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                                 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, 1997
                                      or

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

                        Commission File Number: 0-26330
                                                -------

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

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

 455 BUSINESS CENTER DRIVE, 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.

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 1998 (based on the closing price of $3.25 as quoted
by Nasdaq National Market as of such date) was approximately $16,863,000.

As of March 20, 1998, 13,385,325 shares of the registrant's Common Stock were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1998 are incorporated by reference into Part
III of this Annual Report on Form 10-K.

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                               TABLE OF CONTENTS

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          PART I

Item 1.   Business                                                     3
Item 2.   Properties                                                  17
Item 3.   Legal Proceedings                                           17
Item 4.   Submission of Matters to a Vote of Security Holders         18

          PART II

Item 5.   Market for Registrant's Common Equity and Related           18
          Stockholder Matters
Item 6.   Selected Financial Data                                     20
Item 7.   Management's Discussion and Analysis of Financial           22
          Condition and Results of Operations
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk  28
Item 8.   Financial Statements and Supplementary Data                 29
Item 9.   Changes in and Disagreements with Accountants on            53
          Accounting and Financial Disclosure

          PART III

Item 10.  Directors and Officers of the Registrant                    53
Item 11.  Executive Compensation                                      53
Item 12.  Security Ownership of Certain Beneficial Owners and         53
          Management
Item 13.  Certain Relationships and Related Transactions              53
             PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports        54
          on Form 8-K

          Signature Page                                              58
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                                    PART I

Item 1.    Business.

GENERAL

     Astea International Inc. ("Astea" or the "Company") develops, markets and
supports a suite of client/server and host-based applications for the Technology
Enabled Relationship Management ("TERM") software market. Companies worldwide
are automating the ways they interact with their customers, and Astea believes
that companies in almost every industry can find competitive advantages through
the use of customer management software. Astea is currently one of a few
application vendors offering software solutions and professional services for
automating critical aspects of field service, customer support and sales and
marketing operations. Astea's products automate customer interaction functions,
improve access to customer information and facilitate the proactive satisfaction
of customer needs. Thus, the Company believes that its principal product
offerings--DISPATCH-1(TM), HEAT(TM), Abalon(TM), ServiceAlliance and V-
Service(TM)--enable organizations with field service, customer support, and
sales and marketing requirements to increase their revenue opportunities and
decrease costs, while improving customer satisfaction and building customer
loyalty. Astea's software is used by approximately 4,000 companies and
approximately 90,000 end users worldwide today.

     The Company's original product, DISPATCH-1, helps organizations with
complex and geographically dispersed field service operations automate and
manage call center operations among customers, headquarters, branch offices and
the field. The new Version 8.0 of DISPATCH-1 is Year 2000 compliant and supports
both Internet and graphical desktop interfaces as well as support for
complementary third-party products. During 1997, Astea introduced two new
service automation product offerings positioned for the mid-market and smaller
enterprises. The Company believes that its new ServiceAlliance and V-Service
products formed will reduce implementation complexity of the Company's solutions
by taking advantage of client/server and web technologies. With these new
offerings, the Company has broadened the potential market for its service
automation products beyond its traditional enterprise customers. Through its
Bendata, Inc. subsidiary, the Company also offers the HEAT family of software
applications, which provides a number of products for the help desk automation
market. The Abalon Customer Management Solution(TM) ("Abalon") is a
client/server, object-oriented software package for sales and marketing
automation. Acquired with the Company's purchase of Swedish-based Astea
International AB (formerly Abalon AB) in 1996, this customer management solution
provides a suite of modular applications built around a central customer
database. To implement its products, Astea also provides its clients with an
array of professional consulting services and a wide range of training and
customer support services.

     Astea's products are flexible to meet clients' changing computing and
business needs; generally scalable to address the needs of both small, rapidly
growing and large, multinational organizations; and modular to accommodate
growth within the enterprise so that a solution can be implemented in phases and
expanded as required. The Company's products are platform independent, using
popular client/server environments, multiple hardware platforms and operating
systems such as DOS, Windows, Windows NT, UNIX, VMS, Open VMS and OSF, depending
on the product. Astea's products operate across a number of relational database
management systems including, depending on the Astea software, those from
Oracle, Progress, Sybase, Informix, Microsoft Sequel Server and WATCOM, and they
are deployed on local and wide-area networks with the ability to utilize
multiple communications protocols.  The Company markets its products both
domestically and internationally through offices in the United States and
overseas, as well as through value added resellers and system integrators.

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Products

     The Company's products include ServiceAlliance, DISPATCH-1, the Heat
family of products, Abalon, PowerHelp, and V-Service, which provided 2%, 49%,
34%, 13%, 2%,  and 0%, respectively, of the Company's software license,
maintenance and service revenues in 1997.

ServiceAlliance

     In August 1997, Astea announced the release of ServiceAlliance, a new
client/server-based field service management software solution targeted toward
smaller companies, which draws on the best practices and functionality of
Astea's DISPATCH-1, the industry's leading customer service application. The
Company is encouraged by the initial market acceptance of ServiceAlliance, which
is being implemented in businesses worldwide. See "Certain Factors that May
Affect Future ResultsUncertain Market Acceptance of ServiceAlliance and Abalon;
Continued Dependence on DISPATCH-1 as Principal Product." ServiceAlliance is a
quickly implemented software solution that can easily be configured to reflect
the way service organizations actually run their businesses. ServiceAlliance
provides a universal view of customer information, which facilitates the
tracking and management of customers anywhere in the customer life cycle. Key
elements in the customer life cycle that the product supports include: customer
and helpdesk order requests, service orders, customer support for third-party
databases, a price book, contracts, sales orders, repair orders and logistics
from the time of request through allocation and shipment.

     ServiceAlliance is a centralized request management system that enables
users to  receive, manage and close complex requests from within a single
module. Multiple orders can be tracked under a single customer request number.
Support for mixed request types under a single customer request allows the
inclusion of items for different action groups (service, help desk, repair,
sales order, or tickler) under a single call. This improves the quality of
customer interaction with a single access point for all their service needs.
The integration of the logistics module with the customer request module
provides the ability to update the status of customer requests as services are
performed. This maintains the customer status automatically, eliminating
confusion regarding call status.  ServiceAlliance can be deployed rapidly. The
system allows changes in the presentation of information, the business rules, or
the underlying processes of a business.  Screen graphics for every service
function have a consistent look to accelerate user familiarity.  Integration
lets users move from one step to another with maximum efficiency and minimum
chance of error. Source code modifications are generally unnecessary.

     ServiceAlliance was designed to interface with the "best of breed"
products for paging, search engines, case-based reasoning, computer telephony
integration, electronic mail and Internet tools. ActiveX automation makes it
easy to connect to other applications that conform to that standard. Supported
environments include: ClientsWindows 95 and Windows NTNetworksTCP/IP, Windows
NT, NetBUEI, and Novell (SPX/IPX).  ServiceAlliance operates with Oracle,
Sybase, MS SQL Server and SQL Anywhere databases.

DISPATCH-1

     Introduced in 1986 as the Company's original standard product,
DISPATCH-1 incorporates years of industry experience and is targeted toward
larger companies such as the Fortune 1,000. It automates critical field service
operations and distributes customer, product and technical information ranging
from field service, depot repair and logistics to finance and contract
administration. DISPATCH-1 automates a broad range of field service operations,
allowing a client to track information relevant to customer accounts. DISPATCH-1
has been licensed by more than 400 clients worldwide since its introduction. In
1997, approximately 49% of the Company's total revenues derived from license,
maintenance and professional service fees related to

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DISPATCH-1. See "Certain Factors that May Affect Future Results--Uncertain
Market Acceptance of ServiceAlliance and Abalon; Continued Dependence on
DISPATCH-1 as Principal Product."

     DISPATCH-1 has more than 30 core operational modules, which allow call
center operations to open and track service requests, identify contractual
obligations, generate new sales opportunities, diagnose problems and analyze the
appropriate field resources required to address the problem. Spare parts
inventory needed for on-site, in-house or third-party repairs is managed from
requisition through purchasing, receiving and shipping. Repairs made to parts
and components returned from the field are tracked through the product's depot
operations capabilities. Integrated financial modules capture cost and revenue
information throughout the life of the customer interaction. Product performance
and failure information also can be captured and shared with engineering,
quality and manufacturing departments to deliver improvements in quality
control, design and production. With Version 8.0, released in December 1997, the
functionality of DISPATCH-1 became even more comprehensive. The new release
provides users with easy-to-use interface choices, Year 2000 compliance,
enhanced contracts administration and service order management functionality.
Users can now use the system from virtually any type of interface over the
Internet, with a personal computer or with traditional terminals. Users can
interface with their data with one or all of these interfaces simultaneously.
Each of the interfaces provides similar screens and may be used separately or in
any combination. A new desktop interface provides a Microsoft Windows interface
to DISPATCH-1. With this familiar point-and-click interface, links and icons can
be added to automate access to key DISPATCH-1 functions. The event-driven, thin
display client is optimized to perform well in both LAN and WAN environments.
Remote users, again, can access all features of DISPATCH-1 through the Internet,
a corporate LAN/WAN and through direct modem connections.

     DISPATCH-1's remote access modules, REMOTE-1, Manager's Window and Customer
Access, address the specific processing needs of field technicians, their
managers and the client's customers. Using Astea's REMOTE-1 module, mobile field
technicians have direct access to critical customer service information via
wireline networks, ensuring that required equipment and parts are obtained
before traveling to the customer site. Manager's Window enables field managers
to gain access to and assess a technician's progress, help troubleshoot problems
and reassign resources to address workload requirements as new customer
priorities arise. Customer Access allows an organization's customers to connect
directly to DISPATCH-1 to initiate service requests, place parts orders and
track the service provider's progress on service calls, streamlining the call
center administration process and further strengthening the client's
relationship with the customer.  Astea has also developed decision support
modules to further automate and decentralize the decision-making capabilities
offered by DISPATCH-1.  In April 1997, Astea introduced DISPATCH-1 WebView,
which provides access to all DISPATCH-1 functionality, using Web browsers such
as Netscape Navigator 3.0 and above or Microsoft Internet Explorer 3.0 and above
on PC or Macintosh computers.  This is of particular benefit to companies moving
to a "thin-client" Internet approach to enterprise-wide applications. Remote
users can access all features of DISPATCH-1's 30 modules through the Internet, a
corporate LAN/WAN and through direct modem connections.

     DISPATCH-1 is available on UNIX, VMS and Open VMS operating systems and
operates with Oracle and Progress database management systems.

HEAT Products

     Originally introduced by the Company's Bendata subsidiary in December 1990,
HEAT is a fully customizable software solution for automating an organization's
help desk system without the need for extensive programming.  The HEAT solution
employs client/server databases to assist end-users and help desk agents to
resolve problems and answer questions, log and manage calls to the help desk,
automate alert conditions, manage workflow, improve tracking and comprehension
of trends in help desk activity and coordinate the overall problem resolution
process.  The HEAT products are designed to be customizable and

                                       5
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easy to use, without the need for programming. Non-technical users can modify
field descriptions, add and define new fields, adjust layout design, and create
new tables.

     HEAT customers can distribute and access knowledge bases of problem
resolutions via an expert problem solving tool, First Level Support.  Customers
of HEAT can also use the HEAT add-on products, which provide help desk
integration with popular third-party applications.  Such applications include
HEAT Workgroup Asset Manager (which offers true asset management functionality
to the workgroup market allowing customers to measure the total cost of
ownership of their equipment) and HEAT Telephony Manager (which provides an
integration between HEAT and the PBX phone system to allow HEAT screen pops when
a call is received).

     HEATWeb is a flexible and secure application for extending help desk
support services to the Internet and Intranet. Customers and help desk agents
can use HEATWeb to more quickly resolve issues using a standard Web browser.
With HEATWeb, remote help desk technicians can acknowledge, resolve, and assign
critical call information. The Internet user can also search knowledge solutions
exported from the First Level Support module in HEAT.

     Bendata's Support Management Signature Series product is a set of
integrated software tools that focuses specifically on support center management
and planning activities.  It combines an extensive, built-in knowledge base of
proven management practices with structured, customizable design templates.
This tool simplifies the development of process flows, service level agreements,
job descriptions, workforce forecasting, budgeting, and many other essential
elements of support center management.

     Bendata's family of HEAT products are scalable, enabling customers to
operate under a number of environments. These products are written in C++ and
adhere to open standards employing native ODBC (open database compliant)
implementation to provide compatibility with a broad range of databases. HEAT is
available on 16 bit and 32 bit Windows operating systems and operates with
Microsoft Access, Microsoft SQL Server, Sybase SQL Anywhere, Oracle, Informix
and other leading relational database management.

Abalon

     Abalon is a scalable, modular, object oriented, client/server-based,
integrated software product that enables companies to coordinate activities
ranging from marketing programs to telemarketing and telesales, field sales
activities, customer training and customer support. Originating in Sweden,
Abalon was introduced in North America in 1997.  Abalon provides a suite of
integrated, modular applications built around a central database.  These
applications can be used as stand-alone departmental systems or integrated into
an enterprise-wide solution.  Abalon Base is a central repository for
information gathered about prospects, customers, business partners, competitors
and suppliers.  Abalon Marketing provides a set of advanced tools that identify
and target specific market segments for the purpose of planning, promotions, or
telemarketing. Abalon Sales is a tool for both the individual salesperson and
the sales manager designed to reduce time spent on administrative chores. Abalon
Project keeps track of actual time and resources expended during the sales
implementation process. Abalon Tele is a system for telemarketing and telesales
that is integrated with other Abalon modules to better coordinate and execute
call-center oriented projects with scripting and call management functionality
ranging from market research to sales proposals to support calls. Abalon Mobile
offers a portable sales system for the traveling professional. Abalon Intranet
and Internet Integration uses Abalon as a World Wide Web server. And Abalon
Course Booking tracks and manages training and seminar programs and Customer
Agreements for referencing and tracking customer contracts online.

     Abalon is written in C++ and adheres to open standards. Abalon is available
on major operating systems such as Windows, Windows NT and UNIX, and operates
with Oracle, Informix and Sybase relational database management systems.
Microsoft SQL Server and other database products are supported via ODBC.

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The Virtual Service Corporation

     In October 1997, Astea announced the formation of Virtual Service
Corporation ("VSC"). VSC is currently a wholly-owned subsidiary of the Company;
pursuant to a joint development agreement, Mitsubishi Electronics America, Inc.
has agreed to provide technology and other support to VSC and, in exchange, is
represented on VSC's board of directors and has the option to acquire an
ownership interest in VSC not greater than 50%, depending on certain
circumstances.

     VSC's product, V-Service, is a "virtual" service bureau that provides for
the full deployment of DISPATCH-1 through the Internet, on a highly secure,
time-share basis. V-Service provides access to the software and to each
customer's database for a monthly service fee, which includes customer support.
Both the hardware and software are maintained at VSC's facility in Horsham,
Pennsylvania. The Company believes V-Service greatly reduces the customers' need
to invest in hardware, software and networking, and that it is unique in the
field service management software market. V-Service also permits quicker
implementation and more flexible deployment, with fewer infrastructure
limitations, than traditional software offerings.

PowerHelp

     In conjunction with the Company's restructuring during the first quarter of
1997, the Company is no longer directly marketing the PowerHelp product.  In
July 1997, the Company granted all of its North American distribution rights in
its PowerHelp product to Vertical Solutions, Inc. ("VSI"), a system integrator
and reseller based in Cincinnati, Ohio, for a period of two years.   VSI also
assumed responsibility for the technical support of the Company's existing
PowerHelp customers in North America, and VSI is authorized to make
modifications and enhancements to the PowerHelp product.

PROFESSIONAL SERVICES AND CUSTOMER SUPPORT SERVICES

     Astea offers a range of specialized professional and customer support
services to assist its clients in using its products effectively. These services
include business process consulting, implementation planning, project
management, customization, education and training, technical support and ongoing
software maintenance. Astea believes that its professional services capabilities
allow its clients to deploy the Company's products quickly and efficiently.
Together, professional services and customer support comprised 59% of the
Company's total revenues in 1997, compared to 54% in 1996.

Professional Services

     As of December 31, 1997, the professional services group consisted of 252
professional services personnel headquartered in three offices in the United
States and seven offices internationally: in the United Kingdom, the
Netherlands, Sweden, Israel, Australia and New Zealand. Of the Company's 252
professional services personnel, 141 representatives are based in domestic
offices while the remaining 111 representatives are based overseas. The initial
professional services engagement usually lasts between six and 18 months for
DISPATCH-1 and less for the other application. For some of Astea's largest
clients, dedicated, global project teams are created to work exclusively with
these clients. In the case of smaller clients or more discrete projects,
appropriate teams are assembled from the Company's worldwide offices to perform
the required services. Due to the more complex nature of Astea's DISPATCH-1 and
Abalon offerings, customers that license these programs purchase a higher volume
of professional services than customers of HEAT products, ServiceAlliance and V-
Service.

