UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


___________________________________________


**FORM
      10-K**


(Mark
      One)


**[X]**  Annual
      Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
      1934.


For
      The
      Fiscal Year Ended: December 31, 2005


or





[
 
      ]  Transition
      Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
      1934.


For
      the
      transition period from __________ to
      __________





Commission
      File Number: **0-26330**


**ASTEA
      INTERNATIONAL INC.**


(Exact
      name of registrant as specified in its charter)


**Delaware**
            **23-2119058**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**240
                Gibraltar Road, Horsham, Pennsylvania**
            **19044******(Address
                of principal executive offices)
            (Zip
                Code)




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





Securities
      registered pursuant to Section 12(b) of the Act: **None**





Securities
      registered pursuant to Section 12(b) of the Act: **Common
      Stock, $.01 par value**





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


Yes __ No X





Indicate
      by checkmark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  Yes __NoX





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





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





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





Large
      Accelerated filer __  Accelerated Filer __   Non-accelerated
      filer X





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





The
      aggregate market value of the voting stock held by nonaffiliates of the
      registrant as of June 30, 2006 (based on the closing price of $9.10 as quoted
      by
      Nasdaq Capital Market as of such date) was approximately $19,936,744.





As
      of
      March 15, 2007, 3,591,185 shares of the registrant’s Common Stock were
      outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE




None.











**TABLE
      OF CONTENTS**




PagePART
                IItem
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            17Item
                1B.
            Unresolved
                SEC Items
            27Item
                2.
            Properties
            27Item
                3.
            Legal
                Proceedings
            27Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            27PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity and
                Related
            28Stockholder
                MattersItem
                6.
            Selected
                Financial Data
            29Item
                7.
            Management’s
                Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            30Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            42Item
                8.
            Financial
                Statements and Supplementary
                Data
            43Item
                9.
            Changes
                in and Disagreements with Accountants
                on
            71Accounting
                and Financial DisclosureItem
                9A.
            Controls
                and Procedures
            71Item
                9B.
            Other
                Information
            72PART
                IIIItem
                10.
            Directors
                and Executive Officers of the
                Registrant
            72Item
                10A.
            Departure
                of Directors of Principal Officers; Election
                of
            72Directors;
                Appointment of Principal
                officersItem
                11.
            Executive
                Compensation
            72Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
            72ManagementItem
                13.
            Certain
                Relationships and Related
                Transactions
            73Item
                14.
            Principal
                Accountant Fees and Services
            73PART
                IVItem
                15.
            Exhibits
                and Financial Statement
                Schedules
            73Signature
                Page
            76Consent
                of Independent Registered Public Accounting
                Firm
            77Certificates
            78





**PART
      I**





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





**General**





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




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





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





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





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





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





Astea
      provides customers with an array of professional consulting, training and
      customer support services to implement its products and integrate them with
      other corporate systems such as back-office financial and ERP applications.
      Astea also maintains and supports its software over its installed life cycle.
      The Company’s experience and domain expertise in service and sales management,
      distribution, logistics, finance, mobile






3






technologies,
      internet applications and enterprise systems integration are made available
      to
      customers during their assessments of where and how their business processes
      can
      be improved.





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





**FieldCentrix
      Acquisition**





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





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





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














4










**Current
      Product Offerings**





*Astea
      Alliance*








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





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





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





In
      February 2007, the latest software version, Astea Alliance, 8.0 was released.
      This version will deliver extensive enhancements and new features to empower
      service-centric organizations to achieve a new level of service excellence.
      Built on Microsoft .NET 2.0 platform and offering more than 200 web services
      for
      ease of integration and accelerated development, Astea Alliance 8.0 is one
      of
      the most open and non-proprietary solutions available on the market today.
      It
      builds on the prior version, Astea Alliance 6.8, which was designed and built
      with new system architecture for Web-based deployment using the Microsoft.NET
      development architecture. Prior to this, products were engineered for Windows
      client/server technology and marketed as AllianceEnterprise. AllianceEnterprise
      products included re-engineered and enhanced versions of service modules that
      were initially introduced as ServiceAlliance® in 1997, and a re-engineered and
      enhanced version of the Company’s sales force automation product that was
      initially introduced as SalesAlliance in 1999.






5





ServiceAlliance
      and SalesAlliance, the earliest versions of Astea Alliance solutions, were
      the
      Company’s initial new technology offerings following a long and highly
      successful history with its DISPATCH-1 legacy system solutions. Astea
      Alliance solutions have been licensed to over 244  customers
      worldwide. Market acceptance of Astea Alliance by  global
      and regional companies has continually increased since 2002 and the Company
      has
      aggressively pursued opportunities for larger system implementations with mid-size
      to large enterprises on a worldwide basis .





The
      current Astea Alliance offering consists of:


·
            9
                Core Applications


·
            Mobile
                Applications


·
            Extended
                Portals


·
            Reporting
                and Business Intelligence


·
            Tools





**Astea
      Alliance Core Applications:**


Alliance
      Contact Center


Alliance
      Depot Repair


Alliance
      Field Service


Alliance
      Logistics


Alliance
      Marketing Campaigns


Alliance
      Order Processing


Alliance
      Professional Services


Alliance
      Sales


Alliance
      Dynamic Scheduling Engine





**Astea
      Alliance Mobile Applications:**


Alliance
      Laptop for Service


Alliance
      Mobile


Alliance
      2-way Paging





**Astea
      Alliance Extended Portals:**


Customer
      Self-Service


Remote
      Technician





**Astea
      Alliance Reporting and Business Intelligence:**


Alliance
      Reporting


Alliance
      Business Intelligence





**Astea
      Alliance Tools:**


Alliance
      BizTalk Connector


Alliance
      Knowledge Base


Alliance
      Links


Alliance
      Studio





**Astea
      Alliance Core Applications**





*Alliance
      Contact Center*





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






6






escalation,
      and interface to Computer Telephony Integration (CTI) systems help streamline
      customer interaction processes. Work scheduling and demand balancing optimize
      staff utilization. Employee personal portals with access to comprehensive
      real-time customer data and decision support tools including intelligent
      knowledge management and scripting for problem resolution and inside sales
      drive
      higher staff productivity. Aside from more efficient customer service and higher
      levels of customer satisfaction, the objectives of Astea’s Alliance Contact
      Center software are to reduce overhead through improved first-call resolution
      rates and shorter service-call handling times. A powerful, third-party knowledge
      engine is integrated into this application to further enhance and extend the
      diagnostic tools available to contact center agents. This optional module is
      also available for Depot Repair and Field Service applications.





*Alliance
      Depot Repair*





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





*Alliance
      Field Service*





The
      Alliance Field Service core application delivers a robust set of automated
      capabilities to streamline and improve management of field service activities.
      By automating workflow field service representatives can more efficiently
      complete and document assignments, manage vehicle assets, capture expenses
      and
      generate revenue through add-on sales during a customer contact. Applications
      alert dispatchers to contractual minimum response times and expedite
      coordination of field force skills matching, scheduling, dispatch and repair
      parts logistics. The use of the Dynamic Scheduling Engine automates much of
      this
      process. The *Remote
      Technician* portal
      allows site-based field engineers and other off-site agents secure access to
      the
      core system. Mobile tools deliver rich functionality on notebook and PDA
      platforms that enable field forces to work electronically for receiving,
      documenting and reporting assignments, eliminating manual procedures, service
      delays and paper reporting. The software supports all field service categories
      including equipment installations, break/fix, planned maintenance and meter
      reading. Applications can also be integrated with equipment diagnostic systems
      for fully automated solutions that initiate and prioritize service requests
      and
      dispatch assignments to field employees’ PDAs without human
      intervention.





*Alliance
      Logistics*





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






7


*Alliance
      Marketing Campaigns*





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





*Alliance
      Order Processing*





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





*Alliance
      Professional Services*





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





*Alliance
      Sales*





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








8


*Alliance
      Dynamic Scheduling Engine (DSE)*





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





**Astea
      Alliance Mobile Applications**





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





**Astea
      Alliance Extended Portals**





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





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





**Astea
      Alliance Reporting and Business Intelligence (BI)**





For
      proactive service management, Alliance BI provides highly visual, real-time
      analysis of
      business performance, focusing on Key Performance Indicators - a tool that
      facilitates businesses’ understanding customer behavior. Alliance BI enables the
      viewing of information for the entire enterprise, increasing revenues and
      identifying new business opportunities. Alliance
      BI has been designed to ensure that users of all kinds have immediate access
      to
      crucial information whenever it's needed. In the boardroom, at agent level,
      or
      even for customers, this tool effortlessly allows the viewing of performance
      data such as performance against service level agreements, contract
      profitability, product failure rate, repair turn around times, customer
      satisfaction and engineer efficiency. Reports allow businesses to see how many
      orders have met their contractual service ETA and how many failed, which helps
      organizations better understand customer satisfaction. Workloads show the
      available working hours at a specific location in contrast to the demand for
      workforce planning and optimization.






9





**Astea
      Alliance Tools**





*Alliance
      Links*





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





*Alliance
      Studio*





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





**FieldCentrix
      Enterprise Suite**





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





The
      current FieldCentrix Enterprise offering consists of:


·
            FX
                Service Center


·
            FX
                Mobile


·
            FX
                e-Service


·
            FX
                Resource Utilization


·
            FX
                Interchange


·
            FX
                Interchange for JD Edwards


·
            FX
                Mobility Express


·
            FX
                Express for JD Edwards





*FX
      Service Center*





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








10





*FX
      Mobile*





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





*FX
      e-Service*





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





*FX
      Resource Utilization*





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





*FX
      Interchange*





FX
      Interchange software provides data transporting services that allow enterprises
      to quickly and easily integrate FieldCentrix Enterprise to existing legacy
      and
      business systems - to get the most value from field data. FX Interchange
      converts data stored in FX Service Center knowledge base to XML (eXtensible
      Markup Language) or a Microsoft SQL Server 7.0/2000 database. Once converted,
      the data is easily accessible to other systems for basic billing and payroll
      extraction, and extensive bi-directional integration purposes to support the
      needs of an accounting, call center, or service dispatch integrated
      solution.






11





*FX
      Interchange for JD Edwards*





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





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





*FX
      Mobility Express*





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





*FX
      Express for JD Edwards*





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





**Astea
      Client Services**





Professional
      Services :





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





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





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






12





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





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





Following
      the Go Live, Astea professional services engages the customer in the *Assessment
      Phase* .
      During
      this effort, the delivered system is assessed to validate benefits, analyze
      the
      process to measure key performance indicators, document and understand lessons
      learned. To perform these assessments, Astea consultants collect and analyze
      the
      planned benefits, processes used to capture and report on the key performance
      indicators, and document the lessons learned from all phases of the
      implementation. An action plan is developed from the lessons learned and key
      performance indicators for use in future phases and/or releases.





Technical
      Services :





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





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





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





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





*Customer
      Support*





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






13





*Education
      & Training*




Application
      Training:





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





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





Technical
      Training:





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





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





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





**Customers**





The
      Company estimates that it has **** sold **** licenses
      to **** approximately **** 600
      customers ranging from small, rapidly growing companies to large, multinational
      corporations with geographically dispersed operations and remote offices. More
      than 244 licenses (including 2006 sales) have been sold for Astea Alliance
      and
      the remainder for DISPATCH-1 software and the FieldCentrix software. The broad
      applicability of the Company’s products is demonstrated by the wide range of
      companies across many markets and industries that use one or more of Astea’s
      products, including customers in information technology, medical devices and
      diagnostic systems, industrial controls and instrumentation, retail systems,
      office automation, imaging systems, facilities management, telecommunications,
      and other industries with equipment sales and service requirements. In 2006
      no
      customer represented more than 10% of total revenues. In 2005, one customer,
      EDS, represented 24% of revenues. In 2004, Carrier Corporation accounted for
      16%
      of the Company’s revenues.





**Sales
      and Marketing**





The
      Company markets its products through a worldwide network of direct and indirect
      sales and services offices with corporate headquarters in the United States
      and
      regional headquarters in the United Kingdom (Europe, Middle East and Africa
      Operations) and Australia (Asia Pacific Operations). Sales partners include
      distributors (value-added resellers, system integrators and sales agents) and
      OEM partners. The Company actively seeks to expand its reseller network and
      establish an international indirect distribution channel targeted at the
      mid-market tier. See “Certain Factors that May Affect Future Results 3⁄4 **** Need
      to
      Expand Indirect Sales.”






14





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





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





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





Astea’s
      international sales accounted for 27% of the Company’s revenues in 2006, 48% of
      the Company’s revenues in 2005 and 37% in 2004. See “Certain Factors that May
      Affect Future Results—Risks Associated with International Sales.”





**Product
      Development**





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





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






15





The
      Company’s total expense for product development for the years ended December 31,
      2006, 2005 and 2004, was $3,842,000, $2,461,000 and $1,431,000 respectively.
      These expenses amounted to 19%, 11% and 8%
      of
      total revenues for 2006, 2005, and 2004, respectively. The Company capitalized
      software development costs of $2,821,000, $1,555,000 and $1,380,000 in 2006,
      2005 and 2004, respectively. The significant increase in software costs
      capitalized in 2006 results from the focus on completing version 8.0 of Astea
      Alliance, which continued throughout the year. In addition, there were two
      new
      projects developed at FieldCentrix, version 4.1 and the integration of FX
      Mobility with Astea Alliance. The Company anticipates that it will continue
      to
      allocate substantial resources to its development effort for the upgrade of
      its
      suite of products. See “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” and “Certain Factors that May Affect Future
      Results—Need for Development of New Products.”





**Manufacturing**





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





**Competition**





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





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





**Licenses
      and Intellectual Property**





Astea
      considers its software proprietary and licenses its products to its customers
      under written license agreements. The Company also employs an encryption system
      that restricts a user’s access to source code to further protect the Company’s
      intellectual property. Because the Company’s products allow customers to use the
      software’s built in features to customize their applications without altering
      the framework source code, the framework source code for the Company’s products
      is typically neither licensed nor provided to customers. The Company does,
      however, license source code from time to time and maintains certain third-party
      source code escrow arrangements. See “Customers” and “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations.”





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






16





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, 2006, the Company, including its subsidiaries, had a total of
      193
      full time employees worldwide, 100 in the United States, 19 in the United
      Kingdom, 6 in the Netherlands, 56 in Israel and **** 12
      in
      Australia. The Company’s future performance depends, in significant part, upon
      the continued service of its key technical and management personnel and its
      continuing ability to attract and retain highly qualified and motivated
      personnel in all areas of its operations. See “Certain Factors that May Affect
      Future Results—Dependence on Key Personnel; Competition for Employees.” None of
      the Company’s employees is represented by a labor union. The Company has not
      experienced any work stoppages and considers its relations with its employees
      to
      be good.





**Corporate
      History**





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





**Item1A.**  **Risk
      Factors**





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






17





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





**Recent
      History of Net Losses**





The
      Company has a history of net losses. In 2006, it generated a loss of $5.0
      million. The Company generated net income of $1.2 million in 2005 and $1.5
      million in fiscal 2004. As of December 31, 2006, stockholders’ equity is
      approximately $6.1 million, which is net of an accumulated deficit of
      approximately $20.3 million. Moreover, the Company expects to continue to incur
      additional operating expenses for research and development. As a result, the
      Company will need to generate significant revenues to achieve and maintain
      profitability. The Company may not be able to achieve the necessary revenue
      growth or profitability in the future. If the Company does not attain or sustain
      profitability or raise additional equity or debt in the future, the Company
      may
      be unable to continue its operations.





