================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                   -------------------------------------------

                                    FORM 10-K
(Mark One)

 [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. For The Fiscal Year Ended: December 31, 2004
                                       or

[ ]   Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. For the transition period from          to
                                                     --------   ---------

                         Commission File Number: 0-26330

                            ASTEA INTERNATIONAL INC.
             (Exact name of registrant as specified in its charter)

                    Delaware                                 23-2119058
     ---------------------------------------            --------------------
      (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                      Identification No.)


    240 Gibraltar Road, Horsham, Pennsylvania                19044
    --------------------------------------------         ------------
     (Address of principal executive offices)             (Zip Code)


       Registrant's telephone number, including area code: (215) 682-2500
                                                           --------------

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
                                                             ---------------

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 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. [ _ ]

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

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of June 30, 2004 (based on the closing  price of $8.92 as quoted
by Nasdaq National Market as of such date) was approximately $14,614,082.

As of March 15, 2005,  3,002,398  shares of the  registrant's  Common Stock were
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

================================================================================
================================================================================

<TABLE>
<CAPTION>

<S>  <C>                                                                                          <C>

                                TABLE OF CONTENTS

                                                                                                 Page
                  PART I                                                                         ----

Item 1.           Business                                                                        3
Item 2.           Properties                                                                     14
Item 3.           Legal Proceedings                                                              15
Item 4.           Submission of Matters to a Vote of Security Holders                            15

                  PART II

Item 5.           Market for Registrant's Common Equity and Related                              16
                  Stockholder Matters
Item 6.           Selected Financial Data                                                        17
Item 7.           Management's Discussion and Analysis of Financial                              18
                  Condition and Results of Operations
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk                     35
Item 8.           Financial Statements and Supplementary Data                                    36
Item 9.           Changes in and Disagreements with Accountants on                               55
                  Accounting and Financial Disclosure
Item 9A.          Controls and Procedures                                                        55
Item 9B.          Other Information                                                              55

                  PART III

Item 10.          Directors and Officers of the Registrant                                       56
Item 10A.         Departure of Directors or Principal Officers; Election of Directors;
                  Appointment of Principal Officers                                              58
Item 11.          Executive Compensation                                                         59
Item 12.          Security Ownership of Certain Beneficial Owners and                            62
                  Management
Item 13.          Certain Relationships and Related Transactions                                 63
Item 14.          Principal Accountant Fees and Services                                         63


                  PART IV


Item 15.          Exhibits and Financial Statement Schedules.                                    64

                  Signature Page                                                                 67

                  Consent of Independent Certified Public Accountant                             68

                  Certificates                                                                   69



</TABLE>


                                       2
<PAGE>


PART I

Item 1.  Business.


General

         Astea International Inc. and subsidiaries  (collectively "Astea" or the
"Company") develops, markets and supports service management software solutions,
which are licensed to companies that sell and service equipment, and/or sell and
deliver professional services. Companies invest in Astea's software and services
to automate enterprise  business processes for purposes of revenue  enhancement,
cost containment, operational efficiency and improving management's awareness of
operational  performance  through  analytical  reporting.  Customers'  return on
investment  from Astea  solutions is achieved  through  improved  management  of
information,  people and cash flows, thereby increasing  competitive  advantages
and customer satisfaction, top-line revenue and profitability.

         Astea solutions are used in industries such as information  technology,
medical devices and diagnostic systems, industrial controls and instrumentation,
retail systems,  office  automation,  imaging  systems,  facilities  management,
telecommunications  and  other  industries  with  equipment  sales  and  service
requirements.  Astea's  strong focus on enterprise  solutions for  organizations
that sell and deliver  services is a unique industry  differentiator  that draws
upon the Company's industry experience and core expertise.

         Founded in 1979, Astea is known  throughout the industry,  largely from
its  history as a dominant  provider  of software  solutions  for field  service
management and depot repair.  Astea has since expanded its product  portfolio to
also  include  integrated  management  applications  for  sales  and  marketing,
multi-channel customer contact centers, and professional services automation.

         In 2002,  Astea began  commercial  release of its latest Astea Alliance
service  management suite version 6 products ("Astea Alliance 6") that adapt the
Company's domain expertise and integrated business process  functionality to the
Microsoft.NET Web Services  framework.  Astea solutions include a variety of Web
portal and wireless  remote-access  capabilities  integrating  mobile employees,
contractors,  business partners and customers into an enterprise's consolidated,
real-time management of workforce, assets and business relationships.

         Astea's  software  has been  licensed to  approximately  600  companies
worldwide.  Customers range from mid-size organizations to large,  multinational
corporations  with  geographically  dispersed  locations  around the globe.  The
Company markets and supports its products through a worldwide  network of direct
and indirect  sales and  services  offices with  corporate  headquarters  in the
United States and regional  headquarters  in the United  Kingdom and  Australia.
Sales partners include distributors  (value-added resellers,  system integrators
and sales agents) and OEM partners.

         In addition to its own product development that is conducted at Company
facilities in the United States and Israel,  Astea  participates in partnerships
with complementary  technology companies in order to reduce  time-to-market with
new product  capabilities  and  continually  increase its value  proposition  to
customers.  The Company's  product  strategies are developed from the collective
feedback from customers,  industry  consultants,  technology  partners and sales
partners, in addition to its internal product management and development.  Astea
also works with its active user community who closely  advises and  participates
in ongoing product development efforts.

         Astea  provides  customers  with an array of  professional  consulting,
training and customer  support  services to implement its products and integrate
them  with  other  corporate  systems  such  as  back-office  financial  and ERP
applications.  Astea also maintains and supports its software over its installed
life cycle.  The




                                       3
<PAGE>

Company's  experience  and domain  expertise  in service  and sales  management,
distribution, logistics, finance, mobile technologies, internet applications and
enterprise  systems  integration  are made  available to customers  during their
assessments of where and how their business processes can be improved.

         The  Company's  sales and  marketing  efforts  are  almost  exclusively
focused on new software licensing and support services for its latest generation
of Astea Alliance products. Marketing and sales of licenses and services related
to the Company's  legacy system  DISPATCH-1(R)  products are limited to existing
DISPATCH-1 customers.

Current Product Offerings

Astea Alliance

                                [GRAPHIC OMITTED]

         Astea Alliance is a service management  offering consisting of software
applications  and  services.  The  software  product  consists  of a  series  of
applications.  The offering has been  developed  as a global  solution  from the
ground up with multi-lingual and multi-currency capabilities.

         Astea  Alliance  has been  designed  to address  the  complete  service
lifecycle,  from lead  generation  and project  quotation to service and billing
through  asset  retirement.   It  integrates  and  optimizes  critical  business
processes for Campaigns,  Call Center, Depot Repair,  Field Service,  Logistics,
Projects and Sales and Order  Processing.  Astea extends its  application  suite
with  mobile,  portals,  analytics,  tools and services  solutions.  In order to
ensure customer  satisfaction and quick return on investment,  Astea also offers
infrastructure tools and services.

         Astea  Alliance  is  licensed to  companies  that sell  and/or  service
capital  equipment  or  mission  critical  assets.  Companies  invest in Astea's
software  and  services  to automate  service  processes  for cost  containment,
operational  efficiency,   and  management  visibility.   Customers'  return  on
investment is achieved  through  improved  management  of customer  information,
people and cash flows,  thereby  increasing  competitive  advantage and customer
satisfaction,  top-line revenues and profitability.  Astea solutions are used in
industries  such as  information  technology,  medical  devices and  diagnostics
systems,  industrial  controls  and  instrumentation,   retail  systems,  office
automation,  imaging  systems,  facilities  management,  telecommunications  and
related industries with equipments sales and service requirements.

         The latest version software,  Astea Alliance 6.8, is designed and built
with a new system architecture for Web-based  deployment using the Microsoft.NET
development  architecture.  Prior to this,  products were engineered for Windows
client/server technology and marketed as AllianceEnterprise.  AllianceEnterprise
products  included  re-engineered  and enhanced versions of service modules that
were initially introduced as


                                       4
<PAGE>


ServiceAlliance(R)  in 1997,  and a  re-engineered  and enhanced  version of the
Company's  sales force  automation  product  that was  initially  introduced  as
SalesAlliance in 1999.

         ServiceAlliance  and  SalesAlliance,  the  earliest  versions  of Astea
Alliance  solutions,   were  the  Company's  initial  new  technology  offerings
following a long and highly successful history with its DISPATCH-1 legacy system
solutions.  Astea  Alliance  solutions  have been licensed to over 225 customers
worldwide.  Market acceptance of Astea Alliance by global and regional companies
has continually  increased since 2002 and the Company has  aggressively  pursued
opportunities  for  larger  system   implementations   with  mid-size  to  large
enterprises on a worldwide basis.

      The current Astea Alliance offering consists of:

       o    8 Core Applications
       o    Mobile Applications
       o    Extended Portals
       o    Reporting and Analytical Tools
       o    Services
       o    Tools

      Astea Alliance Core Applications:
           Alliance Contact Center
           Alliance Depot Repair
           Alliance Field Service
           Alliance Logistics
           Alliance Marketing Campaigns
           Alliance Order Processing
           Alliance Professional Services
           Alliance Sales

      Astea Alliance Mobile Applications:
           Alliance Notebook for Service
           Alliance Notebook for Sales
           Alliance PocketPC for Service
           Alliance 2-way Paging

      Astea Alliance Extended Portals:
           Customer Self-Service
           Remote Technician

      Astea Alliance Reporting and Analytical Tools:
           Analytics Framework
           Analytical Reports - Field ServiceCore Applications Standard Reports
           Mobile Applications Standard Reports

      Astea Alliance Services:
           Alliance Consulting
           Alliance Customer Support
           Alliance Education & Training


                                       5
<PAGE>


      Astea Alliance Tools:
           Alliance BizTalk Connector
           Alliance Financial Link
           Alliance Global Database
           Alliance Knowledge Base
           Alliance Links
           Alliance Studio

Astea Alliance Core Applications

Alliance Contact Center

         The  Alliance  Contact  Center   application   supports  call  centers,
information desks, service hotlines,  inside sales and telemarketing activities.
Integrated, multi-channel, inbound/outbound capabilities enable customer service
representatives  to serve  prospects  and  customers  in their  media of choice,
including  phone,  fax,  e-mail or Internet.  Integrated  customer  self-service
portals with automated email response,  automated call escalation, and interface
to  Computer  Telephony  Integration  (CTI)  systems  help  streamline  customer
interaction  processes.  Work  scheduling  and demand  balancing  optimize staff
utilization.  Employee  personal portals with access to comprehensive  real-time
customer  data  and  decision  support  tools  including  intelligent  knowledge
management  and scripting for problem  resolution  and inside sales drive higher
staff productivity. Aside from more efficient customer service and higher levels
of customer  satisfaction,  the  objectives of Astea's  Alliance  Contact Center
software are to reduce overhead through improved first-call resolution rates and
shorter service-call  handling times. A powerful,  third-party knowledge base is
integrated  into this  application to further  enhance and extend the diagnostic
tools available to contact center agents. This optional module is also available
for Depot Repair and Field Service applications.

Alliance Depot Repair

         Alliance Depot Repair  automates  tracking of assets through  equipment
calibration and repair chains, including merchandise ownership, location, repair
status and warranty coverage. Objectives are to gain real-time visibility of all
repair  chain  activities,  ensure  compliance  with  warranty  and  contractual
agreements,  respond to customer inquiries with up-to-the-minute  repair status,
collect and analyse repair statistics for product design improvement, and reduce
overhead  such as  inventory  carrying  costs.  Applications  support  in-house,
subcontractor and vendor  calibration and repair;  customer and vendor exchanges
and advance  exchanges;  equipment  on loan;  change of  ownership;  merchandise
shipments, cross shipments and pickups; consolidated repair orders; and, storage
and refurbishment programs. Integration with other Astea Alliance modules allows
repair orders and repair status  queries to be initiated  from customer  contact
centers, field service, field sales and warehouses as well as the repair depot.

Alliance Field Service

         The Alliance  Field Service core  application  delivers a robust set of
automated  capabilities  to streamline  and improve  management of field service
activities.  By  automating  workflow  field  service  representatives  can more
efficiently complete and document  assignments,  manage vehicle assets,  capture
expenses and generate  revenue  through add-on sales during a customer  contact.
Applications  alert  dispatchers  to  contractual  minimum  response  times  and
expedite coordination of field force skills matching,  scheduling,  dispatch and
repair parts logistics.  The Remote  Technician  portal allows  site-based field
engineers and other  off-site  agents  secure access to the core system.  Mobile
tools deliver rich functionality on notebook and PDA platforms that enable field
forces  to  work   electronically  for  receiving,   documenting  and  reporting
assignments,  eliminating manual procedures, service delays and paper reporting.
The  software  supports  all  field  service  categories   including   equipment
installations,  break/fix,  planned maintenance and meter reading.


                                       6
<PAGE>


Applications can also be integrated with equipment  diagnostic systems for fully
automated  solutions that initiate and prioritize  service requests and dispatch
assignments to field employees' PDAs without human intervention.

Alliance Logistics

         The Alliance  Logistics  core  application is divided into 3 functional
portals.  These are Supply Chain, Inventory Management and Reverse Supply Chain,
reflecting the diversity of needs in this area. Seamlessly integrated with sales
and  service   applications,   Alliance   Logistics  enables  equipment  service
organizations to control inventory costs,  manage assets and implement proactive
service management strategies.  Automated calculation of stock profiles based on
usage eliminates  overstocking  and  dramatically  reduces costs associated with
storing,  depreciating,  and insuring inventory.  The application supports parts
and tools  management for effective  field service  delivery and SLA compliance.
Improved cost management  improves cash flow by streamlining  and shortening the
cycles  from  inventory  to  usage  to  billing.   Lower  logistics  costs  open
opportunities to recognize higher margins on products and services. Key areas to
apply Alliance  Logistics  include asset management,  field service  parts/tools
management, demand fulfillment, and sales fulfilment.

Alliance Marketing Campaigns

         This core application coordinates the planning,  execution and analysis
of marketing  campaigns.  The software supports  budgeting and tracking complete
multi-channel   campaigns  that  integrate   advertising,   direct  mail,  email
marketing,   telemarketing,   etc.  Electronic   campaigns  such  as  email  and
telemarketing are further supported with list management, script development and
user interfaces for campaign  execution.  Marketing managers can define campaign
offerings  such as  products  and  services  to be sold,  pricing  and  discount
tolerances;  assign campaign attributes;  attach campaign  documentation such as
descriptive text, images,  slogans and lead conversion  literature;  and monitor
and measure response.  The big picture view enables managers to assess synergies
each channel  delivers to an overall campaign and adjust channel details such as
prospect lists, scripts,  budgets or offering incentives to elicit best results.
Integration  with other Astea  Alliance  modules  enables  equipment and service
organizations  to leverage  abundant  customer  information  for identifying new
potential  revenue sources and marketing to maximize  customer loyalty and sales
opportunities.

Alliance Order Processing

         The  Alliance  Order   Processing   module   provides   straightforward
functionality for the management of quotations and order fulfillment. Quotations
can be created for the sale of products  and the  provision  of field  services.
Integration  with the  Approvals  process and the  Logisitcs  and Field  Service
modules ensure good management  control and  sustainable  promises for delivery.
This  application  is ideally  suited to the sale of  "consumable  products"  in
association with the provision of equipment-based  services,  but can be equally
applied to the supply of finished products resulting from up-sell and cross-sell
opportunities.

Alliance Professional Services

         Alliance   Professional   Services  supports  management  of  knowledge
workers,  such as deployed by professional  services  organizations and internal
service departments of large organizations.  Functionality  focuses on planning,
deploying  and  billing  service  engagements  that can extend for days,  weeks,
months  and  years.  Applications  improve  resource  planning  and  allocation,
workflow  management,  consultant time and expense reporting,  subcontractor and
vendor  invoice  processing,   customer  billing,   and  visibility  of  service
engagements.   Integration   with  other  Astea  Alliance  modules  delivers  an
end-to-end  solution to market,  sell,  manage and bill  professional  services.
Capabilities to share sales,  service,  project,  and post-project field service
data across the enterprise enable professional services organizations to operate
with  less  overhead,  improved  cash  flow,  higher  profitability,   and  more
competitive bidding.



                                       7
<PAGE>


Alliance Sales

         Sales  consolidates and streamlines  enterprise  sales processes,  from
quote  generation  through order  processing,  at all points of customer contact
including  field sales,  inside  sales,  contact  center sales and field service
sales.  Lead-to-close sales process  capabilities include integration with Astea
Alliance marketing, customer support and field service applications,  leveraging
all  enterprise  knowledge  pools to increase sales  opportunities,  margins and
close rates. Consolidated views of sales and service data also provide a clearer
understanding of enterprise  operations to drive strategic  business  decisions.
Sales force automation  application  automates business rules and practices such
as enterprise-defined sales methodologies,  sales pipeline management, territory
management, contact and opportunity management, forecasting,  collaborative team
selling and  literature  fulfillment.  The same  functionality  is  delivered to
mobile  resources  via  the  notebook  application  -  with  full  two-way  data
synchronization  with the central  database,  via wired and  wireless  networks.
Other  applications  prompt  customer  support and service  staff to up-sell and
cross-sell during contact with customers.

Astea Alliance Mobile Applications

         Astea provides a family of mobility  applications for use away from the
base office.  These enable  customers to match mobile  access to field sales and
service  needs.   Untethered  wireless  applications  with  synchronized  client
databases  are  provided  for   notebooks   and  Pocket  PC  handheld   devices.
Direct-connect, real-time wireless text messaging is provided for two-way pagers
and capable mobile smart phones. The mobile connectivity  integrates field sales
and service  activity with automated  front-office  processes and eliminates the
time, costs,  procedural delays and errors of paper reporting.  Benefits include
reduced  field  administration  costs;  electronic  data sharing among field and
in-house  personnel;  improved speed,  accuracy  content and compliance of field
reporting;  faster sales order  processing and customer service  invoicing;  and
other operational efficiencies.

Astea Alliance Extended Portals

         The Alliance Customer Portal is a secure,  multi-level entry point that
supports  unattended  e-business  transactions  for  customer  self-service  and
self-sales.  Alliance Customer Portal empowers  customers and lessens dependence
on sales and service staff to conduct  transactions  that can be performed  over
the  Internet.  It  reduces  routine  voice  and fax calls to  customer  contact
centers,  freeing lines for customers whose critical needs do require assistance
from  a  service  representative.  The  pre-defined  Entry-Level,  Standard  and
Enterprise  profiles in connection with a flexible and powerful security utility
ensure tight  control on access to sensitive  data and a range of features  that
can be  enabled.  It also  provides  another  channel to  promote  and sell more
products  and services to an existing  customer  base.  The customer  portal can
delay or eliminate needs for contact center  expansion and associated  increases
in facility, equipment and staffing costs.

         The  Remote  Technician  Portal  provides  secure  connectivity  to the
enterprise system from customer sites, technician's homes or other non-corporate
locations.  The  available  functionality  covers the needs of a mobile  service
resource in the areas of work and  inventory  management  -  equivalent  to that
available with Alliance Notebook for Service.

Astea Alliance Reporting and Analytics

         For proactive service  management,  Alliance  Analytics provides highly
visual, real-time analysis of business performance,  focusing on Key Performance
Indicators - a tool that facilitates businesses understanding customer behavior.
Alliance Analytics enables the viewing of information for the entire


                                       8
<PAGE>


enterprise,  increasing  revenues and  identifying  new business  opportunities.
Utilizing a DataMart built with  Microsoft's SQL Server 2000 Analysis  Services,
it helps  'drill  down' and  `drill  across'  to focus on the true  value of the
captured   customer   information,   with  views  of  actionable  data  at  both
departmental  and  enterprise-wide  levels.  The  graphical   representation  of
individual data is available for Field Service,  with  additional  deliveries of
Analytical  Reports  that cover  Contact  Center,  Depot  Repair,  and Sales and
Marketing planned for 2005. This affords  businesses the opportunity to focus on
critical   information  that  is  fundamental  to  the  ongoing   attainment  of
outstanding customer service management. Alliance Analytics has been designed to
ensure  that users of all kinds  have  immediate  access to crucial  information
whenever  it's  needed.  In the  boardroom,  at  agent  level,  or even for your
customers, this tool effortlessly allows the viewing of performance data such as
performance against service level agreements,  contract  profitability,  product
failure  rate,  repair turn around  times,  customer  satisfaction  and engineer
efficiency.  Reports  allow  businesses  to see how many  orders  have met their
contractual  service  ETA  and  how  many  failed  which  helping  organizations
understand customer satisfaction.  Workloads show the available working hours at
a specific  location  in contrast  with the demand for  workforce  planning  and
optimization.

Astea Alliance Services

Alliance Consulting

         Professional Services:
         ----------------------

         Astea's  typical  professional  services  engagement  does not  include
customizations,  but rather includes planning, prototyping and implementation of
Astea's products within the client's organization.

         During  the  initial   planning  phase  of  the   engagement,   Astea's
professional  services  personnel  work  closely  with  representatives  of  the
customer to prepare a detailed project plan that includes a timetable,  resource
requirements,  milestones,  in-house training programs,  onsite business process
training  and  demonstrations  of  Astea's  product   capabilities   within  the
customer's organization.

         The  next  most  critical  phase  of the  Astea  professional  services
engagement  is  the  prototyping  phase,  in  which  Astea  works  closely  with
representatives  of the customer to configure Astea's software  functionality to
the customer's specific business process requirements.

         The next integral phase in the professional  services engagement is the
implementation phase, in which Astea's professional services personnel work with
the client to develop detailed data mapping,  conversions,  interfaces and other
technical and business  processes  necessary to integrate  Astea's software into
the customer's computing environment.  Ultimately, education plans are developed
and  executed to provide  the  customer  with the  process and system  knowledge
necessary to  effectively  utilize the software  and fully  implement  the Astea
solution. Professional services are charged on an hourly or per diem basis.

         The last phase of the engagement utilizes Astea's professional services
personnel to assist in Go Live planning and the Go Live effort.

         Astea will assist in the  planning  for  installation,  initialization,
data preparation,  operational procedures, schedules and required resources. The
initialization  and creation of the production  database is planned and prepared
for the data history,  open orders and all required data for go live processing.
During the cut-over to the Astea  solution,  Astea  business  resources are best
utilized to assist new users with functionality/processes  while Astea technical
resources support customer IT staff.

         Following the Go Live, Astea professional services engages the customer
in the Assessment Phase. During this effort, the delivered system is assessed to
validate  benefits,  analyze the process to measure key performance  indicators,
document and understand lessons learned. To perform these assessments we collect




                                       9
<PAGE>

and analyze the planned  benefits,  processes  used to capture and report on the
key performance indicators,  and document the lessons learned from all phases of
the implementation. An action plan is developed from the lessons learned and key
performance indicators for use in future phases and/or releases.

         Technical Services:
         -------------------

         Astea's   technical   services  teams  provide   services   related  to
installation,  data verification,  functional design,  technical design,  system
infrastructure  setup or changes,  customizations,  QA  activities,  testing and
go-live support.

         Initially,  software and database installation  resources are available
to prepare the environment for the prototyping phase.

