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 June 30, 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: August 6, 2004: 19,961,303 shares, $0.01 par value.

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 June 30, 2004, which was originally filed with the Securities and Exchange Commission on August 9, 2004 (the “Quarterly Report”), to reflect the restatement of the Company’s financial statements for the quarter ended June 30, 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 March 31, 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 August 9, 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.

Datastream Systems, Inc.

FORM 10-Q/A

Quarter ended June 30, 2004

(restated)

Index

		Page No.
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) - June 30, 2004 and December 31, 2003	5
	Consolidated Statements of Operations (restated) - For the three months ended June 30, 2004 and 2003	6
	For the six months ended June 30, 2004 and 2003	7
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income (restated) - For the six months ended June 30, 2004	8
	Consolidated Statements of Cash Flows (restated) - For the six months ended June 30, 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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
Part II.	Other Information
Item 1.	Legal Proceedings	29
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits and Reports on Form 8-K	30
Signatures		31
Exhibit Index		32

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.

4

ITEM 1. Consolidated Financial Statements

Datastream Systems, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

	June 30, 2004			December 31, 2003
	(restated)			(restated)
Current assets:
Cash and cash equivalents	$	46,477,223		$	45,037,099
Accounts receivable, net of allowance for doubtful accounts of $720,321 and $747,243 in 2004 and 2003, respectively		16,816,245			17,670,267
Unbilled revenue		1,946,469			1,151,374
Prepaid expenses		1,691,064			1,331,413
Income tax receivable		548,225			531,377
Deferred income taxes, net		1,002,362			1,278,492
Other assets		1,212,460			1,442,348
Total current assets		69,694,048			68,442,370
Investment		501,983			501,983
Property and equipment, net		11,528,831			11,238,830
Deferred income taxes, net		3,128,191			4,283,773
Other long term assets		56,354			104,252
Total assets	$	84,909,407		$	84,571,208
Current liabilities:
Accounts payable	$	4,095,814		$	3,376,454
Other accrued liabilities		7,590,768			8,411,198
Unearned revenue		18,087,149			18,299,952
Total liabilities		29,773,731			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; 21,560,503 shares issued and 19,966,303 outstanding at June 30, 2004 and 21,453,911 shares issued and 20,207,211 outstanding at December 31, 2003		215,605			214,539
Additional paid-in capital		90,394,243			89,674,896
Accumulated deficit		(20,694,560	)		(23,648,069	)
Other accumulated comprehensive loss		(3,502,784	)		(3,094,688	)
Treasury stock, at cost; 1,594,200 shares at June 30, 2004, 1,246,700 shares at December 31, 2003		(11,276,828	)		(8,663,074	)
Total stockholders’ equity		55,135,676			54,483,604
Total liabilities and stockholders’ equity	$	84,909,407		$	84,571,208

See accompanying notes to consolidated financial statements.

5

Datastream Systems, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

Three months ended June 30, 2004 and 2003

	June 30, 2004		June 30, 2003
	(restated)		(restated)
Revenues:
Software product	$	6,575,979	$	6,294,899
Services and support		17,559,292		17,084,545
Total revenues		24,135,271		23,379,444
Cost of revenues:
Cost of product revenues		211,261		382,218
Cost of services and support revenues		7,276,509		7,550,852
Total cost of revenues		7,487,770		7,933,070
Gross profit		16,647,501		15,446,374
Operating expenses:
Sales and marketing		7,320,988		7,975,082
Product development		3,515,524		3,019,990
General and administrative		3,280,787		2,691,873
Total operating expenses		14,117,299		13,686,945
Operating income		2,530,202		1,759,429
Other income:
Interest income, net		117,539		114,941
Other income (expense), net		23,636		(1,470,628	)
Total other income (expense)		141,175		(1,355,687	)
Income before income taxes		2,671,377		403,742
Income tax expense		1,024,339		216,884
Net income	$	1,647,038	$	186,858
Basic net income per share	$	0.08	$	.01
Diluted net income per share	$	0.08	$	.01
Basic weighted average number of common shares outstanding		20,019,775		20,085,679
Diluted weighted average number of common shares outstanding		20,204,231		20,508,776

See accompanying notes to consolidated financial statements.

