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, 2007


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.
      Employerincorporation
      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(b) of the Act:  Common
Stock, $.01 par value





Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes
_    No X





Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes _    No X





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.   [ X ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
act.


Large
Accelerated filer __      Accelerated Filer
__      Non-accelerated
Filer       Smaller Reporting Company
_X_





Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
if the Exchange Act.)   Yes__ NoX





The
aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 30, 2007 (based on the closing price of $6.05 as quoted by
Nasdaq Capital Market as of such date) was $13,254,649.  For purposes
of determining this amount only, the registrant has defined affiliates of the
registrant to include the executive officers and directors of registrant and
holders of more than 10% of the registrant’s common stock on June 30,
2007.





As of
April 14, 2008, 3,596,185 shares of the registrant’s Common Stock were
outstanding.


DOCUMENTS
INCORPORATED BY REFERENCE


None.












TABLE
OF CONTENTS





PagePART
      IItem 1.
            Business
            3Item 1A.
            Risk Factors
            18Item 1B.
            Unresolved Staff Comments
            27Item 2.
            Properties
            27Item 3.
            Legal Proceedings
            27Item 4.
            Submission of Matters to a Vote of Security
      Holders
            27PART
      IIItem 5.
            Market for Registrant’s Common Equity and
      Related
            28Stockholder Matters and Issuer Purchases of Equity
      SecuritiesItem 6.
            Selected Financial Data
            30Item 7.
            Management’s Discussion and Analysis of
      Financial
            31Condition and Results of OperationsItem 7A.
            Quantitative and Qualitative Disclosures about Market
      Risk
            45Item 8.
            Financial Statements and Supplementary Data
            46Item 9.
            Changes in and Disagreements with Accountants
    on
            79Accounting and Financial DisclosureItem 9A(T).
            Controls and Procedures
            79Item 9B.
            Other Information
            81PART
      IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            81Item 10A.
            Departure of Directors of Principal Officers; Election
      of
            81Directors; Appointment of Principal
    officersItem 11.
            Executive Compensation
            81Item 12.
            Security Ownership of Certain Beneficial Owners
      and
            82Management and Related Stockholder MattersItem 13.
            Certain Relationships and Related Transactions,
      and
            82Director IndependenceItem 14.
            Principal Accountant Fees and Services
            82PART
      IVItem 15.
            Exhibits and Financial Statement Schedules
            82Signature Page
            85Consent of Independent Registered Public Accounting
      FirmCertificates








2





PART
I


Forward-Looking
Statements





This form
10-K may contain, in addition to historical information, forward-looking
statements.  These forward-looking statements are based on the
Company’s current assumptions, expectations and projections about future
events.  Words like “believe,” “anticipate,” “intend,” “estimate,”
“expect,” “project,” and similar expressions are used to identify
forward-looking statements, although not all forward-looking statements contain
these words. These forward-looking statements are necessarily estimates
reflecting the best judgment of the Company’s management and involve a number of
risks, uncertainties and assumptions that could cause actual results to differ
materially from those expressed or implied by the forward-looking
statements.  Among the factors that could cause actual results to
differ from those expressed or implied by a forward-looking statement are those
described in the sections entitled “Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in the Company’s
Annual Report on Form 10-K, and in the Company’s Quarterly Reports on Form 10-Q,
as filed with the SEC.  Other unknown or unpredictable factors also
could have material adverse effects on the Company’s future results,
performance, or achievements.  In light of these risks, uncertainties,
assumptions, and factors, actual results could differ materially from those
expressed or implied in the forward-looking statements.  You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date stated, or if no date is stated, as of the date of
this release.





The
Company is not under any obligation and does not intend to make publicly
available any update or other revision to any forward-looking statements to
reflect circumstances existing after the date of this release or to reflect the
occurrence or future events even if experience or future events make it clear
that any expected results expressed or implied by these forward-looking
statements will not be realized.





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 improvement, and expansion of management’s
awareness of operational performance through analytical
reporting.  Customers’ return on investment from implementing Astea’s
solutions is achieved through more efficient management of information, people
and cash flows, thereby increasing competitive advantages and customer
satisfaction as well as 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
extensive industry experience and core expertise.





Founded
in 1979, Astea is known throughout the industry, largely from its history as a
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.





Astea
offers all the cornerstones of service lifecycle management, including customer
management, service management, asset management, reverse logistics management
and mobile workforce management.  This comprehensive approach provides
unmatched expertise in service lifecycle workflow and integration needs
throughout the service continuum.  Astea’s solutions empower companies
by making more actionable data readily accessible, providing the agility
companies need to achieve sustainable value in less time and successfully
compete in a global community.





Astea’s
software has been licensed to approximately 625 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.  See Note 16 to the Consolidated
Financial Statements Geographic Segment Data for revenues, income (loss) from
operations and long lived assets related to each of the Company’s geographic
operating regions for the past three years.






3





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 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 primarily focused on new software
licensing and support services for its latest generation of Astea Alliance and
FieldCentrix products. Marketing and sales of licenses and services related to
the Company’s legacy system DISPATCH-1® products are limited to existing
DISPATCH-1 customers.





FieldCentrix
Acquisition





On
September 21st, 2005,
Astea acquired most of the assets and certain liabilities of FieldCentrix, Inc.,
a leading provider of mobile workforce automation.  Astea and
FieldCentrix together bring more than 35 years of proven experience and
excellence and are now uniting to better support their customers in their
combined mission to decrease costs, maximize revenues and increase the quality
of service to achieve a competitive advantage.  Astea’s vision is to
continue to enable the seamless integration of information and a common
user-interface across all areas in the Service Management Lifecycle, which will
lead to a reduction in process costs and total costs of ownership.





FieldCentrix
has a very strong mobility solution in the market today. Mobility is one area in
which Astea looks to further enhance and build out its current mobility offering
based upon customer needs.  The acquisition of FieldCentrix gave Astea
immediate mobility domain expertise which further strengthens its Service
Lifecycle Management Solution Suite.   Astea and FieldCentrix are
combining the expertise of the two organizations to break new ground in
providing solutions that continue to deliver exceptional value for
organizations.  Together, Astea and FieldCentrix are taking a major
step forward in revolutionizing Service Lifecycle Management – and continuing
their mission to make organizations and their customers successful.





A major
benefit to Astea’s customers is the ability to offer stronger mobility solutions
that are tightly integrated into Astea Alliance. FieldCentrix customers now have
access to a larger sales, support, service, and product development
team.  Astea has retained the FieldCentrix employees and their offices
in Irvine, CA.  As a result, Astea offers an even more comprehensive
product portfolio that translates into immediate benefits for
organizations.  They can also bring innovative products to the market
in a shorter time period to further optimize service organizations.






4




Current
Product Offerings





Astea
Alliance








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, dynamic scheduling, portals, business
intelligence, 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 and human capital.  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.






5





In the
first quarter of 2007, the latest software version, Astea Alliance 8.0 was
released.  This version delivered extensive enhancements and new
features to empower service-centric organizations to achieve a new level of
service excellence.  Built on Microsoft .NET 2.0 platform and offering
more than 200 web services for ease of integration and accelerated development,
Astea Alliance 8.0 is one of the most open and non-proprietary solutions
available on the market today.   It builds on the prior version,
Astea Alliance 6.8, which was designed and built with 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 ServiceAlliance® 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 250 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:


·
            9
      Core Applications


·
            Mobile
      Applications


·
            Extended
      Portals


·
            Reporting
      and Business Intelligence


·
            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


Alliance
Dynamic Scheduling Engine





Astea
Alliance Mobile Applications:


Alliance
Laptop for Service


Alliance
Mobile


Alliance
2-way Paging





Astea
Alliance Extended Portals:


Customer
Self-Service


Remote
Technician





Astea
Alliance Reporting and Business Intelligence:


Alliance
Reporting


Alliance
Business Intelligence








6





Astea
Alliance Tools:


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.  The 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 engine 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
analyze 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 use of the Dynamic Scheduling Engine
automates much of this process.  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. 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.







7





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
fulfilment, 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 Logistics
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 those
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.











8








Alliance
Sales





Alliance
Sales consolidates and streamlines the sales processes of an enterprise, 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.





Alliance
Dynamic Scheduling Engine (DSE)





Alliance
DSE is the new generation of field service scheduling solutions for a new era of
service management.  It is a proven and robust, real-time scheduling
solution designed to optimize and balance the complex tradeoffs between service
cost and level of service.  It addresses the specific challenges of
the user field service scheduling, while simultaneously increasing efficiency,
accuracy and profitability to help you sustain a competitive advantage in
today’s volatile environment. Astea has taken a scheduling engine that was
developed to handle mission critical environments such as emergency response,
where a response time determined life or death, and embedded it into its core
product.   Astea DSE provides for maximum flexibility that
enables companies to proactively drive, manage and monitor their technicians
through demand forecasting, workforce profiling, and operational
optimization.  Powered by the latest Microsoft .NET technology,
Astea’s DSE enhances productivity, improves business processes and maximizes
return on investment.





Astea
Alliance Mobile Applications





Astea
provides a family of mobility applications for use away from the base
office.  The applications 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.








9





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 Laptop for Service.





Astea
Alliance Reporting and Business Intelligence (BI)





For
proactive service management, Alliance BI provides highly visual, real-time
analysis of business performance, focusing on Key Performance Indicators - a
tool that facilitates businesses’ understanding of customer behavior. Alliance
BI enables the viewing of information for the entire enterprise, increasing
revenues and identifying new business opportunities.  Alliance BI 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
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 helps organizations better
understand customer satisfaction.  Workloads show the available
working hours at a specific location in contrast to the demand for workforce
planning and optimization.





Astea
Alliance Tools





Alliance
Link





Alliance
Link is a enterprise application integration product that interfaces 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 Link 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.





FieldCentrix
Enterprise Suite





The
FieldCentrix Enterprise is a service management solution that runs on a wide
range of mobile devices (handheld computers, laptops and PCs, and Pocket PC
devices), and integrates seamlessly with popular CRM and ERP
applications.  Add-on features include a Web-based customer
self-service portal, workforce optimization capabilities, and equipment-centric
functionality.   FieldCentrix has licensed applications to
companies in a wide range of sectors including HVACR, building and real estate
services, manufacturing and process instruments and controls, and medical
equipment.





The
current FieldCentrix Enterprise offering consists of:


·
            FX
      Service Center


·
            FX
      Mobile


·
            FX
      e-Service


·
            FX
      Resource Utilization


·
            FX
      Interchange


·
            FX
      Interchange for JD Edwards


·
            FX
      Mobility Express


·
            FX
      Express for JD Edwards






10





FX
Service Center





FX
Service Center is an Internet-based service management and dispatch solution
that gives organizations unprecedented command over their field service
operation and helps them effectively manage call taking, entitlement
verification, field personnel scheduling and dispatching, customer service, work
orders, timesheets, service agreements, inventory and equipment tracking,
pre-invoicing, and reporting. The software is extremely intuitive, giving
organizations graphical picture views of the scheduling board, work order lists,
field service worker and site locations, and more.   Real-time
drag-and-drop scheduling and re-scheduling take just a few mouse clicks, and
pre-scheduling preventive maintenance calls are simple as well.  FX
Service Center makes completed work order and timesheet information instantly
available for export to an organization’s accounting, ERP, or CRM
system.   Or, they can integrate FX Service Center with an
organization’s accounting, ERP or CRM system for seamless information
flow.





FX
Mobile





FX Mobile
is a revolutionary workflow software product that uses innovative wireless
communications technology with handheld computers, laptops, and PDA’s to
automate field service processes and help field service personnel do their jobs
better and faster.  With FieldCentrix’s smart mobile client
technology, field service workers are able to complete their work,
uninterrupted, regardless of wireless coverage.  Along with FX Service
Center, FX Mobile eliminates the manual inefficiencies and paperwork that can
overwhelm service technicians and an organization’s business.  With FX
Mobile, service technicians receive work orders electronically on their mobile
devices.  It then guides them, screen by screen, through the job –
prompting them to perform standard tasks, take notes, and even record future
recommended repairs or activities.  With FX Mobile, field service
personnel can now spend their time in the field, better serving customers,
generating new business, and increasing organizations bottom line.  FX
Mobile is an international offering that supports various languages, as well as
currencies, measurement systems and time zones.





FX
e-Service





FX
e-Service is an extension of the FieldCentrix solution that provides a dynamic
customer self-service portal that links directly from a customer’s Web
site.  When integrated with FX Mobile software, it provides the unique
capability to truly deliver real-time information from the point of service to
your customers.   Working seamlessly with FX Service Center call
center and dispatching software, FX e-Service gives an organization’s customers
the flexibility of submitting service requests, accessing work order
information, and managing their account over the Internet.  Customers
can receive an email notification each time the status of a work order
changes.  This allows them to know instantly when the request has been
received, scheduled, is in progress and when it is complete – all without ever
calling into the office, waiting on hold or taking up valuable CSR
resource.





FX
Resource Utilization





With the
FieldCentrix Enterprise solution, organizations have already gained the
competitive advantage of best-of-breed mobile field service
automation.  By adding FX Resource Utilization software to the mix,
they can now take their real time service data to the next level and
dramatically increase the productivity and efficiency of their work force and
service operations through load balancing and optimized resource
planning.  FX Resource Utilization is a strategic workforce modelling
tool for accurately planning, tracking, and analysing service resources in
real-time.  It provides an easy and automated way to size, manage, and
report on resource capacity and utilization across the enterprise to determine
how to best deploy resources, cost effectively balance workloads and service
engineers, and still make sure all service level commitments are met and
contracts remain profitable.






11





FX
Interchange





FX
Interchange software provides data transporting services that allow enterprises
to quickly and easily integrate FieldCentrix Enterprise to existing legacy and
business systems – to get the most value from field data.  FX
Interchange converts data stored in FX Service Center knowledge base to XML
(eXtensible Markup Language) or a Microsoft SQL Server database.  Once
converted, the data is easily accessible to other systems for basic billing and
payroll extraction, and extensive bi-directional integration purposes to support
the needs of an accounting, call center, or service dispatch integrated
solution.





FX
Crossing Point





FX
Crossing Point is an integration connector that allows for the transfer of data
for field mapping, data transformations and error handling.  With FX
Crossing Point the integration is more streamlined and efficient, enabling rapid
benefits by leveraging data from FieldCentrix Enterprise and other third party
applications.





FX
Crossing Point for JD Edwards





FieldCentrix
field service automation software and JD Edwards® Enterprise
and EnterpriseOne applications are integrated to provide medium to large
companies with an easy-to-use, cost-effective way to streamline and automate
field service operations. The systems are integrated through FX InterchangeTM for
JD Edwards.  This interface dynamically transfers key customer, work
order, and accounting related information between the FieldCentrix and JD
Edwards applications. This means the key functions that organizations need to
run their business efficiently and cost-effectively are now seamless and
completed electronically — without paper.





With the
FieldCentrix and JD Edwards solution, service workers in the field access and
enter all work order information using a mobile device at the job site. When the
work is done, the service worker closes the work order and the completed
information is sent wirelessly back to the office automatically. The electronic
information is instantly accessible for processing by an organization’s billing
system so there's no data entry needed. Because you also no longer have to wait
for the field service worker to bring in the paperwork before you can close the
work order, customers can be billed quicker.





FX
Mobility Express





For
customers who want to mobilize their workforce without deploying a full field
service automation solution, FieldCentrix offers a special mobilized application
development toolkit called FX Mobility ExpressTM. The FX Mobility Express toolkit
is bundled with FieldCentrix’s popular mobile middleware and allows
organizations to quickly and easily build custom mobile applications that fully
leverage FieldCentrix’s robust and scalable mobile infrastructure and user-
friendly interface.  Mobilizing applications with FX Mobility Express
provides organizations with a cost-effective way to create a powerful solution
that fits their unique business requirements on top of a tried and tested
platform – a platform built from years of mobile and wireless technology
experience and proven by thousands of users worldwide.





Astea
Client Services





Professional
Services:





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






12





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
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 solutions 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 solutions 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
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 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, Astea consultants collect 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 the 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, minor 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.






13





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





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 for
the modules they have purchased.





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 Astea’s solutions. The objective of this training is to provide
the audience with a working knowledge of these solutions.  This
exposure to the system will enable project communication and add insight into
specific business processes.





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
solutions.  Included within these tasks are:  Security,
Batch Applications, Escalation, Import, etc.





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





Customers





The
Company estimates that it hassoldlicenses toapproximately625 customers ranging
from small, rapidly growing companies to large, multinational corporations with
geographically dispersed operations and remote offices. More than 255 licenses
(including 2007 sales) have been sold for Astea Alliance, 40 for FieldCentrix
products and the remainder for DISPATCH-1 software.  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 2007 two customers represented 11% and 10% of total
revenues respectively.  In 2006, no customer represented more than 10%
of total revenues.  In 2005, one customer accounted for 25% of the
Company’s revenues.







14





Sales
and Marketing





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 Alliance and
FieldCentrix 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 32% of the Company’s revenues in 2007, 31% of
the Company’s revenues in 2006 and 49% in 2005.  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 FieldCentrix. 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.






15





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





The
Company’s total expense for product development for the years ended December 31,
2007, 2006 and 2005, was $4,402,000, $3,842,000 and $2,461,000 respectively.
These expenses amounted to 14%, 21% and 11% of total revenues for 2007, 2006,
and 2005, respectively.  The Company capitalized software development
costs of $1,836,000, $2,821,000 and $1,555,000 in 2007, 2006 and 2005,
respectively.  Capitalized software development costs decreased
approximately $1 million in 2007 compared to 2006 principally due to the release
of version 8.0 in early 2007.  At that time, all costs related to
improving the product were no longer capitalized and were charged directly to
product development expense.  Capitalized development costs were
higher in 2006 than 2005 due to the focus of completing version 8.0 and two
FieldCentrix projects, version 4.1 and the integration of FX Mobility with Astea
Alliance.  The Company anticipates that it will continue to allocate
substantial resources to its development effort for the upgrade of its 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 electronically via
FTP (file transfer protocol).  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”) and PeopleSoft Inc., (“PeopleSoft”), both 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.”











16





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 use the software’s built in features to customize
their applications without altering the framework source code, the framework
source code for the 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, 2007, the Company, including its subsidiaries, had a total of 185
full time employees worldwide, 96 in the United States, 19 in the United
Kingdom, 5 in the Netherlands, 54 in Israel and11 in
Australia.  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.  Both products were subsequently re-engineered into
components of the AllianceEnterprise suite which was 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 version
6.  The Company released a new system architecture based on
Microsoft.NET during the third quarter of 2004.  On September 21,
2005, the Company acquired substantially all the assets and certain liabilities
of FieldCentrix, Inc.   In the first quarter of 2007, the Company
delivered Astea Alliance version 8.0 which is built on the Microsoft .NET 2.0
platform offering more than 200 web services for ease of integration and
accelerated development.






