are  adequately
provided for through the allowance for doubtful  accounts.  We may, in certain  circumstances,  grant discounts for product sales.  The
discounts are recognized as a reduction of product revenue.

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 $5.1 million and $5.3 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.

15

---

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 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

The Companys management, with
the participation of the Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of March 31, 2004. Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2004,
the Companys disclosure controls and procedures were effective to provide reasonable
assurance that the information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms.

There have been no changes in the
Companys internal controls over financial reporting during the quarter ended March
31, 2004 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

16

---

##### Table of Contents

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
|-------------------------------------
|
|January 1 - January 31, 2004         
|February 1 - February 29, 2004       
|March 1 - March 31, 2004             
|                                     
|Total                                
|                                     

(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                           
|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

17

---

##### Table of Contents

(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

18

---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|Date: May 10, 2004 | Datastream Systems, Inc.          
|------------------ | ----------------------------------
|                   | /s/ C. Alex Estevez               
|                   | C. Alex Estevez                   
|                   | Chief Financial Officer (principal
|                   | financial and accounting officer) 

19

---

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 pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

20

---