         Data  verification  and  feedback  services can be provided for initial
data  verification  analysis.  These efforts are conducted to determine  present
state of information as far as type, conversions,  data manipulation,  location,
frequency,  method of interface (initial load, ongoing load, data export or data
import,) and data integrity. Findings are documented and shared with the project
team.

         During the  implementation  phase,  Astea's technical  services team is
often engaged to assist with the functional  and/or  technical design as related
to customer desired system personalization,  customization and interfaces, often
referred to as `gaps'.  Gap solutions are assessed and categorized  into system,
studio,  customization  or  interface.  Utilizing  the  services of the customer
project team, Astea professional  services and Astea technical services Business
Requirement  Documents (BRDs) are created for all customizations and interfaces.
Astea  technical  services  will  provide  specifications  and a  quote  for the
customization.  The Customer and Astea agree on the outcome of the customization
and  all  expected  outputs  prior  to  the  actual  development  customization.
Following  acceptance of the BRDs, code will be written as per design. QA of the
code with test data sets will complete these efforts.

         Astea's  technical  services team will also provide testing and go-live
support, as required.

Alliance Customer Support

         Astea's customer support organization provides customers with telephone
and online technical support, as well as product  enhancements,  updates and new
software releases. The company can provide 24X7 "follow-the-sun" support through
its global support network. Local representatives support all regions of Astea's
worldwide operations. Astea personnel or a distributor's personnel familiar with
local business  customs and practices  provide  support in real-time and usually
spoken in native languages.  Typically, customer support fees are established as
a fixed  percentage  of license  fees and are invoiced to customers on an annual
basis.  Astea's  customer  support  representatives  are  located  in the United
States,  Europe,  Israel and Australia.  In addition,  Astea  provides  customer
support 24X7 with its self-service  portal.  The maintenance  offering  provides
customers with support and help desk services, as well as software service packs
and release upgrades.

Alliance Education & Training

         Application Training:
         ---------------------

         Key business  owners  responsible  for the  implementation  of the core
components  will receive  in-depth  training  designed to present the  features,
functionality  and  terminology  of the Astea  solution.  The  objective of this
training  is to  provide  the  audience  with a working  knowledge  of the Astea
solution.  This exposure to the system will enable project communication and add
insight into specific business processes.



                                       10
<PAGE>


         End-user   training   plans  and  documents  are  created   during  the
implementation  phase.  These plans and  documentation  are  utilized to conduct
end-user training sessions prior to go-live.



         Technical Training:
         -------------------

         Software and database  installation/creation  training is provided,  as
required and/or recommended.

         System   Administration   training   provides  the  customer  IT  staff
pre-requisite knowledge to manipulate and manage administrative tasks associated
with the Astea  solution.  Included  within  these  tasks are:  Security,  Batch
Applications, Escalation, Import, etc.

         Many customers are interested in performing  their own  personalization
and  customization  to the system.  Training  sessions are  available to enhance
customer  understanding  of  available  options for  personalization  and how to
perform customizations.

Astea Alliance Tools

Alliance Links

         Alliance  Links  are a family  of  enterprise  application  integration
products that interface  Astea  Alliance to other  enterprise  systems,  such as
back-office  financial and ERP  applications,  remote  equipment  monitoring and
diagnostic  software,  and wireless data transmission  services.  Alliance Links
extend  Astea  Alliance's  return on  investment  for  customers  by making  all
Alliance modules  accessible to external software through web services and open,
well defined,  synchronous and asynchronous  application  programming interfaces
(APIs) that are XML based.

Alliance Studio

         Alliance  Studio is a toolset for easily  adapting  system behavior and
user  interfaces to specific  business  environments  without  expensive  custom
programming.  A customer can control how Astea Alliance  automates  workflows as
well as the  system's  intuitiveness  and "look and  feel" to  employees,  which
thereby maximizes the system's usability,  effectiveness and benefits.  Alliance
Studio reduces system  implementation  time and cost, and  subsequently  enables
customers to update system  performance as their  business needs  change--all of
which contributes to the system's low cost of ownership.

Customers

         The Company  estimates that it has sold  approximately  600 licenses to
customers ranging from small, rapidly growing companies to large,  multinational
corporations with geographically  dispersed operations and remote offices.  More
than 225  licenses  have been  sold for Astea  Alliance  and the  remainder  for
DISPATCH-1. The broad applicability of the Company's products is demonstrated by
the wide range of companies  across many markets and industries  that use one or
more of Astea's products, including customers in information technology, medical
devices and diagnostic systems, industrial controls and instrumentation,  retail
systems,   office   automation,    imaging   systems,   facilities   management,
telecommunications,  and other  industries  with  equipment  sales  and  service
requirements.  In 2004 there was one major  customer  that  accounted for 15% of
total revenues. In 2003 and 2002, no single customer accounted for more than 10%
of the Company's revenues.

Sales and Marketing



                                       11
<PAGE>


         The Company markets its products through a worldwide  network of direct
and indirect  sales and  services  offices with  corporate  headquarters  in the
United States and regional  headquarters in the United Kingdom  (Europe,  Middle
East and Africa  Operations)  and  Australia  (Asia Pacific  Operations).  Sales
partners include  distributors  (value-added  resellers,  system integrators and
sales  agents)  and OEM  partners.  The  Company  actively  seeks to expand  its
reseller network and establish an international  indirect  distribution  channel
targeted at the  mid-market  tier.  See "Certain  Factors that May Affect Future
Results-- Need to Expand Indirect Sales."

         Astea's direct sales force employs a consultative  approach to selling,
working  closely with  prospective  clients to understand and define their needs
and determine how such needs can be addressed by the Company's  products.  These
clients  typically  represent  the mid- to high-end  of the  market.  A prospect
development  organization  comprised of telemarketing  representatives,  who are
engaged in outbound  telemarketing  and inbound inquiry response to a variety of
marketing vehicles,  develops and qualifies sales leads prior to referral to the
direct sales staff.  Additional  prospects are identified and qualified  through
the  networking  of direct sales staff and the  Company's  management as part of
daily business activities.

         The modular  structure  of Astea's  software  and its  ongoing  product
development  efforts  provide  opportunities  for  incremental  sales of product
modules and consulting services to existing accounts.  See "Certain Factors that
May Affect Future Results--  Continued  Dependence on Large Contracts May Result
in Lengthy Sales and  Implementation  Cycles and Impact Revenue  Recognition and
Cash Flow."

         Astea's  corporate  marketing  department  is  responsible  for product
marketing, lead generation and marketing communications, including the Company's
corporate website, dialogue with high tech industry analysts, trade conferences,
advertising, e-marketing, on-line and traditional seminars, direct mail, product
collateral and public  relations.  Based on feedback from  customers,  analysts,
business partners and market data, the marketing  department  provides input and
direction   for  the  Company's   ongoing   product   development   efforts  and
opportunities  for  professional  services.  Leads developed from the variety of
marketing  communications  vehicles  are  routed  through  the  Company's  Astea
Alliance sales and marketing automation system. The Company also participates in
an  annual  conference  for  users of  Astea's  DISPATCH-1  and  Astea  Alliance
products.  Conference  participants  attend  training  sessions,  workshops  and
presentations, and interact with other Astea product users, Astea management and
staff,  and technology  partners,  providing  important input for future product
direction.

         Astea's international sales accounted for 39% of the Company's revenues
in 2004,  34% of the  Company's  revenues in 2003 and 31% in 2002.  See "Certain
Factors that May Affect  Future  Results--Risks  Associated  with  International
Sales."

Product Development

         Astea's  product  development  strategy  is to  provide  products  that
perform  with  exceptional  depth and breadth of  functionality  and are easy to
implement, use and maintain.  Products are designed to be flexible,  modular and
scalable,  so that they can be implemented  incrementally in phases and expanded
to satisfy the evolving  information  requirements  of Astea's clients and their
customers.  Each  product  is also  designed  to  utilize  n-tier,  distributed,
thin-client  and Web  environments  that can be  powered  by  multiple  hardware
platforms and operating  systems.  To accomplish  these goals,  the Company uses
widely  accepted,  commercially  available  application  development  tools from
Microsoft  Corporation for Astea Alliance and Progress Software  Corporation for
DISPATCH-1.  These  software  tools  provide the  Company's  customers  with the
flexibility to deploy Astea's  products across a variety of hardware  platforms,
operating systems and relational database  management systems.  The latest Astea
Alliance  products  are  currently  being  engineered  for existing and emerging
Microsoft  technologies such as COM+, Microsoft ComPlus Transactions,  Microsoft
Message  Queuing (MSMQ),  Internet  Information  Server (IIS) and  Microsoft.NET
Enterprise  Servers  including  Windows  2000 and 2003  Servers,  SQL Server and
BizTalk Server.



                                       12
<PAGE>

         In  addition  to  product  development  that is  conducted  at  Company
facilities in the United States and Israel,  Astea  participates in partnerships
with  complementary  technology  companies  to  reduce  time-to-market  with new
product   capabilities  and  continually   increase  its  value  proposition  to
customers.

         The  Company's  total  expenses for product  development  for the years
ended  December  31,  2004,  2003  and  2002,  were  $1,431,00,  $2,490,000  and
$1,781,000 respectively; and these expenses amounted to 7%, 19% and 11% of total
revenues  for 2004,  2003,  and 2002,  respectively.  In  addition,  the Company
incurred  capitalized  software  development  costs of $1,380,000,  $480,000 and
$807,000 in 2004, 2003 and 2002, respectively. During 2004 the Company wrote off
$1,155,000 of fully  amortized  capitalized  software for versions that had been
deemed no longer useful or  functional.  Additionally,  the Company  anticipates
that  it  will  continue  its  consistent  and  substantial   resources  on  its
development  effort towards the upgrade of the Astea Alliance suite of products.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and  "Certain  Factors  that May Affect  Future  Results--Need  for
Development of New Products."

Manufacturing

         The Company's software products are distributed on CD ROMs and via FTP.
Included  with the  software  products  are  security  keys (a  software  piracy
protection) and documentation  available on CD ROM and hard copy.  Historically,
the Company has purchased media and  duplicating  and printing  services for its
product packaging from outside vendors.

Competition

         The service  management  software  market is intensely  competitive and
subject to rapid  change.  To maintain or increase its position in the industry,
the Company  will need to  continually  enhance its current  product  offerings,
introduce  new products and  features  and  maintain its  professional  services
capabilities.  The  Company  currently  competes  on the  basis of the depth and
breadth  of  its  integrated  product  features  and  functions,  including  the
adaptability and scalability of its products to specific customer  environments;
the  ability to deploy  complex  systems  locally,  regionally,  nationally  and
internationally;  product  quality;  ease-of-use;  reliability and  performance;
breadth of professional  services;  integration of Astea's  offerings with other
enterprise  applications;  price;  and the  availability of Astea's  products on
popular operating  systems,  relational  databases,  Internet and communications
platforms.

         Competitors  vary in  size,  scope  and  breadth  of the  products  and
services offered. The Company encounters  competition generally from a number of
sources,  including other software companies,  third-party professional services
organizations that develop custom software,  and information systems departments
of potential customers developing  proprietary,  custom software. In the service
management marketplace, the Company competes against publicly held companies and
numerous smaller,  privately held companies.  The Company's  competitors include
Siebel Systems, Inc. ("Siebel"),  PeopleSoft Inc.,  ("PeopleSoft"),  acquired by
Oracle,  SAP AG ("SAP"),  Oracle Corporation  ("Oracle"),  Great Plains Software
which was acquired by Microsoft  ("Microsoft  Great Plains"),  Clarify which was
acquired by Amdocs Limited ("Amdocs Clarify"),  Viryanet Ltd. ("Viryanet") and a
number of smaller privately held companies. See "Certain Factors that May Affect
Future  Results--Competition  in the Customer  Relationship  Management Software
Market is Intense."

Licenses and Intellectual Property

         Astea considers its software proprietary and licenses its products to
its customers under written license agreements. The Company also employs an
encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the framework
source code, the framework source code for the


                                       13
<PAGE>


Company's products is typically neither licensed nor provided to customers.  The
Company  does,  however,  license  source  code from time to time and  maintains
certain  third-party  source  code  escrow  arrangements.  See  "Customers"  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

         The Company  seeks to protect its  products  through a  combination  of
copyright,  trademark, trade secret and fair business practice laws. The Company
also requires  employees,  consultants  and third parties to sign  nondisclosure
agreements.  Despite  these  precautions,  it may be possible  for  unauthorized
parties to copy certain  portions of the Company's  products or reverse engineer
or obtain and use  information  that the  Company  regards as  proprietary.  The
Company presently has no patents or patent  applications  pending.  See "Certain
Factors that May Affect  Future  Results--Risks  of  Dependence  on  Proprietary
Technology."

         Because the software  development  industry is  characterized  by rapid
technological  change, Astea believes that factors such as the technological and
creative skills of its personnel,  new product  developments,  frequent  product
enhancements,   and  reliable   product   maintenance   are  more  important  to
establishing and maintaining a technology leadership position than current legal
protections.

 Employees

         As of December 31, 2004, the Company, including its subsidiaries, had a
total of 139 full time employees  worldwide,  57 in the United States, 21 in the
United Kingdom,  5 in the Netherlands,  44 in Israel, 11 in Australia,  and 1 in
Japan. The Company's future performance  depends,  in significant part, upon the
continued  service  of its  key  technical  and  management  personnel  and  its
continuing  ability  to  attract  and  retain  highly  qualified  and  motivated
personnel in all areas of its operations.  See "Certain  Factors that May Affect
Future Results--Dependence on Key Personnel; Competition for Employees." None of
the Company's  employees is  represented  by a labor union.  The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.

Corporate History

         The Company was  incorporated  in  Pennsylvania  in 1979 under the name
Applied System Technologies, Inc. In 1992, the Company changed its name to Astea
International   Inc.  Until  1986,  the  Company   operated   principally  as  a
software-consulting firm, providing professional software consulting services on
a fee for service and on a project basis.  In 1986,  the Company  introduced its
DISPATCH-1  product.  In November 1991, the Company's sole stockholder  acquired
the outstanding stock of The DATA Group Corporation  ("Data Group"),  a provider
of  field   service   software  and  related   professional   services  for  the
mainframe-computing  environment.  Data  Group was  merged  into the  Company in
January 1994. In February  1995, the Company and its sole  stockholder  acquired
the outstanding  stock of Astea Service & Distribution  Systems BV ("Astea BV"),
the Company's  distributor of DISPATCH-1 and related services in Europe.  In May
1995,  the  Company  reincorporated  in  Delaware.  In July  1995,  the  Company
completed its initial  public  offering of Common Stock.  In February  1996, the
Company merged with Bendata,  Inc. In June 1996, the Company acquired Abalon AB.
In September 1998  (effective July 1, 1998),  the Company sold Bendata,  Inc. In
December  1998,  the  Company  sold  Abalon AB. In  December  1997,  the Company
introduced  ServiceAlliance  and in  October  1999,  SalesAlliance,  which  were
subsequently  re-engineered  into  components  of the  AllianceEnterprise  suite
introduced in 2001.  Through 2001 and into 2002, the Company rebuilt its product
functionality  for Web-based  applications  and in August 2003 introduced  Astea
Alliance  6.  The  Company   released  a  new  system   architecture   based  on
Microsoft.NET during the third quarter of 2004.

Item 2.  Properties.

         The  Company's  headquarters  are  located  in  a  leased  facility  of
approximately  22,000  square feet in Horsham,  Pennsylvania.  The Company  also
leases  facilities for  operational  activities in Culemborg,  Netherlands,  and
Tefen,  Israel,  and for sales and customer  support  activities  in  Cranfield,
England  and  St.



                                       14
<PAGE>


Leonards,   Australia.   The  Company  believes  that  suitable   additional  or
alternative  office  space  will be  available  in the  future  on  commercially
reasonable terms as needed.




Item 3.  Legal Proceedings.

         From time to time,  the Company is involved in  litigation  relating to
claims  arising  out of its  operations  in the normal  course of  business.  In
addition,  since the Company enters into a number of large  contracts  requiring
the  complex  installation  of  software  products  and  the  implementation  of
considerable  professional  services over several quarterly periods, the Company
is from time to time engaged in  discussions  and  deliberations  with customers
regarding the adequacy and timeliness of the  installation  or service,  product
functionality  and  features  desired by the customer  and  additional  work and
service  requirement  that  were  not  anticipated  at the  commencement  of the
project.  The Company  from time to time will  reserve  funds for  contingencies
under  contract  deliberations.  The  Company  is  currently  not a party to any
material  legal  proceedings,  the  adverse  outcome of which,  in  management's
opinion,  would  have a  material  adverse  effect  on the  Company's  business,
financial condition 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  the  fiscal  year  covered  by  this  report,  through  the
solicitation of proxies or otherwise.



                                       15
<PAGE>



                                     PART II

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

         The  Company's  Common  Stock is traded on the Nasdaq  National  Market
under the symbol "ATEA." The following table sets forth the high and low closing
sale prices for the Common Stock as reported by the Nasdaq  National  Market for
the past two fiscal years:

        2004                                         High           Low
        ---------------------------------------------------------------
        First quarter                               $4.31         $2.41
        Second quarter                              13.75          3.15
        Third quarter                                9.62          5.13
        Fourth quarter                               8.74          6.31

        2003                                         High           Low
        ---------------------------------------------------------------
        First quarter                               $3.10         $2.55
        Second quarter                               4.35          2.65
        Third quarter                                4.40          2.81
        Fourth quarter                               3.50          2.10

         In September 2003, the Company  affected a 1:5 reverse stock split. All
prices  reported for periods prior to the reverse stock split have been adjusted
for the reverse stock split.

         As of March 15, 2005, there were  approximately 35 holders of record of
the  Company's  Common  Stock.   (Because   "holders  of  record"  include  only
stockholders  listed with the Company's transfer agent and exclude  stockholders
listed  separately  with  financial  nominees,  this number does not  accurately
reflect the actual number of beneficial owners of the Company's Common Stock, of
which the Company  estimates  there were more than 2,700 on such date.) On March
15,  2005,  the last  reported  sale  price of the  Common  Stock on the  Nasdaq
SmallCap Market was $6.91 per share.

         The  Board  of  Directors  from  time to  time  reviews  the  Company's
forecasted  operations  and  financial  condition to determine  whether and when
payment of a dividend or dividends is appropriate. On June 30, 2000, the Company
paid its only dividend since its initial public offering. The dividend was $2.05
per share.


                                       16
<PAGE>

<TABLE>
<CAPTION>

<S>                                                             <C>         <C>         <C>         <C>        <C>

Item 6.  Selected Financial Data.

Years ended December 31,                                          2004        2003        2002        2001        2000
--------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (3)
Revenues:
     Software license fees                                      $  7,992    $  1,935    $  6,504    $  6,384   $   6,554
     Services and maintenance                                     11,325      10,906      10,294      10,973      13,763
                                                                ----------------------------------------------------------

         Total revenues                                           19,317      12,841      16,798      17,357      20,317
                                                                ----------------------------------------------------------

Cost and Expenses:
     Cost of software license fees                                 1,838         898       1,262       1,224       1,199
     Cost of services and maintenance                              6,356       6,963       6,345       6,808      10,928
     Product development                                           1,431       2,490       1,781       2,590       2,744
     Sales and marketing                                           5,565       5,875       6,218       5,396       6,857
     General and administrative (1)                                2,051       2,198       2,426       2,837       4,066
     Restructuring charge (2)                                       --          --          --           333       1,101
                                                                ----------------------------------------------------------

        Total costs and expenses                                  17,241      18,424      18,032      19,188      26,895
                                                                ----------------------------------------------------------

Income(loss) from continuing operations
      before interest and taxes                                    2,076      (5,583)     (1,234)     (1,831)     (6,578)
Net interest income                                                   58          54         106         309       1,496
                                                                ----------------------------------------------------------
Income(loss) from continuing
      operations before income taxes                               2,134      (5,529)     (1,128)     (1,522)

Income tax expense                                                  --          --           200        --            --
                                                                ----------------------------------------------------------
Profit/(Loss) from continuing operations                           2,134      (5,529)     (1,328)     (1,522)     (5,082)
Gain on sale of discontinued operations,
       Net of taxes (4)                                             --          --          --          --           293
                                                                ----------------------------------------------------------

Net Profit/(Loss)                                               $  2,134    $ (5,529)   $ (1,328)   $ (1,522)  $  (4,789)
                                                                ----------------------------------------------------------
Basic income (loss) per share:
      Continuing operations                                     $    .72    $  (1.89)   $  (0.09)  $   (0.10)  $  (0.35)
      Gain on sale of discontinued operations                       --          --          --          --          0.02
                                                                ----------------------------------------------------------

                                                                $    .72    $  (1.89)   $  (0.09)  $   (0.10)  $  (0.33)
                                                                ==========================================================

Diluted income (loss) per share                                 $    .71    $  (1.89)   $  (0.09)  $   (0.10)  $  (0.33)
                                                                ==========================================================
Shares used in computing basic income (loss)
 per share                                                         2,960       2,922       2,921       2,926       2,914
Shares used in computing diluted  income (loss)
per share                                                          3,001       2,922       2,921       2,926       2,914
Balance Sheet Data:
Working capital                                                 $  3,969    $  1,820    $  6,449   $   7,313   $   9,668
Total assets                                                      13,754      10,096      16,443      18,015      21,653
Long-term debt, less current portion                                --          --          --          --            23
Accumulated deficit                                              (15,967)    (18,100)    (12,568)    (11,239)     (9,716)
Total stockholders' equity                                         6,071       3,734       8,998      10,105      11,955

</TABLE>



(1)  Included  in the  fourth  quarter  of 2001  is a  restructuring  charge  of
     $409,000,  which includes cost of consolidating  office space and severance
     of certain  personnel.  The second quarter of 2000 contains a restructuring
     charge of $1,101,000,  which includes  severance  costs, an office closing,
     and other actions aimed at reducing operating  expenses.  See Note 4 of the
     Notes to the Consolidated Financial Statements.

(2)  Certain  reclassifications  have  been  made  in  prior  years  due  to the
     implementation  of EITF 01-14 (See Note 2 of the Notes to the  Consolidated
     Financial  Statements)  and the 1:5 reverse  stock split which  occurred in
     September  2003  (See  Note 3 of the  Notes to the  Consolidated  Financial
     Statements).

(3)  During 2000, the Company reversed  $149,000 of excess reserves and received
     a distribution of unused escrow balance  totaling  $144,000  related to the
     1998 sales of two of its subsidiaries, Bendata Inc. and Abalon AB.


                                       17
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

Overview

         This  document   contains   various   forward-looking   statements  and
information  that are based on management's  beliefs as well as assumptions made
by and  information  currently  available to  management.  Such  statements  are
subject to various risks and uncertainties,  which could cause actual results to
vary materially from those contained in such forward, looking statements. Should
one or more of these risks or uncertainties  materialize,  or should  underlying
assumptions  prove  incorrect,  actual  results may vary  materially  from those
anticipated, estimated, expected or projected. Certain of these as well as other
risks and  uncertainties  are  described in more detail in this Annual Report on
Form 10-K.

