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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

For the transition period from              to             

Commission File Number 0-27138

CATALYST INTERNATIONAL, INC.

8989 North Deerwood Drive, Milwaukee, Wisconsin 53223

(414) 362-6800

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

None

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

Common Stock, $0.10 par value

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, 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 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 the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)     Yes  ¨    No  x

As of June 30, 2003, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $4,638,000 (based upon the closing price of the registrant’s common stock on that date).

As of March 22, 2004, the number of shares outstanding of the registrant’s common stock was 7,853,570.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held June 24, 2004 are incorporated by reference into Part III.

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CATALYST INTERNATIONAL, INC.

FORM 10-K

For The Fiscal Year Ended December 31, 2003

INDEX

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PART I

Forward-Looking Information/Risk Factors

Items 1, 2, 3, 5, 7 and 7A of this Form 10-K contain “forward-looking statements,” subject to protections under federal law. We intend words such as “believes,” “anticipates,” “plans,” “may,” “will,” “should,” “expects” and similar expressions to identify forward-looking statements. In addition, statements regarding Catalyst’s future revenues or financial performance and its plans, objectives, vision, goals, expectations or intentions are forward-looking statements, such as statements regarding Catalyst’s liquidity; future financings; software releases, upgrades and capabilities; future attainment of corporate goals; and adequacy of capital resources and reserves. There are a number of important factors that could cause Catalyst’s results to differ materially from those indicated by the forward-looking statements, including among others, those risk factors described in Exhibit 99.1 attached to this 10-K and incorporated herein by this reference. Forward-looking statements relate to the date made, and Catalyst undertakes no obligation to update them.

Item 1. Business

GENERAL

Company Background

Catalyst International, Inc. was founded in 1979 and incorporated in the State of Delaware in 1982. We provide customer-driven software and services that optimize supply chain performance. We offer an innovative suite of supply chain execution (SCE) software products and services, called CatalystComplete^™, that help our customers implement, integrate, manage, and operate fast, efficient supply chain networks.

We develop SCE software products and services that add value to the supply chain and minimize risks to mission-critica1 operations. We believe that CatalystComplete benefits our customers by delivering both a return on investment and a return on information. The return on investment is achieved through enhanced operational efficiencies and improved capital utilization. Our software improves the operational efficiency of distribution centers by increasing labor productivity through efficient employee scheduling, reduction of downtime, and by streamlining product flow. The advanced features of our software improve capital utilization by lowering inventory levels, increasing inventory turns, and warehouse efficiencies, and improving space utilization. CatalystComplete also provides a return on information through improved customer service, enhanced customer satisfaction, and shortened delivery times.

Our plan is to improve our position as one of the leading best-of-breed SCE suppliers through growth in three areas. First, we plan to expand our product and services offering to include additional components of SCE through both internal development and through acquisition. Second, we plan to continue to add products and services that supplement the SCE offerings of the major ERP (Enterprise Resource Planning) companies, particularly SAP. Finally, we plan to expand our customer base by combining with other SCE companies as part of the continuing industry consolidation.

Our strategy is to provide customer-driven, value-added software products and services that are focused on our customers’ business goals and based on an open, modular technology. We also have a unique ability to integrate with and support SCE products from leading ERP vendors, particularly SAP. Our vision is to be the sole resource our customers need to install, integrate, and manage world-class SCE software products that minimize risk and maximize the long-term value of our customer’s investment. We call this unique ability to support heterogeneous SCE environments “best-for-business”.

Our website address is http://www.catalystinternational.com/. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K are all attainable, free of charge, on our website. Information on our website is not part of this report on Form 10-K.

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Products and Technology

Our software products and services (CatalystComplete^™) are organized into three distinct groups each of which address a specific set of SCE requirements:

CatalystComplete^™ can be configured to meet the needs of individual customers by utilizing the following key attributes:

CatalystCommand^™, our Supply Chain Execution Management solution set, manages the physical movement and storage of goods and associated resources at or between locations. It comprises the following three product suites:

We believe that we are the first SCE supplier to offer both flow-through functionality and traditional warehouse management features in one system, allowing a facility to run in either or both modes. Flow-through is commonly used by retailers and provides the capability to receive product and send it directly to shipping without ever being stored in the warehouse or physically handled.

