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

                                    FORM 10-K
(Mark One)

 [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. For The Fiscal Year Ended: December 31, 2003

                                       or

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

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

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

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


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

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

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

Securities registered pursuant to Section 12(g) of the Act:

                                                   Common Stock, $.01 par value
                                                   ----------------------------

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

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

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

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant as of June 30, 2003 (based on the closing price of $3.10 as quoted by
Nasdaq National Market as of such date) was approximately $4,981,010.

As of March 24, 2004,  2,964,972  shares of the  registrant's  Common Stock were
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.
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                                TABLE OF CONTENTS
                                                                                         Page
                                                                                         -----
                  PART I

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

                  PART II

Item 5.           Market for Registrant's Common Equity and Related                      16
                  Stockholder Matters
Item 6.           Selected Financial Data                                                17
Item 7.           Management's Discussion and Analysis of Financial                      18
                  Condition and Results of Operations
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk             35
Item 8.           Financial Statements and Supplementary Data                            36
Item 9.           Changes in and Disagreements with Accountants on                       54
                  Accounting and Financial Disclosure
Item 9A.          Controls and Procedures                                                54

                  PART III

Item 10.          Directors and Officers of the Registrant                               55
Item 11.          Executive Compensation                                                 58
Item 12.          Security Ownership of Certain Beneficial Owners and                    61
                  Management
Item 13.          Certain Relationships and Related Transactions                         62
Item 14.          Principal Accountant Fees and Services                                 62


                  PART IV


Item 15.          Exhibits, Financial Statement Schedules, and Reports                   63
                  on Form 8-K

                  Signature Page                                                         66

                  Consent of Independent Certified Public Accountant                     67






                                       2




PART I

Item 1.           Business.

General

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

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

         In 2002,  Astea began  commercial  release of its latest Astea Alliance
service  management suite version 6 products ("Astea Alliance 6") that adapt the
Company's domain expertise and integrated business process  functionality to the
Microsoft.NET Web Services  framework.  Astea solutions include a variety of Web
portal and wireless  remote-access  capabilities to integrate 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  580  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,


                                       3



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

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

Current Product Offerings

Astea Alliance


                               [GRAPHIC OMMITTED]



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

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

         Astea  Alliance  is  licensed to  companies  that sell  and/or  service
capital  equipment  or  mission  critical  assets.  Companies  invest in Astea's
software  and  services  to automate  service  processes  for cost  containment,
operational  efficiency,   and  management  visibility.   Customers'  return  on
investment is achieved  through  improved  management  of customer  information,
people  and cash  flows,  thereby  increasing  competitive  advantage,  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.



                                       4



         The latest version  software,  Astea Alliance 6.7, is engineered with a
new  system  architecture  for  Web-based  deployment  using  the  Microsoft.NET
development  platform.  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(R) in 1997, and a re-engineered and
enhanced  version of the  Company's  sales  force  automation  product  that was
initially introduced as SalesAlliance in 1999.

         ServiceAlliance  and  SalesAlliance,  the  earliest  versions  of Astea
Alliance  solutions,   were  the  Company's  initial  new  technology  offerings
following a long and highly successful history with its DISPATCH-1 legacy system
solutions.  Astea  Alliance  solutions  have been licensed to over 200 customers
worldwide.  Market acceptance of Astea Alliance by global and regional companies
increased in 2002 and the Company is  aggressively  pursuing  opportunities  for
larger system  implementations with mid-size to large enterprises on a worldwide
basis.

