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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

  For the fiscal year ended December 31, 2003

OR

  For the transition period from              to             

Commission File Number: 0-25590

Datastream Systems, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (864) 422-5001

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of Class)

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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

As of June 30, 2003, the aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant was $182,233,423. Such aggregate market value was computed by reference to the closing sale price of the Common Stock as quoted on the Nasdaq National Market on such date. For purposes of making this calculation only, the Registrant has defined affiliates as including all directors and executive officers, but excluding any institutional shareholders owning more than ten percent of the Registrant’s Common Stock.

Number of shares of Common Stock outstanding as of March 4, 2004: 20,226,466.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2004 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.

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DATASTREAM SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2003

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“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 Annual Report on Form 10-K (the “Annual 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 Annual 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, and we have described many such items under “Risk Factors” set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report. 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; 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 shareholder’s 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,” 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.

As used herein, except as otherwise indicated by the context, the terms “Datastream” and “Company” are used to refer to Datastream Systems, Inc. and its subsidiaries.

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PART I

Item 1. Business.

Company 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. This saves time and money by optimizing maintenance resources, improving equipment and staff productivity, increasing inventory efficiency, and reducing warranty-related costs. Our analytical tools enable better decision making to help improve future asset performance and profitability. Our strategy is to provide software and services that help targeted customers improve their profitability through better management of their assets. We execute against this strategy by continuing to invest in people and products that deliver a unique offering to the marketplace.

Datastream Systems, Inc. was incorporated on January 8, 1986 in the state of South Carolina and re-incorporated on December 21, 1994 in the state of Delaware.

Available Information

We have been making our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available through our website, www.datastream.net, free of charge and will continue to do so as soon as reasonably practicable after electronically filing such material with the SEC. For more information, please visit www.datastream.net.

Our Products

Datastream 7i. Datastream 7i^™ provides customers with the tools they need for effective asset performance management. As an Internet-based product, Datastream 7i applies to virtually any size operation, from the large, multi-national enterprise requiring global solutions to the single, small shop with basic requirements. Datastream 7i is optimal in large, asset-intensive environments and is also well suited for multinational organizations that require high transaction volumes in multiple currencies and languages. Datastream 7i is available for Microsoft SQL Server and Oracle databases. Key features and modules of Datastream 7i include:

21 CFR Part 11: This feature enables compliance with 21 CFR Part 11 FDA requirements for Electronic Records/Electronic Signatures in the pharmaceutical, food and beverage, and personal care products industries. 21 CFR Part 11 includes electronic signatures, multiple approval levels, record snapshots, a high level of security and configurability, and the ability to track all changes and edits made to electronic forms or documents.

Databridge: Through Databridge^™, Datastream 7i can integrate with third party applications and receive and process data from external systems.

Datastream 7i Analytics: Datastream 7i Analytics provides in-depth, flexible reporting and graphing capabilities to help users analyze key metrics, forecast performance issues, and take preventive measures to optimize asset performance.

Datastream 7i Buy: Datastream 7i Buy^™, automates the process of procuring industrial spare parts by connecting suppliers and buyers of industrial spare parts through the Internet.

Datastream 7i Extended: Datastream 7i Extended utilizes a zero-footprint HTML interface to offer functionality that addresses the most commonly used functions such as work management, material management, and asset management. Based on a J2EE infrastructure utilizing Enterprise Java Beans (EJBs) and Web Services, Datastream 7i Extended offers functionality that is easier to install, distribute and manage than most other Internet applications.

Datastream 7i Mobile: Datastream 7i Mobile enables customers to interface with Datastream 7i through portable input devices, such as laptops, pagers, cell phones, and personal digital assistants (PDAs). Users

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can create and update work orders, book labor hours, define equipment relationships, activate equipment warranties, record meter readings, and log inspection results from the field.

Key Performance Indicators (KPIs): Through KPIs, users define and monitor asset performance indicators, such as mean time between equipment failures, without having to run reports. KPIs provide a snapshot of how assets are performing against user-defined benchmarks.

Multi-Organization Security: For companies located in multiple countries utilizing a variety of currencies and languages, Datastream 7i can create multiple entities with one database. Each site within the organization is able to view and edit its own data while using its own currency and language.

Screen Designer: Screen Designer, included with Datastream 7i Extended, is an editing tool that allows users to modify screen layout and create user-defined fields without technical programming knowledge.