17





Item
1A.                      Risk
Factors





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 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.  In 2007, it generated net income
of $2.8 million.  The Company generated a loss of $7.1 million in 2006
and net income of $1 million in fiscal 2005.  As of December 31, 2007,
stockholders’ equity is approximately $7.1 million, which is net of an
accumulated deficit of approximately $19.9 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.





Decreased
Revenues from DISPATCH-1





In each
of 2007, 2006, and 2005, 2%, 6%, and 7% respectively, of the Company’s total
revenues were 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.  In 2007, there was
$77,000 of license sales to existing customers compared to $31,000 in 2006 and
$16,000 in 2005.  Total DISPATCH-1 revenues have been insignificant in
each of the last three fiscal years.  That trend is expected to
continue.





While the
Company has licensed Astea Alliance to over 255 companies worldwide from 1998
through 2007, and 40 companies for the FieldCentrix suite supported by the
Company since September 2005, revenues from sales of both Astea Alliance and
FieldCentrix may not be 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 and FieldCentrix
offerings, on developing new products and product enhancements to complement its
existing product offerings, on its ability to continue to generate professional
services, support and maintenance revenues to Astea Alliance and FieldCentrix
customers 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
and FieldCentrix products, maintain an acceptable level of support and
maintenance revenues or to lower its expenses, thereby avoiding future
losses.






18





Need
for Development of New Products





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 the
software 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.  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





On rare
occasions, the Company’s clients may request significant customization of Astea
Alliance and FieldCentrix products to address unique characteristics of their
businesses or computing environments.  In these situations, the
Company would apply contract accounting to determine the recognition of license
revenues.  The Company’s commitment to the 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.








19





Risk
of Product Defects; Failure to Meet Performance Criteria





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.  Thiscould 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 is often 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
twelve 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 professional services
revenues from those projects to be shifted from the expected quarter to a
subsequent quarter or quarters.





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.






20





Fluctuations in Quarterly Operating
Results May Be Significant





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





·  Revenue
from software sales;


·  the
timing of new product releases;


·  market
acceptance of new and enhanced versions of the Company’s products;


·  customer
order deferrals in anticipation of enhancements or new products;


·  the size
and timing of significant orders, the recognition of revenue from such
orders;


·  changes
in pricing policies by the Company and its competitors;


·  the
introduction of alternative technologies;


·  changes
in operating expenses;


·  changes
in the Company’s strategy;


·  personnel
changes;


·  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. Economic slowdowns in the United States
and in other parts of the world can cause many companies to delay or reduce
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 such a 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.









21




Competition in the Customer
Relationship Management (CRM) 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, who owns 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 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:





·
            they
      compete for the same customers that the Company tries to
      attract;


·
            if
      the Company loses customers to its competitors, it may be difficult or
      impossible to win them back;


·
            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


·
            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.






22




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 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:




·  be time
consuming to defend;


·  result in
costly litigation or damage awards;


·  divert
management’s attention and resources;


·  cause
product shipment delays; or


· 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.






23




Risks
Associated with International Sales




Astea’s
international sales accounted for 32% of the Company’s revenues in 2007, 31% in
2006, and 49% in 2005.  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:





·
            difficulties
      in establishing and managing international distribution channels and in
      translating   products into foreign
    languages;


·
            difficulties
      finding staff to manage foreign operations and collect accounts
      receivable;


·
            difficulties
      enforcing intellectual property
rights;


·
            liabilities
      and financial exposure under foreign laws and regulatory
      requirements;


·
            fluctuations
      in the value of foreign currencies and currency exchange rates;
      and


·
            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.  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 who 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.












24




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 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 38% 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.










25







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 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 Capital Market Compliance
Requirements




The
Company’s common stock trades on The NASDAQ Capital 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 the Nasdaq Capital, there can be no
assurance that the Company will be able to continue to satisfy such
requirements.





Securities
and Exchange Act of 1934 and Section 404 of the Sarbanes Oxley Act of 2002
Compliance Requirements





As a
publicly traded company, the Company is subject to the reporting requirements of
the Securities and Exchange Act of 1934.  Furthermore, the Company is
categorized as a non-accelerated filer, which means that the Company must have
its’ auditors attest to the systems of internal control as of December 31, 2008
as required under Section 404 of the Sarbanes-Oxley Act of
2002.  Failure to adequately comply with either act can result in
penalties and sanctions. In addition, the independent auditors may issue a
qualified opinion on the Company’s systems of internal controls which may
negatively impact customer and investor confidence in the Company.





Material
Weakness in Internal Control





In
connection with the preparation of the 2007 audit, management discovered errors
in accounting for revenue.  The discovery of these errors required
management to restate its annual financial statements for 2005 and 2006 as well
as all quarters from March 31, 2006 through September 30,
2007.   Management communicated to the Company's Audit Committee
that the following matter involving the Company's internal controls and
operations was considered to be a material weakness, as defined under standards
established by the Public Company Accounting Oversight Board.





The
Company did not properly apply the provisions of US GAAP, namely AICPA Statement
of Position (SOP) 97-2-Software Revenue Recognition and SOP 98-9-Modification of
SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions, and
related practice aids issued by the American Institute of Certified Public
Accountants (AICPA).






26





A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected by
the entity’s internal control.





The
Company intends to immediately expand its internal contract documentation
procedures as well as it’s professional service implementation plan review
procedures in order to fully comply with all provisions of US GAAP, to correct
the material weakness identified.  However, if the Company is unable
to make the necessary improvements to its internal controls over accounting for
software revenue recognition and disclosures, it is possible that errors in
future financial statements could go undetected.





Increased
Costs for Sarbanes-Oxley Compliance





The
Company is considered a non-accelerated filer for purposes of complying with
section 404 of the Sarbanes-Oxley Act.  In 2007 and 2008, the Company
must comply by reporting that it has examined and tested its internal controls
and that it complies with the standards set for non-accelerated filing companies
as of December 31, 2007 and 2008.  For the year ended December 31,
2008, the Company’s auditors will be required to attest to management’s
assertion on its internal accounting controls.  As a result of the
increased requirements placed on the Company by section 404 of the
Sarbanes-Oxley Act, the Company expects to incur increased audit costs as well
as costs to contract with outside consultants to assist in the compliance
effort.





Item
1B.                  Unresolved
SEC Items





None





Item
2.                      Properties.





The
Company’s headquarters are located in a leased facility of approximately 22,000
square feet in Horsham, Pennsylvania which runs through April 2014. The Company
also leases facilities for operational activities in Irvine, California;
Culemborg, Netherlands; and Karmiel, Israel, and for sales and customer support
activities in Cranfield, England and St. 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.





On and
shortly after April 6, 2006, certain purported shareholder class action and
derivative lawsuits were filed in the United States District Court for the
Eastern District of Pennsylvania against the Company and certain of its
directors and officers.  The lawsuits, alleging that the Company and
certain of its officers and directors violated federal securities laws and state
laws, related to the Company’s March 31, 2006 announcement of the accounting
restatement for overcapitalized software development costs during the first two
quarters of 2005 and the undercapitalized software development costs during the
third quarter of 2005. The Company believed these lawsuits were without
merit and defended them vigorously. On
August 9, 2007, the court dismissed the Consolidated Amended Complaint, without
prejudice, and granted plaintiffs leave to file an amended Consolidated Amended
Complaint.  The plaintiffs did not file an Amended Complaint, and
instead agreed to a joint stipulation for dismissal provided Astea did not seek
a recovery of costs against the plaintiffs.  OnAugust
21, 2007, the court dismissed the Consolidated Amended Complaint with prejudice,
and on September 4, 2007, the Court also dismissed the related derivative
lawsuit with prejudice.  Therefore, this matter is now
concluded.





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.






27





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:





2007
            High
            LowFirst
      quarter
            $  7.37
            $  5.31Second
      quarter
            8.05
            5.35Third
      quarter
            6.36
            4.00Fourth
      quarter
            6.76
            4.112006
            High
            LowFirst
      quarter
            $  25.71
            $  11.73Second
      quarter
            11.80
            7.87Third
      quarter
            9.67
            4.26Fourth
      quarter
            8.19
            4.71





As of
March 17 2008, there were approximately 42 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
17, 2008, the last reported sale price of the Common Stock on the Nasdaq Capital
Market was $3.07per share.





Dividend
Policy





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. No
dividends have been declared since June 2000.  Consequently,
shareholders will need to sell their shares of our common stock to realize a
return on their investment, if any.





Securities Authorized for
Issuance Under Equity Compensation Plans





Plan
      Category
            Number
      of Securities to be Issued upon Exercise of Outstanding Options, Warrants
      & Rights
            Weighted
      Average Exercise Price of Outstanding Options, Warrants &
      Rights
            Number
      Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (excluding securities reflected in column
      (a))(a)
            (b)
            (c)Equity
      Compensation plans approved by security holders
            484,000
            $5.91
            137,000Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            484,000
            $5.91
            137,000








28








Stock Performance
Graph





The
following graph compares the percentage change in cumulative total stockholder
return on the Common Stock during the period from December 31, 2002 through
December 31, 2007 with cumulative total return on (i) an SIC Index that includes
all organizations in the Company’s Standard Industrial Classification (SIC) Code
7372-Prepackaged Software and (ii) the Nasdaq Market Index.  The
comparison assumes that $100 was invested on December 31, 2002 in the Common
Stock at the initial public offering price and in each of the foregoing indices,
and assumes reinvestment of dividends, if any.














29




Item
6.                      Selected Financial
Data


Years
      ended December 31,
            
            2007
            
            2006
      Restated
            
            2005
              Restated
            
            2004
              Restated
            
            2003(in
      thousands, except per share data)Consolidated
      Statement of Income Data:Revenues:Software license fees
            
            $
            8,089
            
            $
            3,431
            
            $
            8,057
            
            $
            7,392
            
            $
            1,935Services and maintenance
            
            
            22,281
            
            
            14,751
            
            
            13,908
            
            
            11,315
            
            
            10,906Total revenues (1)(2)(3)
            
            
            30,370
            
            
            18,182
            
            
            21,965
            
            
            18,707
            
            
            12,841Cost
      and Expenses:Cost of software license fees
            
            
            2,641
            
            
            1,687
            
            
            1,178
            
            
            1,838
            
            
            898Cost of services and maintenance
            
            
            11,908
            
            
            10,262
            
            
            8,261
            
            
            6,356
            
            
            6,963Product development
            
            
            4,402
            
            
            3,842
            
            
            2,461
            
            
            1,431
            
            
            2,490Sales and marketing
            
            
            5,319
            
            
            5,923
            
            
            6,192
            
            
            5,565
            
            
            5,875General and administrative
            
            
            3,405
            
            
            3,757
            
            
            3,003
            
            
            2,051
            
            
            2,198Total costs and expenses (4)
            
            
            27,675
            
            
            25,471
            
            
            21,095
            
            
            17,241
            
            
            18,424Income(loss)
      from operations
              before interest and taxes
            
            
            2,695
            
            
            (7,289)
            
            
            870
            
            
            1,466
            
            
            (5,583
            )Interest
      income
            
            
            111
            
            
            234
            
            
            165
            
            
            58
            
            
            54Income(loss)
      from
              operations before income taxes
            
            
            2,806
            
            
            (7,055)
            
            
            1,035
            
            
            1,524
            
            
            (5,529
            )Income
      tax expense
            
            
            41
            
            
            29
            
            
            7
            
            
            -
            
            
            -Net
      profit/(loss)
            
            $
            2,765
            
            $
            (7,084)
            
            $
            1,028
            
            $
            1,524
            
            $
            (5,529
            )Basic
      income (loss) per share
            
            $
            .78
            
            $
            (2.00)
            )
            $
            .33
            
            $
            .51
            
            $
            (1.89
            )Diluted
      income (loss) per share
            
            $
            .78
            
            $
            (2.00)
            
            $
            .33
            
            $
            .51
            
            $
            (1.89
            )Shares
      used in computing basic income (loss)
              per
      share
            
            
            3,550
            
            
            3,547
            
            
            3,093
            
            
            2,960
            
            
            2,922Shares
      used in computing diluted income (loss)
              per
      share
            
            
            3,550
            
            
            3,547
            
            
            3,116
            
            
            3,001
            
            
            2,922Consolidated
      Balance Sheet Data at December 31,Working
      capital (deficit) (5)
            
            $
            486
            
            $
            (3,580)
            
            $
            5,495
            
            $
            3,969
            
            $
            1,820Total
      assets
            
            
            17,560
            
            
            18,059
            
            
            21,612
            
            
            13,754
            
            
            10,096Long-term
      debt, less current portion
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accumulated
      deficit (5)
            
            
            (19,869
            )
            
            (22,634)
            
            
            (15,550
            )
            
            (16,578
            )
            
            (18,100
            )Total
      stockholders’ equity (5)
            
            
            7,108
            
            
            3,815
            
            
            10,459
            
            
            5,461
            
            
            3,734





(1)
            Revenue
      for 2004 has been restated by $610,000 to reflect the restatement of
      revenue associated with a 2004 contract in the U.K.   See
      Note 2 of the Notes to the Consolidated Financial
    Statements.


(2)
            Revenue
      for 2005 has been restated by $800,000, of which $611,000 is associated
      with a 2004 contract in the U.K. and $189,000 is associated with a
      contract in the U.S.  See Note 2 of the Notes to the
      Consolidated Financial Statements.


(3)
            Revenues
      for 2006 have been restated by $2,102,000, to reflect the restatement of
      revenue associated with certain undelivered software elements for
      contracts executed in 2006.  See Note 2 of the Notes to the
      Consolidated Financial Statements.


(4)
            Results
      for 2007 and 2006 include expense of $305,000 and $397,000 respectively
      for stock compensation plans as required under SFAS 123(R), effective at
      January 1, 2006.  Prior years do not contain cost of stock
      compensation plans.


(5)
            Restated






30




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 offerings, Astea
Alliance and FieldCentrix Enterprise suites, integrate and automate sales and
service business processes and thereby increase 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 27% of the Company’s total revenues in 2007, 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 knowledge management mapping and analytical software
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 written 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.






31




FieldCentrix





On
September 21, 2005, the Company, through a wholly owned subsidiary, FC
Acquisition Corp., acquired substantially all of the assets and certain
liabilities of FieldCentrix, Inc, the service industry’s leading mobile field
force automation company. The acquisition immediately strengthened and further
cemented Astea’s standing as the leading company that provides an end-to-end
enterprise solution that addresses every facet of the Service Management
Lifecycle process.





FieldCentrix
develops and markets mobile field service automation (FSA) systems, which
include the wireless dispatch and support of mobile field technicians using
portable, hand-held computing devices.  The FieldCentrix offering runs
on a wide range of mobile devices (handheld computers, laptops and PC’s, and
Pocket PC devices), and integrates seamlessly with popular CRM and ERP
applications.   FieldCentrix has licensed applications to Fortune
500 and mid-size companies in a wide range of sectors including HVAC, building
and real estate services, manufacturing, process instruments and controls, and
medical equipment.





FieldCentrix’
expertise in mobility and emerging mobile technologies gives Astea’s global
customer base new ways to update and streamline service organizations, which
increasingly support hundreds of remote locations and mobile technical
teams.  Astea and FieldCentrix will combine the expertise of the two
organizations to break new ground in providing premier solutions that will
continue to deliver exceptional value for service-centric
companies.





Restatement





In
conjunction with the preparation of the 2007 Form 10-K, management identified
errors in accounting for certain license contracts (the “Contracts”) which were
executed in 2006 and 2005.





2006





In the
second and third quarters of 2006, certain sales Contracts (four in total)
included add-on analytical modules that had not, at that time, been
released.   These contracts consisted of numerous licenses and
modules that were purchased by customers and delivered to them in the quarters
in which the Company recognized the revenues related to the
Contracts.  Included in the Contracts were two or three insignificant
add-on modules for an analytical tool.  The main component of the tool
and one of the analytical modules were included in the delivery of the software
to the customers.  However, there were one or two analytical modules
that could not be delivered with the software.  The Company originally
estimated a value for the undelivered modules and deferred the revenues related
to these modules until they were delivered, which occurred in the first and
second quarters of 2007.





Management
identified a similar error in the accounting for a contract entered into in
2005.  The customer had been promised a specified upgrade to an
unreleased version.  At the time the Company filed its 2006 and 2005
Forms 10-K,  the Company estimated a value for the upgrade and
deferred that amount of revenue until the upgrade could be
delivered.





In
conjunction with the preparation of the 2007 Form 10-K, management determined
that it did not have vendor specific objective evidence (“VSOE”) for the
undelivered insignificant add-on module software licenses and the specified
upgrade.  According to American Institute of Certified Public
Accountants, (AICPA) SOP 97-2 “Software Revenue Recognition” and related
statements, undelivered elements to a sale must have VSOE in order to recognize
revenue for the delivered elements that do not have VSOE.  The Company
uses the residual method for recognizing revenues on its software
licenses.  In such instances, the accounting rules state that if VSOE
for undelivered software modules cannot be determined, then all revenue related
to that sale must be deferred until the undelivered elements are
delivered.  Accordingly, all revenues, including license, service and
maintenance revenues, must be deferred until the delivery and acceptance of the
final undelivered element.  Therefore, the Company restated its
consolidated financial statements for 2006 and 2005 to defer all license
revenues and service and maintenance revenues recognized in 2006 and 2005 in
relation to the Contracts.  The undelivered modules and specified
upgrade were delivered in the first and second quarters of 2007.  Upon
the final delivery, all deferred revenues were recognized.  The effect
of this restatement is to reduce revenue by $2,102,000 in 2006 and by $189,000
in 2005 and recognize revenue amounting to $2,291,000 in 2007.  All
cash related to these transactions was received by December 31,
2007.  The Company’s policy is to recognize expenses as incurred when
revenues are deferred in connection with transactions where VSOE cannot be
established for an undelivered element as the Company follows the accounting
requirements of SOP 97-2.  Accordingly, all costs associated with the
contract were recorded in the period when incurred, which differs from the
period in which the associated revenue was recognized.






32





In
addition the Company determined that a software implementation agreement
contained a reference to an unreleased upgrade of the software.  The
software licensing agreement and the software implementation agreement were
signed in the third and fourth quarter of 2007 respectively.  Based on
AICPA Technical Practice Aid 5100.39, Software Recognition for Multiple
Element Arrangements, under certain conditions, multiple agreements
between a vendor and customer should be considered as one
agreement.  In this case, it was determined that the project
implementation plan should be considered as part of the original software
licensing agreement.  Since the implementation plan referred to an
unreleased version of the Company’s software for which no VSOE exists, all
revenue related to the transaction, including license and services and
maintenance should be deferred until the specified upgrade is
delivered.  Accordingly, $700,000 of revenue, consisting of $674,000
of license revenue and $26,000 of professional services and maintenance revenue
will be deferred from the third quarter of 2007.  The upgrade was
delivered to the customer in the first quarter of 2008.  It is
expected that all of the deferred revenue related to this contract will be
recognized at that time.