**Decreased
      Revenues from DISPATCH-1**





In
      each
      of 2006, 2005, and 2004, 5%, 6%, and 14% respectively, of the Company’s total
      revenues were derived from the licensing of DISPATCH-1 and the providing of
      professional services in connection with the implementation, deployment and
      maintenance of DISPATCH-1 installations. See “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.” The Company
      originally introduced Astea Alliance in August 1997 in order to target a market
      segment in which DISPATCH-1 was not cost-effective or attractive. Subsequent,
      rapid changes in technology have now positioned the Astea Alliance suite,
      introduced in 2001 and which includes the Astea Alliance functionality, to
      supercede DISPATCH-1 as the company’s flagship product. As a result, there are
      no license sales planned or anticipated for DISPATCH-1 to new customers. License
      revenues from DISPATCH-1 were $31,000 in 2006 and $16,000 in 2005. Total
      DISPATCH-1 revenues have been insignificant each of the last three fiscal years
      and that trend is expected to continue.





While
      the
      Company has licensed Astea Alliance to over 244 companies worldwide from 1998
      through 2006, revenues from sales of Astea Alliance alone may not be sufficient
      to support the expenses of the Company. The Company’s future success will depend
      mainly on its ability to increase licenses of the Astea Alliance suite and
      FieldCentrix offerings, on developing new products and product enhancements
      to
      complement its existing product offerings, on its ability to continue support
      and maintenance revenues from DISPATCH-1, and on its ability to control its
      operating expenses. Any failure of the Company’s products to achieve or sustain
      market acceptance, or of the Company to sustain its current position in the
      Customer Relationship Management software market, would have a material adverse
      effect on the Company’s business and results of operations. There can be no
      assurance that the Company will be able to increase demand for Astea Alliance
      and FieldCentrix, maintain an acceptable level of support and maintenance
      revenues from DISPATCH-1, or to lower its expenses, thereby avoiding future
      losses.











18





**Need
      for Development of New Products**





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





**Rapid
      Technological Change**





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





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





**Burdens
      of Customization**





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







19





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





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





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





The
      sale
      and implementation of the Company’s products generally involve a significant
      commitment of resources by prospective customers. As a result, the Company’s
      sales process is often subject to delays associated with lengthy approval
      processes attendant to significant capital expenditures, definition of special
      customer implementation requirements, and extensive contract negotiations with
      the customer. Therefore, the sales cycle varies substantially from customer
      to
      customer and typically lasts between four and twelve months. During this time
      the Company may devote significant time and resources to a prospective customer,
      including costs associated with multiple site visits, product demonstrations
      and
      feasibility studies. The Company may experience a number of significant delays
      over which the Company has no control. Because the costs associated with the
      sale of the product are fixed in current periods, timing differences between
      incurring costs and recognizing of revenue associated with a particular project
      may result. Moreover, in
      the
      event of any downturn in any existing or potential customer’s business or the
      economy in general, purchases of the Company’s products may be deferred or
      canceled. Furthermore,
      the implementation of the Company’s products typically takes several months of
      integration of the product with the customer’s other existing systems and
      customer training. A successful implementation requires a close working
      relationship between the customer and members of the Company’s professional
      service organization. These issues make it difficult to predict the quarter
      in
      which expected orders will occur. Delays in implementation of products could
      cause some or all of the professional services revenues from those projects
      to
      be shifted from the expected quarter to a subsequent quarter or quarters.





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











20








**Fluctuations
      in Quarterly Operating Results May Be Significant**





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




·  Revenue
      from software sales;


·  the
      timing of new product releases;


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


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


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


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


·  the
      introduction of alternative technologies;


·  changes
      in operating expenses;


·  changes
      in the Company’s strategy;


·  personnel
      changes;


·  the
      effect of potential acquisitions by the Company and its competitors; and general
      domestic


and
      international economic and political factors.





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




**Fluctuations
      in Quarterly Operating Results Due to Seasonal Factors**




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




**General
      Economic Conditions May Affect Operations**




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




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





The
      Company competes in the CRM software market. This market is highly competitive
      and the Company expects competition in the market to increase. The Company’s
      competitors include large public companies such as Oracle, who owns PeopleSoft
      and Siebel, as well as traditional enterprise resource planning (ERP) software
      providers such as SAP that are developing CRM capabilities. In addition, a
      number of smaller privately held companies generally focus only on discrete
      areas of the CRM software marketplace. Because the barriers to entry in the
      CRM
      software market are relatively low, new competitors may emerge with products
      that are superior to the Company’s products or that achieve greater market
      acceptance. Moreover, the CRM industry is currently experiencing significant
      consolidation, as larger public companies seek to enter the CRM market through
      acquisitions or establish other cooperative relationships among themselves,
      thereby enhancing their ability to compete in this market with their combined
      resources. Some of the Company’s existing and potential competitors have greater
      financial, technical, marketing and distribution resources than the Company.
      These and other competitors pose business risks to the Company
      because:






21





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


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


·
            lower
                prices and a smaller market share could limit the Company’s revenue
                generating ability, reduce its gross margins and restrict its ability
                to
                become profitable or sustain profitability; and


·
            competitors
                may be able to devote greater resources to more quickly respond to
                emerging technologies and changes in customer requirements or to
                the
                development, promotion and sales of their
                products.





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





**Risk
      of Dependence on Proprietary Technology**




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




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




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




Substantial
      litigation and threats of litigation regarding intellectual property rights
      are
      common in this industry. The Company is not aware that its products and
      technologies employ technology that infringes any valid, existing proprietary
      rights of third parties. While there currently are no pending lawsuits against
      the Company regarding infringement of any existing patents or other intellectual
      property rights or any notices that it is infringing the intellectual property
      rights of others, third parties may assert such claims in the future. Any
      claims, with or without merit, could:






22




·  be
      time
      consuming to defend;


·  result
      in
      costly litigation or damage awards;


·  divert
      management’s attention and resources;


·  cause
      product shipment delays; or


·
            require the Company to seek to enter into royalty or licensing agreements,
                which may not be available on terms acceptable to the Company, if
                at
                all.





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





**Dependence
      on Technology from Third Parties**





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




**Need
      to Expand Indirect Sales**





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





**Risks
      of Future Acquisitions**




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







23




**Risks
      Associated with International Sales**




Astea’s
      international sales accounted for 27% of the Company’s revenues in 2006, 48% in
      2005, and 37% in 2004. The
      Company expects that international sales will continue to be a significant
      component of its business. In the Company’s efforts to expand its international
      presence, it will face certain risks, which it may not be successful in
      addressing. These risks include:




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


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


**·**
            difficulties
                enforcing intellectual property
                rights;


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


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


**·**
            potentially
                adverse tax consequences.




Additionally,
      the current economic difficulties in several Asian countries could have an
      adverse impact on the Company’s international operations in future periods. Any
      of these factors, if not successfully addressed, could harm the Company’s
      operating results.





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




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




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




**Dependence
      on Key Personnel who are Required to Perform Military Service**




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




**Risks
      Associated with Inflation and Currency Fluctuations**




The
      Company generates most of its revenues in U.S. dollars but all of its costs
      associated with the foreign operations located in Europe, the Pacific Rim and
      Israel are denominated in the respective local currency and translated into
      U.S.
      dollars for consolidation and reporting. As a result, the Company is exposed
      to
      risks to the extent that the rate of inflation in Europe, the Pacific Rim or
      Israel exceeds the rate of devaluation of their related foreign currency in
      relation to the U.S. dollar or if the timing of such devaluations lags behind
      inflation in Europe, the Pacific Rim or Israel. In that event, the cost of
      the
      Company’s operations in Europe, the Pacific Rim and Israel measured in terms of
      U.S. dollars will increase and the U.S. dollar-measured results of operations
      will suffer. Historically, Israel has experienced periods of high inflation.






24




**Dependence
      on Key Personnel; Competition for Employees**




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





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





**Concentration
      of Ownership**





Currently,
      Zack B. Bergreen, the Company’s chief executive officer, beneficially owns
      approximately 38% of the outstanding Common Stock of the Company. As a result,
      Mr. Bergreen exercises significant control over the Company through his ability
      to influence and control the election of directors and all other matters that
      require action by the Company’s stockholders. Under certain circumstances, Mr.
      Bergreen could prevent or delay a change of control of the Company which may
      be
      favored by a significant portion of the Company’s other stockholders, or cause a
      change of control not favored by the majority of the Company’s other
      stockholders. Mr. Bergreen’s ability under certain circumstances to influence,
      cause or delay a change in control of the Company also may have an adverse
      effect on the market price of the Company’s Common Stock.





**Possible
      Volatility of Stock Price**





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





**Limitations
      of the Company Charter Documents**




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






25




**NASDAQ
      Capital Market Compliance Requirements**




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





**Material
      Weakness in Internal Control**





In
      connection with the completion of its audit of and the issuance of an
      unqualified report on the Company's consolidated financial statements for the
      fiscal year ended December 31, 2006, the Company's independent registered public
      accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit
      Committee that the following matter involving the Company's internal controls
      and operations was considered to be a material weakness, as defined under
      standards established by the Public Company Accounting Oversight
      Board:





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





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





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





**Increased
      Costs for Sarbanes-Oxley Compliance**





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






26








**Item1B.**  **Unresolved
      SEC Items**





None





**Item
      2.**  **Properties.**





The
      Company’s headquarters are located in a leased facility of approximately 22,000
      square feet in Horsham, Pennsylvania. The Company also leases facilities for
      operational activities in Irvine, California; Culemborg, Netherlands; and
      Karmiel, Israel, and for sales and customer support activities in Cranfield,
      England and St. Leonards, Australia. The Company believes that suitable
      additional or alternative office space will be available in the future on
      commercially reasonable terms as needed.





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





On
      and
      shortly after April 6, 2006, certain purported shareholder class action and
      derivative lawsuits were filed in the United States District Court for the
      Eastern District of Pennsylvania against the Company and certain of its
      directors and officers. The lawsuits, alleging that the Company and certain
      of
      its officers and directors violated federal securities laws and state laws,
      related to the Company’s March 31, 2006 announcement of the accounting
      restatement for overcapitalized software development costs during the first
      two
      quarters of 2005 and the undercapitalized software development costs during
      the
      third quarter of 2005. Pursuant to a Stipulation and Order of the Court entered
      July 12, 2006, the putative class actions were consolidated, certain persons
      were appointed as lead plaintiffs, and a consolidated amended complaint was
      filed on September 11, 2006. The defendants filed a motion to dismiss the
      consolidated amended complaint on October 26, 2006 and the Court will decide
      this motion once briefing has been completed. On September 14, 2006, the Court
      consolidated the putative derivative actions, appointed certain persons to
      serve
      as co-lead plaintiffs, and ordered co-lead plaintiffs to file a consolidated
      amended derivative complaint within thirty (30) days after a decision is
      rendered on defendants’ motion to dismiss the consolidated class action. The
      briefings for the motion were completed January 24, 2007, and the motion is
      now
      awaiting the decision of the Court. The Company believes these lawsuits are
      without merit and intends to defend them vigorously.





**Item4.**  **Submission
      of Matters to a Vote of Security Holders.**





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














27








**PART
      II**





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





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





**2006**
            
            **High**
            
            **Low**First
                quarter
            
            $
            25.71
            
            $
            11.73Second
                quarter
            
            
            11.80
            
            
            7.87Third
                quarter
            
            
            9.67
            
            
            4.26Fourth
                quarter
            
            
            8.19
            
            
            4.71






**2005**
            
            **High**
            
            **Low**First
                quarter
            
            $
            8.45
            
            $
            6.41Second
                quarter
            
            
            9.61
            
            
            5.82Third
                quarter
            
            
            8.07
            
            
            5.85Fourth
                quarter
            
            
            18.31
            
            
            7.50





As
      of
      March 15, 2007, there were approximately 35 holders of record of the Company’s
      Common Stock. (Because “holders of record” include only stockholders listed with
      the Company’s transfer agent and exclude stockholders listed separately with
      financial nominees, this number does not accurately reflect the actual number
      of
      beneficial owners of the Company’s Common Stock, of which the Company estimates
      there were more than 2,700 on such date.) On March 15, 2007, the last reported
      sale price of the Common Stock on the Nasdaq Capital Market was
      $5.34 **** per
      share.





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











28




**Item6.**  **Selected
      Financial Data**





**Years
                ended December 31,**
            
            **2006**
            
            **2005**
              **Restated**
            
            **2004**
              **Restated**
            
            **2003**
            
            **2002**(in
                thousands, except per share data)**Statement
                of Income Data:**Revenues:Software license fees
            
            $
            4,670
            
            $
            8,240
            
            $
            7,392
            
            $
            1,935
            
            $
            6,504Services and maintenance
            
            
            15,614
            
            
            13,914
            
            
            11,315
            
            
            10,906
            
            
            10,294Total revenues (1)
            
            
            20,284
            
            
            22,154
            
            
            18,707
            
            
            12,841
            
            
            16,798Cost
                and Expenses:Cost of software license fees
            
            
            1,687
            
            
            1,178
            
            
            1,838
            
            
            898
            
            
            1,262Cost of services and maintenance
            
            
            10,262
            
            
            8,261
            
            
            6,356
            
            
            6,963
            
            
            6,345Product development
            
            
            3,842
            
            
            2,461
            
            
            1,431
            
            
            2,490
            
            
            1,781Sales and marketing
            
            
            5,923
            
            
            6,192
            
            
            5,565
            
            
            5,875
            
            
            6,218General and administrative
            
            
            3,757
            
            
            3,003
            
            
            2,051
            
            
            2,198
            
            
            2,426Total costs and expenses (2)
            
            
            25,471
            
            
            21,095
            
            
            17,241
            
            
            18,424
            
            
            18,032Income(loss)
                from operations
              before interest and taxes
            
            
            (5,187
            )
            
            1,059
            
            
            1,466
            
            
            (5,583
            )
            
            (1,234
            )Interest
                income
            
            
            234
            
            
            165
            
            
            58
            
            
            54
            
            
            106Income(loss)
                from
              operations before income taxes
            
            
            (4,953
            )
            
            1,224
            
            
            1,524
            
            
            (5,529
            )
            
            (1,128
            )Income
                tax expense
            
            
            29
            
            
            7
            
            
            -
            
            
            -
            
            
            200Net
                profit/(loss)
            
            $
            (4,982
            )
            $
            1,217
            
            $
            1,524
            
            $
            (5,529
            )
            $
            (1,328
            )Basic
                income (loss) per share
            
            $
            (1.40
            )
            $
            .39
            
            $
            .51
            
            $
            (1.89
            )
            $
            (0.09
            )Diluted
                income (loss) per share
            
            $
            (1.40
            )
            $
            .39
            
            $
            .51
            
            $
            (1.89
            )
            $
            (0.09
            )Shares
                used in computing basic income (loss)
              per
                share (3)
            
            
            3,547
            
            
            3,093
            
            
            2,960
            
            
            2,922
            
            
            2,921Shares
                used in computing diluted income (loss) per share (3)
            
            
            3,547
            
            
            3,116
            
            
            3,001
            
            
            2,922
            
            
            2,921**Balance
                Sheet Data:**Working
                capital (deficit)
            
            $
            (1,289
            )
            $
            5,495
            
            $
            3,969
            
            $
            1,820
            
            $
            6,449Total
                assets
            
            
            18,059
            
            
            21,612
            
            
            13,754
            
            
            10,096
            
            
            16,443Long-term
                debt, less current portion
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accumulated
                deficit
            
            
            (20,343
            )
            
            (15,361
            )
            
            (16,578
            )
            
            (18,100
            
            
            (12,568
            )Total
                stockholders’ equity
            
            
            6,106
            
            
            10,648
            
            
            5,461
            
            
            3,734
            
            
            8,998








(1)
            Revenues
                for 2004 and 2005 have been restated by $610,000 and $611,000,
                respectively, to reflect the restatement of revenue associated with
                a 2004
                contract in the U.K. See Note 2 of the Notes to the Consolidated
                Financial
                Statements.


(2)
            Results
                for 2006 include expense of $397,000 for stock compensation plans
                as
                required under SFAS 123(R), effective at January 1, 2006. Prior years
                do
                not contain cost of stock compensation
                plans.