         The Company develops,  markets and supports service management software
solutions,  which are licensed to companies that sell and service equipment,  or
sell  and  deliver  professional   services.  The  Company's  principal  product
offering,  the Astea Alliance suite,  integrates and automates sales and service
business  processes  and  thereby  increases  competitive  advantages,  top-line
revenue  growth and  profitability  through  better  management of  information,
people,  assets and cash flows. Astea Alliance offers substantially  broader and
far superior  capabilities over the Company's  predecessor product,  DISPATCH-1,
which was  designed  for only field  service  and  customer  support  management
applications.

         The Company's  products and services are  primarily  used in industries
such  as  information  technology,   medical  devices  and  diagnostic  systems,
industrial  controls and  instrumentation,  retail systems,  office  automation,
imaging systems, facilities management and telecommunications. An eclectic group
of other industries, all with equipment sales and service requirements, are also
represented  in Astea's  customer  base.  The Company  maintains  offices in the
United States, United Kingdom, Australia, Israel and The Netherlands.

         The Company generates revenues from two sources:  software license fees
for  its  software  products,   and  services  and  maintenance   revenues  from
professional services, which includes consulting,  implementation,  training and
maintenance related to those products.

         Software license fees accounted for 41% of the Company's total revenues
in 2004, which was mostly comprised of sales of Astea Alliance. Software license
fee  revenues  also  include  some fees  from the  sublicensing  of  third-party
software,  primarily  relational database licenses.  Typically,  customers pay a
license fee for the software based on the number of licensed users. Depending on
the contract  terms and  conditions,  software  license fees are  recognized  as
revenue upon delivery of the product if no significant vendor obligations remain
and collection of the resulting  receivable is deemed  probable.  If significant
vendor obligations exist at the time of delivery or if the product is subject to
uncertain  customer  acceptance,   revenue  is  deferred  until  no  significant
obligations remain or acceptance has occurred.

         The remaining component of the Company's revenues consists  principally
of fees derived from professional  services  associated with the  implementation
and  deployment  of the Company's  software  products and  maintenance  fees for
ongoing customer support, primarily external customer technical support services
and product enhancements. Professional services (including training) are charged
on an hourly or daily basis and billed on a regular  basis  pursuant to customer
work orders.  Training services may also be charged on a per-attendee basis with
a minimum daily charge.  Out-of-pocket  expenses  incurred by company  personnel
performing  professional services are typically reimbursed by the customer.  The
Company  recognizes  revenue  from  professional  services as the  services  are
performed.  Maintenance  fees are typically paid to the Company under agreements
entered into at the time of the initial software license.  Maintenance  revenue,
which  is  invoiced  annually,  is  recognized  ratably  over  the  term  of the
agreement, which is usually twelve months.



                                       18
<PAGE>



Critical Accounting Policies and Estimates

         The Company's significant  accounting policies are more fully described
in its Summary of Accounting  Policies,  Note 2, to the  Company's  consolidated
financial statements. The preparation of financial statements in conformity with
accounting  principles  generally  accepted  within the United  States  requires
management  to make  estimates and  assumptions  in certain  circumstances  that
affect amounts  reported in the  accompanying  financial  statements and related
notes.  In preparing these  financial  statements,  management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially  different amounts would be reported related to
the  accounting  policies  described  below;   however,   application  of  these
accounting   policies  involves  the  exercise  of  judgments  and  the  use  of
assumptions as to future  uncertainties  and, as a result,  actual results could
differ from these estimates.

Revenue Recognition

         Revenues are  recognized  in  accordance  with  Statement of Operations
Procedures (SOP) 97-2, which provides  guidelines on the recognition of software
license  fee  revenue.  Principally,  license  revenue  may be  recognized  when
persuasive evidence of an arrangement exists, delivery has occurred, the license
fee is fixed and  determinable  and the  collection of the fee is probable.  The
Company  allocates a portion of its software  revenue to  post-contract  support
activities  or to other  services or products  provided to the customer  free of
charge or at  non-standard  discounts  when  provided  in  conjunction  with the
licensing arrangement.  Amounts allocated are based upon standard prices charged
for those  services or products.  Software  license fees for  resellers or other
members of the indirect  sales  channel are based on a fixed  percentage  of the
Company's standard prices.  The Company recognizes  software license revenue for
such contracts  based upon the terms and conditions  provided by the reseller to
its customer.

         Revenue from post-contract  support is recognized ratably over the term
of the  contract on a  straight-line  basis.  Consulting  and  training  service
revenue is generally recognized at the time the service is performed.  Fees from
licenses sold together with  consulting  services are generally  recognized upon
shipment, provided that the contract has been executed, delivery of the software
has occurred,  fees are fixed and determinable and collection is probable.  Fees
from the service  component in these types of contracts  are  recognized  as the
services are performed.  In instances where the aforementioned criteria have not
been met,  both the license and the  consulting  fees are  recognized  under the
percentage of completion method of contract accounting.

         In limited  instances,  the Company will enter into contracts for which
revenue  is  recognized  under  contract  accounting.  The  accounting  for such
arrangements requires judgment,  which impacts the timing of revenue recognition
and provision for estimated losses, if applicable.

Accounts Receivable

         The Company  evaluates  the  adequacy  of its  allowance  for  doubtful
accounts at the end of each quarter. In performing this evaluation,  the Company
analyzes the payment  history of its significant  past due accounts,  subsequent
cash  collections on these accounts and comparative  accounts  receivable  aging
statistics.  Based on this information,  along with consideration of the general
strength  of the  economy,  the  Company  develops  what  it  considers  to be a
reasonable   estimate  of  the   uncollectible   amounts  included  in  accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.



                                       19
<PAGE>



Capitalized Software Research and Development Costs

         The Company  accounts for its internal  software  development  costs in
accordance  with Statement of Financial  Accounting  Standards  ("SFAS") No. 86,
"Accounting for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed." The Company capitalizes  software development costs subsequent to the
establishment of technological  feasibility  through the product's  availability
for general release.  Costs incurred prior to the establishment of technological
feasibility  are  charged  to product  development  expense.  Development  costs
associated with product  enhancements that extend the original product's life or
significantly improve the original product's  marketability are also capitalized
once technological feasibility has been established.  Software development costs
are  amortized  on a  product-by-product  basis over the greater of the ratio of
current revenues to total anticipated  revenues or on a straight-line basis over
the estimated useful lives of the products  (usually two years),  beginning with
the initial release to customers.  During the first quarter of 2004, the Company
revised the  estimated  life for its  capitalized  software  products from three
years to two  years  based  on  current  sales  trends  and the rate of  product
release. The Company continually  evaluates whether events or circumstances have
occurred  that  indicate  that  the  remaining  useful  life of the  capitalized
software  development  costs should be revised or that the remaining  balance of
such assets may not be recoverable.  The Company evaluates the recoverability of
capitalized  software based on the estimated future revenues of each product. As
of December 31, 2004,  management  believes  that no revisions to the  remaining
useful  lives or  write-downs  of  capitalized  software  development  costs are
required.

Recent Accounting Pronouncements

         In  December  2004,  the FASB  issued  FAS No.  123( R) ,  "Share-Based
Payment," an amendment of FASB  Statements  123 and 95. FAS No, 123( R) replaced
FAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  and  supercedes APB
Opinion No. 25,  "Accounting  for Stock  Issued to  Employees."  This  statement
requires  companies  to  recognize  the fair  value of stock  options  and other
stock-based  compensation  to  employees  prospectively  beginning  with  fiscal
periods  beginning  after June 15,  2005.  This means that the  Company  will be
required to implement FAS No, 123( R) no later than the quarter  beginning  July
1, 2005. The Company currently measures  stock-based  compensation in accordance
with APB Opinion No. 25, as discussed  above. The Company  anticipates  adopting
the modified  prospective  method of FAS No. 123( R) on July 1, 2005. The impact
on the company's financial condition or results of operations will depend on the
number and terms of stock options  outstanding on the date of change, as well as
future options that may be granted.

         In January  2003,  the FASB  issued  Interpretation  No. 46 ("FIN 46"),
"Consolidation  of  Variable  Interest  Entities"  was  issued.  FIN 46 provides
guidance on consolidating  variable interest entities and applies immediately to
variable  interests  created after  January 31, 2003. In December 31, 2003,  the
FASB  revised  and  superceded  FIN 46 with the  issuance of FIN 46R in order to
address  certain  implementation  issues that were  adopted the first  reporting
period  ending  after  March 15,  2004.  The  interpretation  requires  variable
interest  entities to be  consolidated  if the equity  investment at risk is not
sufficient to permit an entity to finance its  activities  without  support from
other parties or the equity  investors lack certain  specified  characteristics.
The  adoption  of FIN 46 did  not  have an  impact  on the  Company's  financial
position or result of operation.

         In May 2003, the FASB issued Statement no. 150, "Accounting for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities  and Equity"
("SFAS 150").  SFAS 150 establishes  standards for how an issuer  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  It requires that an issuer classify a financial  instrument that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those  instruments were previously  classified as equity.  SFAS 150 is



                                       20
<PAGE>


effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning  after June 15, 2003.  The adoption of SFAS 150 did not have an impact
on the Company's financial position or results of operation.



Results of Continuing Operations

The following table sets forth, for the periods  indicated,  selected  financial
data and the  percentages of the Company's  total  revenues  represented by each
line item presented for the periods presented:

Years ended December 31,                       2004         2003        2002
--------------------------------------------------------------------------------
Revenues:
    Software license fees                      41.4   %      15.1  %     38.7 %
    Services and maintenance                   58.6          84.9        61.3
                                         ---------------------------------------
        Total revenues                        100.0   %     100.0  %    100.0 %
                                         ---------------------------------------
Costs and expenses:
   Cost of software license fees                9.6   %       6.0  %      7.5 %
   Cost of services and maintenance            32.9          55.2        37.8
   Product development                          7.6          19.4        10.6
   Sales and marketing                         28.8          45.8        37.0
   General and administrative                  10.6          17.1        14.4
                                         ---------------------------------------
        Total costs and expenses               89.5   %     143.5  %    107.3 %
                                         ---------------------------------------

Comparison of Years Ended December 31, 2004 and 2003

         Revenues.  Total revenues increased $6,476,000,  or 50%, to $19,317,000
for the year  ended  December  31,  2004  from  $12,841,000  for the year  ended
December 31, 2003. Software license revenues increased by 313% in 2004, compared
to 2003.  Services and maintenance  fees for 2004 amounted to $11,325,000,  a 4%
increase from 2003.

         Software  license  fee  revenues   increased   $6,057,000  or  313%  to
$7,992,000 in 2004 from $1,935,000 in 2003.  Astea Alliance license fee revenues
increased to  $7,187,000  in 2004 from  $1,935,000 in 2003, an increase of 271%.
The Company also sold  $805,000 of  additional  DISPATCH-1  licenses to existing
customers.  There  were 6  different  license  sales  of  DISPATCH-1  in 2004 as
compared to no license sales in 2003. The overall increase in license revenue is
primarily the result of greater acceptance of our vision,  which resulted in the
release of version  6.7.  This new version is based  completely  on .Net,  a new
Microsoft  operating  system  platform.  In  addition,   there  was  an  overall
improvement in our economy over the past year.

         Total services and  maintenance  revenues  increased  $419,000 or 4% to
$11,325,000  in 2004 from  $10,906,000  in 2003.  The  increase  in service  and
maintenance  revenues is  attributable  to an increase  of  $1,131,000  in Astea
Alliance  revenues  partially  offset by a decrease  in  DISPATCH-1  revenues of
$712,000.   Astea  Alliance  service  and  maintenance   revenues  increased  to
$9,375,000 in 2004 from  $8,244,000  in 2003 due to the growing  Astea  Alliance
customer base.  DISPATCH-1  service and  maintenance  revenues  decreased 27% to
$1,949,000  in 2004 from  $2,661,000  in 2003 due to an ongoing  decrease in the
number of customers under service and maintenance contracts.  As a result of the
decreasing demand for DISPATCH-1 and the lack of any related product development
by the Company,  the decrease in service and maintenance  revenue is expected to
continue in 2005 for DISPATCH-1.

         In 2004  there  was one  major  customer,  Carrier  Corporation,  which
accounted for 15% of total revenues compared to 2003 when no customer  accounted
for more than 10% of the Company's revenues.



                                       21
<PAGE>


         Costs of Revenues.  Costs of software  license fee  revenues  increased
140%, or  $1,072,000,  to $1,838,000 in 2004 from $766,000 in 2003. The increase
in cost of sales results from increased amortization of capitalized software and
license  costs  of third  party  software  embedded  in the  Company's  products
resulting  from the higher  volume of  license  sales.  Included  in the cost of
software license fees is the amortization of capitalized  software.  Capitalized
software  amortization  increased to  $1,088,000  in 2004 from $599,000 in 2003.
During the first quarter of 2004, the Company revised the estimated  useful life
of its software products from three years to two years. The shorter amortization
period increased  amortization for the year by $489,000 or 81% compared to 2003.
In addition,  the Company capitalized $1,338,000 of development costs due to its
concentrated  effort to convert  its newest  version of service  Alliance to the
..Net platform. Accordingly, the increase in amortization of capitalized software
is due to  both  the  decrease  in  amortization  period  and  the  increase  in
development costs  capitalized.  The gross margin percentage on software license
sales increased to 77% in 2004 from 60% in 2003.

         The costs of  services  and  maintenance  revenues  decreased  10%,  or
$739,000, to $6,356,000 in 2004 from $7,095,000 in 2003. The decrease in cost of
services and  maintenance  is primarily  attributed  to a reduction in headcount
from last year to this year. The service and maintenance gross margin percentage
increased  to 44% in 2004 from 35% in 2003.  The  increased  margin is primarily
attributable  to the decrease in costs and improved  utilization of professional
services personnel, which contributed to increased revenues.

         Product  Development.  Product  development  expenses decreased 41%, or
$1,059,000,  to $1,431,000 in 2004 from $2,490,000 in 2003. Product  development
as a percentage  of total  revenue  decreased  to 7% in 2004  compared to 19% in
2003.  This  decline  is due to both the  increase  in  revenues  as well as the
increase in software costs capitalized  compared to last year. Gross development
expense  before the  capitalization  of software  costs were  $2,811,000 in 2004
compared to  $2,970,000  in 2003.  Additionally  in 2004,  the Company wrote off
$1,155,000 of fully amortized  software for old versions that had been deemed no
longer  useful or  functional.  The Company  capitalizes  software  costs out of
product development. Capitalized software totaled $1,380,000 in 2004 compared to
$480,000 in 2003. The increase in software capitalization is a result of product
development  initiatives  to  convert  the  Company's  product  to  .NET,  a new
Microsoft  operating  system  platform  through  the  release of Astea  Alliance
version  6.7 during  the third  quarter of 2004,  as well as  development  costs
associated with a new version anticipated to be released in the first quarter of
2005.

         Sales and  Marketing.  Sales and  marketing  expenses  decreased 5%, or
$310,000,  to  $5,565,000  in 2004 from  $5,875,000  in 2003.  The  decrease  is
primarily the result of a reduction in marketing costs due to the  consolidation
of  worldwide  marketing  programs  into the United  States  from the  Company's
foreign operations, reduction of redundant sales personnel throughout the world,
partially  offset by higher  sales  commissions  on increased  software  license
revenues.  The  Company  continues  to focus on  improving  its market  presence
through  intensified  marketing  efforts to increase  awareness of the Company's
products.  This  occurred  through the use of Webinars  focused in the  vertical
industries in which the Company operates, attendance at selected trade shows and
increased investment in lead generation for its sales force. Sales and marketing
expense as a percentage of total  revenues  decreased to 28% in 2004 from 46% in
2003.

         General and Administrative. General and administrative expenses consist
of  salaries,   benefits   and  related   costs  for  the   Company's   finance,
administrative  and  executive  management  personnel,  legal costs,  accounting
costs,  bad debt  write-offs  and various  costs  associated  with the Company's
status as a public company.  The Company's general and  administrative  expenses
were $2,051,000 in 2004 and $2,198,000 in 2003 representing a 7% decrease.  This
decrease  is  primarily  due  to a  decrease  in  bad  debt  expense,  which  is
attributable  to improvement  in customer  payment  performance  and recovery of
legal fees in connection  with legal action in Europe.  As a percentage of total
revenues,  general and administrative expenses decreased to 11% in 2004 compared
to 17% in 2003. The decrease in expenses relative to revenues  primarily results
from the increase in total revenues generated during 2004.



                                       22
<PAGE>


         Net Interest Income.  Net interest income increased  $4,000, to $58,000
in 2004 from $54,000 in 2003. This increase was primarily attributable to slight
growth in both interest rates and investable funds.

         Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and  liabilities be recognized  using enacted tax rates for the effect of
temporary  differences  between  the book and tax basis of  recorded  assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation  allowance  if it is more likely than not that some  portion or all of
the deferred tax asset will not be realized.

         The realizability of the deferred tax assets is evaluated  quarterly by
assessing the valuation  allowance and by adjusting the amount of the allowance,
if necessary.  The factors used to assess the likelihood of realization  are the
forecast of future  taxable  income and available tax planning  strategies  that
could be  implemented  to realize the net  deferred  tax asset.  During the year
ended  December  31,  2004,  the  Company  recorded no tax expense or income tax
benefit met and  maintained to increase its valuation  allowance  related to its
net  deferred tax asset based on an  assessment  of what portion of the asset is
more likely  than not to be  realized,  in  accordance  with FSAS No.  109.  The
Company will review this provision  periodically in the future as  circumstances
change.

         International   Operations.    Total   revenue   from   the   Company's
international  operations increased by $3,254,000,  or 75% to $7,565,000 in 2004
from $4,311,000 in 2003. The increase in revenue from  international  operations
was primarily  attributable to the increases in license  revenues from the Astea
Alliance suite. Most of the increase  occurred in Europe,  where the Company has
focused   attention  on  expanding   awareness   of  the   Company's   products.
International  revenues from professional  services and maintenance increased 9%
to $3,857,000 in 2004 from $3,527,000 in 2003. Overall, international operations
resulted in net profit of $1,221,000 for 2004 compared to net loss of $1,772,000
in 2003.  Operating  costs  increased  slightly  due to higher  cost of sales on
licenses and higher sales  commissions,  both resulting from the increased level
of revenues in 2004 compared to 2003. Accordingly, the increase in international
net income of $2,993,000 is approximately the same as the year-to-year  increase
in revenue.  Additionally,  the weakening of the U.S. dollar against the foreign
currencies  in Europe,  the  Pacific Rim and Israel,  contributed  to  increased
revenues upon translation into U.S. currency.

Comparison of Years Ended December 31, 2003 and 2002

         Revenues.  Total revenues decreased $3,957,000,  or 24%, to $12,841,000
for the year  ended  December  31,  2003  from  $16,798,000  for the year  ended
December 31, 2002.  Software license revenues decreased by 70% in 2003, compared
to 2002.  Services and maintenance  fees for 2003 amounted to $10,906,000,  a 6%
increase from 2002.

         Software license fee revenues decreased $4,569,000 or 70% to $1,935,000
in 2003 from $6,504,000 in 2002. Astea Alliance  license fee revenues  decreased
to $1,935,000 in 2003 from  $6,221,000 in 2002, a decrease of 69%. There were no
license sales DISPATCH-1 in 2003 as compared to sales totaling  $283,000 in 2002
primarily due to the Company's  planned movement from its legacy software to the
Astea Alliance suite. The decrease in license revenue is primarily the result of
delayed investment in information technology on the part of our target customers
due to the slowly improving economy.

         Total services and  maintenance  revenues  increased  $612,000 or 6% to
$10,906,000  in 2003 from  $10,294,000  in 2002.  The  increase  in service  and
maintenance  revenues is  attributable  to an increase  of  $1,705,000  in Astea
Alliance  revenues  partially  offset by a decrease  in  DISPATCH-1  revenues of
$1,093,000.  Astea  Alliance  service  and  maintenance  revenues  increased  to
$8,244,000 in 2003 from  $6,540,000  in 2002 due to the growing  Astea  Alliance
customer base.  DISPATCH-1  service and  maintenance  revenues  decreased 29% to
$2,661,000  in 2003 from  $3,754,000  in 2002 due to an ongoing  decrease in the
number of customers


                                       23
<PAGE>


under service and maintenance  contracts.  As a result of the decreasing  demand
for DISPATCH-1,  the decrease in service and maintenance  revenue is expected to
continue in 2004.

         In 2003 and  2002,  no  customer  accounted  for  more  than 10% of the
Company's revenues.

         Costs of Revenues.  Costs of software  license fee  revenues  decreased
39%, or $496,000,  to $766,000 in 2003 from $1,262,000 in 2002.  Included in the
cost of software  license  fees is the  amortization  of  capitalized  software.
Capitalized software amortization decreased to $600,000 in 2003 from $870,000 in
2002.  The  decrease  in  amortization  of  capitalized  software  is due to the
decrease in the amount of  unamortized  capitalized  software.  The gross margin
percentage on software  license sales decreased to 60% in 2003 from 81% in 2002.
This  decrease  is  primarily  attributable  to the  significant  fixed  cost of
software amortization.

         The costs of  services  and  maintenance  revenues  increased  12%,  or
$750,000,  to  $7,095,000  in 2003 from  $6,345,000  in 2002.  The  service  and
maintenance gross margin  percentage  decreased to 35% in 2003 from 38% in 2002.
The decreased  margin is primarily  attributable  to the increase in third party
costs as a result of upgrades.

         Product  Development.  Product  development  expenses increased 40%, or
$709,000,  to $2,490,000 in 2003 from $1,781,000 in 2002. Product development as
a percentage of total revenue  increased to 19% in 2003 compared to 11% in 2002.
The Company's total product development costs,  including  capitalized  software
development  costs  were  $2,970,000  or 23% of  revenues  in 2003  compared  to
$2,588,000,  which was 15% of revenues in 2002,  an increase of $382,000 or 15%.
The increase in product  development  expenses is primarily  attributable to the
increased  effort to convert  the  Company's  product to .NET,  a new  Microsoft
operating  system platform.  In doing so, the Company  increased its development
staff  headcount to 40 employees in 2003 from 33 in 2002.  Additionally,  during
2003 the U.S.  dollar  weakened  against the Israel  shekel,  which is where the
Company  performs  most  of its  development,  thereby  resulting  in  increased
expenses  upon  translation  into U.S.  currency.  The  Company  has focused its
development  effort  exclusively  on the upgrade of the Astea  Alliance suite of
products.

         Sales and  Marketing.  Sales and  marketing  expenses  decreased 6%, or
$343,000,  to  $5,875,000  in 2003 from  $6,218,000  in 2002.  The  decrease  is
primarily the result of lower  commissions  due to lower sales.  Despite  actual
performance,  the Company  continued to focus on improving  its market  presence
through  intensified  marketing  efforts to increase  awareness of the Company's
products.  This  occurred  through the use of Webinars  focused in the  vertical
industries in which the Company operates, attendance at selected trade shows and
increased investment in lead generation for its sales force. Sales and marketing
expense as a percentage of total  revenues  increased to 46% in 2003 from 37% in
2002.