As a
result of these determinations, we restated our financial statements and
quarterly results of operations (unaudited) included in this annual
report.  In addition we will restate the consolidated interim
financial statements for the 2007 and 2006 periods contained in our 2007
quarterly reports on Form 10-Q.  The modifications contained in the
restated financial statements relate to revenue and deferred
revenues.  It affected the elements of cash flow, but did not have any
impact to net cash flow from operations as reported in the statements of cash
flows.  These restated financial statements reflect an increase in
basic net loss per share of ($.60) for the year ended December 31, 2006 and a
decrease in net income per share of ($.06) for the year ended December 31,
2005.





2005





In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified.  In the fourth quarter of 2004, our U.K. subsidiary
entered into a contract with a new customer.  In 2004, the Company
recognized all of the license revenue.  In 2005 and the first three
quarters of 2006, the Company recognized services and maintenance revenue based
on work performed for the customer.  However, the contract contained a
specified upgrade right, which was delivered in the first quarter of
2005.  According to accounting requirements, a specified upgrade right
must be valued using vendor specific objective evidence (VSOE).  The
Company uses the residual method for recognizing revenue on its software
licenses.  In such instances, the accounting rules state that VSOE for
a specified upgrade right cannot be determined and therefore, revenue must be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered.  Although the specified upgrade was
delivered in the first quarter of 2005, changes in the customer’s requirements
and subsequent concessions granted by the Company in October 2005 (which
included an additional specified upgrade right), further delayed our ability to
establish  that delivery and acceptance of the license had
occurred.  This additional specified upgrade was delivered in the
first quarter of 2007.  Accordingly all revenue, including license,
service and maintenance should have been deferred until the delivery and
acceptance of the final element.  Therefore, the Company restated its
financial statements to defer all license, service and maintenance revenue
recognized in relation to this contract in 2004, 2005 and the first three
quarters of 2006, which was $610,000, $611,000 and $457,000,
respectively.  The Company’s policy is to recognize expenses as
incurred when revenues are deferred in connection with transactions where VSOE
cannot be established for an undelivered element as the Company follows the
accounting requirements of SOP 97-2.  Accordingly, all costs
associated with the contract were recorded in the period when incurred, which
differs from the period in which the associated revenue will be
recognized.






33





All
revenue related to this contract was recognized in 2007, with the exception of
certain post contract support revenue totaling $34,000, which will be recognized
ratably over 2008.  All cash related to the transaction, $1,678,000,
has been received by the Company as of December 31, 2007.





As a
result of this determination, we restated our financial statements and quarterly
results of operations (unaudited) included in this annual report.  In
addition we restated the consolidated interim financial statements for the 2006
periods contained in our 2006 quarterly reports on Form 10-Q.  The
modifications contained in the restated financial statements relate to revenue
and deferred revenues.  It affected the elements of cash flow, but did
not have any impact to net cash flow from operations as reported in the
statements of cash flows.  These restated financial statements reflect
a decrease in the basic net income per share of ($.20) for the year-ended
December 31, 2005 and a decrease in the basic and diluted net income per share
of ($.21) and ($.20), respectively for the year-ended December 31,
2004.





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 of
America 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




Astea’s
revenue is principally recognized from two sources: (i) licensing arrangements
and (ii) services and maintenance.





The
Company markets its products primarily through its direct sales force and
resellers.  License agreements do not provide for a right of return,
and historically, product returns have not been significant.





Astea
recognizes revenue on its software products in accordance with AICPA Statement
of Position (“SOP”) 97-2, Software Revenue Recognition,
SOP 98-9, Modification of SOP
97-2, Software Revenue
Recognition with Respect to Certain Transactions, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts; and SEC Staff
Accounting Bulletin (“SAB”) 104, Revenue
Recognition.





Astea
recognizes revenue from license sales when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is
probable.  We utilize written contracts as a means to establish the
terms and conditions by which our products, support and services are sold to our
customers.  Delivery is considered to have occurred when title and
risk of loss have been transferred to the customer, which generally occurs after
a license key has been delivered electronically to the
customer.  Revenue for arrangements with extended payment terms in
excess of one year is recognized when the payments become due, provided all
other recognition criteria are satisfied.  If collectibility is not
considered probable, revenue is recognized when the fee is
collected.  Our typical end user license agreements do not contain
acceptance clauses.  However, if acceptance criteria are required,
revenues are deferred until customer acceptance has occurred.






34





Astea
allocates revenue to each element in a multiple-element arrangement based on the
elements’ respective fair value, determined by the price charged when the
element is sold separately.  Specifically, Astea determines the fair
value of the maintenance portion of the arrangement based on the price, at the
date of sale, if sold separately, which is generally a fixed percentage of the
software license selling price.  The professional services portion of
the arrangement is based on hourly rates which the Company charges for those
services when sold separately from software.  If evidence of fair
value of all undelivered elements exists, but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual
method.  If an undelivered element for which evidence of fair value
does not exist, all revenue in an arrangement is deferred until the undelivered
element is delivered or fair value can be determined.  Under the
residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is recognized as
revenue.  The proportion of the revenue recognized upon delivery can
vary from quarter-to-quarter depending upon the determination of vendor-specific
objective evidence (“VSOE”) of fair value of undelivered
elements.  The residual value, after allocation of the fee to the
undelivered elements based on VSOE of fair value, is then allocated to the
perpetual software license for the software products being sold.





When
appropriate, the Company may allocate 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 rates when provided in
conjunction with the licensing arrangement.  Amounts allocated are
based upon standard prices charged for those services or products which, in the
Company’s opinion, approximate fair value.  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,
which is generally twelve months 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 June
2006, the FASB reached a consensus on Emerging Issues Task Force ("EITF") Issue
No. 06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation), ("EITF 06-03"). EITF 06-3 indicates that the income
statement presentation on either a gross basis or a net basis of the taxes
within the scope of the issue is an accounting policy decision that should be
disclosed. EITF 06-3 is effective for interim and annual periods beginning
after December 15, 2006. The adoption of EITF 06-3 did not change our
policy of presenting taxes within the scope of EITF 06-3 on a net basis and
had no impact on our consolidated financial statements.
  Deferred
Revenue


Deferred
revenue includes amounts billed to or received from customers for which revenue
has not been recognized.  This generally results from post-contract
support, software installation, consulting and training services not yet
rendered or license revenue which has been deferred until all revenue
requirements have been met or as services are performed.





Accounts
Receivable and Allowance for Doubtful Accounts





Regarding
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.






35







Unbilled
receivables are established when revenue is deemed to be recognized based on the
Company’s revenue recognition policy, but due to contractual restraints, the
Company does not have the right to invoice the customer.





Capitalized
Software and 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. Product development expense includes payroll, employee benefits, other
headcount-related costs associated with product development and any related
costs to third parties under sub-contracting or net of any collaborative
arrangements.





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 beginning with the initial release to
customers.  The Company’s estimated life for its capitalized software
products is two years based on current sales trends and the rate of product
release.  The Company continually evaluates whether events or
circumstances had 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.





Goodwill





Part of
the purchase price for the FieldCentrix assets, acquired September 21, 2005,
included the acquisition of goodwill.   Goodwill is tested for
impairment on an annual basis as of September 30.  It is also tested
between annual tests if indicators of potential impairment exists, using a
fair-value-based approach.  No impairment of goodwill has been
identified during any of the periods presented.





Goodwill
is tested for impairment at the operating unit level using a two-step
approach.  The first step is to compare the fair value of a reporting
unit to its carrying amount, including goodwill.  If the fair value of
the reporting unit is greater than its carrying unit, goodwill is not considered
impaired and the second step is not required.  If the fair value of
the reporting unit is less than the carrying amount, the second step of the
impairment test measures the amount of the impairment loss, if any, by comparing
the implied fair value of goodwill to its carrying amount.  If the
assumptions we used to estimate fair value of goodwill change, there could be an
impact on future reported results of operations.





Acquired
Intangible Assets





Acquired
intangible assets (excluding goodwill) are amortized on a straight-line basis
over their estimated useful lives and reviewed for impairment on an annual
basis, or on an interim basis if an event or circumstance occurs between annual
tests indicating that the assets might be impaired.  The impairment
test will consist of comparing the undiscounted cash flows expected to be
generated by the acquired intangible asset to its carrying amount.  If
the asset is considered to be impaired, an impairment loss will be recognized in
an amount by which the carrying amount of the asset exceeds its fair
value.





Share-Based
Compensation – Option Plans





Beginning
on January 1, 2006, the Company began accounting for stock options under the
provision of SFAS 123(R), Share-Based Payment, which
requires the recognition of the fair value of share-based
compensation.  The fair value of stock option awards was estimated
using a Black-Scholes closed-form option valuation model.  This model
requires the input of assumptions in implementing SFAS 123(R), including
expected stock price volatility, expected term and estimated forfeitures of each
award.    We elected the modified-prospective method for
adoption of SFAS 123(R).






36





Prior to
the implementation of SFAS 123(R), we accounted for stock option awards under
the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and made pro forma footnote disclosures as required by
Statement of Financial Accounting Standards No. 148, or SFAS 148, Accounting For Stock-Based
Compensation – Transition and Disclosure, which amended Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.  Pro forma net income and pro forma net income
per share disclosed in the footnotes to the consolidated condensed financial
statements were estimated using a Black-Scholes closed-form option valuation
model to determine the estimated value and by attributing such fair value over
the requisite service period on a straight-line basis for those awards that
actually vested.





The
adoption of SFAS 123(R) has impacted our Consolidated Statement of Operations
through the recognition of share-based compensation expenses in cost of services
and maintenance, development, sales and marketing, and general and
administrative expenses.   Future periods are expected to reflect
similar costs.  Prior to the adoption of SFAS 123(R) no stock based
compensation cost had been recorded.





Accounting
for Income Taxes





Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and operating loss and tax
credit carryforwards and are measured using the enacted tax rates and laws that
will be in effect when the difference and carryforwards are expected to be
recovered or settled.  In accordance with Statement of Financial
Accounting Standards (“FAS”) No. 109, Accounting for Income Taxes (“FAS 109”) ,
a valuation allowance for deferred tax assets is provided when we estimate that
it is more likely than not that all or a portion of the deferred tax assets may
not be realized through future operations.  This assessment is based
upon consideration of available positive and negative evidence which includes,
among other things, our most recent results of operations and expected future
profitability.  We consider our actual historical results to have a
stronger weight than other more subjective indicators when considering whether
to establish or reduce a valuation allowance on deferred tax
assets.





As of
December 31, 2007, we had approximately $12.5 million of deferred tax assets,
against which we provided a $12.5 million valuation allowance.  Our
net deferred tax assets were generated primarily by operating
losses.  Accordingly, it is more likely than not, that we will not
realize these assets through future operations.





On
January 1, 2007, we implemented the provisions of FAS interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB statement
109 (“FIN 48”).   FIN 48 clarifies the accounting for uncertainty
in income taxes and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return.  Estimated interest is
recorded as a component of interest expense and penalties are recorded as a
component of general and administrative expense.  Such amounts were
not material for 2007, 2006 and 2005.  The adoption of FIN 48 did not
have a material impact on our financial position.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 141 (revised 2007), Business Combinations ("FAS 141(R)") which
replaces FAS No.141, Business Combinations. FAS 141(R) retains the underlying
concepts of FAS 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but FAS
141(R) changed the method of applying the acquisition method in a number of
significant aspects. Changes prescribed by FAS 141(R) include, but are not
limited to, requirements to expense transaction costs and costs to restructure
acquired entities; record earn-outs and other forms of contingent consideration
at fair value on the acquisition date; record 100% of the net assets acquired
even if less than a 100% controlling interest is acquired; and to recognize any
excess of the fair value of net assets acquired over the purchase consideration
as a gain to the acquirer. FAS 141(R) is effective on a prospective basis for
all business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with the
exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made
to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of FAS
141(R) would also apply the provisions of FAS 141(R). Early adoption is not
allowed. We are currently evaluating the effects, if any, that FAS 141(R) may
have on our consolidated financial statements.







37




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests in Consolidated Financial Statements ("FAS
160").  FAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. FAS 160 also clarifies that all of
those transactions resulting in a change in ownership of a subsidiary are equity
transactions if the parent retains its controlling financial interest in the
subsidiary. FAS 160 requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent's owners and the interests of the noncontrolling owners of a
subsidiary.  FAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. FAS 160 shall be applied prospectively as of the
beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements. The presentation and
disclosure requirements shall be applied retrospectively for all periods
presented. We are currently evaluating the effects, if any, that FAS 160 may
have on our consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("SFAS No. 159"). SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value and to provide additional information that will help
investors and other users of financial statements to understand more easily the
effect on earnings of a company's choice to use fair value. It also requires
companies to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet. We
are required to adopt SFAS No. 159 on January 1, 2008 and are currently
evaluating the impact, if any, of SFAS No. 159 on our consolidated financial
statements.




In
September 2006, the FASB issued FAS No 157, Fair Value Measurement (“FAS
157”).  FAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosure about fair value measurements.  FAS
157 is effective for years beginning after November 15, 2007.  The
adoption of this Statement is not expected to have a material effect on the
Company’s consolidated financial statements.






38




Results
of 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,
            2007
            
            2006
              (restated)
            
            2005
              (restated)Revenues:Software
      license fees
            26.6
            %
            18.9
            %
            36.7
            %Services
      and maintenance
            73.4
            
            81.1
            
            63.3Total
      revenues
            100.0
            %
            100.0
            %
            100.0
            %Costs
      and expenses:Cost
      of software license fees
            8.7
            %
            9.3
            %
            5.4
            %Cost
      of services and maintenance
            39.2
            
            56.4
            
            37.6Product
      development
            14.5
            
            21.1
            
            11.2Sales
      and marketing
            17.5
            
            32.6
            
            28.1General
      and administrative
            11.2
            
            20.7
            
            13.7Total
      costs and expenses
            91.1
            
            140.1
            
            96.0Net
      income (loss)
            9.1
            %
            (39.0)
            %
            4.6
            %





Comparison
of Years Ended December 31, 2007 and 2006 (restated)





Revenues.Total
revenues increased $12,188,000 or 67%, to $30,370,000 for the year ended
December 31, 2007 from $18,182,000 for the year ended December 31,
2006.  Software license revenues increased 136% in 2007, compared to
2006. Services and maintenance fees for 2007 amounted to $22,281,000, a 51%
increase from 2006.





Software
license fee revenues increased $4,658,000 or 136% to $8,089,000 in 2007 from
$3,431,000 in 2006.  Astea Alliance license revenues increased to
$6,420,000 in 2007 from $2,364,000 in 2006, an increase of 172%. The increase
results from the growing acceptance by the market place of the Company’s latest
software versions, which are completely based on .Net Microsoft’s operating
system platform, as well as the recognition of $1,422,000 of revenue deferred
from 2006 and 2005 related to certain undelivered modules  and
specified upgrade that were delivered in 2007.  The Company also sold
$1,592,000 of FieldCentrix licenses compared to $1,037,000 in
2006.  In addition, the Company sold $77,000 of its DISPATCH-1
licenses to existing customers in 2007 compared to $31,000 in 2006.





Total
services and maintenance revenues increased $7,530,000 or 51% to $22,281,000 in
2007 from $14,751,000 in 2006.  The increase is attributable to an
increase of $5,565,000 in Astea Alliance service and maintenance revenues of
which $1,261,000 is related to the U.K. contract that was deferred in 2006 and
recognized in 2007.   In addition, $869,000 of service and
maintenance revenue was recognized for services performed in 2006 and 2005 but
deferred until 2007 due to the sales including certain undelivered analytical
modules.  Additionally, there was an increase in service and
maintenance revenue of $2,184,000 from the Company’s FieldCentrix customer
base.  The increase in FieldCentrix service and maintenance revenue
resulted from services connected to license sales in 2006 and
2007.  Partially offsetting the increases to service and maintenance
revenues is a decrease in DISPATCH-1 revenues of
$380,000.     Due to the decreasing demand for
DISPATCH-1 professional services and the lack of any related product development
by the Company, the decrease in service and maintenance revenue is expected to
continue beyond 2007.





In 2007
two customers represented 11% and 10% of total revenues
respectfully.  In 2006, no customer represented more than 10% of total
revenues.  In 2005, one customer accounted for 25% of the Company’s
revenues.






39





Costs of Revenues.Costs of
software license fee revenues increased 57% to $2,641,000 in 2007 from
$1,687,000 in 2006. The increase results from increased amortization of
capitalized software development costs and increases in the cost of third party
software licenses embedded in our software.  Amortization of
capitalized software increased 80% to $2,234,000 in 2007 from $1,240,000 in
2006.  The principal reason for the increase was due to the release of
version 8.0 in the first quarter of 2007.  Once the new version was
released, the Company started to amortize the development costs that had
previously been capitalized.  The gross margin percentage on software
license sales is 67% in 2007 and 51% in 2006.  The improvement in the
margin results from the increase in license revenue in 2007.





The costs
of services and maintenance revenues increased 16% to $11,908,000 in 2007 from
$10,262,000 in 2006.  The increase in cost of services and maintenance
is primarily attributed to an increase in the professional services staff in the
U.S. which was necessary to meet the increased demand from the Company’s new and
existing customer base for new license implementations as well as the extensive
upgrade to customer systems from older versions of Astea Alliance to the latest
released version.  In 2007, the Company recognized $71,000 in share
based compensation expense for employees compared to $45,000 in
2006.  In addition, the Company invested in additional support staff
to improve the timing and quality of support provided to its
customers.  The service and maintenance gross margin percentage
increased to 47% in 2007 from 30% in 2006.  The increased margin is
primarily attributable to increased billable projects and the recognition of
$869,000 of service and maintenance revenue deferred from 2006 and 2005 related
to undelivered software elements where the cost of providing the services
occurred in 2006 and 2005.  Accordingly, future service and
maintenance margins are not expected to remain as high as those recognized in
2007.





Product Development.Product
development expenses increased 15%, or $560,000, to $4,402,000 in 2007 from
$3,842,000 in 2006.  Development costs increased due to an increased
focus on improving the quality of products and a decrease of $985,000 in
development costs capitalized compared to 2006.  Additionally, $51,000
in share based compensation expense for employees was recorded at December 31,
2007 compared to $90,000 expense for year ending December 31, 2006.





Product
development as a percentage of total revenue decreased to 14% in 2007 compared
to 21% in 2006. This decrease is due to the growth in revenue in 2007 exceeding
the growth in product development costs.   Gross development
expense before the capitalization of software costs and was $6,238,000 in 2007,
a 6% decrease  from $6,663,000 in 2006.  Capitalized
software totaled $1,836,000 in 2007 compared to $2,821,000 in
2006.  The decrease in software capitalization of 35% over last year
reflects the intense effort put forth by the Company to expand and improve its
products.  In 2007, the Company released version 8.0 of Astea
Alliance.