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the extended supply chain. Our componentized system enables customers to start small and grow later. Our exclusive modular business process “plug-ins” allow customers to go beyond shipping compliance to support a variety of supply chain processes including receiving, putaway, shipping, picking, packing and loading.

Our component-based architecture is easily integrated with all pieces in a total SCE solution, including manufacturing resource planning and ERP systems, such as SAP^™ and Oracle^®; and supply chain planning (SCP) and transportation management systems. CatalystCommand interfaces with a wide range of automation technology interfaces, such as radio frequency-based scanning and data collection devices, bar coding devices, and material handling equipment (such as conveyors, sorters, and carousels). CatalystCommand also interfaces with several add-on third party software products that deliver specific functionality including shipping management, warehouse optimization, and warehouse simulation.

CatalystConnect^™, our Supply Chain Process Management solution set facilitates, coordinates and optimizes the information and product flow in the extended supply chain network. It comprises the following three product suites:

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CatalystCompass^™, our Supply Chain Performance Management solution set provides analysis of execution and process activities for the purpose of managing and improving performance. It comprises the following three product suites:

Product Releases and Roadmap

Building on the proof-of-concept work that was done in 2002, we have developed our new products using an open standards based J2EE technology foundation that supports zero footprint browser operations on Windows, Linux or Unix based hardware. The adoption of this new technology has allowed the introduction of new products in response to market and existing customer needs, with typical release cycles being reduced from 18-24 months down to 4-6 months.

In 2003 we made a number of releases to expand our product offering, including the following:

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Services Overview

We offer a broad array of implementation and SCE performance improvement services to help customers take full advantage of our deep understanding of the strategies, processes, and technology that underpin the most successful distribution centers. We collaborate with our customers from the onset of an engagement to make certain our software products and services address their priority needs and will work effectively in their distribution centers.

We have several groups responsible for offering services and customer support to ensure customer satisfaction; these groups include Engagement Services, Customer Education and Training, Customer Support, Consulting Services, Facilities Management, and Enabling Technologies.

CatalystImplement^™

Our Engagement Services group offers a proprietary implementation methodology to ensure that the customer’s SCE solution is delivered on time, on budget, and on target to meets its business objectives. Our implementation methodology consists of training, business scenario development, configuration of the software, a conference room pilot (CRP), project management, and implementation support services. The CRP is a critical element of the Catalyst approach. It allows our customers to work hands-on with configured software in a practice environment at our headquarters. The CRP enables us and our customers to model warehouse management operations, prototype and validate customer business requirements, and resolve operating issues prior to live implementation.

As an SAP LES integrator, we leverage our focus on SAP LES and warehouse management to participate in TeamSAP^™ projects along with SAP and other SAP implementation partners. This participation will increase implementation success and long-term serviceability for SAP LES.

CatalystConsult^™ Trainer (Customer Education and Training)

Our Customer Education and Training team provides education and training on the use, administration, and configuration of our SCE software products. Our approach employs a mixture of “train the trainer” and “train the user”. Typically, customer employees from operations and information systems participate in training. We provide in-depth documentation, structured training classes, and hands-on training for our software products. Catalyst University offers a series of continuing education courses for current customers, value-added resellers (VARs), and other partners.

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CatalystCare^™ (Customer Support)

Our Customer Support group assists customers 24 hours a day, 7 days a week following the installation of CatalystCommand. The group assists with the operation of the software and provides telephone support. Customers may purchase additional support through flexible, multi-tiered CatalystCare Support Plans. These plans feature a comprehensive menu from which users can select different levels of support in terms of telephone access, response times, resolution times, reporting and value-added services.

We developed a world-class customer service center called the Supply Chain Execution Competency Center (SCE Competency Center) in 1999. The SCE Competency Center supports both SAP LES and Catalyst SCE software products by providing training, consulting, and support services. Under our alliance with SAP, we deploy our world-class service organization to implement and provide support for customer and TeamSAP partner requests, including a support hot line, implementation services, and on-site support for SAP LES in North America. Ongoing customer support services monitor system performance and facilitate software configurations, modifications, upgrades, and troubleshooting, as needed.

