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, 2005


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(g) of the Act: **Common
      Stock, $.01 par value**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes X No





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





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







Large
                Accelerated filer __
            Accelerated
                Filer __
            Non-accelerated
                filerX








Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      if the Exchange Act.) Yes__ No X





The
      aggregate market value of the voting stock held by nonaffiliates of the
      registrant as of June 30, 2005 (based on the closing price of $6.28 as quoted
      by
      Nasdaq Capital Market as of such date) was approximately $10,365,768.





As
      of
      March 15, 2006, 3,585,185 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
                SEC Items
            26Item
                2.
            Properties
            26Item
                3.
            Legal
                Proceedings
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity and Related
            27Stockholder
                MattersItem
                6.
            Selected
                Financial Data
            28Item
                7.
            Management’s
                Discussion and Analysis of Financial
            29Condition
                and Results of OperationsItem
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            39Item
                8.
            Financial
                Statements and Supplementary Data
            40Item
                9.
            Changes
                in and Disagreements with Accountants on
            64Accounting
                and Financial DisclosureItem
                9A.
            Controls
                and Procedures
            64Item
                9B.
            Other
                Information
            64PART
                IIIItem
                10.
            Directors
                and Executive Officers of the Registrant
            64Item
                10A.
            Departure
                of Directors of Principal Officers; Election of
            64Directors;
                Appointment of Principal officersItem
                11.
            Executive
                Compensation
            64Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
            64ManagementItem
                13.
            Certain
                Relationships and Related Transactions
            65Item
                14.
            Principal
                Accountant Fees and Services
            65PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules
            66Signature
                Page
            69Consent
                of Independent Registered Public Accounting Firm
            70Certificates
            71











- -
 2


**PART
      I**





**Item
      1.**  **Business.**





**General**





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




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





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





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





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





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





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








3





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





**FieldCentrix
      Acquisition**





On
      September 21 st ,
      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 is looking to further enhance and build out its current mobility
      offering based upon customer needs. The acquisition of FieldCentrix gives Astea
      immediate mobility domain expertise which will further strengthen its Service
      Lifecycle Management Solution Suite. Astea and FieldCentrix will combine 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 will be its ability to now 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 will be retaining the FieldCentrix employees and their
      offices in Irvine, CA. As a result, Astea will be able to offer an even more
      comprehensive product portfolio that translates into immediate benefits for
      organizations. They will also be able to 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,
      f rom
      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.





The
      latest version software, Astea Alliance 6.8, is 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 233  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 .








5




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
      Notebook for Service


Alliance
      Notebook for Sales


Alliance
      PocketPC for Service


Alliance
      2-way Paging





**Astea
      Alliance Extended Portals:**


Customer
      Self-Service


Remote
      Technician





**Astea
      Alliance Reporting and Business Intelligence:**


Alliance
      Reporting


Alliance
      Business Intelligence


Mobile
      Applications Standard Reports





**Astea
      Alliance Tools:**


Alliance
      BizTalk Connector


Alliance
      Financial Link


Alliance
      Global Database


Alliance
      Knowledge Base


Alliance
      Links


Alliance
      Studio





**Astea
      Alliance Core Applications**





*Alliance
      Contact Center*





The
      Alliance Contact Center application supports call centers, information desks,
      service hotlines, inside sales and telemarketing activities. Integrated,
      multi-channel, inbound/outbound capabilities enable customer service
      representatives to serve prospects and customers in their media of choice,
      including phone, fax, e-mail or Internet. 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.








6





*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.





*Alliance
      Logistics*





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








7





*Alliance
      Marketing Campaigns*





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





*Alliance
      Order Processing*





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





*Alliance
      Professional Services*





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





*Alliance
      Sales*





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








8





*Alliance
      Dynamic Scheduling Engine*





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





**Astea
      Alliance Extended Portals**





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





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





**Astea
      Alliance Reporting and 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 customer behavior. Alliance BI enables
      the
      viewing of information for the entire enterprise, increasing revenues and
      identifying new business opportunities. Utilizing a DataMart built with
      Microsoft’s SQL Server 2000
      Analysis Services ,
      it
      helps 'drill down' and ‘drill across’ to focus on the true value of the captured
      customer information, with views of actionable data at both departmental and
      enterprise-wide levels. The graphical representation of individual data is
      available for Field Service, with additional deliveries of Analytical Reports
      that cover Contact Center, Depot Repair, Logistics and Sales and Marketing
      planned for 2006. This affords businesses the opportunity to focus on critical
      information that is fundamental to the ongoing attainment of outstanding
      customer service management. 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 your customers, this tool
      effortlessly allows the viewing of performance data such as performance against
      service level agreements, contract profitability, product failure rate, repair
      turn around times, customer satisfaction and engineer efficiency. Reports allow
      businesses to see how many orders have met their contractual service ETA and
      how
      many failed which helping organizations understand customer satisfaction.
      Workloads show the available working hours at a specific location in contrast
      with the demand for workforce planning and optimization.






9





**Astea
      Alliance Tools**





*Alliance
      Links*





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





*Alliance
      Studio*





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





**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
                Fleet Manager


·
            FX
                Interchange


·
            FX
                Interchange for JD Edwards


·
            FX
                Mobility Express


·
            FX
                Express for Epicor


·
            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 organizations accounting, ERP, or CRM system. Or, they can integrate FX
      Service Center with your 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
      organizations 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 customers 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 organizations 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 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
      Fleet Manager*





FX
      Fleet
      Manager is FieldCentrix’s Global Positioning System (GPS) offering to help
      manage an organization’s mobile resources more effectively. FX Fleet Manager can
      operate in a stand alone mode or integrated with FieldCentrix Enterprise, the
      industry’s most robust mobile field service management solution that includes a
      revolutionary field service engine and mobile workforce software. FX Fleet
      Manager gives organizations better control and management of their field
      operations and allows them to make decisions that will increase profitability,
      reduce service costs enhance customer responsiveness and satisfaction, and
      improve productivity and efficiency.





*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 7.0/2000 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
      Interchange 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.





*FX
      Express for Epicor*





FX
      Express for Epicor is a pre-packaged offering that bundles everything
      organizations need to seamlessly combine FieldCentrix’s revolutionary field
      service engine and mobile workflow software with their Epicor Avanté, DataFlo,
      and Manage 2000 application suites - all for one, low introductory price.
      Embedding FieldCentrix into an Epicor applications environment creates an
      automated, end-to-end mobile field service management network that increases
      profitability, reduces service costs, enhances customer responsiveness and
      satisfaction, and improves productivity and
      efficiency.






12





*FX
      Express for JD Edwards*





FX
      Express for JD Edwards is a pre-packaged offering that bundles everything
      organizations need to seamlessly combine FieldCentrix’s revolutionary field
      service engine and mobile workflow software with their Oracle JD Edwards
      EnterpriseOne and World application suites - all for one, low introductory
      price. Embedding FieldCentrix into a JD Edwards application environment creates
      an automated, end-to-end mobile field service management network that increases
      profitability, reduces service costs, enhances customer responsiveness and
      satisfaction, and improves productivity and efficiency.





**Astea
      Client Services**





Professional
      Services :





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





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





The
      next
      most critical phase of the Astea professional services engagement is the
      prototyping phase, in which Astea works closely with representatives of the
      customer to configure Astea’s software 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.








13





Technical
      Services :





Astea’s
      technical services teams provide services related to installation, data
      verification, functional design, technical design, system infrastructure setup
      or changes, customizations, QA activities, testing and go-live support.
      Initially, software and database installation resources are available to prepare
      the environment for the prototyping phase.





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





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





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








*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.





*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.






14





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
      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 has **** sold **** approximately **** 600
      licenses to customers ranging from small, rapidly growing companies to large,
      multinational corporations with geographically dispersed operations and remote
      offices. More than 233 licenses have been sold for Astea Alliance and the
      remainder for DISPATCH-1. The Company estimates that through the FieldCentrix
      acquisition, they acquired roughly 40 new customers. 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 2005 there was one major
      customer, EDS that accounted for 23% of total revenues. In 2004 there one
      customer, Carrier Corporation, represented 15% of revenues and in 2003, no
      single customer accounted for more than 10% of the Company’s revenues.





**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 3⁄4 **** Need
      to
      Expand Indirect Sales.”





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





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





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








15





Astea’s
      international sales accounted for 50% of the Company’s revenues in 2005, 35% of
      the Company’s revenues in 2004 and 34% in 2003. See “Certain Factors that May
      Affect Future Results—Risks Associated with International Sales.”





**Product
      Development**





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





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





The
      Company’s total expense for product development for the years ended December 31,
      2005, 2004 and 2003, was $2,503,000, $1,431,000 and $2,490,000 respectively.
      These expenses amounted to 11%, 7% and 19% of total revenues for 2005, 2004,
      and
      2003, respectively. The Company capitalized software development costs of
      $1,555,000, $1,380,000 and $480,000 in 2005, 2004 and 2003, respectively. The
      Company anticipates that it will continue to allocate substantial resources
      to
      its development effort for the upgrade of the Astea Alliance and FieldCentrix
      suite of products. See “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” and “Certain Factors that May Affect Future
      Results—Need for Development of New Products.”





**Manufacturing**





The
      Company’s software products are distributed on CD ROMs and via FTP (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.






16





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.”





**Licenses
      and Intellectual Property**





Astea
      considers its software proprietary and licenses its products to its customers
      under written license agreements. The Company also employs an encryption system
      that restricts a user’s access to source code to further protect the Company’s
      intellectual property. Because the Company’s products allow customers to
      customize their applications without altering the framework source code, the
      framework source code for the 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, 2005, the Company, including its subsidiaries, had a total of
      195
      full time employees worldwide, 94 in the United States, 24 in the United
      Kingdom, 6 in the Netherlands, 58 in Israel and **** 13
      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.








17








**Corporate
      History**





The
      Company was incorporated in Pennsylvania in 1979 under the name Applied System
      Technologies, Inc. In 1992, the Company changed its name to Astea International
      Inc. Until 1986, the Company operated principally as a software-consulting
      firm,
      providing professional software consulting services on a fee for service and
      on
      a project basis. In 1986, the Company introduced its DISPATCH-1 product. In
      November 1991, the Company’s sole stockholder acquired the outstanding stock of
      The DATA Group Corporation (“Data Group”), a provider of field service software
      and related professional services for the mainframe-computing environment.
      Data
      Group was merged into the Company in January 1994. In February 1995, the Company
      and its sole stockholder acquired the outstanding stock of Astea Service &
Distribution Systems BV (“Astea BV”), the Company’s distributor of DISPATCH-1
      and related services in Europe. In May 1995, the Company reincorporated in
      Delaware. In July 1995, the Company completed its initial public offering of
      Common Stock. In February 1996, the Company merged with Bendata, Inc. In June
      1996, the Company acquired Abalon AB. In September 1998 (effective July 1,
      1998), the Company sold Bendata, Inc. In December 1998, the Company sold Abalon
      AB. In December 1997, the Company introduced ServiceAlliance and in October
      1999, SalesAlliance, which were subsequently re-engineered into components
      of
      the AllianceEnterprise suite introduced in 2001. Through 2001 and into 2002,
      the
      Company rebuilt its product functionality for Web-based applications and in
      August 2003 introduced Astea Alliance 6. The Company released a new system
      architecture based on Microsoft.NET during the third quarter of 2004. On
      September 21, 2005, the Company acquired substantially all the assets and
      certain liabilities of FieldCentrix, Inc.