     Astea's typical professional services engagement includes planning,
prototyping and implementation of Astea's products within the client's
organization. During the initial planning phase of the engagement, Astea's

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professional services personnel work closely with representatives of the client
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 client's
organization. The next, most critical phase of the Astea professional services
personnel engagement is the prototyping phase, in which Astea works closely with
representatives of the client to configure Astea's software functionality to the
client's specific business process requirements. During the prototyping phase,
Astea's professional services personnel design the technology infrastructure,
define and document business processes and establish the order of product
deployment. The critical element of the prototyping phase is a detailed analysis
of the client's business processes and needs. The final 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, product customizations and other technical and
business processes necessary to integrate Astea's software into the client's
computing environment. Ultimately, education plans are developed and executed to
provide the client with the process and system knowledge necessary to
effectively utilize the software and fully implement the Astea solution.
Professional services are charged on an hourly or per diem basis and are billed,
pursuant to customer work orders, usually on a monthly basis.

Customer Support

     The Company's customer support group provides Astea's clients with
telephone and on-line technical support, as well as product enhancements,
updates, new releases and corrections. Astea's customer support group is
deployed to provide support for Astea's clients in all regions of Astea's
worldwide operations, providing local client representatives with real-time
support usually spoken in their native languages by Astea and distributor
personnel familiar with local business customs and practices. Typically,
customer support fees are established as a fixed percentage of license fees and
are invoiced to clients on an annual basis after the conclusion of the warranty
period, which is normally 90 days. Astea's customer support representatives are
located in three offices in the United States and five offices in Europe and
Australia. As of December 31, 1997, the Company's worldwide customer support
group consisted of 90 representatives, 42 located in the United States and 48
based internationally.

CUSTOMERS

     The Company estimates that it has approximately 4,000 customers,
representing more than 90,000 end-users. Astea's customers range from small,
rapidly growing companies to large, multinational corporations with
geographically dispersed operations and remote offices. 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
telecommunications, computers and electronics, office equipment, and third-party
service and support organizations.

     In 1997 and 1996, no customer accounted for 10% or more of the Company's
revenues. In 1995, the Company had one customer that accounted for approximately
19% of revenues.

SALES AND MARKETING

     Astea markets its products and services through a multi-tiered sales
structure comprised of direct sales and telesales operations, and through
relationships with value-added resellers ("VARs") and international
distributors. The Company's sales organization consisted of 63 personnel on
December 31, 1997 (which excludes sales management, administration and support
personnel), complemented by a coordinated marketing effort of the Company's
marketing group, which consisted of 31 personnel on December 31, 1997. See
"Certain Factors that May Affect Future ResultsNeed to Increase Sales Force and
Expand Indirect Sales."

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     Astea's direct sales force of 63 personnel employs a telesales process for
HEAT products, a hybrid approach to selling ServiceAlliance and Abalon, and a
consultative sales process for other products, working closely with prospective
clients to understand and define their customers' 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 TERM software market. A prospect
development organization comprised of telemarketing representatives develops and
qualifies sales leads prior to referral to the direct sales staff. See "Certain
Factors that May Affect Future Results--Continued Dependence on Large Contracts
May Result in Lengthy Sales and Implementation Cycles." 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.

     The Company's telesales channel targets low- to mid-market opportunities
and is the principal channel of distribution for the HEAT products. For domestic
sales, Astea's telesales operation employs several account management teams
consisting of one account representative and one account executive. The account
representatives qualify leads generated by marketing activities. The account
executives provide telephone demonstrations, present the Company's support and
help desk products at local seminars, conduct site visits and close qualified
leads generated by the account representatives.

     The Abalon product is currently sold and marketed in United States, Central
Europe and Scandinavia through a direct sales channel. In Scandinavia, where
Abalon is a dominant vendor, the organization is vertically focused on market
segments such as telecommunications, financial services, manufacturing, and
construction management.  In other regions, the organization is still more
geographically focused. During 1997 a number of partners have signed partnership
agreements and trained their employees to resell the Abalon product.

     Astea's marketing department is responsible for lead generation and product
and professional services marketing, and the department provides input into the
Company's ongoing product development efforts based on client feedback and
market data. Leads developed from marketing are routed through Abalon, the
Company's sales automation system. The Company also participates in an annual
conference organized and sponsored by ADONUS, an independent user group
comprised of Astea's DISPATCH-1 and PowerHelp clients. Conference participants
attend training sessions, workshops and presentations, and interact with other
Astea product users and Astea management and staff, providing important input
for future product direction.

     Astea's international sales continued to increase in 1997, accounting for
37% of the Company's revenues in 1997, 32% in 1996 and 21% in 1995. 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 are easy
to use and implement. Its 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 also is designed to be both platform and hardware
independent, using popular client/server environments, multiple hardware
platforms and operating systems. To accomplish these goals, the Company uses
widely accepted, commercially available application development tools from
Progress Software Corporation, Sybase, Inc. and Microsoft Corporation. These
software tools provide the Company's clients with the flexibility to deploy
Astea's products across a variety of hardware platforms, operating systems,
client/server configurations and relational database management systems.

     As of December 31, 1997, the Company's product development staff consisted
of 117 employees. The Company's total expenses for product development for the
years ended December 31, 1997, 1996 and 1995 were $10,273,000, $7,989,000 and
$4,178,000, respectively. These expenses represented 17%, 13% and 8% of

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total revenues for 1997, 1996 and 1995, respectively. In addition, the Company
capitalized software development costs of $950,000, $1,858,000 and $957,000 in
1997, 1996 and 1995, respectively. The Company anticipates that it will continue
to commit substantial resources to product development in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 hereof and "Certain Factors that May Affect Future
Results--Need for Development of New Products."

MANUFACTURING

     The Company's software products are distributed on standard magnetic disks,
tapes and CD ROMs. Included with the software products are security keys and
documentation available on CD ROM and in print. Historically, the Company has
purchased diskettes, tapes, and duplicating and printing services from outside
vendors. The Company has been able to obtain adequate supplies of all components
and materials in a timely manner from existing and alternate sources of supply.

COMPETITION

     The TERM 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 expand its professional services capabilities. The
Company currently competes on the basis of the breadth of its product features
and functions, including the adaptability and scalability of its products and
their enablement with other client/server products; the ability to deploy
complex systems both locally and internationally; product quality, ease-of-use,
reliability and performance; breadth of professional services; integration of
Astea's offerings with other enterprise and client/server applications; price;
and the availability of Astea's products on popular operating systems,
relational databases, the Internet and communications platforms.

     Competitors vary in size, scope and breadth of the products and services
offered. The Company encounters competition generally from a number of sources,
including other software companies, third-party professional services
organizations that develop custom software, and management information systems
departments of potential customers developing proprietary, custom software. The
Company's competitors include SAP AG ("SAP"), Clarify Inc. ("Clarify"), Siebel
Systems, Inc. ("Siebel"), Remedy Corp. ("Remedy"), Scopus Technology, Inc.
("Scopus"), The Vantive Corporation ("Vantive"), Metrix Corp. ("Metrix") and a
number of smaller privately-held companies which generally focus only on
discrete areas of the TERM software marketplace. In the field service
marketplace, the Company competes against publicly-held companies and numerous
smaller, privately-held companies. In the customer support and help desk
marketplace, the Company competes against a number of smaller, privately-held
and publicly-held companies as well as larger publicly-held companies with
greater resources. With the introduction of Abalon into the United States, this
product faces a variety of established competitors such as Siebel, The Baan
Company's Aurum division, Vantive and Scopus, as well as a number of smaller
companies. See "Certain Factors that May Affect Future Results--Competition in
the Technology Enabled Relationship Management Software Market Is Intense."

                                      10
<PAGE>

LICENSES AND INTELLECTUAL PROPERTY

     Astea considers its software proprietary and licenses its products to its
customers generally 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 source
code, the 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.

     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 and consultants or 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, 1997, the Company, including its subsidiaries, had a
total of 568 full time employees worldwide, 316 in the United States, 87 in
Sweden, 59 in the United Kingdom, 31 in the Netherlands, 4 in France, 38 in
Israel, 30 in Australia and 3 in New Zealand. Of the total, 129 were employed in
sales and marketing, 117 in product development, 252 in professional services
and customer support and 70 in administration and finance. As of December 31,
1997, the Company's Bendata subsidiary had a total of 182 employees, 135 in the
United States and 47 in the United Kingdom. As of December 31, 1997, the
Company's Astea International AB subsidiary had a total of 87 employees, all
located in Sweden. 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. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified personnel in the future. See "Certain Factors that May
Affect Future Results--Dependence on Key Personnel; Competition for Employees."
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.

CORPORATE HISTORY

     The Company was incorporated in Pennsylvania in 1979 under the name Applied
System Technologies, Inc., and 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.

                                      11
<PAGE>

In February 1996, the Company merged with Bendata, Inc. In June 1996, the
Company acquired Astea International AB (formerly Abalon AB).

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     UNCERTAIN MARKET ACCEPTANCE OF  SERVICEALLIANCE AND ABALON; CONTINUED
DEPENDENCE ON DISPATCH-1 AS PRINCIPAL PRODUCT.   In each of 1997, 1996 and 1995,
more than 49%, 61% and 76%, respectively, of the Company's total revenues
derived from the licensing of DISPATCH-1 and the provision 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 developed ServiceAlliance,
which it introduced in August 1997, in order to target potential customers for
which DISPATCH-1 was not cost-effective or attractive. While the Company
licensed ServiceAlliance to 10 companies with a total of 356 users worldwide in
1997, ServiceAlliance has not yet earned market acceptance. At the same time,
while the Company licensed Abalon to 50 companies with a total of more than
2,000 users worldwide in 1997, Abalon has not yet earned market acceptance in
the United States, and it has only begun to win market acceptance in Europe
outside of Scandinavia.  The Company's future success will depend in part on its
ability to continue to reduce its reliance on revenues generated by DISPATCH-1,
by increasing licenses of  ServiceAlliance, the HEAT products, the Abalon
products, V-Service and other offerings, and by developing new products and
product enhancements to complement its existing field service and customer
support offerings. The Company believes that a number of factors will determine
such acceptance, including product performance, ease of adoption, migration from
host-based to client/server computing environments, Internet connectivity and
interoperability with diverse hardware platforms, network servers, financial and
reporting applications and databases. Any failure of the Company's products to
achieve or sustain market acceptance, or of the Company to sustain its current
position in the field service, customer support and sales and marketing software
markets, 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 sustain demand for DISPATCH-1 and grow demand for ServiceAlliance, Abalon,
HEAT and V-Service, thereby avoiding future losses, or to successfully develop
any new products and product enhancements in order to increase sales of other
products and reduce its reliance on licenses of DISPATCH-1 and related
professional services revenue.

     FLUCTUATIONS IN QUARTERLY OPERATING RESULTS MAY BE SIGNIFICANT. The
Company's quarterly operating results have in the past varied significantly and
are likely to vary significantly in the future, depending on factors such as the
size and timing of revenue from significant orders, the recognition of revenue
from such orders, the timing of new product releases and market acceptance of
these new releases, increases or

                                      12
<PAGE>

other changes in operating expenses, the level of product and price competition,
and the seasonality of its business. As a result of the application of the
revenue recognition rules applicable to the Company's licenses under generally
accepted accounting principles, the Company's license revenues may be recognized
in periods after those in which the respective licenses were signed. In
addition, the Company's quarterly operating results are dependent on factors
such as budgeting cycles of its customers, customer order deferrals in
anticipation of enhancements or new products, the impact of acquisitions of
competitors, the cancellation of licenses or maintenance agreements, product
life cycles, software bugs and other product quality problems, personnel
changes, changes in Company strategy, investments to develop sales distribution
channels, changes in the level of operating expenses and general domestic and
international economic and political conditions, among others.

  In recent years, the Company has generally had stronger demand for its
products during the quarters ending in June and December and weaker demand in
the quarter ending in March. To the extent international operations constitute a
higher percentage of the Company's total revenues, the Company anticipates that
it may also experience relatively weaker demand in the quarter ending in
September. Moreover, the Company has generally recorded 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, the
Company's results of operations may vary seasonally in accordance with licensing
activity or otherwise, and will also depend upon its recognition of revenue from
such licenses from time to time. There can be no assurance that the Company will
be profitable or avoid losses in any future period, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance.

  CONTINUED DEPENDENCE ON LARGE CONTRACTS MAY RESULT IN LENGTHY SALES AND
IMPLEMENTATION CYCLES. The sale and implementation of the Company's DISPATCH-1
product generally involve a significant commitment of resources by prospective
customers.  While ServiceAlliance and Abalon require a less substantial
commitment than does DISPATCH-1, the purchase and implementation of
ServiceAlliance and Abalon also require a substantial commitment. 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. The sales cycle associated with the license of
DISPATCH-1 and Abalon varies substantially from customer to customer and
typically lasts between six and nine months, during which 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, and 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 incurrence
of costs and recognition 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.

  In addition, following the initial sale, the implementation of DISPATCH-1 (and
to a lesser extent, Abalon) typically involves several months of customer
training and integration of the product with the customer's other existing
systems. A successful implementation requires a close working relationship
between the customer and members of the Company's professional service
organization. Occasionally, delays result from a customer's inattention to the
implementation project for reasons unrelated to the Company's performance. 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. Some of the Company's customers have adopted the Company's
software on an incremental basis. There can be no assurance that the Company's
customers will

                                      13
<PAGE>

expand usage of the Company's software on an enterprise-wide basis or implement
new software products introduced by the Company. The failure of the Company's
software to perform according to customer expectations or otherwise to be
deployed on an enterprise-wide basis could have a material adverse effect on the
ability of the Company to collect revenues or to increase revenues from new as
well as existing customers. The Company believes that period-to-period
comparisons of its results of operations should not be relied upon as any
indication of future performance.

  COMPETITION IN THE TECHNOLOGY ENABLED RELATIONSHIP MANAGEMENT SOFTWARE MARKET
IS INTENSE. The TERM software market is intensely competitive. The Company's
competitors include SAP, Siebel, Clarify, Remedy, Scopus, Vantive, Metrix and a
number of smaller, privately-held companies that generally focus only on
discrete areas of the TERM software marketplace. Some of the Company's existing
and potential competitors have greater financial, technical, marketing and
distribution resources than the Company.  Moreover, the TERM industry is
currently experiencing significant consolidation, as larger public companies
seek to enter the TERM market through acquisitions. The Company expects that
competition will increase as a result of software industry consolidations. As a
result, some of the Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development and distribution of their products.

  Because the barriers to entry in the TERM software market are relatively low,
new competitors may emerge with products that are superior to the Company's
products in performance, functionality or ease-of-use, or that achieve greater
market acceptance.  Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share.  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.

  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 computing environment. 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 have sufficient resources to make the necessary investments. Also, 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.  If the Company is unable to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially adversely effected.

  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, adverse earnings or other financial announcements of the Company's
customers and general stock market conditions 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.

                                      14
<PAGE>

  RAPID TECHNOLOGICAL CHANGE. The client/server application software market is
subject to rapid technological change, frequent new product introductions and
evolving technologies and industry standards that can quickly render existing
products and services obsolete. While the Company is not aware of any emerging
products that are likely to render its existing products obsolete, there can be
no assurance that the Company's products could not suffer such obsolescence.
Because of the rapid pace of technological change in the application software
industry, the Company's current market position in field service, customer
support, sales and marketing automation or other markets that it may enter could
be eroded rapidly by product advancements. The Company's application environment
relies primarily on software development tools from Progress Software
Corporation and PowerSoft Corporation, a subsidiary of Sybase, Inc. If
alternative software development tools were to be designed and generally
accepted by the marketplace, the Company could be at a competitive disadvantage
relative to companies employing such alternative developmental tools, possibly
resulting in material harm to the Company's financial condition and results of
operation.

  BURDENS OF CUSTOMIZATION. Certain of the Company's clients request
customization of the Company's software products to address unique
characteristics of their businesses or computing environments. The Company's
commitment to customization could place a burden on the Company's client support
resources or delay the delivery or installation of products which, in turn,
could materially adversely affect the Company's relationship with significant
clients or otherwise adversely affect its 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.

  NEED TO INCREASE SALES FORCE AND EXPAND INDIRECT SALES. The Company has
historically sold its products through its direct sales force and a limited
number of distributors. The Company's ability to achieve significant revenue
growth in the future will depend in large part on its success in recruiting and
training more sales personnel and establishing relationships with distributors,
resellers and systems integrators. 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 with
certain third party distributors, resellers and systems integrators.  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, resellers or systems integrators
could have a material adverse effect on the Company's business, operating
results or financial condition. In addition, there can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels. Any failure by the Company to expand  its direct sales
force or other distribution channels would materially adversely affect the
Company's business, operating results and financial condition.

  RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA. The Company's
field service and sales and marketing software is intended for use in
enterprise-wide applications that may be critical to a customer's business. As a
result, the Company's customers and potential customers typically have demanding
requirements for installation and deployment. Software products as complex as
those offered by the Company may contain errors or failures, particularly when
software must be customized for a particular licensee, when new products are
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. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found in
software, customizations or releases after commencement of commercial shipments,
resulting in loss or delay of revenue or delay in market acceptance, diversion
of development resources or increased service and warranty costs, any of which
could have a material adverse effect upon the Company's business, operating
results and financial condition.