Warranty Management: This feature enables users to track both meter- and date-based asset warranties and process warranty claims. Users can also automatically track all work orders that have a potential claim. Datastream 7i retrieves the work orders for claim processing, posts specified meter readings for claim and historical purposes, and tracks time-elapsed based warranties.

Datastream 7i Architecture: Datastream 7i is an “n-tier” application, comprised primarily of the client, application server, and database server, completely designed and built using standard Internet protocols and technologies. The client for Datastream 7i can be any standard Java-enabled Web browser such as Internet Explorer 6.x. The client interacts directly with the second tier application server, which manages all business logic and workflow of the system. The Datastream 7i application server component, based on Oracle technology, interacts with the third-tier database server, which is responsible for storing all customer data.

Datastream 7i incorporates VeriSign digital certificates for authentication and 128-bit SSL encryption to protect data being transmitted from the server to the client. S-HTTP is also supported. Datastream 7i offers electronic record generation and storage, electronic signature, back-end tamper monitoring, preventive maintenance and inspection revision control, and an extensive auditing and reporting suite. As a result, Datastream 7i offers compliance tools for customers in the most stringent regulatory environments, such as those required by the US Department of Energy and the US Food and Drug Administration.

Datastream 7i is an open system that facilitates integration with third-party systems via standard integration tools. The product is standards compliant, supporting conventions such as Java, J2EE, Forms, Web services, XML, LDAP, and SOAP.

Datastream 7i product revenues as a percentage of total revenues were approximately 17%, 15% and 11% in 2003, 2002 and 2001, respectively. Total Datastream 7i revenues, including product revenues and service and support revenues were approximately 51%, 47%, and 35% in 2003, 2002 and 2001, respectively.

MP2. MP2^® is designed for more traditional small- to medium-sized organizations dependent on more established technology architectures, such as those found in client server and file server environments. MP2, available in both file server and client server versions, is able to generate over 4,000 standard reports providing analysis down to specific location, piece of equipment, and employee. Add-on features to MP2 include MP2 Messenger^™, Pocket MP2^™, Pagerlink^™, and MP2 Weblink^®. MP2 is available for Microsoft Access, Microsoft SQL Server, and Oracle databases. The client server version of MP2 manages most of the processing at the server which expedites performance, ensures data integrity and security and reduces network traffic. MP2 is available in five languages.

Customers

For eighteen years, we have provided asset management software and services to the marketplace. We have over 7,000 customers who we actively support, and this customer base includes more than 60 percent of the Fortune 500. We have sold systems in 140 countries and in nearly every industry. We sell to our customers and prospective customers through a combination of direct sales, telesales and international distributors in virtually every major industry. Although we have customers in nearly every industry, we have specific strength in government, healthcare, manufacturing, oil and gas, pharmaceutical, transportation, and public utility industries.

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No customer has represented more than 5% of our total annual revenues in any of the last three fiscal years.

Sales and Marketing

We sell our products and services through 161 sales professionals (as of March 1, 2004), which includes a direct sales force of 63 and a telesales force of 25. There are 73 sales personnel who represent pre-sales engineers, management, research, and lead qualification. We use internal and third-party systems to help manage our sales, marketing and customer support processes.

Our marketing department consists of 28 employees (as of March 1, 2004) and is responsible for marketing through public relations, industry analyst relations, customer reference programs, trade shows and seminars, strategic partnerships and direct mail. The marketing department is also responsible for web site design, product marketing, collateral development and provides input for our product development efforts.

Internationally, we market our software and services from offices in Argentina, Brazil, Canada, Chile, China, France, Germany, Italy, Japan, Mexico, the Netherlands, Singapore, and the United Kingdom. In addition, we have a network of affiliates located throughout the balance of Europe, Latin America and the Asia Pacific. For financial information about our segment and operations in different geographic locations, see note 10 of our consolidated financial statements.

Alliances and Partners

We have established marketing agreements with IBM Global Services, Oracle Corporation, Microsoft Corporation and webMethods. We also have established a software development and licensing agreement with GE Fanuc Automation North America, Inc. (“GE Fanuc”), an affiliate of GE Industrial Systems, to deliver integrated asset management solutions globally.