         General and Administrative. General and administrative expenses consist
of  salaries,   benefits   and  related   costs  for  the   Company's   finance,
administrative  and  executive  management  personnel,  legal costs,  accounting
costs,  bad debt  write-offs  and various  costs  associated  with the Company's
status as a public company.  The Company's general and  administrative  expenses
were $2,198,000 in 2003 and $2,426,000 in 2002 representing a 9% decrease.  This
decrease  is  primarily  due to  lower  costs  related  to  legal  and  investor
relations'  activity and other taxes.  Partially  offsetting this decrease,  the
Company  experienced  an  increase  in bad debt  expense of  $277,000,  which is
attributable  to the  reserve  of  license  and  service  revenues  related to a
customer. As a percentage of total revenues, general and administrative expenses
increased  to 18% in 2003  compared  to 14% in 2002.  The  increase  in expenses
relative to  revenues  primarily  results  from the  decrease in total  revenues
generated during 2003.

         Restructuring Charge. At the end of December 2001, the Company recorded
a  restructuring  charge of  $409,000  in  connection  with  severance  costs to
downsize the  Company's  employment  roles and  eliminate  excess  office space.
Additionally,  the Company reversed  $76,000 of restructuring  costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial


                                       24
<PAGE>


Statements).  In the fourth quarter of 2002, the Company  determined that it had
over-accrued $24,000 from its 2001 restructuring charge and, therefore, reversed
it. The expense reversal is included in general and administrative expenses.

         Net Interest Income. Net interest income decreased $52,000,  to $54,000
in 2003 from  $106,000 in 2002.  This  decrease was  primarily  attributable  to
significantly  lower  interest  rates  paid  in 2003 on  invested  cash  and the
reduction in cash balances, which were used to fund operations.


         Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and  liabilities be recognized  using enacted tax rates for the effect of
temporary  differences  between  the book and tax basis of  recorded  assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation  allowance  if it is more likely than not that some  portion or all of
the deferred tax asset will not be realized.

         The realizability of the deferred tax assets is evaluated  quarterly by
assessing the valuation  allowance and by adjusting the amount of the allowance,
if necessary.  The factors used to assess the likelihood of realization  are the
forecast of future  taxable  income and available tax planning  strategies  that
could be  implemented  to realize the net  deferred  tax asset.  During the year
ended  December  31,  2002,  the  Company  recorded a tax expense of $200,000 to
increase its valuation  allowance related to its net deferred tax asset based on
an  assessment  of what  portion  of the  asset  is more  likely  than not to be
realized,  in  accordance  with FSAS No.  109.  The  Company  will  review  this
provision periodically in the future as circumstances change.

         International   Operations.    Total   revenue   from   the   Company's
international operations declined by $830,000, or 16% to $4,311,000 in 2003 from
$5,141,000 in 2002.  The decrease in revenue from  international  operations was
primarily  attributable  to the  reductions  in license  revenues from the Astea
Alliance  suite.  The  economic  slowdown  in both  Europe and the  Pacific  Rim
severely impacted the operating results of the Company.  International  revenues
from professional  services and maintenance  increased 17% to $3,527,000 in 2003
from $3,005,000 in 2002. Overall,  international operations resulted in net loss
of $1,772,000  for 2003 compared to net income of $4,000 in 2002.  Combined with
the  decrease  in  revenues,  the  decrease  in income  resulted in part from an
increase in reserves against doubtful accounts.  Additionally,  the weakening of
the U.S.  dollar against the foreign  currencies in Europe,  the Pacific Rim and
Israel, contributed to increased expenses upon translation into U.S. currency.

Liquidity and Capital Resources

         Net cash provided by operating  activities  was $2,678,000 for the year
ended  December 31, 2004  compared to net cash used in  operations of $1,200,000
for the  year  ended  December  31,  2003.  The  increase  in cash  provided  by
operations of $3,878,000 was primarily  attributable  to the swing in net income
of $7,663,000 which resulted from a net loss of $5,529,000 in 2003 to net income
of  $2,134,000  in 2004 and an  increase in  depreciation  and  amortization  of
$465,000,   primarily  the  result  of  reducing  the  amortization   period  of
capitalized  software from 3 to 2 years.  Also  contributing  to the increase in
cash flow was an increase in accounts  payable and accrued  expenses of $121,000
compared  to a decrease  of  $382,000  in 2003.  This  change  resulted  from an
increase in overall volume of license sales that included  royalties  payable to
vendors  for  third  party  software  embedded  in the  Company's  products.  In
addition,  deferred  revenues  increase  by  $1,339,000  in 2004  compared  to a
decrease  of  $688,000  in 2003.  This  change was also the result of  increased
license  revenues,   which  generated  new  maintenance   contracts.   Partially
offsetting  the net  increase  in cash flows was the use of cash of  $7,224,000,
which  resulted  from an increase in accounts  receivable  in 2004 of $2,272,000
compared to a decrease in accounts  receivable of $4,952,000 in 2003. This swing
resulted from the increased level of revenues in 2004 compared to 2003.



                                       25
<PAGE>


         The Company used  $1,769,000 of cash for  investing  activities in 2004
compared to using  $64,000 in 2003.  Most of the  increased use of cash resulted
from an increase in capitalized  software of $1,380,000  compared to $480,000 in
2003. The increase in capitalized  software results from the concentrated effort
of the Company to convert its software  products to the .Net platform as well as
expand  the  functionality  of its  product  suite.  In  addition,  the  Company
purchased  $389,000 of property and  equipment  compared to $216,000 in 2003. In
2003, the Company  terminated a life  insurance  policy it held on behalf of its
Chief Executive Officer and received payment of $632,000 from the cash surrender
value of the policy.

         The Company  generated  $131,000 in financing  activities  for the year
ended  December  31,  2004  compared  to  generating  $2,000  for the year ended
December 31, 2003.  The increase in cash  generated by financing  activities was
principally attributable to the exercise of company stock options in 2004.

         At  December  31,  2004,  the Company  had a working  capital  ratio of
approximately  1.5:1,  with total cash of $4,483,000.  The Company has projected
revenues  for 2005 that will  generate  enough  funds to sustain its  continuing
operations.  However, if current projections trail expectations, the Company has
plans  in place  to  reduce  operating  expenditures  appropriately  in order to
continue to fund all required expenditures.  The Board of Directors from time to
time reviews the Company's  forecasted  operations  and  financial  condition to
determine  whether and when payment of a dividend or  dividends is  appropriate.
The Company  does not plan any  significant  capital  expenditures  in 2005.  In
addition, it does not anticipate that its operations or financial condition will
be affected materially by inflation.

Contractual Obligations and Commercial Commitments

<TABLE>
<CAPTION>

<S>                            <C>              <C>            <C>                             <C>

         The following tables summarize our contractual and commercial
obligation as of December 31, 2005:

                                                   Payment Due By Period
                                   2005         2006-2007       2008-2009     2010 and after        Total
                               ----------       ----------      ----------    --------------    ----------
 Contractual Cash
   Obligations:
   Long-term Debt              $     --         $       --     $        --                     $       --
   Capital Leases                    --                 --              --                             --
   Operating Leases            $873,000         $1,583,000     $ 1,119,000                     $3,575,000


                                        Amounts of Commitment Expiration Per Period
                                   2005         2006-2007      2008-2009     2010 and after         Total
                               ----------       ----------      ----------    --------------    ----------
 Other Commercial
   Commitments:
   Letters of Credit           $300,000         $       --     $        --    $        --      $  300,000

</TABLE>



Certain Factors That May Affect Future Results

         The  Company  does  not  provide  forecasts  of  its  future  financial
performance.  From time to time, however, information provided by the Company or
statements made by its employees may contain "forward looking"  information that
involves risks and uncertainties.  In particular,  statements  contained in this
Annual Report on Form 10-K that are not historical  fact may constitute  forward
looking  statements and are made under the safe harbor provisions of the Private
Securities  Litigation  Reform  Act of 1995.  The  Company's  actual  results of
operations  and  financial  condition  have  varied and may in the  future  vary
significantly from those stated in any forward looking statements.  Factors that
may  cause  such  differences  include,  but  are not


                                       26
<PAGE>


limited to, the risks, uncertainties and other information discussed within this
Annual Report on Form 10-K,  as well as the accuracy of the  Company's  internal
estimates of revenue and operating expense levels.

         The following  discussion of the Company's  risk factors should be read
in conjunction with the financial statements and related notes thereto set forth
elsewhere in this report.  The  following  factors,  among  others,  could cause
actual  results to differ  materially  from  those set forth in forward  looking
statements  contained or  incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business,  results of operations and financial
conditions:


Recent History of Net Losses

         The Company has a history of net losses. Although the Company generated
net income of $2.1 million in 2004, it incurred net losses of approximately $5.5
million in fiscal  2003,  $1.3 million in fiscal 2002 and $1.5 million in fiscal
2001.  As of December  31,  2004,  stockholders'  equity is  approximately  $6.0
million,  which is net of an accumulated deficit of approximately $16.0 million.
Moreover, the Company expects to continue to incur additional operating expenses
for research  and  development.  As a result,  the Company will need to generate
significant revenues to achieve and maintain profitability.  The Company may not
be able to achieve the necessary  revenue growth or profitability in the future.
If the  Company  does not attain or sustain  profitability  or raise  additional
equity  or debt in the  future,  the  Company  may be  unable  to  continue  its
operations.

Uncertain Market Acceptance of  Astea Alliance; Decreased Revenues from
DISPATCH-1

         In each of 2004, 2003, and 2002 14%, 21%, and 24% respectively,  of the
Company's  total  revenues was derived from the licensing of DISPATCH-1  and the
providing  of  professional  services  in  connection  with the  implementation,
deployment  and  maintenance  of  DISPATCH-1  installations.  See  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations."  The
Company originally introduced Astea Alliance in August 1997 in order to target a
market  segment  in  which  DISPATCH-1  was not  cost-effective  or  attractive.
Subsequent,  rapid changes in technology  have now positioned the Astea Alliance
suite,  introduced in 2001 and which includes the Astea Alliance  functionality,
to supercede  DISPATCH-1 as the company's flagship product.  As a result,  there
are no license sales planned or  anticipated  for  DISPATCH-1 to new  customers.
Total  license  revenues  from  DISPATCH-1  was $805,000 in 2004.  There were no
license revenues of DISPATCH-1 in 2003. Total DISPATCH-1  revenues have declined
in each of the last three  fiscal  years and that trend is  expected to continue
and accelerate.

         While the Company has  licensed  Astea  Alliance to over 225  companies
worldwide in 1998 through 2004,  revenues from sales of Astea Alliance alone are
not yet sufficient to support the expenses of the Company.  The Company's future
success  will depend  mainly on its  ability to  increase  licenses of the Astea
Alliance suite offerings, on developing new products and product enhancements to
complement its existing  product  offerings,  on its ability to continue support
and  maintenance  revenues  from  DISPATCH-1,  and on its ability to control its
operating expenses.  Any failure of the Company's products to achieve or sustain
market  acceptance,  or of the Company to sustain  its  current  position in the
Customer Relationship  Management software market, would have a material adverse
effect on the  Company's  business  and results of  operations.  There can be no
assurance that the Company will be able to increase  demand for Astea  Alliance,
obtain an acceptable level of support and maintenance  revenues from DISPATCH-1,
or to lower its expenses, thereby avoiding future losses.

Need for Development of New Products



                                       27
<PAGE>


         The  Company's  future  success will depend upon its ability to enhance
its current  products and develop and  introduce  new products on a timely basis
that keep pace  with  technological  developments,  industry  standards  and the
increasingly sophisticated needs of its customers, including developments within
the client/server,  thin-client and object-oriented computing environments. Such
developments may require, from time to time,  substantial capital investments by
the Company in product development and testing.  The Company intends to continue
its  commitment  to  research  and  development  and its  efforts to develop new
products and product  enhancements.  There can be no assurance  that the Company
will not  experience  difficulties  that could delay or prevent  the  successful
development,   introduction   and   marketing   of  new   products  and  product
enhancements;   that  new  products  and  product  enhancements  will  meet  the
requirements  of the  marketplace  and achieve  market  acceptance;  or that the
Company's  current or future  products  will  conform to industry  requirements.
Furthermore,  reallocation of resources by the Company, such as the diversion of
research and development  personnel to development of a particular feature for a
potential  or existing  customer,  can delay new  products  and certain  product
enhancements.  Some of our  customers  adopted our  software  on an  incremental
basis.   These   customers   may  not  expand   usage  of  our  software  on  an
enterprise-wide  basis or implement  new  software  products  introduced  by the
Company.  The failure of the  software to perform to  customer  expectations  or
otherwise  to be  deployed  on an  enterprise-wide  basis  could have a material
adverse  effect on the  Company's  ability to collect  revenues  or to  increase
revenues  from new as well as  existing  customers.  If the Company is unable to
develop  and  market  new  products  or   enhancements   of  existing   products
successfully,  the Company's ability to remain  competitive in the industry will
be materially adversely effected.

Rapid Technological Change

         In this industry there is a continual emergence of new technologies and
continual  change  in  customer  requirements.  Because  of the  rapid  pace  of
technological change in the application software industry, the Company's current
market  position  could be eroded rapidly by product  advancements.  In order to
remain  competitive,   the  Company  must  introduce  new  products  or  product
enhancements  that  meet  customers'  requirements  in a timely  manner.  If the
Company is unable to do this, it may lose current and  prospective  customers to
competitors.

         The  Company's  application  environment  relies  primarily on software
development tools from Microsoft Corporation in the case of Astea Alliance,  and
Progress  Software  Corporation,  in the  case  of  DISPATCH-1.  If  alternative
software  development  tools were to be designed and  generally  accepted by the
marketplace,  we could be at a  competitive  disadvantage  relative to companies
employing such alternative developmental tools.

Burdens of Customization

         Certain  of  the  Company's  clients  request  customization  of  Astea
Alliance  products to address  unique  characteristics  of their  businesses  or
computing  environments.  In these  situations,  the  Company  applies  contract
accounting  to determine  the  recognition  of license  revenues.  The Company's
commitment to customization could place a burden on its client support resources
or delay the  delivery  or  installation  of  products,  which,  in turn,  could
materially  adversely  affect  its  relationship  with  significant  clients  or
otherwise adversely affect business and results of operations.  In addition, the
Company could incur  penalties or reductions in revenues for failures to develop
or timely  deliver  new  products  or  product  enhancements  under  development
agreements and other  arrangements with customers.  If customers are not able to
customize or deploy the Company's  products  successfully,  the customer may not
complete  expected  product  deployment,  which  would  prevent  recognition  of
revenues and  collection of amounts due, and could result in claims  against the
Company.

Risk of Product Defects; Failure to Meet Performance Criteria


                                       28
<PAGE>


         The  Company's   software  is  intended  for  use  in   enterprise-wide
applications  that may be  critical  to its  customer's  business.  As a result,
customers and potential  customers  typically  demand  strict  requirements  for
installation and deployment. The Company's software products are complex and may
contain  undetected  errors or  failures,  particularly  when  software  must be
customized for a particular customer, when first introduced or when new versions
are released.  Although the Company  conducts  extensive  product testing during
product  development,  the Company has at times  delayed  commercial  release of
software  until  problems  were  corrected  and,  in some  cases,  has  provided
enhancements to correct errors in released  software.  The Company could, in the
future, lose revenues as a result of software errors or defects. Despite testing
by the Company and by current and potential  customers,  errors in the software,
customizations  or  releases  might  not  be  detected  until  after  initiating
commercial shipments,  which could result in additional costs, delays,  possible
damage to the Company's  reputation  and could cause  diminished  demand for the
Company's products.  This could lead to customer  dissatisfaction and reduce the
opportunity to renew maintenance contracts or sell new licenses.

Continued  Dependence on Large Contracts May Result in Lengthy Sales and
Implementation  Cycles and Impact Revenue Recognition and Cash Flow

         The sale and implementation of the Company's products generally involve
a significant commitment of resources by prospective customers. As a result, the
Company's  sales  process  often is subject to delays  associated  with  lengthy
approval processes attendant to significant capital expenditures,  definition of
special   customer   implementation   requirements,   and   extensive   contract
negotiations with the customer.  Therefore, the sales cycle varies substantially
from  customer to customer  and  typically  lasts  between four and nine months.
During this time the  Company may devote  significant  time and  resources  to a
prospective  customer,  including  costs  associated  with multiple site visits,
product  demonstrations  and feasibility  studies.  The Company may experience a
number of significant delays over which the Company has no control.  Because the
costs  associated  with the sale of the  product  are fixed in current  periods,
timing differences between incurring costs and recognizing of revenue associated
with a particular project may result.  Moreover, in the event of any downturn in
any  existing  or  potential  customer's  business  or the  economy in  general,
purchases of the Company's products may be deferred or canceled.

         Furthermore,  the  implementation of the Company's  products  typically
takes several months of  integration  of the product with the  customer's  other
existing systems and customer training. A successful  implementation  requires a
close  working  relationship  between the customer and members of the  Company's
professional service organization. These issues make it difficult to predict the
quarter  in which  expected  orders  will  occur.  Delays in  implementation  of
products  could  cause some or all of the  revenues  from those  licenses  to be
shifted from the expected quarter to a subsequent quarter or quarters.  In these
situations, the Company applies contract accounting to determine the recognition
of license revenue.

         When the Company has provided  consulting services to implement certain
larger projects, some customers have in the past delayed payment of a portion of
license fees until  implementation  was complete and in some cases have disputed
the consulting  fees charged for  implementation.  There can be no assurance the
Company will not experience  additional delays or disputes  regarding payment in
the future,  particularly  if the  Company  receives  orders for large,  complex
installations.  Additionally,  as a result  of the  application  of the  revenue
recognition rules applicable to the Company's  licenses under generally accepted
accounting principles, license revenues may be recognized in periods after those
in which  the  respective  licenses  were  signed.  The  Company  believes  that
period-to-period  comparisons of its results of operations  should not be relied
upon as any indication of future performance.

Fluctuations in Quarterly Operating Results May Be Significant

         The Company's  quarterly  operating results have in the past and may in
the future vary or decrease significantly depending on factors such as:


                                       29
<PAGE>


          o    Revenue from software sales;
          o    the timing of new product releases;
          o    market  acceptance of new and enhanced  versions of the Company's
               products;
          o    customer order  deferrals in  anticipation of enhancements or new
               products;
          o    the size and timing of  significant  orders,  the  recognition of
               revenue from such orders;
          o    changes in pricing policies by the Company and its competitors;
          o    the introduction of alternative technologies;
          o    changes in operating expenses;
          o    changes in the Company's strategy;
          o    personnel changes;
          o    the  effect of  potential  acquisitions  by the  Company  and its
               competitors;  and general domestic and international economic and
               political factors.

         The Company has limited or no control over many of these  factors.  Due
to all these  factors,  it is possible that in some future quarter the Company's
operating results will be materially adversely affected.

Fluctuations in Quarterly Operating Results Due to Seasonal Factors

         The Company expects to experience  fluctuations in the sale of licenses
for its  products  due to seasonal  factors.  The Company  has  experienced  and
anticipates  that it may experience  relatively  lower sales in the first fiscal
quarter due to patterns in capital  budgeting and  purchasing  cycles of current
and  prospective  customers.  The Company  also  expects  that sales may decline
during the summer  months of its third  quarter,  particularly  in the  European
markets.  Moreover,  the Company  generally  records most of its total quarterly
license  revenues in the third month of the  quarter,  with a  concentration  of
these  revenues  in the last half of that third  month.  This  concentration  of
license  revenues is  influenced  by  customer  tendencies  to make  significant
capital  expenditures at the end of a fiscal quarter.  The Company expects these
revenue  patterns to continue for the foreseeable  future.  Thus, its results of
operations may vary seasonally in accordance with licensing  activity,  and will
also depend upon  recognition  of revenue from such  licenses from time to time.
The  Company  believes  that  period-to-period  comparisons  of its  results  of
operations  are not  necessarily  meaningful and should not be relied upon as an
indication of future performance.

General Economic Conditions May Affect Operations

         As business has grown, the Company has become  increasingly  subject to
the  risks  arising  from  adverse  changes  in  domestic  and  global  economic
conditions.  Because of the recent economic slowdown in the United States and in
other parts of the world,  many  companies  are delaying or reducing  technology
purchases and investments.  Similarly, the Company's customers may delay payment
for Company  products  causing  accounts  receivable  to increase.  In addition,
terrorist  attacks could further  contribute to the slowdown in the economies of
North  America,  Europe  and Asia.  The  overall  impact to the  Company of this
slowdown is difficult to predict,  however,  revenues could decline, which would
have an  adverse  effect  on the  Company's  results  of  operations  and on its
financial condition, as well as on its ability to sustain profitability.

Competition in the Customer Relationship Management Software Market is Intense

         The Company competes in the CRM software market.  This market is highly
competitive and the Company expects  competition in the market to increase.  The
Company's competitors include large public companies such as Oracle,  PeopleSoft
and Siebel, as well as traditional  enterprise  resource planning (ERP) software
providers  such as SAP that are  developing  CRM  capabilities.  In addition,  a
number of smaller  privately  held  companies  generally  focus only on discrete
areas of the CRM software marketplace.  Because the barriers to entry in the CRM
software  market are relatively  low, new  competitors  may emerge with products
that are  superior to the  Company's  products or that  achieve  greater  market
acceptance.  Moreover,  the



                                       30
<PAGE>

CRM  industry is currently  experiencing  significant  consolidation,  as larger
public companies seek to enter the CRM market through  acquisitions or establish
other  cooperative  relationships  among  themselves,  thereby  enhancing  their
ability to compete in this market  with their  combined  resources.  Some of the
Company's existing and potential competitors have greater financial,  technical,
marketing  and  distribution   resources  than  the  Company.  These  and  other
competitors pose business risks to the Company because:

          o    they  compete for the same  customers  that the Company  tries to
               attract;
          o    if the Company  loses  customers  to its  competitors,  it may be
               difficult or impossible to win them back;
          o    lower prices and a smaller market share could limit the Company's
               revenue generating ability, reduce its gross margins and restrict
               its ability to become profitable or sustain profitability; and
          o    competitors  may be  able to  devote  greater  resources  to more
               quickly respond to emerging  technologies and changes in customer
               requirements or to the development,  promotion and sales of their
               products.

There can be no assurance that the Company will be able to compete  successfully
against current and future  competitors or that  competitive  pressures faced by
the Company will not adversely affect its business and results of operations.

Risk of Dependence on Proprietary Technology

         The Company depends heavily on proprietary  technology for its business
to succeed.  The  Company  licenses  its  products to  customers  under  license
agreements  containing,  among other terms,  provisions  protecting  against the
unauthorized use, copying and transfer of the licensed program. In addition, the
Company relies on a combination  of trade secrets,  copyright and trademark laws
and  confidentiality  procedures to protect the Company's  proprietary rights in
its  products  and  technology.   The  legal  protection  is  limited,  however.
Unauthorized  parties may copy aspects of the Company's  products and obtain and
use  information  that the Company  believes is  proprietary.  Other parties may
breach  confidentiality  agreements or other  contracts  they have made with the
Company.  Policing  unauthorized use of the Company's software is difficult and,
while the  Company  is unable to  determine  the  extent to which  piracy of its
software  products  exists,  software  piracy can be expected to be a persistent
problem. There can be no assurance that any of the measures taken by the Company
will be adequate to protect its  proprietary  technology or that its competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's  technologies.  If the Company  fails to  successfully
enforce its proprietary technology, its competitive position may be harmed.