**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 through 2003. The Company generated net
      income of $1.8 million in 2005 and $2.1 million in fiscal 2004. However, it
      generated net losses of $5.5 million in fiscal 2003 and $1.3 million in fiscal
      2002. As of December 31, 2005, stockholders’ equity is approximately $11.8
      million, which is net of an accumulated deficit of approximately $14.2 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.








18





**Decreased
      Revenues from DISPATCH-1**





In
      each
      of 2005, 2004, and 2003, 6%, 14%, and 21% respectively, of the Company’s total
      revenues was derived from the licensing of DISPATCH-1 and the providing of
      professional services in connection with the implementation, deployment and
      maintenance of DISPATCH-1 installations. See “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.” The Company
      originally introduced Astea Alliance in August 1997 in order to target a market
      segment in which DISPATCH-1 was not cost-effective or attractive. Subsequent,
      rapid changes in technology have now positioned the Astea Alliance suite,
      introduced in 2001 and which includes the Astea Alliance functionality, to
      supercede DISPATCH-1 as the company’s flagship product. As a result, there are
      no license sales planned or anticipated for DISPATCH-1 to new customers. In
      2005, there was $16,000 of license revenues from DISPATCH. In 2004, there was
      $805,000 of license revenues of DISPATCH-1. Total DISPATCH-1 revenues have
      declined in each of the last three fiscal years and that trend is expected
      to
      continue.





While
      the
      Company has licensed Astea Alliance to over 225 companies worldwide in 1998
      through 2005, revenues from sales of Astea Alliance alone 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
      offerings, on developing new products and product enhancements to complement
      its
      existing product offerings, on its ability to continue support and maintenance
      revenues from DISPATCH-1, and on its ability to control its operating expenses.
      Any failure of the Company’s products to achieve or sustain market acceptance,
      or of the Company to sustain its current position in the Customer Relationship
      Management software market, would have a material adverse effect on the
      Company’s business and results of operations. There can be no assurance that the
      Company will be able to increase demand for Astea Alliance, obtain an acceptable
      level of support and maintenance revenues from DISPATCH-1, or to lower its
      expenses, thereby avoiding future losses.





**Need
      for Development of New Products**





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.








19








**Rapid
      Technological Change**





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





The
      Company’s application environment relies primarily on software development tools
      from Microsoft Corporation. If alternative software development tools were
      to be
      designed and generally accepted by the marketplace, we could be at a competitive
      disadvantage relative to companies employing such alternative developmental
      tools.





**Burdens
      of Customization**





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





**Risk
      of Product Defects; Failure to Meet Performance Criteria**





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





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





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






20





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.





**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.






21




**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.




**Competition
      in the Customer Relationship Management Software Market is
      Intense**





The
      Company competes in the CRM software market. This market is highly competitive
      and the Company expects competition in the market to increase. The Company’s
      competitors include large public companies such as Oracle, 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.






22




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




**Possible
      Infringement of Third Party Intellectual Property Rights**




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






23





**Need
      to Expand Indirect Sales**





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





**Risks
      of Future Acquisitions**




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




**Risks
      Associated with International Sales**





Astea’s
      international sales accounted for 50% of the Company’s revenues in 2005, 39% in
      2004, and 34% in 2003. 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.
      Moreover, the currency unification in Europe may change the market for the
      Company’s business software. Any of these factors, if not successfully
      addressed, could harm the Company’s operating results.





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




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




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






24




**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.




**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.








25





**Possible
      Volatility of Stock Price**





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





**Limitations
      of the Company Charter Documents**




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







**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. 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.






26




**Item
      3.**  **Legal
      Proceedings.**





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





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





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year covered by this report, through the solicitation of proxies
      or otherwise.








**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:





**2005**
            
            **High**
            
            **Low**First
                quarter
            
            $
            8.45
            
            $
            6.41Second
                quarter
            
            
            9.61
            
            
            5.82Third
                quarter
            
            
            8.07
            
            
            5.85Fourth
                quarter
            
            
            18.31
            
            
            7.50**2004**
            
            
            **High**
            
            
            **Low**First
                quarter
            
            $
            4.31
            
            $
            2.41Second
                quarter
            
            
            13.75
            
            
            3.15Third
                quarter
            
            
            9.62
            
            
            5.13Fourth
                quarter
            
            
            8.74
            
            
            6.31







As
      of
      March 15, 2006, there were approximately 35 holders of record of the Company’s
      Common Stock. (Because “holders of record” include only stockholders listed with
      the Company’s transfer agent and exclude stockholders listed separately with
      financial nominees, this number does not accurately reflect the actual number
      of
      beneficial owners of the Company’s Common Stock, of which the Company estimates
      there were more than 2,700 on such date.) On March 15, 2006, the last reported
      sale price of the Common Stock on the Nasdaq Capital Market was
      $17.62 **** per
      share.





The
      Board
      of Directors from time to time reviews the Company’s forecasted operations and
      financial condition to determine whether and when payment of a dividend or
      dividends is appropriate. No dividends have been declared since June
      2000.







27





**Item
      6. Selected Financial Data**





**Years
                ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands, except per share data)**Statement
                of Income Data:**Revenues:Software license fees
            
            $
            8,240
            
            $
            7,992
            
            $
            1,935
            
            $
            6,504
            
            $
            6,384Services and maintenance
            
            
            14,525
            
            
            11,325
            
            
            10,906
            
            
            10,294
            
            
            10,973Total revenues
            
            
            22,765
            
            
            19,317
            
            
            12,841
            
            
            16,798
            
            
            17,357Cost
                and Expenses:Cost of software license fees
            
            
            1,136
            
            
            1,838
            
            
            898
            
            
            1,262
            
            
            1,224Cost of services and maintenance
            
            
            8,261
            
            
            6,356
            
            
            6,963
            
            
            6,345
            
            
            6,808Product development
            
            
            2,503
            
            
            1,431
            
            
            2,490
            
            
            1,781
            
            
            2,590Sales
                and marketing
            
            
            6,192
            
            
            5,565
            
            
            5,875
            
            
            6,218
            
            
            5,396General and administrative (1)
            
            
            3,003
            
            
            2,051
            
            
            2,198
            
            
            2,426
            
            
            2,837Restructuring charge
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            333Total costs and expenses
            
            
            21,095
            
            
            17,241
            
            
            18,424
            
            
            18,032
            
            
            19,188Income(loss)
                from continuing operations
              before interest and taxes
            
            
            1,670
            
            
            2,076
            
            
            (5,583
            )
            
            (1,234
            )
            
            (1,831
            )Net
                interest income
            
            
            165
            
            
            58
            
            
            54
            
            
            106
            
            
            309Income(loss)
                from continuing
              operations before income taxes
            
            
            1,835
            
            
            2,134
            
            
            (5,529
            )
            
            (1,128
            )
            
            309
            )Income
                tax expense (benefit)
            
            
            7
            
            
            -
            
            
            
            
            
            200
            
            
            -Net
                profit/(loss)
            
            $
            1,828
            
            $
            2,134
            
            $
            (5,529
            )
            $
            (1,328
            )
            $
            (1,522
            )Basic
                income (loss) per share
            
            $
            .59
            
            $
            .72
            
            $
            (1.89
            )
            $
            (0.09
            )
            $
            (0.10
            )Diluted
                income (loss) per share
            
            $
            .59
            
            $
            .72
            
            $
            (1.89
            )
            $
            (0.09
            )
            $
            (0.10
            )Shares
                used in computing basic income (loss)
              per share (2)
            
            
            3,093
            
            
            2,960
            
            
            2,922
            
            
            2,921
            
            
            2,926Shares
                used in computing diluted income (loss) per share (2)
            
            
            3,116
            
            
            3,001
            
            
            2,922
            
            
            2,921
            
            
            2,926**Balance
                Sheet Data:**Working
                capital
            
            $
            5,488
            
            $
            3,969
            
            $
            1,820
            
            $
            6,449
            
            $
            7,313Total
                assets
            
            
            21,612
            
            
            13,754
            
            
            10,096
            
            
            16,443
            
            
            18,015Long-term
                debt, less current portion
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accumulated
                deficit
            
            
            (14,140
            )
            
            (15,967
            )
            
            (18,100
            )
            
            (12,568
            )
            
            (11,239
            )Total
                stockholders’ equity
            
            
            11,869
            
            
            6,071
            
            
            3,734
            
            
            8,998
            
            
            10,105








(1)
            Certain
                reclassifications have been made in prior years due to the implementation
                of EITF 01-14 (See Note 2 of the Notes to the Consolidated Financial
                Statements).


(2)
            Restated
                for a 1:5 reverse stock-split occurred in September 2003 (See Note
                3 of
                the Notes to the Consolidated Financial
                Statements).










- -
 28


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





**Overview**





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





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





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





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





Software
      license fees accounted for 36% of the Company’s total revenues in 2005, which
      was mostly comprised of sales of Astea Alliance. Software license fee revenues
      also include some fees from the sublicensing of third-party software, primarily
      relational database licenses. Typically, customers pay a license fee for the
      software based on the number of licensed users. Depending on the contract terms
      and conditions, software license fees are recognized as revenue upon delivery
      of
      the product if no significant vendor obligations remain and collection of the
      resulting receivable is deemed probable. If significant vendor obligations
      exist
      at the time of delivery or if the product is subject to uncertain customer
      acceptance, revenue is deferred until no significant obligations remain or
      acceptance has occurred.





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








29





*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 industry’s leading mobile field force
      automation company. The acquisition immediately strengthens and further cements
      Astea’s standing as the leading company that can provide 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 has evolved
      into a leading complementary service management solution that 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 will give 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’s strong and robust enterprise service lifecycle management solution
      complements the FieldCentrix mobility offering to provide the FieldCentrix
      customer base with the most robust service lifecycle management system on the
      market today. Astea and FieldCentrix will combine the expertise of the two
      organizations to break new ground in providing premier solutions that continue
      to deliver exceptional value for service-centric companies.





**Critical
      Accounting Policies and Estimates**





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





*Revenue
      Recognition*





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* .






30





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.
      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 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.





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 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. 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. Software license fees
      for resellers or other members of the indirect sales channel are based on a
      fixed percentage of the Company’s standard prices. The Company recognizes
      software license revenue for such contracts based upon the terms and conditions
      provided by the reseller to its customer.





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





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





*Deferred
      Revenue*





Deferred
      revenue includes amounts billed to or received from customers for which revenue
      has not been recognized. This generally results from deferred maintenance,
      software installation, consulting and training services not yet rendered;
      license revenue is deferred until all revenue requirements have been met or
      as
      services are performed. Unbilled receivables are established when revenue is
      deemed to be recognized based on the Company’s revenue recognition policy, but
      for which the Company does not have the right to bill the customer per the
      contract terms.








31








*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.





*Capitalized
      Software Research and Development Costs*





The
      Company accounts for its internal software development costs in accordance
      with
      Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
      the
      Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
      Company capitalizes software development costs subsequent to the establishment
      of technological feasibility through the product’s availability for general
      release. Costs incurred prior to the establishment of technological feasibility
      are charged to product development expense. Product
      development expense includes payroll, employee benefits, and other
      headcount-related costs associated with product development.





Software
      development costs are amortized on a product-by-product basis over the greater
      of the ratio of current revenues to total anticipated revenues or on a
      straight-line basis over the estimated useful lives of the products (usually
      two
      years), beginning with the initial release to customers. During the first
      quarter of 2004, the Company revised the estimated life for its capitalized
      software products from three years to two year 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 December 31. 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.