Sales and Marketing.Sales and
marketing expenses decreased 10%, or $604,000, to $5,319,000 in 2007 from
$5,923,000 in 2006.  The decrease is primarily the result of headcount
changes during 2007 and the shift of the Company’s user conference to the spring
of 2008 which resulted in no conference in 2007.   Additionally,
$32,000 in share based compensation expense for employees was expensed in 2007
compared to $123,000 recorded at December 31, 2006.  The Company
continues to focus on improving its market presence through intensified
marketing efforts to increase awareness of the Company’s
products.  This occurs 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 18% in 2007 from 33% in 2006 principally from the large increase in
revenue in 2007 over 2006.





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 expense and various costs associated with the
Company’s status as a public company.  The Company’s general and
administrative expenses were $3,405,000 in 2007 and $3,757,000 in
2006.  Expenses in 2007 declined $352,000, a 9%
decrease.  This decrease is primarily due to a decrease of legal fees
of $240,000 from 2006 which related to the class action lawsuit that was filed
in April, 2006 and a decrease of $100,000 in bonuses paid to management in
2006.   Partially offsetting the cost decreases was an increase
of $12,000 in share based compensation expense for employees in 2007 compared to
2006. As a percentage of total revenues, general and administrative expenses
decreased to 11% in 2007 compared to 21% in 2006.  The decrease in
expenses relative to revenues primarily results from the decrease in expenses
described above and the large increase in revenues.






40





Interest Income.Net
interest income decreased $123,000, to $111,000 in 2007 from $234,000 in
2006.  This decrease was primarily attributable to a reduction in the
cash available to invest in 2007 compared to 2006.





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.  Based on the
Company’s current year and historical operating losses, the Company determined
maintaining a full valuation allowance was appropriate.  The Company
made a provision of $41,000 in 2007 and $29,000 in 2006, for income taxes which
resulted from a difference between an indefinite-lived asset, goodwill, which is
amortized for tax, but not amortized for financial reporting
purposes.





International Operations.Total revenues
from the Company’s international operations increased $4,224,000 or 76% to
$9,790,000 in 2007 from $5,566,000 in 2006.  Part of the increase in
revenue from international operations was attributable to the recognition in
2007 of $1,679,000 in license, service and maintenance revenues which had been
deferred from a transaction that occurred with a customer in 2004 and continued
through 2006.  Excluding the revenue recognized in 2007 from the U.K.
customer that had been deferred from previous years, total revenue from
international operations is $8,078,000 which is a 45% increase over the same
period in 2006.  The increase in revenues also results from a
significant increase in professional services in Europe and license sales in the
Asia Pacific region.  Overall, international operations resulted in
net profit of $2,971,000 for 2007 compared to net loss of $875,000 in
2006.  International operating costs increased by $256,000 due to
higher cost of services and maintenance resulting from increased professional
service work.  The increase in international net income of $3,846,000
is the direct result of the increase in service and maintenance revenues and the
recognition of deferred revenues from 2004 through 2006 for which all related
costs had been recognized in prior years.  Profit margins recognized
in 2007 are not expected to be as high in future years.





Net income
(loss).  The Company generated net income of $2,765,000 for the
year ended December 31, 2007 compared to net loss of $7,084,000 in
2006.  The improvement of $9,849,000 is primarily the result of a 67%
increase in revenues.  The increase in revenues is partially due to
the growing acceptance by the market place of the Company’s latest software
version as well as the recognition of $3,936,000 of revenue deferred from 2006
and 2005 related to certain undelivered modules and specified upgrade that were
delivered in 2007.





Comparison
of Years Ended December 31, 2006 (restated) and 2005 (restated)





Revenues.Total
revenues decreased $3,783,000 or 17%, to $18,182,000 for the year ended December
31, 2006 from $21,965,000 for the year ended December 31,
2005.  Software license revenues decreased 57% in 2006, compared to
2005. Services and maintenance fees for 2006 amounted to $14,751,000, a 6%
increase from 2005.





Software
license fee revenues decreased $4,626,000 or 57% to $3,431,000 in 2006 from
$8,057,000 in 2005.  Astea Alliance license revenues decreased to
$2,364,000 in 2006 from $7,753,000 in 2005, a decrease of 70%. The decrease
results primarily from one large license sale of $4.5 million in
2005.  The Company also sold $1,037,000 of FieldCentrix licenses in
2006 compared to $288,000 in 2005.  FieldCentrix was acquired in
September of 2005.  The 2006 results reflect a full year of results
compared to only three months in 2005.






41





Total
services and maintenance revenues increased $843,000 or 6% to $14,751,000 in
2006 from $13,908,000 in 2005.  The increase is principally due to a
full year of recognizing FieldCentrix maintenance revenue, compared to only
three months in 2005.  In addition there was a decrease of $579,000 in
Astea Alliance service and maintenance revenue and a decline of $399,000 in
DISPATCH-1 service and maintenance revenue.  Due to the decreasing
demand for DISPATCH-1 professional services and the lack of any related product
development by the Company, the decrease in service and maintenance revenue is
expected to continue in 2007.





In 2006
no customer accounted for more than 10% of total revenues compared to 2005 when
one customer, accounted for 25% of the Company’s total revenues and 28% of Astea
Alliance revenue.





Costs of Revenues.Costs of
software license fee revenues increased 43% to $1,687,000 in 2006 from
$1,178,000 in 2005. The increase results from increased amortization of
capitalized software development costs, increases in the cost of third party
software licenses embedded in our software and a full year of FieldCentrix
acquired software amortization.  Amortization of capitalized software
increased by 22% to $1,240,000 in 2006 from $1,020,000 in 2005.  The
gross margin percentage on software license sales decreased to 51% in 2006 from
85% in 2005 due to a reduction in license revenue and an increase in cost of
license fees.





The costs
of services and maintenance revenues increased 24% to $10,262,000 in 2006 from
$8,261,000 in 2005.  The increase in cost of services and maintenance
is primarily attributed to a full year of professional services staff from the
2005 FieldCentrix acquisition and additional headcount in the U.S. which
resulted from the Company’s initiative to improve the quality of the
professional services provided to its customers, as well as the extensive
upgrade to customer systems from older versions of Astea Alliance to the latest
released version   Additionally, $45,000 in share based
compensation expense for employees  was recorded at December 31, 2006
compared to no expense for year ending December 31, 2005. In addition, the
Company invested in additional support staff to improve the timing and quality
of support provided to its’ customers.  The service and maintenance
gross margin percentage decreased to 30% in 2006 from 41% in
2005.  The decreased margin is primarily attributable to the
non-billable time required for new hires to be properly trained on the Company’s
software before they can effectively generate revenue.





Product Development.Product
development expenses increased 56%, or $1,381,000, to $3,842,000 in 2006 from
$2,461,000 in 2005.  Development costs increased due to an increase in
headcount in the Company’s development center in Israel by 14%, the addition of
development staff for a complete year from the acquisition of FieldCentrix,
which occurred on September 21, 2005, and an increased focus on improving the
quality of newly developed products.  Additionally, $90,000 in share
based compensation expense for employees was recorded in 2006 compared to no
expense for 2005.





Product
development as a percentage of total revenue increased to 21% in 2006 compared
to 11% in 2005. This increase is due to both the overall increase in product
development expenses coupled with a reduction in total revenue.  The
2006 percentage is about 4% higher due to the overall decrease in revenues in
2006 compared to 2005.  Gross development expense before the
capitalization of software costs and was $6, 663,000 in 2006, 64% greater than
$4,058,000 in 2005.  Capitalized software totaled $2,821,000 in 2006
compared to $1,555,000 in 2005.  The increase in software
capitalization of 81% over last year reflects the intense effort put forth by
the Company to expand and improve its products.  In 2006, the Company
released a new version of its FieldCentrix software and a mobility product for
Astea Alliance users, based on the expertise of FieldCentrix as well as
intensive efforts to complete the latest version of Astea Alliance, which was
released in February 2007.





Sales and Marketing.Sales and
marketing expenses decreased 4%, or $269,000, to $5,923,000 in 2006 from
$6,192,000 in 2005.  The decrease is primarily the result of decreased
sales commissions resulting from reduced software license sales partially offset
by increased investment in marketing programs in order to increase market
awareness of the Company’s products and domain expertise in Service Life Cycle
Management.  Additionally, $123,000 in share based compensation
expense for employees was recorded at December 31, 2006 compared to no expense
for year ending December 31, 2005.  The Company continues to focus on
improving its market presence through intensified marketing efforts to increase
awareness of the Company’s products.  This occurs 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 33% in 2006 from 28% in 2005, resulting from the
decline in revenue from 2005 to 2006.






42





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 expense and various costs associated with the
Company’s status as a public company.  The Company’s general and
administrative expenses were $3,757,000 in 2006 and $3,003,000 in 2005
representing a 25% increase.  This increase is primarily due to the
inclusion of a full year’s rent for the FieldCentrix office in Irvine,
California, an increase of $191,000; $420,000 of additional legal fees partially
resulting from the class action lawsuit that was filed in April, 2006 and
$100,000 in bonuses paid to management.   Additionally, $139,000
in share based compensation expense for employees was recorded at December 31,
2006 compared to no expense for year ending December 31, 2005. As a percentage
of total revenues, general and administrative expenses increased to 21% in 2006
compared to 14% in 2005.  The increase in expenses relative to
revenues primarily results from the increase in expenses described above, as
well as the decrease in total revenues generated during 2006.





Interest Income.Net
interest income increased $69,000, to $234,000 in 2006 from $165,000 in
2005.  This increase was primarily attributable to growth in the
interest rates earned on the Company’s invested cash as well as an increase in
investable funds in the early part or 2006.





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.  Based on the
Company’s current year and historical operating losses, the Company determined
maintaining a full valuation was appropriate.  The Company made a
provision of $29,000 and $7,000 for 2006 and 2005 respectively, for income taxes
which resulted from a difference between an indefinite-lived asset, goodwill,
which is amortized for tax, but not amortized for financial reporting
purposes.





International Operations.Total revenues
from the Company’s international operations decreased by $5,173,000, or 48% to
$5,566,000 in 2006 compared to $10,739,000 in 2005.  The decrease in
revenue from international operations was primarily attributable to a decrease
in license revenues of $4,133,000, the majority of the decline in
Europe.  International revenues from professional services and
maintenance decreased 19% to $4,441,000 in 2006 from $5,482,000 in
2005.  Overall, international operations resulted in a net loss of
$876,000 for 2006 compared to net profit of $1,279,000 in
2005.  International operating costs decreased by $1,445,000 due to
lower cost of services and maintenance resulting from a decrease in headcount,
lower sales commissions resulting from a decrease in license revenues in 2006
compared to 2005 and an increase in bad debt expense.  The decrease in
international net income of $2,154,000 is the direct result of the decrease in
license revenues.





Net income
(loss).  The Company generated a net loss of $7,084,000 for the
year ended December 31, 2006 compared to net income of $1,028,000 in
2005.  The decrease in net income of $8,112,000 is the result of a 17%
decrease in revenues, particularly a decline of $57% in license revenues and an
increase in operating costs of 20%.











43





Liquidity
and Capital Resources (2006 and 2005 restated)





Operating
Activities





Net cash
provided by operating activities was $949,000 for the year ended December 31,
2007, an improvement of $3,897,000 over the year ended December 31, 2006 in
which $2,948,000 of cash was used by operations.  The increase in cash
generated by operations was primarily attributable to a swing in net income of
$9,849,000 which resulted from income of $2,765,000 in 2007 compared to a loss
of $7,084,000 in 2006, an increase in non cash charges of $806,000 and a smaller
increase in accounts receivable in 2007 than 2006 by
$140,000.  Partially offsetting these increases of cash was a decrease
in deferred revenues of $6,645,000, an increase in prepaid expense over a
decrease in 2006 of $90,000 and a decrease in accounts payable and accrued
expenses which was $272,000 more than in 2006.  The significant
reduction in deferred revenues occurred due to the deferral of license,
professional services and maintenance revenues in 2006 resulting from
undelivered elements, all of which were delivered in 2007 and accordingly
recognized as revenue.





Investing
Activities





The
Company used $2,357,000 of cash for investing activities in 2007 compared to
using $3,265,000 in 2006.  The decrease in cash used for investing
activities of $908,000 results from a decrease in capitalized software
development costs of $985,000, a reduction in property and equipment purchases
of $145,000 and the release of $88,000 from restricted
cash.  Partially offsetting these reduced investment outflows was an
increase in goodwill of $134,000 related to the payment of the earnout
provisions in the FieldCentrix purchase agreement.





Financing
Activities





The
Company generated $15,000 from financing activities from the exercise of stock
options for the year ended December 31, 2007 compared to generating $19,000 of
cash from the exercise of stock options for the year ended December 31,
2006.  The decrease in cash generated by financing activities of
$4,000 was attributable to a decline in the exercise of Company stock options in
2007.





At
December 31, 2007, the Company had a working capital ratio of approximately
1.05:1, with total cash of $1,615,000.





The
Company had $1,615,000 in cash at year ended December 31, 2007, compared to
$3,120,000 for year ended December 31, 2006.





The
Company has projected revenues for 2008 that will generate enough funds to
sustain its continuing operations.  However, if actual results 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 2008.  In
addition, it does not anticipate that its operations or financial condition will
be affected materially by inflation.





On May
23, 2006 the Company entered into a secured revolving line of credit (Line)
agreement with a bank.  This agreement was amended in June of
2007.  Maximum available borrowings under the Line represent the
lesser of 80% of the Borrowing Base, which is eligible accounts receivables as
defined, or $2.0 million.  Amounts outstanding on the line of credit
were zero on December 31, 2007.  As of March 31, 2008, the Company had
an available Borrowing Base of $2.0 million.





As of
March 30, 2008, the amount outstanding on the line of credit was
zero.






44





Contractual
Obligations and Commercial Commitments





The
following tables summarize our contractual and commercial obligations, as of
December 31, 2007:





Payment
      Due By PeriodTotal
            
            
            2008
            
            
            
            2009-2010
            
            
            
            2011-2012
            
            
            2013 and afterContractual
      Cash
              Obligations:Long-term
      Debt
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Capital
      Leases
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      Leases
            
            $
            5,262,000
            
            
            $
            1,201,000
            
            
            $
            2,051,000
            
            
            $
            1,203,000
            
            
            $
            807,000








Amounts
      of Commitment Expiration Per PeriodTotal
            
            
            2008
            
            
            
            2009-2010
            
            
            
            2011- 2012
            
            
            2013 and afterOther
      Commercial
              Commitments:Letters
      of Credit
            
            $
            313,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -





There are
no off balance sheet transactions that would require disclosure in the above
contractual obligations and commercial commitments table.





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.  As a result, as of December 31, 2007, the
Company’s investments consisted of institutional money market
funds.  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.






45




Item
8.                 Financial
Statements and Supplementary Data.





Report
of Independent Registered Public Accounting Firm







The Board
of Directors




Astea
International Inc.:




We have
audited the accompanying consolidated balance sheet of Astea International Inc.
and Subsidiaries as of December 31, 2007, and the related consolidated
statements of operations and stockholders’ equity and cash flows for the year
ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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. An audit includes
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
audit provides a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Astea International,
Inc. and Subsidiaries as of December 31, 2007 and the consolidated results of
their operations and their cash flows for the year ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.




As
discussed in footnote 2 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Tax
Positions, on January 1, 2007.




/s/ Grant
Thornton LLP




Philadelphia,
Pennsylvania




April 15,
2008







46





Report
of Independent Registered Public Accounting Firm





Board of
Directors and Stockholders


Astea
International Inc.


We have
audited the accompanying consolidated balance sheet of Astea International Inc.
and subsidiaries (collectively the “Company”) as of December 31, 2006, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the two years in the period ended December 31,
2006.  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 audit 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America.





As
disclosed in Note 2, the Company has restated its consolidated balance sheet as
of December 31, 2006 and related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two years in the period
ended December 31, 2006 to correct an error in recognizing
revenue.  As a result of this revision, net loss for the year ended
December 31, 2006 was increased by $2,102,000 and  net income for the
year ended December 31, 2005 was reduced by $189,000.





As
disclosed in Note 12 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment”, utilizing the modified prospective transition
method effective January 1, 2006.














BDO
Seidman, LLP


March 30,
2007, except for Note 2 which is as of April 15, 2008.







47


ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS








December
      31,2007
            
            2006
              (restated)ASSETSCurrent
      assets:Cash
      and cash equivalents
            $   1,615,000
            
            $    3,120,000Restricted
      cash
            150,000
            
            225,000Receivables,
      net of allowance of  $206,000 and $163,000
            8,517,000
            
            6,860,000Prepaid
      expenses and other
            416,000
            
            423,000Total
      current assets
            10,698,000
            
            10,628,000Property
      and equipment, net
            418,000
            
            648,000Intangibles,
      net
            1,439,000
            
            1,719,000Capitalized
      software development costs, net
            3,238,000
            
            3,636,000Goodwill
            1,540,000
            
            1,253,000Other
      long term restricted cash
            163,000
            
            -Other
      long-term assets
            64,000
            
            175,000Total
      assets
            $  17,560,000
            
            $  18,059,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            $    3,632,000
            
            $    3,930,000Deferred
      revenues
            6,743,000
            
            10,278,000Total
      current liabilities
            10,375,000
            
            14,208,000Long-term
      liabilitiesDeferred
      tax liability
            77,000
            
            36,000Commitments
      and ContingenciesStockholders’
      equity:Preferred
      stock, $.01 par value, 5,000,000 shares
              authorized,
      none issued
            -
            
            -Common
      stock, $.01 par value, 25,000,000 shares
              authorized,
      3,596,000 and 3,591,000  shares issued
    respectively
            36,000
            
            36,000Additional
      paid-in-capital
            27,852,000
            
            27,532,000Accumulated
      comprehensive loss –
              translation
      adjustment
            (703,000
            )
            (911,000
            )Accumulated
      deficit
            (19,869,000
            )
            (22,634,000
            )Less:  Treasury
      stock at cost, 42,000 shares
            (208,000
            )
            (208,000
            )Total
      stockholders’ equity
            7,108,000
            
            3,815,000Total
      liabilities and stockholders' equity
            $  17,560,000
            
            $  18,059,000








See
accompanying notes to the consolidated financial statements.