         Other   software    providers   could   develop   similar    technology
independently,  which may  infringe on the  Company's  proprietary  rights.  The
Company  may not be able  to  detect  infringement  and may  lose a  competitive
position in the market  before it does so. In addition,  competitors  may design
around the Company's technology or develop competing  technologies.  The laws of
some foreign  countries do not protect the Company's  proprietary  rights to the
same extent as do the laws of the United States.  Litigation may be necessary to
enforce the Company's proprietary rights. Such litigation is time-consuming, has
an uncertain  outcome and could  result in  substantial  costs and  diversion of
management's  attention  and  resources.   However,  if  the  Company  fails  to
successfully enforce its proprietary rights, the Company's  competitive position
may be harmed.

Possible Infringement of Third Party Intellectual Property Rights

         Substantial litigation and threats of litigation regarding intellectual
property  rights are common in this industry.  The Company is not aware that its
products and technologies  employ technology that infringes any valid,  existing
proprietary  rights of third  parties.  While  there  currently  are no  pending
lawsuits against the Company  regarding  infringement of any existing patents or
other  intellectual  property  rights or any notices



                                       31
<PAGE>


that it is infringing the intellectual  property rights of others, third parties
may assert such claims in the future. Any claims, with or without merit, could:

          o    be time consuming to defend;
          o    result in costly litigation or damage awards;
          o    divert management's attention and resources;
          o    cause product shipment delays; or
          o    require  the Company to seek to enter into  royalty or  licensing
               agreements, which may not be available on terms acceptable to the
               Company, if at all.

A successful claim of intellectual  property infringement against the Company or
the  Company's  failure  or  inability  to  license  the  infringed  or  similar
technology  could  seriously harm its business  because the Company would not be
able to sell the impacted product without exposing itself to litigation risk and
damages.  Furthermore,  redevelopment of the product so as to avoid infringement
could cause the Company to incur significant additional expense and delay.

Dependence on Technology from Third Parties

         The  Company  integrates  various  third-party   software  products  as
components of its software.  The Company's  business  would be disrupted if this
software,  or functional  equivalents  of this  software,  were either no longer
available  to the Company or no longer  offered to the  Company on  commercially
reasonable  terms.  In either  case,  the  Company  would be  required to either
redesign its software to function with alternate third-party software or develop
these components itself,  which would result in increased costs and could result
in delays in software  shipments.  Furthermore,  the Company  might be forced to
limit the features available in its current or future software offerings.

Need to Expand Indirect Sales

         The Company has historically sold its products through its direct sales
force  and a limited  number  of  distributors  (value-added  resellers,  system
integrators  and sales  agents).  The Company's  ability to achieve  significant
revenue  growth in the  future  will  depend  in large  part on its  success  in
establishing  relationships  with distributors and OEM partners.  The Company is
currently investing,  and plans to continue to invest,  significant resources to
expand  its   domestic  and   international   direct  sales  force  and  develop
distribution  relationships.   The  Company's  distributors  also  sell  or  can
potentially sell products offered by the Company's competitors.  There can be no
assurance that the Company will be able to retain or attract a sufficient number
of its  existing  or  future  third  party  distribution  partners  or that such
partners will recommend,  or continue to recommend,  the Company's products. The
inability to establish or maintain  successful  relationships  with distributors
and OEM  partners  or to train its direct  sales  force could cause its sales to
decline.

Risks of Future Acquisitions

         As part of Astea's growth  strategy,  it may pursue the  acquisition of
businesses,  technologies  or products that are  complementary  to its business.
Acquisitions  involve a number of special  risks  that could harm the  Company's
business,  including the diversion of management's attention, the integration of
the operations and personnel of the acquired  companies,  and the potential loss
of key employees. In particular,  the failure to maintain adequate operating and
financial  control  systems  or  unexpected   difficulties   encountered  during
expansion  could  harm  the  Company's  business.  Acquisitions  may  result  in
potentially dilutive issuances of equity securities,  and the incurrence of debt
and contingent  liabilities,  any of which could materially adversely affect the
Company's business and results of operations.

Risks Associated with International Sales



                                       32
<PAGE>


         Astea's international sales accounted for 39% of the Company's revenues
in 2004, 34% in 2003, and 31% in 2002.  The Company  expects that  international
sales will  continue  to be a  significant  component  of its  business.  In the
Company's  efforts to expand its  international  presence,  it will face certain
risks, which it may not be successful in addressing. These risks include:

          o    difficulties   in   establishing   and   managing   international
               distribution  channels and in  translating  products into foreign
               languages;
          o    difficulties  finding  staff to  manage  foreign  operations  and
               collect accounts receivable;
          o    difficulties enforcing intellectual property rights;
          o    liabilities  and  financial   exposure  under  foreign  laws  and
               regulatory requirements;
          o    fluctuations  in the value of  foreign  currencies  and  currency
               exchange rates; and
          o    potentially adverse tax consequences.

Additionally, the current economic difficulties in several Asian countries could
have an  adverse  impact on the  Company's  international  operations  in future
periods.  Moreover, the currency unification in Europe may change the market for
the Company's  business  software.  Any of these  factors,  if not  successfully
addressed, could harm the Company's operating results.

Research and Development in Israel; Risks of Potential Political, Economic or
 Military Instability

         Astea's  principal  research and development  facilities are located in
Israel. Accordingly,  political,  economic and military conditions in Israel may
directly affect its business.  Continued  political and economic  instability or
armed  conflicts in Israel or in the region could  directly  harm the  Company's
business and operations.

         Since the  establishment  of the  State of Israel in 1948,  a number of
armed  conflicts have taken place between Israel and its Arab  neighbors,  and a
state of hostility has existed in varying  degrees and intensity.  This state of
hostility  has led to security and economic  problems for Israel.  The future of
peace efforts  between Israel and its Arab  neighbors,  particularly in light of
the recent  violence and  political  unrest in Israel and the rest of the Middle
East,  remains  uncertain and several  countries  still  restrict  business with
Israel and Israeli  companies.  These  restrictive  laws and  policies  may also
materially harm the Company's operating results and financial condition.

Dependence on Key Personnel that are Required to Perform Military Service

         Many of the  Company's  employees  in Israel are  obligated  to perform
annual military reserve duty in the Israeli army and are subject to being called
to active duty at any time, which could adversely  affect the Company's  ability
to pursue its planned  research  and  development  efforts.  The Company  cannot
assess the full impact of these  requirements  on its  workforce or business and
the Company  cannot  predict the effect of any  expansion  or reduction of these
obligations.  However,  in light of the recent violence and political  unrest in
Israel,  there is an  increased  risk that a number of the  Company's  employees
could be called to active  military  duty without  prior  notice.  The Company's
operations could be disrupted by the absence for a significant period of time of
one or more of our key employees or a significant  number of other employees due
to military service.  Any such disruption in the Company's operations could harm
its operations.

Risks Associated with Inflation and Currency Fluctuations

         The Company  generates most of its revenues in U.S.  dollars but all of
its costs associated with the foreign  operations located in Europe, the Pacific
Rim and Israel are  denominated in the respective  local currency and translated
into U.S. dollars for consolidation and reporting.  As a result,  the Company is
exposed to risks to the extent that the rate of inflation in Europe, the Pacific
Rim or Israel exceeds the rate of devaluation of their related foreign  currency
in relation to the U.S. dollar or if the timing of such devaluations



                                       33
<PAGE>


lags behind inflation in Europe,  the Pacific Rim or Israel.  In that event, the
cost of the Company's  operations in Europe, the Pacific Rim and Israel measured
in terms of U.S. dollars will increase and the U.S.  dollar-measured  results of
operations will suffer.  Historically,  Israel has  experienced  periods of high
inflation.

Dependence on Key Personnel; Competition for Employees

         The continued  growth and success largely depends on the managerial and
technical  skills  of  key  technical,   sales  and  management  personnel.   In
particular, the Company's business and operations are substantially dependent of
the performance of Zack B. Bergreen, the founder and chief executive officer. If
Mr. Bergreen were to leave or become unable to perform services for the Company,
the business would likely be harmed.

         The Company's success also depends,  to a substantial  degree, upon its
continuing  ability to attract,  motivate and retain  other  talented and highly
qualified personnel.  Competition for key personnel is intense,  particularly so
in recent  years.  From time to time the Company has  experienced  difficulty in
recruiting  and  retaining  talented and  qualified  employees.  There can be no
assurance  that the Company can retain its key  technical,  sales and managerial
employees or that it can attract,  assimilate  or retain other highly  qualified
technical, sales and managerial personnel in the future. If the Company fails to
attract or retain enough skilled personnel,  its product development efforts may
be  delayed,  the  quality of its  customer  service  may  decline and sales may
decline.

Concentration of Ownership

         Currently,  Zack B. Bergreen,  the Company's chief  executive  officer,
beneficially  owns  approximately  47% of the  outstanding  Common  Stock of the
Company.  As a result,  Mr.  Bergreen  exercises  significant  control  over the
Company  through his ability to influence  and control the election of directors
and all other matters that require action by the Company's  stockholders.  Under
certain  circumstances,  Mr. Bergreen could prevent or delay a change of control
of the Company  which may be favored by a  significant  portion of the Company's
other stockholders,  or cause a change of control not favored by the majority of
the  Company's  other   stockholders.   Mr.  Bergreen's  ability  under  certain
circumstances  to  influence,  cause or delay a change in control of the Company
also may have an adverse  effect on the  market  price of the  Company's  Common
Stock.

Possible Volatility of Stock Price

         The  market  price of the Common  Stock has in the past  been,  and may
continue to be, subject to significant  fluctuations  in response to, and may be
adversely  affected by, variations in quarterly  operating  results,  changes in
earnings  estimates by analysts,  developments  in the  software  industry,  and
adverse earnings or other financial  announcements of the Company's customers as
well as other  factors.  In addition,  the stock market can  experience  extreme
price and volume  fluctuations  from time to time,  which may bear no meaningful
relationship to the Company's performance. Broad market fluctuations, as well as
economic  conditions  generally and in the software industry  specifically,  may
result in material  adverse effects on the market price of the Company's  common
stock.

Limitations of the Company Charter Documents

         The  Company's   Certificate  of  Incorporation   and  By-Laws  contain
provisions  that could  discourage a proxy  contest or make more  difficult  the
acquisition  of a  substantial  block of the Company's  common stock,  including
provisions  that allow the Board of  Directors  to take into account a number of
non-economic  factors,  such  as  the  social,  legal  and  other  effects  upon
employees,  suppliers,  customers and creditors,  when evaluating offers for the
Company's  acquisition.  Such  provisions  could limit the price that  investors
might be willing to pay in the future for the Company's  shares of common stock.
The Board of Directors is authorized to issue, without stockholder  approval, up
to 5,000,000 shares of preferred stock with voting,  conversion and other


                                       34
<PAGE>


rights and  preferences  that may be superior to the Company's  common stock and
that could  adversely  affect the voting power or other rights of our holders of
common stock. The issuance of preferred stock or of rights to purchase preferred
stock could be used to discourage an unsolicited acquisition proposal.

Nasdaq SmallCap Market Compliance Requirements

         The Company's common stock trades on The Nasdaq SmallCap Market,  which
has certain  compliance  requirements  for  continued  listing of common  stock,
including a series of financial  tests  relating to shareholder  equity,  public
float,  number of market makers and shareholders,  and maintaining a minimum bid
price per share for the Company's common stock. The result of delisting from The
NASDAQ  SmallCap  Market could be a reduction in the liquidity of any investment
in the Company's  common stock and a material adverse effect on the price of its
common  stock.  Delisting  could reduce the ability of holders of the  Company's
common stock to purchase or sell shares as quickly and as  inexpensively as they
could have done in the past. This lack of liquidity would make it more difficult
for the  Company  to raise  capital  in the  future.  Although  the  Company  is
currently  in  compliance  with all  continued  listing  requirements  of Nasdaq
SmallCap, there can be no assurance that the Company will be able to continue to
satisfy such requirements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

         The  Company's  exposure to market  risk for changes in interest  rates
relates primarily to the Company's  investment  portfolio.  The Company does not
have any derivative financial  instruments in its portfolio.  The Company places
its  investments in instruments  that meet high credit  quality  standards.  The
Company is adverse to principal loss and ensures the safety and  preservation of
its invested funds by limiting default risk, market risk and reinvestment  risk.
The Company is currently in the process of revamping its  investment  portfolio.
As a result,  as of December 31, 2004,  the Company's  investments  consisted of
commercial  paper. The Company does not expect any material loss with respect to
its investment portfolio.

Foreign Currency Risk

         The Company does not use foreign currency forward exchange contracts or
purchased  currency  options to hedge local  currency  cash flows or for trading
purposes. All sales arrangements with international customers are denominated in
foreign currency.  The Company does not expect any material loss with respect to
foreign currency risk.

         The Company has  reviewed the impact of its  subsidiaries  dominated in
German deutsche marks,  French francs and the Dutch guilder  converting into the
Euro beginning  January 1, 2002.  This  conversion has had no material impact on
its  systems  related  to  the  Company's  business   activities  and  financial
reporting.  The Company is not aware of any  circumstances  indicating  that the
introduction  of the Euro  caused or will cause  material  misstatements  in the
Company's  accounting  records or adversely  affects business  operations in the
future.




                                       35
<PAGE>






Item 8.  Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Astea International Inc.

         We have audited the accompanying  consolidated  balance sheets of Astea
International  Inc. and  subsidiaries  as of December 31, 2004 and 2003, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 2004.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

         We conducted our audits in accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects,  the financial position of Astea International
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting  principles  generally accepted
in the United States of America.


\s\BDO Seidman, LLP
--------------------
BDO Seidman, LLP



                                       36
<PAGE>


Philadelphia, PA
February 25, 2005





                                       37
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                       <C>                <C>

                                        ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                                                 CONSOLIDATED BALANCE SHEETS


        December 31,                                                        2004               2003
        ---------------------------------------------------------------------------------------------------

                                     ASSETS
        Current assets:
          Cash and cash equivalents                                       $ 4,483,000        $ 3,480,000
          Restricted cash                                                     300,000            300,000
          Receivables, net of reserves of  $411,000 and $810,000            6,428,000          3,943,000
          Prepaid expenses and other                                          441,000            601,000
                                                                        --------------     --------------

           Total current assets
                                                                           11,652,000          8,324,000
                                                                        --------------     --------------

        Property and equipment, net
                                                                              548,000            509,000
        Capitalized software development costs, net
                                                                            1,520,000          1,229,000
        Other assets                                                           34,000             34,000
                                                                        --------------     --------------

           Total assets                                                   $13,754,000        $10,096,000
                                                                        ==============     ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
        Current liabilities:
          Accounts payable and accrued expenses                           $ 3,194,000        $ 3,003,000
          Deferred revenues
                                                                            4,489,000          3,359,000
                                                                        --------------     --------------

            Total current liabilities                                       7,683,000          6,362,000
                                                                        --------------     --------------


        Commitments and Contingencies

        Stockholders' equity:
           Preferred stock, $.01 par value, 5,000,000 shares
             authorized, none issued                                               --                 --
           Common stock, $.01 par value, 25,000,000 shares
             authorized, 3,002,000 and 2,965,000  shares issued,
             respectfully                                                      30,000             30,000
           Additional paid-in capital                                      22,997,000         22,792,000
           Accumulated comprehensive loss -
             translation adjustment
                                                                             (779,000)          (776,000)
           Accumulated deficit
                                                                          (15,967,000)       (18,100,000)
           Less:  Treasury stock at cost, 43,000 and 44,000
        shares                                                               (210,000)          (212,000)
                                                                        --------------     --------------

                  Total stockholders' equity                                6,071,000          3,734,000
                                                                        --------------     --------------

                  Total liabilities and stockholders' equity              $13,754,000        $10,096,000
                                                                        ==============     ==============


        See accompanying notes to the consolidated financial statements.

</TABLE>


                                       38

<PAGE>
<TABLE>
<CAPTION>

<S>                                                           <C>             <C>              <C>

                    ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,                                           2004           2003            2002
-----------------------------------------------------------------------------------------------------------

Revenues:
    Software license fees                                     $  7,992,000    $  1,935,000     $  6,504,000
    Services and maintenance                                    11,325,000      10,906,000       10,294,000
                                                              ---------------------------------------------
          Total revenues                                        19,317,000      12,841,000       16,798,000
                                                              ---------------------------------------------

Costs and expenses:
      Cost of software license fees                              1,838,000         766,000        1,262,000
      Cost of services and maintenance                           6,356,000       7,095,000        6,345,000
      Product development                                        1,431,000       2,490,000        1,781,000
      Sales and marketing                                        5,565,000       5,875,000        6,218,000
      General and administrative                                 2,051,000       2,198,000        2,426,000
                                                              ---------------------------------------------

          Total costs and expenses                              17,241,000      18,424,000       18,032,000
                                                              ---------------------------------------------

Income (loss) from operations                                    2,076,000      (5,583,000)      (1,234,000)

Interest income                                                     58,000          58,000          112,000
Interest expense                                                      --            (4,000)          (6,000)
                                                              ---------------------------------------------
Income (loss) before income taxes                                2,134,000      (5,529,000)      (1,128,000)
Income tax expense                                                    --              --            200,000
                                                              ---------------------------------------------
Net income (loss)                                             $  2,134,000    $ (5,529,000)    $ (1,328,000)
                                                              =============================================
Basic net income (loss) per share                             $        .72    $      (1.89)    $      (0.45)
                                                              =============================================
Diluted net income (loss) per share                           $        .71    $      (1.89     $      (0.45)
                                                              =============================================
Weighted average shares used in computing basic net income
(loss) per share                                                 2,960,000       2,922,000        2,921,000
                                                              ---------------------------------------------
Weighted average shares used in computing diluted net
income
  (loss)per share                                                3,001,000       2,922,000        2,921,000
                                                              =============================================


        See accompanying notes to the consolidated financial statements.

</TABLE>



                                       39
<PAGE>


<TABLE>
<CAPTION>

<S>              <C>                     <C>       <C>          <C>           <C>             <C>         <C>

                                                                      ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                                                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                   Additional   Accumulated                                Total
                                         Common     Paid-in    Comprehensive  Accumulated     Treasury  Stockholders' Comprehensive
                                          Stock     Capital         Loss        Deficit         Stock      Equity      Income(Loss)
                                       --------------------------------------------------------------------------------------------
Balance, January 1, 2002                 148,000   22,674,000   (1,256,000)   (11,239,000)    (222,000)   10,105,000

      Issuance of common stock under
        employee stock purchase plan        --           --           --           (1,000)       5,000         4,000
      Comprehensive income                  --           --        217,000           --           --         217,000  $    217,000
      Net loss                              --           --           --       (1,328,000)        --      (1,328,000)   (1,328,000)
                                       --------------------------------------------------------------------------------------------
Balance, December 31, 2002               148,000   22,674,000   (1,039,000)   (12,568,000)    (217,000)    8,998,000  $ (1,111,000)
                                                                                                                      ============

      Reverse stock split               (118,000)     118,000         --             --           --            --
      Issuance of common stock under
        employee stock purchase plan        --           --           --           (3,000)       5,000         2,000
      Comprehensive income                  --           --        263,000           --           --         263,000  $    263,000
      Net loss                              --           --           --       (5,529,000)        --      (5,529,000)   (5,529,000)
                                       --------------------------------------------------------------------------------------------
Balance, December 31, 2003                30,000   22,792,000     (776,000)   (18,100,000)    (212,000)    3,734,000  $ (5,266,000)
                                                                                                                      ============

      Issuance of common stock under        --           --           --           (1,000)       2,000         1,000
        employee stock purchase plan
      Exercise of stock options             --        131,000         --             --           --         131,000
      Options for satisfaction of liability --         74,000         --             --           --          74,000
      Comprehensive income                  --           --         (3,000)          --           --          (3,000) $     (3,000)
      Net income                            --           --           --        2,134,000         --       2,134,000     2,134,000
                                       --------------------------------------------------------------------------------------------

Balance 12/31/04                       $  30,000 $ 22,997,000    $(779,000)  $(15,967,000)   $(210,000) $  6,071,000  $  2,131,000
                                                                                                                      ============

        See accompanying notes to the consolidated financial statements.
</TABLE>



                                       40
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                        <C>            <C>            <C>

                    ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,                                                      2004            2003           2002
---------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
   Net income (loss )                                                      $ 2,134,000    $(5,529,000)   $(1,328,000)
   Adjustments to reconcile net income(loss) to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                                        1,375,000        910,000      1,295,000

        Increase (decrease) in allowance for doubtful                           84,000       (477,000)      (255,000)
accounts
        Officer's life insurance valuation                                        --             --           59,000
        Deferred income taxes                                                     --             --          200,000
        Changes in operating assets and liabilities:
            Receivables                                                     (2,272,000)     4,952,000        (39,000)
            Prepaid expenses and other                                         (61,000)        67,000        125,000

            Accounts payable and accrued expenses                              121,000       (382,000)       186,000

            Accrued restructuring                                                 --             --         (385,000)
            Deferred revenues                                                1,297,000       (688,000)      (203,000)
            Other                                                                 --          (53,000)      (110,000)
                                                                          -------------------------------------------

Net cash provided by (used in) operating activities                          2,678,000     (1,200,000)      (455,000)
                                                                          -------------------------------------------

Cash flows from investing activities:
        Proceeds from sales of investments                                        --             --        2,987,000
        Purchases of property and equipment                                   (389,000)      (216,000)      (404,000)

        Capitalized software development costs                              (1,380,000)      (480,000)      (807,000)
        Increase in restricted cash                                               --             --         (300,000)
        Proceeds from the termination of life insurance policy                    --          632,000           --
                                                                          -------------------------------------------

Net cash (used in) provided by investing activities                         (1,769,000)       (64,000)     1,476,000
                                                                          -------------------------------------------

Cash flows from financing activities:
        Proceeds from exercise of stock options and
employee  stock purchase plan                                                  131,000          2,000          4,000
        Net repayments of long-term debt                                          --             --          (34,000)
                                                                          -------------------------------------------
Net cash provided by (used in) financing activities                            131,000          2,000        (30,000)
                                                                          -------------------------------------------
Effect of exchange rate changes on cash and cash
   equivalents                                                                 (37,000)      (225,000)       (95,000)
                                                                          -------------------------------------------
Net increase (decrease) in cash and cash equivalents                         1,003,000     (1,487,000)       896,000
Cash and cash equivalents balance, beginning of year                         3,480,000      4,967,000      4,071,000
                                                                          -------------------------------------------
Cash and cash equivalents balance, end of year                             $ 4,483,000    $ 3,480,000    $ 4,967,000
                                                                          ===========================================
Supplemental disclosure of cash flow information:
      Satisfaction of liability with options                                    74,000           --             --
      Cash paid for interest expense                                       $     1,000    $     4,000    $     6,000
                                                                          ===========================================

                     See accompanying notes to the consolidated financial statements.