CatalystConsult^™ (Consulting Services)

With our Consulting Services team, we address both the pre-implementation and post-implementation needs of our customers. This includes pre- and post-implementation audits, physical inventory, item measurement, warehouse optimization, time-standards development, inbound packaging evaluation, and warehouse simulation.

CatalystCare Complete^™ (Facilities Management)

Our Facilities Management representatives provide the resources and expertise necessary to help customers manage their supply chain systems and information technology (IT) facilities more efficiently. Services include scheduled remote machine or database management, full-time on-site WMS and IT infrastructure management and support and temporary assistance from experienced staff. Because each customer has different needs, we collaborate with each customer to develop a customized service offering with the right level of hands-on support and the right mix of dedicated and temporary resources, both on-site and on-call.

Additional Capabilities

Hardware and Enabling Technologies

We resell a variety of hardware products developed and manufactured by third parties in order to provide our customers with an integrated distribution center management solution. These products include computer hardware, radio frequency terminal networks, bar code printers and scanners, and other peripherals. We resell all third-party hardware products pursuant to agreements with manufacturers or through distributor-authorized reseller agreements pursuant to which we are entitled to purchase hardware products at discount prices and to receive technical support in connection with product installations and any subsequent product malfunctions. We generally purchase hardware from our vendors only after receiving an order from a customer. As a result, we do not maintain hardware inventory.

Strategic Alliances

We intend to expand the capabilities of our software products through key strategic alliances. This approach enables us to go beyond our own innovations and internal capabilities and access the technology, skills, and knowledge of other leading vendors in the supply chain industry. Many components of CatalystComplete are made available through our supply chain software partners.

In 1999, Catalyst and SAP AG, a leading supplier of ERP software, entered into an advanced strategic alliance. In connection with this alliance, SAP America, Inc., a subsidiary of SAP AG, acquired, at the time of purchase, a 9.7% ownership position in Catalyst.

To provide a complete product offering for our customers, Catalyst and SAP initiated joint programs to set a new standard for integration. These include the joint development of the SAP advanced interface for integrating CatalystCommand and SAP’s LES with R/3^™ and mySAP.com^™, the designation of Catalyst as a principal service provider for implementation and modification of SAP’s LES, and establishing Catalyst as a North American support center for SAP’s LES software products. We believe our customers will benefit from the complementary expertise of the two companies and that we are well positioned to extend our market presence.

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Additional Markets

We serve customers in several different industries, representing several major vertical market categories. Our vertical market strategy targets industries that have the most demanding supply chain requirements, since this will enable us to leverage our expertise and experience for competitive advantage. We have a dedicated sales group for each of our vertical markets – motor vehicle/parts (including automotive, aerospace, and parts distribution), retail, consumer goods, process goods (including pharmaceuticals and specialty chemicals), and cross-industry applications. These markets will remain our primary focus for the next 12 to 24 months. In addition, our sales teams will explore opportunities to expand our presence in sub-categories of these markets (e.g., discount stores and direct-to-consumer in the retail sector), as well as selected horizontal markets (e.g., third party logistic providers).

We support the needs of various distribution models including traditional distribution, push/pull, flow, Internet fulfillment, and any combination. We believe the expertise we have developed in each of these markets through our customer base provides us with a significant competitive advantage in selling to prospective customers where similar functionality is required.

Worldwide Distribution

Our United Kingdom subsidiary, Catalyst WMS International Limited, was established in 1994 in London, England to sell, service, and support our software products in certain international markets. We plan to continue to increase our international business through an aggressive effort to recruit and manage VARs in selected foreign markets, such as the fast-growing markets of Latin America and Europe. These VARs work together with Catalyst personnel in obtaining agreements for global, multi-site installations with multi-national customers. CatalystCommand is currently available in English, French, Italian, Portuguese, German, and Spanish.

Acquisition Opportunities

We intend to pursue strategic acquisitions of technologies, products, and businesses that enable us to enhance and expand our software product and service offerings.