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











29




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





**Overview**





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





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





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





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





Software
      license fees accounted for 23% of the Company’s total revenues in 2006, which
      was mostly comprised of sales of Astea Alliance. Software license fee revenues
      also include some fees from the sublicensing of third-party software, primarily
      knowledge management software licenses. Typically, customers pay a license
      fee
      for the software based on the number of licensed users. Depending on the
      contract terms and conditions, software license fees are recognized as revenue
      upon delivery of the product if no significant vendor obligations remain and
      collection of the resulting receivable is deemed probable. If significant vendor
      obligations exist at the time of delivery or if the product is subject to
      uncertain customer acceptance, revenue is deferred until no significant
      obligations remain or acceptance has occurred.





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







30


*FieldCentrix*





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





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





FieldCentrix’
      expertise in mobility and emerging mobile technologies gives Astea’s global
      customer base new ways to update and streamline service organizations, which
      increasingly support hundreds of remote locations and mobile technical teams.
      Astea’s strong and robust enterprise service lifecycle management solution
      complements the FieldCentrix mobility offering to provide the FieldCentrix
      customer base with the most robust service lifecycle management system on the
      market today. Astea and FieldCentrix will combine the expertise of the two
      organizations to break new ground in providing premier solutions that continue
      to deliver exceptional value for service-centric companies.





***Restatements***





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





All
      revenue related to this contract is expected to be recognized in the first
      quarter of 2007, with the exception of certain post contract support revenue
      totaling $131,000, which will be recognized ratably over 2007 and 2008. All
      cash
      related to the transaction, $1,678,000 has been received by the Company as
      of
      December 31, 2006, with the exception of $259,000, most of which was received
      in
      the first quarter of 2007 and the remainder of which is expected to be received
      early in the second quarter of 2007.






31





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





**Critical
      Accounting Policies and Estimates**





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





*Revenue
      Recognition*





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





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





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





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





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






32





When
      appropriate, the Company may allocate a portion of its software revenue to
      post-contract support activities or to other services or products provided
      to
      the customer free of charge or at non-standard rates when provided in
      conjunction with the licensing arrangement. Amounts allocated are based upon
      standard prices charged for those services or products which, in the Company’s
      opinion, approximate fair value. Software license fees for resellers or other
      members of the indirect sales channel are based on a fixed percentage of the
      Company’s standard prices. The Company recognizes software license revenue for
      such contracts based upon the terms and conditions provided by the reseller
      to
      its customer.





Revenue
      from post-contract support is recognized ratably over the term of the contract,
      which is generally twelve months on a straight-line basis. Consulting and
      training service revenue is generally unbundled and recognized at the time
      the
      service is performed. Fees from licenses sold together with consulting services
      are generally recognized upon shipment, provided that the contract has been
      executed, delivery of the software has occurred, fees are fixed and determinable
      and collection is probable.





*Deferred
      Revenue*





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





*Accounts
      Receivable*





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





*Capitalized
      Software Research and Development Costs*





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






33





Software
      development costs are amortized on a product-by-product basis over the greater
      of the ratio of current revenues to total anticipated revenues or on a
      straight-line basis over the estimated useful lives of the products (usually
      two
      years), beginning with the initial release to customers. During the first
      quarter of 2004, the Company reduced the estimated life for its capitalized
      software products from three years to two years based on current sales trends
      and the rate of product release. The Company continually evaluates whether
      events or circumstances had occurred that indicate that the remaining useful
      life of the capitalized software development costs should be revised or that
      the
      remaining balance of such assets may not be recoverable. The Company evaluates
      the recoverability of capitalized software based on the estimated future
      revenues of each product .





*Goodwill*





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





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





*Acquired
      Intangible Assets*





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





*Share-Based
      Compensation - Option Plans*





Beginning
      on January 1, 2006, the Company began accounting for stock options under the
      provision of Statement of Financial Accounting Standards No. 123(R), or SFAS
      123(R), *Share-Based
      Payments* ,
      which
      requires the recognition of the fair value of share-based compensation. The
      fair
      value of stock option awards was estimated using a Black-Scholes closed-form
      option valuation model. This model requires the input of assumptions in
      implementing SFAS 123(R), including expected stock price volatility, expected
      term and estimated forfeitures of each award. The parameters used in the model
      are reviewed and adjusted on a quarterly basis. We elected the
      modified-prospective method for adoption of SFAS 123(R).





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






34






As
      a
      result of adopting SFAS 123(R), for the year ended December 31, 2006 loss
      before income taxes and net loss was $397,000 higher than if the Company had
      continued to account for share-based compensation under APB 25. The basic and
      diluted loss per share for the year ended December 31, 2006 was $0.11
      greater than if the Company had continued to account for share-based
      compensation under APB 25.





As
      of
      December 31, 2006, the total unrecognized compensation cost related to
      non-vested options amounted to $686,000, which is expected to be recognized
      over
      the options’ average remaining vesting period of 3.86years. No income tax
      benefit was realized by the Company in the year ended December 31, 2006 as
      the
      Company reported an operating loss and maintained a full valuation allowance
      on
      its net deferred tax asset.





The
      Company had a choice of two attribution methods for allocating compensation
      costs under SFAS No. 123(R): the “straight-line” method, which allocates expense
      on a straight-line basis over the requisite service period of the last
      separately vesting portion of an award, or the “graded vesting attribution
      method”, an accelerated amortization method, which allocates expense on a
      straight-line basis over the requisite service period for each separately
      vesting portion of the award as if the award was in-substance, multiple awards.
      We chose the graded vesting attribution method and accordingly, amortize the
      fair value of each option tranche over the respective tranche’s requisite
      service period.





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





With
      the
      adoption of SFAS 123(R), in order to determine the fair value of stock options
      costs, the Company assumed estimated forfeiture rate of 24.5%. Forfeiture rates
      were not reflected in prior year estimates of the fair value of stock
      options.





As
      of
      December 31, 2006, the total unrecognized compensation cost related to
      non-vested options granted amounted to $686,000 which is expected to be
      recognized over the options’ remaining vesting period of 3.86 years. No income
      tax benefit was realized by the Company in year ending December 31, 2006 as
      the
      Company reported an operating loss and maintained a full valuation allowance
      on
      its net deferred tax asset.





**Recent
      Accounting Pronouncements**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes-an Interpretation of FASB Statement 109”, which
      establishes that the financial statement effects of a tax position taken or
      expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The Company is still evaluating the
      impact of adopting FIN 48, however, is not expected to have a material impact
      on
      our results of operations or our financial position.




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






35




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements, “(SAB 108). SAB
      108 was issued to provide interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. The effective date of SAP 108 is for
      fiscal years ending on or before November 15, 2006. This pronouncement did
      not
      have any impact on the Company’s consolidated financial statements.




**Results
      of Continuing Operations**




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





**Years
                ended December 31,**
            
            **2006**
            
            **2005**
              **(restated)**
            
            **2004**
              **(restated)**Revenues:Software license fees
            
            
            23.0
            %
            
            37.2
            %
            
            39.5
            %Services and maintenance
            
            
            77.0
            
            
            62.8
            
            
            60.5Total revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Cost of software license fees
            
            
            8.3
            %
            
            5.3
            %
            
            9.8
            %Cost of services and maintenance
            
            
            50.6
            
            
            37.3
            
            
            34.0Product development
            
            
            19.0
            
            
            11.1
            
            
            7.7Sales and marketing
            
            
            29.2
            
            
            27.9
            
            
            29.7General and administrative
            
            
            18.5
            
            
            13.6
            
            
            11.0Total costs and expenses
            
            
            125.6
            %
            
            95.2
            %
            
            92.2
            %





**Comparison
      of Years Ended December 31, 2006 and 2005**





*Revenues.* Total
      revenues decreased $1,870,000 or 8%, to $20,284,000 for the year ended December
      31, 2006 from $22,154,000 for the year ended December 31, 2005. Software license
      revenues decreased 43% in 2006, compared to 2005. Services and maintenance
      fees
      for 2006 amounted to $15,614,000, an 12% increase from 2005.





Software
      license fee revenues decreased $3,570,000 or 43% to $4,670,000 in 2006 from
      $8,240,000 in 2005. Astea Alliance license revenues decreased to $3,603,000
      in
      2006 from $7,936,000 in 2005, a decrease of 55%. The decrease results primarily
      from one large license sale of $4.5 million in 2005. The Company also sold
      $1,037,000 of FieldCentrix licenses compared to $288,000 in 2005 which reflects
      a full year of results compared to 2005.





Total
      services and maintenance revenues increased $1,700,000 or 12% to $15,614,000
      in
      2006 from $13,914,000 in 2005. The increase is principally due to a full year
      of
      earning FieldCentrix maintenance revenue, because the company was acquired
      on
      September 21, 2005. In addition there was an increase of $275,000 in Astea
      Alliance service and maintenance revenue offset by an expected decline of
      $399,000 in DISPATCH-1 service and maintenance revenue. Due to the decreasing
      demand for DISPATCH-1 professional services and the lack of any related product
      development by the Company, the decrease in service and maintenance revenue
      is
      expected to continue in 2007.





In
      2006
      no customer accounted for more than 10% of total revenues compared to 2005
      when
      one customer, EDS, accounted for 24% of the Company’s total revenues and 28% of
      Astea Alliance revenue.







36


*Costs
      of Revenues* **.** Costs
      of
      software license fee revenues increased 43% to $1,687,000 in 2006 from
      $1,178,000 in 2005. The increase results from increased amortization of
      capitalized software development costs, increases in the cost of third party
      software licenses embedded in our software and a full year of FieldCentrix
      acquired software amortization. Amortization of capitalized software increased
      by 22% to $1,240,000 in 2006 from $1,020,000 in 2005. The gross margin
      percentage on software license sales decreased to 64% in 2006 from 86% in 2005
      due to a reduction in license revenue and an increase in cost of license
      fees.





The
      costs
      of services and maintenance revenues increased 24% to $10,262,000 in 2006 from
      $8,261,000 in 2005. The increase in cost of services and maintenance is
      primarily attributed to a full year of professional services staff from the
      2005
      FieldCentrix acquisition and additional headcount in the U.S. which resulted
      from the Company’s initiative to improve the quality of the professional
      services provided to its customers, as well as the extensive upgrade to customer
      systems from older versions of Astea Alliance to the latest released version
      Additionally, $45,000 in share based compensation expense for employees was
      recorded at December 31, 2006 compared to no expense for year ending December
      31, 2005. In addition, the Company invested in additional support staff to
      improve the timing and quality of support provided to its’ customers. The
      service and maintenance gross margin percentage decreased to 34% in 2006 from
      41% in 2005. The decreased margin is primarily attributable to the non-billable
      time required for new hires to be properly trained on the Company’s software
      before they can effectively generate revenue.




*Product
      Development* **.** Product
      development expenses increased 56%, or $1,381,000, to $3,842,000 in 2006 from
      $2,461,000 in 2005. Development costs increased due to an increase in headcount
      in the Company’s development center in Israel by 14%, the addition of
      development staff for a complete year from the acquisition of FieldCentrix,
      which occurred on September 21, 2005, and an increased focus on improving the
      quality of product development. Additionally, $90,000 in share based
      compensation expense for employees was recorded at December 31, 2006 compared
      to
      no expense for year ending December 31, 2005.





Product
      development as a percentage of total revenue increased to 19% in 2006 compared
      to 11% in 2005. This increase is due to both the overall increase in product
      development expenses coupled with a reduction in total revenue. The 2006
      percentage is about 2% higher due to the overall decrease in revenues in 2006
      compared to 2005. Gross development expense before the capitalization of
      software costs and was $6, 663,000 in 2006, 64% greater than $4,058,000 in
      2005.
      Capitalized software totaled $2,821,000 in 2006 compared to $1,555,000 in 2005.
      The increase in software capitalization of 81% over last year reflects the
      intense effort put forth by the Company to expand and improve its products.
      In
      2006, the Company released a new version of its FieldCentrix software and a
      mobility product for Astea Alliance users, based on the expertise of
      FieldCentrix as well as intensive efforts to complete the latest version of
      Astea Alliance, (Astea Alliance 8.0), which was released in February 2007.





*Sales
      and Marketing* **.** Sales
      and
      marketing expenses decreased 4%, or $269,000, to $5,923,000 in 2006 from
      $6,192,000 in 2005. The decrease is primarily the result of decreased sales
      commissions resulting from reduced software license sales partially offset
      by
      increased investment in marketing programs in order to increase market awareness
      of the Company’s products and domain expertise in Service Life Cycle Management,
      Additionally, $123,000 in share based compensation expense for employees was
      recorded at December 31, 2006 compared to no expense for year ending December
      31, 2005. The Company continues to focus on improving its market presence
      through intensified marketing efforts to increase awareness of the Company’s
      products. This occurs through the use of Webinars focused in the vertical
      industries in which the Company operates, attendance at selected trade shows,
      and increased investment in lead generation for its sales force. Sales and
      marketing expense as a percentage of total revenues increased to 29% in 2006
      from 28% in 2005.






37





*General
      and Administrative* **.** General
      and administrative expenses consist of salaries, benefits and related costs
      for
      the Company’s finance, administrative and executive management personnel, legal
      costs, accounting costs, bad debt expense and various costs associated with
      the
      Company’s status as a public company. The Company’s general and administrative
      expenses were $3,757,000 in 2006 and $3,003,000 in 2005 representing a 25%
      increase. This increase is primarily due to the inclusion of a full year’s rent
      for the FieldCentrix office in Irvine, California, an increase of $191,000;
      $420,000 of additional legal fees partially resulting from the class action
      lawsuit that was filed in April, 2006 and $100,000 in bonuses paid to
      management. Additionally, $139,000 in share based compensation expense for
      employees was recorded at December 31, 2006 compared to no expense for year
      ending December 31, 2005. As a percentage of total revenues, general and
      administrative expenses increased to 19% in 2006 compared to 14% in 2005. The
      increase in expenses relative to revenues primarily results from the increase
      in
      expenses described above, as well as the decrease in total revenues generated
      during 2006.





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




*Income
      Tax Expense.* The
      Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
      for Income Taxes” which requires that deferred tax assets and liabilities be
      recognized using enacted tax rates for the effect of temporary differences
      between the book and tax basis of recorded assets and liabilities. SFAS No.
      109
      also requires that deferred tax assets be reduced by a valuation allowance
      if it
      is more likely than not that some portion or all of the deferred tax asset
      will
      not be realized. Based on the Company’s current year and historical operating
      losses, the Company determined maintaining a full valuation was appropriate.
      The
      Company made a provision of $29,000 and $7,000 for 2006 and 2005 respectively,
      for income taxes which resulted from a difference between an indefinite-lived
      asset, goodwill, which is amortized for tax, but not amortized for financial
      reporting purposes.





*International
      Operations* **.** Total
      revenues from the Company’s international operations decreased by 5,174,000, or
      48% to $5,565,000 in 2006 from $10,739,000 in 2005. The decrease in revenue
      from
      international operations was primarily attributable to a decrease in license
      revenues of $4,133,000, the majority of the decline in Europe. International
      revenues from professional services and maintenance decreased 19% to $4,441,000
      in 2006 from $5,482,000 in 2005. Overall, international operations resulted
      in a
      net loss of $876,000 for 2006 compared to net profit of $1,279,000 in 2005.
      International operating costs decreased by $1,445,000 due to lower cost of
      services and maintenance resulting from a decrease in headcount, lower sales
      commissions resulting from a decrease in license revenues in 2006 compared
      to
      2005 and an increase in bad debt expense. The decrease in international net
      income of $2,154,000 is the direct result of the decrease in license revenues.





**Comparison
      of Years Ended December 31, 2005 and 2004 (restated)**





*Revenues.* Total
      revenues increased $3,447,000 or 18%, to $22,154,000 for the year ended December
      31, 2005 from $18,707,000 for the year ended December 31, 2004. Software license
      revenues increased 11% in 2005, compared to 2004. Services and maintenance
      fees
      for 2005 amounted to $13,914,000, a 23% increase from 2004.