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment,” an
      amendment of FASB Statements 123 and 95. FAS No, 123(R) replaced FAS No. 123,
      “Accounting for Stock-Based Compensation,” and supercedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” This statement requires companies to
      recognize the fair value of stock options and other stock-based compensation
      to
      employees prospectively beginning with fiscal periods beginning after June
      15,
      2005. This means that the Company will be required to implement FAS No, 123(R)
      no later than the quarter beginning January 1, 2006. The Company currently
      measures stock-based compensation in accordance with APB Opinion No. 25, as
      discussed above. The Company anticipates adopting the modified prospective
      method of FAS No. 123(R) on January 1, 2006. The impact on the company’s
      financial condition or results of operations will depend on the number and
      terms
      of stock options outstanding on the date of change, as well as future options
      that may be granted.






32




In
      March
      2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional
      Asset Retirement Obligations” (“FIN 47). FIN 47 provides guidance relating to
      the identification of and financial reporting for legal obligations to perform
      an asset retirement activity. The Interpretation requires recognition of a
      liability for the fair value of a conditional asset retirement obligation when
      incurred if the liability’s fair value can be reasonably estimated. FIN 47 also
      defines when an entity would have sufficient information to reasonably estimate
      the fair value of an asset retirement obligation. The provision is effective
      no
      later than the end of fiscal years ending after December 15, 2005. The Company
      will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does
      not
      believe the adoption will have a material impact on its consolidated financial
      position or results of operations or cash flows.




In
      May
      2005, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.
      SFAS
      No. 154 requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. SFAS No. 154 also requires that retrospective application of a change
      in
      accounting principle be limited to the direct effects of the change. Indirect
      effects of the change in accounting principle, such as a change in
      nondiscretionary profit-sharing payment resulting from an accounting change,
      should be recognized in the period of the accounting change. SFAS No. 154 also
      requires that a change in depreciation, amortization or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate effected by a change in accounting principle. SFAS No. 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Early adoption is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date this
      Statement is issued. Management does not expect the implementation of this
      new
      standard to have a material impact on their financial position, results of
      operations and cash flows.




In
      June
      2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue
      05-6, *Determining
      the Amortization Period for Leasehold Improvements* ,
      which
      requires that leasehold acquired in a business combination or purchased
      subsequent to the inception of a lease be amortized over the lesser of the
      useful life of the assets or a term that includes renewals that are reasonably
      assured at the date of the business combination or purchase. EITF 05-6 is
      effective for periods beginning after July 1, 2005. We do no expect the
      provisions of this consensus to have a material impact on our financial
      position, results of operations or cash flows.




**Results
      of Continuing Operations**




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





**Years
                ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003**Revenues:Software
                license fees
            
            
            36.2
            %
            
            41.4
            %
            
            15.1
            %Services
                and maintenance
            
            
            63.8
            
            
            58.6
            
            
            84.9Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Cost
                of software license fees
            
            
            5.0
            %
            
            9.6
            %
            
            6.0
            %Cost
                of services and maintenance
            
            
            36.3
            
            
            32.9
            
            
            55.2Product
                development
            
            
            11.0
            
            
            7.6
            
            
            19.4Sales
                and marketing
            
            
            27.2
            
            
            28.8
            
            
            45.8General
                and administrative
            
            
            13.2
            
            
            10.6
            
            
            17.1Total
                costs and expenses
            
            
            92.7
            %
            
            89.5
            %
            
            143.5
            %






33








**Comparison
      of Years Ended December 31, 2005 and 2004**





*Revenues.* Total
      revenues increased $3,448,000 or 18%, to $22,765,000 for the year ended December
      31, 2005 from $19,317,000 for the year ended December 31, 2004. Software license
      revenues increased 3% in 2005, compared to 2004. Services and maintenance fees
      for 2005 amounted to $14,525,000, a 28% increase from 2004.





Software
      license fee revenues increased $248,000 or 3% to $8,240,000 in 2005 from
      $7,992,000 in 2004. Astea Alliance license fee revenues increased to $7,936,000
      in 2005 from $7,187,000 in 2004, an increase of 10%. This increase reflects
      the
      growing acceptance by the market place of the Company’s new software versions,
      which are completely based on .Net, Microsoft’s operating system platform. The
      Company also sold $16,000 of additional DISPATCH-1 licenses to existing
      customers, compared to $805,000 in 2004. Two existing customers purchased
      additional DISPATCH-1 licenses in 2005 compared to 6 existing customers
      purchasing DISPATCH-1 licenses in 2004. Additionally, the Company recognized
      license revenue of $288,000 from the sale of FieldCentrix products.





Total
      services and maintenance revenues increased $3,200,000 or 28% to $14,525,000
      in
      2005 from $11,325,000 in 2004. The increase in service and maintenance revenues
      is attributable to an increase of $2,565,000 in Astea Alliance revenues
      partially offset by a decrease in DISPATCH-1 revenues of $512,000. Astea
      Alliance service and maintenance revenues increased to $11,940,000 in 2005
      from
      $9,375,000 in 2004 due to the growing Astea Alliance customer base. The increase
      is also attributable to service and maintenance revenue of $1,143,000 from
      the
      newly acquired FieldCentrix customer base. DISPATCH-1 service and maintenance
      revenues decreased 26% to $1,437,000 in 2005 from $1,949,000 in 2004 due to
      an
      ongoing decrease in the number of customers under service and maintenance
      contracts. As a result of the decreasing demand for DISPATCH-1 and the lack
      of
      any related product development by the Company, the decrease in service and
      maintenance revenue is expected to continue in 2006 for DISPATCH-1.





In
      2005
      there was one major customer, EDS, which accounted for 23% of total revenues
      compared to 2004 when one customer, Carrier Corporation, accounted for 15%
      of
      the Company’s total revenues.





*Costs
      of Revenues* **.** Costs
      of
      software license fee revenues decreased 38%, or $702,000, to $1,136,000 in
      2005
      from $1,838,000 in 2004. The decrease in cost of sales results from lower costs
      of third party software. DISPATCH-1 license sales include a significant cost
      for
      a third party license for the database. However, in 2005, DISPATCH-1 license
      sales were only $16,000 compared to $805,000 in 2004, and accordingly the
      related database license costs were insignificant. Capitalized software
      amortization decreased to $1,020,000 in 2005 from $1,088,000 in 2004. The gross
      margin percentage on software license sales increased to 86% in 2005 from 77%
      in
      2004 due to a reduction in third party license costs, lower amortization of
      capitalized software and increased license revenues.





The
      costs
      of services and maintenance revenues increased 30% to $8,261,000 in 2005 from
      $6,356,000 in 2004. The increase in cost of services and maintenance is
      primarily attributed to an increase in headcount from last year as well as
      the
      addition of professional services staff from the acquisition of FieldCentrix
      on
      September 21, 2005. The service and maintenance gross margin percentage
      decreased slightly to 43% in 2005 from 44% in 2004. 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 75%, or $1,072,000, to $2,503,000 in 2005 from
      $1,431,000 in 2004. Development costs increased due to an increase in headcount
      in the Company’s development center in Israel by 35%, the addition of 11
      development staff from the acquisition of FieldCentrix on September 21, 2005,
      and an increased focus on product improvement that resulted in a lower than
      proportionate increase in newly capitalized software development
      costs.






34





Product
      development as a percentage of total revenue increased to 11% in 2005 compared
      to 7% in 2004. This increase is due to the increase in headcount of the
      Company’s development staff as part of its focus on improving the quality and
      functionality of its products. The 2005 percentage is about 4% lower due to
      the
      overall increase in revenues in 2005 compared to 2004. Gross development expense
      before the capitalization of software costs and was $4,058,000 in 2005, 44%
      greater than $2,811,000 in 2004. In 2004, the Company wrote off $1,155,000
      of
      fully amortized software for old versions that had been deemed no longer useful
      or functional. Capitalized software totaled $1,555,000 in 2005 compared to
      $1,380,000 in 2004. The increase in software capitalization of only 13% was
      significantly lower then the overall 44% increase in development spending.
      This
      is reflective of the Company’s focus on improving the existing products compared
      to spending on the development of new products.




*Sales
      and Marketing* **.** Sales
      and
      marketing expenses increased 11%, or $627,000, to $6,192,000 in 2005 from
      $5,565,000 in 2004. The increase is primarily the result of an increase in
      the
      Company’s sales force as well as increased investment in marketing programs in
      order to increase market awareness of the Company’s products and domain
      expertise in Service Life Cycle Management. 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 27% in 2005 from 29% in 2004.





*General
      and Administrative* **.** General
      and administrative expenses consist of salaries, benefits and related costs
      for
      the Company’s finance, administrative and executive management personnel, legal
      costs, accounting costs, bad debt write-offs and various costs associated with
      the Company’s status as a public company. The Company’s general and
      administrative expenses were $3,003,000 in 2005 and $2,051,000 in 2004
      representing a 46% increase. This increase is primarily due to an increase
      in
      bad debt expense of $200,000, recovery of $114,000 legal fees in 2004 in
      connection with legal action in Europe, increased payroll costs of approximately
      $210,000, increased outside consulting expenses, administrative costs of
      $215,000 connected with the operation of FieldCentrix, which was acquired in
      September 2005, and increased travel costs if $50,000. As a percentage of total
      revenues, general and administrative expenses increased to 13% in 2005 compared
      to 11% in 2004. The increase in expenses relative to revenues primarily results
      from the increase in expenses described above, partially offset by the increase
      in total revenues generated during 2005.





*Net
      Interest Income* **.** Net
      interest income increased $107,000, to $165,000 in 2005 from $58,000 in 2004.
      This increase was primarily attributable to slight growth in the interest rates
      earned on the Company’s invested cash as well as an increase in funds which may
      be invested.




*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. In 2005, the Company made a provision of $7,000 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
      revenue from the Company’s international operations increased by $4,511,000, or
      66% to $11,350,000 in 2005 from $6,839,000 in 2004. The increase in revenue
      from
      international operations was primarily attributable to the increases in license
      revenues from the Astea Alliance suite. Most of the increase occurred in Europe,
      where the Company has focused attention on expanding awareness of the Company’s
      products. International revenues from professional services and maintenance
      increased 58% to $6,093,000 in 2005 from $3,857,000 in 2004. Overall,
      international operations resulted in net profit of $1,890,000 for 2005 compared
      to net profit of $1,221,000 in 2004. Operating costs increased due to higher
      cost of sales on professional services resulting from an increase in headcount,
      higher sales commissions resulting from the increased level of revenues in
      2005
      compared to 2004 and an increase in bad debt expense. The increase in
      international net income, 54%, is approximately the same as the year-to-year
      increase in revenue.








35





**Comparison
      of Years Ended December 31, 2004 and 2003**





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





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





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





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





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





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








36




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





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





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





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




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





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






37





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








**Liquidity
      and Capital Resources**





Net
      cash
      provided by operating activities was $5,254,000 for the year ended December
      31,
      2005 compared to $2,678,000 for the year ended December 31, 2004. The increase
      in cash provided by operations of $2,576,000 was primarily attributable to
      an
      increase of $265,000 in depreciation and amortization, an increase of $143,000
      in the allowance for doubtful accounts, a decrease in net income of $306,000,
      a
      decrease in accounts receivable of $1,235,000 compared to an increase of
      $2,272,000 in 2004, a increase in accounts payable and accrued expenses of
      $61,000 compared to an decrease of $121,000 in 2004, partially offset by an
      increase in deferred revenues which was $343,000 less than 2004 and an increase
      of other assets of $124,000.