48




ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS








Years ended December
      31,
            
            2007
            
            
            2006
              (restated)
            
            
            2005
              (restated)Revenues:Software
      license fees
            
            $
            8,089,000
            
            
            $
            3,431,000
            
            
            $
            8,057,000Services
      and maintenance
            
            
            22,281,000
            
            
            
            14,751,000
            
            
            
            13,908,000Total
      revenues
            
            
            30,370,000
            
            
            
            18,182,000
            
            
            
            21,965,000Costs
      and expenses:Cost
      of software license fees
            
            
            2,641,000
            
            
            
            1,687,000
            
            
            
            1,178,000Cost
      of services and maintenance
            
            
            11,908,000
            
            
            
            10,262,000
            
            
            
            8,261,000Product
      development
            
            
            4,402,000
            
            
            
            3,842,000
            
            
            
            2,461,000Sales
      and marketing
            
            
            5,319,000
            
            
            
            5,923,000
            
            
            
            6,192,000General
      and administrative
            
            
            3,405,000
            
            
            
            3,757,000
            
            
            
            3,003,000Total
      costs and expenses
            
            
            27,675,000
            
            
            
            25,471,000
            
            
            
            21,095,000Income
      (loss) from operations
            
            
            2,695,000
            
            
            
            (7,289,000
            )
            
            
            870,000Interest
      income
            
            
            111,000
            
            
            
            234,000
            
            
            
            165,000Income
      (loss) before income taxes
            
            
            2,806,000
            
            
            
            (7,055,000
            )
            
            
            1,035,000Income
      tax expense
            
            
            41,000
            
            
            
            29,000
            
            
            
            7,000Net
      income (loss)
            
            $
            2,765,000
            
            
            $
            (7,084,000
            )
            
            $
            1,028,000Basic
      net income (loss) per share
            
            $
            .78
            
            
            $
            (2.00
            )
            
            $
            .33Diluted
      net income (loss) per share
            
            $
            .78
            
            
            $
            (2.00
            )
            
            $
            .33Weighted
      average shares used in computing basic net income
              (loss) per share
            
            
            3,550,000
            
            
            
            3,547,000
            
            
            
            3,093,000Weighted
      average shares used in computing diluted net income
              (loss)per
      share
            
            
            3,552,000
            
            
            
            3,547,000
            
            
            
            3,116,000




See
accompanying notes to the consolidated financial statements.






49





ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES
              
              CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY




Common
      Stock
              
              Additional
                Paid-in
                Capital
              
              Accumulated
      Compre-
                hensive Loss
              
              Accumulated
      Deficit
              
              Treasury
      Stock
              
              Total
                Stock-holders'
      Equity
              
              Compre-
                hensive
                Income
      (loss)Balance,
      December 31, 2004 restated
              $
              30,000
              $
              22,997,000
              $
              (779,000
              )
              $(16,577,000
              )
              $(210,000
              )
              $  5,461,000Issuance
      of common stock under
                employee
      stock purchase plan
              
              
              
              
              
              
              
              (1,000
              )
              2,000
              
              1,000Exercise
      of stock options
              
              2,000
              
              787,000
              
              
              
              
              
              
              
              789,000Stock
      Issuance – FieldCentrx acquisition
              
              4,000
              
              3,332,000
              
              
              
              
              
              
              
              3,336,000Currency
      translation adjustments
              
              
              
              
              
              (156,000
              )
              
              
              
              
              (156,000
              )
              (156,000)Net
      income – restated
              
              
              
              
              
              
              
              1,028,000
              
              
              
              1,028,000
              
              1,028,000Balance,
      December 31, 2005 restated
              
              36,000
              
              27,116,000
              
              (935,000
              )
              (15,550,000
              )
              (208,000
              )
              10,459,000
              
              872,000Exercise
      of stock options
              
              
              
              19,000
              
              
              
              
              
              
              
              19,000Stock-based
      compensation
              
              
              
              397,000
              
              
              
              
              
              
              
              397,000Currency
      translation adjustments
              
              
              
              
              
              24,000
              
              
              
              
              
              24,000
              
              24,000Net
      (loss) restated
              
              
              
              
              
              
              
              (7,084,000
              )
              
              
              (7,084,000
              )
              (7,084,000)Balance,
      December 31, 2006 restated
              
              36,000
              
              27,532,000
              
              (911,000
              )
              (22,634,000
              )
              (208,000
              )
              3,815,000
              
              (7,060,000)Exercise
      of stock options
              
              
              
              15,000
              
              
              
              
              
              
              
              15,000Stock-based
      compensation
              
              
              
              305,000
              
              
              
              
              
              
              
              305,000Currency
      translation adjustment
              
              
              
              
              
              208,000
              
              
              
              
              
              208,000
              
              203,000Net
      income
              
              
              
              
              
              
              
              2,765,000
              
              
              
              2,765,000
              
              2,765,000Balance,
      December 31, 2007
              $
              36,000
              $
              27,852,000
              $
              (703,000
              )
              $
      (19,869,000
              )
              $(208,000
              )
              $   7,108,000
              
              $  2,968,000





See
accompanying notes to the consolidated financial statements.






50




ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years ended December
      31,
            
            2007
            
            2006
              (restated)
            
            2005
              (restated)Cash
      flows from operating activities:Net income (loss )
            
            $
            2,765,000
            
            $
            (7,084,000
            )
            $
            1,028,000Adjustments to reconcile net income(loss) to net cash
              provided by (used in) operating activities:Depreciation and amortization
            
            
            2,926,000
            
            
            2,237,000
            
            
            1,640,000Increase in provision for doubtful accounts
            
            
            276,000
            
            
            67,000
            
            
            227,000Stock-based compensation
            
            
            305,000
            
            
            397,000
            
            
            -Deferred tax expense
            
            
            41,000
            
            
            29,000
            
            
            7,000Changes in operating assets and liabilities:Receivables
            
            
            (1,621,000
            )
            
            (1,761,000
            )
            
            1,235,000Prepaid expenses and
      other
            
            
            (1,000
            )
            
            89,000
            
            
            44,000Accounts payable and
      accrued expenses
            
            
            (309,000
            )
            
            (37,000
            )
            
            54,000Deferred
      revenues
            
            
            (3,544,000
            )
            
            3,101,000
            
            
            1,143,000Other
assets
            
            
            111,000
            
            
            14,000
            
            
            (124,000
            )Net
      cash provided by used in operating activities
            
            
            949,000
            
            
            (2,948,000
            )
            
            5,254,000Cash
      flows from investing activities:Capitalized software
      development costs
            
            
            (1,836,000
            )
            
            (2,821,000
            )
            
            (1,555,000
            )Purchases of property and
      equipment
            
            
            (146,000
            )
            
            (291,000
            )
            
            (324,000
            )Purchase
      of short term investments
            
            
            (500,000
            )
            
            -
            
            
            -Sale
      of short term investments
            
            
            500,000
            
            
            -
            
            
            -Net cash acquired from
      FieldCentrix acquisition
            
            
            -
            
            
            -
            
            
            616,000Payment of contingent
      purchase price
            
            
            (287,000
            )
            
            (153,000
            )
            
            -Change in restricted
      cash
            
            
            (88,000
            )
            
            -
            
            
            75,000Net
      cash used in investing activities
            
            
            (2,357,000
            )
            
            (3,265,000
            )
            
            (1,188,000
            )Cash
      flows from financing activities:Proceeds from exercise of stock options and employee
              stock purchase plan
            
            
            15,000
            
            
            19,000
            
            
            791,000Net cash provided by
      financing activities
            
            
            15,000
            
            
            19,000
            
            
            791,000Effect
      of exchange rate changes on cash and cash
              equivalents
            
            
            (112,000
            )
            
            (170,000
            )
            
            144,000Net (decrease) increase in
      cash and cash equivalents
            
            
            (1,505,000
            )
            
            (6,364,000
            )
            
            5,001,000Cash
      and cash equivalents balance, beginning of year
            
            
            3,120,000
            
            
            9,484,000
            
            
            4,483,000Cash
      and cash equivalents balance, end of year
            
            $
            1,615,000
            
            $
            3,120,000
            
            $
            9,484,000Cash paid for interest
      expense
            
            $
            -
            
            $
            -
            
            $
            -





See
      accompanying notes to the consolidated financial
    statements.











51





Supplemental
Cash Flow Information – FieldCentrix Acquisition





Non-Cash
Transactions:


Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Acquisition
      of FieldCentrix Net Assets:Purchase
      PriceCommon
      stock issued
            
            $
            -
            
            
            $
            -
            
            
            $
            3,336,000Assets
      acquired:Accounts
      receivable
            
            
            -
            
            
            
            -
            
            
            
            (384,000
            )Prepaid
      Expenses
            
            
            -
            
            
            
            -
            
            
            
            (80,000
            )Property
      and equipment
            
            
            -
            
            
            
            -
            
            
            
            (730,000
            )Software
            
            
            
            
            
            
            
            
            
            
            (721,000
            )Customer
      relationship list
            
            
            -
            
            
            
            -
            
            
            
            (1,360,000
            )Other
      assets
            
            
            -
            
            
            
            -
            
            
            
            (31,000
            )Goodwill
            
            
            -
            
            
            
            -
            
            
            
            (1,100,000
            )Total
      assets acquired:
            
            
            -
            
            
            
            -
            
            
            
            (4,406,000
            )Liabilities
      assumed:Accrued
      expenses
            
            
            -
            
            
            
            -
            
            
            
            719,000Deferred
      revenue
            
            
            -
            
            
            
            -
            
            
            
            967,000Total
      liabilities assumed
            
            
            -
            
            
            
            -
            
            
            
            1,686,000Net
      assets acquired
            
            
            -
            
            
            
            -
            
            
            
            (2,720,000
            )Net
      Cash received from FieldCentrix
              acquisition
            
            $
            -
            
            
            $
            -
            
            
            $
            616,000






52




ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





1. Company
Background





Astea
International Inc. and Subsidiaries (collectively the “Company” or “Astea”) are
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
products are Astea Alliance, FX Service Center and FX Mobile.  Astea
Alliance supports the complete service lifecycle, from lead generation and
project quotation to service and billing through asset retirement.  FX
Service Center is a service management and dispatch solution system that gives
organizations command over their field service operations.   FX
Mobile offerings include mobile field service automation (FSA) systems, which
include the wireless devices and support of mobile field technicians using
portable, hand-held computing devices.  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. Restatements





In
conjunction with the preparation of the 2007 Form 10-K, management identified
errors in accounting for certain license contracts (the “Contracts”) which were
executed 2006 and 2005.





2006





In the
second and third quarters of 2006, certain sales Contracts (four in total)
included add-on analytical modules that had not, at that time, been
released.   These contracts consisted of numerous licenses and
modules that were purchased by customers and delivered to them in the quarters
in which the Company recognized the revenues related to the
Contracts.  Included in the Contracts were two or three insignificant
add-on modules for an analytical tool.  The main component of the tool
and one of the analytical modules were included in the delivery of the software
to the customers.  However, there were one or two analytical modules
that could not be delivered with the software.  The Company originally
estimated a value for the undelivered modules and deferred the revenues related
to these modules until they were delivered, which occurred in the first and
second quarters of 2007.





Management
identified a similar error in the accounting for a contract entered into in
2005.  The customer had been promised a specified upgrade to an
unreleased version.  At the time the Company filed its 2006 and 2005
Forms 10-K, the Company estimated a value for the upgrade and deferred that
amount of revenue until the upgrade could be
delivered.  .





In
conjunction with the preparation of the Form 10-K for 2007, management
determined that it did not have vendor specific objective evidence (“VSOE”) for
the undelivered insignificant add-on module software licenses and the specified
upgrade.  According to American Institute of Certified Public
Accountants (AICPA) SOP 97-2 “Software Revenue Recognition” and related
statements, undelivered elements to a sale must have VSOE in order to recognize
revenue for the delivered elements that do not have VSOE.  The Company
uses the residual method for recognizing revenues on its software
licenses.  In such instances, the accounting rules state that if VSOE
for undelivered software modules cannot be determined, then all revenue related
to that sale must be deferred until the undelivered elements are
delivered.  Accordingly, all revenues, including license, service and
maintenance revenues, must be deferred until the delivery and acceptance of the
final undelivered element.  Therefore, the Company restated its
consolidated financial statements for 2006 and 2005 to defer all license
revenues and service and maintenance revenues recognized in 2006 and 2005 in
relation to the Contracts.  The undelivered modules and specified
upgrade were delivered in the first and second quarters of 2007.  Upon
the final delivery, all deferred revenues were recognized.  The effect
of this restatement is to reduce revenue by $2,102,000 in 2006 and by $189,000
in 2005 and recognize revenue amounting to $2,291,000 in
2007.    All cash related to these transactions was received
by December 31, 2007.  The Company’s policy is to recognize expenses
as incurred when revenues are deferred in connection with transactions where
VSOE cannot be established for an undelivered element as the Company follows the
accounting requirements of SOP 97-2.  Accordingly, all costs
associated with the contract were recorded in the period when incurred, which
differs from the period in which the associated revenue was
recognized.






53





In
addition the Company determined that a software implementation agreement
contained a reference to an unreleased upgrade of the software. The software
licensing agreement and the software implementation agreement were signed in the
third and fourth quarter of 2007 respectively.  Based on AICPA
Technical Practice Aid 5100.39, Software Recognition for Multiple
Element Arrangements, under certain conditions, multiple agreements
between a vendor and customer should be considered as one
agreement.  In this case, it was determined that the project
implementation plan should be considered as part of the original sales
agreement.  Since the implementation plan referred to an unreleased
version of the Company’s software for which no VSOE exists, all revenue related
to the transaction, including license and services and maintenance should be
deferred until the specified upgrade is delivered.  Accordingly,
$700,000 of revenue, consisting of $674,000 of license revenue and $26,000 of
professional services and maintenance revenue will be deferred from the third
quarter of 2007.  The upgrade was delivered to the customer in the
first quarter of 2008.  It is expected that all of the deferred
revenue related to this contract will be recognized at that time.





As a
result of these determinations, we restated our financial statements and
quarterly results of operations (unaudited) included in this annual
report.  In addition we will restate the consolidated interim
financial statements for the 2007 and 2006 periods contained in our 2007
quarterly reports on Form 10-Q.  The modifications contained in the
restated financial statements relate to revenue and deferred
revenues.  It affected the elements of cash flow, but did not have any
impact to net cash flow from operations as reported in the statements of cash
flows.  These restated financial statements reflect an increase in
basic net loss per share of ($.60) for the year ended December 31, 2006 and a
decrease in net income per share of ($.06) for the year ended December 31,
2005.





2005





In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified.  In the fourth quarter of 2004, our U.K. subsidiary
entered into a contract with a new customer.  In 2004, the Company
recognized all of the license revenue.  In 2005 and the first three
quarters of 2006, the Company recognized services and maintenance revenue based
on work performed for the customer.  However, the contract contained a
specified upgrade right, which was delivered in the first quarter of
2005.  According to accounting requirements, a specified upgrade right
must be valued using vendor specific objective evidence (VSOE).  The
Company uses the residual method for recognizing revenue on its software
licenses.  In such instances, the accounting rules state that VSOE for
a specified upgrade right cannot be determined and therefore, revenue must be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered.  Although the specified upgrade was
delivered in the first quarter of 2005, changes in the customer’s requirements
and subsequent concessions granted by the Company in October 2005 (which
included an additional specified upgrade right), further delayed our ability to
establish  that delivery and acceptance of the license had
occurred.  This additional specified upgrade was delivered in the
first quarter of 2007.  Accordingly all revenue, including license,
service and maintenance should have been deferred until the delivery and
acceptance of the final element.  Therefore, the Company restated its
financial statements to defer all license, service and maintenance revenue
recognized in relation to this contract in 2004, 2005 and the first three
quarters of 2006, which was $610,000, $611,000 and $457,000,
respectively.  The Company’s policy is to recognize expenses as
incurred when revenues are deferred in connection with transactions where VSOE
cannot be established for an undelivered element as the Company follows the
accounting requirements of SOP 97-2.  Accordingly, all costs
associated with the contract were recorded in the period when incurred, which
differs from the period in which the associated revenue will be
recognized.






54





All
revenue related to this contract was recognized in 2007, with the exception of
certain post contract support revenue totaling $34,000, which will be recognized
ratably over 2008.  All cash related to the transaction, $1,678,000,
has been received by the Company as of December 31, 2007.





As a
result of this determination, we restated our financial statements and quarterly
results of operations (unaudited) included in this annual report.  In
addition we restated the consolidated interim financial statements for the 2006
periods contained in our 2006 quarterly reports on Form 10-Q.  The
modifications contained in the restated financial statements relate to revenue
and deferred revenues.  It affected the elements of cash flow, but did
not have any impact to net cash flow from operations as reported in the
statements of cash flows.  These restated financial statements reflect
a decrease in the basic net income per share of ($.20) for the year-ended
December 31, 2005 and a decrease in the basic and diluted net income per share
of ($.21) and ($.20), reflectively for the year-ended December 31,
2004.





































55








ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31, 2006As
      previously reported
            
            
            Adjustment
            
            
            As
      restatedASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            3,120,000
            
            
            
            
            
            $
            3,120,000Restricted
      Cash
            
            
            225,000
            
            
            
            
            
            
            225,000Receivables,
      net of reserves of  $310,000
            
            
            6,860,000
            
            
            
            
            
            
            6,860,000Prepaid
      expenses and other
            
            
            423,000
            
            
            
            
            
            
            423,000Total
      current assets
            
            
            10,628,000
            
            
            
            
            
            
            10,628,000Property
      and equipment, net
            
            
            648,000
            
            
            
            
            
            
            648,000Intangibles,
      net
            
            
            1,719,000
            
            
            
            
            
            
            1,719,000Capitalized
      software development costs, net
            
            
            3,636,000
            
            
            
            
            
            
            3,636,000Goodwill
            
            
            1,253,000
            
            
            
            
            
            
            1,253,000Other
      long-term assets
            
            
            175,000
            
            
            
            
            
            
            175,000Total
      assets
            
            $
            18,059,000
            
            
            
            
            
            $
            18,059,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            3,930,000
            
            
            
            
            
            $
            3,930,000Deferred
      revenues
            
            
            7,987,000
            
            
            $
            2,291,000
            
            
            
            10,278,000Total
      current liabilities
            
            
            11,917,000
            
            
            
            2,291,000
            
            
            
            14,208,000Long-term
      liabilities:Deferred
      tax liability
            
            
            36,000
            
            
            
            
            
            
            
            36,000Stockholders’
      equityPreferred
      stock, $.01 par value, 5,000,000 shares
              authorized,
      non issued.
            