Software
      license fee revenues increased $848,000 or 11% to $8,240,000 in 2005 from
      $7,392,000 in 2004. Astea Alliance license fee revenues increased to $7,936,000
      in 2005 from $6,585,000 in 2004, an increase of 20%. This increase reflects
      the
      growing acceptance by the market place of the Company’s new software versions,
      which are completely based on .Net, Microsoft’s operating system platform. The
      Company also sold $16,000 of additional DISPATCH-1 licenses to existing
      customers, compared to $805,000 in 2004. Two existing customers purchased
      additional DISPATCH-1 licenses in 2005 compared to 6 existing customers
      purchasing DISPATCH-1 licenses in 2004. Additionally, the Company recognized
      license revenue of $288,000 from the sale of FieldCentrix products.






38





Total
      services and maintenance revenues increased $2,599,000 or 23% to $13,914,000
      in
      2005 from $11,315,000 in 2004. The increase in service and maintenance revenues
      is attributable to an increase of $1,964,000 in Astea Alliance revenues
      partially offset by a decrease in DISPATCH-1 revenues of $512,000. Astea
      Alliance service and maintenance revenues increased to $11,329,000 in 2005
      from
      $9,365,000 in 2004 due to the growing Astea Alliance customer base. The increase
      is also attributable to service and maintenance revenue of $1,143,000 from
      the
      newly acquired FieldCentrix customer base. DISPATCH-1 service and maintenance
      revenues decreased 26% to $1,437,000 in 2005 from $1,949,000 in 2004 due to
      an
      ongoing decrease in the number of customers under service and maintenance
      contracts. As a result of the decreasing demand for DISPATCH-1 and the lack
      of
      any related product development by the Company, the decrease in service and
      maintenance revenue is expected to continue in 2006 for DISPATCH-1.





In
      2005
      there was one major customer, EDS, which accounted for 24% of total revenues
      compared to 2004 when one customer, Carrier Corporation, accounted for 16%
      of
      the Company’s total revenues.





*Costs
      of Revenues* **.** Costs
      of
      software license fee revenues decreased 36%, or $660,000, to $1,178,000 in
      2005
      from $1,838,000 in 2004. The decrease in cost of sales results from lower costs
      of third party software. DISPATCH-1 license sales include a significant cost
      for
      a third party license for the database. However, in 2005, DISPATCH-1 license
      sales were only $16,000 compared to $805,000 in 2004, and accordingly the
      related database license costs were insignificant. Capitalized software
      amortization decreased to $1,020,000 in 2005 from $1,088,000 in 2004. The gross
      margin percentage on software license sales increased to 86% in 2005 from 75%
      in
      2004 due to a reduction in third party license costs, lower amortization of
      capitalized software and increased license revenues.





The
      costs
      of services and maintenance revenues increased 30% to $8,261,000 in 2005 from
      $6,356,000 in 2004. The increase in cost of services and maintenance is
      primarily attributed to an increase in headcount from last year as well as
      the
      addition of professional services staff from the acquisition of FieldCentrix
      on
      September 21, 2005. The service and maintenance gross margin percentage
      decreased slightly to 41% in 2005 from 44% in 2004. The decreased margin is
      primarily attributable to the non-billable time required for new hires to be
      properly trained on the Company’s software before they can effectively generate
      revenue and the deferral of services and maintenance on the contract which
      is
      underlying the restatement.




*Product
      Development* **.** Product
      development expenses increased 72%, or $1,030,000, to $2,461,000 in 2005 from
      $1,431,000 in 2004. Development costs increased due to an increase in headcount
      in the Company’s development center in Israel by 35%, the addition of 11
      development staff from the acquisition of FieldCentrix on September 21, 2005,
      and an increased focus on product improvement that resulted in a lower than
      proportionate increase in newly capitalized software development
      costs.





Product
      development as a percentage of total revenue increased to 11% in 2005 compared
      to 8% in 2004. This increase is due to the increase in headcount of the
      Company’s development staff as part of its focus on improving the quality and
      functionality of its products. The 2005 percentage is about 4% lower due to
      the
      overall increase in revenues in 2005 compared to 2004. Gross development expense
      before the capitalization of software costs and was $4,058,000 in 2005, 44%
      greater than $2,811,000 in 2004. In 2004, the Company wrote off $1,155,000
      of
      fully amortized software for old versions that had been deemed no longer useful
      or functional. Capitalized software totaled $1,555,000 in 2005 compared to
      $1,380,000 in 2004. The increase in software capitalization of only 13% was
      significantly lower then the overall 44% increase in development spending.
      This
      is reflective of the Company’s focus on improving the existing products compared
      to spending on the development of new products.




*Sales
      and Marketing* **.** Sales
      and
      marketing expenses increased 11%, or $627,000, to $6,192,000 in 2005 from
      $5,565,000 in 2004. The increase is primarily the result of an increase in
      the
      Company’s sales force as well as increased investment in marketing programs in
      order to increase market awareness of the Company’s products and domain
      expertise in Service Life Cycle Management. The Company continues to focus
      on
      improving its market presence through intensified marketing efforts to increase
      awareness of the Company’s products. This occurs through the use of Webinars
      focused in the vertical industries in which the Company operates, attendance
      at
      selected trade shows, and increased investment in lead generation for its sales
      force. Sales and marketing expense as a percentage of total revenues decreased
      to 28% in 2005 from 30% in 2004.






39





*General
      and Administrative* **.** General
      and administrative expenses consist of salaries, benefits and related costs
      for
      the Company’s finance, administrative and executive management personnel, legal
      costs, accounting costs, bad debt write-offs and various costs associated with
      the Company’s status as a public company. The Company’s general and
      administrative expenses were $3,003,000 in 2005 and $2,051,000 in 2004
      representing a 46% increase. This increase is primarily due to an increase
      in
      bad debt expense of $200,000, recovery of $114,000 legal fees in 2004 in
      connection with legal action in Europe, increased payroll costs of approximately
      $210,000, increased outside consulting expenses, administrative costs of
      $215,000 connected with the operation of FieldCentrix, which was acquired in
      September 2005, and increased travel costs if $50,000. As a percentage of total
      revenues, general and administrative expenses increased to 14% in 2005 compared
      to 11% in 2004. The increase in expenses relative to revenues primarily results
      from the increase in expenses described above, partially offset by the increase
      in total revenues generated during 2005.





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





*International
      Operations* **.** Total
      revenue from the Company’s international operations increased by $3,785,000, or
      54% to $10,739,000 in 2005 from $6,954,000 in 2004. The increase in revenue
      from
      international operations was primarily attributable to the increases in license
      revenues from the Astea Alliance suite. Most of the increase occurred in Europe,
      where the Company has focused attention on expanding awareness of the Company’s
      products. International revenues from professional services and maintenance
      increased 43% to $5,482,000 in 2005 from $3,847,000 in 2004. Overall,
      international operations resulted in net profit of $1,279,000 for 2005 compared
      to net profit of $611,000 in 2004. Operating costs increased due to higher
      cost
      of sales on professional services resulting from an increase in headcount,
      higher sales commissions resulting from the increased level of revenues in
      2005
      compared to 2004 and an increase in bad debt expense. The increase in
      international net income, 109%, results from the increase in license revenue
      for
      which the direct costs are insignificant.





**Liquidity
      and Capital Resources**





Net
      cash
      used by operating activities was $2,948,000 for the year ended December 31,
      2006
      compared to $5,254,000 of cash generated by operations for the year ended
      December 31, 2005, a change of $8,202,000. The increase in cash used by
      operations was primarily attributable to a decrease in income of $6,199,000,
      and
      an increase in accounts receivable of $2,996,000, which includes an increase
      in
      unbilled receivables of $1,241,000. Partially offsetting these uses of operating
      cash were increases in the non-cash charges of depreciation and amortization
      of
      $597,000, stock option expenses of $397,000 which are reported in the statement
      of operations for the first time in 2006, as required by FAS 123(R). Trade
      accounts receivable increased despite an overall decrease in revenues for 2006,
      compared to 2005, due to an increase in unbilled receivables associated with
      certain contracts with extended payment terms for which revenue has been
      deferred and higher fourth quarter revenues in 2006 compared to the fourth
      quarter of 2005.





The
      Company used $3,265,000 of cash for investing activities in 2006 compared to
      using $1,188,000 in 2005. The increase in cash used for investing activities
      of
      $2,077,000 results from an increase in capitalized software development costs
      of
      $1,266,000, and goodwill increased by $153,000 due to earnout provisions of
      the
      FieldCentrix purchase agreement. In 2005, the Company received $616,000 in
      cash
      from the FieldCentrix acquisition and released $75,000 from a restricted bank
      account collateralizing a letter of credit on a leased facility.






40




The
      Company generated $19,000 from financing activities for the year ended December
      31, 2006 compared to generating $791,000 of cash for the year ended December
      31,
      2005. The decrease in cash generated by financing activities of $772,000 was
      principally attributable to a decline in the exercise of Company stock options
      in 2006.





At
      December 31, 2006, the Company had a working capital ratio of approximately
      .9:1, with total cash of $3,120,000. The major component of current liabilities
      that is causing the working capital ratio to be below 1:1, is deferred revenues
      of $8 million in 2006, which represents an increase of $2.2 million over 2005.
      Contained in deferred revenues is $1.6 million related to the 2004 license
      agreement which also includes deferred service and maintenance revenue for
      which
      the Company has restated revenue previously recognized. The majority of the
      revenue is expected to be recognized in the first quarter of 2007.





The
      Company has projected revenues for 2007 that will generate enough funds to
      sustain its continuing operations. However, if current projections trail
      expectations, the Company has plans in place to reduce operating expenditures
      appropriately in order to continue to fund all required expenditures. The Board
      of Directors from time to time reviews the Company’s forecasted operations and
      financial condition to determine whether and when payment of a dividend or
      dividends is appropriate. The Company does not plan any significant capital
      expenditures in 2007. In addition, it does not anticipate that its operations
      or
      financial condition will be affected materially by inflation.





On
      May
      23, 2006 the Company entered into a secured revolving line of credit (Line)
      agreement with a bank. Maximum available borrowings under the Line represent
      the
      lesser of 80% of the Borrowing Base, which is eligible accounts receivables
      as
      defined, or $4.0 million. Amounts outstanding on the line of credit were zero
      on
      December 31, 2006.





As
      of
      March 30, 2007, the amount outstanding on the line of credit was
      zero.





**Contractual
      Obligations and Commercial Commitments**





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





**Payment
                Due By Period**Total
            
            2007
            
            2008-2009
            
            2010-2011
            
            2012
                and after**Contractual
                Cash**
              **Obligations:**Long-term
                Debt
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            
            -Capital
                Leases
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                Leases
            
            $
            2,415,000
            
            $
            1,398,000
            
            $
            945,000
            
            $
            55,000
            
            $
            17,000






**Amounts
                of Commitment Expiration Per Period**Total
            
            2007
            
            2008-2009
            
            2010
                -2011
            
            2012
                and after**Other
                Commercial**
              **Commitments:**Letters
                of Credit
            
            $
            225,000
            
            $
            225,000
            
            $
            -
            
            $
            -







41





**Item7A.**  **Quantitative
      and Qualitative Disclosures about Market Risk**





**Interest
      Rate Risk**





The
      Company’s exposure to market risk for changes in interest rates relates
      primarily to the Company’s investment portfolio. The Company does not have any
      derivative financial instruments in its portfolio. The Company places its
      investments in instruments that meet high credit quality standards. The Company
      is adverse to principal loss and ensures the safety and preservation of its
      invested funds by limiting default risk, market risk and reinvestment risk.
      The
      Company is currently in the process of revamping its investment portfolio.
      As a
      result, as of December 31, 2006, the Company’s investments consisted of
      commercial paper. The Company does not expect any material loss with respect
      to
      its investment portfolio.





**Foreign
      Currency Risk**





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


42


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





**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders


Astea
      International Inc.








We
      have
      audited the accompanying consolidated balance sheets of Astea International
      Inc.
      and subsidiaries (collectively the “Company”) as of December 31, 2006 and 2005,
      and the related consolidated statements of operations, stockholders’ equity and
      cash flows for each of the three years in the period ended December 31, 2006.
      These financial statements are the responsibility of the Company’s management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Astea International Inc. and
      subsidiaries as of December 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2006 in conformity with accounting principles generally accepted
      in
      the United States of America.





As
      disclosed in Note 2, the Company has restated its consolidated balance sheet
      as
      of December 31, 2005 and related consolidated statements of operations,
      stockholders’ equity and cash flows for each of the two years in the period
      ended December 31, 2005 to correct an error in recognizing revenue. As a result
      of this revision, net income for the years ended December 31, 2005 and 2004
      was
      reduced by $611,000 and $610,000, respectively.





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








BDO
      Seidman, LLP


Woodbridge,
      NJ


March
      30,
      2007






43





**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**








**December
                31,**
            
            **2006**
            
            **2005**
              **restated****ASSETS**Current
                assets:Cash and cash equivalents
            
            $
            3,120,000
            
            $
            9,484,000Restricted cash
            
            
            225,000
            
            
            225,000Receivables, net of reserves of $163,000 and $310,000
            
            
            6,860,000
            
            
            5,037,000Prepaid expenses and other
            
            
            423,000
            
            
            485,000Total current assets
            
            
            10,628,000
            
            
            15,231,000Property
                and equipment, net
            
            
            648,000
            
            
            1,038,000Intangibles,
                net
            
            
            1,719,000
            
            
            1,999,000Capitalized
                software development costs, net
            
            
            3,636,000
            
            
            2,055,000Goodwill
            
            
            1,253,000
            
            
            1,100,000Other
                long-term assets
            
            
            175,000
            
            
            189,000Total assets
            
            $
            18,059,000
            
            $
            21,612,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts payable and accrued expenses
            
            $
            3,930,000
            
            $
            3,969,000Deferred revenues
            
            
            7,987,000
            
            
            5,767,000Total current liabilities
            
            
            11,917,000
            
            
            9,736,000Long-term
                liabilitiesDeferred revenues
            
            
            -
            
            
            1,221,000Deferred tax liability
            
            
            36,000
            
            
            7,000Total
                long-term liabilities
            
            
            36,000
            
            
            1,228,000Commitments
                and ContingenciesStockholders’
                equity:Preferred stock, $.01 par value, 5,000,000 shares
              authorized, none issued
            
            
            -
            
            
            -Common stock, $.01 par value, 25,000,000 shares
              authorized, 3,591,000 and 3,585,000 shares issued
                respectively
            
            
            36,000
            
            
            36,000Additional paid-in capital
            
            
            27,532,000
            
            
            27,116,000Accumulated comprehensive loss -
              translation adjustment
            
            
            (911,000
            )
            
            (935,000
            )Accumulated deficit
            
            
            (20,343,000
            )
            
            (15,361,000
            )Less: Treasury stock at cost, 42,000 shares
            
            
            (208,000
            )
            
            (208,000
            )Total stockholders’ equity
            
            
            6,106,000
            
            
            10,648,000Total liabilities and stockholders' equity
            
            $
            18,059,000
            
            $
            21,612,000








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


44


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








**Years
                ended December 31,**
            
            **2006**
            
            **2005**
              **(restated)**
            
            **2004**
              **(restated)**Revenues:Software license fees
            
            $
            4,670,000
            
            $
            8,240,000
            
            $
            7,392,000Services and maintenance
            
            
            15,614,000
            
            
            13,914,000
            
            
            11,315,000Total revenues
            
            
            20,284,000
            
            
            22,154,000
            
            
            18,707,000Costs
                and expenses:Cost of software license fees
            
            
            1,687,000
            
            
            1,178,000
            
            
            1,838,000Cost of services and maintenance
            
            
            10,262,000
            
            
            8,261,000
            
            
            6,356,000Product development
            
            
            3,842,000
            
            
            2,461,000
            
            
            1,431,000Sales and marketing
            
            
            5,923,000
            
            
            6,192,000
            
            
            5,565,000General and administrative
            
            
            3,757,000
            
            
            3,003,000
            
            
            2,051,000Total costs and expenses
            
            
            25,471,000
            
            
            21,095,000
            
            
            17,241,000Income
                (loss) from operations
            
            
            (5,187,000
            )
            