The
      Company used $1,188,000 of cash for investing activities in 2005 compared to
      using $1,769,000 in 2004. The decrease in cash used for investing activities
      of
      $581,000 results from the Company receiving $616,000 in cash from the
      FieldCentrix acquisition in September 2005, the release of $75,000 from a
      restricted bank account collateralizing a letter of credit on a leased facility
      and reduced capital expenditures of $65,000 compared to 2004, partially offset
      by an increase of $176,000 in capitalized software development
      costs.





The
      Company generated $791,000 in financing activities for the year ended December
      31, 2005 compared to generating $131,000 for the year ended December 31, 2004.
      The increase in cash generated by financing activities of $660,000 was
      principally attributable to the exercise of company stock options in 2005.At
      December 31, 2005, the Company had a working capital ratio of approximately
      1.6:1, with total cash of $9,484,000. The Company has projected revenues for
      2006 that will generate enough funds to sustain its continuing operations.
      However, if current projections trail expectations, the Company has plans in
      place to reduce operating expenditures appropriately in order to continue to
      fund all required expenditures. The Board of Directors from time to time reviews
      the Company’s forecasted operations and financial condition to determine whether
      and when payment of a dividend or dividends is appropriate. The Company does
      not
      plan any significant capital expenditures in 2006. In addition, it does not
      anticipate that its operations or financial condition will be affected
      materially by inflation.














38







**Contractual
      Obligations and Commercial Commitments**





The
      following tables summarize our contractual and commercial obligations, as of
      December 31, 2006:





**Payment
                Due By Period**2006
            
            2007-2008
            
            2009-2010
            
            2011
                and after
            
            Total**Contractual
                Cash**
              **Obligations:**Long-term
                Debt
            
            $
            -
            
            $
            -
            
            $
            -
            
            
            -
            
            $
            -Capital
                Leases
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                Leases
            
            $
            1,235,000
            
            $
            1,543,000
            
            $
            540,000
            
            
            -
            
            $
            3,318,000





**Amounts
                of Commitment Expiration Per Period**2005
            
            2006-2007
            
            2008
                -2009
            
            2010
                and after
            
            Total**Other
                Commercial**
              **Commitments:**Letters
                of Credit
            
            $
            225,000
            
            $
            -
            
            $
            -
            
            
            
            
            $
            225,000











**Item
      7A.**  **Quantitative
      and Qualitative Disclosures about Market Risk**





**Interest
      Rate Risk**





The
      Company’s exposure to market risk for changes in interest rates relates
      primarily to the Company’s investment portfolio. The Company does not have any
      derivative financial instruments in its portfolio. The Company places its
      investments in instruments that meet high credit quality standards. The Company
      is adverse to principal loss and ensures the safety and preservation of its
      invested funds by limiting default risk, market risk and reinvestment risk.
      The
      Company is currently in the process of revamping its investment portfolio.
      As a
      result, as of December 31, 2005, the Company’s investments consisted of
      commercial paper. The Company does not expect any material loss with respect
      to
      its investment portfolio.





**Foreign
      Currency Risk**





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








39







**Item
      8.**  **Financial
      Statements and Supplementary Data.**





**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders


Astea
      International Inc.








We
      have
      audited the accompanying consolidated balance sheets of Astea International
      Inc.
      and subsidiaries (collectively the “Company”) as of December 31, 2005 and 2004,
      and the related consolidated statements of operations, stockholders’ equity and
      cash flows for each of the three years in the period ended December 31, 2005.
      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, 2005 and 2004, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2005 in conformity with accounting principles generally accepted
      in
      the United States of America.










BDO
      Seidman, LLP


Philadelphia,
      PA


March
      24,
      2006













- -
 40


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**








**December
                31,**
            
            **2005**
            
            **2004****ASSETS**Current
                assets:Cash and cash equivalents
            
            $
            9,484,000
            
            $
            4,483,000Restricted cash
            
            
            225,000
            
            
            300,000Receivables, net of reserves of $310,000 and $411,000
            
            
            5,037,000
            
            
            6,428,000Prepaid expenses and other
            
            
            485,000
            
            
            441,000Total current assets
            
            
            15,231,000
            
            
            11,652,000Property
                and equipment, net
            
            
            1,038,000
            
            
            548,000Intangibles,
                net
            
            
            1,999,000
            
            
            -Capitalized
                software development costs, net
            
            
            2,055,000
            
            
            1,520,000Goodwill
            
            
            1,100,000
            
            
            -Other
                long-term assets
            
            
            189,000
            
            
            34,000Total assets
            
            $
            21,612,000
            
            $
            13,754,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts payable and accrued expenses
            
            $
            3,976,000
            
            $
            3,194,000Deferred revenues
            
            
            5,767,000
            
            
            4,489,000Total current liabilities
            
            
            9,743,000
            
            
            7,683,000Commitments
                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, 3,585,000 and 3,002,000 shares issued
                respectively
            
            
            36,000
            
            
            30,000Additional paid-in capital
            
            
            27,116,000
            
            
            22,997,000Accumulated comprehensive loss -
              translation adjustment
            
            
            (935,000
            )
            
            (779,000
            )Accumulated deficit
            
            
            (14,140,000
            )
            
            (15,967,000
            )Less: Treasury stock at cost, 42,000 and 43,000 shares
            
            
            (208,000
            )
            
            (210,000
            )Total stockholders’ equity
            
            
            11,869,000
            
            
            6,071,000Total liabilities and stockholders' equity
            
            $
            21,612,000
            
            $
            13,754,000








**See
      accompanying notes to the consolidated financial
      statements.**


- -
 41


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








**Years
                ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003**Revenues:Software
                license fees
            
            $
            8,240,000
            
            $
            7,992,000
            
            $
            1,935,000Services
                and
                maintenance
            
            
            14,525,000
            
            
            11,325,000
            
            
            10,906,000Total revenues
            
            
            22,765,000
            
            
            19,317,000
            
            
            12,841,000Costs
                and expenses:Cost
                of
                software license fees
            
            
            1,136,000
            
            
            1,838,000
            
            
            766,000Cost
                of
                services and maintenance
            
            
            8,261,000
            
            
            6,356,000
            
            
            7,095,000Product
                development
            
            
            2,503,000
            
            
            1,431,000
            
            
            2,490,000Sales
                and marketing
            
            
            6,192,000
            
            
            5,565,000
            
            
            5,875,000General
                and administrative
            
            
            3,003,000
            
            
            2,051,000
            
            
            2,198,000Total costs and expenses
            
            
            21,095,000
            
            
            17,241,000
            
            
            18,424,000Income
                (loss) from operations
            
            
            1,670,000
            
            
            2,076,000
            
            
            (5,583,000
            )Interest
                income
            
            
            165,000
            
            
            58,000
            
            
            58,000Interest
                expense
            
            
            -
            
            
            -
            
            
            (4,000
            )Income
                (loss) before income taxes
            
            
            1,835,000
            
            
            2,134,000
            
            
            (5,529,000
            )Income
                tax expense
            
            
            7,000
            
            
            -
            
            
            -Net
                income (loss)
            
            $
            1,828,000
            
            $
            2,134,000
            
            $
            (5,529,000
            )Basic
                net income (loss) per share
            
            $
            .59
            
            $
            .72
            
            $
            (1.89
            )Diluted
                net income (loss) per share
            
            $
            .59
            
            $
            .71
            
            $
            (1.89
            )Weighted
                average shares used in computing basic net income (loss) per
                share
            
            
            3,093,000
            
            
            2,960,000
            
            
            2,922,000Weighted
                average shares used in computing diluted net income
              (loss)per
                share
            
            
            3,116,000
            
            
            3,001,000
            
            
            2,922,000














**See
      accompanying notes to the consolidated financial
      statements.**


- -
 42





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





**Common****Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Accumulated
                Comprehensive**
              **Loss**
            
            **Accumulated****Deficit**
            
            **Treasury****Stock**
            
            **Total**
              **Stockholders'****Equity**
            
            **Comprehensive
                I****ncome(loss)**Balance,
                January 31, 2002
            
            $
            148,000
            
            $
            22,674,000
            
            $
            (1,039,000
            )
            $
            (12,568,000
            )
            $
            (217,000
            )
            $
            8,998,000Reverse
                stock split
            
            
            (118,000
            )
            
            118,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of
                common stock under
              employee stock purchase plan
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,000
            )
            
            5,000
            
            
            2,000Comprehensive
                income
            
            
            -
            
            
            -
            
            
            263,000
            
            
            -
            
            
            -
            
            
            263,000
            
            $
            263,000Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,529,000
            )
            
            -
            
            
            (5,529,000
            )
            
            (5,529,000
            )Balance,
                December 31, 2003
            
            
            30,000
            
            
            22,792,000
            
            
            (776,000
            )
            
            (18,100,000
            )
            
            (212,000
            )
            
            3,734,000
            
            
            (5,266,000
            )Issuance
                of
                common stock under
              employee stock purchase plan
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,000
            )
            
            2,000
            
            
            1,000Exercise
                of
                stock options
            
            
            -
            
            
            131,000
            
            
            -
            
            
            -
            
            
            -
            
            
            131,000Options
                for satisfaction of liability
            
            
            -
            
            
            74,000
            
            
            -
            
            
            -
            
            
            -
            
            
            74,000Comprehensive
                income
            
            
            -
            
            
            -
            
            
            (3,000
            )
            
            -
            
            
            -
            
            
            (3,000
            )
            $
            (3,000
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,134,000
            
            
            -
            
            
            2,134,000
            
            
            2,134,000Balance,
                December 31, 2004
            
            
            30,000
            
            
            22,997,000
            
            
            (779,000
            )
            
            (15,967,000
            )
            
            (210,000
            )
            
            6,071,000
            
            
            2,131,000Issuance
                of
                common stock under
              employee stock purchase plan
            
            
            
            
            
            
            
            
            
            
            
            (1,000
            )
            
            2,000
            
            
            1,000Exercise
                of
                stock options
            
            
            2,000
            
            
            787,000
            
            
            
            
            
            
            
            
            
            
            
            789,000Stock
                Issuance - FieldCentrix acquisition
            
            
            4,000
            
            
            3,332,000
            
            
            
            
            
            
            
            
            
            
            
            3,336,000Comprehensive
                income
            
            
            
            
            
            
            
            
            (156,000
            )
            
            
            
            
            
            
            
            (156,000
            )
            
            (156,000
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            1,828,000
            
            
            
            
            
            1,828,000
            
            
            1,828,000Balance,
                December 31, 2005
            
            $
            36,000
            
            $
            27,116,000
            
            $
            (935,000
            )
            $
            (14,140,000
            )
            $
            (208,000
            )
            $
            11,
                869,000
            
            $
            1,672,000











**See
      accompanying notes to the consolidated financial
      statements.**


- -
 43


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
                ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003****Cash
                flows from operating activities:**Net income (loss )
            
            $
            1,828,000
            
            $
            2,134,000
            
            $
            (5,529,000
            )Adjustments to reconcile net income(loss) to net cash
              provided by (used in) operating activities:Depreciation
                and
                amortization
            