                                      15
<PAGE>

  RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1997, international sales
represented approximately 34% of the Company's total revenues.  In 1996,
international sales represented approximately 32% of the Company's total
revenues. In 1995, international sales represented approximately 21% of the
Company's total revenues. The Company expects that international sales will
continue to be a significant component of its business. International sales are
subject to a variety of significant risks, including difficulties in
establishing and managing international distribution channels and in translating
products into foreign languages. International operations also may encounter
difficulties in collecting accounts receivable, staffing and managing personnel
and enforcing intellectual property rights. Other factors that can also
adversely affect international operations include fluctuations in the value of
foreign currencies and currency exchange rates, changes in import/export duties
and quotas, introduction of tariff or non-tariff barriers, potentially adverse
tax consequences, possible recessionary environments in economies outside the
United States, changes in the market for business software as a result of
currency unification in Europe, and economic or political changes in
international markets. In addition, as the Company increases its international
sales, its total revenues may also be affected to a greater extent by seasonal
fluctuations resulting from lower sales that typically occur during the summer
months in Europe and other parts of the world.

  YEAR 2000 RISKS. The Company is reviewing its existing product offerings to
ensure that these offerings are adequately able to address the issues expected
to arise in connection with the upcoming change in the century.
ServiceAlliance, Abalon, the HEAT family of products, and certain recent
releases of DISPATCH-1 are designed to accurately calculate, compare and
sequence date and time data between the twentieth and twenty-first centuries.
The Company has implemented plans and timetables for modifying or phasing out
the remainder of its products (older versions of DISPATCH-1) that are not
currently able to calculate, compare and sequence all date and time data between
the twentieth and twenty-first centuries.  The Company regularly provides its
customers with current information on the status of these development efforts.
There can be no assurance, however, that the Company will successfully complete
this development in the published timeframes. In addition, the Company has not
fully determined the extent to which the Company's products may be impacted by
third parties' systems, which may not be "Year 2000" compliant.  While the
Company has begun efforts to seek reassurance from its suppliers, there can be
no assurance that the systems of other companies which the Company deals with or
on which the Company's systems rely will be timely converted, or that any such
failure to convert by another company could not have an adverse effect on the
Company.  Moreover, the law regarding liability for "Year 2000" problems is
evolving rapidly and could become more friendly to users of software with
alleged "Year 2000" deficiencies. The Company limits its contractual warrantees
on "Year 2000" compliance to objective performance standards that the Company
has tested, and the Company makes no warrantees for nonconformance if the
Company's software products are combined with other software or data that are
not conducive to accurately calculating, comparing or sequencing date and time
data between the twentieth and twenty-first centuries. Nonetheless, there can be
no assurance that some of the Company's customers will not assert legal claims
against the Company based on "Year 2000" theories of liability.  While the
Company believes that such claims would be precluded by its contracts, if such a
claim were upheld in court, the resulting expense to the Company and diversion
of management and development time could have a material, adverse effect on the
Company's operations and financial condition.

  DEPENDENCE ON KEY PERSONNEL; COMPETITION FOR EMPLOYEES. The future success of
the Company will depend in large part on its ability to attract and retain
talented and qualified employees, including skilled management personnel.  The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for key personnel is intense, particularly so in recent years. From time to time
the Company has experienced difficulty in recruiting 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. The inability of the Company to hire talented personnel or the loss of
key employees could have a material adverse effect on the Company's business and
results of operations.

                                      16
<PAGE>

  CONCENTRATION OF OWNERSHIP. Zack B. Bergreen, the Company's Chairman and Chief
Executive Officer, as of December 31, 1997, beneficially owned more than 50% 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, under
certain circumstances, 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.

  RISKS OF DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is
heavily dependent upon proprietary technology. The Company's products are
licensed to customers under signed 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 secret, copyright and trademark laws and non-disclosure agreements to
protect its proprietary rights in its products and technology. 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. In addition,
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. There can be no
assurance that measures taken by the Company will be adequate to protect the
Company's proprietary technology. In addition, there can be no assurance that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies. In addition,
although the Company believes that its products and technologies do not infringe
on any existing proprietary rights of others, and although there are no pending
lawsuits against the Company regarding infringement of any existing patents or
other intellectual property rights or any notices that the Company is infringing
the intellectual property rights of others, there can be no assurance that such
infringement claims will not be asserted by third parties in the future. Any
such situations can have a material adverse effect on the Company's business and
results of operations.

  POSSIBLE PRODUCT LIABILITY. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective under the laws of certain jurisdictions. The sale and
support of products by the Company may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in the
future. A successful product liability claim brought against the Company could
have a material adverse effect on the Company's business, operating results and
financial condition.

ITEM 2.   PROPERTIES.

  The Company's headquarters are located in a leased facility of approximately
51,500 square feet in Horsham, Pennsylvania. The Company also leases facilities
for operational activities in Bedford, Massachusetts; Colorado Springs,
Colorado; Houten, the Netherlands; Bromma, Sweden; and Tefen, Israel; and for
sales and customer support activities in  Swindon, England; St. Leonards,
Australia; Auckland, New Zealand; and Gothenburg, Sweden. The Company believes
that suitable additional or alternative office space will be available in the
future on commercially reasonable terms as needed.

ITEM 3.   LEGAL PROCEEDINGS.

  From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In addition,
since the Company enters into a number of large contracts requiring the complex
installation of software products and the implementation of considerable
professional

                                      17
<PAGE>

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 product requirements
that were not anticipated at the commencement of the project. These
deliberations sometimes result in changes in services required, upward or
downward price adjustments, or reworking of contract terms. The Company from
time to time will reserve funds for contingencies under contract deliberations.
The Company is 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. See
Note 16 of the Notes to the Consolidated Financial Statements.

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:

<TABLE>
<CAPTION>
         1996:                                    High           Low
                                               -----------  --------------
         <S>                                   <C>          <C>
         First quarter                              $29.50          $21.00
         Second quarter                              29.75           23.75
         Third quarter                               24.25            5.00
         Fourth quarter                               8.38            4.88

         1997:
         First quarter                                6.38            3.89
         Second quarter                               3.75            1.94
         Third quarter                                3.19            2.38
         Fourth quarter                               2.94            1.75
</TABLE>

  As of March 20, 1998, there were approximately 93 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 3,000 on such date.) On March 20, 1998,
the last reported sale price of the Common Stock on the Nasdaq National Market
was $3.25 per share.

  From its inception in 1979 to July 27, 1995, the Company elected to be treated
as an S corporation for Federal and state income tax purposes.  In connection
with the initial public offering of its Common Stock, the Company terminated its
election to be treated as an S corporation on July 27, 1995.  The Company paid
an aggregate of $1,979,000 and $8,296,000 of cash dividends and distributions in
1996 and 1995, respectively, to Zack B. Bergreen, the sole stockholder of the
Company prior to the initial public offering, principally representing the
remaining amount of the Company's previously taxed but undistributed S
corporation earnings. The Company does not presently intend to declare a cash
dividend on the Common Stock in the foreseeable future and expects to retain
future earnings to fund the development and growth of its business.

                                      18
<PAGE>

  As of December 31, 1997, the Company has used $37,312,000 of the $42,057,000
net proceeds from its initial public offering of common stock.  The use of
proceeds includes $9,952,000 for the acquisition of Astea International AB,
$3,416,000 for expenses incurred in connection with the merger with Bendata,
Inc., $7,779,000 of S corporation distributions paid to the majority
stockholder, $6,150,000 for purchases and installation of property and
equipment, $1,359,000 of temporary investments, $1,542,000 for repayment of
indebtedness and $7,114,000 of working capital for product development
activities and general operations.

                                      19
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
Years ended December 31,                        1997        1996      1995      1994     1993
----------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S>                                           <C>        <C>        <C>       <C>      <C>
STATEMENT OF OPERATIONS
 DATA:(1)
Revenues:
    Software license fees..................   $ 24,777   $ 28,857   $29,904   $15,532  $ 6,179
    Services and maintenance...............     36,157     33,851    24,062    11,815    8,414
                                              ------------------------------------------------
      Total revenues.......................     60,934     62,708    53,966    27,347   14,593
                                              ------------------------------------------------

Cost and expenses:
    Cost of software license fees (2)......      4,702      3,982     3,880     1,807      876
    Cost of services and maintenance.......     23,949     23,477    16,198     7,603    5,219
    Product development....................     10,273      7,989     4,178     2,677    1,584
    Sales and marketing....................     21,196     22,390    14,902     8,277    3,004
    General and administrative (3).........     13,953      9,535     6,357     3,659    2,642
    Restructuring charge (4)...............      5,328          -         -         -        -
    Expenses related to Bendata merger
      transaction (5)......................          -      3,416         -         -        -
    Charge for purchased research and
      development (6)......................          -     13,810         -         -        -
                                              ------------------------------------------------
      Total costs and expenses.............     79,401     84,599    45,515    24,023   13,325
Income (loss) from operations..............    (18,467)   (21,891)    8,451     3,324    1,268
Net interest expense  (income).............         15       (571)     (179)      408      231
                                              ------------------------------------------------
Income (loss) before income taxes..........    (18,482)   (21,320)    8,630     2,916    1,037
Provision (benefit) for income taxes(7)....         12     (1,613)    1,883        49       16
                                              ------------------------------------------------
Net income (loss)..........................   $(18,494)  $(19,707)  $ 6,747   $ 2,867  $ 1,021
                                              ================================================

Basic earnings (loss) per share............   $  (1.40)  $  (1.53)  $  0.64   $  0.32  $  0.13
Diluted earnings (loss) per share..........   $  (1.40)  $  (1.53)  $  0.59   $  0.30  $  0.13
Shares used in computing basic
 earnings (loss) per share.................     13,252     12,844    10,514     9,100    7,600
Shares used in computing diluted
 earnings (loss) per share.................     13,252     12,844    11,484     9,539    7,926

Pro Forma Data:
    Historical income (loss) before
      income taxes.........................              $(21,320)  $ 8,630   $ 2,916  $ 1,037
    Pro forma income taxes (benefit)(2)....                (2,082)    3,452     1,133      308
                                                         -------------------------------------
    Pro forma net income (loss)............              $(19,238)  $ 5,178   $ 1,783  $   729
                                                         -------------------------------------
    Pro forma basic earnings (loss)
      per share............................              $  (1.50)  $  0.49   $  0.20  $  0.10
                                                         =====================================
    Pro forma diluted earnings (loss)
      per share............................              $  (1.50)  $  0.45   $  0.19  $  0.09
                                                         =====================================
BALANCE SHEET DATA:(1)
Working capital............................   $  7,800   $ 20,760   $40,732   $ 2,745  $ 1,489
Total assets...............................     41,773     57,691    69,370    22,481   13,350
Long-term debt, less
 current portion...........................      1,636      3,708     2,532     2,913    2,628
Retained earnings (deficit)................    (35,502)   (17,008)    2,699     4,963    2,096
Total stockholders' equity.................     13,429     31,617    47,920     6,368    2,587
</TABLE>

                                      20
<PAGE>

(1)  In February 1996, the Company completed the merger of Bendata. This
     transaction was accounted as a pooling of interests. Hence, the financial
     position and results of operations of the Company and Bendata are combined
     in 1996 and all prior periods are restated to give the effect to the
     merger.  See Note 4 of the Notes to the Consolidated Financial Statements.
     In February 1995, the Company acquired Astea BV and in June 1996, the
     Company acquired Astea International AB (formerly Abalon AB).  These
     acquisitions were accounted for as purchases.  Hence, the results of
     operations after the acquisition date are included in the statement of
     operations data.  See Note 5 of the Notes to the Consolidated Financial
     Statements.
(2)  Included in cost of software license fees in the first quarter of 1997 is a
     write-off of $453,000 of capitalized software development costs related to
     the Company's support automation product, PowerHelp, and to older versions
     of certain service automation modules which are no longer marketed by the
     Company.  See Note 6 of the Notes to the Consolidated Financial Statements.
(3)  As a result of the restructuring, during the first quarter of 1997, the
     Company recorded a goodwill impairment charge of $2,058,000 which is
     included in general and administrative expense. This charge related to the
     1995 acquisition of Astea BV.  See Note 6 of the Notes to the Consolidated
     Financial Statements.
(4)  Included in the first quarter of 1997 is a restructuring charge of
     $5,328,000 which includes severance costs, office closing costs and other
     consolidation costs.  See Note 6 of the Notes to the Consolidated Financial
     Statements.
(5)  In connection with the Bendata merger, $3,416,000 of merger expenses
     ($2,609,000 after-tax) were incurred and charged to expense in the first
     quarter of 1996.  The Bendata merger expenses consisted of bonus payments
     made to Bendata non-shareholder employees, as well as legal, accounting and
     investment banking fees.  See Note 4 of the Notes to the Consolidated
     Financial Statements.
(6)  In connection with the acquisition of Astea International AB, the Company
     recorded a one-time charge of $13,810,000 related to the fair value of in
     process research and development.  See Note 5 of the Notes to the
     Consolidated Financial Statements.
(7)  Until July 1995, Astea had operated as a S corporation for income tax
     purposes since its inception in 1979; and until February 1996, Bendata,
     Inc. and Bendata UK had operated as a S corporation and a partnership,
     respectively.  Therefore, the historical financial statements before
     conversion to C corporation do not include a provision for federal and
     state income taxes for such years, except for certain state income taxes
     imposed at the corporate level. Pro forma net income has been computed as
     if the Company had been fully subject to federal and state income taxes
     based on the tax laws in effect during the respective years.   See Note 3
     of the Notes to the Consolidated Financial Statements.

                                      21
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

OVERVIEW

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

  The Company develops, licenses, implements and supports a suite of
client/server and host-based applications for the Technology Enabled
Relationship Management ("TERM") Software Market that permit organizations of
various sizes across a wide range of industries to automate field service,
customer support and sales and marketing functions. The Company maintains
operations in the United States, Australia, New Zealand, the Netherlands,
France, the United Kingdom, Sweden and Israel.

  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, customization, implementation, training and
maintenance related to those products.

  Software license fees, which accounted for 41% of the Company's total revenues
in 1997, consist of license fees for the Company's products. Software license
fee revenues also include some fees from the sublicensing of third-party
software, primarily consisting of relational database licenses constituting an
integral part of the Company's products. Typically, customers pay a license fee
for the software based on the number of licensed users and modules licensed. The
Company's pricing is structured so that the licensing of a greater number of
users within a customer's organization results in a decreasing per-user cost to
that customer. Thus, pricing varies both with the number of users and type and
number of modules licensed. 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
delivery or if the product is subject to customer acceptance, revenue is
deferred until no significant obligations remain or acceptance has occurred.

  The second 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, to a lesser extent,
maintenance fees for ongoing customer support, primarily external customer
technical support services and product enhancements. Professional services are
charged on an hourly or per diem basis and billed monthly pursuant to customer
work orders. Training services are 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. Annual 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 upon the expiration of the warranty period,
is recognized ratably over the term of the agreement, which is usually twelve
months.

  The Company's 1997, 1996 and 1995 financial results include the results of
Bendata, Inc. ("Bendata") which Astea acquired by merger in February 1996 and
was accounted for as a pooling of interests. See Note 4 of the Notes to the
Consolidated Financial Statements. Astea's 1996 financial results include the
July to December results of Astea International AB (formerly Abalon AB), which
Astea acquired in June 1996 and accounted for as a purchase transaction. See
Note 5 of the Notes to the Consolidated Financial Statements.

                                      22
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Years ended December 31,                     1997          1996           1995
-------------------------------------------------------------------------------
<S>                                      <C>               <C>            <C>
Revenues:
    Software license fees                     40.7%          46.0%         55.4%
    Services and maintenance                  59.3           54.0          44.6
                                         --------------------------------------
        Total revenues                       100.0          100.0         100.0
                                         --------------------------------------
Costs and expenses:
   Cost of software license fees               7.7%           6.4%          7.2%
   Cost of services and maintenance           39.3           37.4          30.0
   Product development                        16.9           12.7           7.7
   Sales and marketing                        34.8           35.7          27.6
   General and administrative                 22.9           15.2          11.8
   Restructuring charge                        8.7              -             -
   Expenses related to Bendata
        merger transaction                       -            5.5             -
   Charges for purchased in process
        research and development                 -           22.0             -
                                         --------------------------------------
        Total costs and expenses             130.3%         134.9%         84.3%
                                         --------------------------------------
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

     Revenues.  Total revenues decreased 3% to $60,934,000 in 1997 from
$62,708,000 in 1996. Revenues were generated from Astea's three product lines:
Service Automation  (DISPATCH-1, ServiceAlliance and V-Service), Support
Automation (HEAT and PowerHelp) and Sales Automation (Abalon).   Within these
product lines,  Service Automation realized a decline in total revenues of 19%,
or $7,066,000, to $30,872,000 in 1997 from $37,938,000 in 1996.   This decline
was offset by increased Support Automation and Sales Automation revenues.
Support automation revenues increased 8%, or $1,686,000, to $22,224,000 in 1997
from $20,538,000 in 1996, resulting from the HEAT product revenue increases
offset by decreases in  PowerHelp product revenue.  Sales Automation revenues
increased $3,606,000 to $7,838,000 in 1997 from $4,232,000 in the last six
months of 1996.  The Sales Automation product line was acquired in June 1996.