Product Development

We offer a collaborative information-rich suite of products and services that provides complete SCE functionality for supply chains worldwide. We intend to continue to introduce new product and service offerings, upgrade the functionality of our existing products, and establish partnerships to support this strategy. We work closely with our customers and prospective customers to understand their requirements and to design enhancements, new products, and services that meet their needs. All product development is performed by our employees or by contract personnel under our management. Product development costs were $3.5 million in 2003, $4.7 million in 2002, and $5.2 million in 2001.

Sales and Marketing

We market and sell software and services in North America, Europe, and Latin America through direct sales and channel partner organizations. Our products are operating in Australia, Brazil, Canada, El Salvador, France, Germany, Guatemala, Holland, Ireland, Italy, Mexico, Spain, the United Kingdom, and the United States. Our UK subsidiary is responsible for the sale, service, and support of Catalyst software products in certain international markets.

In Latin America and Europe, we utilize the assistance of VARs to sell and assist in implementation and support of our software products. We plan to continue strengthening our presence in these regions through our relationships with supply chain participants and enterprise software vendors and by developing close relationships with system integrators in those regions.

To support our sales force, we conduct comprehensive marketing programs which include direct mail, public relations, seminars, trade shows, joint programs with vendors and consultants, and ongoing customer communication programs. Our sales cycle begins with the generation of a sales lead or the receipt of a request for proposal (RFP) from a prospective customer, which is typically followed by the qualification of the lead or prospect, an analysis of the customer’s needs, response to the RFP, one or more presentations or product demonstrations, a visit to a similar or representative warehouse running our software products, and finally, contract negotiation and execution.

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We believe that, with over 20 years of experience in the WMS industry, our software is established, proven, and accepted in the marketplace. We further believe that the level of expertise found throughout our organization includes some of the best in the industry in design, development, implementation, and support. We have created a team of employees, vendors, and consultants who are recognized as experts and leaders in their respective fields, which allows us to provide our customers with a strong resource of products, services, and knowledge. This resource should help our customers stay competitive in their respective industries.

In 2003 our products and services were accepted for inclusion on the United States General Services Administration’s Schedule (GSA Schedule) of products and services available under established terms to all parts of the federal government.

As of December 31, 2003, the sales and marketing organization was based in our headquarters in Milwaukee, Wisconsin, in the London office, and in satellite offices located throughout the United States.

Proprietary Rights and Licenses

We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures, license agreements, and other contractual provisions to protect our proprietary information. We have no patents or patent applications pending. Due to the rapid pace of change in the computer software industry, we believe that trade secret and copyright protection are less significant in affecting our business, results of our operations, or financial condition than factors such as the knowledge, ability, and experience of our employees, frequent product enhancements, and timeliness and quality of support services. We typically grant the right to use our software products under a perpetual license, which is generally non-transferable and solely for the customer’s internal operations at designated sites. Under the terms of our license agreements, we generally own all modifications to our software that are developed and implemented for a customer.

Customers

Our mission is to be the dominant firm in the tier-one market segment. Tier-one customers are characterized by the size, complexity, and volume of their distribution facilities and supply chain network. While most Fortune 1000 firms are tier-one, the segment is not limited to these firms. Tier-one distribution facility characteristics typically include: size of 200,000 square feet or more, volumes of 10,000 items per day or more, at least 75 concurrent users, extensive use of automated material handing equipment, radio frequency devices and bar coding, complex warehousing strategies, and other non-standard requirements such as hazardous materials, refrigeration, etc.

In the year ended December 31, 2003, we had no sales to individual customers that exceeded 10% of revenues. In the year ended December 31, 2002, we had one customer that accounted for more than 10% of total revenues. The customer represented $4.2 million or 13.1% of our total revenues. This customer’s spending increased during 2002 due to the timing of a significant project. We anticipate that this customer will not continue to exceed 10% of our revenues. We do not believe that the loss of any single customer would have a material adverse effect upon our business, results of operations, or financial condition.

We have historically relied on its key vertical markets for a substantial portion of revenues. We do not, however, intend to focus solely on these markets for future sales and do not anticipate that we will depend on any single market for a substantial portion of our sales.

As of December 31, 2003, backlog was approximately $13.5 million, compared with approximately $9.6 million as of December 31, 2002. We believe that all backlog amounts should be filled in 2004. For these purposes, backlog is defined as revenues to be recognized from contracts that have been signed.