            
            1,640,000
            
            
            1,375,000
            
            
            910,000Provision
                for
                doubtful accounts
            
            
            227,000
            
            
            84,000
            
            
            477,000Changes
                in
                operating assets and liabilities:Receivables
            
            
            1,235,000
            
            
            (2,272,000
            )
            
            3,998,000Prepaid
                expenses and other
            
            
            44,000
            
            
            (61,000
            )
            
            67,000Accounts
                payable and accrued expenses
            
            
            61,000
            
            
            121,000
            
            
            (382,000
            )Deferred
                revenues
            
            
            343,000
            
            
            1,297,000
            
            
            (688,000
            )Other
                long term assets
            
            
            (124,000
            )
            
            -
            
            
            (53,000
            )Net
                cash provided by (used in) operating activities
            
            
            5,254,000
            
            
            2,678,000
            
            
            (1,200,000
            )**Cash
                flows from investing activities:**Release
                of restricted cash
            
            
            75,000
            
            
            -
            
            
            -Purchases
                of
                property and equipment
            
            
            (324,000
            )
            
            (389,000
            )
            
            (216,000
            )Net
                cash acquired from FieldCentrix acquisition
            
            
            616,000
            
            
            -
            
            
            -Capitalized
                software development costs
            
            
            (1,555,000
            )
            
            (1,380,000
            )
            
            (480,000
            )Proceeds
                from
                the termination of life insurance policy
            
            
            -
            
            
            -
            
            
            632,000Net
                cash (used in) investing activities
            
            
            (1,188,000
            )
            
            (1,769,000
            )
            
            (64,000
            )**Cash
                flows from financing activities:**Proceeds
                from
                exercise of stock options and employee
              stock purchase plan
            
            
            791,000
            
            
            131,000
            
            
            2,000Net
                cash provided by financing activities
            
            
            791,000
            
            
            131,000
            
            
            2,000Effect
                of exchange rate changes on cash and cash
              equivalents
            
            
            144,000
            
            
            (37,000
            )
            
            (225,000
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            5,001,000
            
            
            1,003,000
            
            
            (1,487,000
            )Cash
                and cash equivalents balance, beginning of year
            
            
            4,483,000
            
            
            3,480,000
            
            
            4,967,000Cash
                and cash equivalents balance, end of year
            
            $
            9,484,000
            
            $
            4,483,000
            
            $
            3,480,000Supplemental
                disclosure of cash flow information:Satisfaction
                of
                liability with stock options
            
            
            -
            
            $
            74,000
            
            
            -Cash
                paid for interest expense
            
            $
            -
            
            $
            1,000
            
            $
            4,000








**See
                accompanying notes to the consolidated financial
                statements.**














44














**Supplemental
      Cash Flow Information - FieldCentrix Acquisition**





Non-Cash
      Transactions:


**Years
                Ended**
              **December
                31,****2005**
            
            **2004****Acquisition
                of FieldCentrix Net Assets:**Purchase
                PriceCommon stock issued
            
            $
            3,336,000
            
            $
            -Assets
                acquired:Accounts
                receivable
            
            
            (384,000
            )
            
            -Prepaid
                Expenses
            
            
            (80,000
            )
            
            -Property
                and
                equipment
            
            
            (730,000
            )
            
            -Software
            
            
            (721,000
            )Customer
                relations
            
            
            (1,360,000
            )
            
            -Other
                assets
            
            
            (31,000
            )
            
            -Goodwill
            
            
            (1,100,000
            )
            
            -Total
                assets acquired:
            
            
            (4,406,000
            )
            
            -**Liabilities
                assumed:**Accrued
                expenses
            
            
            719,000
            
            
            -Deferred
                revenue
            
            
            967,000
            
            
            -Total
                liabilities assumed
            
            
            1,686,000
            
            
            -Net
                assets acquired
            
            
            (2,720,000
            )
            
            -Net
                Cash received from FieldCentrix acquisition
            
            $
            616,000
            
            $
            -


- -
 45


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**








**1.**   **Company
      Background**





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





*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* .






46





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.
      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 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.





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 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. Under the residual method, as required under SOP 98-9, 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. Software license fees
      for resellers or other members of the indirect sales channel are based on a
      fixed percentage of the Company’s standard prices. The Company recognizes
      software license revenue for such contracts based upon the terms and conditions
      provided by the reseller to its customer.





Revenue
      from post-contract support is recognized ratably over the term of the contract
      on a straight-line basis. Consulting and training service revenue is generally
      unbundled and recognized at the time the service is performed. Fees from
      licenses sold together with consulting services are generally recognized upon
      shipment, provided that the contract has been executed, delivery of the software
      has occurred, fees are fixed and determinable and collection is probable. In
      instances where consulting services are essential to the functionality of the
      software, both the license and the consulting fees are recognized under the
      percentage of completion method of contract accounting.





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





*Reimbursable
      Expenses*





The
      Company charges customers for out-of-pocket expenses incurred by its employees
      during the performance of professional services in the normal course of
      business. In accordance with Emerging Issues Task Force 01-14, “Income Statement
      Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses
      Incurred,” billings for out-of-pocket expenses that are reimbursed by the
      customer are to be included in revenues with the corresponding expense included
      in cost of sales. During fiscal years 2005, 2004 and 2003, the Company billed
      $370,000, $296,000, and $326,000 respectively, of reimbursable expenses to
      customers.






47





*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. If actual collections experience changes, revisions to
      the allowances may be required. Activity in the allowance for doubtful accounts
      is as follows:





**Year
                Ended**
              **December
                31**
            
            **Balance
                at**
              **beginning
                of year**
            
            **Charged
                costs**
            
            **Write
                offs**
            
            **Balance
                at end of year**2005
            
            $
            411,000
            
            $
            227,000
            
            $
            328,000
            
            $
            310,0002004
            
            
            810,000
            
            
            84,000
            
            
            483,000
            
            
            411,0002003
            
            
            1,018,000
            
            
            477,000
            
            
            685,000
            
            
            810,000





*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, 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 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, 2005, the Company has determined
      that no impairment has occurred.





*Capitalized
      Software Development Costs*





The
      Company capitalizes software development costs in accordance with SFAS No.
      86,
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed.” The Company capitalizes software development costs subsequent to the
      establishment of technological feasibility through the product’s availability
      for general release. Costs incurred prior to the establishment of technological
      feasibility are charged to product development expense. Development costs
      associated with product enhancements that extend the original product’s life or
      significantly improve the original product’s marketability are also capitalized
      once technological feasibility has been established. Software development costs
      are amortized on a product-by-product basis over the greater of the ratio of
      current revenues to total anticipated revenues or on a straight-line basis
      over
      the estimated useful lives of the products (usually two years), beginning with
      the initial release to customers. During the first quarter of 2004, the Company
      revised the estimated life for its capitalized software products from three
      years to two years based on current sales trends and the rate of product
      release. The impact of reducing the estimated life resulted in $562,000 of
      additional amortization in 2004. In 2005, the reduction in estimated life
      resulted in $306,000 of additional amortization. The Company continually
      evaluates whether events or circumstances have occurred that indicate that
      the
      remaining useful life of the capitalized software development costs should
      be
      revised or that the remaining balance of such assets may not be recoverable.
      The
      Company evaluates the recoverability of capitalized software based on the
      estimated future revenues of each product. As of December 31, 2005, management
      believes that no revisions to the remaining useful lives or write-downs of
      capitalized software development costs are required.








48





*Goodwill*





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 at December 31, 2005.





The
      Company tests goodwill for impairment annually during the first quarter 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 more likely than not reduce
      the
      fair value of a reporting unit below its carrying value, goodwill will be
      evaluated for impairment between annual tests.





*Major
      Customers*





In
      2005,
      the Company had one customer which accounted for 23% of revenues. In 2004 a
      different customer accounted for 15% of revenues and 2003 no single customers
      represented 10% or more of total revenues. No customer accounted for 10% or
      more
      of total accounts receivable at either December 31, 2005 or 2004.




*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.





Senior
      management reviews accounts receivable on a monthly basis to determine if any
      receivables will potentially be uncollectible. The Company includes any accounts
      receivable balances that are determined to be uncollectible in its allowance
      for
      doubtful accounts. If all attempts to collect a receivable have failed, the
      receivable will then be written off against the allowance. Based on all
      information available, the Company believes its allowance for doubtful accounts
      as of December 31, 2005 is adequate. However, actual write-offs might exceed
      the
      recorded allowance.






49




*Fair
        Value of Financial Instruments*
 
 Due
        to
        the short term nature of these accounts, the carrying values of cash, cash
        equivalents, accounts receivable, accounts payable and accrued expenses
        approximate the respective fair values.
  *Income
        Taxes*
 
 The
        Company recognizes deferred tax assets and liabilities for the expected future
        tax consequences of events that have been recognized in the Company’s financial
        statements or tax returns. Under this method, deferred tax assets and
        liabilities are determined based on the difference between the financial
        statement carrying amounts and the tax bases of assets and liabilities using
        enacted tax rates in effect in the years in which the differences are expected
        to reverse. 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 for the years ended December
        31,
        2005, 2004, and 2003 were $101,000, $86,000 and $104,000
        respectively.
 
 *Currency
        Translation*
 
 The
        accounts of the international subsidiaries and branch operations are translated
        in accordance with SFAS No. 52, “Foreign Currency Translation,” which requires
        that assets and liabilities of international operations be translated using
        the
        exchange rate in effect at the balance sheet date. The results of operations
        are
        translated at average exchange rates during the year. The effects of exchange
        rate fluctuations in translating assets and liabilities of international
        operations into U.S. dollars are accumulated and reflected as a currency
        translation adjustment in the accompanying consolidated statements of
        stockholders’ equity. Transaction gains and losses are included in net income
        (loss). There are no material transaction gains or losses in the accompanying
        consolidated financial statements for the periods presented.
 
 *Net
        Income (Loss) Per Share*
 
 The
        Company presents earnings per share in accordance with SFAS No. 128, “Earnings
        per ** Share.”
        Pursuant to SFAS No. 128, dual presentation of basic and diluted earnings
        per
        share (“EPS”) is required for companies with complex capital structures on the
        face of the statements of operations. Basic EPS is computed by dividing net
        income (loss) by the weighted-average number of common shares outstanding
        for
        the period. Diluted EPS reflects the potential dilution from the exercise
        or
        conversion of securities into common stock. Under the treasury stock method
        it
        is assumed that 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 number of the shares assumed issued
        and the number of shares assumed purchased represents the dilutive
        shares.
 
 At
        December 31, 2005 and 2004 there were 22,743 and 41,178 net additional dilutive
        shares assumed to be converted at an average exercise price of $5.06 and
        $4.52
        per share, which brought the total outstanding dilutive shares to 3,116,000
        and
        3,001,000 respectively. Additionally, at December 31, 2005 and 2004 the Company
        had 41,975 and 51,950 antidilutive shares that were excluded from diluted
        earnings per share calculation due to their antidilutive nature.
 
 The
        Company sustained a loss for fiscal year 2003. Options at December 31, 2003
        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.
 