     Software license fee revenues decreased 14%, or $4,080,000, to $24,777,000
in 1997 from $28,857,000 in 1996. The decrease primarily relates to decreases in
license revenues from DISPATCH-1 within the Service Automation product line and
from PowerHelp within the Support Automation product line, resulting from a
decreasing demand for these products. Service Automation software license
revenues decreased 32%, or $4,035,000, to $8,480,000 in 1997 from $12,515,000 in
1996. In August 1997, the Company added ServiceAlliance to its Service
Automation product line. In 1997, the Company recorded ServiceAlliance license
revenue of $928,000. PowerHelp license revenues decreased $2,637,000, to
$733,000 in 1997 from $3,370,000 in 1996. Offsetting these decreases was an
increase in HEAT license revenue in the Support Automation product line and
license revenue in the Sales Automation product line. HEAT software license
revenues increased 10%, or $1,068,000, to $12,105,000 in 1997 from $11,037,000
in 1996. This increase reflects the expansion of the customer help desk market
and the increased acceptance of the Company's HEAT product. Sales Automation
software license revenues were $3,459,000 in 1997 compared to $1,935,000 in the
second half of 1996.

                                      23
<PAGE>

     Services and maintenance revenues increased 7%, or $2,306,000, to
$36,157,000 in 1997 from $33,851,000 in 1996. Increases were realized in Support
Automation and Sales Automation amounting to $3,178,000 and $2,081,000,
respectively. These increases are offset by a $2,953,000 decrease in service and
maintenance revenues from Service Automation. The increase in service and
maintenance revenues is attributable to the expansion of the Company's installed
base and a full year of marketing the Sales Automation product, which was
acquired in June 1996.

     In 1997 and 1996, none of the Company's customers accounted for more than
10% of total revenues.

     Costs of Revenues. Costs of software license fee revenues increased 18%, or
$720,000, to $4,702,000 in 1997 from $3,982,000 in 1996. The software license
gross margin decreased by 5% to 81% in 1997 from 86% in 1996. This decrease in
gross margin was primarily due to higher capitalized software amortization and
the $453,000 write-off of capitalized software development costs in the first
quarter of 1997. The write-off related to products and versions that will no
longer be marketed in conjunction with the Company's restructuring of its
product lines. Amortization of capitalized software increased 30%, or $224,000,
to $963,000 in 1997 from $739,000 in 1996.

     The costs of services and maintenance revenues increased 2%, or $472,000,
to $23,949,000 in 1997 from $23,477,000 in 1996. This increase was attributable
to a full year of costs of services and maintenance for Sales Automation, which
was acquired in June 1996, offset by cost reductions in the Service Automation
product line as a result of the first quarter 1997 restructuring. The service
and maintenance gross margin percentage increased 3% , to 34% in 1997 from 31%
in 1996.

     Product Development.  Product development expenses increased 29%, or
$2,284,000, to $10,273,000 in 1997 from $7,989,000 in 1996.  Product development
as a percentage of total revenue increased 4% to 17% in 1997 compared to 13% in
1996.   This increase is a result of the Company's commitment to bring new
product offerings and enhancements of existing products to the market, including
the Company's August 1997 introduction of ServiceAlliance.  The increase is also
the result of a full year of Sales Automation product line development expenses
in 1997 of  $731,000 compared to $302,000 in the second half of 1996.  The
Company's total product development costs, including capitalized software
development costs, were $11,223,000, or 18% of total revenues in 1997 compared
to $9,847,000, or 16% of total revenues in 1996, an increase of  14% or
$1,376,000.  The capitalized portions of total product development costs were
$950,000, or 8%, compared to  $1,858,000 or 19% in 1996.  The Company
anticipates that it will continue to commit substantial resources to product
development in the future.

     Sales and Marketing.  Sales and marketing expenses decreased 5%, or
$1,194,000, to $21,196,000 in 1997 from $22,390,000 in 1996.  The decrease
primarily relates to lower commissions as a result of lower license revenue in
1997 compared to 1996, primarily in the Service Automation product line. The
decrease was offset by a full year of Sales Automation expenses of $3,500,000 in
1997, an increase of $2,204,000 from $1,296,000 of expenses in the second half
of 1996.   Sales and marketing expense as a percentage of total revenues
decreased 1% to 35% in 1997 from 36% in 1996.

     General and Administrative.  General and administrative expenses increased
46%, or $4,418,000, to $13,953,000 in 1997 from $9,535,000 in 1996.  As a
percentage of total revenues, general and administrative expenses increased 8%
to 23% in 1997 compared to 15% in 1996.  This increase primarily relates to non-
recurring charges of $5,131,000 in 1997.  These charges include $2,058,000 for
the write-off of Astea BV goodwill and $3,073,000 of contingency reserve for the
possible failure to deliver a commercial release of software product under a
beta development agreement, payment of cash and stock options related to the
settlement of claims by a shareholder and other contingencies. The increase in
general and administrative expenses is also the result of a full year of Astea
International AB in 1997 of  $853,000 compared to $410,000

                                      24
<PAGE>

in the second half of 1996. These increases are offset by a charge in 1996 of
$1,400,000 to address a customer satisfaction issue. See Notes 5 and 16 to the
Notes to the Consolidated Financial Statements.

     Restructuring Charge.  During the first quarter of 1997, the Company
recorded a restructuring charge of $5,328,000 for actions aimed at reducing
costs and consolidating its development activities primarily in its service
automation product line.  These costs included accruals for severance costs of
$1,713,000, office closing costs and unutilized lease expense of $3,136,000,
including $1,597,000 of non-cash writedowns of property and equipment, and other
consolidation costs of $479,000.

     Net Interest Expense/Income. Net interest expense/income decreased 103%,
or $586,000, to $15,000 of net interest expense in 1997 from $571,000 of net
interest income in 1996.  This decrease was primarily attributable to the cash
used in the 1996 acquisitions of Bendata and Astea International AB and the
operating cash requirements of the Company which reduced its investments.

     International Operations.  Total revenue from the Company's international
operations grew by $2,178,000, to $22,395,000 in 1997 from $20,217,000 in 1996.
The increase in revenue from international operations was primarily attributable
to the Astea International AB acquisition which accounted for $7,338,000 in 1997
compared to $4,232,000 during the second half of 1996.   This increase was
offset by declining international revenues in the Service Automation product
line.  International operations resulted in a $10,962,000 loss for 1997.  The
loss includes $5,042,000 of non-recurring charges.  These charges include
$2,058,000 for the write-off of Astea BV goodwill and $2,984,000 charge for
restructuring the Company's international operations.  The loss also includes a
$3,659,000 operating loss for the Company's Israeli operation, which is
primarily a research and development cost center. The current economic
difficulties of several Asian countries could have an adverse impact on the
Company's international operations in future periods.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995

     Revenues.  Total revenues increased 16% to $62,708,000 in 1996 from
$53,966,000 in 1995. Within Astea's three product lines, the Service Automation
product line realized a slight decline in total revenues. This decline was
offset by increased Support Automation product line revenues and the addition of
the Company's Sales Automation product line which was acquired in 1996.  Service
Automation revenues decreased 8% or $3,284,000 to $37,938,000 in 1996 from
$41,222,000 in 1995. In 1996, Support Automation revenues increased 61%, or
$7,794,000, to $20,538,000 from $12,744,000 in 1995 primarily resulting from
HEAT product.  Sales Automation revenues amounted to $4,232,000 in 1996,
resulting from the acquisition of Astea International AB in June 1996.

     Software license fee revenues decreased 4%, or $1,047,000, to $28,857,000
in 1996 from $29,904,000 in 1995.  Within Astea's three product lines, Service
Automation software license revenues decreased 41%, or $8,567,000, to
$12,515,000 in 1996 from $21,082,000 in 1995.  This decrease was due primarily
to increased competition which prolonged sales cycles in the Service Automation
software marketplace, which reduced the number of large volume software license
agreements in 1996. In 1995, three large volume software license agreements
accounted for $13,000,000, or 43% of 1995 license revenues.  Offsetting the
decrease in Service Automation license revenues was a significant increase in
Support Automation license agreements.  Support Automation software license
revenues increased 63%, or $5,585,000, to $14,407,000 in 1996 from $8,822,000 in
1995.  This increase was due primarily to new customers and reflects the
expansion of the customer help desk market and increased acceptance of the
Company's HEAT and PowerHelp products.  Bendata's software license fee revenues
increased significantly in 1996 as a result of increased demand for the HEAT
line of products in the United States and abroad.  Sales Automation software
license revenues were $1,935,000 in the second half of 1996, subsequent to the
Astea International AB acquisition.

                                      25
<PAGE>

     Services and maintenance revenues increased 41%, or $9,789,000, to
$33,851,000 in 1996 from $24,062,000 in 1995.  Increases were realized in
Service, Support and Sales Automation amounting to $5,283,000, $2,209,000 and
$2,297,000, respectively. This increase in service and maintenance revenues is
attributable to the expansion of the Company's installed base and new sales of
DISPATCH-1 licenses, and the increased need for professional services associated
with the ongoing implementation and deployment of more complex software
offerings, including the three large software license agreements from 1995
mentioned above, which continued implementation throughout 1996.

     In 1996, none of the Company's customers accounted for more than 10% of
total revenues.  In 1995, the Company had one customer which accounted for 19%
of total revenues.

     Costs of Revenues.  Costs of software license fee revenues increased 3%,
or $102,000, to $3,982,000 in 1996 from $3,880,000 in 1995. As a percentage of
software license fee revenues, the costs of software license fees increased by
1% to 14% in 1996 from 13% in 1995. The increase was due to the increase in the
aggregate cost of third-party software licenses sold in conjunction with the
Company's products. Amortization of capitalized software decreased 7%, or
$57,000, to $739,000 in 1996 from $796,000 in 1995.

     The costs of services and maintenance revenues increased 45%, or
$7,279,000, to $23,477,000 from $16,198,000 in 1995.  This increase was
attributable to increased services and maintenance obligations due to the
growing customer bases within all three product lines. Increased obligations and
related personnel costs contributed to the increase in services and maintenance
costs both on an absolute basis and as a percentage of service and maintenance
revenues.  Costs of services and maintenance related to the Astea International
AB acquisition during the last six months of 1996 amounted to $1,430,000.  Costs
of services and maintenance as a percentage of services and maintenance revenues
increased 2% to 69% in 1996 from 67% in 1995.

     Product Development.  Product development expenses increased 91%, or
$3,811,000, to $7,989,000 in 1996 from $4,178,000 in 1995.  This increase is a
result of the Company's commitment to bring new product offerings to the market
along with the enhancement of existing products. Product development expenses
also include the addition of Astea International AB in the second half of the
year which totaled $302,000. As a percentage of revenues, product development
expenses increased 5% to 13% in 1996 from 8% in 1995. The Company's total
product development costs, including capitalized software development costs,
were $9,847,000, or 16% of revenues in 1996 compared to $5,135,000, or 10% of
revenues in 1995, an increase of 92% or $4,712,000.  The capitalized portions of
total product development costs were $1,858,000, or 19%, in 1996 compared to
$957,000, or 19%, in 1995.

     Sales and Marketing.  Sales and marketing expenses increased 50%, or
$7,488,000, to $22,390,000 in 1996 from $14,902,000 in 1995.  This increase
resulted from the various selling models attendant to the Company's acquired
products and increased emphasis on sales processes within the sales and
marketing organizations.  Sales and marketing expenses during the second half of
1996 include $1,296,000 related to Astea International AB. Sales and marketing
expense as a percentage of revenues increased 8% to 36% in 1996 from 28% in
1995.

     General and Administrative. General and administrative expenses increased
50%, or $3,178,000, to $9,535,000 in 1996 from $6,357,000 in 1995. As a
percentage of revenues, general and administrative expenses increased 3% to 15%
in 1996 compared to 12% in 1995. This increase relates to the continued effort
by the Company to support the growth of the Company by establishing the proper
infrastructure to meet the current and future needs of the Company. The Company
increased its payroll significantly, including through the Astea International
AB acquisition, from 327 employees in 1995 to 594 employees as of December 31,
1996. General and administrative expenses also includes a significant charge of
$1,400,000 made by the Company to address a customer satisfaction issue. See
Note 16 to the Notes to the Consolidated Financial Statements.

                                      26
<PAGE>

     Net Interest Income. Net interest income increased 219%, or $392,000, to
$571,000 in 1996 from $179,000 in 1995.  This increase was primarily due to a
full year's interest earned on the proceeds from the Company's initial public
offering in July 1995.

     International Operations.  Total revenue from the Company's international
operations grew by 82%, or $9,113,000, to $20,217,000 in 1996 from $11,103,000
in 1995.  Growth was experienced in all segments of the Company's international
operations including the Astea International AB acquisition which accounted for
$4,232,000 during the second half of 1996. During 1996, the Company made several
important strides to expand and fortify its international presence. The Astea
International AB acquisition and Bendata merger (including a UK branch) were
completed, the Company signed a distributor agreement with Nissho Iwai in Japan,
and the Company expanded existing international operations. International
operations resulted in a $3,095,000 loss for 1996; this loss was primarily
attributable to the Company's Israeli operation, which had an operating loss of
$1,727,000. Israel is primarily a research and development cost center.

     Income Tax Expense (Benefit).  The Company's and Bendata's status as
subchapter S corporations under the Internal Revenue Code, were terminated in
July 1995 for Astea and in February 1996 for Bendata.  As a result of these
terminations, the Company became subject to federal and additional state income
taxes commencing in 1995.  See Notes 2 and 15 of the Notes to the Consolidated
Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by (used in) operating activities was $1,191,000 for
the year ended December 31, 1997 compared to $(6,352,000) for the year ended
December 31, 1996.  This increase was primarily attributable to the Company's
non-cash goodwill write-down, expense related to the issuance of stock and stock
options in various dispute settlements, increased collection of receivables,
timing of income tax refunds, as well as increases in accounts payable and
accrued expenses and deferred revenues.  The increases were offset by the non-
cash charge of $13,810,000 recorded in 1996 and by the Company's net loss
resulting from the factors described above under "Results of Operations--
Comparison of Years Ended December 31, 1997 and 1996."

     The Company generated $5,431,000 of cash from investing activities in
1997 compared to $7,430,000 in 1996.  The decrease was primarily attributable to
a decrease in the sale of investments available for sale offset by the 1996
payment for acquired businesses of $9,710,000.

     The Company used $1,267,000 in financing activities for the year ended
December 31, 1997 compared to cash used of $1,785,000 for the year ended
December 31, 1996.  In 1997, funds were used to pay down the line of credit and
to make debt repayments, partially offset by the proceeds from the exercises of
stock options and employee stock purchase rights. For the year ended December
31, 1995, the Company received net proceeds totaling $42,057,000 for the
issuance of common stock in its initial public offering, offset by an S
corporation distribution, repayment of debt and repayment of notes receivable
from the sole stockholder and his wife. For the years ended December 31, 1996
and 1995, the Company utilized $1,979,000 and $8,641,000, respectively, S
corporation distributions and dividends paid to stockholders.

     The Company maintains a line of credit with a maximum borrowing
availability of $2,000,000. The line of credit bears interest at the lending
bank's prime rate (8.5% at December 31, 1997).  Borrowings under the line of
credit are secured by $2,000,000 of the Company's investments.  As of
December 31, 1997, the Company has not been in compliance with certain loan
covenants. The Company has obtained a waiver from the bank relating to such non-
compliance. The line expires on June 1, 1998.

     Astea International AB has a revolving line of credit for borrowings up
to 8,000,000 SEK or $1,007,000.  As of December 31, 1997, Astea International
AB's outstanding balance on the line of credit was

                                      27
<PAGE>

$914,000. The revolving line of credit bears interest at the bank's prime rate
plus 2.4% (6.9% at December 31, 1997). Borrowings under the revolving line of
credit are secured by a first security interest in substantially all of Astea
International AB's assets. The line expires on December 31, 1998.