            
            -
            
            
            
            
            
            
            
            -Common
      stock, $.01 par value, 25,000,000 shares
              authorized,
      3,585,000  shares issued
            
            
            36,000
            
            
            
            
            
            
            
            36,000Additional
      paid-in capital
            
            
            27,532,000
            
            
            
            
            
            
            
            27,532,000Accumulated
      comprehensive loss –  translation adjustment
            
            
            (911,000
            )
            
            
            
            
            
            
            (911,000
            )Accumulated
      deficit
            
            
            (20,343,000
            )
            
            
            (2,291,000
            )
            
            
            (22,634,000
            )Less:  Treasury
      stock at cost,
            
            
            (208,000
            )
            
            
            
            
            
            
            (208,000
            )Total
      stockholders’ equity
            
            
            6,106,000
            
            
            
            (2,291,000
            )
            
            
            3,815,000Total
      liabilities and stockholders' equity
            
            $
            18,059,000
            
            
            
            -
            
            
            $
            18,059,000







56




ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS




Year
      ended December 31, 2006As
      previously reported
            
            
            Adjustment
            
            
            As
      restatedRevenues:Software
      license fees
            
            $
            4,670,000
            
            
            $
            (1,239,000
            )
            
            $
            3,431,000Services
      and maintenance
            
            
            15,614,000
            
            
            
            (863,000
            )
            
            
            14,751,000Total
      revenues
            
            
            20,284,000
            
            
            
            (2,102,000
            )
            
            
            18,182,000Costs
      and expenses:Cost
      of software license fees
            
            
            1,687,000
            
            
            
            
            
            
            
            1,687,000Cost
      of services and maintenance
            
            
            10,262,000
            
            
            
            
            
            
            
            10,262,000Product
      development
            
            
            3,842,000
            
            
            
            
            
            
            
            3,842,000Sales
      and marketing
            
            
            5,923,000
            
            
            
            
            
            
            
            5,923,000General
      and administrative
            
            
            3,757,000
            
            
            
            
            
            
            
            3,757,000Total
      costs and expenses
            
            
            25,471,000
            
            
            
            
            
            
            
            25,471,000(Loss)
      from operations
            
            
            (5,187,000
            )
            
            
            
            
            
            
            (7,289,000
            )Interest
      income
            
            
            234,000
            
            
            
            
            
            
            
            234,000(Loss)
      before income taxes
            
            
            (4,953,000
            )
            
            
            
            
            
            
            (7,055,000
            )Income
      tax expense
            
            
            29,000
            
            
            
            
            
            
            
            29,000Net
      (loss)
            
            $
            (4,982,000
            )
            
            $
            (2,102,000
            )
            
            $
            (7,084,000
            )Basic
      net (loss) per share
            
            $
            (1.40
            )
            
            $
            (.60
            )
            
            $
            (2.00
            )Diluted
      net (loss) per share
            
            $
            (1.40
            )
            
            $
            (.60
            )
            
            $
            (2.00
            )Weighted
      average shares used in
              computing
      basic net (loss) per  share
            
            
            3,547,000
            
            
            
            
            
            
            
            3,547,000Weighted
      average shares used in
              computing
      diluted net (loss)per share
            
            
            3,547,000
            
            
            
            
            
            
            
            3,547,000










57





ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS





December
      31, 2005As
      previously reported
            
            
            Adjustment
            
            
            As
      restatedASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            9,484,000
            
            
            
            
            
            $
            9,484,000Restricted
      Cash
            
            
            225,000
            
            
            
            
            
            
            225,000Receivables,
      net of reserves of  $310,000
            
            
            5,037,000
            
            
            
            
            
            
            5,037,000Prepaid
      expenses and other
            
            
            485,000
            
            
            
            
            
            
            485,000Total
      current assets
            
            
            15,231,000
            
            
            
            
            
            
            15,231,000Property
      and equipment, net
            
            
            1,038,000
            
            
            
            
            
            
            1,038,000Intangibles,
      net
            
            
            1,999,000
            
            
            
            
            
            
            1,999,000Capitalized
      software development costs, net
            
            
            2,055,000
            
            
            
            
            
            
            2,055,000Goodwill
            
            
            1,100,000
            
            
            
            
            
            
            1,100,000Other
      long-term assets
            
            
            189,000
            
            
            
            
            
            
            189,000Total
      assets
            
            $
            21,612,000
            
            
            
            
            
            $
            21,612,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            3,969,000
            
            
            
            
            
            $
            3,969,000Deferred
      revenues
            
            
            5,767,000
            
            
            
            
            
            
            5,767,000Total
      current liabilities
            
            
            9,736,000
            
            
            
            
            
            
            9,736,000Long-term
      liabilitiesDeferred
      revenue
            
            
            1,221,000
            
            
            $
            189,000
            
            
            
            1,410,000Deferred
      tax liability
            
            
            7,000
            
            
            
            
            
            
            
            7,000Total
      long-term liabilities
            
            
            1,228,000
            
            
            
            189,000
            
            
            
            1,417,000Stockholders
      EquityCommon
      stock, $.01 par value, 25,000,000 shares
              authorized,
      3,585,000  shares issued
            
            
            36,000
            
            
            
            
            
            
            
            36,000Additional
      paid-in capital
            
            
            27,116,000
            
            
            
            
            
            
            
            27,116,000Accumulated
      comprehensive loss –
              translation
      adjustment
            
            
            (935,000
            )
            
            
            
            
            
            
            (935,000
            )Accumulated
      deficit
            
            
            (15,361,000
            )
            
            
            (189,000
            )
            
            
            (15,550,000
            )Less:  Treasury
      stock at cost,
            
            
            (208,000
            )
            
            
            
            
            
            
            (208,000
            )Total
      stockholders’ equity
            
            
            10,648,000
            
            
            $
            (189,000
            )
            
            
            10,459,000Total
      liabilities and stockholders' equity
            
            $
            21,612,000
            
            
            
            -
            
            
            $
            21,612,000








58


ASTEA
INTERNATIONAL INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS








Year
      ended December 31, 2005As
      previously reported
            
            
            Adjustment
            
            
            As
      restatedRevenues:Software
      license fees
            
            $
            8,240,000
            
            
            $
            (183,000
            )
            
            $
            8,057,000Services
      and maintenance
            
            
            13,914,000
            
            
            
            (6,000
            )
            
            
            13,908,000Total
      revenues
            
            
            22,154,000
            
            
            
            (189,000
            )
            
            
            21,965,000Costs
      and expenses:Cost
      of software license fees
            
            
            1,178,000
            
            
            
            
            
            
            
            1,178,000Cost
      of services and maintenance
            
            
            8,261,000
            
            
            
            
            
            
            
            8,261,000Product
      development
            
            
            2,461,000
            
            
            
            
            
            
            
            2,461,000Sales
      and marketing
            
            
            6,192,000
            
            
            
            
            
            
            
            6,192,000General
      and administrative
            
            
            3,003,000
            
            
            
            
            
            
            
            3,003,000Total
      costs and expenses
            
            
            21,095,000
            
            
            
            
            
            
            
            21,095,000Income
      from operations
            
            
            1,059,000
            
            
            
            
            
            
            
            870,000Interest
      income
            
            
            165,000
            
            
            
            
            
            
            
            165,000Income
      before income taxes
            
            
            1,224,000
            
            
            
            
            
            
            
            1,035,000Income
      tax expense
            
            
            7,000
            
            
            
            
            
            
            
            7,000Net
      income
            
            $
            1,217,000
            
            
            $
            (189,000
            )
            
            $
            1,028,000Basic
      net income per share
            
            $
            .39
            
            
            $
            (.06
            )
            
            $
            .33Diluted
      net income per share
            
            $
            .39
            
            
            $
            (.06
            )
            
            $
            .33Weighted
      average shares used in
              computing
      basic net income per share
            
            
            3,093,000
            
            
            
            
            
            
            
            3,093,000Weighted
      average shares used in
              computing
      diluted net income per share
            
            
            3,116,000
            
            
            
            
            
            
            
            3,116,000










59





3.    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 accounting principles
generally accepted in the United States of America 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.  Significant assets and liabilities that are subject to
estimates include allowances for doubtful accounts, goodwill and other acquired
intangible assets, deferred tax assets and certain accrued and contingent
liabilities.





Revenue
Recognition




Astea’s
revenue is principally recognized from two sources: (i) licensing arrangements
and (ii) services and maintenance.





The
Company markets its products primarily through its direct sales force and
resellers.  License agreements do not provide for a right of return,
and historically, product returns have not been significant.





Astea
recognizes revenue on its software products in accordance with AICPA Statement
of Position (“SOP”) 97-2, Software Revenue Recognition,
SOP 98-9, Modification of SOP
97-2,Software Revenue Recognition with Respect to Certain Transactions, SOP81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts; and SEC Staff Accounting Bulletin (“SAB”) 104, Revenue
Recognition.





Astea
recognizes revenue from license sales when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is
probable.  We utilize written contracts as a means to establish the
terms and conditions by which our products, support and services are sold to our
customers.  Delivery is considered to have occurred when title and
risk of loss have been transferred to the customer, which generally occurs after
a license key has been delivered electronically to the
customer.  Revenue for arrangements with extended payment terms in
excess of one year is recognized when the payments become due, provided all
other revenue recognition criteria are satisfied.  If collectibility
is not considered probable, revenue is recognized when the fee is
collected.  Our typical end user license agreements do not contain
acceptance clauses.  However, if acceptance criteria is required,
revenues are deferred until customer acceptance has occurred.






60





Astea
allocates revenue to each element in a multiple-element arrangement based on the
elements’ respective fair value, determined by the price charged when the
element is sold separately.  Specifically, Astea determines the fair
value of the maintenance portion of the arrangement based on the price, at the
date of sale, if sold separately, which is generally a fixed percentage of the
software license selling price.  The professional services portion of
the arrangement is based on hourly rates which the Company charges for those
services when sold separately from software.  If evidence of fair
value of all undelivered elements exists, but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual
method.  If an undelivered element for which evidence of fair value
does not exist, all revenue in an arrangement is deferred until the undelivered
element is delivered or fair value can be determined. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. The residual value, after
allocation of the fee to the undelivered elements based on VSOE of fair value,
is then allocated to the perpetual software license for the software products
being sold.





When
appropriate, the Company may allocate 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 rates when provided in
conjunction with the licensing arrangement.  Amounts allocated are
based upon standard prices charged for those services or products which, in the
Company’s opinion, approximate fair value.  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,
which is generally twelve months on a straight-line basis.  Consulting
and training service revenue is generally unbundled and recognized at the time
the service is performed.





Deferred
revenue represents payments or accounts receivable from the Company’s customers
for amounts billed in advance.




In June
2006, the FASB reached a consensus on Emerging Issues Task Force ("EITF") Issue
No. 06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation), ("EITF 06-03"). EITF 06-3 indicates that the income
statement presentation on either a gross basis or a net basis of the taxes
within the scope of the issue is an accounting policy decision that should be
disclosed. EITF 06-3 is effective for interim and annual periods beginning
after December 15, 2006. The adoption of EITF 06-3 did not change our
policy of presenting taxes within the scope of EITF 06-3 on a net basis and
had no impact on our consolidated financial statements.


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 services and maintenance.  During fiscal
years 2007, 2006 and 2005, the Company billed $615,000, $329,000, and $370,000
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
Company records an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible.  The
Company also records an additional allowance based on certain percentages of
aged receivables, which are determined based on historical experience and
management’s assessment of the general financial conditions affecting the
Company’s customer base. Once management determines that an account will not be
collected, the account is written off against the allowance for doubtful
accounts.  If actual collections experience changes, revisions to the
allowances may be required.  Activity in the allowance for doubtful
accounts is as follows:






61





Year
      Ended December 31
            
            Balance
      at
              beginning
      of year
            
            
            Expensed
            
            
            Write
      offs
            
            
            Balance
      at
              end
      of year2007
            
            $
            163,000
            
            
            $
            276,000
            
            
            $
            233,000
            
            
            $
            206,0002006
            
            
            310,000
            
            
            
            67,000
            
            
            
            214,000
            
            
            
            163,0002005
            
            
            411,000
            
            
            
            227,000
            
            
            
            328,000
            
            
            
            310,000





Bad debt expense increased in 2007
principally resulting from a Canadian customer becoming insolvent and filing for
bankruptcy protection.   The  decrease  in
bad debt  expense in 2006 from
2005  is  primarily  due  to  improvement  in  customer  payment
performance.





Senior
management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible.  Based on all
information available, the Company believes its allowance for doubtful accounts
as of December 31, 2007 is adequate.  However, actual write-offs might
exceed the recorded allowance.





Property
and Equipment





Property
and equipment are recorded at cost.  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.  When property
and equipment are sold or otherwise disposed of, the fixed asset account and
related accumulated depreciation account are relieved and any gain or loss is
included in operations.  Expenditures for repairs and maintenance are
charged to expense as incurred and significant renewals and betterments are
capitalized.





Impairment
of Long Lived Assets





The
Company evaluates its long-lived assets, including certain identifiable
intangible assets, excluding goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable.  Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of any asset to future undiscounted net
cash flows expected to be generated by the asset.  If such assets are
considered to be impaired, the impairment is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the assets.  As
of December 31, 2007, the Company has determined that no impairment has
occurred.





Capitalized
Software Development Costs





Capitalized
software costs are stated on the balance sheet at the lower of net book value or
net realizable value of capitalized software 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. The Company evaluates the recoverability of
capitalized software based on the estimated future revenues of each product. As
of December 31, 2007, management believes that no revisions to the remaining
useful lives or write-downs of capitalized software development costs are
required.






62





Research and Development
Costs





The
Company reports research and development costs as Product Development expense in
its statement of operations.  These costs include the costs incurred
prior to the establishment of technological feasibility for new product
development.  In addition, research and development costs also include
costs related to improving the quality of the Company’s released software
products and any costs incurred by third party companies that may be engaged
from time to time, to assist the Company in its product development
efforts.





Goodwill





The
Company tests goodwill for impairment annually at September 30 of each fiscal
year at the reporting unit level using a fair value approach, in accordance with
the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets.  If an event occurs or circumstances change that would
likely reduce the fair value of a reporting unit below its carrying value,
goodwill is evaluated for impairment between annual tests.





On
September 21, 2005, the Company acquired the assets and certain liabilities of
FieldCentrix, Inc. through its wholly-owned subsidiary, FC Acquisition Corp.
Included in the allocation of the purchase price was goodwill valued at
$1,100,000.





The
purchase agreement provided for an earnout provision through June 30, 2007 that
pays the sellers a percentage of certain license revenues and certain
professional services.  Due to the contingent nature of such payments,
the value of the future payments was not included in the purchase
price.  However, under FAS 141, as such sales transactions occurred,
the related earnout amounts were added to the purchase price, specifically
goodwill, which for the year ended December 31, 2007 totaled
$287,000.  At December 31, 2007 goodwill is $1,540,000.





Major
Customers





In 2007,
two customers represented 11% and 10% of total revenues.  In 2006 no
customer represented 10% or more of total revenues.  In 2005 one
customer, accounted for 25% of the Company’s revenues.  One customer
represented 21% of total accounts receivable at December 31, 2007.  At
December 21, 2006 one customer accounted for 11% of total accounts
receivable.





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.  Cash balances are maintained with several
banks.  Certain operating accounts may exceed the FDIC
limits.





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.








63





Fair
Value of Financial Instruments





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





Income
Taxes





On
January 1, 2007, we implemented the provisions of FAS interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB statement
109 (“FIN 48”).   FIN 48 clarifies the accounting for uncertainty
in income taxes and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return.  Estimated interest is
recorded as a component of interest expense and penalties are recorded as a
component of general and administrative expense.  Such amounts were
not material for 2007, 2006 and 2005.  The adoption of FIN 48 did not
have a material impact on our financial position.





Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes, under the asset-and-liability method.  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.  Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.





Advertising





Advertising
costs are expensed when incurred.  Advertising costs for the years
ended December 31, 2007, 2006, and 2005 were $191,000, $98,000 and $101,000
respectively and are included in sales and marketing costs.





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
perShare.”  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 dilutive 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 numbers of the shares assumed issued and the number of
shares assumed purchased represents the dilutive shares.








64





For the
year ended December 31, 2007, the Company had net income.  In 2007
there were 2,513 net additional dilutive shares assumed to be converted at an
average exercise price of $4.10.  All options outstanding at December
31, 2006 to purchase shares of common stock were excluded from the diluted loss
per common share calculation as the inclusion of these options would have been
antidilutive.  At December 31, 2005 there was 22,743 net additional
dilutive shares assumed to be converted at an average exercise price of
$5.06.  Additionally, at December 31, 2005 the Company had 41,975
antidilutive shares that were excluded from diluted earnings per share
calculation due to their antidilutive nature.








(in thousands, except per share
      data)Year
      Ended December 31,
            
            2007
            
            
            2006
              (restated)
            
            
            2005
              (restated)Net
      income (loss)
            
            $
            2,765
            
            
            $
            (7,084
            )
            
            $
            1,028Basic
      weighted average number of common shares outstanding
            
            
            3,550
            
            
            
            3,547
            
            
            
            3,093Basic
      earnings (loss) per common share
            
            $
            .78
            
            
            $
            (2.00
            )
            
            $
            .33Effect
      of dilutive stock options
            
            
            2
            
            
            
            -
            
            
            
            23Diluted
      weighted average number of common shares outstanding
            
            
            3,552
            
            
            
            3,547
            
            
            
            3,116Diluted
      earnings (loss) per common share
            
            $
            .78
            
            
            $
            (2.00
            )
            
            $
            .33








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 (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





On
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123(R) using the modified prospective transition method.  Under
this method, compensation costs recognized during 2006, include (a) compensation
costs for all share-based payments granted to employees and directors prior to,
but not yet vested as of January 1, 2006, based on the grant date value
estimated in accordance with the original provision SFAS 123 and (b)
compensation costs for all share-based payments granted subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of FAS 123(R).





The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and amortizes, the estimated option
value using an accelerated amortization method where each option grant is split
into tranches based on vesting periods. The Company’s expected term represents
the period that the Company’s share-based awards are expected to be outstanding
and was determined based on historical experience regarding similar awards,
giving consideration to the contractual terms of the share-based awards and
employee termination data and guidance provided by the U.S. Securities and
Exchange Commission’s Staff Accounting Bulletin 107 (“SAB
107”).  Executive level employees who hold a majority of the options
outstanding, and non-executive level employees were each found to have similar
historical option exercise and termination behavior and thus were grouped for
valuation purposes. The Company’s expected volatility is based on the historical
volatility of its traded common stock in accordance with the guidance provided
by SAB 107 to place exclusive reliance on historical volatilities to estimate
our stock volatility over the expected term of its awards. The Company has
historically not paid dividends and has no foreseeable plans to issue dividends.
The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term.  Results for prior periods have not
been restated.






65







Under the
Company’s stock option plans, options awards generally vest over a four year
period of continuous service and have a 10 year contractual
term.   The fair value of each option is amortized on a
straight-line basis over the option’s vesting period.  The fair value
of each option is estimated on the date of the grant using the Black-Scholes
Merton option pricing formula using the following assumptions as of December 31,
2007.





For
      the year ended
            For
      the year ended
            For
      the year endedDecember
      31, 2007
            December
      31, 2006
            December
      31, 2005Risk-free
      interest rate
            4.22%
            4.77%
            4.32%Expected
      life (in years)
            4.18
            6.15
            6.25Volatility
            91%
            115%
            117%Expected
      dividends
            -
            -
            -Annual
      forfeiture rate
            18.99%
            24.5%
            -





The
weighted-average fair value of options granted during the years ended December
31, 2007, 2006 and 2005 was estimated as $3.11, $5.90 and $6.72
respectively.





Prior to
the adoption of FAS 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with APB
25 as allowed under FAS 123.  The exercise price of the Company’s
stock options granted to employees and directors equaled the market value of the
underlying stock at the date of grant.  Under the intrinsic value
method, no stock-based compensation expense had been recognized in the Company’s
consolidated statement of operations because the average price of the Company’s
stock options granted to employees and directors equaled the market value of the
underlying stock at the date of the grant.