            1,059,000
            
            
            1,466,000Interest
                income
            
            
            234,000
            
            
            165,000
            
            
            58,000Income
                (loss) before income taxes
            
            
            (4,953,000
            )
            
            1,224,000
            
            
            1,524,000Income
                tax expense
            
            
            29,000
            
            
            7,000
            
            
            -Net
                income (loss)
            
            $
            (4,982,000
            )
            $
            1,217,000
            
            $
            1,524,000Basic
                net income (loss) per share
            
            $
            (1.40
            )
            $
            .39
            
            $
            .51Diluted
                net income (loss) per share
            
            $
            (1.40
            )
            $
            .39
            
            $
            .51Weighted
                average shares used in computing basic net income
              (loss)
                per share
            
            
            3,547,000
            
            
            3,093,000
            
            
            2,960,000Weighted
                average shares used in computing diluted net income
              (loss)per share
            
            
            3,547,000
            
            
            3,116,000
            
            
            3,001,000








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


45





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





**Common****Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Accumulated
                Comprehensive**
              **Loss**
            
            **Accumulated****Deficit**
            
            **Treasury****Stock**
            
            **Total**
              **Stockholders'****Equity**
            
            **Comprehensive
                I****ncome(loss)**Balance,
                December 31, 2003
            
            
            30,000
            
            
            22,792,000
            
            
            (776,000
            )
            
            (18,100,000
            )
            
            (212,000
            )
            
            3,734,000Issuance of common stock under
              employee stock purchase plan
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,000
            )
            
            2,000
            
            
            1,000Exercise of stock options
            
            
            -
            
            
            131,000
            
            
            -
            
            
            -
            
            
            -
            
            
            131,000Options for satisfaction of liability
            
            
            -
            
            
            74,000
            
            
            -
            
            
            -
            
            
            -
            
            
            74,000Currency translation adjustments
            
            
            -
            
            
            -
            
            
            (3,000
            )
            
            -
            
            
            -
            
            
            (3,000
            )
            $
            (3,000
            )Net income - restated
            
            
            -
            
            
            -
            
            
            -
            
            
            1,524,000
            
            
            -
            
            
            1,524,000
            
            
            1,524,000Balance,
                December 31, 2004 restated
            
            
            30,000
            
            
            22,997,000
            
            
            (779,000
            )
            
            (16,577,000
            )
            
            (210,000
            )
            
            5,461,000
            
            
            1,521,000Issuance of common stock under
              employee stock purchase plan
            
            
            
            
            
            
            
            
            
            
            
            (1,000
            )
            
            2,000
            
            
            1,000Exercise of stock options
            
            
            2,000
            
            
            787,000
            
            
            
            
            
            
            
            
            
            
            
            789,000Stock Issuance - FieldCentrix acquisition
            
            
            4,000
            
            
            3,332,000
            
            
            
            
            
            
            
            
            
            
            
            3,336,000Currency translation adjustments
            
            
            
            
            
            
            
            
            (156,000
            )
            
            
            
            
            
            
            
            (156,000
            )
            
            (156,000
            )Net income - restated
            
            
            
            
            
            
            
            
            
            
            
            1,217,000
            
            
            
            
            
            1,217,000
            
            
            1,217,000Balance,
                December 31, 2005 restated
            
            
            36,000
            
            
            27,116,000
            
            
            (935,000
            )
            
            (15,361,000
            )
            
            (208,000
            )
            $
            10,648,000
            
            
            1,061,000Exercise of stock options
            
            
            
            
            
            19,000
            
            
            
            
            
            
            
            
            
            
            
            19,000Stock-based compensation
            
            
            
            
            
            397,000
            
            
            
            
            
            
            
            
            
            
            
            397,000Currency translation adjustment
            
            
            
            
            
            
            
            
            24,000
            
            
            
            
            
            
            
            
            24,000
            
            
            24,000Net loss
            
            
            
            
            
            
            
            
            
            
            
            (4,982,000
            )
            
            
            
            
            (4,982,000
            )
            
            (4,982,000
            )Balance,
                December 31, 2006
            
            $
            36,000
            
            $
            27,532,000
            
            $
            (911,000
            )
            $
            (20,343,000
            )
            $
            (208,000
            )
            $
            6,106,000
            
            $
            (4,958,000
            )





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


46


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
                ended December 31,**
            
            **2006**
            
            **2005**
              **(restated)**
            
            **2004**
              **(restated)****Cash
                flows from operating activities:**Net
                  income (loss )
            
            $
            (4,982,000
            )
            $
            1,217,000
            
            $
            1,524,000Adjustments to reconcile net income(loss) to net cash
              provided by (used in) operating activities:Depreciation and amortization
            
            
            2,237,000
            
            
            1,640,000
            
            
            1,375,000Increase in provision for doubtful accounts
            
            
            67,000
            
            
            227,000
            
            
            84,000Stock-based compensation
            
            
            397,000
            
            
            -
            
            
            -Deferred tax expense
            
            
            29,000
            
            
            7,000
            
            
            -Changes in operating assets and liabilities:Receivables
            
            
            (1,761,000
            )
            
            1,235,000
            
            
            (2,272,000
            )Prepaid
                expenses and other
            
            
            89,000
            
            
            44,000
            
            
            (61,000
            )Accounts
                payable and accrued expenses
            
            
            (37,000
            )
            
            54,000
            
            
            121,000Deferred
                revenues
            
            
            999,000
            
            
            954,000
            
            
            1,907,000Other
                long term assets
            
            
            14,000
            
            
            (124,000
            )
            
            -Net
                cash provided by (used in) operating activities
            
            
            (2,948,000
            )
            
            5,254,000
            
            
            2,678,000**Cash
                flows from investing activities:**Capitalized
                software development costs
            
            
            (2,821,000
            )
            
            (1,555,000
            )
            
            (1,380,000
            )Purchases
                of
                property and equipment
            
            
            (291,000
            )
            
            (324,000
            )
            
            (389,000
            )Net
                cash acquired from FieldCentrix acquisition
            
            
            -
            
            
            616,000
            
            
            -Payment
                of contingent purchase price
            
            
            (153,000
            )
            
            -
            
            
            -Release
                of restricted cash
            
            
            -
            
            
            75,000
            
            
            -Net
                cash (used in) investing activities
            
            
            (3,265,000
            )
            
            (1,188,000
            )
            
            (1,769,000
            )**Cash
                flows from financing activities:**Proceeds from exercise of stock options and employee
              stock purchase plan
            
            
            19,000
            
            
            791,000
            
            
            131,000Net
                cash provided by financing activities
            
            
            19,000
            
            
            791,000
            
            
            131,000Effect
                of exchange rate changes on cash and cash
              equivalents
            
            
            (170,000
            )
            
            144,000
            
            
            (37,000
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (6,364,000
            )
            
            5,001,000
            
            
            1,003,000Cash
                and cash equivalents balance, beginning of year
            
            
            9,484,000
            
            
            4,483,000
            
            
            3,480,000Cash
                and cash equivalents balance, end of year
            
            $
            3,120,000
            
            $
            9,484,000
            
            $
            4,483,000Supplemental
                disclosure of cash flow information:Satisfaction
                of
                liability with stock options
            
            
            -
            
            
            -
            
            $
            74,000Cash
                paid for interest expense
            
            $
            -
            
            $
            -
            
            $
            1,000








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








47














**Supplemental
      Cash Flow Information - FieldCentrix Acquisition**





Non-Cash
      Transactions:


**Years
                Ended**
              **December
                31,****2006**
            
            **2005**
            
            **2004****Acquisition
                of FieldCentrix Net Assets:**Purchase
                PriceCommon stock issued
            
            $
            -
            
            $
            3,336,000
            
            $
            -Assets
                acquired:Accounts receivable
            
            
            -
            
            
            (384,000
            )
            
            -Prepaid Expenses
            
            
            -
            
            
            (80,000
            )
            
            -Property and equipment
            
            
            -
            
            
            (730,000
            )
            
            -Software
            
            
            
            
            
            (721,000
            )Customer relationship list
            
            
            -
            
            
            (1,360,000
            )
            
            -Other assets
            
            
            -
            
            
            (31,000
            )
            
            -Goodwill
            
            
            -
            
            
            (1,100,000
            )
            
            -Total
                assets acquired:
            
            
            -
            
            
            (4,406,000
            )
            
            -**Liabilities
                assumed:**Accrued expenses
            
            
            -
            
            
            719,000
            
            
            -Deferred revenue
            
            
            -
            
            
            967,000
            
            
            -Total
                liabilities assumed
            
            
            -
            
            
            1,686,000
            
            
            -Net
                assets acquired
            
            
            -
            
            
            (2,720,000
            )
            
            -Net
                Cash received from FieldCentrix
              acquisition
            
            $
            -
            
            $
            616,000
            
            $
            -


48


**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





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





Astea
      International Inc. and Subsidiaries (collectively the “Company” or “Astea”) is a
      global provider of service management software that addresses the unique needs
      of companies who manage capital equipment, mission critical assets and human
      capital. Clients include Fortune 500 to mid-size companies, which Astea services
      through Company facilities in the United States, United Kingdom, Australia,
      The
      Netherlands and Israel. The Company’s principal products are Astea Alliance, FX
      Service Center and FX Mobile. Astea Alliance supports the complete service
      lifecycle, from lead generation and project quotation to service and billing
      through asset retirement. FX Service Center Internet-based service management
      and dispatch solution that gives organizations command over their field service
      operations. FX Mobile offerings include mobile field service automation (FSA)
      systems, which include the wireless devices and support of mobile field
      technicians using portable, hand-held computing devices. Since its inception
      in
      1979, Astea has licensed applications to companies in a wide range of sectors
      including information technology, telecommunications, instruments and controls,
      business systems, and medical devices.


2. 
Restatements




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





All
      cash
      consideration related to the transaction, $1,678,000 has been received by the
      Company as of December 31, 2006, with the exception of $259,000 most of which
      was received in the first quarter of 2007 and the remainder is expected to
      be
      received early in the second quarter of 2007.





The
      modifications contained in the restated financial statements relate to revenue
      and deferred revenues. It affected the elements of cash flow, but did not have
      any impact to net cash flow from operations as reported in the statements of
      cash flows. The total impact of this restatement on the Company’s statement of
      operations was to decrease the net income applicable to common shareholders
      for
      the year ended December 31, 2005 by $611,000 or $.20 for both basic and diluted
      earnings per share, and to decrease net income applicable to common shareholders
      for the year ended December 31, 2004 by $610,000 or $.21 and $.20 per share
      for
      basic and diluted earnings per share, respectively.






49





As
      a
      result of the correction of the errors described above, the Company restated
      its
      financial statements included in the Annual Report on Form 10-K/A as
      follows:





**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,**
            
            **2005**
              **As
                previously**
              **reported**
            
            **2005**
              **As
                restated****ASSETS**Current
                assets:Cash and cash equivalents
            
            $
            9,484,000
            
            $
            9,484,000Restricted Cash
            
            
            225,000
            
            
            225,000Receivables, net of reserves of $310,000
            
            
            5,037,000
            
            
            5,037,000Prepaid expenses and other
            
            
            485,000
            
            
            485,000Total current assets
            
            
            15,231,000
            
            
            15,231,000Property and equipment, net
            
            
            1,038,000
            
            
            1,038,000Intangibles, net
            
            
            1,999,000
            
            
            1,999,000Capitalized software development costs, net
            
            
            2,055,000
            
            
            2,055,000Goodwill
            
            
            1,100,000
            
            
            1,100,000Other long-term assets
            
            
            189,000
            
            
            189,000Total
                assets
            
            $
            21,612,000
            
            $
            21,612,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts payable and accrued expenses
            
            $
            3,969,000
            
            $
            3,969,000Deferred revenues
            
            
            5,767,000
            
            
            5,767,000Total
                current liabilities
            
            
            9,736,000
            
            
            9,736,000**Long-term
                liabilities**Deferred
                revenue
            
            
            -
            
            
            1,221,000Deferred
                tax liability
            
            
            7,000
            
            
            7,000Total
                long-term liabilities
            
            
            7,000
            
            
            1,228,000Commitments
                and contingencies
            
            
            -
            
            
            -Common
                stock, $.01 par value, 25,000,000 shares
              authorized, 3,585,000 shares issued
            
            
            36,000
            
            
            36,000Additional
                paid-in capital
            
            
            27,116,000
            
            
            27,116,000Accumulated
                comprehensive loss -
              translation
                adjustment
            
            
            (935,000
            )
            
            (935,000
            )Accumulated
                deficit
            
            
            (14,140,000
            )
            
            (15,361,000
            )Less:
                Treasury stock at cost,
            
            
            (208,000
            )
            
            (208,000
            )Total
                stockholders’ equity
            
            
            11,869,000
            
            
            10,648,000Total
                liabilities and stockholders' equity
            
            $
            21,612,000
            
            $
            21,612,000











50





**ASTEA
      INTERNATIONAL INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








**Years
                ended December 31,**
            
            **2005**
            
            **2004****As
                previously reported**
            
            **As
                restated**
            
            **As
                previously reported**
            
            **As
                restated**Revenues:Software
                license fees
            
            $
            8,240,000
            
            $
            8,240,000
            
            $
            7,992,000
            
            $
            7,392,000Services
                and
                maintenance
            
            
            14,525,000
            
            
            13,914,000
            
            
            11,325,000
            
            
            11,315,000Total revenues
            
            
            22,765,000
            
            
            22,154,000
            
            
            19,317,000
            
            
            18,707,000Costs
                and expenses:Cost
                of
                software license fees
            
            
            1,178,000
            
            
            1,178,000
            
            
            1,838,000
            
            
            1,838,000Cost
                of
                services and maintenance
            
            
            8,261,000
            
            
            8,261,000
            
            
            6,356,000
            
            
            6,356,000Product
                development
            
            
            2,461,000
            
            
            2,461,000
            
            
            1,431,000
            
            
            1,431,000Sales
                and marketing
            
            
            6,192,000
            
            
            6,192,000
            
            
            5,565,000
            
            
            5,565,000General
                and administrative
            
            
            3,003,000
            
            
            3,003,000
            
            
            2,051,000
            
            
            2,051,000Total costs and expenses
            
            
            21,095,000
            
            
            21,095,000
            
            
            17,241,000
            
            
            17,241,000Income
                (loss) from operations
            
            
            1,670,000
            
            
            1,059,000
            
            
            2,076,000
            
            
            1,466,000Interest
                income
            
            
            165,000
            
            
            165,000
            
            
            58,000
            
            
            58,000Income
                (loss) before income taxes
            
            
            1,835,000
            
            
            1,224,000
            
            
            2,134,000
            
            
            1,524,000Income
                tax expense
            
            
            7,000
            
            
            7,000
            
            
            -
            
            
            -Net
                income (loss)
            
            $
            1,828,000
            
            $
            1,217,000
            
            $
            2,134,000
            
            $
            1,524,000Basic
                net income (loss) per share
            
            $
            .59
            
            $
            .39
            
            $
            .72
            
            $
            .51Diluted
                net income (loss) per share
            
            $
            .59
            
            $
            .39
            
            $
            .71
            
            $
            .51Weighted
                average shares used in
              computing basic net income (loss) per
              share
            
            
            3,093,000
            
            
            3,093,000
            
            
            2,960,000
            
            
            2,960,000Weighted
                average shares used in
              computing diluted net income
              (loss)per
                share
            
            
            3,116,000
            
            
            3,116,000
            
            
            3,001,000
            
            
            3,001,000








51




**3.**  **Summary
      of Significant Accounting Policies**





*Principles
      of Consolidation*





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





*Use
      of Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      Significant assets and liabilities that are subject to estimates include
      allowances for doubtful accounts, goodwill and other acquired intangible assets,
      deferred tax assets and certain accrued and contingent liabilities.