</TABLE>



                                       41
<PAGE>



                    ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.   Company Background

               Astea  International  Inc.  and  Subsidiaries  (collectively  the
     "Company" or "Astea") is a global provider of service  management  software
     that addresses the unique needs of companies who manage capital  equipment,
     mission  critical assets and human capital.  Clients include Fortune 500 to
     mid-size companies,  which Astea services through company facilities in the
     United States, United Kingdom,  Australia,  The Netherlands and Israel. The
     Company's principal product, Astea Alliance,  supports the complete service
     lifecycle,  from lead  generation  and  project  quotation  to service  and
     billing  through asset  retirement.  It integrates  and optimizes  critical
     business  processes  for  Contact  Center,  Field  Service,  Depot  Repair,
     Logistics,  Professional Services,  and Sales and Marketing.  Astea extends
     its  applications  with  portal,  analytics  and  mobile  solutions.  Astea
     Alliance provides service  organizations with  technology-enabled  business
     solutions  that  improve  profitability,  stabilize  cash-flows  and reduce
     operational costs through automating and integrating key service, sales and
     marketing  processes.  Since its  inception  in 1979,  Astea  has  licensed
     applications to companies in a wide range of sectors including  information
     technology, telecommunications, instruments and controls, business systems,
     and medical devices.

2.   Summary of Significant Accounting Policies

     Principles of Consolidation

               The  consolidated  financial  statements  include the accounts of
     Astea  International  Inc. and its wholly owned  subsidiaries and branches.
     All significant intercompany accounts and transactions have been eliminated
     upon consolidation.

     Use of Estimates

               The  preparation  of  financial  statements  in  conformity  with
     generally  accepted  accounting  principles  requires  management  to  make
     estimates and  assumptions  that affect the reported  amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the  financial  statements  and the  reported  amounts of  revenues  and
     expenses  during the  reporting  period.  Actual  results could differ from
     those estimates.

     Revenue Recognition

               Revenues are recognized in accordance  with Statement of Position
     (SOP)  97-2,  which  provides  guidelines  on the  recognition  of software
     license fee revenue. Principally, revenue may be recognized when persuasive
     evidence of an arrangement exists,  delivery has occurred,  the license fee
     is fixed and  determinable  and the collection of the fee is probable.  The
     Company  allocates  a portion  of its  software  revenue  to  post-contract
     support  activities  or to  other  services  or  products  provided  to the
     customer  free of charge or at  non-standard  discounts  when  provided  in
     conjunction  with the licensing  arrangement.  Amounts  allocated are based
     upon  standard  prices  charged for those  services or  products.  Software
     license fees for resellers or other  members of the indirect  sales channel
     are based on a fixed  percentage  of the  Company's  standard  prices.  The
     Company  recognizes  software license revenue for such contracts based upon
     the terms and conditions provided by the reseller to its customer.



                                       42
<PAGE>


               Revenue from post-contract support is recognized ratably over the
     term of the  contract on a  straight-line  basis.  Consulting  and training
     service  revenue is  generally  unbundled  and  recognized  at the time the
     service is performed.  Fees from  licenses  sold  together with  consulting
     services are generally recognized upon shipment, provided that the contract
     has been  executed,  delivery of the software has occurred,  fees are fixed
     and  determinable  and  collection  is  probable.  In  instances  where the
     aforementioned  criteria  have  not been  met,  both  the  license  and the
     consulting fees are recognized under the percentage of completion method of
     contract accounting.

               In limited  instances,  the Company will enter into contracts for
     which revenue is recognized under contract  accounting.  The accounting for
     such arrangements  requires  judgment,  which impacts the timing of revenue
     recognition and provision for estimated losses, if applicable.

     Reimbursable Expenses

               The Company charges customers for out-of-pocket expenses incurred
     by its employees  during the  performance of  professional  services in the
     normal course of business.  In accordance  with Emerging  Issues Task Force
     01-14,  "Income Statement  Characterization of Reimbursements  Received for
     `Out-of-Pocket'  Expenses  Incurred,"  billings for out-of-pocket  expenses
     that are reimbursed by the customer are to be included in revenues with the
     corresponding  expense included in cost of sales. During fiscal years 2004,
     2003  and  2002,  the  Company  billed  $296,000,  $326,000,  and  $273,000
     respectively, of reimbursable expenses to customers.

     Cash and Cash Equivalents

               The Company  considers  all highly liquid  investments  purchased
     with an original maturity of three months or less to be cash equivalents.

     Allowance for Doubtful Accounts

               The allowance for doubtful  accounts  reflects the Company's best
     estimate on probable  losses inherent in the accounts  receivable  balance.
     Management  determines  the  allowance  based on known  troubled  accounts,
     historical experience, and other currently available evidence.  Activity in
     the allowance for doubtful accounts is as follows

<TABLE>
<CAPTION>

<S>          <C>                     <C>                        <C>                   <C>                     <C>
    -----------------------------------------------------------------------------------------------------------------------
            Year Ended               Balance at
            December 31          beginning of year       Charged costs           Write offs         Balance at end of year
    ------------------------- --------------------- ---------------------- --------------------- --------------------------
             2004                    $    810,000               $ 84,000              $483,000                $   411,000
    ------------------------- --------------------- ---------------------- --------------------- --------------------------
             2003                       1,018,000                479,000               687,000                    810,000
    ------------------------- --------------------- ---------------------- --------------------- --------------------------
             2002                         955,000                533,000               470,000                  1,018,000
    ------------------------- --------------------- ---------------------- --------------------- --------------------------

</TABLE>


     Property and Equipment

               Property  and  equipment  are  recorded  at  cost.  Property  and
     equipment  capitalized  under  capital  leases are  recorded at the present
     value of the minimum lease  payments due over the lease term.  Depreciation
     and  amortization  are  provided  using the  straight-line  method over the
     estimated  useful lives of the related assets or the lease term,  whichever
     is shorter.  Gains and losses on disposal are recognized in the year of the
     disposition.  Expenditures  for  repairs  and  maintenance  are  charged to
     expense  as  incurred  and   significant   renewals  and   betterments  are
     capitalized.



                                       43
<PAGE>


               The Company reviews the carrying values of its long-lived  assets
     for  possible  impairment  whenever  events  or  changes  in  circumstances
     indicate  that the  carrying  amount of the assets  may not be  recoverable
     based on undiscounted estimated future operating cash flows. As of December
     31, 2004, the Company has determined that no impairment has occurred.

     Capitalized Software Development Costs

               The Company capitalizes  software development costs in accordance
     with SFAS No. 86,  "Accounting  for the Costs of  Computer  Software  to be
     Sold,  Leased or  Otherwise  Marketed."  The Company  capitalizes  software
     development   costs  subsequent  to  the   establishment  of  technological
     feasibility through the product's  availability for general release.  Costs
     incurred  prior  to the  establishment  of  technological  feasibility  are
     charged to product development  expense.  Development costs associated with
     product   enhancements   that  extend  the  original   product's   life  or
     significantly  improve  the  original  product's   marketability  are  also
     capitalized once technological  feasibility has been established.  Software
     development  costs are  amortized  on a  product-by-product  basis over the
     greater of the ratio of current revenues to total  anticipated  revenues or
     on a  straight-line  basis over the estimated  useful lives of the products
     (usually  two  years),  beginning  with the initial  release to  customers.
     During the first quarter of 2004,  the Company  revised the estimated  life
     for it capital  software  products  from three  years to two years based on
     current  sales  trends  and the rate of  product  release.  The  impact  of
     reducing the estimated life resulted in $443,000 of additional amortization
     in 2004. The Company continually  evaluates whether events or circumstances
     have  occurred  that  indicate  that  the  remaining  useful  life  of  the
     capitalized  software  development  costs  should  be  revised  or that the
     remaining  balance  of such  assets  may not be  recoverable.  The  Company
     evaluates the recoverability of capitalized software based on the estimated
     future  revenues of each  product.  As of  December  31,  2004,  management
     believes that no revisions to the remaining  useful lives or write-downs of
     capitalized software development costs are required.

     Major Customers

               In 2004, the Company had one customer, Carrier Corporation, which
     accounted  for 15% of  revenues.  In 2003  and  2002  no  single  customers
     represented 10% or more of total revenues.

     Concentration of Credit Risk

               Financial  instruments,  which potentially subject the Company to
     credit  risk,  consist of cash  equivalents  and accounts  receivable.  The
     Company's  policy is to limit the  amount  of  credit  exposure  to any one
     financial  institution,  the  Company  places  investments  with  financial
     institutions  evaluated as being  creditworthy,  or investing in short-term
     money  market which are exposed to minimal  interest  rate and credit risk.
     Concentration  of credit  risk,  with  respect to accounts  receivable,  is
     limited due to the Company's credit evaluation  process.  The Company sells
     its products to  customers  involved in a variety of  industries  including
     information technology,  medical devices and diagnostic systems, industrial
     controls and instrumentation and retail systems. While the Company does not
     require  collateral from its customers,  it does perform  continuing credit
     evaluations of its customer's financial condition.

               Senior management reviews accounts  receivable on a monthly basis
     to determine if any  receivables  will  potentially be  uncollectible.  The
     Company includes any accounts receivable balances that are determined to be
     uncollectible  in its allowance for doubtful  accounts.  If all attempts to
     collect a receivable  have failed,  the receivable will then be written off
     against the  allowance.  Based on all  information  available,  the Company
     believes its  allowance  for  doubtful  accounts as of December 31, 2004 is
     adequate. However, actual write-offs might exceed the recorded allowance.




                                       44
<PAGE>

     Fair Value of Financial Instruments

               Due to the short  term  nature of these  accounts,  the  carrying
     values of cash, cash equivalents, accounts receivable, accounts payable and
     accrued expenses approximate the respective fair values.

     Income Taxes

               The Company  recognizes  deferred tax assets and  liabilities for
     the expected future tax consequences of events that have been recognized in
     the  Company's  financial  statements  or tax  returns.  Under this method,
     deferred tax assets and liabilities are determined  based on the difference
     between  the  financial  statement  carrying  amounts  and the tax bases of
     assets and  liabilities  using  enacted tax rates in effect in the years in
     which the differences are expected to reverse.

     Currency Translation

               The  accounts  of  the  international   subsidiaries  and  branch
     operations are translated in accordance with SFAS No. 52, "Foreign Currency
     Translation,"  which requires that assets and liabilities of  international
     operations be  translated  using the exchange rate in effect at the balance
     sheet date. The results of operations  are  translated at average  exchange
     rates  during  the year.  The  effects of  exchange  rate  fluctuations  in
     translating  assets and liabilities of  international  operations into U.S.
     dollars are accumulated and reflected as a currency translation  adjustment
     in  the  accompanying  consolidated  statements  of  stockholders'  equity.
     Transaction  gains and losses are included in net income (loss).  There are
     no material  transaction  gains or losses in the accompanying  consolidated
     financial statements for the periods presented.

     Net Income (Loss) Per Share

               The Company  presents  earnings per share in accordance with SFAS
     No. 128,  "Earnings per Share." Pursuant to SFAS No. 128, dual presentation
     of basic and diluted  earnings per share  ("EPS") is required for companies
     with  complex  capital   structures  on  the  face  of  the  statements  of
     operations.  Basic EPS is  computed by  dividing  net income  (loss) by the
     weighted-average  number  of  common  shares  outstanding  for the  period.
     Diluted EPS reflects the potential dilution from the exercise or conversion
     of  securities  into common  stock.  Under the treasury  stock method it is
     assumed  that  diluted  stock  options are  exercised.  Furthermore,  it is
     assumed that the proceeds are used to purchase  common stock at the average
     market  price for the  period.  The  difference  between  the number of the
     shares assumed issued and the number of shares assumed purchased represents
     the dilutive shares.

               At December 31, 2004, there were 138,220 net additional  dilutive
     shares  assumed to be converted at an average  exercise  price of $4.05 per
     share,  which brought the total  outstanding  dilutive shares to 3,001,000.

               Additionally  at  December  31,  2004,  the  Company  had  51,950
     anti-dilutive  shares that were  excluded  from diluted  earnings per share
     calculation due to their anti-dilutive nature.

               The  Company  sustained  a loss for  fiscal  years 2003 and 2002.
     Options  with an exercise  price less than  market at December  31, 2003 to
     purchase  31,600 and 30,000  shares of common stock with  average  exercise
     prices of $2.81 and $2.75 per share,  respectively,  were excluded from the
     diluted  (loss) per common  share  calculation  as the  inclusion  of these
     options would have been antidilutive.

<TABLE>
<CAPTION>

<S>                                                                 <C>            <C>              <C>

    ----------------------------------------------------------- ------------- --------------- ---------------
    Year Ending December 31,                                       2004           2003            2002
    ----------------------------------------------------------- ------------- --------------- ---------------
    Net income (loss)                                               $ 2,134        $(5,529)         $(1,328)
    ----------------------------------------------------------- ------------- --------------- ---------------
    Basic   weighted   average   number  of   common   shares
    outstanding                                                       2,960          2,922            2,921
    ----------------------------------------------------------- ------------- --------------- ---------------
    Basic earnings (loss) per common share                          $   .72        $ (1.89)         $  (.45)
    ----------------------------------------------------------- ------------- --------------- ---------------
    Effect of dilutive stock options                                     41               -               -
    ----------------------------------------------------------- ------------- --------------- ---------------
    Diluted   weighted   average   number  of  common  shares
    outstanding                                                       3,001          2,922            2,921
    ----------------------------------------------------------- ------------- --------------- ---------------
    Diluted earnings (loss) per common share                        $   .71        $ (1.89)         $  (.45)
    ----------------------------------------------------------- ------------- --------------- ---------------

</TABLE>



     Comprehensive Income (Loss)

               The  Company  follows  SFAS  No.  130  "Reporting   Comprehensive
     Income." SFAS No. 130 establishes  standards for reporting and presentation
     of  comprehensive  income (loss) and its  components



                                       45
<PAGE>


     (revenues,  expenses,  gains and  losses) in a full set of  general-purpose
     financial  statements.  This statement also requires that all components of
     comprehensive  income (loss) be displayed with the same prominence as other
     financial  statements.  Comprehensive  income (loss) consists of net income
     (loss) and foreign currency  translation  adjustments.  The effects of SFAS
     No.  130 are  presented  in the  accompanying  Consolidated  Statements  of
     Stockholders' Equity.


     Stock Compensation

               The Company  grants stock options for a fixed number of shares to
     employees  with an exercise  price equal to the fair value of the shares at
     the date of grant.  The Company  accounts for stock option grants using the
     intrinsic-value  method in  accordance  with  Accounting  Principles  Board
     Opinion No. 25,  "Accounting for Stock Issued to Employees"  ("APB 25") and
     related  Interpretations.  Under the  intrinsic-value  method,  because the
     exercise  price of the  Company's  employee  stock  options is less than or
     equals the market price of the  underlying  stock on the date of grant,  no
     compensation  expense is  recognized.

               Had  compensation  cost  for  the  Company's  stock  options  and
     employee stock purchase plan been determined  consistent with SFAS No. 123,
     "Accounting for  Stock-Based  Compensation"  and SFAS 148,  "Accounting for
     Stock Based  Compensation - Transition and  Disclosure,"  the Company's net
     income(loss)  and basic and diluted net  income(loss)  per share would have
     been:


                                       46

<PAGE>

<TABLE>
<CAPTION>

<S>                                                        <C>                 <C>                     <C>

                                                               2004                 2003                   2002
                                                         ------------------- --------------------- --------------------

Net income (loss) - as reported                            $ 2,134,000         $ (5,529,000)           $(1,328,000)

Add:  Stock based compensation
   included in net income as reported                              --                    --                     --
Deduct stock based compensation
   determined under fair value based
   methods for all awards                                    (252,000)             (329,000)              (303,000)
                                                         ------------------- --------------------- --------------------

Net income (loss) - pro forma                              $ 1,882,000         $ (5,858,000)           $(1,631,000)
                                                         =================== ===================== ====================


Basic income (loss) per share - as reported                $       .72         $      (1.89)           $     (0.45)

Diluted income (loss) per share - as reported              $       .71         $      (1.89)           $     (0.45)


Basic income (loss) per share -   pro forma                $        64         $      (2.00)           $     (0.56)

Diluted income (loss) per share -  pro forma               $       .63         $      (2.00)           $     (0.56)

</TABLE>




               The weighted  average fair value of those options  granted during
     the years ended  December 31, 2004,  2003 and 2002 was  estimated as $5.39,
     $3.17 and  $3.52,  respectively.  The fair  value of each  option  grant is
     estimated on the date of grant using the Black-Scholes option-pricing model
     with the following weighted average assumptions: risk-free interest rate of
     4.18%,  3.97% and 4.30% for 2004,  2003 and 2002 grants,  respectively;  an
     expected  life of six  years;  volatility  of 130%,  137% and  147%;  and a
     dividend yield of zero for 2004, 2003 and 2002 grants, respectively.

     Reclassifications

               Certain  reclassifications of prior years' amounts have been made
     to conform to the current year presentation.

     Recent Accounting Standards or Accounting Pronouncements

               In December 2004, the FASB issued FAS No. 123( R) ,  "Share-Based
     Payment,"  an  amendment  of FASB  Statements  123 and 95. FAS No,  123( R)
     replaced  FAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  and
     supercedes APB Opinion No. 25,  "Accounting for Stock Issued to Employees."
     This  statement  requires  companies to  recognize  the fair value of stock
     options  and other  stock-based  compensation  to  employees  prospectively
     beginning with fiscal  periods  beginning  after June 15, 2005.  This means
     that the Company  will be required  to  implement  FAS No, 123( R) no later
     than the quarter  beginning  July 1, 2005. The Company  currently  measures
     stock-based  compensation  in  accordance  with  APB  Opinion  No.  25,  as
     discussed above. The Company anticipates  adopting the modified prospective
     method of FAS No.  123( R) on July 1,  2005.  The  impact on the  company's
     financial  condition or results of operations will depend on the number and
     terms of stock options outstanding on the date of change, as well as future
     options that may be granted.



                                       47
<PAGE>


               In January  2003,  the FASB  issued  Interpretation  No. 46 ("FIN
     46"),  "Consolidation  of Variable  Interest  Entities" was issued.  FIN 46
     provides  guidance on consolidating  variable interest entities and applies
     immediately  to variable  interests  created  after  January 31,  2003.  In
     December 31, 2003, the FASB revised and superceded FIN 46 with the issuance
     of FIN 46R in order to  address  certain  implementation  issues  that were
     adopted  the first  reporting  period  ending  after  March 15,  2004.  The
     interpretation  requires  variable  interest entities to be consolidated if
     the  equity  investment  at risk is not  sufficient  to permit an entity to
     finance its  activities  without  support from other  parties or the equity
     investors lack certain  specified  characteristics.  The adoption of FIN 46
     did not have an impact on the  Company's  financial  position  or result of
     operations.

               In May 2003, the FASB issued  Statement no. 150,  "Accounting for
     Certain Financial  Instruments with Characteristics of both Liabilities and
     Equity"  ("SFAS  150").  SFAS 150  establishes  standards for how an issuer
     classifies and measures certain financial  instruments with characteristics
     of both  liabilities  and  equity.  It requires  that an issuer  classify a
     financial  instrument  that is within its scope as a liability (or an asset
     in  some   circumstances).   Many  of  those  instruments  were  previously
     classified  as equity.  SFAS 150 is  effective  for  financial  instruments
     entered into or modified  after May 31, 2003, and otherwise is effective at
     the beginning of the first interim  period  beginning  after June 15, 2003.
     The adoption of SFAS 150 did not have an impact on the Company's  financial
     position or results of operation.

3.       Reverse Stock Split

               On September 2, 2003, the Company implemented a 1:5 reverse stock
     split  of the  Company's  outstanding  common  stock  that  was  previously
     approved at the Annual Meeting of  Stockholders.  The par value of all post
     reverse split shares remained  unchanged at $0.01. The Company redeemed all
     fractional  shares  that  resulted  from the reverse  split.  The number of
     authorized shares was unchanged at 25,000,000.

               Prior years' results have been restated to reflect the results of
     the reverse  stock split,  which  includes the common stock and  additional
     paid-in capital captions on the balance sheet as well as the shares used in
     computing earnings per share.

4.   Receivables

     December 31,                           2004             2003
     ---------------------------- ----------------- -----------------
     Billed receivables                $ 4,379,000       $ 3,013,000
     Unbilled receivables                2,049,000           930,000
                                  ----------------- -----------------

                                       $ 6,428,000       $ 3,943,000
                                  ================= =================

               Billed receivables  represent billings for the Company's products
     and services to end users and value added resellers.  Unbilled  receivables
     represent  contractual  amounts due within one year under software licenses
     that have been  delivered  but have not been  billed.  Billed and  unbilled
     receivables are shown net of reserves for estimated uncollectible amounts.

               For the years ended December 31, 2004, 2003 and 2002, the Company
     recorded  bad  debt  expense  of  $41,000,   $479,000,  and  $533,000,  and
     write-offs of $483,000  $687,000,  and  $470,000.  The decrease in bad debt
     expense  in  2004 is  primarily  due to  improvement  in  customer  payment
     performance.


                                       48
<PAGE>
<TABLE>
<CAPTION>

<S>                                     <C>             <C>               <C>

5.   Property and Equipment

                                                                  December 31,
                                    Useful Life             2004                2003
                                    -----------             ----                ----
  Computers and related
     equipment                          3               $ 2,246,000       $ 3,484,000
  Furniture and fixtures                10                  468,000           470,000
  Leasehold improvements            Lease term              111,000           111,000
  Office equipment                     3-7                  993,000           843,000
                                                     ---------------- -----------------
                                                          3,818,000         4,908,000
  Less:  Accumulated
     depreciation and amortization                      (3,270,000)        (4,399,000)
                                                     ---------------- -----------------

                                                        $   548,000       $   509,000
                                                     ================ =================
</TABLE>


               Depreciation  and  amortization   expense  for  the  years  ended
     December  31, 2004,  2003 and 2002 was  $286,000,  $310,000  and  $425,000,
     respectively.

               In 2002 and 2003,  the Company  acquired  title to the  equipment
     under  capital  leases,  which had a gross  asset  value of  $133,000.  The
     equipment is included in computers and related equipment.

6.   Capitalized Software Development Costs

<TABLE>
<CAPTION>

<S>                                             <C>          <C>             <C>


                                          Remaining Weighted
December 31,                                 Average Life       2004             2003
-------------                             ------------------    ----             ----
Capitalized software development costs          1.68         $ 5,209,000     $ 4,984,000
Less:  Accumulated amortization                                3,689,000       3,755,000
                                                            -------------- ---------------

                                                             $ 1,520,000     $ 1,229,000
                                                            ============== ===============
</TABLE>


               The Company capitalized  software development costs for the years
     ended December 31, 2004, 2003 and 2002 of $1,380,000, 480,000 and $807,000,
     respectively.  Amortization  of  software  development  costs for the years
     ended  December  31,  2004,  2003  and 2002 was  $1,088,000,  $599,000  and
     $870,000, respectively. Additionally, for the year ended December 31, 2004,
     the Company wrote off $1,155,000 of fully  amortized  capitalized  software
     for old versions that had been deemed no longer useful or functional.