We have established formal relationships with over 175 active industrial parts and office product suppliers such as Applied Industrial, Fastenal, Grainger, Motion Industries, Office Depot, MSC Industrial Direct and WESCO. These supplier partners are electronically connected to the Datastream 7i Buy trading network and serve to streamline and optimize the supply chain of spare parts required by our application customers.

Professional Services

We offer seven types of value added professional services to customers: (i) consulting and advisory services to provide solutions to customer-specific applications problems, such as asset management or preventive maintenance, (ii) technical services, which provide on-site installation and systems integration services, (iii) configuration services, which enhance the functionality of a customer’s system, (iv) spare parts purchasing and management services, (v) product and customer support services, (vi) project management, and (vii) customer training. As of March 1, 2004, we employed 249 service and support personnel worldwide, of which 158 were professional service personnel and 91 were support personnel.

Product and customer support services include unlimited, toll-free international access to our support staff, product updates, a searchable Internet site for common questions and requests, an Internet-based support tool for self-help via the Internet, e-mail support and an Internet-based file download service. We also offer a premium support service, under which a customer receives a dedicated analyst for direct level support, faster response and issue resolution commitments, and tailored customer management programs to meet specific customer needs. We provide support for our international customers via a tiered approach: first-level support is provided by a network of partners in conjunction with the local office with back-up expertise offered through the European technical center in Grenoble, France and the North American technical center in Greenville, South Carolina. Support related revenue is an important source of recurring revenue and profitability to our Company.

Hosting Services

Our customers have the option of accessing the functionality of Datastream 7i through hosting services that we provide for a monthly fee. This offering allows customers to access product functionality without the complexities and costs of managing such applications internally. Customers typically purchase the license for Datastream 7i and pay a support fee that covers the price of hosting.

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The hosted offering is housed on a highly reliable, fault tolerant platform located in a UUNet data center. The data center is a generation 3 UUNet facility providing hardened security, direct access to the UUNet backbone through multiple paths, redundant power, and redundant HVAC.

Product Development

Our ability to design, develop, test and support new product technology and enhancements in a timely manner is essential to our future success. As of March 1, 2004, our product development group consisted of 102 people, focused on four key functions: development, quality assurance, documentation, and localization. The Development group consisted of 42 software developers, most of whom hold advanced programming or engineering degrees. We also utilize development contractors for certain product development projects. During the years ended December 31, 2001, 2002, and 2003, we spent $12.4 million, $10.7 million, and $12.4 million, respectively, on product development.

Competition

Our market for application software is intensely competitive. The principal methods of competition in this market include product performance, functionality, price and services. Certain of our existing competitors have greater financial, marketing, service and support and technical resources than Datastream. We compete with enterprise resource planning (ERP) vendors such as IFS, Oracle, Peoplesoft / J.D. Edwards and SAP, who offer enterprise-wide management systems with asset management modules. We also compete with traditional providers of asset management software such as Indus International and MRO Software.

Internationally, we compete with both local and global software vendors. Local and regional competitors are generally smaller, but are more knowledgeable of the specific markets in which they compete. Global competitors target international markets through distributors, direct sales and service offices or through strategic partnerships. Competition in these countries is frequently intense and there can be no assurance that we will be successful in these markets.

We must make continued investments in product development, particularly the development of Internet-based products, to meet competitive pressures. There can be no assurance that we will have sufficient resources to make these investments or that we will be able to make the technical advances necessary to continue to compete effectively in the future.

Intellectual Property

Our success is heavily dependent upon the technological and creative skills of our personnel and how successfully we can safeguard our efforts in developing and enhancing our software and related technology through the protection of our intellectual property rights, brand name, and associated goodwill. We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our software from competitors’ products. For example, we take measures to avoid disclosure of our trade secrets, including, but not limited to, requiring all employees and certain consultants, customers, prospective customers, and others with which we have business relationships to execute confidentiality agreements that prohibit the unauthorized use and disclosure of our trade secrets and other proprietary materials and information. We also enter into license agreements with our customers, business partners and resellers that limit the unauthorized access to, use and distribution of our software, documentation and other proprietary information. These license agreements impose restrictions on the use of our technology, including prohibiting the reverse engineering or decompiling of our software, impose restrictions on the licensee’s ability to utilize the software and provide for specific remedies in the event of a breach of these restrictions. We also restrict access to the source code for our products. While some of our license agreements require us to place the source code for licensed software in escrow for the benefit of the licensee, these agreements generally provide these licensees with a limited, non-exclusive license to use this code in the event we cease to do business without a successor or there is a bankruptcy proceeding by or against us. Certain agreements may also provide that a licensee access and use the escrowed source code if we fail to provide specified software support.