*Revenue
      Recognition*





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





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





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





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





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








52





When
      appropriate, the Company may allocate a portion of its software revenue to
      post-contract support activities or to other services or products provided
      to
      the customer free of charge or at non-standard rates when provided in
      conjunction with the licensing arrangement. Amounts allocated are based upon
      standard prices charged for those services or products which, in the Company’s
      opinion, approximate fair value. Software license fees for resellers or other
      members of the indirect sales channel are based on a fixed percentage of the
      Company’s standard prices. The Company recognizes software license revenue for
      such contracts based upon the terms and conditions provided by the reseller
      to
      its customer.





Revenue
      from post-contract support is recognized ratably over the term of the contract,
      which is generally twelve months on a straight-line basis. Consulting and
      training service revenue is generally unbundled and recognized at the time
      the
      service is performed. Fees from licenses sold together with consulting services
      are generally recognized upon shipment, provided that the contract has been
      executed, delivery of the software has occurred, fees are fixed and determinable
      and collection is probable.





*Reimbursable
      Expenses*





The
      Company charges customers for out-of-pocket expenses incurred by its employees
      during the performance of professional services in the normal course of
      business. In accordance with Emerging Issues Task Force 01-14, “Income Statement
      Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses
      Incurred,” billings for out-of-pocket expenses that are reimbursed by the
      customer are to be included in revenues with the corresponding expense included
      in cost of services and maintenance. During fiscal years 2006, 2005 and 2004,
      the Company billed $329,000, $370,000, and $296,000 respectively, of
      reimbursable expenses to customers.





*Cash
      and Cash Equivalents*





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





*Allowance
      for Doubtful Accounts*





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


**Year
                Ended December 31**
            
            **Balance
                at**
              **beginning
                of year**
            
            **Expensed**
            
            **Write
                offs**
            
            **Balance
                at end of year**2006
            
            $
            310,000
            
            $
            67,000
            
            $
            214,000
            
            $
            163,0002005
            
            
            411,000
            
            
            227,000
            
            
            328,000
            
            
            310,0002004
            
            
            810,000
            
            
            84,000
            
            
            483,000
            
            
            411,000






53





The
      decrease in bad debt expense in 2006 is primarily due to improvement in customer
      payment performance.





Senior
      management reviews accounts receivable on a monthly basis to determine if any
      receivables will potentially be uncollectible. Based on all information
      available, the Company believes its allowance for doubtful accounts as of
      December 31, 2006 is adequate. However, actual write-offs might exceed the
      recorded allowance.





*Property
      and Equipment*





Property
      and equipment are recorded at cost. Depreciation and amortization are provided
      using the straight-line method over the estimated useful lives of the related
      assets or the lease term, whichever is shorter. When property and equipment
      are
      sold or otherwise disposed of, the fixed asset account and related accumulated
      depreciation account are relieved and any gain or loss is included in
      operations. Expenditures for repairs and maintenance are charged to expense
      as
      incurred and significant renewals and betterments are capitalized.





*Impairment
      of Long Lived Assets*





The
      Company evaluates its long-lived assets, including certain identifiable
      intangible assets, excluding goodwill, for impairment whenever events or changes
      in circumstances indicate that the carrying amount of such assets may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of any asset to future undiscounted net cash
      flows expected to be generated by the asset. If such assets are considered
      to be
      impaired, the impairment is measured by the amount by which the carrying amount
      of the asset exceeds the fair value of the assets. As of December 31, 2006,
      the
      Company has determined that no impairment has occurred.





*Capitalized
      Software Development Costs*





The
      Company capitalizes software development costs in accordance with SFAS No.
      86,
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed.” The Company capitalizes software development costs subsequent to the
      establishment of technological feasibility through the product’s availability
      for general release. Costs incurred prior to the establishment of technological
      feasibility are charged to product development expense. Development costs
      associated with product enhancements that extend the original product’s life or
      significantly improve the original product’s marketability are also capitalized
      once technological feasibility has been established. Software development costs
      are amortized on a product-by-product basis over the greater of the ratio of
      current revenues to total anticipated revenues or on a straight-line basis
      over
      the estimated useful lives of the products (usually two years), beginning with
      the initial release to customers. The Company evaluates the recoverability
      of
      capitalized software based on the estimated future revenues of each product.
      As
      of December 31, 2006, management believes that no revisions to the remaining
      useful lives or write-downs of capitalized software development costs are
      required.




*Goodwill*





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






54





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





The
      purchase agreement provided for an earnout provision through June 30, 2007
      that
      pays the sellers a percentage of certain license revenues and certain
      professional services. Due to the contingent nature of such payments, the value
      of the future payments was not included in the purchase price. However, under
      FAS 141, as such sales transactions occur, the related earnout amounts are
      added
      to the purchase price, specifically goodwill, which for the year ended December
      31, 2006 totaled $153,000. At December 31, 2006 goodwill is
      $1,253,000.





*Major
      Customers*





In
      2006
      no customer represented more than 10% of total revenues. In 2005 there was
      one
      customer EDS, that represented 24% of revenues and in 2004, Carrier Corporation
      accounted for 16% of the Company’s revenues. One customer represented 11% of
      total accounts receivable at December 31, 2006. No customer accounted for 10%
      or
      more of total accounts receivable at December 31 2005.




*Concentration
      of Credit Risk*





Financial
      instruments, which potentially subject the Company to credit risk, consist
      of
      cash equivalents and accounts receivable. The Company’s policy is to limit the
      amount of credit exposure to any one financial institution. The Company places
      investments with financial institutions evaluated as being creditworthy, or
      investing in short-term money market which are exposed to minimal interest
      rate
      and credit risk. Cash balances are maintained with several banks. Certain
      operating accounts may exceed the FDIC limits.





Concentration
      of credit risk, with respect to accounts receivable, is limited due to the
      Company’s credit evaluation process. The Company sells its products to customers
      involved in a variety of industries including information technology, medical
      devices and diagnostic systems, industrial controls and instrumentation and
      retail systems. While the Company does not require collateral from its
      customers, it does perform continuing credit evaluations of its customer’s
      financial condition.





*Fair
      Value of Financial Instruments*





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





*Income
      Taxes*





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




*Advertising*





Advertising
      costs are expensed when incurred. Advertising for the years ended December
      31,
      2006, 2005, and 2004 were $98,000, $101,000 and $86,000
      respectively.







55





*Currency
      Translation*





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





*Net
      Income (Loss) Per Share*





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





For
      the
      year ended December 31, 2006, the Company sustained a loss. All options
      outstanding at December 31, 2006 to purchase shares of common stock were
      excluded from the diluted loss per common share calculation as the inclusion
      of
      these options would have been antidilutive. At December 31, 2005 and 2004 there
      were 22,743 and 41,178 net additional dilutive shares assumed to be converted
      at
      an average exercise price of $5.06 and $4.52 per share. Additionally, at
      December 31, 2005 and 2004 the Company had 41,975 and 51,950 antidilutive shares
      that were excluded from diluted earnings per share calculation due to their
      antidilutive nature.





(**in
                thousands, except per share data)****Year
                Ended December 31,**
            
            **2006**
            
            **2005**
              **(restated)**
            
            **2004**
              **(restated)****Net
                income (loss)**
            
            **$**
            **(4,982**
            **)**
            **$**
            **1,217**
            
            **$**
            **1,524**Basic
                weighted average number of common shares outstanding
            
            
            3,547
            
            
            3,093
            
            
            2,960**Basic
                earnings (loss) per common share**
            
            **$**
            **(1.40**
            **)**
            **$**
            **.39**
            
            **$**
            **.51**Effect
                of dilutive stock options
            
            
            -
            
            
            23
            
            
            41Diluted
                weighted average number of common shares outstanding
            
            
            3,547
            
            
            3,116
            
            
            3,001**Diluted
                earnings (loss) per common share**
            
            **$**
            **(1.40**
            **)**
            **$**
            **.39**
            
            **$**
            **.51**





*Comprehensive
      Income (Loss)*





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






56





*Stock
      Compensation*





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





The
      Company had a choice of two attribution methods for allocating compensation
      costs under SFAS No. 123(R): the “straight-line” method, which allocates expense
      on a straight-line basis over the requisite service period of the last
      separately vesting portion of an award, or the “graded vesting attribution
      method”, an accelerated amortization method, which allocates expense on a
      straight-line basis over the requisite service period for each separately
      vesting portion of the award as if the award was in-substance, multiple awards.
      We chose the graded vesting attribution method and accordingly, amortize the
      fair value of each option tranche over the respective tranche’s requisite
      service period.





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





Under
      the
      Company’s stock option plans, options awards generally vest over a four year
      period of continuous service and have a 10 year contractual term. The fair
      value
      of each option is amortized on a straight-line basis over the option’s vesting
      period. The fair value of each option is estimated on the date of the grant
      using the Black-Scholes option valuation model and the following average
      assumptions as of December 31, 2006.





**For
                the year ended**
            **For
                the year ended**
            **For
                the year ended****December
                31, 2006**
            **December
                31, 2005**
            **December
                31, 2004**Risk-free
                interest rate
            4.77%
            4.32%
            4.18%Expected
                life (in years)
            6.15
            6.25
            6.25Volatility
            115%
            117%
            121%Expected
                dividends
            -
            -
            -Annual
                forfeiture rate
            24.5%
            -
            -






57





The
      weighted-average fair value of options granted during the years ended December
      31, 2006, 2005 and 2004 was estimated as $5.90, $6.72 and $5.30
      respectively.





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





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





**Year
                ended December 31****2005**
            
            **2004**Net
                income - as restated
            
            $
            1,217,000
            
            $
            1,524,000Add:
                Stock based compensation
              included in net income as reported
            
            
            -
            
            
            -Deduct
                stock based compensation
              determined under fair value based
              methods for all awards
            
            
            (388,000
            )
            
            (252,000
            )Net
                income - pro forma
            
            $
            829,000
            
            $
            1,272,000Basic
                income per share - as reported
            
            $
            .39
            
            $
            .51Diluted
                income per share - as reported
            
            $
            .39
            
            $
            .51Basic
                income per share - pro forma
            
            $
            .27
            
            $
            .43Diluted
                income per share - pro forma
            
            $
            .27
            
            $
            .42





Prior
      to
      the adoption of SFAS 123(R), the Company included all tax benefits associated
      with stock-based compensation as operating cash flows in the consolidated
      statements of cash flows. SFAS 123(R), requires any reduction in taxes payable
      resulting from tax deductions that exceed the recognized compensation expense
      (excess to tax benefits) to be classified as financing cash flows. The Company
      did not have any excess tax benefit for the year ending December 31,
      2006.





*Reclassifications*





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







58




*Recent Accounting Standards or Accounting Pronouncements*





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes-an Interpretation of FASB Statement 109”, which
      establishes that the financial statement effects of a tax position taken or
      expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The adoption of FIN 48 is not expected
      to have a material impact on our results of operations or our financial
      position.




In
      September2006, the FASB issued FAS No 157, Fair Value Measurement (“FAS 157”).
      FAS 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with generally accepted accounting principles, and expands disclosure
      about fair value measurements. FAS 157 is effective for years beginning after
      November 15, 2007. The adoption of this Statement is not expected to have a
      material effect on the Company’s consolidated financial statements.




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements, “(SAB 108). SAB
      108 was issued to provide interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. The effective date of SAP 108 is for
      fiscal years ended on or before November 15, 2006. This pronouncement did not
      have any impact on the Company’s consolidated financial statements.




**4.**   **Receivables**





**December
                31,**
            
            **2006**
            
            **2005**Billed
                receivables
            
            $
            5,301,000
            
            $
            4,719,000Unbilled
                receivables
            
            
            1,559,000
            
            
            318,000$
            6,860,000
            
            $
            5,037,000





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





**5.**  **Property
      and Equipment**




**December
                31,****Useful
                Life**
            
            **2006**
            
            **2005**Computers
                and related equipment
            
            
            3
            
            $
            3,165,000
            
            $
            2,879,000Furniture
                and fixtures
            
            
            10
            
            
            512,000
            
            
            504,000Leasehold
                improvements
            
            
            *
            
            
            128,000
            
            
            122,000Software
            
            
            1-3
            
            
            365,000
            
            
            280,000Office
                equipment
            
            
            3-7
            
            
            1,234,000
            
            
            1,238,0005,404,000
            
            
            5,023,000Less:
                Accumulated
              depreciation and amortization
            
            
            
            
            
            (4,756,000
            )
            
            (3,985,000
            )$
            648,000
            
            $
            1,038,000





*Leasehold
      improvements are amortized over the assets estimated useful life or lease term,
      whichever is less.






59




Depreciation
      and amortization expense for the years ended December 31, **** 2006, **** 2005
      and **** 2004
      was
      $717,000, $538,000 and $286,000, **** respectively.





**6.**  **Capitalized
      Software Development Costs**





**December
                31,****Remaining
                Weighted****Average
                Life**
            
            **2006**
            
            **2005**Capitalized
                software development costs
            
            
            1.42
            
            $
            9,585,000
            
            $
            6,764,000Less:
                Accumulated amortization
            
            
            
            
            
            (5,949,000
            )
            
            (4,709,000
            )$
            3,636,000
            
            $
            2,055,000





The
      Company capitalized software development costs for the years ended December
      31,
      2006, 2005 and 2004 of $2,821,000, $1,555,000 and $1,380,000, respectively.
      Amortization of software development costs for the years ended December 31,
      2006, 2005 and 2004 was $1,240,000, $1,020,000 and $1,088,000, respectively,
      and
      is reflected in cost of software license fees in the financial statements.
      The
      Company amortizes software developments cost on a straight-line basis over
      the
      estimated useful lives of the product (two years) and expects to amortize
      approximately $2,105,000 during 2007 and $1,531,000 in 2008 based on products
      currently released for sale.





**7.**  **Intangible
      Assets**





Intellectual
      property and customer lists (“intangible assets”) acquired as part of the
      FieldCentrix acquisition are amortized on a straight-line basis over their
      estimated annual lives or over the period of their expected benefit, generally
      ranging from 5 to 10 years. Amortization expense related to these intangible
      assets was $280,000 and $81,000 for the years ended December 31, 2006 and 2005,
      respectively.





**Accumulated
                Amortization**
            
            **Net
                Carrying Value****Description**
            
            **Weighted**
              **Avg.
                Life**
            
            **Gross
                Cost**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Software
            
            
            5
                years
            
            $
            720,000
            
            $
            186,000
            
            $
            42,000
            
            $
            534,000
            
            $
            678,000Customer
                Relationship List
            
            
            10
                years
            
            
            1,360,000
            
            
            175,000
            
            
            39,000
            
            
            1,185,000
            
            
            1,321,000$
            2,080,000
            
            $
            361,000
            
            $
            81,000
            
            $
            1,719,000
            
            $
            1,999,000





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





**Amortization
                Expense**2007
            280,0002008
            280,0002009
            280,0002010
            238,0002011
            136,000









60





**8. 
      Accounts Payable and Accrued Expense**





**December
                31,**
            
            **2006**
            
            **2005**Accounts payable
            
            $
            1,025,000
            
            $
            926,000Accrued compensation and related benefits
            
            
            1,568,000
            
            
            1,389,000Accrued professional services
            
            
            316,000
            
            
            182,000Sales and payroll taxes
            
            
            403,000
            
            
            695,000Other accrued liabilities
            
            
            618,000
            
            
            777,000$
            3,930,000
            
            $
            3,969,000





**9. 
      Income Taxes**




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





The
      provision for income taxes is as follows:





**Years
                ended December 31,**
            
            **2006**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            -
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            --
            
            
            -
            
            
            -Deferred:Federal
            
            $
            27,000
            
            $
            6,000
            
            $
            -State
            
            
            2,000
            
            
            1,000
            
            
            -$
            29,000
            
            $
            7,000
            
            $
            -





Pre-tax
      loss for domestic locations for the years ended December 31, 2006 and 2005
      was
      $4,078,000 and $55,000, respectively. For years ended December 31, 2004 domestic
      pre-tax income was $913,000. Foreign locations had pre-tax loss of $875,000
      for
      the year ended December 31, 2006 and pre-tax income of $1,279,000 and $611,000
      for years ended December 31, 2005 and 2004, respectively.