 50
 (**in
                  thousands, except per share data)****Year
                  Ended December 31,**
              
              **2005**
              
              **2004**
              
              **2003****Net
                  income (loss)**
              
              **$**
              **1,828**
              
              **$**
              **2,134**
              
              **$**
              **(5,529**
              **)**Basic
                  weighted average number of common shares outstanding
              
              
              3,093
              
              
              2,960
              
              
              2,922**Basic
                  earnings (loss) per common share**
              
              **$**
              **.59**
              
              **$**
              **.72**
              
              **$**
              **(1.89**
              **)**Effect
                  of dilutive stock options
              
              
              23
              
              
              41
              
              
              -Diluted
                  weighted average number of common shares outstanding
              
              
              3,116
              
              
              3,001
              
              
              2,922**Diluted
                  earnings (loss) per common share**
              
              **$**
              **.59**
              
              **$**
              **.71**
              
              **$**
              **(1.89**
              **)**
 
 *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*
 
 The
        Company grants stock options for a fixed number of shares to employees with
        an
        exercise price equal to the fair value of the shares at the date of grant.
        The
        Company accounts for stock option grants using the intrinsic-value method
        in
        accordance with Accounting Principles Board Opinion No. 25, “Accounting for
        Stock Issued to Employees” (“APB 25”) and related Interpretations. Under the
        intrinsic-value method, because the exercise price of the Company’s employee
        stock options is greater than or equal to the market price of the underlying
        stock on the date of grant, no compensation expense is recognized.
 
   - -
 51
  Had
        compensation cost for the Company’s stock options and employee stock purchase
        plan been determined consistent with SFAS No. 123, “Accounting for Stock-Based
        Compensation” and SFAS 148, “Accounting for Stock Based Compensation -
        Transition and Disclosure,” the Company’s net income(loss) and basic and diluted
        net income(loss) per share would have been:
 
 **2005**
              
              **2004**
              
              **2003**Net
                  income (loss) - as reported
              
              $
              1,828,000
              
              $
              2,134,000
              
              $
              (5,529,000
              )Add:
                  Stock based compensation
                included
                  in net income as reported
              
              
              -
              
              
              -
              
              
              -Deduct
                  stock based compensation
                determined
                  under fair value based
                methods
                  for all awards
              
              
              (388,000
              )
              
              (252,000
              )
              
              (329,000
              )Net
                  income (loss) - pro forma
              
              $
              1,440,000
              
              $
              1,882,000
              
              $
              (5,858,000
              )Basic
                  income (loss) per share - as reported
              
              $
              .59
              
              $
              .72
              
              $
              (1.89
              )Diluted
                  income (loss) per share - as reported
              
              $
              .59
              
              $
              .71
              
              $
              (1.89
              )Basic
                  income (loss) per share - pro forma
              
              $
              .47
              
              $
              .64
              
              $
              (2.00
              )Diluted
                  income (loss) per share - pro forma
              
              $
              .46
              
              $
              .63
              
              $
              (2.00
              )
 
 The
        weighted average fair value of those options granted during the years ended
        December 31, 2005, 2004 and 2003 was estimated as $6.46, $5.39 and $3.17,
        respectively. The fair value of each option grant is estimated on the date
        of
        grant using the Black-Scholes option-pricing model with the following weighted
        average assumptions: risk-free interest rate of 4.37%, 4.18% and 3.97% for
        2005,
        2004 and 2003 grants, respectively; an expected life of six years; volatility
        of
        122%, 130% and 137%; and a dividend yield of zero for 2005, 2004 and 2003
        grants, respectively.
 
 The
        Company anticipates adopting the modified prospective method of FAS No. 123(R)
        on January 1, 2006. Based on the stock options outstanding as of December
        31,
        2005, we will recognize compensation expense in future consolidated statements
        of income of approximately $235,000 for the year ended December 31, 2006.
        The
        actual impact on our financial condition or results of operations will depend
        on
        the number and terms of stock options outstanding on the date of change,
        as well
        as future options that may be granted.
 
 *Reclassifications*
 
 Certain
        reclassifications of prior years’ amounts have been made to conform to the
        current year presentation.
 
 52
  
 *Recent
        Accounting Standards or Accounting Pronouncements*
 
 In
        December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment,” an
        amendment of FASB Statements 123 and 95. FAS No, 123(R) replaced FAS No.
        123,
“Accounting for Stock-Based Compensation,” and supercedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” This statement requires companies to
        recognize the fair value of stock options and other stock-based compensation
        to
        employees prospectively beginning with fiscal periods beginning after June
        15,
        2005. This means that the Company will be required to implement FAS No, 123(R)
        no later than the quarter beginning January 1, 2006. The Company currently
        measures stock-based compensation in accordance with APB Opinion No. 25,
        as
        discussed above. The Company anticipates adopting the modified prospective
        method of FAS No. 123(R) on January 1, 2006. The impact on the company’s
        financial condition or results of operations will depend on the number and
        terms
        of stock options outstanding on the date of change, as well as future options
        that may be granted..
  In
        March
        2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional
        Asset Retirement Obligations” (“FIN 47). FIN 47 provides guidance relating to
        the identification of and financial reporting for legal obligations to perform
        an asset retirement activity. The Interpretation requires recognition of
        a
        liability for the fair value of a conditional asset retirement obligation
        when
        incurred if the liability’s fair value can be reasonably estimated. FIN 47 also
        defines when an entity would have sufficient information to reasonably estimate
        the fair value of an asset retirement obligation. The provision is effective
        no
        later than the end of fiscal years ending after December 15, 2005. The Company
        will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does
        not
        believe the adoption will have a material impact on its consolidated financial
        position or results of operations or cash flows.
  In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
        Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
        3. SFAS
        No. 154 requires retrospective application to prior periods’ financial
        statements of changes in accounting principle, unless it is impracticable
        to
        determine either the period-specific effects or the cumulative effect of
        the
        change. SFAS No. 154 also requires that retrospective application of a change
        in
        accounting principle be limited to the direct effects of the change. Indirect
        effects of the change in accounting principle, such as a change in
        nondiscretionary profit-sharing payment resulting from an accounting change,
        should be recognized in the period of the accounting change. SFAS No. 154
        also
        requires that a change in depreciation, amortization or depletion method
        for
        long-lived, non-financial assets be accounted for as a change in accounting
        estimate effected by a change in accounting principle. SFAS No. 154 is effective
        for accounting changes and corrections of errors made in fiscal years beginning
        after December 15, 2005. Early adoption is permitted for accounting changes
        and
        corrections of errors made in fiscal years beginning after the date this
        Statement is issued. Management does not expect the implementation of this
        new
        standard to have a material impact on their financial position, results of
        operations and cash flows.
  In
        June
        2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue
        05-6, *Determining
        the Amortization Period for Leasehold Improvements* ,
        which
        requires that leasehold acquired in a business combination or purchased
        subsequent to the inception of a lease be amortized over the lesser of the
        useful life of the assets or a term that includes renewals that are reasonably
        assured at the date of the business combination or purchase. EITF 05-6 is
        effective for periods beginning after July 1, 2005. We do no expect the
        provisions of this consensus to have a material impact on our financial
        position, results of operations or cash flows.
  **3.**  **Reverse
        Stock Split**
 
 On
        September 2, 2003, the Company implemented a 1:5 reverse stock split of the
        Company’s outstanding common stock that was previously approved at the Annual
        Meeting of Stockholders. The par value of all post reverse split shares remained
        unchanged at $0.01. The Company redeemed all fractional shares that resulted
        from the reverse split. The number of authorized shares was unchanged at
        25,000,000.
 
 53
 Results
        for 2003 have been restated to reflect the results of the reverse stock split,
        which includes the common stock and additional paid-in capital captions on
        the
        balance sheet as well as the shares used in computing earnings per
        share.
  **4.**  **Receivables**
 
 **December
                  31,**
              
              **2005**
              
              **2004**Billed
                  receivables
              
              $
              4,719,000
              
              $
              4,379,000Unbilled
                  receivables
              
              
              318,000
              
              
              2,049,000$
              5,037,000
              
              $
              6,428,000
 
 Billed
        receivables represent billings for the Company’s products and services to end
        users and value added resellers. Unbilled receivables represent contractual
        amounts due within one year under software licenses that have been delivered
        but
        have not been billed. Billed and unbilled receivables are shown net of reserves
        for estimated uncollectible amounts.
 
 For
        the
        years ended December 31, 2005, 2004 and 2003, the Company recorded bad debt
        expense of $227,000, $84,000, and $477,000, and write-offs of $328,000 $483,000,
        and $685,000. The decrease in bad debt expense in 2004 is primarily due to
        improvement in customer payment performance. The improved payment performance
        deteriorated somewhat in 2005.
 
 **5.**  **Property
        and Equipment**
  **December
                  31,****Useful
                  Life**
              
              **2005**
              
              ******2004**Computers
                  and related
                equipment
              
              
              3
              
              $
              2,879,000
              
              $
              2,246,000Furniture
                  and fixtures
              
              
              10
              
              
              504,000
              
              
              468,000Leasehold
                  improvements
              
              
              Lease
                  term
              
              
              122,000
              
              
              111,000Software
              
              
              1
              
              
              280,000
              
              
              -Office
                  equipment
              
              
              3-7
              
              
              1,238,000
              
              
              993,0005,023,000
              
              
              3,818,000Less:
                  Accumulated
                depreciation
                  and amortization
              
              
              
              
              
              (3,985,000
              )
              
              (3,270,000
              )$
              1,038,000
              
              $
              548,000
 
 Depreciation
        and amortization expense for the years ended December 31, **** 2005, **** 2004
        and **** 2003
        was
        $538,000, $286,000 and $310,000, **** respectively.
        The increase in property and equipment resulted primarily from the acquisition
        of FieldCentrix, (see note 13).
 
 54
 
 **6.**  **Capitalized
        Software Development Costs**
 
 **Remaining
                    Weighted****Average
                    Life**
              
              **December
                    31,**
                **2005********2004**Capitalized
                  software development costs
              
              
              1.68
              
              $
              6,764,000
              
              $
              5,209,000Less:
                  Accumulated amortization
              
              
              
              
              
              4,709,000
              
              
              3,689,000$
              2,055,000
              
              $
              1,520,000
 
 The
        Company capitalized software development costs for the years ended December
        31,
        2005, 2004 and 2003 of $1,555,000, $1,380,000 and $480,000, respectively.
        Amortization of software development costs for the years ended December 31,
        2005, 2004 and 2003 was $1,020,000, $1,088,000 and $599,000, respectively,
        and
        is reflected in cost of software license fees in the financial statements.
        Additionally, for the year ended December 31, 2004, the Company wrote-off
        $1,155,000 of fully amortized capitalized software for old versions that
        had
        been deemed no longer useful or functional. The Company amortizes software
        developments cost on a straight-line basis over the estimated useful lives
        of
        the product (two years) and expects to amortize approximately $1,130,000
        during
        2006 and $447,000 in 2007 based on products currently released for
        sale.
 
 **7.**  **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. Accumulated amortization of intangible assets
        was
        $81,000 and $0 at December 31, 2005 and 2004, respectively. Amortization
        expense
        related to these intangible assets was $81,000 and $0 for the years ended
        December 31, 2005 and 2004, respectively.
 