     At December 31, 1997, the Company had a working capital ratio of
approximately 1.3:1, with cash and investments available for sale of
$10,104,000.  The Company may need to access additional funding during 1998 to
fund operations as products are rolled out and other strategies progress toward
realization.  The Company believes sufficient cash resources exist to support
its long-term growth strategies either through currently available cash, cash
generated from future operations, or the ability of the Company to obtain
additional financing through private and/or public debt placement.  The Company
does not anticipate that its operations or financial condition will be affected
materially by inflation.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Not Applicable

                                      28
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Astea International Inc.:

     We have audited the accompanying consolidated balance sheets of Astea
International Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997.  These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

     Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



                                         /s/ Arthur Andersen LLP
                                         Arthur Andersen LLP



Philadelphia, Pa.
February 20, 1998

                                      29
<PAGE>

                   ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                                                        1997                   1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                            <C>
                                 ASSETS
Current assets:
  Cash and cash equivalents                                                         $  8,745,000          $  3,334,000
  Investments available for sale                                                       1,359,000             8,994,000
  Receivables, net of reserves of  $2,286,000 and $1,681,000                          18,069,000            24,187,000
  Prepaid expenses and other                                                           2,709,000             2,279,000
  Income tax refund receivable                                                                 -             1,516,000
  Deferred income taxes                                                                2,274,000             1,869,000
                                                                           -------------------------------------------
          Total current assets                                                        33,156,000            42,179,000

Property and equipment, net                                                            3,958,000             8,117,000
Capitalized software development costs, net                                            3,556,000             4,022,000
Goodwill, net                                                                          1,103,000             3,373,000
                                                                           -------------------------------------------
          Total assets                                                              $ 41,773,000          $ 57,691,000
                                                                           ===========================================
     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit                                                                    $    914,000          $  1,678,000
  Current portion of long-term debt (including $0 and $78,000
     due to majority stockholder and his wife)                                         1,085,000               525,000
  Accounts payable and accrued expenses                                               13,749,000            11,076,000
  Deferred revenues                                                                    9,608,000             8,140,000
                                                                           -------------------------------------------
          Total current liabilities                                                   25,356,000            21,419,000
  Deferred income taxes                                                                1,352,000               947,000
  Long-term debt (including $0 and $2,410,000
     due to majority stockholder and his wife)                                         1,636,000             3,708,000

  Commitments and contingencies (Note 16)

Stockholders' equity:
   Preferred stock, $.01 par value, 5,000,000 shares
     authorized, none issued                                                                   -                     -
   Common stock, $.01 par value, 25,000,000 shares
     authorized, 13,361,000 and 13,106,000 shares issued and
     outstanding                                                                         134,000               131,000
   Additional paid-in capital                                                         49,585,000            49,097,000
   Deferred compensation                                                                 (43,000)             (160,000)
   Cumulative currency translation adjustment                                           (745,000)             (443,000)
   Accumulated deficit                                                               (35,502,000)          (17,008,000)
                                                                            -------------------------------------------
          Total stockholders' equity                                                  13,429,000            31,617,000
                                                                           -------------------------------------------
          Total liabilities and stockholders' equity                                $ 41,773,000          $ 57,691,000
                                                                           ===========================================
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      30
<PAGE>

                   ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME



<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                1997                1996                 1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                 <C>                 <C>
Revenues:
      Software license fees                                           $ 34,777,000        $ 28,857,000           $29,904,000
      Services and maintenance                                          36,157,000          33,851,000            24,062,000
                                                               -------------------------------------------------------------

          Total revenues                                                60,934,000          62,708,000            53,966,000
                                                               -------------------------------------------------------------
Costs and expenses:
      Cost of software license fees                                      4,702,000           3,982,000             3,880,000
      Cost of services and maintenance                                  23,949,000          23,477,000            16,198,000
      Product development                                               10,273,000           7,989,000             4,178,000
      Sales and marketing                                               21,196,000          22,390,000            14,902,000
      General and administrative                                        13,953,000           9,535,000             6,357,000
      Restructuring charge                                               5,328,000                   -                     -
      Expenses related to Bendata
          merger transaction                                                     -           3,416,000                     -
      Charge for purchased research and
          development                                                            -          13,810,000                     -
                                                               -------------------------------------------------------------

          Total costs and expenses                                      79,401,000          84,599,000            45,515,000

Income (loss) from operations                                          (18,467,000)        (21,891,000)            8,451,000

Interest income                                                            447,000           1,099,000               740,000
Interest expense (including $108,000,
   $330,000 and $348,000 to the majority
   stockholder and his wife)                                              (462,000)           (528,000)             (561,000)
                                                               -------------------------------------------------------------
Income (loss) before income taxes                                      (18,482,000)        (21,320,000)            8,630,000
Provision for income taxes (benefit)                                        12,000          (1,613,000)            1,883,000
                                                               -------------------------------------------------------------
Net income (loss)                                                     $(18,494,000)       $(19,707,000)          $ 6,747,000
                                                               =============================================================

Basic earnings (loss) per share                                             $(1.40)             $(1.53)          $      0.64
Diluted earnings (loss) per share                                           $(1.40)             $(1.53)          $      0.59
Shares used in computing basic earnings
    (loss) per share                                                    13,252,000          12,844,000            10,514,000
Shares used in computing diluted earnings
    (loss) per share                                                    13,252,000          12,844,000            11,484,000

Pro forma data (Note 3) (unaudited):
-----------------------------------
       Historical income (loss) before
           income taxes                                                                   $(21,320,000)          $ 8,630,000
       Pro forma income taxes (benefit)                                                     (2,082,000)            3,452,000
                                                                                  ------------------------------------------
       Pro forma net income (loss)                                                        $(19,238,000)          $ 5,178,000
                                                                                  ==========================================
       Pro form basic earnings (loss) per share                                                 $(1.50)          $     0 .49
                                                                                  ==========================================
       Pro forma diluted earnings (loss) per share                                              $(1.50)          $     0 .45
                                                                                  ==========================================
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      31
<PAGE>

                   ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                            Cumulative
                                                                     Additional                              Currency
                                        Preferred     Common           Paid-In           Deferred           Translation
                                          Stock        Stock           Capital         Compensation         Adjustment
                                       ----------     ---------     -------------      ------------         -----------
<S>                                    <C>            <C>           <C>                <C>                  <C>
Balance, January 1, 1995               $               $ 91,000      $ 1,915,000       $  (601,000)         $
    Sale of common stock in
       initial public offering, net
        of                                      -        32,000       42,025,000                 -                  -
       offering costs
    Exercise of stock options                   -         1,000          144,000                 -                  -
    Stock option tax benefits                   -             -        1,070,000                 -                  -
    Additional capital contribution
     by                                         -             -           46,000                 -                  -
       Bendata, Inc. stockholders
    Issuance of common stock by
       Bendata, Inc.                            -             -           30,000                 -                  -
    Amortization of deferred
        compensation                            -             -                -           213,000                  -
    Dividend paid                               -                              -                 -                  -
    S corporation distribution and
       combination of minority interest
       in Astea BV (see Notes 1 and             -             -          370,000                 -                  -
       19)
    Cumulative currency translation
      adjustment                                -             -                -                 -           (115,000)
    Net income                                  -             -                -                 -                  -
                                       --------------------------------------------------------------------------------
Balance, December 31, 1995                      -       124,000       45,600,000          (388,000)          (115,000)
    Issuance of common stock for the
       purchase of  Astea
        International                           -         2,000        4,998,000                 -                  -
      AB (see Note 5)
    Grant of stock options below
        fair market value                       -             -           31,000           (31,000)                 -
    Exercise of stock options                   -         5,000          544,000                 -                  -
    Amortization of deferred
       compensation                             -             -                -           162,000                  -
    Cancellation of options granted             -             -          (97,000)           97,000                  -
    S corporation distribution (see
       Note 19)                                 -             -       (1,979,000)                -                  -
    Cumulative currency translation
       adjustment                               -             -                -                 -           (328,000)
    Net loss                                    -             -                -                 -                  -
                                       --------------------------------------------------------------------------------
Balance, December 31, 1996                      -       131,000       49,097,000          (160,000)          (443,000)
    Issuance of common stock in
      dispute settlement (see Note              -         1,000          202,000                 -                  -
       16)
   Grant of stock options in dispute
      settlement (see Note 16)                  -             -          157,000                 -                  -
   Exercise of stock options                    -         2,000           96,000                 -                  -
   Amortization of deferred
      compensation                              -             -                -            57,000                  -
   Cancellation of options granted              -             -          (60,000)           60,000                  -
   Issuance of common stock under
      employee stock purchase plan              -             -           93,000                 -                  -
   Cumulative currency translation
      adjustment                                -             -                -                 -           (302,000)
   Net loss                                     -             -                -                 -                  -
                                       --------------------------------------------------------------------------------
Balance, December 31, 1997             $        -      $134,000      $49,585,000         $ (43,000)         $(745,000)
                                       ================================================================================

<CAPTION>
                                                                      Total
                                              Retained Earnings    Stockholders'
                                                  (Deficit)           Equity
                                              -----------------    --------------
<S>                                           <C>                  <C>
Balance, January 1, 1995                          $  4,963,000       $  6,368,000
    Sale of common stock in
       initial public offering, net
        of                                                   -         42,057,000
       offering costs
    Exercise of stock options                                -            145,000
    Stock option tax benefits                                -          1,070,000
    Additional capital contribution
     by                                                      -             46,000
       Bendata, Inc. stockholders
    Issuance of common stock by
       Bendata, Inc.                                         -             30,000
    Amortization of deferred
        compensation                                         -            213,000
    Dividend paid                                     (345,000)          (345,000)
    S corporation distribution and
       combination of minority
       interest
       in Astea BV (see Notes 1 and                 (8,666,000)        (8,296,000)
       19)
    Cumulative currency translation
      adjustment                                             -           (115,000)
    Net income                                       6,747,000          6,747,000
                                       ------------------------------------------
Balance, December 31, 1995                           2,699,000         47,920,000
    Issuance of common stock for the
       purchase of  Astea
        International                                        -          5,000,000
      AB (see Note 5)
    Grant of stock options below
        fair market value                                    -                  -
    Exercise of stock options                                -            549,000
    Amortization of deferred
       compensation                                          -            162,000
    Cancellation of options granted                          -                  -
    S corporation distribution (see
       Note 19)                                              -         (1,979,000)
    Cumulative currency translation
       adjustment                                            -           (328,000)
    Net loss                                       (19,707,000)       (19,707,000)
                                       ------------------------------------------
Balance, December 31, 1996                         (17,008,000)        31,617,000
    Issuance of common stock in
      dispute settlement (see Note                           -            203,000
       16)
   Grant of stock options in dispute
      settlement (see Note 16)                               -            157,000
   Exercise of stock options                                 -             98,000
   Amortization of deferred
      compensation                                           -             57,000
   Cancellation of options granted                           -                  -
   Issuance of common stock under
      employee stock purchase plan                           -             93,000
   Cumulative currency translation
      adjustment                                             -           (302,000)
   Net loss                                        (18,494,000)       (18,494,000)
                                              -----------------------------------
Balance, December 31, 1997                        $(35,502,000)      $ 13,429,000
                                              ===================================
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      32
<PAGE>

                   ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                             1997                 1996                  1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                               $ (18,494,000)       $ (19,707,000)       $     6,747,000
   Adjustments to reconcile net income (loss) to net cash
        provided by (used in) operating activities:
        Goodwill write-down                                            2,058,000                    -                      -
        Expense related to stock, stock options and debt
            issued in dispute                                          1,522,000                    -                      -
        Write-off of capitalized software                                453,000                    -                      -
        Non-cash restructuring charges                                   832,000                    -                      -
        Depreciation and amortization                                  3,563,000            3,035,000              2,159,000
        Amortization of deferred compensation                             57,000              162,000                213,000
        Charge for purchased in process research and
            development                                                        -           13,810,000                      -
        Tax benefit from exercise of stock options                             -                    -              1,070,000
        Other                                                             31,000              (21,000)                77,000
        Changes in operating assets and liabilities, net of
             effect of acquired businesses:
            Receivables                                                6,022,000           (2,015,000)            (6,288,000)
            Prepaid expenses and other                                  (431,000)             (14,000)              (886,000)
            Income tax refund receivable                               1,516,000           (1,516,000)                     -
            Accounts payable and accrued
                expenses                                               2,622,000              259,000              4,302,000
            Deferred revenues                                          1,440,000               31,000               (190,000)
            Deferred income taxes                                              -             (376,000)            (1,058,000)
                                                                   ---------------------------------------------------------
   Net cash provided by (used in) operating activities                 1,191,000           (6,352,000)             6,146,000
                                                                   ---------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Sales (purchases) of investments available for sale                 7,635,000           21,828,000            (30,822,000)
   Purchases of property and equipment                                (1,254,000)          (2,830,000)            (1,952,000)
   Capitalized software development costs                               (950,000)          (1,858,000)              (957,000)
   Payment for acquired businesses, net of cash
      acquired                                                                 -           (9,710,000)            (1,312,000)
   Repayments of notes receivable from
      majority stockholder and his wife                                        -                    -                217,000
   Other                                                                       -                    -                 18,000
                                                                   ---------------------------------------------------------
      Net cash provided by (used in) investing activities              5,431,000            7,430,000            (34,808,000)
                                                                   ---------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (repayments) on line of credit                        (764,000)            (209,000)               200,000
   Proceeds from exercise of stock options and employee                  191,000              549,000                145,000
      stock purchase plan
   Net repayments of  long-term debt                                    (694,000)            (146,000)              (804,000)
   Proceeds from issuance of common stock, net                                 -                    -             42,057,000
   Decrease in amounts due to stockholder                                      -                    -             (1,431,000)
   S corporation distribution and dividends paid to
      stockholders                                                             -           (1,979,000)            (8,641,000)
   Other                                                                       -                    -                 46,000
                                                                   ---------------------------------------------------------
      Net cash provided by (used in) financing activities             (1,267,000)          (1,785,000)            31,572,000
                                                                   ---------------------------------------------------------
   Effect of exchange rate changes on cash and cash
       equivalents                                                        56,000               20,000                 (8,000)
                                                                   ---------------------------------------------------------
   Net increase (decrease) in cash and cash equivalents                5,411,000             (687,000)             2,902,000
   Cash and cash equivalents balance, beginning of year                3,334,000            4,021,000              1,119,000
                                                                   ---------------------------------------------------------
   Cash and cash equivalents balance, end of year                  $   8,745,000        $   3,334,000        $     4,021,000
                                                                   =========================================================
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      33
<PAGE>

                   ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.   COMPANY BACKGROUND

     Astea International Inc. (the "Company" or "Astea") develops, markets,
licenses, implements and supports a suite of client/server and host-based
applications for the Technology Enabled Relationship Management ("TERM")
software market that permit organizations to automate field service, customer
support and sales and marketing operations. The Company licenses its products to
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations. These customers represent
a range of industries including telecommunications, computers and electronics,
office equipment and third-party service and support organizations.

     In 1994, the Company and its majority stockholder formed Astea Israel Ltd.
("Astea Israel"), which was 79%-owned by the Company and 21%-owned by the
Company's majority stockholder. In February 1995, the Company acquired Astea
Service and Distribution Systems BV ("Astea BV"), which was owned in the same
percentages as Astea Israel (see Note 5). In connection with an initial public
offering discussed below, the minority interests of the majority stockholder
were contributed to the Company for no consideration.

     In August 1995, the Company closed its initial public offering of common
stock (the "Offering"). The Company offered and sold 3,101,298 shares, including
underwriters' over-allotment, of common stock at a public offering price of
$15.00 per share. The net proceeds to the Company from the Offering after the
underwriting discount and payment of offering expenses were $42,057,000.

     In February 1996, the Company merged with Bendata, Inc. and Bendata (UK)
Limited LLC (collectively "Bendata") (the "Merger"). The Merger has been
accounted for as a pooling of interests, and accordingly, the historical
financial statements have been restated to include Bendata (see Note 4).

     In June 1996, the Company acquired Bebalon AB, the sole shareholder of
E.L.G. Data AB which was the sole shareholder of Astea International AB,
formerly Abalon AB (collectively "Abalon") in a transaction accounted for under
the purchase method of accounting (see Note 5).

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The consolidated and combined financial statements include the accounts of
Astea International Inc. and its wholly owned subsidiaries and branches. The
financial statements reflect the elimination of all significant intercompany
accounts and transactions.

                                      34
<PAGE>

Use of Estimates

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

Revenue Recognition

     Depending on contract terms and conditions, software license fees are
recognized 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 delivery and/or the product is subject
to customer acceptance, revenue is deferred until no significant obligations
remain and/or acceptance has occurred. If the payment of the license fee is
coincident to services which are deemed to be essential to the transaction, the
license fee is deferred and recognized using contract accounting over the period
during which the services are performed. The Company's software licensing
agreements provide for customer support (typically 90 days) and, in some
instances, training. The portion of the license fee associated with customer
support is unbundled from the license fee and is recognized ratably over the
warranty period as maintenance revenue. The portion of the license fee for
training is unbundled from the license fee and is recognized as services revenue
as performed. The Company believes that its revenue recognition policy is in
accordance with the American Institute of Certified Public Accountants'
Statement of Position No. 97-2, "Software Revenue Recognition."

     Services revenues, which include consulting, implementation and training,
are recognized as performed. Maintenance revenues are recognized ratably over
the terms of the maintenance agreements.

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.

Investments Available for Sale

     Pursuant to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
As of December 31, 1997 and 1996, all short-term investments have been
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. As of December
31, 1997 and 1996, unrealized losses and gains were not material to the
financial statements. Realized gains and losses, computed using specific
identification, and declines in value determined to be permanent are recognized
in the consolidated statements of income.