61




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





**December
                31,**
            
            **2006**
            
            **2005**Deferred
                income tax assets:Revenue recognition
            
            $
            40,000
            
            $
            29,000Accruals and reserves not
              currently deductible for tax
            
            
            203,000
            
            
            122,000Benefit of net operating loss carryforward
            
            
            10,201,000
            
            
            8,447,000Benefit of foreign net operating loss
              carryforward
            
            
            2,041,000
            
            
            2,548,000Depreciation
            
            
            221,000
            
            
            65,000Alternative minimum tax
            
            
            370,000
            
            
            370,000Capital loss carryforward
            
            
            -
            
            
            10,000Non-qualified stock options
            
            
            24,00013,100,000
            
            
            11,591,000Deferred
                income tax liabilities:Capitalized software development costs
            
            
            (1,346,000
            )
            
            (761,000
            )Amortization of deductible goodwill
            
            
            (36,000
            )
            
            (7,000
            )(1,382,000
            )
            
            (768,000
            )Net deferred tax asset before allowance
            
            
            (11,718,000
            )
            
            (10,823,000
            )Valuation allowance
            
            
            (11,754,000
            )
            
            (10,830,000
            )Net deferred income tax liability
            
            $
            (36,000
            )
            $
            (7,000
            )





Realization
      of deferred tax assets is primarily dependent on future taxable income, the
      amount and timing of which is uncertain. The valuation allowance is adjusted
      on
      a periodic basis to reflect management’s estimate of the realizable value of the
      net deferred tax assets. Therefore, a valuation allowance has been recorded
      for
      the entire net deferred tax asset with the exception of $36,000 related to
      the
      deferred tax liability associated with indefinite-lived intangible assets in
      accordance with SFAS No. 142. Because indefinite-lived intangible assets and
      goodwill are not amortized for book purposes, the related deferred tax
      liabilities will not reverse until some indeterminate future period when the
      assets becomes impaired, are disposed of, or in the case of indefinite-lived
      intangible assets, begin to reverse if they are reclassified as an amortizing
      intangible asset. SFAS No. 109 requires the expected timing of future reversals
      of deferred tax liabilities to be taken into account when evaluating the
      realizability of deferred tax assets. Therefore, the Company believes the
      reversal of deferred tax liabilities related to indefinite-lived intangible
      assets and goodwill should not be considered a source of future taxable income
      when assessing the realization of the Company’s deferred tax assets. And as a
      result a deferred expense has been recorded.





In
      2004
      the Company utilized $494,000 of its reserved deferred tax asset to offset
      its
      provision for income taxes, primarily from the utilization of its net operating
      loss carryforward and turning of certain accruals. In the years ended December
      31, 2006 and 2005, there were no income taxes owed, as the Company had tax
      losses.





The
      Company has a tax holiday in Israel, which expires in 2014. Net income for
      the
      Israeli subsidiary was $425,000 and $417,000 for the years ended December 31,
      2006 and 2005, respectfully. The Israeli subsidiary has net carryforward losses
      for Israeli tax purposes of approximately $0.7 million.





As
      of
      December 31, 2006, the Company had a net operating loss carryforward for United
      States federal income tax purposes of approximately **** $30,002,000.
      Included in the aggregate net operating loss carryforward is $8,895,000 of
      tax
      deductions related to equity transactions, the benefit of which will be credited
      to stockholders’ equity, if and when realized after the other tax deductions in
      the carryforwards have been realized. The net operating loss carryforwards
      expire in 2016 through 2025.






62





The
      Company does not provide for federal income taxes or tax benefits on the
      undistributed earnings or losses of its international subsidiaries because
      earnings are reinvested and, in the opinion of management, will continue to
      be
      reinvested indefinitely. At December 31, 2006, the Company had not provided
      federal income taxes on cumulative earnings of individual international
      subsidiaries of $2,691,000. Should these earnings be distributed in the form
      of
      dividends or otherwise, the Company would be subject to both U.S. income taxes
      and withholding taxes in various international jurisdictions. Determination
      of
      the related amount of unrecognized deferred U.S. income tax liability is not
      practicable because of the complexities associated with its hypothetical
      calculation. As noted above, the Company has significant net operating loss
      carryforwards for U.S. federal income taxes purposes, which are available to
      offset the potential tax liability if the earnings were to be
      distributed.





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





**10.**  **Line of Credit**




On
      May
      23, 2006 the Company entered into a secured revolving line of credit (Line)
      agreement with a bank. Maximum available borrowings under the Line represent
      the
      lesser of 80% of the Borrowing Base, which is defined as Eligible Accounts
      Receivables, or $4.0 million. Amounts outstanding on the line of credit were
      zero on December 31, 2006. Interest is payable monthly based on the Bank’s prime
      rate, which was 8.25% at December 31, 2006. The Company pays a quarterly fee
      for
      the unused portion of the line of credit. The fee is .25% for the unused portion
      of the available line of credit. For 2006, the Company paid $5,000 in unused
      line of credit fees.





**11.**    **Commitments
      and Contingencies**





The
      Company leases facilities and equipment under noncancelable operating leases.
      Rent expense for facility leases for the years ended December 31, 2006, 2005
      and
      2004 was $1,065,000, $780,000 and $701,000, respectively. Equipment and vehicle
      expense for the years ended December 31,, 2006, 2005 and 2004 was $249,000,
      $210,000 and $154,000.


Future
      minimum lease payments under the Company’s leases as of December 31, 2006 are as
      follows:





**Operating
                Leases**2007
            
            $
            1,398,0002008
            
            
            778,0002009
            
            
            167,0002010
            
            
            37,0002011
            
            
            18,000Thereafter
            
            
            17,000Total
                minimum lease payments
            
            $
            2,415,000





The
      Company has a letter of credit of $225,000 as of December 31, 2006 related
      to a
      lease obligation. The letter of credit is collateralized by a certificate of
      deposit of $225,000 which is reported as restricted cash. The letter of credit
      may be reduced by $75,000 per year in November. Under the lease agreement,
      it is
      set to expire in February 2009.






63








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





**12.**   **Profit
      Sharing Plan/Savings Plan**




The
      Company maintains a discretionary profit sharing plan, including a voluntary
      Section 401(k) feature, covering all qualified and eligible employees. Company
      contributions to the profit sharing plan are determined at the discretion of
      the
      Board of Directors. The Company matches 25% of eligible employees’ contributions
      to the 401(k) plan up to a maximum of 1.5% of each employee’s compensation. The
      Company contributed approximately $85,000, $53,000 and $50,000 for the years
      ended December 31, 2006, 2005 and 2004, respectively.





**13.**  **Equity
      Plans**





**Share-Based
      Awards**





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





SFAS
      No.
      123(R) requires companies to estimate the fair value of share-based payment
      awards issued in the form of stock options on the date of the grant using an
      option-pricing model. The value of the portion of the award that is ultimately
      expected to vest is recognized as an expense over the requisite service period.
      The Company estimated, at the adoption of SFAS No. 123(R), the value of an
      additional paid-in capital pool for tax impacts related to employee share-based
      compensation awards for which compensation costs were reflected in our pro
      forma
      disclosures required under SFAS No. 123 to be approximately $357,000. Although
      not recorded in the financial statements, this pool (a hypothetical credit
      in
      paid-in capital) can be utilized to charge tax expense (recorded as deferred
      tax
      asset), which are ultimately not realizable when stock options are exercised
      or
      expire. As the Company presently has valuation allowances related to its
      deferred tax assets, the use of the hypothetical pool could not occur until
      such
      valuation reserve has been eliminated.





As
      a
      result of adopting SFAS 123(R), for the year ended December 31, 2006 loss
      before income taxes and net loss was $397,000 higher than if the Company had
      continued to account for share-based compensation under APB 25. The basic and
      diluted loss per share for the year ended December 31, 2006 was $0.11
      greater than if the Company had continued to account for share-based
      compensation under APB 25.




As
      of
      December 31, 2006, the total unrecognized compensation cost related to
      non-vested options amounted to $686,000, which is expected to be recognized
      over
      the options’ remaining vesting periods of 3.86 years. No income tax benefit was
      realized by the Company in the year ended December 31, 2006 as the Company
      reported an operating loss and maintained a full valuation allowance on its
      net
      deferred tax asset.








64





*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, 2006, 2005 and 2004 and changes
      during the years then ended are as follows:





**OPTIONS
                OUTSTANDING**
            
            **OPTIONS**
              **EXERCISABLE****Shares**
              **Available
                for Grant**
            
            **Shares**
            
            **Wtd.
                Avg.**
              **Exercise
                Price**
            
            **Shares**
            
            **Wtd.
                Avg.**
              **Exercise
                Price**Balance,
                December 31, 2003
            
            
            116,000
            
            
            478,000
            
            $
            5.99
            
            
            213,000
            
            $
            7.91Granted
            
            
            
            
            
            110,000
            
            
            5.65
            
            
            -
            
            
            -Cancelled
            
            
            
            
            
            (155,000
            )
            
            6.32
            
            
            -
            
            
            -Exercised
            
            
            
            
            
            (37,000
            )
            
            4.70
            
            
            -
            
            
            -Expired
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2004
            
            
            113,000
            
            
            396,000
            
            $
            5.73
            
            
            190,000
            
            $
            7.09Granted
            
            
            
            
            
            205,000
            
            
            7.22
            
            
            -
            
            
            -Cancelled
            
            
            
            
            
            (129,000
            )
            
            6.95
            
            
            -
            
            
            -Exercised
            
            
            
            
            
            (162,000
            )
            
            4.88
            
            
            -
            
            
            -Expired
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2005
            
            
            36,000
            
            
            310,000
            
            $
            7.04
            
            
            89,000
            
            $
            9.11Authorized
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            
            
            
            222,000
            
            
            6.91
            
            
            -
            
            
            -Cancelled
            
            
            
            
            
            (99,000
            )
            
            6.84
            
            
            -
            
            
            -Exercised
            
            
            
            
            
            (6,000
            )
            
            3.23
            
            
            -
            
            
            -Expired
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -Balance,
                December 31, 2006
            
            
            242,000
            
            
            427,000
            
            $
            6.71
            
            
            118,000
            
            $
            6.59





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





The
      following table summarizes outstanding options that are vested and expected
      to
      vest under the Company’s stock option plans as of December 31,
      2006.





**Number
                of Shares**
            
            **Weighted**
              **Average
                Price**
              **Per
                Share**
            
            **Weighted
                Average Remaining Contractual Term (in years)**
            
            **Aggregate**
              **Intrinsic
                Value**Outstanding
                Options
            
            
            427,000
            
            $
            6.71
            
            
            8.25
            
            $
            409,569Ending
                Vested and Expected to Vest
            
            
            309,000
            
            $
            6.70
            
            
            0.95
            
            $
            325,632Options
                Exercisable
            
            
            118,000
            
            $
            6.59
            
            
            5.91
            
            $
            186,345





The
      intrinsic value of options exercised for the years ending December 31, 2006,
      2005 and 2004 was $35,000, $1,201,000 and $55,000 respectively. The total fair
      value of shares vested for the years December 31, 2006, 2005 and 2004 was
      $263,000, $69,000 and $243,000, respectively





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






65


A
      summary
      of the status of the Company’s nonvested share options as of December 31, 2006
      is presented below:





**Non
                Vested Shares**
            
            **Shares**
            
            **Wtd.
                Avg. Grant Date**
              **Fair
                Value**Nonvested
                at December 31, 2005
            
            
            221,000
            
            $
            6.53Granted
            
            
            222,000
            
            $
            6.91Vested
            
            
            (54,000
            )
            $
            5.32Forfeited
                or expired
            
            
            (80,000
            )
            $
            6.84Nonvested
                at December 31, 2006
            
            
            309,000
            
            $
            6.70





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





**Year
                Ended**
              **December
                31, 2006**Cost
                of Revenues
            
            $
            45,000Development
            
            
            90,000Sales
                & Marketing
            
            
            123,000General
                & Administrative
            
            
            139,000Pre-tax
                share based compensation
            
            $
            397,000Income
                tax benefit
            
            
            -Share-based
                compensation expense, net
            
            $
            397,000





*Employee
      Stock Purchase Plan*





In
      May
      1995, the Company adopted an employee stock purchase plan (the “ESPP”) which
      allows full-time employees with one year of service the opportunity to purchase
      shares of the Company’s common stock through payroll deductions at the end of
      bi-annual purchase periods. The purchase price is the lower of 85% of the
      average market price on the first or last day of the purchase periods. An
      employee may purchase up to a maximum of 100 shares or 10% of the employee’s
      base salary, whichever is less, provided that the employee’s ownership of the
      Company’s stock is less than 5% as defined in the ESPP. Pursuant to the ESPP,
      50,000 shares of common stock were reserved for issuance. During 2005 and 2004
      shares purchased were 500 and 500, respectively. The plan expired on June 30,
      2005 and was not renewed.





**14.**  **FieldCentrix
      Acquisition**





On
      September 21, 2005, the Company, through a newly formed wholly-owned subsidiary,
      FC Acquisition Corp., acquired substantially all of the assets of FieldCentrix,
      Inc., a leading provider of mobile workforce automation, pursuant to an Asset
      Purchase Agreement for $3,336,000 of Company stock. The total cost of the
      acquisition including earnout through December 31, 2006, legal, accounting
      and
      investment banking fees was $3,777,000.





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






66





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





The
      purchase price of FieldCentrix was allocated as follows:





**Assets
                acquired**
            
            **Total
                Allocation**Cash
            
            $
            906,000Accounts
                receivable
            
            
            384,000Prepaid
                expenses
            
            
            80,000Property
                and
                equipment
            
            
            730,000Software
            
            
            721,000Customer
                relations
            
            
            1,360,000Other
                assets
            
            
            31,000Goodwill
            
            
            1,253,0005,465,000Less
                liabilities assumed:Accrued
                expenses
            
            
            721,000Deferred
                revenue
            
            
            967,0001,688,000Total
                purchase price
            
            $
            3,777,000








Goodwill
      is expected to be deductible for tax purposes.