Competition

The SCE software industry continues to be highly fragmented with a number of competitors. Our competitors, including publicly and privately held companies, focus either on WMS or SCE, or offer a comprehensive software offering of which warehouse management is a part.

The competitive factors affecting the market for our software and services include: corporate and product reputation, features and functionality, vertical market expertise, customer configurability, effective and timely implementation,

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availability of products on open computer platforms, ability to interface with existing customer’s equipment and systems, ability to support radio frequency and bar code technology, quality of support services, real-time capabilities, RDBMS technology, scalability, international capabilities, documentation and training, product quality, performance, and price. We believe that we compete effectively with respect to these factors, but there can be no assurance that we will continue to do so. See Competition in Exhibit 99.1.

Employees

As of December 31, 2003, we had 187 full-time employees worldwide, none of whom were represented by any collective bargaining organization. We have never experienced a work stoppage and consider relations with our employees to be good.

Item 2. Properties

Our corporate headquarters is approximately 62,000 square feet of leased office space in Milwaukee, Wisconsin. The term of the lease expires in January 2006, but we have the option to extend such term for an additional ten-year period. We lease approximately 6,500 square feet of additional office space in Milwaukee, Wisconsin. The term of this lease also expires in January 2006. We lease approximately 4,650 square feet of office space in Newtown, Pennsylvania, pursuant to a lease that expires in 2008. Catalyst WMS International Limited leases approximately 7,550 square feet of office space in Uxbridge, England, pursuant to a lease that expires in 2008. We believe that these existing facilities should be adequate for our needs through at least 2004.

Item 3. Legal Proceedings

On October 8, 1999, a former customer (the Claimant) instituted an arbitration proceeding against Catalyst with the American Arbitration Association in Milwaukee, Wisconsin. The Claimant alleged breach of warranty and sought relief in the form of monetary damages in excess of $1.9 million. An arbitration award was issued on January 2, 2002 in favor of the Claimant in the amount of $799,840, plus interest at 5% from December 7, 2001. We filed a motion to vacate this award for non-compliance with the applicable arbitration procedures. On January 29, 2002, the Claimant filed a petition to confirm the award. On November 22, 2002, the District Court ruled in favor of Catalyst’s motion to vacate the arbitration award and denied the claimant’s petition to confirm the award. The claimant appealed this decision to the 7^th Circuit Court of Appeals. During 2003, no decision has been made by the 7^th Circuit Court of Appeals. We believe that because we have adequately reserved for this matter, the outcome of this proceeding will not have a material effect on our financial position or results of operations.

We are involved in various other claims and legal matters of a routine nature which are being handled in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these unresolved claims and legal matters or the range of possible loss or recovery, we believe that these unresolved claims and legal matters will not have a material effect on our financial position or results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II

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

Through February 26, 2003, shares of Catalyst’s common stock were quoted on the Nasdaq Stock Market under the symbol CLYS. Effective February 27, 2003, shares of Catalyst’s common stock are quoted on the Over-the-Counter Bulletin Board exchange under the symbol CLYS.OB. The following table represents the high and low price information for Catalyst’s common stock for each quarterly period within the two most recent fiscal years.

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Source: Yahoo

On March 22, 2004, there were approximately 1,339 beneficial owners, 157 of which were record holders.

Prices listed above are determined by the over-the-counter market and as such, over-the-counter market quotations reflect inter-dealer prices, without retail mark-up or commission, and may not necessarily represent actual transactions.

Catalyst has never paid cash dividends on its common stock. Our policy has been to retain cash from operations to provide funds for the operation and expansion of our business. Accordingly, we do not anticipate paying cash dividends in the foreseeable future.

On September 30, 2003, we sold $2.1 million of 12% secured promissory notes due on September 30, 2007 along with five-year warrants to purchase a total of 739,437 shares of our common stock at a price of $1.42 per share. The securities were sold to directors and a limited number of other financially sophisticated accredited investors in a transaction exempt from registration under the Securities Act pursuant to Section 4(2) thereof. The securities bear a restrictive legend.

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Item 6. Selected Financial Data

FINANCIAL HIGHLIGHTS

(In thousands, except per share data)