                                      35
<PAGE>

Property and Equipment

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

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 and until the
product is available 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 (three to five years), beginning with the initial release to customers.
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. During 1997,
the Company wrote-off capitalized software development costs that were no longer
marketed by the Company (see Note 6). As of December 31, 1997, management
believes that no revisions to the remaining useful life or write-downs of
capitalized software development costs are required.

Goodwill

     Goodwill represents the excess of the purchase price for various
acquisitions accounted for as purchases over the fair value of the net assets
acquired (see Note 5) and is amortized on a straight-line basis over 10 years.
The Company evaluates the realizability of goodwill based on estimates of
undiscounted future cash flows over the remaining useful life of the net assets.
If the amount of such estimated undiscounted future cash flows is less than the
net book value of the related assets, the assets and related goodwill would be
written down to its net realizable value. No such write-down was required for
the years ended December 31, 1996 and 1995. In 1997, the Company wrote down the
value of goodwill related to Astea BV (see Note 6). No further write-downs are
required for the year ended December 31, 1997.

Major Customers

     In 1997 and 1996, the Company had no customers which accounted for more
than 10% of total revenues. In 1995, the Company had one customer which
accounted for 19% of total revenues.

                                      36
<PAGE>

Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of investments available for sale and trade
receivables. The Company does not require collateral from its customers.

Stock Split

     On May 23, 1995, the Company effected a 4.75-for-1 stock split in the form
of a stock dividend. All references in the accompanying consolidated financial
statements to the number of common shares and per share amounts have been
retroactively restated to reflect the stock split.

Supplemental Cash Flow Information

     For the years ended December 31, 1997, 1996 and 1995, the Company paid
interest of $500,000, $513,000 and $582,000, respectively (of which $242,000,
$330,000 and $348,000, respectively, was paid to the majority stockholder and
his wife (see Note 19)), federal income taxes of zero, $998,000 and $660,000,
respectively, and state income taxes of zero, $179,000, and $212,000,
respectively. In 1997, the Company received a refund of federal income tax of
$1,516,000.

Income Taxes

     The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," the objective of which is to recognize the amount
of current and deferred income taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in the
financial statements as measured by enacted tax laws.

     Prior to the closing of the Offering, the Company had elected to be taxed
under Subchapter S of the Internal Revenue Code. As a result, the Company was
not subject to federal income taxes, and the taxable income of the Company was
included in the sole stockholder's tax return. The Company also had elected S
corporation status in certain states and, therefore, had recorded a provision
for state income taxes for those states that do not recognize or partially
recognize S corporation treatment.

     Shortly before the closing of the Offering, the Company terminated its
status as a S corporation and is now subject to federal and additional state
income taxes. The Company recorded a tax benefit of $518,000 as a result of
establishing a net deferred tax asset upon its conversion to a C corporation.

     Prior to the Merger (see Note 4), Bendata, Inc. had elected to be taxed
under Subchapter S of the Internal Revenue Code for federal income taxes and in
certain states and Bendata (UK) Limited LLC ("Bendata UK") (a Colorado limited
liability corporation) was taxed under U.S. partnership income tax rules and
regulations. As a result, Bendata was not subject to federal income taxes, and
the taxable income of Bendata was included in Bendata, Inc.'s stockholders' or
Bendata UK's members' individual tax returns, respectively. In connection with
the Merger, Bendata, Inc. terminated its status as an S corporation and Bendata
UK terminated its partnership status and is now subject to federal and state
income taxes. The Company recorded tax expense of $575,000 as a result of
establishing a net deferred tax liability in connection with the Merger.

                                      37
<PAGE>

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
cumulative currency translation adjustment in the accompanying consolidated
statements of stockholders' equity. Transaction gains and losses are included in
net income. There are no material transaction gains or losses in the
accompanying consolidated financial statements for the periods presented.

Earnings (Loss) Per Share

     The Company has adopted SFAS No. 128 , "Earnings per Share," which
supersedes APB Opinion No. 15 ("APB No. 15"), "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 income. Basic EPS, which replaced primary EPS, is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period. Diluted EPS, which replaced fully diluted EPS, reflects the
potential dilution from the exercise or conversion of securities into common
stock. Options to purchase 1,980,000 and 1,859,000 shares of common stock with
an average exercise price per share of $2.62 and $4.93 were outstanding as of
December 31, 1997 and 1996, respectively, but were excluded from the diluted
loss per common share calculation as the inclusion of these options would have
an antidilutive effect. For the year ended December 31, 1995, the weighted
average number of common shares outstanding (used to compute basic EPS) was
10,514,000. The diluted effect of common stock options was 970,000. Therefore,
the number of shares used to compute diluted EPS for the year ended December 31,
1995 was 11,484,000. The Company adopted SFAS No. 128 in its December 31, 1997
financial statements.

In accordance with SFAS No. 128, all earnings (loss) per common share data
previously reported have been restated to comply with its provisions. The effect
of this accounting change on previously reported earnings (loss) per common
share data is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                          1996                1995
--------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                              <C>
Per common share amounts:
Primary earnings (loss) per common share as reported                            $(1.53)              $0.59
Effect of SFAS No. 128                                                               -                0.05
                                                                    ------------------------------------------
Basic earnings (loss) per common share as restated                              $(1.53)              $0.64
                                                                    ==========================================

Fully diluted earnings (loss) per common share as reported                      $(1.53)              $0.59
Effect of SFAS No. 128                                                               -                   -
                                                                    ------------------------------------------
Diluted earnings (loss) per common share as restated                            $(1.53)              $0.59
                                                                    ==========================================
</TABLE>

                                      38
<PAGE>

New Accounting Pronouncements

     SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued in June 1997. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements and
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with equal prominence as other financial statements.
SFAS No. 130 is required to be adopted for the Company's fiscal year ending
December 31, 1998. The adoption of this pronouncement is expected to have no
impact on the Company's financial position or results of operations. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is required to be adopted for the Company's 1998 year-
end financial statements. The Company is currently evaluating the impact, if
any, of the adoption of this pronouncement on the Company's existing
disclosures.

3.   PRO FORMA INFORMATION (UNAUDITED)

Pro Forma Income Tax Provision

     On July 26, 1995, Astea terminated its status as an S corporation and, as
a result, is now subject to federal and additional state income taxes. In
connection with the Merger, Bendata, Inc. terminated its status as a S
corporation and Bendata UK terminated its partnership status and, as a result,
are now subject to federal and state income taxes. Accordingly, for
informational purposes, the accompanying consolidated statements of income for
the years ended December 31, 1996 and 1995 include an unaudited pro forma
adjustment for the income taxes that would have been recorded if Astea and
Bendata had been C corporations, based on the tax laws in effect during the
respective periods.

Pro Forma Basic and Diluted Earnings (Loss) Per Share

     Pro forma basic and diluted earnings (loss) per share for 1996 and 1995
were calculated by dividing pro forma earnings (loss) by the shares used in
computing basic and diluted earnings (loss) per share, respectively. All share
and per share amounts have been adjusted retroactively to give effect to the
Bendata merger discussed in Note 4 and the stock split discussed in Note 2.

4.   BENDATA MERGER

     On February 27, 1996, the Company completed a merger with Bendata, Inc. and
Bendata UK, international providers of client/server software for the internal
help desk market. The Company exchanged 1,500,000 shares of its common stock for
all of the outstanding capital stock of Bendata, Inc. and membership interest in
Bendata UK in a merger accounted for as a pooling of interests. The Company's
historical financial statements have been restated to include Bendata.

     In connection with the Merger, $3,416,000 of merger expenses ($2,609,000
after-tax) were incurred and charged to expense in the first quarter of 1996.
The Merger expenses consisted of bonus payments made to Bendata non-shareholder
employees, as well as legal, accounting and investment banking fees.

                                      39
<PAGE>

     A reconciliation of previously reported sales and earnings for the year
ended December 31, 1995 is as follows:

<TABLE>
     <S>                                                    <C>
     Revenues:                                                       $43,016,000
         Previously reported                                          10,950,000
                                                            --------------------
         Bendata                                                      53,966,000
                                                            ====================

     Net income:                                                     $ 6,697,000
         Previously reported                                              50,000
                                                            --------------------
         Bendata                                                     $ 6,747,000
                                                            ====================

     Pro forma net income (Note 3) (unaudited):                      $ 5,147,000
         Previously reported                                              31,000
         Bendata                                            --------------------
                                                                     $ 5,178,000
                                                            ====================
</TABLE>

5.   ACQUISITIONS

Acquisition of Astea BV

     On February 1, 1995, the Company and its majority stockholder acquired all
of the issued and outstanding shares of Astea BV for $1,760,000 (see Note 1).

     The following assets were acquired and liabilities were assumed in
connection with the acquisition of Astea BV:

<TABLE>
     <S>                                       <C>
     Accounts receivable                                                 $ 1,480,000
     Property and equipment                                                  120,000
     Goodwill                                                              2,628,000
     Accounts payable and accrued expenses                                (2,818,000)
     Capitalized lease obligations                                           (98,000)
                                                             -----------------------
     Cash paid, net of cash acquired of $448,000                         $ 1,312,000
                                                             =======================
</TABLE>

                                      40
<PAGE>

Acquisition of Astea International AB

     On June 28, 1996, the Company acquired all of the issued and outstanding
shares of Astea International AB in exchange for $9,652,000 in cash, 233,236
shares of common stock and a $900,000 note payable in equal annual installments
in cash or stock over three years. In connection with the acquisition, the
Company recorded a one-time charge of $13,810,000 related to the fair value of
in process research and development. The following assets were acquired,
liabilities were assumed and expense incurred in connection with the acquisition
of Astea International AB:

<TABLE>
     <S>                                                     <C>
     Purchased in process research and
            development                                              $13,810,000
     Accounts receivable                                               1,251,000
     Prepaid expenses                                                    338,000
     Capitalized software development costs                            1,190,000
     Goodwill                                                            935,000
     Property and equipment                                              607,000
     Other liabilities                                                (1,508,000)
     Accounts payable and accrued expenses                            (1,182,000)
     Present value of notes payable to former owners                    (789,000)
     Fair value of common stock issued                                (5,000,000)
                                                             -------------------
     Cash paid                                                       $ 9,652,000
                                                             ===================
</TABLE>

Acquisition of Professional Help Desk

     In 1996, the Company acquired certain assets and liabilities of
Professional Help Desk PTY Limited ("Professional Help Desk"), an Australian
distributor, for $58,000, forgiveness of a Bendata UK royalty receivable of
$213,000 and minimum future royalty payments with a present value of $98,000.

     The Company accounted for the acquisitions of Astea BV, Astea International
AB and Professional Help Desk as purchases and, accordingly, the purchase prices
were allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of the
net assets acquired of $3,933,000 has been recorded as goodwill and is being
amortized over ten years on a straight-line basis. During 1997, the Company
wrote-off goodwill of $2,628,000 and related accumulated amortization of
$570,000 (see Note 6). Goodwill is net of accumulated amortization of $202,000
and $560,000 as of December 31, 1997 and 1996, respectively. Amortization
expense for the years ended December 31, 1997, 1996 and 1995 was $212,000,
$326,000 and $234,000, respectively.

     Results of operations after the acquisition dates are included in the
consolidated statements of income. The following unaudited pro forma information
has been prepared assuming that the Astea International AB acquisition had taken
place on January 1, 1995. The pro forma effects of the Astea BV acquisition on
the 1995 results of operations and the Professional Help Desk acquisition on the
1996 and 1995 results of operations are immaterial. The pro forma information
includes the elimination of the Bendata Merger costs (see Note 4) and the charge
for purchased in process research and development, pro forma adjustments for
interest expense that would have been incurred to finance the purchase,
amortization of intangibles arising from the transaction and pro forma income
taxes for Astea and Bendata (see Note 3). The pro forma financial information is
not necessarily indicative of

                                      41

<PAGE>

the operating results that would have occurred had the transaction been
effective on the assumed date, nor is it necessarily indicative of future
operating results.

<TABLE>
<CAPTION>
                                                                       (unaudited)
     -----------------------------------------------------------------------------------------------
     Years ended December 31,                                  1996                     1995
     -----------------------------------------------------------------------------------------------
     <S>                                               <C>                       <C>
     Revenues                                                 $ 66,175,000               $59,902,000
     Net income (loss)                                        $(20,421,000)              $ 4,693,000
     Basic earnings (loss) per share                          $      (1.59)              $      0.45
     Diluted earnings (loss) per share                        $      (1.59)              $      0.41
</TABLE>

6.   RESTRUCTURING AND OTHER CHARGES

     During the first quarter of 1997, the Company recorded a restructuring
charge of $5,328,000 for actions aimed at reducing costs and consolidating its
development activities primarily in its service automation product line. These
costs included accruals for severance costs of $1,713,000, office closing costs
and unutilized lease expense of $3,136,000, including $1,597,000 of non-cash
writedowns of property and equipment, and other consolidation costs of $479,000.

     As of December 31, 1997, the balance of the accrued restructuring charge
of $1,868,000 is required for longer term real and personal property leases and
severance commitments payable through June 1999 (see Note 13).

     Included in cost of software license fees in the first quarter of 1997 is
a write-off of $453,000 of capitalized software development costs related to one
of the Company's support automation products, PowerHelp, and to older versions
of certain service automation modules which are no longer marketed by the
Company.

     As a result of the restructuring, during the first quarter of 1997, the
Company recorded a goodwill impairment charge of $2,058,000 which is included in
general and administrative expense on the accompanying consolidated statements
of income. This charge related to the 1995 acquisition of Astea BV which
experienced a deterioration in its operations. In 1997, as a result of the
restructuring of its operation, the Company closed certain locations which were
part of Astea BV.

7.   CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
DECEMBER 31,                                                  1997                   1996
-----------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>
Cash and money market accounts                                $7,745,000             $3,334,000
Commercial Paper                                               1,000,000                      -
                                                      -----------------------------------------
                                                              $8,745,000             $3,334,000
                                                      =========================================
</TABLE>

8.   INVESTMENTS AVAILABLE FOR SALE

<TABLE>
<CAPTION>
DECEMBER 31,                                                  1997                  1996
--------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>
U.S. Government Agencies Securities                            $1,054,000  $                     -
Corporate bonds                                                   305,000                  969,000
Municipal securities                                                    -                4,700,000
Auction market preferred stock                                          -                3,325,000
                                                      --------------------------------------------
                                                               $1,359,000               $8,994,000
                                                      ============================================
</TABLE>

                                      42
<PAGE>

       All investments available for sale have maturities of less than twelve
months from the respective balance sheet date. Losses on sales of securities for
the years ended December 31, 1997 and 1996 were $24,000 and $59,000,
respectively, and have been included in interest expense in the accompanying
consolidated statements of income. No gains or losses on transactions were
recorded in fiscal year 1995 as all sales occurred at par value upon maturity of
the securities.

9.    RECEIVABLES

<TABLE>
<CAPTION>
       December 31,                         1997              1996
     -------------------------------------------------------------------
     <S>                                  <C>                <C>
       Billed receivables                 $14,813,000        $19,801,000
       Unbilled receivables                 2,369,000          3,180,000
       Royalties receivable                   876,000          1,187,000
       Other                                   10,000             19,000
                                          ------------------------------
                                          $18,068,000        $24,187,000
                                          ==============================
</TABLE>

       Billed receivables represent billings for the Company's products and
services to end users, while royalties receivable represents billings to the
Company's value added resellers. Both balances are shown net of reserves for
estimated uncollectible amounts. Unbilled receivables represent contractual
amounts due within one year under software licenses which are not yet billable.

10.    PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                     USEFUL LIFE/                 DECEMBER 31,
                                                                    --------------------------------------
                                                      LEASETERM             1997                1996
                                                      ---------             ----                ----
       <S>                                           <C>            <C>                    <C>
       Building under capital lease                      16           $          -         $ 2,462,000
       Computers and related equipment                    3              6,265,000           6,544,000
       Furniture and fixtures                            10              1,058,000           1,386,000
       Equipment under capital leases                   3-5              1,076,000           1,097,000
       Leasehold improvements                            15                 71,000             810,000
       Office equipment                                   7                366,000             706,000
       Other                                              5                 50,000              47,000
                                                                    --------------------------------------
                                                                         8,886,000          13,052,000
       Less:  Accumulated depreciation
           and amortization                                             (4,928,000)         (4,935,000)
                                                                    --------------------------------------
                                                                       $ 3,958,000         $ 8,117,000
                                                                    ======================================
</TABLE>

       During 1997, the Company wrote-off property and equipment of $3,287,000
and accumulated depreciation and amortization of $1,973,000 and recorded a net
charge to the restructuring accrual of $1,314,000 (see Note 6). Additionally,
during 1997, the Company terminated the building lease with its majority
stockholder and his wife and wrote-off $2,462,000 of building under capital
lease and $576,000 of accumulated amortization (see Note 19).

       Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $2,389,000, $1,970,000 and $1,129,000, respectively.

       Equipment under capital leases includes telephone systems, computers and
related equipment. Title to the property is owned by the financing companies.
The gross book value of equipment securing these leases is $1,076,000 and
$1,558,000 as of December 31, 1997 and 1996, respectively. Accumulated
amortization on assets under capital leases as of December 31, 1997 and 1996 was
$388,000 and $754,000, respectively.