 **Gross
                  Carrying Value**
              
              **Accumulated
                  Amortization****Description**
              
              **Weighted**
                **Avg.
                  Life**
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004**Software
              
              
              5
                  years
              
              $
              720,000
              
              $
              -
              
              $
              42,000
              
              $
              -Customer
                  List
              
              
              10
                  years
              
              
              1,360,000
              
              
              -
              
              
              39,000
              
              
              -$
              2,080,000
              
              $
              -
              
              $
              81,000
              
              $
              -
 
 Estimated
        amortization expense for each of the next five years is as follows:
 
 **Amortization
                  Expense**2006
              $
                  280,0002007
              280,0002008
              280,0002009
              280,0002010
              238,000
 
 
 55
 
 **8.**  **Accounts
        Payable and Accrued Expenses**
 
 **December
                  31,**
              
              **2005**
              
              **2004**Accounts
                  payable
              
              $
              926,000
              
              $
              688,000Accrued
                  compensation and related benefits
              
              
              1,389,000
              
              
              1,229,000Accrued
                  professional services
              
              
              182,000
              
              
              197,000Sales
                  and payroll taxes
              
              
              695,000
              
              
              410,000Other
                  accrued liabilities
              
              
              784,000
              
              
              670,000$
              3,976,000
              
              $
              3,194,000
 
 **9.**  **Income
        Taxes**
  Astea
        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,**
              
              **2005**
              
              **2004**
              
              **2003**Current:Federal
              
              $
              -
              
              $
              -
              
              $
              -State
              
              
              -
              
              
              -
              
              
              -Foreign
              
              
              -
              
              
              -
              
              
              --
              
              
              -
              
              
              -Deferred:Federal
              
              $
              6,000
              
              $
              -
              
              $
              -State
              
              
              1,000
              
              
              -
              
              
              -$
              7,000
              
              $
              -
              
              $
              -
   56
 
 
 The
        approximate income tax effect of each type of temporary difference is as
        follows:
 
 **December
                  31,**
              
              **2005**
              
              **2004**Deferred
                  income tax assets:Revenue
                  recognition
              
              $
              29,000
              
              $
              -Accruals
                  and reserves not
                currently
                  deductible for tax
              
              
              122,000
              
              
              126,000Benefit
                  of net operating loss carryforward
              
              
              8,447,000
              
              
              7,882,000Depreciation
              
              
              65,000
              
              
              32,000Alternative
                  minimum tax
              
              
              370,000
              
              
              370,000Capital
                  loss carryforward
              
              
              10,000
              
              
              10,0009,043,000
              
              
              8,420,000Deferred
                  income tax liabilities:Capitalized
                  software development costs
              
              
              (761,000
              )
              
              (547,000
              )Amortization
                  of deductible goodwill
              
              
              (7,000
              )
              
              -(768,000
              )
              
              (547,000
              )Net
                  deferred tax asset before allowance
              
              
              (8,275,000
              )
              
              (7,873,000
              )Valuation
                  allowance
              
              
              (8,282,000
              )
              
              (7,873,000
              )Net
                  deferred income tax liability
              
              $
              (7,000
              )
              $
              -
 
 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 $7,000 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
        assets 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
        2004
        the Company utilized $494,000 of its reserved deferred tax asset to offset
        its
        provision for income taxes, primarily from the utilization of its net operating
        loss carryforward and turning of certain accruals. In the years ended December
        31, 2005 and 2003, there were no income taxes owed, as the Company had tax
        losses.
 
 The
        Company has a tax holiday in Israel, which expires in 2015. Net income for
        the
        Israeli subsidiary was $417,000 and $334,950 for the years ending December
        31,
        2005 and 2004, respectfully. The Israeli subsidiary has net carryforward
        losses
        for Israeli tax purposes of approximately $0.7 million.
 
 As
        of
        December 31, 2005, the Company had a net operating loss carryforward for
        United
        States federal income tax purposes of approximately **** $24,800,000.
        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.
 
 57
 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, 2005, the Company had not provided
        federal income taxes on cumulative earnings of individual international
        subsidiaries of $4,076,000. 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.
 
 
 **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, 2005, 2004
        and
        2003 was $780,000, $701,000 and $867,000, respectively.
 
 Future
        minimum lease payments under the Company’s leases as of December 31, 2005 are as
        follows:
 
 **Operating
                  Leases**2006
              $
                  1,235,0002007
              896,0002008
              647,0002009
              506,0002010
              34,000Total
                  minimum lease payments
              $
                  3,318,000
 
 On
        September 11, 2002, the Company invested $300,000 in a certificate of deposit,
        which was pledged as collateral on an outstanding letter of credit related
        to a
        lease obligation. It was classified as restricted cash on the balance sheet.
        According to the lease agreement, the letter of credit may be reduced by
        $75,000
        per year starting in November 2005, at which time it was reduced to $225,000.
        The certificate of deposit automatically renews every six months. The letter
        of
        credit is due to expire in February 2009.
 
 From
        time
        to time, the Company may be involved in certain legal actions and customer
        disputes arising in the ordinary course of business. In the Company’s opinion,
        the outcome of such actions will not have a material adverse effect on the
        Company’s financial position or results of operations.
 
 **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 $53,000, $50,000 and $61,000 for the years
        ended December 31, 2005, 2004 and 2003, respectively.
 
 58
 
 **12.**  **Equity
        Plans**
 
 *Stock
        Option Plans*
 
 The
        Company has Stock Option Plans (the “Plans”) under which incentive and
        non-qualified stock options may be granted to its employees, officers, directors
        and others. Generally, incentive stock options are granted at fair value,
        become
        exercisable over a four-year period, and are subject to the employee’s continued
        employment. Non-qualified options are granted at exercise prices determined
        by
        the Board of Directors and vest over varying periods. A summary of the status
        of
        the Company’s stock options as of December 31, 2005, 2004 and 2003 and changes
        during the years then ended is as follows:
 
 **OPTIONS
                  OUTSTANDING**
              
              **OPTIONS**
                **EXERCISABLE****Shares**
                **Available
                  for Grant**
              
              **Shares**
              
              **Wtd.
                  Avg. Exercise Price**
              
              
              
              **Shares**
              
              **Wtd.
                  Avg. Exercise Price**Balance,
                  January 1, 2003
              
              
              147,000
              
              
              447,000
              
              $
              6.24
              
              
              
              
              
              138,000
              
              $
              8.96Granted
                  at market
              
              
              (127,000
              )
              
              127,000Cancelled
              
              
              96,000
              
              
              (96,000
              )Balance,
                  December 31, 2003
              
              
              116,000
              
              
              478,000
              
              $
              5.99
              
              
              
              
              
              213,000
              
              $
              7.91Granted
                  at market
              
              
              (110,000
              )
              
              110,000Cancelled
              
              
              150,000
              
              
              (151,000
              )Exercised
              
              
              -
              
              
              (37,000
              )Expired
              
              
              (43,000
              )
              
              -Balance,
                  December 31, 2004
              
              
              113,000
              
              
              400,000
              
              $
              5.73
              
              
              
              
              
              190,000
              
              $
              7.09Granted
                  at market
              
              
              (205,000
              )
              
              205,000
              
              
              -
              
              
              
              
              
              -
              
              
              -Cancelled
              
              
              131,000
              
              
              (133,000
              )
              
              -
              
              
              
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              (162,000
              )
              
              -
              
              
              
              
              
              -
              
              
              -Expired
              
              
              (3,000
              )
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -Balance,
                  December 31, 2005
              
              
              36,000
              
              
              310,000
              
              $
              7.04
              
              
              
              
              
              89,000
              
              $
              9.11
 
 The
        following table summarizes information about stock options outstanding at
        December 31, 2005:
 
 **OPTIONS
                    OUTSTANDING**
                **OPTIONS
                    EXERCISABLE****Range
                    of**
                  ******Exercise
                    Prices**
                **Number****Outstanding**
                **Weighted
                    Average Remaining**
                  **Contract
                    Life****(Years)**
                **Weighted
                    Average**
                  **Exercise
                    Price**
                **Number**
                  **Exercisable**
                **Weighted
                    Average**
                  **Exercise
                    Price**$
                    2.75
                **-**
                $
                    4.85
                92,000
                7.22
                $
                    3.60
                38,000
                $
                    3.86$
                    5.70
                **-**
                $
                    8.45
                194,000
                8.68
                $
                    7.18
                27,000
                $
                    7.66$
                    15.30
                **-**
                $
                    31.25
                24,000
                2.14
                $
                    19.19
                24,000
                $
                    19.19$
                    2.75
                **-**
                $
                    31.25
                310,000
                7.75
                $
                    7.04
                89,000
                $
                    9.11
 
 *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, 2004
        and
        2003, shares purchased were 500, 500 and 1,100, respectively. At December
        31,
        2005, there were 29,121 shares available for future purchases. The plan expired
        on June 30, 2005 and was not renewed.
  59
 **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, 2005, legal, accounting
        and
        investment banking fees was $3,626,000.
 
 In
        the
        Acquisition, 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. Assuming there are no indemnification claims,
        this
        stock escrow will be released to FieldCentrix on or about September 21, 2006.
        Additionally, FieldCentrix deposited $177,243 into an escrow account to cover
        any uncollected accounts receivable and/or maintenance revenues of customers
        who
        have not consented to the assignment of their contracts with FieldCentrix
        Inc.
        to FC Acquisition Corp. The cash escrow was analyzed on or about January
        19,
        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 is allocated as follows:
 
 **Assets
                  acquired**:
              
              **Disclosed
                  in Third Quarter**
              
              **Purchase
                  Adjustment**
              
              **Total
                  Allocation**Cash
              
              $
              906,000
              
              
              
              
              $
              906,000Accounts
                  receivable
              
              
              354,000
              
              
              (30,000
              )
              
              384,000Prepaid
                  expenses
              
              
              95,000
              
              
              15,000
              
              
              80,000Property
                  and equipment
              
              
              1,451,000
              
              
              
              
              
              730,000Software
              
              
              721,000
              
              
              
              
              
              721,000Customer
                  relations
              
              
              1,360,000
              
              
              
              
              
              1,360,000Other
                  assets
              
              
              31,000
              
              
              
              
              
              31,000Goodwill
              
              
              956,000
              
              
              (144,000
              )
              
              1,100,0005,153,000
              
              
              (159,000
              )
              
              5,312,000Less
                  liabilities assumed:Accrued
                  expenses
              
              
              492,000
              
              
              227,000
              
              
              719,000Deferred
                  revenue
              
              
              1,035,000
              
              
              (68,000
              )
              
              967,0001,527,000
              
              
              159,000
              
              
              1,686,000Total
                  purchase price
              
              $
              3,626,000
              
              $
              -
              
              $
              3,626,000
 
 60
 The
        $1,100,000 allocated to goodwill is expected to be deductible for tax
        purposes.
 
 The
        acquisition of the long lived assets described above will result in future
        depreciation and amortization expense to the Company. All assets will be
        depreciated or amortized using the straight-line method over the following
        estimated useful live:
 
 **Asset**
              **Useful
                  Life**Property
                  and Equipment
              1
                  to 4 yearsSoftware
              1
                  to 5 years
  
 Customer
        lists are amortized on a straight line basis over the period of their
        expected benefit. The expected benefit period will be reevaluated on a periodic
        basis based upon actual revenues generated.
 
 
 **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**
              
              **2004**Revenues
              
              
              
              
              $
              27,532,000
              
              $
              27,760,000Net
                  (loss)
              
              
              
              
              $
              (1,283,000
              )
              $
              (1,958,000
              )Net
                  (loss) per common shareBasic
              
              
              
              
              $
              (.38
              )
              $
              (.58
              )Diluted
              
              
              
              
              $
              (.38
              )
              $
              (.58
              )Weighted
                  shares outstandingBasic
              
              
              
              
              
              3,397,000
              
              
              3,318,000Diluted
              
              
              
              
              
              3,397,000
              
              
              3,318,000
 
  61
 
 
 **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 be in a single
        reporting segment, specifically the license, implementation and support of
        its
        software.
 