     Estimated amortization for the next two years is as follows:

               2005       $         926,000
               2006                 594,000
                               --------------
                          $       1,520,000
                               ==============




                                       49
<PAGE>



<TABLE>
<CAPTION>

<S>                                                  <C>                  <C>

7.   Accounts Payable and Accrued Expenses


       December 31,                                      2004                2003
  ------------------------------------------- ------------------- --------------------
  Accounts payable                                   $   688,000          $   656,000
  Accrued compensation and related benefits            1,229,000            1,029,000
  Accrued professional services                          197,000              241,000
  Sales and payroll taxes                                410,000              298,000
  Other accrued liabilities                              670,000              779,000
                                              ------------------- --------------------

                                                     $ 3,194,000          $ 3,003,000
                                              =================== ====================
</TABLE>

8.   Income Taxes

 The provision (benefit) for income taxes is as follows:

Years ended December 31,      2004       2003        2002
-------------------------------------------------------------
Current:
              Federal            $--        $--   $      --
              State               --         --          --
              Foreign             --         --          --
                          -----------------------------------
                                  --         --          --
Deferred:
              Federal             --         --     200,000
                          -----------------------------------
                                 $--        $--   $ 200,000
                          ===================================


              The approximate income tax effect of each type of temporary
difference is as follows:


 December 31,                                          2004            2003
 ----------------------------------------------------------------------------
  Deferred income tax assets:
      Revenue recognition                          $      --      $    20,000
      Accruals and reserves not
          currently deductible for tax                 126,000        313,000
      Benefit of net operating loss carryforward     7,882,000      8,015,000
      Depreciation                                      32,000         94,000
      Alternative minimum tax                          370,000        370,000
      Capital loss carryforward                         10,000         10,000
                                                   --------------------------
                                                     8,420,000      8,822,000
  Deferred income tax liabilities:
      Capitalized software development costs          (547,000)      (455,000)
                                                   --------------------------
                                                     7,873,000      8,367,000
      Valuation reserve                             (7,873,000)    (8,367,000)
                                                   --------------------------

      Net deferred income tax asset                $      --      $        --
                                                   ==========================

               For  all  years  presented,  the  Company  provided  a  valuation
     allowance for all of its net deferred tax asset based on the uncertainty of
     the realization of future taxable income.



                                       50
<PAGE>


               In 2004, the Company utilized  $494,000 of its reserved  deferred
     tax asset to offset its  provision  for income  taxes,  primarily  from the
     utilization of its net operating loss  carryforward  and turning of certain
     accruals.  In the years ended  December  31,  2003 and 2002,  there were no
     income taxes owed,  due to the Company's  loss  position.  During 2002, the
     Company increased its valuation  allowance to fully offset its deferred tax
     asset of $200,000.

               The Company has a tax holiday in Israel,  which  expires in 2010.
     Net income of the Israeli  Subsidiary  was  $334,950  and  $216,276 for the
     years  ending  December  31,  2004  and  2003,  respectively.  The  Israeli
     subsidiary  has  net  carryforward  losses  for  Israeli  tax  purposes  of
     approximately 1.2 million.

               As of December 31,  2004,  the Company had a net  operating  loss
     carryforward for United States federal income tax purposes of approximately
     $23,200,000.  Included in the aggregate net operating loss  carryforward is
     $7,761,000 of tax deductions related to equity transactions, the benefit of
     which will be credited to stockholders'  equity, if and when realized after
     the other tax deductions in the carryforwards  have been realized.  The net
     operating loss carryforward begins to expire in 2016.

               The Company  does not provide  for  federal  income  taxes or tax
     benefits  on the  undistributed  earnings  or losses  of its  international
     subsidiaries  because  earnings  are  reinvested  and,  in the  opinion  of
     management,  will continue to be reinvested  indefinitely.  At December 31,
     2004,  the Company had not  provided  federal  income  taxes on  cumulative
     earnings of individual  international  subsidiaries  of $1,850,000.  Should
     these earnings be  distributed  in the form of dividends or otherwise,  the
     Company would be subject to both U.S. income taxes and withholding taxes in
     various international jurisdictions. Determination of the related amount of
     unrecognized  deferred U.S. income tax liability is not practicable because
     of the complexities associated with its hypothetical calculation.  As noted
     above,  the Company has  significant net operating loss  carryforwards  for
     U.S.  federal  income  taxes  purposes,  which are  available to offset the
     potential tax liability if the earnings were to be distributed.

               The extent to which the loss  carryforward  can be used to offset
     future taxable income and tax  liabilities,  respectively,  may be limited,
     depending on the extent of ownership changes within any three-year period.

9.   Commitments and Contingencies

               The Company leases  facilities and equipment under  noncancelable
     operating  leases.Rent  expense  under all  operating  leases for the years
     ended December 31, 2004, 2003 and 2002 was $701,000, $867,000 and $970,000,
     respectively.

              Future minimum lease payments under the Company's leases as of
December 31, 2004 are as follows:
                                                Operating Leases

              2005                                  $   873,000
              2006                                      818,000
              2007                                      765,000
              2008                                      693,000
              2009                                      426,000
                                              ----------------------

              Total minimum lease payments          $ 3,575,000
                                              ======================

               On  September  11,  2002,  the  Company  invested  $300,000  in a
     certificate  of deposit,  which was pledged as collateral on an outstanding
     letter  of credit  related  to a lease  obligation.  It was  classified  as



                                       51
<PAGE>

     restricted   cash  on  the  balance  sheet.   The  certificate  of  deposit
     automatically  renews  every  six  months.  The  letter of credit is due to
     expire in February 2009.

               From time to time,  the Company may be involved in certain  legal
     actions and customer  disputes  arising in the ordinary course of business.
     In the  Company's  opinion,  the  outcome of such  actions  will not have a
     material adverse effect on the Company's  financial  position or results of
     operations.

10.  Profit Sharing Plan/Savings Plan

               The  Company  maintains  a  discretionary  profit  sharing  plan,
     including a voluntary  Section 401(k)  feature,  covering all qualified and
     eligible  employees.  Company  contributions to the profit sharing plan are
     determined at the discretion of the Board of Directors. The Company matches
     25% of eligible employees' contributions to the 401(k) plan up to a maximum
     of  1.5%  of  each  employee's   compensation.   The  Company   contributed
     approximately $50,000, $61,000 and $57,000 for the years ended December 31,
     2004, 2003 and 2002, respectively.

11.  Equity Plans

     Stock Option Plans

               The  Company has Stock  Option  Plans (the  "Plans")  under which
     incentive and non-qualified  stock options may be granted to its employees,
     officers,  directors  and others.  Generally,  incentive  stock options are
     granted at fair value,  become exercisable over a four-year period, and are
     subject to the employee's continued  employment.  Non-qualified options are
     granted at exercise  prices  determined  by the Board of Directors and vest
     over  varying  periods.  A summary  of the  status of the  Company's  stock
     options as of December 31, 2004, 2003 and 2002 and changes during the years
     then ended is as follows:

<TABLE>
<CAPTION>

<S>                  <C>                         <C>              <C>              <C>         <C>              <C>

                                                                                                     OPTIONS
                                                                 OPTIONS OUTSTANDING               EXERCISABLE
                                                                 -------------------               -----------

                                                Shares                           Wtd. Avg.                    Wtd. Avg.
                                               Available                         Exercise                     Exercise
                                               for Grant           Shares          Price       Shares         Price
                                         ------------------------------------------------------------------------------
    Balance, January 1, 2002                     250,000          345,000          $ 8.38      101,000          $10.78
       Granted at market                        (174,000)         174,000
       Cancelled                                  72,000          (72,000)
       Expired                                    (1,000)              --
                                         ------------------------------------------------------------------------------
    Balance, December 31, 2002                   147,000          447,000          $ 6.24      138,000          $8.96
       Granted at market                        (127,000)         127,000
       Cancelled                                  96,000          (96,000)
                                         ------------------------------------------------------------------------------
    Balance, December 31, 2003                   116,000          478,000          $ 5.99      213,000          $7.91
       Granted at market                        (110,000)         110,000              --      --                  --
       Cancelled                                 150,000         (151,000)             --      --                  --
       Exercised                                      --          (37,000)             --      --                  --
       Expired                                   (43,000)              --              --      --                  --
                                         ------------------------------------------------------------------------------
    Balance, December 31, 2004                   113,000          400,000          $ 5.73      190,000          $7.09
                                         ==============================================================================
</TABLE>





                                       52
<PAGE>

     The following table summarizes information about stock options outstanding
at December 31, 2004:

<TABLE>
<CAPTION>

<S>       <C>         <C>             <C>            <C>                  <C>             <C>                <C>

                                              OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                                 ----------------------------------------------------    --------------------------------
                                                  Weighted
                                                   Average
           Range of                               Remaining            Weighted                           Weighted
           Exercise                 Number         Contract            Average             Number          Average
            Prices               Outstanding     Life (Years)       Exercise Price       Exercisable   Exercise Price
            ------               -----------     ------------       --------------       -----------   --------------
          $ 2.75  -   $  4.85         287,000        6.46                 $ 3.94          124,000            $ 4.38

          $ 5.31  -   $  8.45          88,000        7.49                 $ 7.56           41,000            $ 7.48

          $12.50  -   $ 31.25          25,000        3.24                 $19.81           25,000            $19.81
          ------      ------          ------                                               ------
          $ 2.75  -   $ 31.25         400,000        6.49                 $ 5.73          190,000            $ 7.09

</TABLE>


     Employee Stock Purchase Plan

               In May 1995, the Company  adopted an employee stock purchase plan
     (the "ESPP") which allows full-time  employees with one year of service the
     opportunity  to  purchase  shares of the  Company's  common  stock  through
     payroll deductions at the end of bi-annual  purchase periods.  The purchase
     price is the lower of 85% of the average  market price on the first or last
     day of the  purchase  periods.  An employee may purchase up to a maximum of
     100  shares  or 10% of the  employee's  base  salary,  whichever  is  less,
     provided that the employee's  ownership of the Company's stock is less than
     5% as defined in the ESPP.  Pursuant to the ESPP,  50,000  shares of common
     stock were  reserved  for  issuance.  During  2004,  2003 and 2002,  shares
     purchased  were 500, 1,100 and 1,200,  respectively.  At December 31, 2004,
     there were 29,621 shares available for future purchases. The plan is set to
     expire on June 30, 2005.

12.      Related Party Transactions

               In  November   2001,   the  Company   entered  into  a  five-year
     development  and  license  agreement  with a third party owned in part by a
     Director of the Company.  The agreement requires the third party to design,
     develop and deliver a product to be re-sold by the Company in exchange  for
     a royalty fee. In accordance  with the agreement,  the Company paid royalty
     fees  totaling  $32,500,  $22,500  and  $37,500  in 2004,  2003  and  2002,
     respectively.

               During 2003, the Director  terminated his  relationship  with the
     Company  and was  engaged  as a sales  consultant.  In this  capacity,  the
     Company made payments  totaling $17,000 in 2003. In January 2004, the sales
     consultancy was terminated.






                                       53
<PAGE>


13.      Geographic Segment Data

               The  Company  and its  subsidiaries  are  engaged in the  design,
     development,  marketing  and  support of its  service  management  software
     solutions.  Substantially  all  revenues  result  from the  license  of the
     Company's software products and related professional  services and customer
     support  services.  The Company's chief executive officer reviews financial
     information presented on a consolidated basis, accompanied by disaggregated
     information  about  revenues by  geographic  region for  purposes of making
     operating decisions and assessing financial performance.  Accordingly,  the
     Company considers itself to be in a single reporting segment,  specifically
     the license, implementation and support of its software.

<TABLE>
<CAPTION>

<S>                                                         <C>                <C>                   <C>

    Year ended December 31,                                         2004                2003                 2002
    -------------------------------------------------------------------------------------------------------------------
    Revenues:
         Software license fees
              United States
                    Domestic                                $     4,285,000    $       1,151,000     $      4,296,000
                    Export                                                -                    -               72,000
                                                         --------------------------------------------------------------
                         Total United States
                             software license fees                4,285,000            1,151,000            4,368,000

              Europe                                              2,457,000              337,000            1,151,000
              Other foreign                                       1,250,000              447,000              985,000
                                                         --------------------------------------------------------------
                         Total foreign software
                             license fees                         3,707,000              784,000            2,136,000
                                                         --------------------------------------------------------------
                         Total software license                   7,992,000            1,935,000            6,504,000
    fees

         Services and maintenance
              United States
                    Domestic                                      6,719,000            6,239,000            7,037,000
                    Export                                          749,000            1,140,000              252,000
                                                         --------------------------------------------------------------
                          Total United States
                              service and
                              maintenance revenue                 7,468,000            7,379,000            7,289,000
                                                         --------------------------------------------------------------

              Europe                                              2,584,000            2,300,000            2,126,000
              Other foreign                                       1,273,000            1,227,000              879,000
                                                         --------------------------------------------------------------
                          Total foreign service
                              and
                              maintenance revenue                3,857,000,            3,527,000            3,005,000
                                                         --------------------------------------------------------------
                          Total service and
                              maintenance revenue                11,325,000           10,906,000           10,294,000
                                                         --------------------------------------------------------------

         Total revenue                                      $    19,317,000    $      12,841,000     $     16,798,000
                                                         ==============================================================
         Profit(loss) from continuing operations
              United States                                 $       913,000    $      (3,757,000)    $     (1,332,000)
              Europe                                                 60,000                                  (454,000)
                                                                                      (1,361,000
              Other foreign                                       1,161,000             (411,000)             458,000
                                                         --------------------------------------------------------------
                    Total income(loss)
        from continuing operations                          $     2,134,000    $      (5,529,000)    $     (1,328,000)

                                                         ==============================================================
         Identifiable assets
              United States                                 $     8,550,000    $       6,493,000     $     11,786,000
              Europe                                              4,041,000            2,404,000            2,753,000
              Other foreign                                       1,163,000            1,199,000            1,904,000
                                                         --------------------------------------------------------------

           Total assets                                     $    13,754,000    $      10,096,000     $     16,443,000
                                                         ==============================================================


</TABLE>



                                       54
<PAGE>


<TABLE>
<CAPTION>

<S>                                                <C>                <C>                <C>                <C>

14.  Selected Consolidated Quarterly Financial Data (Unaudited)

    2004 Quarter Ended                              Dec 31,             Sep 30,             Jun 30,            Mar 31,
    --------------------------------------------------------------------------------------------------------------------
    Revenues                                       $5,012,000         $4,004,000         $ 4,416,000        $ 5,884,000
    Gross profit                                    2,619,000          2,086,000           2,493,000          3,927,000
    Net income                                        186,000            155,000             309,000          1,483,000

    Basic net income per share                            .06                .05                 .10                .51
    Diluted net income per share                          .06                .05                 .10                .51
    Shares used in computing basic
      net income per share (in
      thousands)                                        2,960              2,954               2,954              2,921
    Shares used in computing diluted
    net income per share (in
    thousands)                                          3,013              2,992               2,972              2,923


    2003 Quarter Ended                               Dec 31,             Sep 30,             Jun 30,            Mar 31,
    --------------------------------------------------------------------------------------------------------------------
    Revenues                                       $2,871,000         $2,844,000         $ 3,138,000        $ 3,988,000
    Gross profit                                      755,000            983,000           1,127,000          2,115,000
    Net loss                                       (1,979,000)        (1,580,000)         (1,503,000)          (467,000)

    Basic and diluted net loss per share                (0.68)             (0.54)              (0.51)             (0.16)

    Shares used in computing basic
      and diluted net loss per share
      (in thousands)                                    2,922              2,922               2,921              2,921

</TABLE>



Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.

         None.

Item 9A. Controls and Procedures.

               Our management,  under the supervision and with the participation
     of the Chief Executive Officer and Chief Financial Officer,  have evaluated
     the  effectiveness of our controls and procedures  related to our reporting
     and disclosure obligations as of December 31, 2004, which is the end of the
     period  covered  by  this  Annual  Report  on  Form  10-K.  Based  on  that
     evaluation,  the Chief Executive  Officer and Chief Financial  Officer have
     concluded  that our  disclosure  controls and  procedures  are effective to
     ensure  that  (a)  material  information  relating  to  us,  including  our
     consolidated  subsidiaries,  is made known to these officers by our and our
     consolidated   subsidiaries   other   employees,    particularly   material
     information  related to the period for which this periodic  report is being
     prepared;  and (b) this  information  is recorded,  processed,  summarized,
     evaluated and reported, as applicable, within the time periods specified in
     the rules and forms promulgated by the Securities and Exchange Commission.

               There were no changes  that  occurred  during the fiscal  quarter
     ended December 31, 2004 that have  materially  affected,  or are reasonable
     likely  to  materially   affect,   our  internal  controls  over  financial
     reporting.

Item 9B.  Other Information

               None.


                                       55
<PAGE>



                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

         The Directors and the  executive  officers of the Company,  their ages,
business  experience  and the positions  currently held by each such person with
the Company are listed below.

         Zack B.  Bergreen,  59,  founded  the Company in  November  1979.  From
November 1979 to January 1998, he served as President, Treasurer and Director of
the Company.  In April 1995, he was elected Chief Executive Officer and Chairman
of the Board of Directors.  From January 1998 through  August 1999 Mr.  Bergreen
served as Chairman of the Board and Chief Executive Officer. From August 1999 to
May 2000, his sole title was Chairman of the Board. Since June 2000, in addition
to Chairman of the Board,  Mr.  Bergreen  resumed the positions of President and
Chief Executive  Officer.  Mr. Bergreen holds a Bachelor of Science and a Master
of Science degree in Electrical Engineering from the University of Maryland.

         Adrian Peters, 55, joined the Company's Board of Directors in June 2000
and is a member of the Audit  Committee.  He is the  President  and  founder  of
Tellstone  (previously  Boston  Partners),  a firm that specializes as strategic
advisors to high-tech  firms,  starting in 1995. From 1986 through 1995, he held
positions as President and CEO of various companies,  within Siemens AG, a large
maker of telecommunications  and industrial and other equipment.  Prior to that,
he held senior positions at Federale,  an investment firm,  Andersen  Consulting
and IBM.  Mr.  Peters  studied  science and  engineering  at the  University  of
Stellenbosch in South Africa as well as management at Harvard Business School.

         Thomas J. Reilly, Jr., 65 joined Astea's Board in September 2003. He is
also  Chairman  of the Audit  Committee.  A  thirty-one  year  veteran of Arthur
Andersen,  he brings  extensive  experience  auditing  both  public and  private
corporations  in the  manufacturing,  professional  services,  construction  and
distribution  industries  to  the  Company.  He was  partner  in  charge  of the
Philadelphia  Audit Division of Arthur Andersen for seven years and participated
in Quality  Control  reviews of several U.S. and  International  offices  before
retiring in 1996.

         Eric Siegel, 48, joined Astea's Board in September 2002 and is a member
of the Audit  Committee.  In 1983,  he  founded  Siegel  Management  Company,  a
strategy  consulting and investment  banking advisory firm with a diverse client
base;  principally  middle market firms.  His expertise and  experience had been
utilized by growth companies, public market and acquisition candidates, industry
consolidators and turnarounds. He also serves on the Board of NCO Group (NASDAQ:
NCOG), a provider of outsourced  accounts  receivable  management and collection
services,  and PSCInfoGroup,  a privately backed information management company.
An  established  author,  he has been a lecturer  in  management  at the Wharton
School for over twenty years.  Mr.  Siegel is a magna cum laude  graduate of the
University  of  Pennsylvania  and  received an MBA from the Wharton  School with
honors.

         George S.  Rapp,  52,  joined  Astea in April  2004 as Chief  Financial
Officer and Treasurer.  Mr. Rapp is a certified  public  accountant and has over
twenty-five  years of experience in financial  management and  reporting.  He is
responsible  for the  company's  financial  planning,  investor  relations,  and
executive  guidance to help drive corporate  performance.  Prior to Astea,  from
June 2002 to January  2004,  Mr. Rapp served as Senior Vice  President and Chief
Financial Officer of Advanta Bank Corp, a commercial credit card issuer based in
Spring House, PA, which is a subsidiary of Advanta Corporation. From August 2000
to June 2002,  Mr.  Rapp served as Senior Vice  President  and Chief  Accounting
Officer of Sovereign  Bancorp in Philadelphia,  PA.  Immediately  prior to that,
from 1995 to 2000, Mr. Rapp served as Chief Financial  Officer of Republic First
Bancorp, a commercial bank holding company based in Philadelphia,  Pennsylvania.
Mr. Rapp received his Bachelor of Science degree from St.  Joseph's  University.
Mr. Rapp resigned on January 4, 2005.



                                       56
<PAGE>


         Rick Etskovitz,  50, joined Astea  International  in June 2000, when he
was elected chief  financial  officer and treasurer.  Responsible for the firm's
financial  planning,  investor  relations,  and executive guidance to help drive
corporate  performance,  Rick brings to his position 25 years of  experience  in
financial management and reporting. A certified public accountant, he previously
served  Astea for seven  years as the  engagement  partner  from an  independent
accounting firm. Before beginning his career in private practice,  Rick was part
of the financial  management team at Dupont where he held  responsibilities  for
Mergers and Acquisitions, Financial Planning, Corporate Accounting and Benefits.
Rick received his Bachelor of Science from the Pennsylvania State University and
his Masters of Business  Administration  from the Wharton Graduate School at the
University of Pennsylvania.  Mr. Etskovitz  resigned from the firm in April 2004
and returned as CFO on January 4, 2005.

         John  Tobin,  39,  joined  the  Company in June 2000 and serves as Vice
President, General Counsel, and Secretary. Mr. Tobin is responsible for handling
the legal affairs of the Company,  along with various corporate  development and
business  development  initiatives.  Prior to joining Astea,  John worked at the
Philadelphia  law firms Pepper  Hamilton LLP and Wolf,  Block,  Schorr and Solis
Cohen LLP,  specializing in corporate  transactions and  intellectual  property.
Prior to returning to the  Philadelphia  area in 1998,  he worked as a corporate
and  entertainment  lawyer  in Los  Angeles,  specializing  in  motion  picture,
television and music  transactions  and  licensing,  most recently with PolyGram
Filmed  Entertainment.  Mr. Tobin  received  his  Bachelor of Science  degree in
Economics from the Wharton School of the University of Pennsylvania in 1987, and
received his law degree from the University of Pennsylvania in 1992.

         Kenneth Roy, 45, Vice President of Sales, is chartered with leading the
Company's  sales  operations to drive  revenue and market share.  Mr. Roy joined
Astea in December 2003.  Immediately  prior to Astea,  he worked at PTC, Inc., a
provider   of  Product   Lifecycle   Management   software   based  in  Needham,
Massachusetts,  where  he was a  Global  Account  Manager.  From  July  2001  to
September  2002 he worked as Director of Sales for the  Northeast  at  SynQuest,
Inc., a Norcross,  Georgia based supply chain event planning software  provider.
Prior to that, from December 1999 to July 2001, he was a Regional Vice President
at VerticalNet Solutions in Horsham, Pennsylvania,  selling enterprise software.
Mr. Roy received a Bachelor of Science degree in Organizational  Management from
Eastern College and a veteran of the U.S. Marine Corps.