                                      43
<PAGE>

11.    CAPITALIZED SOFTWARE DEVELOPMENT COSTS

<TABLE>
<CAPTION>
       DECEMBER 31,                                        1997                1996
     ------------------------------------------------------------------------------------
     <S>                                                <C>                 <C>
       Capitalized software development costs           $ 6,507,000         $ 6,280,000
       Less:  Accumulated amortization                   (2,951,000)         (2,258,000)
                                                        ---------------------------------
                                                        $ 3,556,000         $ 4,022,000
                                                        =================================
</TABLE>

       The Company capitalized software development costs for the years ended
December 31, 1997, 1996 and 1995 of $950,000, $1,858,000, and $957,000,
respectively. Amortization of software development costs for the years ended
December 31, 1997, 1996 and 1995 was $963,000, $739,000, and $796,000,
respectively. During 1997, the Company wrote-off capitalized software
development costs of $723,000 and related accumulated amortization of $270,000
(see Note 6).

12.    LINES OF CREDIT

       The Company has two credit agreements with two banks: a $2,000,000 line
of credit with interest at the bank's prime rate (8.5% at December 31, 1997) and
a revolving line of credit (with a Swedish bank) for borrowings up to
$1,007,000, translated at the December 31, 1997 exchange rate, with interest at
the bank's prime rate plus 2.4% (6.9% at December 31, 1997). Borrowings under
the $2,000,000 facility are secured by $2,000,000 of the Company's investments.
Borrowings under the Swedish facility are secured by a first security interest
in substantially all of Astea International AB's assets. Both agreements require
the Company to maintain certain financial and nonfinancial covenants, as
defined. During 1997, the Company has not been in compliance with certain loan
covenants under the $2,000,000 facility. The Company has obtained a waiver from
the bank relating to such non-compliance

       The $2,000,000 line of credit expires on June 1, 1998 and the Swedish
line of credit expires on December 31, 1998. At December 31, 1996, the Swedish
facility included an overdraft provision of $145,000 which expired on January
31, 1997.

       During 1997, the highest outstanding balance, the average outstanding
balance and the weighted average interest rate on the $2,000,000 facility were
$1,300,000, $7,000 and 8.4%, respectively, and on the Swedish facility were
$1,182,000, $950,000 and 6.6%, respectively.

13.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
       DECEMBER 31,                                               1997               1996
     ----------------------------------------------------------------------------------------
     <S>                                                      <C>                 <C>
       Accounts payable                                         $ 7,008,000       $ 5,570,000
       Accrued compensation and related benefits                  2,516,000         3,385,000
       Accrued restructuring (see Note 6)                         1,868,000                 -
       Reserve for contingencies (see Note 16)                    1,087,000           215,000
       Other accrued liabilities                                  1,270,000         1,906,000
                                                              -------------------------------
                                                                $13,749,000       $11,076,000
                                                              ===============================
</TABLE>

                                      44
<PAGE>

14.    LONG-TERM DEBT

<TABLE>
<CAPTION>
       DECEMBER 31,                                                   1997                1996
     ----------------------------------------------------------------------------------------------
       <S>                                                        <C>                    <C>
       Capitalized lease obligations (see Note 16)                 $ 1,018,000           $3,346,000
       Notes payable to former owners of acquired
           companies (see Note 5)                                      609,000              887,000
       Note payable to customer (see Note 16)                          337,000                    -
       Note payable to stockholder (see Note 16)                       757,000                    -
                                                                  ---------------------------------
                                                                     2,721,000            4,233,000
       Less:  Current portion                                       (1,085,000)            (525,000)
                                                                  ---------------------------------
                                                                   $ 1,636,000           $3,708,000
                                                                  =================================
</TABLE>

       During 1997, the Company terminated the building lease with its majority
stockholder and his wife and wrote-off $2,433,000 of capital lease obligations
(see Note 19).

       Minimum principal repayments of long term debt as of December 31, 1997,
excluding capitalized lease obligations (see Note 16), are $876,000 in 1998,
$421,000 in 1999, $171,000 in 2000, $186,000 in 2001 and $49,000 in 2002. The
carrying amount of the Company's long-term debt approximates its fair value.

15.    INCOME TAXES

       In July 1995 (see Note 2), Astea terminated its status as a S corporation
and as of that date, has been subject to federal and state income taxes.

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

<TABLE>
<CAPTION>
       YEARS ENDED DECEMBER 31,                        1997               1996               1995
     ------------------------------------------------------------------------------------------------------
     <S>                                     <C>                        <C>                 <C>
       Current
           Federal                                   $(2,834,000)       $(2,837,000)        $2,118,000
           State                                               -             27,000            525,000
           Foreign                                    (2,540,000)           140,000                  -
                                             ---------------------------------------------------------
                                                      (5,374,000)        (2,670,000)         2,643,000
       Deferred
           Federal                                     1,132,000             80,000           (185,000)
           State                                               -                  -            (57,000)
           Foreign                                             -           (728,000)                 -
                                             ---------------------------------------------------------
                                                       1,132,000           (648,000)          (242,000)

       Reinstatement of deferred
           income tax assets                                   -            575,000           (518,000)
                                             ---------------------------------------------------------
                                                      (4,242,000)        (2,743,000)         1,883,000
                                             ---------------------------------------------------------
       Valuation allowance                             4,254,000          1,130,000                  -
                                             ---------------------------------------------------------
                                                     $    12,000        $(1,613,000)        $1,883,000
                                             =========================================================
</TABLE>

                                      45
<PAGE>

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

<TABLE>
<CAPTION>
       DECEMBER 31,                                                    1997                          1996
     ---------------------------------------------------------------------------------------------------------------
     <S>                                                    <C>                                     <C>
       Current deferred income tax assets (liabilities):

         Revenue recognition                                        $ 2,517,000                     $   582,000
         Accruals and reserves not
             currently deductible for tax                             1,569,000                       1,431,000
         Cash basis of accounting                                      (443,000)                       (239,000)
         Benefit of operating loss
             carryforward                                                95,000                          95,000
         Valuation reserve                                           (1,464,000)                              -
                                                            ---------------------------------------------------
                                                                      2,274,000                       1,869,000
       Non -current deferred income tax
         assets (liabilities):
         Benefit of operating loss
             carryforward                                             3,947,000                       1,527,000
         Deferred compensation                                           17,000                         142,000
         Capitalized lease obligations                                        -                         194,000
         Capitalized software
             development costs                                       (1,347,000)                     (1,437,000)
         Depreciation methods                                           (49,000)                         (4,000)
         Cash basis of accounting                                             -                        (239,000)
         Valuation reserve                                           (3,920,000)                     (1,130,000)
                                                            ---------------------------------------------------
                                                                     (1,352,000)                       (947,000)
                                                            ---------------------------------------------------
         Net deferred income tax asset                              $   922,000                     $   922,000
                                                            ===================================================
</TABLE>

       Due to the uncertainty of the ultimate realization of certain net
operating losses and other current deferred tax assets, the Company has provided
a valuation reserve for the deferred tax assets as of December 31,1997. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near-term if estimates of future taxable income are reduced.

                                      46
<PAGE>

       The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
       YEARS ENDED DECEMBER 31,                                   1997            1996          1995
     ----------------------------------------------------------------------------------------------------
     <S>                                               <C>                      <C>            <C>
       Federal statutory tax rate                                 (34.0)%       (34.0)%          34.0%
       Valuation reserve                                           15.3           5.3              -
       Net operating losses from foreign
            subsidiaries not benefitted                            13.7           1.0            2.2
       Nondeductible Abalon acquisition and
            Bendata merger expenses                                   -          24.1              -
       Reinstatement of deferred taxes
            upon conversion to C corporation
            status                                                    -           2.7           (6.0)
       State income taxes, net of federal tax
            benefit                                                   -           0.1            3.9
       Income not subject to corporate taxes
            due to S corporation status                               -          (0.5)         (16.7)
       Nondeductible expenses                                      (0.3)         (0.4)           1.0
       Other                                                        5.2          (5.9)           3.4
                                                       ---------------------------------------------
                                                                   (0.1)%        (7.6)%         21.8%
                                                       =============================================
</TABLE>

       As of December 31, 1997, the Company had a net operating loss
carryforward for United States federal income tax purposes of approximately
$20,317,000. Included in the aggregate net operating loss carryforward is
$9,129,000 of tax deductions related to equity transactions, the benefit of
which will be credited to stockholders' equity, if and when realized after the
other tax deductions in the carryforwards have been realized. The net operating
loss carryforward began to expire in 1998.

16.    COMMITMENTS AND CONTINGENCIES

       The Company leases facilities and equipment under noncancelable operating
leases and equipment under noncancelable capital leases. Interest rates on the
capital leases range from 9.0% to 9.2%.

       Rent expense under all operating leases for the years ended December 31,
1997, 1996 and 1995 was $2,521,000, $1,974,000, and $1,028,000, respectively.

                                      47
<PAGE>

       Future minimum lease payments under the Company's leases as of December
31, 1997 are as follows:

<TABLE>
<CAPTION>
                                  OPERATING LEASES         CAPITAL LEASES
                              ------------------------  --------------------
<S>                           <C>                       <C>
1998                                       $ 2,665,000           $  301,000
1999                                         2,362,000              293,000
2000                                         1,963,000              293,000
2001                                         1,913,000              314,000
2002                                         1,634,000               43,000
Thereafter                                     504,000                    -
                               -----------------------------------------------
Total minimum lease payments               $11,041,000           $1,244,000
                               ===============================================

Less: Amount representing interest                                 (226,000)
                                                        ----------------------

Present value of future minimum lease payments                    1,018,000
Less: Current portion                                              (209,000)
                                                        ----------------------
                                                                 $  809,000
                                                        ======================
</TABLE>

       In September 1997, the Company settled a dispute with a customer
regarding the implementation of the Company's software products. In conjunction
with the settlement, the Company issued 81,000 shares of common stock, paid
$300,000 on October 1, 1997 and entered into a non-interest bearing promissory
note for $337,000 which is payable on March 31, 1998.

       In 1995, the Company entered into a beta software development agreement
with a customer which was amended on February 13, 1998. The Company was required
to deliver various versions of beta releases of this software product throughout
1996 and is required to deliver a commercial release version of this software
product prior to August 31, 1998. In 1996, the Company accrued $272,000 of
penalties related to the late deliveries of the beta versions of the software
product. The Company could incur an additional penalty of $425,000 if the
scheduled delivery of the commercial release of the software product is not made
in accordance with the agreement. In conjunction with the contract amendment,
the Company was required to obtain a letter of credit for $425,000. Management
does not expect any significant losses to result from this amended agreement.

       In connection with the settlement of a dispute and to avoid potential
litigation with a stockholder, the Company entered into an agreement with a
stockholder which provided, among other items, a $1,000,000 non-interest bearing
promissory note payable in twenty equal quarterly installments through June 30,
2002 (present value of $825,000), a non-qualified stock option grant to purchase
90,000 shares of the Company's common stock with a fair value of $157,000 and a
$300,000 cash payment made on October 1, 1997.

       The Company is from time to time 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.

17.    PROFIT SHARING PLAN

       The Company maintains a voluntary profit sharing plan, including a
Section 401(k) feature, covering all qualified and eligible employees. Company
contributions to the plan are determined at the discretion of the Board of
Directors. For the years ended December 31, 1997 and 1996, the Company did not
make any contributions. For the year ended December 31, 1995, profit sharing
contributions by the Company were $201,000.

                                      48
<PAGE>

18.    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, 1997,
1996 and 1995 and changes during the years then ended is as follows:

<TABLE>
<CAPTION>

                                                                    OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                                               ---------------------------------------------------------------
                                                   SHARES                       WTD. AVG.                        WTD. AVG.
                                                  AVAILABLE                     EXERCISE                         EXERCISE
                                                  FOR GRANT        SHARES       PRICE           SHARES           PRICE
<S>                                          <C>                  <C>          <C>              <C>              <C>
Balance, January 1, 1995                           844,000        1,506,000     $ 1.18          587,000          $0.40
   Authorized                                      200,000                -          -
   Granted at market                              (463,000)         463,000      17.25
   Cancelled                                        51,000          (51,000)      5.15
   Exercised                                             -         (203,000)      0.86
                                           -----------------------------------------------------------------------------------
Balance, December 31, 1995                         632,000        1,715,000       5.75          664,000          $0.46
   Granted at market                              (893,000)         893,000      15.26
   Granted below market                            (80,000)          80,000      24.77
   Granted outside Plan at market                        -          184,000       6.04
   Cancelled                                       529,000         (529,000)     14.06
   Cancelled outside Plan                                           (15,000)      6.50
   Exercised                                             -         (469,000)      1.17
                                           -----------------------------------------------------------------------------------
Balance, December 31, 1996                         188,000        1,859,000       4.93          590,000          $2.79
   Authorized                                      500,000                -          -
   Granted at market                            (1,539,000)       1,539,000       2.68
   Granted outside Plan at market                        -          721,000       3.35
   Cancelled                                     1,556,000       (1,556,000)      5.28
   Cancelled outside Plan                                -         (433,000)      5.12
   Exercised                                             -         (150,000)      0.65
                                           -----------------------------------------------------------------------------------
Balance, December 31, 1997                         705,000        1,980,000       2.62          774,000          $2.25
                                           ===================================================================================
</TABLE>

       The following table summarizes information about stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                             -------------------------------------------         --------------------------------
                                            WEIGHTED
                                             AVERAGE        WEIGHTED                                 WEIGHTED
         RANGE OF              NUMBER       REMAINING       AVERAGE                NUMBER            AVERAGE
      EXERCISE PRICES        OUTSTANDING   CONTRACTUAL    EXERCISE PRICE         EXERCISABLE       EXERCISE PRICE
      ---------------        -----------   -----------    --------------         -----------       --------------
                                              LIFE
                                              ----
     <S>                     <C>            <C>           <C>                    <C>               <C>
     $ 0.21  -  $ 2.50          671,000       7.42           $ 1.48                 338,000            $ 0.85
       2.52  -    2.52          924,000       8.70             2.52                 296,000              2.52
       2.56  -    7.75          325,000       10.0             2.98                 116,000              3.04
      15.00  -   15.00           60,000       7.57            15.00                  24,000             15.00
                              ---------                                             -------
       0.21  -   15.00        1,980,000       8.48             2.62                 774,000              2.25
                              =========                                             =======
</TABLE>

       In July 1996, the Company repriced all outstanding non-officer employee
options to $7.75, the fair market value on the new grant date. In October 1996,
the Company repriced certain outstanding officer options to the current fair
market value of $5.50. In April 1997, the Company repriced all

                                      49
<PAGE>

outstanding employee options to $2.52, the fair market value on the new grant
date. Options granted to directors under the 1995 Director Plan were not
repriced.

       The Company accounts for options and the employee stock purchase plan
under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," under which deferred compensation expense has been
recorded for options granted with exercise prices below fair value. The deferred
compensation is charged to expense ratably over the vesting period. 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," the Company's net income (loss) and basic and diluted earnings
(loss) per share would have been:

<TABLE>
<CAPTION>
                                                   1997                     1996                   1995
                                           -----------------------------------------------------------------------
<S>                                        <C>                          <C>                     <C>
Net income (loss)-as reported                  $(18,494,000)            $(19,707,000)           $6,747,000
Net income (loss)-pro forma                    $(22,103,000)            $(24,266,000)           $3,986,000

Basic earnings (loss) per share-
    as reported                                $      (1.40)            $      (1.53)           $     0.64
Diluted earnings (loss) per share-
    as reported                                $      (1.40)            $      (1.53)           $     0.59
Diluted earnings (loss) per share-
    pro forma                                  $      (1.67)            $      (1.89)           $     0.35
</TABLE>

       The resulting effect on pro forma net income (loss) and net income (loss)
per share disclosed for 1997, 1996 and 1995 is not likely to be representative
of the effects on net income (loss) and net income (loss) per share on a pro
forma basis in future years, because 1997, 1996 and 1995 pro forma results
include the impact of only three, two and one years, respectively, of grants and
related vesting, while subsequent years will include additional years of grants
and vesting.

       The weighted average fair value of those options granted during the years
ended December 31, 1997, 1996 and 1995 was estimated as $1.84, $7.31 and $12.10,
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 6.60%, 6.48% and 5.98% for 1997,
1996 and 1995 grants, respectively; an expected life of six years; volatility of
85%; and a dividend yield of zero for 1997, 1996 and 1995 grants.

       The weighted average fair value of the employee purchase rights granted
in 1997 and 1996 was $1.51 and $9.52, respectively. The fair value of the
purchase rights was estimated using the Black-Scholes model with the following
weighted average assumptions: risk-free interest rate of 6.10% and 5.46% for
1997 and 1996, respectively; an expected life of six months; volatility of 85%;
and a dividend yield of zero for 1997 and 1996.

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 500 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, 250,000 shares of common stock were reserved for issuance.
During 1997, 24,357 shares were purchased. During 1996 and 1995, no shares were

                                      50
<PAGE>

purchased under the ESPP. At December 31, 1997, there were 225,643 shares
available for future purchases.