6

Datastream Systems, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

Six months ended June 30, 2004 and 2003

	June 30, 2004		June 30, 2003
	(restated)		(restated)
Revenues:
Software product	$	13,116,376	$	12,716,395
Services and support		34,346,514		33,429,783
Total revenues		47,462,890		46,146,178
Cost of revenues:
Cost of product revenues		699,029		602,948
Cost of services and support revenues		14,169,314		15,071,137
Total cost of revenues		14,868,343		15,674,085
Gross profit		32,594,547		30,472,093
Operating expenses:
Sales and marketing		14,650,290		15,226,354
Product development		6,907,897		5,890,310
General and administrative		6,643,331		6,264,990
Total operating expenses		28,201,518		27,381,654
Operating income		4,393,029		3,090,439
Other income:
Interest income, net		238,835		234,413
Other income (expense), net		43,229		(1,430,717	)
Total other income (expense)		282,064		(1,196,304	)
Income before income taxes		4,675,093		1,894,135
Income tax expense		1,721,584		738,581
Net income	$	2,953,509	$	1,155,554
Basic net income per share	$	0.15	$	0.06
Diluted net income per share	$	0.15	$	0.06
Basic weighted average number of common shares outstanding		20,111,735		20,051,459
Diluted weighted average number of common shares outstanding		20,329,995		20,314,507

See accompanying notes to consolidated financial statements.

7

Datastream Systems, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(unaudited)

Six months ended June 30, 2004

(restated)

	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Other Accumulated Comprehensive Loss			Treasury Stock			Total Stockholders’ 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
Prior period 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		—		—		2,953,509			—			—			2,953,509
Foreign currency translation adjustment		—		—		—			(408,096	)					(408,096	)
Total comprehensive income															2,545,413
Exercise of stock options		973		590,287		—			—			—			591,260
Tax benefit of options exercised		—		66,650		—			—			—			66,650
Stock issued for Employee Stock Purchase Plan		93		62,410		—			—			—			62,503
Acquisition of 347,500 shares		—		—		—			—			(2,613,754	)		(2,613,754	)
Balance at June 30, 2004	$	215,605	$	90,394,243	$	(20,694,560	)	$	(3,502,784	)	$	(11,276,828	)	$	55,135,676

See accompanying notes to consolidated financial statements.

8

Datastream Systems, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

Six months ended June 30, 2004 and 2003

	June 30, 2004			June 30, 2003
	(restated)			(restated)
Cash flows from operating activities:
Net income	$	2,953,509		$	1,155,554
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,470,418			1,838,078
Amortization		18,965			18,964
Loss on write-down of investment		—			1,500,536
Loss on disposal of equipment		16,225			—
Provision for doubtful accounts		516,560			357,461
Deferred income taxes		1,431,712			(585,209	)
Changes in operating assets and liabilities:
Accounts receivable		337,462			752,272
Unbilled revenue		(795,095	)		769,908
Prepaid expenses		(359,651	)		(176,800	)
Income taxes receivable/payable		49,802			963,962
Other assets		258,821			253,736
Accounts payable		719,360			17,240
Other accrued liabilities		(820,430	)		(1,130,862	)
Unearned revenue		(212,803	)		1,627,326
Net cash provided by operating activities		5,584,855			7,362,166
Cash flows from investing activities:
Additions to property and equipment		(1,776,644	)		(2,289,827	)
Net cash used in investing activities		(1,776,644	)		(2,289,827	)
Cash flows from financing activities:
Proceeds from exercise of stock options		591,260			1,606,179
Proceeds from issuances of shares under employee stock purchase plan		62,503			79,495
Cash paid to acquire treasury stock		(2,613,754	)		(721,302	)
Net cash (used in) provided by financing activities		(1,959,991	)		964,372
Foreign currency translation adjustment		(408,096	)		130,817
Net increase in cash and cash equivalents		1,440,124			6,167,528
Cash and cash equivalents at beginning of period		45,037,099			34,731,362
Cash and cash equivalents at end of period	$	46,477,223		$	40,898,890

See accompanying notes to consolidated financial statements.