The
following table illustrates the effect on the net income and earnings per share
if the Company had applied the fair value recognition provisions of FAS 123 to
options granted under the Company’s stock option plan in all periods
presented.





Year ended December 31
            
            2005Net
      income – as restated
            
            $
            1,028,000Add:  Stock
      based compensation
              included
      in net income as reported
            
            
            -Deduct
      stock based compensation
              determined
      under fair value based
              methods
      for all awards
            
            
            (388,000
            )Net
      income – pro forma , as restated
            
            $
            640,000Basic
      income per share - as restated
            
            $
            .33Diluted
      income per share - as restated
            
            $
            .33Basic
      income per share - pro forma as restated
            
            $
            .21Diluted
      income per share - pro forma as restated
            
            $
            .21






66





Prior to
the adoption of SFAS 123(R), the Company included all tax benefits associated
with stock-based compensation as operating cash flows in the consolidated
statements of cash flows.  SFAS 123(R), requires any reduction in
taxes payable resulting from tax deductions that exceed the recognized
compensation expense (excess to tax benefits) to be classified as financing cash
flows.  The Company did not have any excess tax benefit for the year
ending December 31, 2007.





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 2007, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 141 (revised 2007), Business Combinations ("FAS 141(R)") which
replaces FAS No.141, Business Combinations. FAS 141(R) retains the underlying
concepts of FAS 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting but FAS
141(R) changed the method of applying the acquisition method in a number of
significant aspects. Changes prescribed by FAS 141(R) include, but are not
limited to, requirements to expense transaction costs and costs to restructure
acquired entities; record earn-outs and other forms of contingent consideration
at fair value on the acquisition date; record 100% of the net assets acquired
even if less than a 100% controlling interest is acquired; and to recognize any
excess of the fair value of net assets acquired over the purchase consideration
as a gain to the acquirer. FAS 141(R) is effective on a prospective basis for
all business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with the
exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made
to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of FAS
141(R) would also apply the provisions of FAS 141(R). Early adoption is not
allowed. We are currently evaluating the effects, if any, that FAS 141(R) may
have on our consolidated financial statements.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests in Consolidated Financial Statements ("FAS 160").
FAS 160 amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. FAS 160 also clarifies that all of
those transactions resulting in a change in ownership of a subsidiary are equity
transactions if the parent retains its controlling financial interest in the
subsidiary. FAS 160 requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent's owners and the interests of the noncontrolling owners of a subsidiary.
FAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
FAS 160 shall be applied prospectively as of the beginning of the fiscal year in
which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. We are currently evaluating
the effects, if any, that FAS 160 may have on our consolidated financial
statements.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("SFAS No. 159"). SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value and to provide additional information that will help
investors and other users of financial statements to understand more easily the
effect on earnings of a company's choice to use fair value. It also requires
companies to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet. We
are required to adopt SFAS No. 159 on January 1, 2008 and are currently
evaluating the impact, if any, of SFAS No. 159 on our consolidated financial
statements.








67




In
September 2006, the FASB issued FAS No 157, Fair Value Measurement (“FAS
157”).  FAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosure about fair value measurements.  FAS
157 is effective for years beginning after November 15, 2007.  The
adoption of this Statement is not expected to have a material effect on the
Company’s consolidated financial statements.




3. Receivables





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 receivables are shown net of reserves
for estimated uncollectible amounts.  Receivables consisting of the
following:





December
      31,2007
            
            
            2006Billed
      receivables
            
            $
            7,470,000
            
            
            $
            5,301,000Unbilled
      receivables
            
            
            1,047,000
            
            
            
            1,559,000$
            8,517,000
            
            
            $
            6,860,000





4.            Property
and Equipment





Property
and equipment consist of:





December
      31,Useful Life
            
            
            2007
            
            
            2006Computers
      and related equipment
            
            
            3
            
            
            $
            3,542,000
            
            
            $
            3,165,000Furniture
      and fixtures
            
            
            10
            
            
            
            512,000
            
            
            
            512,000Leasehold
      improvements
            
            
            10
            
            
            
            129,000
            
            
            
            128,000Software
            
            
            1-3
            
            
            
            416,000
            
            
            
            365,000Office
      equipment
            
            
            3-7
            
            
            
            1,240,000
            
            
            
            1,234,0005,839,000
            
            
            
            5,404,000Less:  Accumulated
              depreciation
      and amortization
            
            
            
            
            
            
            (5,421,000
            )
            
            
            (4,756,000
            )$
            418,000
            
            
            $
            648,000





Depreciation and
amortization expense for the years ended December 31,2007,2006 and2005
was  $412,000, $717,000 and $538,000,respectively.









68





5.      Capitalized
Software Development Costs





RemainingWeighted
            December
      31,Average Life
            2007
            2006Capitalized
      software       development
      costs
            1.27
            $     8,073,000
            $   9,585,000Less:  Accumulated
      amortization
            
            (4,835,000)
            (5,949,000)$     3,238,000
            $  3,636,000





The
Company capitalized software development costs of $1,836,000, $2,821,000 and
$1,555,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.  Amortization of capitalized software development costs
for the years ended December 31, 2007, 2006 and 2005 was $2,234,000, $1,240,000
and $1,020,000, respectively, and is reflected in cost of software license fees
in the financial statements.  Additionally, for the year ended
December 31, 2007, the Company wrote-off $3,348,000 of fully amortized
capitalized software for old versions that had been deemed no longer useful or
functional.  The Company amortizes software developments costs using
the greater of the straight-line basis over the estimated useful lives of the
product (two years) or the revenue forecast method.





6.      Intangible
Assets





Intellectual
property and customer lists (“intangible assets”) acquired as part of the
FieldCentrix acquisition are amortized on a straight-line basis over their
estimated annual lives or over the period of their expected benefit, generally
ranging from 5 to 10 years.  Amortization expense related to these
intangible assets remained the same at $280,000 for the years ended December 31,
2007 and 2006, respectively.





Accumulated Amortization
            Net Carrying ValueDescription
            Weighted
              Avg. Life
            Gross Cost
            2007
            2006
            2007
            2006Software
            5
      years
            $   720,000
            $   330,000
            $  186,000
            $   390,000
            $   534,000Customer
      Relationship List
            10
      years
            1,360,000
            311,000
            175,000
            1,049,000
            1,185,000$2,080,000
            $   641,000
            $  361,000
            $1,439,000
            $1,719,000





Estimated amortization expense for each
of the next five years is as follows:





Amortization Expense2008
            280,0002009
            280,0002010
            238,0002011
            136,0002012
            136,000











69








7.    Accounts
Payable and Accrued Expense





Accounts
payable and accrued expenses consist of:





December
      31,
            
            2007
            
            
            2006Accounts
      payable
            
            $
            911,000
            
            
            $
            1,025,000Accrued
      compensation and related benefits
            
            
            1,748,000
            
            
            
            1,568,000Accrued
      professional services
            
            
            90,000
            
            
            
            316,000Sales
      and payroll taxes
            
            
            335,000
            
            
            
            403,000Other
      accrued liabilities
            
            
            548,000
            
            
            
            618,000$
            3,632,000
            
            
            $
            3,930,000





8.    Income
Taxes





The
Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes,
which provides for an asset and liability approach to accounting for income
taxes.  Deferred tax assets and liabilities represent the future tax
consequences of the differences between the financial statement carrying amounts
for assets and liabilities versus the tax bases of assets and
liabilities.  Under this method, deferred tax assets are recognized
for deductible temporary differences, operating loss and tax credit
carryforwards.  Deferred liabilities are recognized for taxable
temporary differences.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.  The impact of tax rate changes on deferred tax assets and
liabilities is recognized in the year that the change is enacted.





The
provision for income taxes is as follows:





Years ended December
      31,
            
            2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            -
            
            
            $
            -
            
            
            $
            -State
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
            
            
            -
            
            
            
            -
            
            
            
            --
            
            
            
            -
            
            
            
            -Deferred:Federal
            
            $
            32,000
            
            
            $
            27,000
            
            
            $
            6,000State
            
            
            9,000
            
            
            
            2,000
            
            
            
            1,000$
            41,000
            
            
            $
            29,000
            
            
            $
            7,000





Pre-tax
income for domestic locations for the year ended December 31, 2007 and 2006 was
$15,000 and pre tax loss for the year ended December 31, 2006 was
$6,180,000.  Foreign locations had pre-tax income of $3,350,000 for
the year ended December 31, 2007, pre-tax loss of $875,000 in 2006 and pre-tax
income of $1,279,000 in 2005.







70





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





December
      31,
            
            2007
            
            
            2006Deferred
      income tax assets:Revenue
      recognition
            
            $
            64,000
            
            
            $
            40,000Accruals
      and reserves not
              currently
      deductible for tax
            
            
            194,000
            
            
            
            203,000Benefit
      of net operating loss carryforward
            
            
            14,229,000
            
            
            
            10,916,000Benefit
      of foreign net operating loss
              carryforward
            
            
            1,829,000
            
            
            
            2,041,000Depreciation
            
            
            224,000
            
            
            
            221,000Alternative
      minimum tax
            
            
            370,000
            
            
            
            370,000Non-qualified
      stock options
            
            
            55,000
            
            
            
            24,000Other
            
            
            26,000
            
            
            
            -16,991,000
            
            
            
            13,815,000Deferred
      income tax liabilities:Capitalized
      software development costs
            
            
            (1,306,000
            )
            
            
            (1,346,000
            )Amortization
      of deductible goodwill
            
            
            (77,000
            )
            
            
            (36,000
            )(1,383,000
            )
            
            
            (1,382,000
            )Net
      deferred tax asset before allowance
            
            
            (15,608,000
            )
            
            
            (12,433,000
            )Valuation
      allowance
            
            
            (15,685,000
            )
            
            
            (12,469,000
            )Net
      deferred income tax liability
            
            $
            (77,000
            )
            
            $
            (36,000
            )





Realization
of deferred tax assets is primarily dependent on future taxable income, the
amount and timing of which is uncertain.  The valuation allowance is
adjusted on a periodic basis to reflect management’s estimate of the realizable
value of the net deferred tax assets.  Therefore, a valuation
allowance has been recorded for the entire net deferred tax asset with the
exception of $77,000 related to the deferred tax liability associated with
indefinite-lived intangible assets in accordance with SFAS No.
142.  Because indefinite-lived intangible assets and goodwill are not
amortized for book purposes, the related deferred tax liabilities will not
reverse until some indeterminate future period when the asset becomes impaired,
are disposed of, or in the case of indefinite-lived intangible assets, begin to
reverse if they are reclassified as an amortizing intangible
asset.  SFAS No. 109 requires the expected timing of future reversals
of deferred tax liabilities to be taken into account when evaluating the
realizability of deferred tax assets.  Therefore, the Company believes
the reversal of deferred tax liabilities related to indefinite-lived intangible
assets and goodwill should not be considered a source of future taxable income
when assessing the realization of the Company’s deferred tax assets. And as a
result a deferred expense has been recorded.





In 2007
the Company utilized $306,000 of its reserved deferred tax asset to offset its
provision for income taxes, primarily from the utilization of its net operating
loss carryforward and timing of certain accruals.  In the years ended
December 31, 2006 and 2005, there were no income taxes owed, as the Company had
tax losses.





The
Company has a tax holiday in Israel, which expires in 2014.  Taxable
income for the Israeli subsidiary was $272,000 and $425,000 for the years ended
December 31, 2007 and 2006, respectfully.  The Israeli subsidiary has
net carryforward losses for Israeli tax purposes of approximately $0.7
million.





As of
December 31, 2007, the Company had a net operating loss carryforward for United
States federal income tax purposes of approximately$21,888,000.  Included
in the aggregate net operating loss carryforward is $8,895,000 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 carryforwards expire in
2016 through 2025.






71





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, 2006, the Company had not
provided federal income taxes on cumulative earnings of individual international
subsidiaries of $2,691,000.  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.





The
effective tax rate differed from the statutory U.S. federal income tax rate as
follows:





Year
      ended December 31,2007
            
            
            2006
            
            
            2005U.S.
      Federal Statutory rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
      Tax
            
            
            0.3
            %
            
            
            0.0
            %
            
            
            0
            %Permanent
      differences
            
            
            3.9
            %
            
            
            (2.1
            %)
            
            
            1.1
            %Foreign
      benefit
            
            
            (9.1
            %)
            
            
            0.0
            %
            
            
            0
            %Other
            
            
            -
            
            
            
            2.3
            %
            
            
            (0.5
            %)Valuation
      allowance
            
            
            (27.6
            %)
            
            
            (34.6
            %)
            
            
            (33.9
            %)1.5
            %
            
            
            (0.4
            %)
            
            
            0.7
            %





9.            Line
of Credit





On May
23, 2006 the Company entered into a secured revolving line of credit (Line)
agreement with a bank.  This agreement was amended in June of
2007.  Maximum available borrowings under the Line represent the
lesser of 80% of the Borrowing Base, which is eligible accounts receivables as
defined, or $2.0 million.  Amounts outstanding on the line of credit
were zero on December 31, 2007.  Interest is payable monthly based on
the Bank’s prime rate, which was 7.25% at December 31, 2007.  The
Company pays a quarterly fee for the unused portion of the line of
credit.  The fee is .25% for the unused portion of the available line
of credit.  For 2007, the Company paid $7,500 in unused line of credit
fees.





10.           Commitments
and Contingencies





The
Company leases facilities and equipment under noncancelable operating leases.
Rent expense for facility leases for the years ended December 31, 2007, 2006 and
2005 was $1,128,000, $1,065,000 and $780,000, respectively.  Equipment
and vehicle expense for the years ended December 31, 2007, 2006 and 2005 was
$257,000, $249,000 and $210,000.






72





Future
minimum lease payments under the Company’s leases as of December 31, 2007 are as
follows:





Operating Leases2008
            
            $
            1,201,0002009
            
            
            1,095,0002010
            
            
            956,0002011
            
            
            598,0002012
            
            
            605,000Thereafter
            
            
            807,000Total
      minimum lease payments
            
            $
            5,262,000





The
Company has a letters of credit of $313,000 as of December 31, 2007 as security
for a lease obligation.  The letter of credit is collateralized by a
certificate of deposit of $150,000 which is reported as restricted
cash.





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.





11. 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 $87,000, $85,000
and $53,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.





12.           Equity
Plans





Share-Based
Awards





Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R),
Share-Based Payment,
using the modified-prospective transition method, and therefore, has not
restated its financial statements for prior periods. For awards expected to
vest, compensation cost recognized in the year ended December 31, 2007
includes the following: (a) compensation cost, based on the grant-date
estimated fair value and expense attribution method of SFAS 123, related to any
share-based awards granted through, but not yet vested as of January 1,
2007, and (b) compensation cost for any share-based awards granted on or
subsequent to January 1, 2007, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123(R).





SFAS No.
123(R) requires companies to estimate the fair value of share-based payment
awards issued in the form of stock options on the date of the grant using an
option-pricing model.  The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite
service period.  The Company estimated, at the adoption of SFAS No.
123(R), the value of an additional paid-in capital pool for tax impacts related
to employee share-based compensation awards for which compensation costs were
reflected in our pro forma disclosures required under SFAS No. 123 to be
approximately $305,000.  Although not recorded in the financial
statements, this pool (a hypothetical credit in paid-in capital) can be utilized
to charge tax expense (recorded as deferred tax asset), which are ultimately not
realizable when stock options are exercised or expire.  As the Company
presently has valuation allowances related to its deferred tax assets, the use
of the hypothetical pool could not occur until such valuation reserve has been
eliminated.






73





As of
December 31, 2007, the total unrecognized compensation cost related to
non-vested options amounted to $505,000, which is expected to be recognized over
the options’ remaining vesting periods of 3.86 years.  No income tax
benefit was realized by the Company in the year ended December 31, 2007 as the
Company maintains a full valuation allowance on its net deferred tax
asset.





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, 2007, 2006 and 2005
and changes during the years then ended are as follows:





OPTIONS OUTSTANDING
            
            
            OPTIONS
              EXERCISABLEShares
            
            
            Wtd.
      Avg.
              Exercise
              Price
            
            
            Shares
            
            
            Wtd.
      Avg. Exercise
              PriceBalance,
      December 31, 2004
            
            
            
            396,000
            
            
            $
            5.73
            
            
            
            190,000
            
            
            $
            7.09Granted
            
            
            
            205,000
            
            
            
            7.22
            
            
            
            -
            
            
            
            -Cancelled
            
            
            
            (129,000
            )
            
            
            6.95
            
            
            
            -
            
            
            
            -Exercised
            
            
            
            (162,000
            )
            
            
            4.88
            
            
            
            -
            
            
            
            -Expired
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2005
            
            
            
            310,000
            
            
            $
            7.04
            
            
            
            89,000
            
            
            $
            9.11Granted
            
            
            
            222,000
            
            
            
            6.91
            
            
            
            -
            
            
            
            -Cancelled
            
            
            
            (99,000
            )
            
            
            6.84
            
            
            
            -
            
            
            
            -Exercised
            
            
            
            (6,000
            )
            
            
            3.23
            
            
            
            -
            
            
            
            -Expired
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2006
            
            
            
            427,000
            
            
            $
            6.71
            
            
            
            118,000
            
            
            $
            6.59Authorized
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            
            202,000
            
            
            
            5.04
            
            
            
            -
            
            
            
            -Cancelled
            
            
            
            (140,000
            )
            
            
            7.23
            
            
            
            -
            
            
            
            -Exercised
            
            
            
            (5,000
            )
            
            
            3.10
            
            
            
            -
            
            
            
            -Expired
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2007
            
            
            
            484,000
            
            
            $
            5.91
            
            
            
            177,000
            
            
            $
            6.43





During
the second quarter of 2006, the shareholders of the Company approved the 2006
Stock Option Plan in order to fulfill the Company’s needs of attracting new
managerial and technical talent and retaining existing talent.  The
2006 Plan authorizes the issuance of a maximum of 350,000 shares of Common Stock
of the Company.






74





The
following table summarizes outstanding options that are vested and expected to
vest under the Company’s stock option plans as of December 31,
2007.





Number
      of Shares
            Weighted
              AveragePrice
              Per Share
            Weighted
      Average
              Remaining
      Contractual
              Term (in years)
            Aggregate
              Intrinsic ValueOutstanding
      Options
            484,000
            $5.91
            7.98
            $369,449Ending
      Vested and Expected to Vest
            359,000
            $6.01
            7.48
            $278,659Options
      Exercisable
            177,000
            $6.43
            5.95
            $142,573


The
intrinsic value of options exercised for the years ending December 31, 2007,
2006 and 2005 was $15,000, $35,000 and $1,201,000
respectively.   The total fair value of shares vested for the
years December 31, 2007, 2006 and 2005 was $314,000, $263,000 and $69,000,
respectively





The
Company’s policy is to issue shares from the pool of authorized but unissued
shares upon the exercise of stock options.