We claim exclusive title to and ownership of the software we develop. We also seek to protect our software, documentation and other proprietary information under the trade secret, copyright and trademark laws. We assert

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copyright in our software, documentation and other qualifying works of authorship. We also assert trademark rights in and to our name, product names, logos and other markings that are designed to permit customers to identify our goods and services. We regularly file for and have been granted trademark protection from the U.S. Patent and Trademark Office and in other countries for qualifying marks.

Despite our efforts to protect our intellectual property rights, there can be no assurance that these protections will be adequate to protect our intellectual property rights or that our competitors will not independently develop software products that are superior to our products. Existing copyright laws provide us limited protection in prohibiting competitors from independently producing software products that are substantially similar to our products. We do not hold any patents or have any patent applications pending.

Although we employ both statutory and contractual protections against unauthorized use of our proprietary technology, we may not be able to detect such unauthorized use or take appropriate steps to enforce our intellectual property rights effectively. In addition, certain contractual provisions, including restrictions on use, copying, transfer and disclosure of licensed programs, may be unenforceable under the laws of certain jurisdictions. Our international operations expose us to certain additional intellectual property risks in that the laws of some countries do not protect our proprietary rights to the same extent as do the laws of the United States. Policing the unauthorized use of our intellectual property rights is difficult and expensive, particularly given the global nature and reach of the Internet. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from the technology we have developed without paying for it. The misappropriation and use by others of our intellectual property could materially harm our business.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, and believe that our products, trademarks, service marks and other proprietary rights do not infringe the proprietary rights of third parties, there can be no assurance that such parties will not assert infringement claims against us. In addition, we license technology from third parties that is incorporated into our software, and we bundle technology from third parties with our software. Any infringement claims, even those without merit, made against us arising out of our own or third party technology, could be time-consuming and expensive to defend and require us to address inherent uncertainties. The loss of proprietary technology or a successful claim against us could have a material adverse effect on our financial condition and results of operations.

Datastream^®, Datastream 7i^™, Datastream 7i Buy^™, Databridge^™, MP2^®, MP2 WebLink^®, Pocket MP2^™, MP2 Messenger^™ and PagerLink^™ are our trademarks or service marks and are used in this report to denote our products and services. Other product and company names mentioned herein may be trademarks of their respective owners.

Seasonality

We typically see weaker service revenues in the third and fourth quarters of our calendar year due to lower utilization from Europe in the summer and fewer available billable days in 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 may cause our results to vary from quarter to quarter.

Employees

As of March 1, 2004, we employed approximately 636 persons, including 189 sales and marketing personnel, 249 service and support representatives, 96 administrative personnel and 102 employees involved in product development. This includes both full-time and part-time employees. None of our employees are represented by a labor organization and we are not a party to any collective bargaining agreement. We consider relations with our employees to be good.

Segment and Geographic Information

See note 10 to the consolidated financial statements contained herein for information regarding our business segment and operations in different geographical regions.

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Item 2. Properties

We conduct our principal operations out of a 125,000 square foot headquarters building owned by the Company and located in Greenville, South Carolina. We also own a 15,000 square foot building in Dessau, Germany. We also have the following office properties under lease:

It is our intention to renew the above leases at the then current market rate at the time the lease expires.

Item 3. Legal Proceedings.

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

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

No matters were submitted to a vote of Datastream’s stockholders during the fourth quarter ended December 31, 2003.

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PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.

Our common stock, $.01 par value per share (the “Common Stock”), is traded on the Nasdaq National Market under the symbol DSTM. We have never declared or paid any cash dividends on our Common Stock. However, we declared a two-for-one stock split, effected in the form of a one-for-one share dividend, effective September 12, 1995. We declared a second two-for-one stock split, effected in the form of a one-for-one share dividend, effective January 30, 1998. We do not anticipate paying any cash dividends in the foreseeable future. The chart below sets forth the high and low closing prices for each quarter of our last two fiscal years.

The closing price of a share of our Common Stock on March 4, 2004 was $8.25. As of March 4, 2004, we had 193 shareholders of record of its Common Stock.

Item 6. Selected Financial Data.

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