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






67




**15.** **Unaudited
      Pro Forma Financial Information**




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




**Year
                ended**
              **December
                31,****2005**
              **(restated)**
            
            **2004**
              **(restated)**Revenues
            
            $
            26,921,000
            
            $
            27,150,000Net
                (loss)
            
            $
            (1,894,000
            )
            $
            (2,568,000
            )Net
                (loss) per common shareBasic
            
            $
            (.56
            )
            $
            (.77
            )Diluted
            
            $
            (.56
            )
            $
            (.77
            )Weighted
                shares outstandingBasic
            
            
            3,397,000
            
            
            3,318,000Diluted
            
            
            3,397,000
            
            
            3,318,000














68







**16.**  **Geographic
      Segment Data**





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





**Year
                ended December 31,**
            
            **2006**
            
            **2005**
              **(restated)**
            
            **2004**
              **(restated)**Revenues:Software license feesUnited StatesDomestic
            
            $
            3,546,000
            
            $
            2,983,000
            
            $
            4,285,000Export
            
            
            -
            
            
            -
            
            
            -Total United Statessoftware
                license fees
            
            
            3,546,000
            
            
            2,983,000
            
            
            4,285,000United Kingdom
            
            
            589,000
            
            
            4,580,000
            
            
            1,674,000Other foreign
            
            
            535,000
            
            
            677,000
            
            
            1,433,000Total foreign softwarelicense fees
            
            
            1,124,000
            
            
            5,257,000
            
            
            3,107,000Total software license fees
            
            
            4,670,000
            
            
            8,240,000
            
            
            7,392,000Services
                and maintenanceUnited StatesDomestic
            
            
            10,580,000
            
            
            8,128,000
            
            
            6,719,000Export
            
            
            593,000
            
            
            304,000
            
            
            749,000Total United States serviceand maintenance revenue
            
            
            11,173,000
            
            
            8,432,000
            
            
            7,468,000United Kingdom
            
            
            1,822,000
            
            
            2,248,000
            
            
            1,824,000Other foreign
            
            
            2,619,000
            
            
            3,234,000
            
            
            2,023,000Total foreign service andmaintenance revenue
            
            
            4,441,000
            
            
            5,482,000
            
            
            3,847,000Total service andmaintenance revenue
            
            
            15,614,000
            
            
            13,914,000
            
            
            11,315,000Total
                revenue
            
            $
            20,284,000
            
            $
            22,154,000
            
            $
            18,707,000Net
                income(loss) from operationsUnited States
            
            $
            (4,107,000
            )
            $
            (62,000
            )
            $
            913,000United Kingdom
            
            
            (1,533,000
            )
            
            256,000
            
            
            (657,000
            )Other foreign
            
            
            658,000
            
            
            1,023,000
            
            
            1,268,000Net income(loss) from
              operations
            
            $
            (4,982,000
            )
            $
            1,217,000
            
            $
            1,524,000Long
                lived assetsUnited States
            
            $
            7,050,000
            
            $
            6,000,000
            
            $
            1,865,000United Kingdom
            
            
            59,000
            
            
            67,000
            
            
            55,000Other foreign
            
            
            322,000
            
            
            314,000
            
            
            183,000Total
                asset
            
            $
            7,431,000
            
            $
            6,381,000
            
            $
            2,103,000






69








**17.**  **Selected
      Consolidated Quarterly Financial Data (Unaudited)**





**2006
                Quarter Ended**
            
            **Dec
                31,**
            
            **Sep
                30,**
              **(restated)**
            
            **Jun
                30,**
              **(restated)**
            
            **Mar
                31,**
              **(restated)**Revenues
            
            $
            5,693,000
            
            $
            6,349,000
            
            $
            4,399,000
            
            $
            3,843,000Gross
                profit
            
            
            2,637,000
            
            
            3,509,000
            
            
            1,497,000
            
            
            692,000Net
                income(loss)(1)
            
            
            (713,000
            )
            
            45,000
            
            
            (2,035,000
            )
            
            (2,279,000
            )Basic
                net income(loss) per share
            
            $
            (.20
            )
            $
            .01
            
            $
            (.57
            )
            $
            (.64
            )Diluted
                net income(loss) pershare
            
            $
            (.20
            )
            $
            .01
            
            $
            (.57
            )
            $
            (.64
            )Shares
                used in computing basic net income(loss) per share (in
                thousands)
            
            
            3,549
            
            
            3,549
            
            
            3,547
            
            
            3,543Shares
                used in computing diluted net income(loss) per share (in
                thousands)
            
            
            3,549
            
            
            3,567
            
            
            3,547
            
            
            3,543






**2005
                Quarter Ended**
            
            **Dec
                31,**
              **(restated)**
            
            **Sep
                30,**
              **(restated)**
            
            **Jun
                30,**
              **(restated)**
            
            **Mar
                31,**
              **(restated)**Revenues
            
            $
            5,329,000
            
            $
            8,089,000
            
            $
            5,127,000
            
            $
            3,609,000Gross
                profit
            
            
            2,584,000
            
            
            5,757,000
            
            
            2,870,000
            
            
            1,504,000Net
                income(loss)
            
            
            (701,000
            )
            
            2,629,000
            
            
            199,000
            
            
            (910,000
            )Basic
                net income(loss) per share
            
            $
            (.20
            )
            $
            .89
            
            $
            .07
            
            $
            (.31
            )Diluted
                net income(loss) pershare
            
            $
            (.20
            )
            $
            85
            
            $
            .06
            
            $
            (.31
            )Shares
                used in computing basic net income(loss) per share (in
                thousands)
            
            
            3,
                455
            
            
            2,968
            
            
            2,962
            
            
            2,960Shares
                used in computing diluted net income(loss) per share (in
                thousands)
            
            
            3,485
            
            
            3,106
            
            
            3,056
            
            
            2,960





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







In
      connection with the preparation of the 2006 Form 10-K, an error in the Company’s
      accounting for revenue recognition relating to a particular contract from 2004
      was identified. In the fourth quarter of 2004, our U.K. subsidiary entered
      into
      a contract with a new customer, which contained a specified upgrade right for
      which we could not establish VSOE. According to accounting requirements, such
      revenue should be deferred until the upgrade was delivered and accepted.
      However, even though it was delivered in the first quarter of 2005, changes
      in
      the customers requirements, and subsequent concessions granted by the Company
      in
      October 2005 (which included an additional specified upgrade right) further
      delayed our ability to establish delivery and acceptance of the license which
      occurred. This additional specified upgrade was delivered in the first quarter
      of 2007. Accordingly, all revenue recognized in relation to the customer must
      be
      deferred until the complete upgrade was delivered to the customer. It was
      determined that revenue of $36,000, $126,000 and $129,000 must be deferred
      for
      the first, second and third quarters of 2006, respectively. The impact of the
      restatement was to decrease basic and diluted earnings per share by ($.01)
      in
      the first quarter of 2006, ($.03) in the second quarter of 2006, and ($.04)
      for
      the third quarter of 2006. For 2005, revenue of $161,000, $232,000, $160,000
      and
      $58,000 must be deferred for the first, second, third and fourth quarters,
      respectively. The impact of the restatement was to decrease both basic and
      diluted earnings per share by ($.06) in the first quarter, ($.08) in the second
      quarter and ($.05) in the third quarter. For the fourth quarter of 2005, basic
      earnings per share decreased ($.01) and diluted earnings per share decreased
      ($.02).






70




The
      Company will amend its 2006 Forms 10-Q for the interim periods ended March
      31,
      2006, June 30, 2006 and September 30, 2006 shortly after the filing of this
      Form
      10-K.





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





None.





**Item9A.**  **Controls
      and Procedures.**





The
      Company’s management team, under the supervision and with the participation of
      the Company’s principal executive officer and principal financial officer,
      evaluated the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
      Exchange Act of 1934 (“Exchange Act”), as of the last day of the period covered
      by this report, December 31, 2006. The term disclosure controls and procedures
      means the Company’s controls and other procedures that are designed to ensure
      that information required to be disclosed by the Company in the reports that
      the
      Company files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms. Disclosure controls and procedures
      include, without limitation, controls and procedures designed to ensure that
      information required to be disclosed by the Company in the reports that the
      Company files or submits under the Exchange Act is accumulated and communicated
      to management, including the Company’s principal executive and principal
      financial officers, or persons performing similar functions, as appropriate
      to
      allow timely decisions regarding required disclosure. Based on this evaluation,
      the Company’s principal executive officer and principal financial officer
      concluded that, because of the material weaknesses in the Company’s internal
      control over financial reporting described below, the Company’s disclosure
      controls and procedures were not effective as of December 31, 2006. To address
      the material weaknesses in the Company’s internal control over financial
      reporting described below, we performed additional manual procedures and
      analysis and other post-closing procedures in order to prepare the consolidated
      financial statements included in this report. As a result of these expanded
      procedures, the Company believes that the consolidated financial statements
      contained in this report present fairly, in all material respects, our financial
      condition, results of operations and cash flows for the fiscal years covered
      thereby in conformity with generally accepted accounting principles in the
      United States (“GAAP”).





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






71





In
      connection with the completion of its audit of and the issuance of an
      unqualified report on the Company's consolidated financial statements for the
      fiscal year ended December 31, 2006, the Company's independent registered public
      accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit
      Committee that the following matter involving the Company's internal controls
      and operations was considered to be a material weakness, as defined under
      standards established by the Public Company Accounting Oversight
      Board:





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





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




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




There
      were no changes that occurred during the fiscal quarter ended December 31,
      2006
      that have materially affected, or are reasonable likely to materially affect,
      our internal controls over financial reporting.





**Item
      9B.**  **Other
      Information**





None


**PART
      III**





**Item
      10.**  **Directors
      and Executive Officers of the Registrant.**





Certain
      information required by Part III is omitted from this Report in that the Company
      will file a definitive proxy statement with 120 days after the end of this
      fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for its 2006
      Annual Meeting of Stockholders proposed to be held on May 30, 2007, and the
      information therein is incorporated herein reference.





**Item10A.**  **Departure
      of Directors or Principal Officers; Election of Directors; Appointment of
      Principal Officers**





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





**Item11.**  **Executive
      Compensation**





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





**Item12.**  **Security
      Ownership of Certain Beneficial Owners and Management.**





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






72






**Item
      13.**  **Certain
      Relationships and Related Transactions**





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





**Item
      14.**  **Principal
      Accountant Fees and Services**





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





**PART
      IV**





**Item15.**  **Exhibits
      and Financial Statement Schedules**





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





i) Consolidated
      Balance Sheets at December 31, 2006 and 2005




ii)
            Consolidated
                Statements of Operations for the years ended December 31, 2006, 2005,
                and
                2004


iii) Consolidated
      Statements of Stockholders’ Equity for the years ended December 31,


2006,
      2005, and 2004




iv)
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005,
                and
                2004


v) Notes
      to
      the Consolidated Financial Statements





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





(a)(2) *Schedules.*





a) Schedule
      II - Valuation and Qualifying Accounts





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





(a)(3)   *List
      of Exhibits.*





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


**Exhibit
                  No.**
              **Description**3(i).1
              Certificate
                  of Incorporation of the Company (Incorporated herein by reference
                  to
                  Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as
                  amended (File No. 33-92778)).3(ii).1
              By-Laws
                  of the Company (Incorporated herein by reference to Exhibit 3.2
                  to the
                  Company’s Registration Statement on Form S-1, as amended (File No.
                  33-92778)).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)).
   73
  10.1
              1994
                  Amended Stock Option Plan (Incorporated herein by reference to
                  Exhibit
                  10.1 tothe
                  Company’s Registration Statement on Form S-1, as amended (File No.
                  33-92778)).10.2
              Form
                  of Non-Qualified Stock Option Agreement under the 1994 Amended
                  Stock
                  Option Plan (Incorporated herein by reference to Exhibit 10.2 to
                  the
                  Company’s Registration Statement on Form S-1, as amended (File No.
                  33-92778)).10.3
              Form
                  of Incentive Stock Option Agreement under the 1994 Amended Stock
                  Option
                  Plan (Incorporated herein by reference to Exhibit 10.3 to the Company’s
                  Registration Statement on Form S-1, as amended (File No.
                  33-92778)).10.4
              1991
                  Amended Non-Qualified Stock Option Plan (Incorporated herein by
                  reference
                  to Exhibit 10.4 to the Company’s Registration Statement on Form S-1,
                  as amended (File No. 33-92778)).10.5
              Form
                  of Non-Qualified Stock Option Agreement under the 1991 Amended
                  Non-Qualified Stock Option Plan (Incorporated herein by reference
                  to
                  Exhibit 10.5 to the Company’s Registration Statement on Form S-1, as
                  amended (File No. 33-92778)).10.6
              1995
                  Employee Stock Purchase Plan (Incorporated herein by reference
                  to Exhibit
                  10.6 to the Company’s Registration Statement on Form S-1, as amended
                  (File No. 33-92778)).10.7
              Amendment
                  No. 1 to 1995 Employee Stock Purchase Plan (Incorporated herein
                  by
                  reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
                  for the fiscal quarter ended September 30, 1997).10.8
              1995
                  Employee Stock Purchase Plan Enrollment/Authorization Form (Incorporated
                  herein by reference to Exhibit 4.7 to the Company’s Registration Statement
                  on Form S-8, filed on September 19, 1995 (File No.
                  33-97064)).10.9
              Amended
                  and Restated 1995 Non-Employee Director Stock Option Plan (Incorporatedherein
                  by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K
                  for the year ended December 31, 1997).10.10
              Form
                  of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
                  Director Stock Option Plan (Incorporated herein by reference to
                  Exhibit
                  4.5 to the Company’s Registration Statement on Form S-8, filed on
                  September 19, 1995 (File No. 33-97064)).10.11
              1997
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  10.10 to
                  the Company’s Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1996).10.12
              Form
                  of Non-Qualified Stock Option Agreement under the 1997 Stock Option
                  Plan.
                  (Incorporated herein by reference to Exhibit 10.11 to the Company’s Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1996).10.13
              Form
                  of Incentive Stock Option Agreement under the 1997 Stock Option
                  Plan
                  (Incorporated herein by reference to Exhibit 10.12 to the Company’s Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1996).10.14
              1998
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  10.14 to
                  the Company’s Annual Report on Form 10-K for the year ended December 31,
                  1997).10.15
              Form
                  of Non-Qualified Stock Option Agreement under the 1998 Stock Option
                  Plan.(Incorporated
                  herein by reference to Exhibit 10.15 to the Company’s Annual Report on
                  Form 10-K for the year ended December 31, 1997).10.16
              Form
                  of Incentive Stock Option Agreement under the 1998 Stock Option
                  Plan.(Incorporated
                  herein by reference to Exhibit 10.16 to the Company’s Annual Report on
                  Form 10-K for the year ended December 31, 1997).10.28
              2001
                  Stock Option Plan (Incorporated herein by reference to Exhibit
                  99.1 to the
                  Company’s Registration Statement on Form S-8 (File No.
                  333-107757)).21.1
              Subsidiaries
                  of the Registrant.23.1*
              Consent
                  of BDO Seidman, LLP.
   74
   24.1*
              Powers
                  of Attorney (See the Signature Page).31.1*
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - President
                  and
                  Chief Executive Officer31.2*
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
                  Financial Officer32.1*
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002 - President and Chief Executive
                  Officer32.2*
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906


*Exhibits.*





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


75


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 2nd day of April
      2007.





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





POWER
      OF
      ATTORNEY





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





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





Signature
              Title
              Date/s/
                  Zack Bergreen
              Chief
                  Executive Officer
              April
                  2, 2007Zack
                  Bergreen
              (Principal
                  Executive Officer)/s/
                  Rick Etskovitz
              Chief
                  Financial Officer
              April
                  2, 2007Rick
                  Etskovitz
              (Principal
                  Financial and AccountingOfficer)/s/
                  Eileen Smith
              Controller
              April
                  2, 2007Eileen
                  Smith/s/
                  Thomas J. Reilly, Jr.
              Director
              April
                  2, 2007Thomas
                  J. Reilly, Jr./s/
                  Zack Bergreen
              Director
              April
                  2, 2007Zack
                  Bergreen/s/
                  Adrian Peters
              Director
              April
                  2, 2007Adrian
                  Peters/s/
                  Eric Siegel
              Director
              April
                  2, 2007Eric
                  Siegel







76








**Consent
      of Independent Registered Public Accounting
      Firm**








Astea
      International Inc. Subsidiaries


Horsham,
      Pennsylvania











We
      hereby
      consent to the incorporation by reference in the Registration Statements (Nos.
      333-33825, 333-107757, 333-34865, and 333-61981) on Form S-8 and (Nos.
      333-11949, 333-90394, and 333-17459) on Form S-3 of Astea International, Inc.
      and subsidiaries of our report dated March 30, 2007, relating to the
      consolidated financial statements of Astea International, Inc. and subsidiaries
      appearing in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.










BDO
      Seidman, LLP


Woodbridge,
      NJ








April
      2,
      2007