A summary
of the status of the Company’s nonvested share options as of December 31, 2007
is presented below:





Non Vested Shares
            
            Shares
            
            
            Wtd.
      Avg. Grant Date
              Fair ValueNonvested
      at December 31, 2006
            
            
            309,000
            
            
            $
            6.70Granted
            
            
            200,000
            
            
            $
            5.04Vested
            
            
            (58,000
            )
            
            $
            6.11Forfeited
      or expired
            
            
            144,000
            )
            
            $
            7.24Nonvested
      at December 31, 2007
            
            
            307,000
            
            
            $
            6.01





In
accordance with Staff Accounting Bulletin No. 107, we classified share-based
compensation expense within the cost of services and maintenance, development,
sales and marketing, and general and administrative
expenses.   The following table shows total share based
compensation expense included in the Consolidated Statement of
Operations:





Year
      Ended
              December 31, 2007
            
            
            Year
      Ended
              December 31, 2006Cost
      of Services and Maintenance
            
            $
            71,000
            
            
            $
            45,000Development
            
            
            51,000
            
            
            
            90,000Sales
      & Marketing
            
            
            32,000
            
            
            
            123,000General
      & Administrative
            
            
            151,000
            
            
            
            139,000Pre-tax
      share based compensation
            
            $
            305,000
            
            
            $
            397,000Income
      tax benefit
            
            
            -
            
            
            
            -Share-based
      compensation expense, net
            
            $
            305,000
            
            
            $
            397,000





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 2005, 500 shares were purchased. The plan expired on
June 30, 2005 and was not renewed.








75





13.  FieldCentrix
Acquisition





On
September 21, 2005, the Company, through a newly formed wholly-owned subsidiary,
FC Acquisition Corp., acquired substantially all of the assets of FieldCentrix,
Inc., a leading provider of mobile workforce automation, pursuant to an Asset
Purchase Agreement for $3,336,000 of Company stock.  The total cost of
the acquisition including earnout through December 31, 2007, legal, accounting
and investment banking fees was $4,064,000.





The
Company acquired substantially all of the assets of FieldCentrix, including
cash, accounts receivables, personal property, contracts with customers,
intellectual property, existing customer relationships and assumed certain
liabilities of FieldCentrix.  In consideration for the assets acquired
and liabilities assumed from FieldCentrix, the Company issued 421,106 shares of
its unregistered stock to FieldCentrix, Inc.  The shares were valued
at $3,336,000 based upon the average closing price of the Company’s common stock
for five trading days preceding the closing of the Acquisition
($7.922).  The Purchase Agreement also provides for certain quarterly
cash earnout payments payable to FieldCentrix through June 30, 2007 related to
the collection of gross license revenues for certain sales of FieldCentrix
products, and collections on certain professional services for FieldCentrix
customers.





Ten
percent of the shares issued were deposited into escrow to cover any claims for
indemnification made by the Company or FC Acquisition Corp. against FieldCentrix
under the Purchase Agreement.  This stock escrow was released to
FieldCentrix on September 30, 2006.  Additionally, FieldCentrix
deposited $177,243 into an escrow account to cover any uncollected accounts
receivable and/or maintenance revenues of customers who had not consented to the
assignment of their contracts with FieldCentrix Inc. to FC Acquisition Corp. The
cash escrow was analyzed in January 2006 with a portion being released to FC
Acquisition Corp. for the total of uncollected accounts receivable and
unassigned maintenance contracts that existed at the date of the
acquisition.





The
purchase price of FieldCentrix was allocated as follows:





Assets acquired
            
            Total
      AllocationCash
            
            $
            906,000Accounts
      receivable
            
            
            384,000Prepaid
      expenses
            
            
            80,000Property
      and equipment
            
            
            730,000Software
            
            
            721,000Customer
      relations
            
            
            1,360,000Other
      assets
            
            
            31,000Goodwill
            
            
            1,540,0005,752,000Less
      liabilities assumed:Accrued
      expenses
            
            
            721,000Deferred
      revenue
            
            
            967,0001,688,000Total
      purchase price
            
            $
            4,064,000






76




Goodwill
is expected to be deductible for tax purposes.





The
acquisition of the long lived assets described above resulted in depreciation
and amortization expense to the Company.  All assets above were
depreciated or amortized, as appropriate, using the straight-line method over
the following estimated useful lives.  Certain assets were fully
depreciated in 2006.  Those with longer lives continue to be
depreciated and amortized over the estimated useful lives.





14.
            Unaudited
      Pro Forma Financial Information





Unaudited
pro forma financial information for the years ended December 31, 2005 and 2004
as though the FieldCentrix acquisition had occurred on January 1, 2004 is as
follows:





Year
      ended
              December
      31,2005
              (restated)
            
            
            2004
              (restated)Revenues
            
            $
            26,732,000
            
            
            $
            27,150,000Net
      (loss)
            
            $
            (2,083,000
            )
            
            $
            (2,568,000
            )Net
      (loss) per common shareBasic
            
            $
            (.61
            )
            
            $
            (.77
            )Diluted
            
            $
            (.61
            )
            
            $
            (.77
            )Weighted
      shares outstandingBasic
            
            
            3,397,000
            
            
            
            3,318,000Diluted
            
            
            3,397,000
            
            
            
            3,318,000








77





15.           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 have three
reporting segments, specifically the license, implementation and support of its
software.





Year
      ended December 31,
            
            2007
            
            
            2006
              (restated)
            
            
            2005
              (restated)Revenues:Software
      license feesUnited
      StatesDomestic
            
            $
            6,129,000
            
            
            $
            2,307,000
            
            
            $
            2,800,000Export
            
            
            -
            
            
            
            -
            
            
            
            -Total
      United States software license fees
            
            
            6,129,000
            
            
            
            2,307,000
            
            
            
            2,800,000United
      Kingdom
            
            
            997,000
            
            
            
            589,000
            
            
            
            4,580,000Asia/Pacific
            
            
            963,000Other
      foreign
            
            
            -
            
            
            
            535,000
            
            
            
            677,000Total
      foreign software license fees
            
            
            1,960,000
            
            
            
            1,124,000
            
            
            
            5,257,000Total
      software license fees
            
            
            8,089,000
            
            
            
            3,431,000
            
            
            
            8,057,000Services
      and maintenanceUnited
      StatesDomestic
            
            
            14,287,000
            
            
            
            9,717,000
            
            
            
            8,122,000Export
            
            
            197,000
            
            
            
            593,000
            
            
            
            304,000Total
      United States service and maintenance revenue
            
            
            14,484,000
            
            
            
            10,310,000
            
            
            
            8,426,000United
      Kingdom
            
            
            5,291,000
            
            
            
            1,822,000
            
            
            
            2,248,000Asia/Pacific
            
            
            1,651,000Other
      foreign
            
            
            855,000
            
            
            
            2,619,000
            
            
            
            3,234,000Total
      foreign service and maintenance revenue
            
            
            7,797,000
            
            
            
            4,441,000
            
            
            
            5,482,000Total
      service and maintenance revenue
            
            
            22,281,000
            
            
            
            14,751,000
            
            
            
            13,908,000Total
      revenue
            
            $
            30,370,000
            
            
            $
            18,182,000
            
            
            $
            21,965,000Net
      income(loss) from operationsUnited
      States
            
            $
            (206,000
            )
            
            $
            (6,209,000
            )
            
            $
            (251,000
            )United
      Kingdom
            
            
            2,031,000
            
            
            
            (1,533,000
            )
            
            
            256,000Asia/Pacific
            
            
            852,000Other
      foreign
            
            
            88,000
            
            
            
            658,000
            
            
            
            1,023,000Net
      income(loss) from operations
            
            $
            2,765,000
            
            
            $
            (7,084,000
            )
            
            $
            1,028,000Long
      lived assetsUnited
      States
            
            $
            6,533,000
            
            
            $
            7,050,000
            
            
            $
            6,000,000United
      Kingdom
            
            
            26,000
            
            
            
            59,000
            
            
            
            67,000Asia/Pacific
            
            
            27,000Other
      foreign
            
            
            113,000
            
            
            
            322,000
            
            
            
            314,000Total
      assets
            
            $
            6,699,000
            
            
            $
            7,431,000
            
            
            $
            6,381,000








78





16.           Selected
Consolidated Quarterly Financial Data (Unaudited)





2007
      Quarter Ended
            
            Dec
      31,
            
            
            Sep
      30,
              (restated)
            
            
            Jun
      30,
              (restated)
            
            
            Mar
      31,
              (restated)Revenues
            
            $
            6,822,000
            
            
            $
            7,153,000
            
            
            $
            6,877,000
            
            
            $
            9,518,000Gross
      profit
            
            
            3,011,000
            
            
            
            3,152,000
            
            
            
            3,248,000
            
            
            
            6,410,000Net
      income(loss)
            
            
            (80,000
            )
            
            
            192,000
            
            
            
            (299,000
            )
            
            
            2,952,000Basic
      net income(loss) per share
            
            $
            (.02
            )
            
            $
            .05
            
            
            $
            (.08
            )
            
            $
            .83Diluted
      net income(loss) per
              Share
            
            $
            (.02
            )
            
            $
            .05
            
            
            $
            (.08
            )
            
            $
            .83Shares
      used in computing basic net income(loss) per share (in
      thousands)
            
            
            3,552
            
            
            
            3,549
            
            
            
            3,549
            
            
            
            3,549Shares
      used in computing diluted net income(loss) per share (in
      thousands)
            
            
            3,552
            
            
            
            3,551
            
            
            
            3,549
            
            
            
            3,5762006
      Quarter Ended
            
            Dec
      31,
              (restated)
            
            
            Sep
      30,
              (restated)
            
            
            Jun
      30,
              (restated)
            
            
            Mar
      31,
              (restated)Revenues
            
            $
            5,378,000
            
            
            $
            4,886,000
            
            
            $
            4,122,000
            
            
            $
            3,796,000Gross
      profit
            
            
            2,322,000
            
            
            
            2,046,000
            
            
            
            1,220,000
            
            
            
            645,000Net
      (loss)
            
            
            (1,028,000
            )
            
            
            (1,418,000
            )
            
            
            (2,312,000
            )
            
            
            (2,326,000
            )Basic
      net (loss) per share
            
            $
            (.29
            )
            
            $
            (.40
            )
            
            $
            (.65
            )
            
            $
            (.66
            )Diluted
      net (loss) per
              Share
            
            $
            (.29
            )
            
            $
            (.40
            )
            
            $
            (.65
            )
            
            $
            (.66
            )Shares
      used in computing basic net (loss) per share (in
thousands)
            
            
            3,549
            
            
            
            3,549
            
            
            
            3,547
            
            
            
            3,543Shares
      used in computing diluted net (loss) per share (in
    thousands)
            
            
            3,549
            
            
            
            3,549
            
            
            
            3,547
            
            
            
            3,543





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





None.





Item
9A(T).              Controls
and Procedures.





Controls
and Procedures





As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive
officer, who is also the principal financial officer, of the Company’s
disclosure controls and procedures ( as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based
on this evaluation, the principal financial officer concluded that as of
December 31, 2007, due to a material weakness in revenue recognition and
accounting for stock based compensation, discussed below in Management’s report
on Internal Control over Financial reporting, our disclosure controls and
procedures were not effective.  Additional review, evaluation and
oversight were undertaken on the part of management in order to ensure our
consolidated financial statements were prepared in accordance with generally
accepted accounting principles and, as a result, management has concluded that
the consolidated financial statements in the Annual Report on Form 10-K fairly
presents, in all material respects, our financial position, results of
operations and cash flows for the periods presented.






79





Managements
Annual Report On Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, we evaluated the effectiveness and design and operation of
our internal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).





In
connection with management’s assessment of our internal control over financial
reporting described above, management has identified that as of December 31,
2007, our disclosure controls and procedures did not adequately provide for
effective controls over the accounting for revenue recognition and stock based
compensation.  Specifically, our disclosure controls and procedures
did not adequately provide for effective control over the review and monitoring
of revenue recognition for certain license sale contracts that included
undelivered elements.  As a result of this deficiency, the Company
must restate its Form 10-K for the years ending December 31, 2006 and
2005.  In addition, the Company must restate its quarterly
consolidated financial statements for the quarters ended March 31, 2006, June
30, 2006, September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007
and September 30, 2007.





In
addition, our disclosure controls and procedures did not adequately provide for
effective controls over the accounting for stock based
compensation.  Specifically, the Company did not correctly estimate
certain variables related to the calculation of options in accordance with SFAS
123R, which resulted in a significant deficiency.  Accounting
adjustments were recorded in the Company’s financial results for 2007 to correct
for the improper estimate.  A similar significant deficiency was also
identified during 2006.  According to the rules of COSO, if the same
item is identified as a significant deficiency in two consecutive years, it must
be considered as a material weakness.





Because
of the material weaknesses identified, management has concluded that our
internal control over financial reporting and procedures did not adequately
provide for effective internal control over financial reporting as of December
31, 2007, based on criteria in the COSO framework.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





In  connection  with
the completion  of  its audit  of and the issuance
of an unqualified report on the Company's consolidated  financial
statements for the  fiscal year ended December 31, 2007, the Company's independent
registered  public  accounting  firm, Grant Thornton LLP("Grant Thornton"), communicated
to the Company's Audit Committee that the following matter involving the
Company's internal controls and operations was considered to be a material
weakness, as defined under standards established by the Public Company
Accounting Oversight Board.





The
Company does not maintain sufficiently detailed documentation regarding how
modifications to its standard software license terms (and the related accounting
impact, if any) comply with provisions in US GAAP, namely SOP 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2 Software Revenue
Recognition with Respect to Certain Transactions and related practice aids
issued by the American Institute of Certified Public Accountants
(AICPA).






80





A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected by
the entity’s internal control.





The
Company intends to immediately expand its internal contract documentation
procedures in order to fully comply with all provisions of US GAAP, in order to
completely correct the material weakness identified.


There
were no changes that occurred during the fiscal quarter ended December 31,
2007 that have materially
affected, or are reasonable likely to materially affect, our internal controls
over financial reporting.





Item
9B.                      Other
Information





None








PART
III





Item
10.                      Directors
and Executive Officers of the Registrant.





Certain
information required by Part III is omitted from this Report in that the Company
will file a definitive proxy statement with 120 days after the end of this
fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for its 2007
Annual Meeting of Stockholders proposed to be held on June 11, 2008, and the
information therein is incorporated herein reference.





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





The
information set forth under the captions “Executive Officers” of the Proxy
Statement is incorporated herein by reference.





Item
11.                     Executive
Compensation





Executive
Severance Agreements





On April
15, 2008, as authorized by the Compensation Committee of the Board of Directors
at its meeting on April 14, 2008, the Company entered into supplemental
agreements with its three principal executive officers, to provide severance
benefits in the event of:  a) the termination of their employment
without Cause; b) their resignation for Good Reason; or c) either of the above
in the twelve month period following a Change of Control of the
Company.  The Executive Severance Agreements (the “Agreements”) were
made with Zack Bergreen, the Chairman and Chief Executive Officer, John Tobin,
the President, and Rick Etskovitz, the Chief Financial
Officer.   “Cause”, “Good Reason” and “Change in Control” are as
defined in the Agreements.





In the
event of a termination without Cause or a resignation for Good Reason, in either
case unrelated to a Change in Control, the Agreements provide that the executive
would receive severance compensation of six months’ base pay at the then current
base pay, plus reimbursement of the cost of “COBRA” continuation coverage for
six months.  Such payment would be paid out via normal payroll over
the six month period.





In the
event that that the executive’s employment terminates within one year of the
effective date of a Change in Control of the Company, due to a termination
without Cause or a resignation for Good Reason, then the executive would receive
severance compensation of twelve months’ base pay at the then current rate of
pay, plus reimbursement of the cost of “COBRA” continuation coverage for twelve
months.  Such payment would be made in a single lump sum following
execution of the appropriate release.





In either
event, the executive would be required to execute a release of claims prior to
the benefits being paid.






81





The
Agreements also provided for compliance with the requirements of Internal
Revenue Code Section 409A, including the delayed payments of benefits if
determined to be applicable pursuant to Section 409A.





The above
description of the Agreements is qualified in its entirety by reference to the
complete copies of the Agreements for each individual that have been filed as
Exhibits to this Form 10-K.





The
information in the Proxy Statement set forth under the captions “Executive
Compensation Summary” and “Report on Executive Compensation” is incorporated
herein by reference.





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





The
information set forth under the captions “Security Ownership of Certain
Beneficial Owners and Management’ of the Proxy Statement is incorporated herein
by reference.





Item
13.                     Certain
Relationships and Related Transactions





The
information required by this Item is incorporated by reference from the Proxy
Statement under the heading “Certain Relationships and Related
Transactions.”





Item
14.                     Principal
Accountant Fees and Services





The
information required by this Item is incorporated by reference from the Proxy
Statement under the heading “Principal Accountant Fees and
Service.”





PART
IV





Item
15.                      Exhibits
and Financial Statement Schedules


(a)(1)(A)                Consolidated
Financial Statements.
 
 i)          
  Consolidated Balance Sheets at December 31, 2007 and 2006
 ii)           
Consolidated Statements of Operations for the years ended December 31, 2007,
2006, and 2005
 iii)           Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006,
and 2005
 iv)           Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and
200
 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:




82





Exhibit
      No.
              Description3(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)).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)).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).
   83
  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)).10.30
              Form
      of Severance Agreement, dated April 14, 2008, between Astea and certain of
      its officers (filed as Exhibit to Form 14-A)21.1
              Subsidiaries
      of the Registrant.23.1*
              Consent of Grant Thorton, LLP23.2*
              Consent of BDO Seidman, LLP.24.1*
              Powers
      of Attorney (See the Signature Page).31.1*
              Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 – President and Chief Executive
      Officer31.2*
              Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 – Chief Financial
Officer32.1*
              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 Officer32.2*
              Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section
906




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.




84




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 15th day of April
2008.





ASTEA
      INTERNATIONAL INC.By:
      /s/Zack
      BergreenZack
      BergreenChief
      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.





Signature
            Title
            Date/s/ Zack
      Bergreen
            Chief
      Executive Officer
            April
      15, 2008Zack
      Bergreen
            (Principal
      Executive Officer)/s/ Rick
      Etskovitz
            Chief
      Financial Officer
            April
      15, 2008Rick
      Etskovitz
            (Principal
      Financial and Accounting Officer)/s/ Eileen
      Smith
            Controller
            April
      15, 2008Eileen
      Smith/s/ Thomas J. Reilly,
      Jr.
            Director
            April
      15, 2008Thomas
      J. Reilly, Jr./s/ Zack
      Bergreen
            Director
            April
      15, 2008Zack
      Bergreen/s/ Adrian
      Peters
            Director
            April
      15, 2008Adrian
      Peters/s/ Eric
      Siegel
            Director
            April
      15, 2008Eric
      Siegel