9

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 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 March 31, 2004. The restatement impacts the three months ended June 30, 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 ($9,000) and $305,000 for the three months ended June 30, 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 general and administrative expenses. These adjustments principally relate to bad debt expense offsetting the above revenue recognition adjustments described above and to certain previously unadjusted audit differences of approximately $1,000 and $114,000 for the three months ended June 30, 2003 and 2004, respectively.

The net effect of these adjustments to income (loss) before income taxes was an increase (decrease) of approximately ($10,000) and $191,000 for the three months ended June 30, 2003 and 2004, respectively. There was no impact to earnings per share for the three months ended June 30, 2003 and 2004, respectively.

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 by approximately $93,000 and $103,000 as of June 30, 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 $43,000 and ($18,000) for the three-month period ended June 30, 2003 and 2004, respectively. The impact on the foreign currency translation adjustment component of the consolidated statement of cash flows was approximately $40,000 and ($42,000) for the three-month period ended June 30, 2003 and 2004, respectively.

The Company’s diluted weighted average number of common shares outstanding decreased by 253,859 and 110,725 for the three-month period ended June 30, 2003 and 2004, respectively as a result of adjusting for the tax impact on assumed proceeds under the treasury stock method.

10

The financial results as of June 30, 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
	June 30, 2004		Adjustments			June 30, 2004
	As previously reported					Restated
Statement of Operations Data:
Revenues:
Product	$	6,544,443	$	31,536		$	6,575,979
Professional services and support		17,286,280		273,012			17,559,292
Total revenues		23,830,723		304,548			24,135,271
Cost of revenues:
Cost of product revenues		211,261		—			211,261
Cost of professional services and support revenues		7,276,509		—			7,276,509
Total cost of revenues		7,487,770		—			7,487,770
Gross profit		16,342,953		304,548			16,647,501
Operating expenses:
Sales and marketing		7,320,988		—			7,320,988
Product development		3,515,524		—			3,515,524
General and administrative		3,167,053		113,734			3,280,787
Total operating expenses		14,003,565		113,734			14,117,299
Operating income		2,339,388		190,814			2,530,202
Other income :
Interest income, net		117,539		—			117,539
Other income		23,636		—			23,636
Net other income		141,175		—			141,175
Income before income taxes		2,480,563		190,814			2,671,377
Income tax expense		942,614		81,725			1,024,339
Net income	$	1,537,949	$	109,089		$	1,647,038
Basic net income per share	$	0.08	$	0.00		$	0.08
Diluted net income per share	$	0.08	$	0.00		$	0.08
Basic weighted average number of common shares outstanding		20,019,775		—			20,019,775
Diluted weighted average number of common shares outstanding		20,314,956		(110,725	)		20,204,231

11

	For the six months ended
	June 30, 2004		Adjustments			June 30, 2004
	As previously reported					Restated
Statement of Operations Data:
Revenues:
Product	$	13,001,218	$	115,158		$	13,116,376
Professional services and support		33,916,345		430,169			34,346,514
Total revenues		46,917,563		545,327			47,462,890
Cost of revenues:
Cost of product revenues		699,029		—			699,029
Cost of professional services and support revenues		14,133,502		35,812			14,169,314
Total cost of revenues		14,832,531		35,812			14,868,343
Gross profit		32,085,032		509,515			32,594,547
Operating expenses:
Sales and marketing		14,650,290		—			14,650,290
Product development		6,907,897		—			6,907,897
General and administrative		6,313,735		329,596			6,643,331
Total operating expenses		27,871,922		329,596			28,201,518
Operating income		4,213,110		179,919			4,393,029
Other income:
Interest income, net		238,835		—			238,835
Other income		43,229		—			43,229
Net other income		282,064		—			282,064
Income before income taxes		4,495,174		179,919			4,675,093
Income tax expense		1,643,962		77,622			1,721,584
Net income	$	2,851,212	$	102,297		$	2,953,509
Basic net income per share	$	0.14	$	0.00		$	0.15
Diluted net income per share	$	0.14	$	0.00		$	0.15
Basic weighted average number of common shares outstanding		20,111,735		—			20,111,735
Diluted weighted average number of common shares outstanding		20,461,822		(131,827	)		20,329,995