19.    RELATED PARTY TRANSACTIONS

       The Company had leased certain of its office facilities from its majority
stockholder and his wife under a noncancelable capital lease which had an
original expiration date of 2009 and required annual lease payments of $399,000.
Payments of $283,000, $399,000 and $399,000 for the years ended December 31,
1997, 1996 and 1995, respectively, were made by the Company under this lease. On
September 17, 1997, the Company entered into a lease termination agreement with
the majority stockholder and his wife, whereby, the Company agreed to pay
$583,000. During 1997, the Company paid $272,000 of this amount, with the
remainder of $311,000 paid in February 1998. In conjunction with the lease
termination, the Company wrote-off the building under capital lease, net of
accumulated amortization and the capital lease obligation and recorded a net
charge of $36,000 to the restructuring accrual. In management's opinion, the
terms of this related party lease and the related lease termination were at
least as favorable to the Company as could have been obtained from an
unaffiliated third party.

       From its inception in 1979 through the Offering, the Company had been
owned by one individual. In January 1995, a distribution of $370,000 was made to
the majority stockholder which was used by the majority stockholder for the
payment of his 21% interest in Astea BV (see Notes 1 and 5). As a result of the
termination of the Company's S corporation status, distributions totaling
$1,979,000 and $8,296,000 have been paid to the majority stockholder in 1996 and
1995, respectively, which represented taxed but undistributed S corporation
earnings.

       Prior to the acquisition of Bendata, Inc. by the Company, the former
majority stockholder of Bendata, Inc. received a note payable of $1,500,000 in
exchange for the contribution of certain assets. The note was payable upon
demand at an interest rate of 7%. The note was repaid in full as of December 31,
1995. Total payments during 1995 were $1,181,000 including principal of
$1,139,000 and interest of $42,000. During 1995, Bendata, Inc. made
distributions of $345,000 to its stockholders.

       In 1997, 1996 and 1995, the Company paid premiums on behalf of the
majority stockholder and his wife of $52,000, $70,000 and $75,000, respectively,
under split dollar life insurance policies.

                                      51
<PAGE>

  20.  GEOGRAPHIC SEGMENT DATA

       The Company operates in one business segment. The following table
  presents information about the Company's operations by geographic area:

<TABLE>
<CAPTION>
Year ended December 31,                1997           1996           1995
-----------------------------------------------------------------------------
<S>                                <C>            <C>            <C>
  Revenues:
    Software license fees
      United States
        Domestic                   $ 14,267,000   $ 17,515,000   $ 23,546,000
        Export                        1,093,000      1,575,000        814,000
      Transfers between
      geographic areas                1,655,000      1,917,000      2,227,000
                                   ------------------------------------------
                                     17,015,000     21,007,000     26,587,000

      Europe                          7,873,000      6,321,000      5,158,000
      Other foreign                   1,544,000      3,446,000        386,000
      Transfers between
        geographic areas                694,000      1,127,000        552,000
                                   ------------------------------------------
                                     10,110,000     10,894,000      6,096,000
      Eliminations                   (2,349,000)    (3,044,000)    (2,779,000)
                                   ------------------------------------------
                                     24,777,000     28,857,000     29,904,000
                                   ------------------------------------------

    Services and maintenance
      United States
        Domestic                     21,834,000     22,453,000     17,454,000
        Export                        1,344,000        948,000      1,049,000
                                   ------------------------------------------
                                     23,178,000     23,401,000     18,503,000
                                   ------------------------------------------
      Europe                         11,141,000      5,895,000      4,326,000
      Other foreign                   1,838,000      4,555,000      1,233,000
                                   ------------------------------------------
                                     36,157,000     33,851,000     24,062,000
                                   ------------------------------------------
                                    $60,934,000    $62,708,000    $53,966,000
                                   ==========================================

  Income (loss) from operations
      United States                $ (7,505,000)  $(18,796,000)  $  8,432,000
      Europe                         (6,073,000)      (939,000)     1,043,000
      Other foreign(1)               (4,889,000)    (2,156,000)    (1,024,000)
                                   ------------------------------------------
                                   $(18,467,000)  $(21,891,000)  $  8,451,000
                                   ==========================================

  Identifiable assets
      United States                $ 98,094,000   $100,123,000   $110,718,000
      Europe                          7,213,000      7,450,000      8,371,000
      Other foreign                   1,401,000      7,951,000      1,469,000
      Eliminations                  (64,935,000)   (57,833,000)   (51,188,000)
                                   ------------------------------------------
                                   $ 41,773,000   $ 57,691,000   $ 69,370,000
                                   ==========================================
</TABLE>

(1)  Included in operating losses from other foreign locations were $3,659,000,
     $1,727,000, and $600,000 for the years 1997, 1996, 1995, respectively,
     related to Astea Israel, which is primarily a development cost center. The
     Company conducts its primary development activities within its United
     States operations.

                                      52
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information concerning the directors of the Company is incorporated herein
by reference to the information contained under the heading "Election of
Directors" in the registrant's definitive Proxy Statement for the Company's 1998
Annual Meeting of Stockholders to be held on May 14, 1998, which will be filed
with the Securities and Exchange Commission not later than April 30, 1998 (the
"Definitive Proxy Statement").

     Certain information concerning directors and executive officers of the
registrant required by this item is incorporated herein by reference to the
information contained under the heading "Occupations of Directors and Executive
Officers" in the registrant's Definitive proxy Statement.

     The information concerning the compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this item is incorporated herein by
reference to the Definitive Proxy Statement under the heading "Section 16
Beneficial Ownership Reporting Compliance."

ITEM 11.  EXECUTIVE COMPENSATION.

     Information concerning executive compensation required by this item is
incorporated herein by reference to the information contained under the heading
"Compensation and Other Information Concerning Directors and Officers" in the
Definitive Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information concerning security ownership of certain beneficial owners and
management required by this item is incorporated herein by reference to the
information contained under the heading "Management and Principal Holders of
Voting Securities" in the Definitive Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information concerning certain relationships and related transactions
required by this item is incorporated herein by reference to the information
contained under the heading "Certain Relationships and Related Transactions" in
the Definitive Proxy Statement. See also Note 19 of the Notes to the
Consolidated Financial Statements of the Company appearing elsewhere in this
Annual Report on Form 10-K.

                                      53
<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

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

          i)    Consolidated Balance Sheets at December 31, 1997 and 1996
          ii)   Consolidated Statements of Income for the years ended December
                31, 1997, 1996 and 1995
          iii)  Statements of Stockholders' Equity for the years ended
                December 31, 1997, 1996 and 1995
          iv)   Statements of Cash Flows for the years ended December 31,
                1997, 1996 and 1995
          v)    Notes to the Consolidated Financial Statements

     (a)(1)(B)  Report of Independent Public Accountants.

     (a)(2)  Schedules.

             a)  Schedule II - Valuation and Qualifying Accounts

                 Schedules not listed above have 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

          2.1      Agreement and Plan of Merger among the Company, Bendata,
                   Inc., Bendata (UK)
                   Limited LLC, BDI Acquisition Corp., Ronald J. Muns, Randall
                   W. Casto, and David Russell, dated as of February 26, 1996
                   (Incorporated herein by reference to Exhibit 7.01 to the
                   Company's Report on Form 8-K, filed on March 1, 1996).

          2.2      Share Purchase Agreement, dated as of June 20, 1996, among
                   the Company, Per Edstrom, Orjan Grinndal and Henrik Lindberg
                   (Incorporated herein by reference to Exhibit 7.01 to the
                   Company's Report on Form 8-K, filed on July 12, 1996).

          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 to the Company's Registration
                   Statement on Form S-1, as amended (File No. 33-92778)).

          10.2     Form of Non-Qualified Stock Option Agreement under the 1994
                   Amended Stock Option Plan (Incorporated herein by reference
                   to Exhibit 10.2 to the Company's Registration Statement on
                   Form S-1, as amended (File No. 33-92778)).

                                      54
<PAGE>

          10.3     Form of Incentive Stock Option Agreement under the 1994
                   Amended Stock Option Plan (Incorporated herein by reference
                   to Exhibit 10.3 to the Company's Registration Statement on
                   Form S-1, as amended (File No. 33-92778)).

          10.4     1991 Amended Non-Qualified Stock Option Plan (Incorporated
                   herein by reference to Exhibit 10.4 to the Company's
                   Registration Statement on Form S-1, as amended (File No. 33-
                   92778)).

          10.5     Form of Non-Qualified Stock Option Agreement under the 1991
                   Amended Non-Qualified Stock Option Plan (Incorporated herein
                   by reference to Exhibit 10.5 to the Company's Registration
                   Statement on Form S-1, as amended (File No. 33-92778)).

          10.6     1995 Employee Stock Purchase Plan (Incorporated herein by
                   reference to Exhibit 10.6 to the Company's Registration
                   Statement on Form S-1, as amended (File No. 33-92778)).

          10.7     Amendment No. 1 to 1995 Employee Stock Purchase Plan
                   (Incorporated herein by reference to Exhibit 10.2 to the
                   Company's Quarterly Report on Form 10-Q for the fiscal
                   quarter ended September 30, 1997).

          10.8     1995 Employee Stock Purchase Plan Enrollment/Authorization
                   Form (Incorporated herein by reference to Exhibit 4.7 to the
                   Company's Registration Statement on Form S-8, filed on
                   September 19, 1995 (File No. 33-97064)).

          10.9*    Amended and Restated 1995 Non-Employee Director Stock Option
                   Plan.

          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.

          10.15*   Form of Non-Qualified Stock Option Agreement under the 1998
                   Stock Option Plan.

          10.16*   Form of Incentive Stock Option Agreement under the 1998 Stock
                   Option Plan.

          10.17    Amended and Restated Lease Agreement dated January 1, 1994,
                   among Zack B. Bergreen, Zahava Bar-Nir, and the Company
                   (Incorporated herein by reference to Exhibit 10.11 to the
                   Company's Registration Statement on Form S-1, as amended
                   (File No. 33-92778)).

          10.18    Guaranty, dated as of January 24, 1994, among Zack B.
                   Bergreen, Zahava Bar-Nir, and Continental Bank, predecessor
                   of Midlantic Bank, N.A. (Incorporated herein by reference to
                   Exhibit 10.12 to the Company's Registration Statement on Form
                   S-1, as amended (File No. 33-92778)).

          10.19    Promissory Note, dated as of November 24, 1994, payable by
                   Zack B. Bergreen to the Company in the amount of $108,978.54
                   (Incorporated herein by reference to Exhibit 10.13 to the
                   Company's Registration Statement on Form S-1, as amended
                   (File No. 33-92778)).

          10.20    Promissory Note, dated as of October 25, 1994, payable by
                   Zack B. Bergreen to the Company in the amount of $108,836.88
                   (Incorporated herein by reference to Exhibit 10.14 to the
                   Company's Registration Statement on Form S-1, as amended
                   (File No. 33-92778)).

                                      55
<PAGE>

          10.21    Termination of Lease Agreement dated September 17, 1997 by
                   and between Zack B. Bergreen and Zahava Bar-Nir, as
                   Landlords, and the Company, as Tenant (Incorporated by
                   reference herein to Exhibit No. 10.1 to the Company's
                   Quarterly Report on Form 10-Q for the fiscal quarter ended
                   September 30, 1997).

          10.22    Agreement of Lease, dated July 12, 1996, between the Company
                   and C/N Horsham Towne Limited Partnership (Incorporated
                   herein by reference to Exhibit 10.17 to the Company's Annual
                   Report on Form 10-K for the fiscal year ended December 31,
                   1996).

          10.23    Amended and Restated Loan and Security Agreement, dated April
                   24, 1995, between the Company and Midlantic Bank, N.A., as
                   amended by letter agreement dated May 22, 1995 (Incorporated
                   herein by reference to Exhibit 10.20 to the Company's
                   Registration Statement on Form S-1, as amended (File No. 33-
                   92778)).

          10.24*   Modification Agreement dated as of June 30, 1997, by and
                   among the Company, PNC Bank, National Association, successor
                   by merger to Midlantic Bank, N.A. and PNC Leasing Corp.

          10.25*   Cross Collateralization Agreement dated June 30, 1997, by and
                   among the Company, PNC Bank, National Association and PNC
                   Leasing Corp.

          10.26    Registration Rights Agreement among the Company, Ronald J.
                   Muns, Randall W. Casto and David Russell dated as of February
                   27, 1996 (Incorporated herein by reference to Exhibit 7.05 to
                   the Company's Report on Form 8-K, filed on March 1, 1996).

          10.27    Agreement dated as of June 30, 1997 between the Company and
                   Ronald J. Muns (Incorporated herein by reference to Exhibit
                   No. 1 to Schedule 13-D/A dated July 7, 1997, by Ronald J.
                   Muns, as reporting person, with respect to the Company, as
                   issuer).

          10.28    Registration Rights Agreement, dated as of June 28, 1996,
                   among the Company, Per Edstrom, Orjan Grinndal and Henrik
                   Lindberg (Incorporated herein by reference to Exhibit 7.03 to
                   the Company's Report on Form 8-K, filed on July 12, 1996).

          10.29    Amendment Agreement, dated as of November 26, 1996, among the
                   Company, Per Edstrom, Orjan Grinndal and Henrik Lindberg
                   (Incorporated herein by reference to Exhibit 7.01 to the
                   Company's Report on Form 8-K, filed on November 27, 1996).

          10.30*   Agreement among Vance F. Brown, Bendata, Inc., and the
                   Company, dated as of November 14, 1997.

          10.31*   Employment and Noncompetition Agreement among Per Edstrom,
                   Abalon AB and the Company, dated June 28, 1996.

          10.32*   Letter to Leonard von Vital regarding employment terms, dated
                   November 6, 1993.

          10.33*   Memorandum of John G. Phillips regarding employment terms,
                   dated May 15, 1997.

          10.34*   Letter to Robert G. Schwartz Jr. regarding severance
                   agreement, dated February 17, 1998.

          21.1*    Subsidiaries of the Registrant.

          23.1*    Consent of Arthur Andersen LLP.

          24.1*    Powers of Attorney (See the Signature Page).

          27.1*    Financial Data Schedule.

          ___________________
          * Filed herewith

                                      56
<PAGE>

          (b)  Reports on Form 8-K.

          The Company filed no current reports on Form 8-K, or amendments to
current reports on Form 8-K/A, during the fiscal quarter ended December 31,
1997.

          (c)  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.

                                      57
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
1998.

                                 ASTEA INTERNATIONAL INC.


                                 By:  /s/ Zack B. Bergreen
                                      -----------------------
                                      Zack B. Bergreen
                                      Chairman and Chief
                                      Executive Officer

                               POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
        Signature                         Title                             Date
        ---------                         -----                             ----
<S>                            <C>                                     <C>

  /s/ Zack B. Bergreen         Chairman and Chief Executive            March 30, 1998
--------------------------
  Zack B. Bergreen             Officer (Principal Executive Officer)

  /s/ John G. Phillips         Vice President and Chief                March 30, 1998
--------------------------
  John G. Phillips             Financial Officer (Principal
                               Financial and Accounting
                               Officer)

  /s/ Charles D. LaMotta       President, Chief Operating              March 30, 1998
--------------------------
  Charles D. LaMotta           Officer and Director

  /s/ Henry H. Greer           Director                                March 30, 1998
--------------------------
  Henry H. Greer

  /s/ Joseph J. Kroger         Director                                March 30, 1998
--------------------------
  Joseph J. Kroger

  /s/ Bruce R. Rusch           Director                                March 30, 1998
--------------------------
  Bruce R. Rusch
</TABLE>

                                      58
<PAGE>

                                                                     SCHEDULE II

                            ASTEA INTERNATIONAL INC.

                       VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                 BALANCE AT                                      OTHER                      BALANCE AT
                                  BEGINNING                                   INCREASES/                    END OF
CLASSIFICATION                    OF PERIOD   ADDITIONS (1)  DEDUCTIONS (2)  DECREASES (3)  INCREASES (4)   PERIOD
-------------------------------  -----------  -------------  --------------  -------------  -------------   ------
<S>                              <C>          <C>            <C>             <C>            <C>             <C>
For the Year Ended
  December 31, 1995

     Reserve for estimated
       uncollectible accounts     $1,024,000    $1,140,000       $(784,000)  $          -    $       -        $1,380,000

For the Year Ended
  December 31, 1996

     Reserve for estimated
       uncollectible accounts     $1,380,000    $  264,000       $(520,000)     $ 534,000        $23,000      $1,681,000

For the Year Ended
   December 31, 1997

     Reserve for estimated
       uncollectible accounts     $1,681,000    $1,744,000       $(969,000)     $(170,000)   $       -        $2,286,000
</TABLE>

(1)  Amounts represent charges to expense and reductions to revenue.
(2)  Amounts represent the write-off of receivables against established
     reserves.
(3)  Amounts represent recoveries of previously written-off receivables and
     amounts reclassed from deferred revenues.
(4)  Amount represents the acquisition of Abalon.

                                      59