 **Year
                    ended December 31,**
                
                **2005**
                
                **2004**
                
                **2003**Revenues:Software license feesUnited StatesDomestic
                
                $
                2,983,000
                
                $
                4,285,000
                
                $
                1,151,000Export
                
                
                -
                
                
                -
                
                
                -Total United Statessoftware
                    license fees
                
                
                2,983,000
                
                
                4,285,000
                
                
                1,151,000United
                    Kingdom
                
                
                4,580,000
                
                
                2,274,000
                
                
                194,000Other
                    foreign
                
                
                677,000
                
                
                1,433,000
                
                
                590,000Total
                    foreign softwarelicense fees
                
                
                5,257,000
                
                
                3,707,000
                
                
                784,000Total
                    software license fees
                
                
                8,240,000
                
                
                7,992,000
                
                
                1,935,000Services
                    and maintenanceUnited StatesDomestic
                
                
                8,128,000
                
                
                6,719,000
                
                
                6,239,000Export
                
                
                304,000
                
                
                749,000
                
                
                1,140,000Total United States serviceand
                    maintenance revenue
                
                
                8,432,000
                
                
                7,468,000
                
                
                7,379,000United
                    Kingdom
                
                
                2,859,000
                
                
                1,834,000
                
                
                1,581,000Other
                    foreign
                
                
                3,234,000
                
                
                2,023,000
                
                
                1,946,000Total
                    foreign service andmaintenance revenue
                
                
                6,093,000
                
                
                3,857,000
                
                
                3,527,000Total
                    service andmaintenance revenue
                
                
                14,525,000
                
                
                11,325,000
                
                
                10,906,000Total
                    revenue
                
                $
                22,765,000
                
                $
                19,317,000
                
                $
                12,841,000Profit(loss)
                    from continuing operationsUnited
                    States
                
                $
                (62,000
                )
                $
                913,000
                
                $
                (3,757,000
                )United
                    Kingdom
                
                
                867,000
                
                
                (47,000
                )
                
                (1,161,000
                )Other
                    foreign
                
                
                1,023,000
                
                
                1,268,000
                
                
                (611,000
                )Total
                    income(loss) from
                  continuing operations
                
                $
                1,828,000
                
                $
                2,134,000
                
                $
                (5,529,000
                )Long
                    lived assetsUnited States
                
                $
                6,001,000
                
                $
                1,865,000
                
                $
                1,460,000United
                    Kingdom
                
                
                67,000
                
                
                55,000
                
                
                88,000Other
                    foreign
                
                
                314,000
                
                
                183,000
                
                
                224,000Total
                    assets
                
                $
                6,382,000
                
                $
                2,103,000
                
                $
                1,772,000
  62
 **16.**  **Selected
        Consolidated Quarterly Financial Data (Unaudited)**
 
 **2005
                    Quarter Ended**
                
                **Dec
                    31,**
                
                **Sep
                    30,**
                  **(Restated)**
                
                **Jun
                    30,**
                  **(Restated)**
                
                **Mar
                    31,**
                  **(Restated)**Revenues
                
                $
                5,387,000
                
                $
                8,249,000
                
                $
                5,359,000
                
                $
                3,770,000Gross
                    profit
                
                
                2,929,000
                
                
                6,021,000
                
                
                2,884,000
                
                
                1,534,000Net
                    income(loss)
                
                
                (643,000
                )
                
                2,789,000
                
                
                431,000
                
                
                (749,000)Basic
                    net income(loss) per share
                
                $
                (.25
                )
                $
                .94
                
                $
                .15
                
                $
                (.25)Diluted
                    net income(loss) per
                  share
                
                $
                (.25
                )
                $
                .90
                
                $
                .14
                
                $
                (.25)Shares
                    used in computing basic net income(loss) per share (in
                    thousands)
                
                
                3,455
                
                
                2,968
                
                
                2,962
                
                
                2,960Shares
                    used in computing diluted net income(loss) per share (in
                    thousands)
                
                
                3,485
                
                
                3,106
                
                
                3,056
                
                
                2,960
  **2004
                  Quarter Ended**
              
              
              **Dec
                  31,**
              
              
              **Sep
                  30,**
              
              
              **Jun
                  30,**
              
              
              **Mar
                  31,**Revenues
              
              $
              5,013,000
              
              $
              4,004,000
              
              $
              4,416,000
              
              $
              5,884,000Gross
                  profit
              
              
              2,617,000
              
              
              2,086,000
              
              
              2,493,000
              
              
              3,927,000Net
                  income
              
              
              187,000
              
              
              155,000
              
              
              309,000
              
              
              1,483,000Basic
                  net income per share
              
              $
              .06
              
              $
              .05
              
              $
              .10
              
              $
              .51Diluted
                  net income per share
              
              $
              .05
              
              $
              .05
              
              $
              .10
              
              $
              .51Shares
                  used in computing basic net income per share (in
                  thousands)
              
              
              2,960
              
              
              2,954
              
              
              2,954
              
              
              2,921Shares
                  used in computing diluted net income per share (in
                  thousands)
              
              
              3,013
              
              
              2,992
              
              
              2,972
              
              
              2,923
 
 During
          the fourth quarter of 2005, the Company discovered that it had over capitalized
          software during the year in the amount $251,000. It was determined by the
          Company that $131,000, $218,000 and ($98,000) of the charge was related
          to the
          first quarter 2005, second quarter 2005 and the third quarter 2005,
          respectively. The impact on basic and diluted net earnings (loss) per share
          was
          ($.04) in the first quarter and ($.07) in the second quarter. The impact
          on
          basic and diluted earnings per share in the third quarter was in increase
          of
          $.03. The quarterly numbers for 2005 above have been restated to reflect
          this
          charge in the appropriate quarter. The Company will file amended Forms
          10-Q
          shortly after the filing of this Form 10-K.
 
  - -
 63
  **Item
        9.**  **Changes
        in and Disagreements with Accountants on Accounting and
        Financial**
 **Disclosure.**
 
 None.
 
 **Item
        9A.**  **Controls
        and Procedures.**
 
 Our
        management, under the supervision and with the participation of the Chief
        Executive Officer and Chief Financial Officer, have evaluated the effectiveness
        of our controls and procedures related to our reporting and disclosure
        obligations as of December 31, 2005, which is the end of the period covered
        by
        this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive
        Officer and Chief Financial Officer have concluded that our disclosure controls
        and procedures are effective to ensure that (a) material information relating
        to
        us, including our consolidated subsidiaries, is made known to these officers
        by
        our and our consolidated subsidiaries other employees, particularly material
        information related to the period for which this periodic report is being
        prepared; and (b) this information is recorded, processed, summarized, evaluated
        and reported, as applicable, within the time periods specified in the rules
        and
        forms promulgated by the Securities and Exchange Commission.
 
 There
        were no changes that occurred during the fiscal quarter ended December 31,
        2005
        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 2006
        Annual Meeting of Stockholders proposed to be held on May 5, 2006, 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**
 
 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.
 
 64
 
 **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”
 
 65
 
 
 
 **PART
        IV**
 
 **Item
        15.**  **Exhibits
        and Financial Statement Schedules**
 
 (a)(1)(A)
              *Consolidated
                  Financial Statements.*i)
              Consolidated
                  Balance Sheets at December 31, 2005 and 2004ii)
              Consolidated
                  Statements of Operations for the years ended December 31, 2005,
                  2004, and
                  2003iii)
              Consolidated
                  Statements of Stockholders’ Equity for the years ended December 31, 2005,
                  2004, and 2003iv)
              Consolidated
                  Statements of Cash Flows for the years ended December 31, 2005,
                  2004, and
                  2003v)
              Notes
                  to the Consolidated Financial Statements(a)(1)(B)
              *Report
                  of Independent Registered Public Accounting Firm.*(a)(2)
              *Schedules.*a)
              Schedule
                  II - Valuation and Qualifying Accounts Schedule listed above has
                  been
                  omitted because the information required to be set forth therein
                  is not
                  applicable or is shown in the accompanying Financial Statements
                  or notes
                  thereto.(a)(3)
              *List
                  of Exhibits.*
 
 The
        following exhibits are filed as part of and incorporated by reference into
        this
        Annual Report on Form 10-K:
 
 **Exhibit
                  No.**
              **Description**3(i).1
              Certificate
                  of Incorporation of the Company (Incorporated herein by reference
                  to
                  Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as
                  amended (File No. 33-92778)).3(ii).1
              By-Laws
                  of the Company (Incorporated herein by reference to Exhibit 3.2
                  to the
                  Company’s Registration Statement on Form S-1, as amended (File No.
                  33-92778)).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 tothe
                  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)).
  66
 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 (Incorporatedherein
                  by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K
                  for the year ended December 31, 1997).10.10
              Form
                  of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
                  Director Stock Option Plan (Incorporated herein by reference to
                  Exhibit
                  4.5 to the Company’s Registration Statement on Form S-8, filed on
                  September 19, 1995 (File No. 33-97064)).10.11
              1997
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  10.10 to
                  the Company’s Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1996).10.12
              Form
                  of Non-Qualified Stock Option Agreement under the 1997 Stock Option
                  Plan.
                  (Incorporated herein by reference to Exhibit 10.11 to the Company’s Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1996).10.13
              Form
                  of Incentive Stock Option Agreement under the 1997 Stock Option
                  Plan
                  (Incorporated herein by reference to Exhibit 10.12 to the Company’s Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1996).10.14
              1998
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  10.14 to
                  the Company’s Annual Report on Form 10-K for the year ended December 31,
                  1997).10.15
              Form
                  of Non-Qualified Stock Option Agreement under the 1998 Stock Option
                  Plan.(Incorporated herein by reference to Exhibit 10.15 to the Company’s Annual
                  Report on Form 10-K for the year ended December 31,
                  1997).10.16
              Form
                  of Incentive Stock Option Agreement under the 1998 Stock Option
                  Plan.(Incorporated herein by reference to Exhibit 10.16 to the Company’s Annual
                  Report on Form 10-K for the year ended December 31,
                  1997).10.28
              2001
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  99.1 to the
                  Company’s Registration Statement on Form S-8 (File No.
                  333-107757)).21.1
              Subsidiaries
                  of the Registrant.23.1*
              Consent
                  of BDO Seidman, LLP.24.1*
              Powers
                  of Attorney (See the Signature Page).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
 
 
 67
 
 
 
 *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.
  - -
 68
  SIGNATURES
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized this 28th day of March
        2006.
 
 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
              March
                  30, 2006Zack
                  Bergreen
              (Principal
                  Executive Officer)/s/Rick
                  Etskovitz
              Chief
                  Financial Officer
              March
                  30, 2006Rick
                  Etskovitz
              (Principal
                  Financial and AccountingOfficer)/s/Eileen
                  Smith
              Controller
              March
                  30, 2006Eileen
                  Smith/s/Thomas
                  J. Reilly, Jr.
              Director
              March
                  30, 2006Thomas
                  J. Reilly, Jr./s/Zack
                  Bergreen
              Director
              March
                  30, 2006Zack
                  Bergreen/s/Adrian
                  Peters
              Director
              March
                  30, 2006Adrian
                  Peters/s/Eric
                  Siegel
              Director
              March
                  30, 2006Eric
                  Siegel
   69