12

	June 30, 2004			Adjustments			June 30, 2004
	As previously reported						Restated
Balance Sheet Data:
Assets
Current assets:
Cash and cash equivalents	$	46,373,995		$	103,228		$	46,477,223
Accounts receivable, net		16,816,245			—			16,816,245
Unbilled revenue, net		1,594,249			352,220			1,946,469
Income taxes receivable		782,824			(234,599	)		548,225
Prepaid expenses		1,691,064			—			1,691,064
Deferred income taxes		1,002,362			—			1,002,362
Other current assets		1,212,460			—			1,212,460
Total current assets		69,473,199			220,849			69,694,048
Investment		501,983			—			501,983
Property and equipment, net		11,528,831			—			11,528,831
Deferred income taxes, net		2,893,429			234,762			3,128,191
Other assets, net		56,354			—			56,354
Total assets	$	84,453,796		$	455,611		$	84,909,407
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,095,814		$	—		$	4,095,814
Other accrued liabilities		7,594,920			(4,152	)		7,590,768
Unearned revenue		16,845,297			1,241,852			18,087,149
Total liabilities		28,536,031			1,237,700			29,773,731
Stockholders’ equity:
Preferred stock		—			—			—
Common stock		215,605			—			215,605
Additional paid-in capital		90,394,243			—			90,394,243
Accumulated deficit		(22,012,769	)		1,318,209			(20,694,560	)
Accumulated other comprehensive loss		(1,402,486	)		(2,100,298	)		(3,502,784	)
Treasury stock		(11,276,828	)		—			(11,276,828	)
Total stockholders’ equity		55,917,765			(782,089	)		55,135,676
Total liabilities and stockholders’ equity	$	84,453,796		$	455,611		$	84,909,407

13

	For the three months ended
	June 30, 2003			Adjustments			June 30, 2003
	As previously reported						Restated
Statement of Operations Data:
Revenues:
Product	$	6,271,635		$	23,264		$	6,294,899
Professional services and support		17,116,924			(32,379	)		17,084,545
Total revenues		23,388,559			(9,115	)		23,379,444
Cost of revenues:
Cost of product revenues		382,218			—			382,218
Cost of professional services and support revenues		7,550,852			—			7,550,852
Total cost of revenues		7,933,070			—			7,933,070
Gross profit		15,455,489			(9,115	)		15,446,374
Operating expenses:
Sales and marketing		7,975,082			—			7,975,082
Product development		3,019,990			—			3,019,990
General and administrative		2,690,858			1,015			2,691,873
Total operating expenses		13,685,930			1,015			13,686,945
Operating income		1,769,559			(10,130	)		1,759,429
Other income (expense):
Interest income, net		114,941			—			114,941
Other expense		(1,470,628	)		—			(1,470,628	)
Net other expense		(1,355,687	)		—			(1,355,687	)
Income before income taxes		413,872			(10,130	)		403,742
Income tax expense		161,410			55,474			216,884
Net income	$	252,462		$	(65,604	)	$	186,858
Basic net income per share	$	0.01		$	0.00		$	0.01
Diluted net income per share	$	0.01		$	0.00		$	0.01
Basic weighted average number of common shares outstanding		20,085,679			—			20,085,679
Diluted weighted average number of common shares outstanding		20,762,635			(253,859	)		20,508,776