         Marikit  Klein-Smith,  37, Vice President,  Marketing,  joined Astea in
April 2003 and brings over 15 years of experience in high-tech  marketing,  with
progressive  management  experience at leading  enterprise  software and service
companies.  She is  responsible  for  the  Company's  branding  initiatives  and
oversees  product  marketing,  lead  generation,  public  relations  and analyst
relation  efforts.  Prior to joining  Astea,  from April 2001 until  April 2003,
Klein-Smith was a strategic marketing consultant for Full Circle Communications.
Previously,  she spent 12 years in the SAP enterprise software market, where she
held the position of Vice  President of  Marketing  at eOnline,  an  application
service   provider   for  SAP  software   (2000-2001);   Director  of  Corporate
Communications at SAP America, one of the largest enterprise software developers
(1998 to 2000),  Global Marketing Manager at Deloitte  Consulting's SAP practice
(1995 to 1998), and Field  Marketing/Public  Relations Specialist at SAP America
(1989 to 1995).  Klein-Smith  holds a  Bachelor  of Science  in  Economics  from
Ursinus College.

         Section  16(a) of the Exchange Act  requires the  Company's  Directors,
executive  officers and holders of more than 10% of the  Company's  Common Stock
(collectively,  "Reporting Persons") to file with the Commission initial reports
of ownership and reports of changes in ownership of Common Stock of the Company.
Such  persons  are  required by  regulations  of the  Commission  to furnish the
Company  with copies of all such  filings.  Based on its review of the copies of
such filings  received by it with respect to the fiscal year ended  December 31,
2004 and written  representations  from certain Reporting  Persons,  the Company
believes  that all  Reporting  Persons  complied  with all Section  16(a) filing
requirements in the fiscal year ended December 31, 2004.



                                       57
<PAGE>


         The Company's  audit committee  includes Adrian A. Peters,  Eric Siegel
and Thomas J. Reilly,  Jr. Thomas J. Reilly, Jr. serves as the audit committee's
financial  expert.  In this  capacity,  Mr. Reilly is  independent,  pursuant to
Section 10A(m)(3) of the Exchange Act.

         The  Company has  adopted  the Code of Ethics for Chief  Executive  and
Senior Financial Officers ("Code of Ethics"), which the Chief Executive Officer,
Chief  Financial  Officer and  Controller of the Company are expected to comply.
The Code of Ethics is a supplement  to the  company-wide  Code of Conduct and is
available in print upon request.  If any substantive  amendments are made to the
Code of  Ethics  or if there  is a grant of a  waiver,  including  any  implicit
waiver,  from a provision of the code to the Company's Chief Executive  Officer,
Chief Financial  Officer or Controller,  the Company will disclose the nature of
such amendment or waiver on the Company's website or in a report on Form 8-K.

Item 10A.  Departure of Directors or Principal Officers; Election of Directors;
           Appointment of Principal Officers

         Effective January 5, 2005, Rick Etskovitz has been appointed as interim
Chief Financial  Officer and Treasurer,  replacing George Rapp, who has resigned
those positions.


                                       58
<PAGE>




Item 11. Executive Compensation.

         The following table sets forth information  concerning the compensation
for  services  in all  capacities  to the  Company  for the fiscal  years  ended
December 31, 2004, 2003, and 2002, of the following  persons (i) each person who
served as Chief  Executive  Officer during the year ended December 31, 2004, and
(ii) four other executive officers of the Company in office at December 31, 2004
who earned more than $100,000 in salary and bonus in fiscal 2004  (collectively,
the "Named Executive Officers").


<TABLE>
<CAPTION>

<S>                                         <C>         <C>

                                                                    SUMMARY COMPENSATION TABLE

                                                   Annual Compensation                 Long-Term
                                                                                      Compensation
                                        -------------------------------------------   ------------
                                                                                      Securities
                                                                                      Underlying
                                                                                        Options         All Other
       Name and Principal Position         Year        Salary ($)     Bonus ($)      (# of shares)   Compensation ($)
       ---------------------------         -----       -----------    ----------     -------------   ----------------
 Zack B. Bergreen                           2004        $   210,000              --            --                  --
 Chairman of the Board and Chief            2003            210,000              --            --                  --
   Executive Officer                        2002            130,000              --            --               69,600 (1)

 George S. Rapp(7)                          2004        $   100,000                        30,000                  --
 Chief Financial Officer

 Rick Etskovitz (8)                         2004             54,338              --                                --
 Chief Financial Officer                    2003            129,525              --        10,000 (2)              --
                                            2002            127,050              --        10,000 (2)              --

 John Tobin (4)                             2004            139,681              --                                --
 Vice President and General Counsel         2003            150,306              --        10,000 (2)              --
                                            2002            151,033 (3)          --        10,000 (2)              --

 Ken Roy (5)                                2004            150,000         $ 44,470                               --
 Vice President, North American Sales       2003             15,865             --         35,000 (5)              --

 Marikit Klein-Smith (6)                    2004        $   104,327                                                --
 Vice President, Marketing                  2003             90,192         $  9,700       10,000 (6)



(1)  Includes premiums for term, split-dollar life insurance paid by the Company
     on behalf of the Named Executive Officer.
(2)  Represents  options to purchase  shares of Common Stock,  which was awarded
     based on merit.
(3)  Compensation paid to Coleman Legal, a third party legal services provider.
(4)  Hired as employee effective January 1, 2003.
(5)  Ken Roy joined Astea in November 2003.
(6)  Marikit Klein-Smith joined Astea in March 2003, resigned in November 2004.
(7)  George Rapp joined Astea in April 2004, resigned in January 2005. No shares
     have vested.
(8)  Rick Etskovitz terminated as CFO at April 2004 and rejoined in January 2005.


</TABLE>


                                       59
<PAGE>



Option Grants in Last Fiscal Year

     The following table sets forth each grant of stock options made during the
year ended December 31, 2004 to each of the Named Executive Officers:

<TABLE>
<CAPTION>


<S>                            <C>    <C>          <C>         <C>        <C>  <C>          <C>        <C>

                                                                          Individual Grants
                                                                          -----------------
                                               Percent of
                                                 Total                               Potential Realizable Value at
                               Number of        Options                                         Assumed
                               Securities      Granted to                             Annual Rates of Stock Price
                               Underlying      Employees      Exercise                  Appreciation for Option
                                Options        In Fiscal       Price     Expiration               Terms(2)
 Name                         Granted (#)        Year       ($/Share)(1)    Date              5%($)     10%($)
 ----                         -----------        ------     ------------    ----              -----    ------
 George Rapp                   30,000 (3)          28%         $3.41      5/11/2014         $166,636   $265,340

</TABLE>


(1)  The  exercise  price  per  share of each  option  was fixed by the Board of
     Directors.
(2)  Amounts  reported in these columns  represent  amounts that may be realized
     upon exercise of the options  immediately  prior to the expiration of their
     term assuming the specified  compounded  rates of appreciation (5% and 10%)
     on the market  value of the  Company's  Common  Stock on the date of option
     grant over the term of the options.  These numbers are calculated  based on
     rules  promulgated  by the  Commission  and do not  reflect  the  Company's
     estimate  of future  stock price  growth.  Actual  gains,  if any, on stock
     option  exercises and Common Stock  holdings are dependent on the timing of
     such exercise and the future  performance  of the  Company's  Common Stock.
     There can be no assurance  that the rates of  appreciation  assumed in this
     table can be achieved or that the amounts reflected will be received by the
     individual.
(3)  Options to purchase  shares will vest in equal  installments on each of the
     first four anniversaries of the grant date.


Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

         The  following  table  sets  forth,  for  each of the  Named  Executive
Officers,  information  with respect to the exercise of stock options during the
year ended December 31, 2004 and the year-end value of unexercised options:


<PAGE>

<TABLE>
<CAPTION>

<S>                                                           <C>    <C>
                                                                                   Value of Unexercised
                               Shares                  Numbers of Unexercised      In-the-Money Options
                            Acquired on     Value       Options at Year End            at Year End
             Name           Exercise(#)  Realized($) Exercisable/Unexercisable  Exercisable/Unexercisable
             ----           ------------ ----------- -------------------------- --------------------------
      Zack B. Bergreen            --            --            60,000/20,000                    --

      Rick Etskovitz              --            --            16,250/13,750                    --

      John Tobin                  --            --            16,250/13,750                    --

      Ken Roy                     --            --             8,750/26,250                    --

      Marikit Klein-Smith         --            --                      --                     --


</TABLE>


Employment Agreements and Severance Arrangements with Executive Officers

         The Company has not entered into employment  agreements with any of its
current Executive Officers.

Board Interlocks and Insider Participation

         No executive  officer of the Company served as a member of the Board of
Directors,  compensation  committee,  or other committee  performing  equivalent
functions,  of  another  entity  one of whose  executive



                                       60
<PAGE>


officers served as a Director of the Company. Other than Mr. Bergreen, no person
who served as a member of the Board was,  during the fiscal year ended  December
31, 2004,  simultaneously  an officer,  employee or consultant of the Company or
any of its  subsidiaries.  Mr.  Bergreen  did  not  participate  in any  Company
determination of his own personal compensation matters.

Compensation of Directors

         Directors who are not employees of the Company  receive a $5,000 annual
retainer and a fee of $1,500 for attendance at each regular and special  meeting
of the  Board  of  Directors,  and are  also  reimbursed  for  their  reasonable
out-of-pocket  expenses incurred in attending meetings.  Non-Employee  Directors
may elect to receive,  in lieu of the foregoing cash compensation,  unrestricted
shares of Common  Stock of the  Company.  Shares of Common Stock in lieu of cash
compensation  are  acquired at the fair market  value of the Common Stock on the
last day of the calendar  quarter during which the cash  compensation was earned
and foregone.  Directors who are employees are not compensated for their service
on the Board of Directors or any committee thereof.


                                       61
<PAGE>






Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The  following  table sets  forth as of March 5, 2005:  (i) the name of
each person who, to the knowledge of the Company,  owned  beneficially more than
5% of the shares of Common Stock of the Company  outstanding at such date;  (ii)
the name of each Director;  and (iii) the name of each current executive officer
of the  Company.  The  following  table  also sets forth as of March 5, 2005 the
number  of  shares  owned  by each of such  persons  and the  percentage  of the
outstanding shares represented thereby, and also sets forth such information for
Directors, nominees and executive officers as a group.

<TABLE>
<CAPTION>

<S>              <C>                                          <C>               <C>

                                                             Amount of       Percent of
 Name and Address Of Beneficial Owner                        Ownership(1)     Class(2)
-------------------------------------                        ------------    ----------

 Zack B. Bergreen(3)                                          1,418,000         47%
     c/o Astea International
     240 Gibraltar Road
    Horsham, Pennsylvania 19044

 Adrian Peters (4)                                               14,200          *

 Eric Siegel (5)                                                  9,400          *

 Thomas J. Reilly, Jr. (6)                                        3,000          *

 Rick Etskovitz (7)                                              20,250          *

 George Rapp                                                          0          *

 John Tobin (8)                                                  16,250          *

 Ken Roy                                                          8,750          *

 Marikit Klein-Smith                                                  0          *

 Leviticus Partners, L.P.                                       250,000         7.8%

 Daniel Zeff                                                    234,883         7.9%

 All current directors, nominees and executive officers       1,974,733        48.9%
 as a group (8 persons)(1)-(8)

</TABLE>


*    Less than 1% of the outstanding shares of Common Stock.
(1)  Except as noted in the footnotes to this table, each person or entity named
     in the table has sole  voting  and  investment  power  with  respect to all
     shares of Common  Stock  owned,  based  upon  information  provided  to the
     Company by  Directors,  officers  and  principal  stockholders.  Beneficial
     ownership is determined in accordance  with the rules of the Securities and
     Exchange  Commission (the  "Commission") and includes voting and investment
     power with respect to shares of Common Stock  subject to options  currently
     exercisable or exercisable within 60 days after the Record Date ("presently
     exercisable stock options").
(2)  Applicable  percentage  of  ownership  as of the Record  Date is based upon
     2,959,727  shares of Common Stock  outstanding as of that date.  Beneficial
     ownership is determined in accordance  with the rules of the Commission and
     includes  voting and  investment  power with  respect to shares.  Presently
     exercisable  stock  options  are  deemed   outstanding  for  computing  the
     percentage ownership of the person holding such options, but are not deemed
     outstanding for computing the percentage of any other person.
(3)  Includes  1,093,203  shares  of  Common  Stock  held by trusts of which Mr.
     Bergreen and his wife are the only trustees,  209,192 shares held by trusts
     with  independent  trustees,  and 55,803  shares of Common  Stock held by a
     family  limited  partnership  of which  Mr.  Bergreen  is the sole  general
     partner.  Also  included  are 60,000  options,  all of which are  currently
     exercisable.
(4)  Board Of Director.  Represents  options to purchase  14,200 shares,  all of
     which are currently exercisable.
(5)  Board Of Director.  Represents  options to purchase  9,400  shares,  all of
     which are currently exercisable.




                                       62
<PAGE>

(6)  Board Of Director. Represents 1,000 shares of common stock and also options
     to purchase 2,000 all of which are exercisable.
(7)  Chief Financial  Officer.  Represents 4,000 shares of common stock and also
     options to purchase 16,250 shares all of which are currently exercisable.
(8)  Vice President and General Counsel.  Represents  options to purchase 16,250
     shares, all of which are currently exercisable.


Item 13. Certain Relationships and Related Transactions.

         Over the years,  the Company  paid  premiums on behalf of the  majority
stockholder and his wife under split dollar life insurance policies.  At the end
of 2002, the Company  stopped paying  premiums on these  policies.  In 2003, the
policies were  surrendered and the Company  received  $632,000 refund of all the
premiums it had paid over the life of the policy.

Item 14. Principal Accountant Fees and Services

         The following  table  presents  fees for  professional  audit  services
rendered  by BDO  Seidman,  LLP  for the  audit  of the  Company's  consolidated
financial  statements  for the years ended  December 31, 2004 and 2003, and fees
billed for other services rendered by BDO Seidman, LLP during those periods:

                                          2004                  2003
                                    -----------------      ----------------
       Audit Fees (1)               $   160,071            $   145,500
       Audit-related Fees (2)             9,000                  9,000
       Tax Fees (3)                      73,219                 62,200
                                         16,000                     --
                                    -----------------      ----------------
       Total (4)                    $   242,290            $   216,700
                                    =================      ================

(1)  Audit fees  consisted of fees for  professional  services  performed by BDO
     Seidman,  LLP for the audit of the Company's annual consolidated  financial
     statements and review of consolidated  financial statements included in the
     Company's  10-Q  filings,  and  services  that  are  normally  provided  in
     connection with statutory and regulatory filings or engagements.
(2)  Audit-related  fees  consisted of fees for assurance  and related  services
     performed by BDO Seidman,  LLP. This includes  employee  benefit plan audit
     and consulting on financial accounting and reporting standards.
(3)  Tax fees consisted of fees for tax compliance, tax advice and tax planning.
(4)  The Audit Committee pre-approved 100% of the fees for 2004.


                                       63
<PAGE>


                                     PART IV


Item 15. Exhibits and Financial Statement Schedules.

    (a)(1)(A)         Consolidated Financial Statements.

             i)       Consolidated Balance Sheets at December 31, 2004 and 2003
             ii)      Consolidated Statements of Operations for the years ended
                      December 31, 2004, 2003, and 2002
            iii)      Consolidated Statements of Stockholders' Equity for the
                      years ended December 31,
                      2004, 2003, and 2002
             iv)      Consolidated Statements of Cash Flows for the years ended
                      December 31, 2004, 2003, and 2002
             v)       Notes to the Consolidated Financial Statements

    (a)(1)(B)         Report of Independent Registered Public Accounting Firm.

    (a)(2)            Schedules.

             a)       Schedule II - Valuation and Qualifying Accounts

                      Schedule listed above has been omitted because the
                      information required to be set forth therein is not
                      applicable or is shown in the accompanying Financial
                      Statements or notes thereto.

    (a)(3)            List of Exhibits.

         The  following  exhibits  are  filed  as  part of and  incorporated  by
reference into this Annual Report on Form 10-K:

         Exhibit No        Description

         3(i).1   Certificate  of  Incorporation  of the  Company  (Incorporated
                  herein  by   reference   to  Exhibit  3.1  to  the   Company's
                  Registration  Statement  on Form  S-1,  as  amended  (File No.
                  33-92778)).
         3(ii).1  By-Laws of the Company  (Incorporated  herein by  reference to
                  Exhibit 3.2 to the  Company's  Registration  Statement on Form
                  S-1, as amended (File No. 33-92778)).
         3.2*     Certificate of Amendment of Certificate  of  Incorporation  of
                  the Company.
         4.1      Specimen    certificate    representing   the   Common   Stock
                  (Incorporated  herein  by  Reference  to  Exhibit  4.1  to the
                  Company's Registration Statement on Form S-1, as amended (File
                  No. 33-92778)).
         10.1     1994  Amended  Stock  Option  Plan  (Incorporated   herein  by
                  reference  to  Exhibit  10.1  to  the  Company's  Registration
                  Statement on Form S-1, as amended (File No. 33-92778)).



                                       64
<PAGE>

         10.2     Form of  Non-Qualified  Stock Option  Agreement under the 1994
                  Amended Stock Option Plan (Incorporated herein by reference to
                  Exhibit 10.2 to the Company's  Registration  Statement on Form
                  S-1, as amended (File No. 33-92778)).
         10.3     Form of  Incentive  Stock  Option  Agreement  under  the  1994
                  Amended Stock Option Plan (Incorporated herein by reference to
                  Exhibit 10.3 to the Company's  Registration  Statement on Form
                  S-1, as amended (File No. 33-92778)).
         10.4     1991 Amended  Non-Qualified  Stock  Option Plan  (Incorporated
                  herein  by  reference   to  Exhibit  10.4  to  the   Company's
                  Registration  Statement  on Form  S-1,  as  amended  (File No.
                  33-92778)).
         10.5     Form of  Non-Qualified  Stock Option  Agreement under the 1991
                  Amended Non- Qualified Stock Option Plan (Incorporated  herein
                  by  reference to Exhibit  10.5 to the  Company's  Registration
                  Statement on Form S-1, as amended (File No. 33-92778)).
         10.6     1995  Employee  Stock  Purchase Plan  (Incorporated  herein by
                  reference  to  Exhibit  10.6  to  the  Company's  Registration
                  Statement on Form S-1, as amended (File No. 33-92778)).
         10.7     Amendment  No.  1  to  1995  Employee   Stock   Purchase  Plan
                  (Incorporated  herein  by  reference  to  Exhibit  10.2 to the
                  Company's Quarterly Report on Form 10-Q for the fiscal quarter
                  ended September 30, 1997).
         10.8     1995 Employee  Stock  Purchase  Plan  Enrollment/Authorization
                  Form  (Incorporated  herein by reference to Exhibit 4.7 to the
                  Company's   Registration  Statement  on  Form  S-8,  filed  on
                  September 19, 1995 (File No. 33-97064)).
         10.9     Amended and Restated 1995  Non-Employee  Director Stock Option
                  Plan (Incorporated  herein by reference to Exhibit 10.9 to the
                  Company's  Annual  Report  on Form  10-K  for the  year  ended
                  December 31, 1997).
         10.10    Form of  Non-Qualified  Stock Option  Agreement under the 1995
                  Non-Employee  Director Stock Option Plan (Incorporated  herein
                  by  reference  to Exhibit  4.5 to the  Company's  Registration
                  Statement on Form S-8,  filed on September  19, 1995 (File No.
                  33-97064)).
         10.11    1997 Stock  Option Plan  (Incorporated  herein by reference to
                  Exhibit 10.10 to the Company's  Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1996).
         10.12    Form of  Non-Qualified  Stock Option  Agreement under the 1997
                  Stock  Option  Plan.  (Incorporated  herein  by  reference  to
                  Exhibit 10.11 to the Company's  Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1996).
         10.13    Form of Incentive Stock Option  Agreement under the 1997 Stock
                  Option Plan (Incorporated herein by reference to Exhibit 10.12
                  to the  Company's  Annual  Report on Form 10-K for the  fiscal
                  year ended December 31, 1996).
         10.14    1998 Stock  Option Plan  (Incorporated  herein by reference to
                  Exhibit 10.14 to the Company's  Annual Report on Form 10-K for
                  the year ended December 31, 1997).
         10.15    Form of  Non-Qualified  Stock Option  Agreement under the 1998
                  Stock  Option  Plan.  (Incorporated  herein  by  reference  to
                  Exhibit 10.15 to the Company's  Annual Report on Form 10-K for
                  the year ended December 31, 1997).
         10.16    Form of Incentive Stock Option  Agreement under the 1998 Stock
                  Option  Plan.  (Incorporated  herein by  reference  to Exhibit
                  10.16 to the Company's Annual Report on Form 10-K for the year
                  ended December 31, 1997).
         10.28    2001 Stock  Option Plan  (Incorporated  herein by reference to
                  Exhibit 99.1 to the Company's  Registration  Statement on Form
                  S-8 (File No. 333-107757)).
         21.1*    Subsidiaries of the Registrant.
         23.1*    Consent of BDO Seidman, LLP.
         24.1*    Powers of Attorney (See the Signature Page).



                                       65
<PAGE>

         31.1*    Certification  pursuant to Section  302 of the  Sarbanes-Oxley
                  Act of 2002 - President and Chief Executive Officer
         31.2*    Certification  pursuant to Section  302 of the  Sarbanes-Oxley
                  Act of 2002 - Chief Financial Officer
         32.1*    Certification  pursuant to 18 U.S.C.  Section 1350, as adopted
                  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002 -
                  President and Chief Executive Officer
         32.2*    Certification  pursuant to 18 U.S.C.  Section 1350, as adopted
                  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of 2002 -
                  Chief Financial Officer


(b)      Exhibits.

         The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above.


                                       66
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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 this 28th day of March
2005.

                                           ASTEA INTERNATIONAL INC.


                                           By: /s/ Zack Bergreen
                                               -----------------------
                                                   Zack Bergreen
                                                   President and Chief
                                                   Executive Officer


                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below constitutes and appoints Zack Bergreen and Rick Etskovitz, jointly
and severally,  his attorney-in-fact,  each with the power of substitution,  for
him in any and all  capacities,  to sign any  amendments  to this Report on Form
10-K and to file same,  with exhibits  thereto and other documents in connection
therewith,  with the Securities and Exchange  Commission,  hereby  ratifying and
confirming  all  that  each  of  said  attorney-in-fact,  or his  substitute  or
substitutes, may do or cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

<S>                                                                                                    <C> <C>

                Signature                                   Title                                  Date
                ---------                                   -----                                  -----

         /s/Zack Bergreen                       President and Chief Executive                    March 28, 2005
         ---------------------------            Officer (Principal Executive Officer)
         Zack Bergreen

         /s/Rick Etskovitz.                     Chief Financial                                  March 28, 2005
         ---------------------------           (Principal Financial
         Rick Etskovitz                         and Accounting Officer)


         /s/Eileen Smith                        Controller                                       March 28, 2005
         ---------------------------
         Eileen Smith

         /s/Thomas J. Reilly, Jr.               Director                                         March 28, 2005
         ---------------------------
         Thomas J. Reilly, Jr.

         /s/Zack Bergreen                       Director                                         March 28, 2005
         ---------------------------
         Zack Bergreen

         /s/Adrian Peters                       Director                                         March 28, 2005
         ---------------------------
         Adrian Peters

         /s/Eric Siegel                         Director                                         March 28, 2005
         ---------------------------
         Eric Siegel


</TABLE>




                                       67
<PAGE>