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	For the six months ended
	June 30, 2003			Adjustments			June 30, 2003
	As previously reported						Restated
Statement of Operations Data:
Revenues:
Product	$	12,793,281		$	(76,886	)	$	12,716,395
Professional services and support		33,379,510			50,273			33,429,783
Total revenues		46,172,791			(26,613	)		46,146,178
Cost of revenues:
Cost of product revenues		602,948			—			602,948
Cost of professional services and support revenues		15,109,137			(38,000	)		15,071,137
Total cost of revenues		15,712,085			(38,000	)		15,674,085
Gross profit		30,460,706			11,387			30,472,093
Operating expenses:
Sales and marketing		15,226,354			—			15,226,354
Product development		5,890,310			—			5,890,310
General and administrative		6,260,283			4,707			6,264,990
Total operating expenses		27,376,947			4,707			27,381,654
Operating income		3,083,759			6,680			3,090,439
Other income (expense):
Interest income, net		234,413			—			234,413
Other expense		(1,430,717	)		—			(1,430,717	)
Net other expense		(1,196,304	)		—			(1,196,304	)
Income before income taxes		1,887,455			6,680			1,894,135
Income tax expense		677,255			61,326			738,581
Net income	$	1,210,200		$	(54,646	)	$	1,155,554
Basic net income per share	$	0.06		$	0.00		$	0.06
Diluted net income per share	$	0.06		$	0.00		$	0.06
Basic weighted average number of common shares outstanding		20,051,459			—			20,051,459
Diluted weighted average number of common Shares outstanding		20,472,336			(157,829	)		20,314,507

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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:

As of and for the three months ended June 30, 2004 and 2003:

	(restated)
	United States and Canada		Europe		Latin America		Asia		Total
June 30, 2004:
Total revenues	$	15,104,988	$	6,355,733	$	1,366,642	$	1,307,908	$	24,135,271
Operating income		2,349,596		127,115		27,333		26,158		2,530,202
Total assets		59,761,979		16,439,047		3,744,056		4,964,325		84,909,407
June 30, 2003:
Total revenues	$	14,828,968	$	5,495,559	$	1,550,890	$	1,504,027	$	23,379,444
Operating income		1,588,419		109,911		31,018		30,081		1,759,429
Total assets		53,926,234		16,670,534		3,385,280		6,360,973		80,343,021

As of and for the six months ended June 30, 2004 and 2003:

	(restated)
	United States and Canada		Europe		Latin America		Asia		Total
June 30, 2004:
Total revenues	$	28,675,383	$	12,784,847	$	2,905,274	$	3,097,386	$	47,462,890
Operating income		4,017,279		255,697		58,105		61,948		4,393,029
Total assets		59,761,979		16,439,047		3,744,056		4,964,325		84,909,407
June 30, 2003:
Total revenues	$	29,449,759	$	11,020,754	$	2,868,611	$	2,807,054	$	46,146,178
Operating income		2,756,511		220,415		57,372		56,141		3,090,439
Total assets		53,926,234		16,670,534		3,385,280		6,360,973		80,343,021

In 2003, we changed the methodology used to determine the intercompany pricing between our US Operations and our foreign affiliates from a comparable ucontrolled 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.

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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 June 30, 2004 and 2003 is as follows:

	(restated)
	Income		Shares	Per Share Amount
For the three months ended:
June 30, 2004:
Basic net income per share	$	1,647,038	20,019,775	$	0.08
Effect of dilutive securities:
Stock options		—	184,456
Diluted net income per share	$	1,647,038	20,204,231	$	0.08
June 30, 2003:
Basic net income per share	$	186,858	20,085,679	$	0.01
Effect of dilutive securities:
Stock options		—	423,097
Diluted net income per share	$	186,858	20,508,776	$	0.01
For the six months ended:
June 30, 2004:
Basic net income per share	$	2,953,509	20,111,735	$	0.15
Effect of dilutive securities:
Stock options		—	218,260
Diluted net income per share	$	2,953,509	20,329,995	$	0.15
June 30, 2003:
Basic net income per share	$	1,155,554	20,051,459	$	0.06
Effect of dilutive securities:
Stock options		—	263,048
Diluted net income per share	$	1,155,554	20,314,507	$	0.06

Antidilutive shares totaling 2,884,697 and 1,537,561 were excluded from the diluted net income per share calculations for the three months ended June 30, 2004 and 2003, respectively, and antidilutive shares totaling 2,339,942 and 2,823,206 were excluded from the diluted net income per share calculations for the six months ended June 30, 2004 and 2003, respectively.

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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 and six months ended June 30, 2004 and 2003.

	(restated) Three months ended
	June 30, 2004			June 30, 2003
Net income as reported	$	1,647,038		$	186,858
Deduct: total stock-based employee compensation expense determined under fair-value-based method for all awards, net of taxes		(763,362	)		(1,054,452	)
Pro forma net income (loss)	$	883,676		$	(867,594	)
Basic net income (loss) per share:
As reported	$	0.08		$	0.01
Pro forma	$	0.04		$	(0.04	)
Diluted net income (loss) per share:
As reported	$	0.08		$	0.01
Pro forma	$	0.04		$	(0.04	)
	Six months ended
	June 30, 2004			June 30, 2003
Net income as reported	$	2,953,509		$	1,155,554
Deduct: total stock-based employee compensation expense determined under fair-value-based method for all awards, net of taxes		(1,532,768	)		(1,661,682	)
Pro forma net income (loss)	$	1,420,741		$	(506,128	)
Basic net income (loss) per share:
As reported	$	0.15		$	0.06
Pro forma	$	0.07		$	(0.02	)
Diluted net income (loss) per share:
As reported	$	0.15		$	0.06
Pro forma	$	0.07		$	(0.02	)

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 June 30, 2004 and 2003: an expected dividend rate of 0% and 0%, an expected volatility of 87.5% and 91.3%, a risk-free rate of 3.62% and 2.99% and an expected life of 4.4 years and 4.6 years, respectively.

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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.

The Company has been contacted by tax authorities in China regarding import taxes withheld by our subsidiary in Shanghai, China since January 2002. As of August 9, 2004, the Company has not received a formal claim or assessment. The Company believes that a claim or assessment is reasonably possible but cannot be reasonably estimated due to the unknown nature of the review. Based on the relatively small size of the subsidiary (less than 1% of the Company’s revenues and assets), the Company believes the impact of the investigation, if any, will not be material to the 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 June 30, 2004, which was originally filed with the Securities and Exchange Commission on August 9, 2004 (the “Quarterly Report”), to reflect the restatement of our financial statements for the quarter ended June 30, 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 March 31, 2004 containing restated financial information reflecting adjustments to our 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 August 9, 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 Audit Committee’s 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.

The net effect of these adjustments to income before income taxes was a decrease of $10,000 for the three months ended June 30, 2003 and an increase of approximately $191,000 for three months ended June 30, 2004.

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There was no impact to earnings per share for the three months ended June 30, 2003 and 2004, respectively.

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. 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 sell services to host the licensed application. During the second quarter of 2004, we experienced higher support revenue per customer than the second quarter of 2003, which was an important contributor to 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 revenues sold as a percentage of total revenues, improved in the second quarter of 2004 compared to the second quarter of 2003 because of reduced services costs and increased support revenue as a percentage of our total revenues which carries a higher gross margin than service revenues. Our operating margin, which measures operating income as a percentage of total revenues, improved in the second quarter of 2004 compared to the second quarter of 2003 due largely to aforementioned higher gross margins in conjunction with improved sales productivity. 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 continue 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. In addition, our prospective customers may delay purchase commitments or extend sales cycles as they enter the control testing and attestation period related to Sarbanes-Oxley Section 404 compliance. Such a delay would have a material adverse affect on our results.

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 deal 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.

21

Results of Operations

Total Revenues: Total revenues increased 3% to $24,135,271 in the second quarter of 2004 from $23,379,444 in the second quarter of 2003. The increase is due to an increase in Datastream 7i license sales and greater customer acceptance of the application hosting business. Total revenues increased 3% to $47,462,890 for the first six months of 2004 from $46,146,178 for the first six months of 2003 due to an increase in Datastream 7i license sales and an increase in application hosting revenue. International revenues, including Canada, increased 5% to $9,515,118 (40% of total revenues) in the second quarter of 2004, as compared to $9,078,956 (39% of total revenues) in the second quarter of 2003. International revenues, including Canada, increased 12% to $19,936,316 (42% of total revenues) for the first six months of 2004, as compared to $17,788,174 (39% of total revenues) in the first six months of 2003. The increase in international revenues, including Canada, as a percentage of total revenues is due primarily to an increase in Datastream 7i revenue in Europe. See Note 2 to the consolidated financial statements.

Software Product Revenues: Software product revenues increased 4% to $6,575,979 (27% of total revenues) in the second quarter of 2004 from $6,294,899 (27% of total revenues) in the second quarter of 2003 and 3% to $13,116,376 (28% of total revenues) for the first six months of 2004 from $12,716,395 (28% of total revenues) for the first six months of 2003 as a result of increased Datastream 7i software sales.

Professional Services and Support Revenues: Professional services and support revenues increased 3% to $17,559,292 (73% of total revenues) in the second quarter of 2004 from $17,084,545 (73% of total revenues) in the second quarter of 2003 and increased 3% to $34,346,514 (72% of total revenues) for the first six months of 2004 from $33,429,783 (72% of total revenues) for the first six months of 2003. Support revenue increased due to an increase in average customer support renewal revenue and an increase in the number of hosted customers. The increase in support revenue was partially offset by a decrease in service revenue, resulting from increased third party service provider competition.

Cost of Product Revenues: Cost of product revenues consists of software purchased for resale, royalties paid to vendors of third party software, cost of product packaging, cost of media, and shipping expenses. Cost of product revenues decreased 45% to $211,261 (3% of product revenues) in the second quarter of 2004, as compared to $382,218 (6% of product revenues) in the second quarter of 2003. This decrease relates primarily to a reduction in third party royalty fees. Cost of product revenues increased 16% to $699,029 (5% of product revenues) for the first six months of 2004, as compared to $602,948 (5% of product revenues) for the first six months of 2003 due to higher third party royalty fees.

Cost of Services and Support Revenues: Cost of services and support revenues decreased 4% to $7,276,509 (41% of services and support revenues) in the second quarter of 2004, as compared to $7,550,852 (44% of services and support revenues) in the second quarter of 2003. Cost of services and support revenues decreased 6% to $14,169,314 (41% of services and support revenues) for the first six months of 2004, as compared to $15,071,137 (45% of services and support revenues) for the first six months of 2003. The decreases are primarily due to decreased reimbursed services costs and overall reductions in both internal and third party services expenditures.

Sales and Marketing Expenses: Sales and marketing expenses decreased 8% to $7,320,988 (30% of total revenues) in the second quarter of 2004 from $7,975,082 (34% of total revenues) in the second quarter of 2003. The decrease in sales and marketing expenses is a result of reduced advertising and field marketing activities and reduced expenditures associated with non-productive sales support personnel. Sales and marketing expenses decreased 4% to $14,650,290 (31% of total revenues) for the first six months of 2004 from $15,226,354 (33% of total revenues) for the first six months of 2003. The decrease in sales and marketing expenses is due to a reduction in advertising, field marketing, and sales personnel.

Product Development Expenses: Total product development expenditures increased 16% to $3,515,524 (15% of total revenues) in the second quarter of 2004 from $3,019,990 (13% of total revenues) in the second quarter of 2003 and increased 17% to $6,907,897 (15% of total revenues) for the first six months of 2004 from $5,890,310 (13% of total revenues) for the first six months of 2003. The increase in total product development expense is a result of increased investment in asset performance management functionality associated with the Company’s next release of Datastream 7i.

General and Administrative Expenses: General and administrative expenses increased 22% to $3,280,787 (14% of total revenues) in the second quarter of 2004 from $2,691,873 (12% of total revenues) in the second quarter of 2003 due primarily to increased fees associated with the Sarbanes-Oxley Act of 2002 and a benefit in the second quarter of 2003 from a reduction in bad debt expense as a result of improved days sales outstanding. General and administrative expenses increased 6% to $6,643,331 (14% of total revenues) for the first six months of 2004 from

22

$6,264,990 (14% of total revenues) for the first six months of 2003 due primarily to increased fees associated with Sarbanes-Oxley compliance. General and administrative expenses may continue to increase due to compliance related to the Sarbanes-Oxley Act of 2002.

Tax Rate: Our effective tax rate was 38% and 54% for the second quarter of 2004 and 2003, respectively. Our effective tax rate was 37% and 39% for the first six months of 2004 and 2003, respectively.

Net income: Net income increased to $1,647,038 (7% of total revenues) in the second quarter of 2004 from net income of $186,858 (1% of total revenues) in the second quarter of 2003 and increased to $2,953,509 (6% of total revenues) for the first six months of 2004 from net income of $1,155,554 (3% of total revenues) for the first six months of 2003. The improvement is attributed to improved operating efficiency in the second quarter of 2004 and a non-operating charge of $1.5 million recognized in the second quarter of 2003 related to a write-down on an investment.

Financial Condition

Consolidated total assets were $84.9 million at June 30, 2004, an increase of $0.3 million from $84.6 million at December 31, 2003.

Consolidated total liabilities were $29.8 million at June 30, 2004, a decrease of approximately $0.3 million from $30.1 million at December 31, 2003. The decrease was primarily from a reduction in accrued liabilities and unearned revenues, offset by an increase in accounts payables. The increase in accounts payable relates primarily to the timing of payments associated with increased capital expenditures in the second quarter of 2004.

Cash and cash equivalents increased 14% to $46.5 million at June 30, 2004 compared to $40.9 million at June 30, 2003. Cash and cash equivalents increased 4% to $46.5 million at June 30, 2004 compared to $45.0 million at December 31, 2003. Cash increased due to improvements in profitability, reductions in accounts receivable and increases to accounts payable.

Liquidity and Capital Resources

We have funded our operating activities primarily with cash generated from operations. We ended the second quarter of 2004 with $46.5 million in cash and cash equivalents, which are defined as highly liquid securities with maturities of 90 days or less.

On August 15, 2003, 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 122,500 shares for approximately $837,000 during the second quarter of 2004, and 439,800 shares overall for $3.3 million under the current plan. The aggregate number of shares repurchased under all prior and current plans was 1,594,200 as of June 30, 2004.

Cash provided by operations decreased 24% to $5.6 million for the six months ended June 30, 2004 from $7.4 million at June 30, 2003. The decrease was primarily the result of significant reductions in accounts receivable and unbilled revenue in 2003 relative to 2004, associated with improvements in collections in the 2003 period. Additionally, the decrease reflects an increase in unearned revenue in 2003 relative to 2004, due to longer support terms in 2003.

Net cash used in investing activities decreased 22% to $1.8 million for the six months ended June 30, 2004 compared to approximately $2.3 million for the six months ended June 30, 2003. The decrease was primarily due to building renovations at our corporate headquarters that occurred during the first half of 2003.

Net cash used in financing activities was $2.0 million for the six months ended June 30, 2004 resulting from increased activity to acquire treasury stock as a part of the Company’s authorized stock repurchase plan. This compares to net cash provided by financing activities of $1.0 million for the six months ended June 30, 2003 due to proceeds from the exercise of employee stock options in 2003.

23

As of June 30, 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 the 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 additional 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 (and our Form 10-Q/A for the quarter ended March 31, 2004).

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.

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.

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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 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 June 30, 2004 and December 31, 2003, we had approximately $4.1 million and $5.6 million, respectively, in deferred tax assets, net of valuation allowances.

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We evaluate our ability to realize 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 our ability to realize deferred tax assets includes: our strong earnings history prior to operating losses realized in 2001, the ability to carry back 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 June 30, 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 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 second quarter of 2004.

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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

• 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

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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 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 June 30, 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 June 30, 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 June 30, 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 June 30, 2004. In addition, subsequent to the quarter ended June 30, 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.

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.

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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	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 – April 30, 2004	—		—	—	682,700
May 1 – May 31, 2004	121,500	$	6.83	121,500	561,200
June 1 – June 30, 2004	1,000		6.30	1,000	560,200
Total	122,500	$	6.83	122,500	560,200

(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

The annual meeting of the Company’s shareholders was held on June 3, 2004. At the annual meeting, the following nominees were elected to serve as Class II Directors for a term of three years, which expires at the 2007 annual meeting.

Name of Director	Votes For	Authority Withheld
Richard T. Brock	16,969,870	1,623,802
Ira D. Cohen	16,389,222	2,204,450

The following persons continue as directors following the annual meeting: Larry G. Blackwell, James R. Talton, Jr., Robert C. Davis and James C. Ryan, Jr.

ITEM 5. Other Information

None

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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

(b) Reports on Form 8-K

The Company furnished a Current Report on Form 8-K on April 28, 2004, pursuant to Item 12, to announce its financial results for the quarter ended March 31, 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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