         The current Astea Alliance offering consists of:

         o      7 Applications
         o      Application Extensions
         o      Tools
         o      Services

         Astea Alliance Applications:
              Alliance Contact Center
              Alliance Depot Repair
              Alliance Field Service
              Alliance Logistics
              Alliance Marketing
              Alliance Professional Services
              Alliance Sales

         Astea Alliance Application Extensions:
              Alliance Reports
              Alliance Analytics
              Alliance Customer Portal
              Alliance Mobile

         Astea Alliance Tools:
              Alliance Global Database
              Alliance Studio
              Alliance Links

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




                                       5




Alliance Contact Center

         The Contact  Center  application  supports  call  centers,  information
desks, service hotlines, inside sales and telemarketing activities.  Integrated,
multi-channel,    inbound/outbound    capabilities   enable   customer   service
representatives  to serve  prospects  and  customers  in their  media of choice,
including  phone,  fax,  e-mail or Internet.  Integrated  customer  self-service
portals with automated email response,  automated call escalation, and interface
to  Computer  Telephony  Integration  (CTI)  systems  help  streamline  customer
interaction  processes.  Work  scheduling  and demand  balancing  optimize staff
utilization.  Employee  personal portals with access to comprehensive  real-time
customer  data  and  decision  support  tools  including  intelligent  knowledge
management  and scripting for problem  resolution  and inside sales drive higher
staff productivity. Aside from more efficient customer service and higher levels
of customer satisfaction, the objectives of Astea Contact Center software are to
reduce  overhead  through  improved  first-call  resolution  rates  and  shorter
service-call handling times.

Alliance Depot Repair

         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

         Astea Field Service delivers a robust set of automated  capabilities to
improve   management  of  field  service   activities   and  for  field  service
representatives to 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.  Mobile  tools 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

         Logistics enables equipment service  organizations to control inventory
costs,  manage assets and implement  proactive  service  management  strategies.
Logistics eliminates overstocking and dramatically reduces costs associated with
storing,  depreciating,  and insuring  inventory.  It allows for 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



                                       6


Logistics include asset management, field service parts/tools management, demand
fulfillment, and sales fulfilment.

Alliance Marketing

         Campaigns 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 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 base sales opportunities.

Alliance Professional Services

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

Alliance Sales

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

Astea Alliance Application Extensions

Alliance Analytics

         For proactive service  management,  Alliance  Analytics provides highly
visual, real-time analysis of business performance,  focusing on Key Performance
Indicators - a tool that ensures businesses truly understand  customer behavior.
Alliance Analytics enables the viewing of information for the entire enterprise,
increasing revenues and identifying new business opportunities.  It helps 'drill
down' and focus on the true value of the  captured  customer  information,  with
views of actionable data at both departmental and  enterprise-



                                       7



wide levels.  The graphical  representation  of individual data is available for
Field Service,  Contact  Center,  Depot Repair,  and Sales and  Marketing.  This
affords  businesses  the  opportunity to focus on critical  information  that is
fundamental  to  the  ongoing   attainment  of  outstanding   customer   service
management.  Alliance  Analytics  has been  designed to ensure that users of all
kinds have immediate access to crucial information  whenever it's needed. In the
boardroom,  at agent level, or even for your customers,  this tool  effortlessly
allows the viewing of performance data such as performance against service level
agreements,  contract  profitability,  product failure rate,  repair turn around
times, customer  satisfaction and engineer efficiency.  Reports allow businesses
to see how many  orders  have met  their  contractual  service  ETA and how many
failed, which will help to understand customer satisfaction.  Workloads show the
available  working hours at a specific  location in contrast with the demand for
workforce planning and optimization.

Alliance Customer Portal

         The customer portal 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.  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.

Alliance Mobile

         Alliance Mobile enables customers to match Astea Alliance mobile access
to  field  sales  and  service  needs.  Untethered  wireless  applications  with
synchronized  client  databases  are provided for laptops 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.  The  solution  also
supports two-way paging and SMS.

Astea Alliance Tools

Alliance Global Database

         Alliance Global Database is the system's enterprise database capable of
data translation for multi-national  organizations to collaborate across country
lines,  including support for double-byte  character data sets such as for Asian
languages.  Each user can interact with the system in their  preferred  language
and currency.  Alliance Global Database also provides  translation  between time
zones,  taxation  methods,  and other  unit-of-measure  implications of a global
enterprise.

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.



                                       8



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 open, well defined,
synchronous and asynchronous  application programming interfaces (APIs) that are
XML based.

Alliance Consulting

Professional Services

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

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

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

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

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

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

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


                                       9



         Key  Performance  Indicators are charted to allow baseline  analysis of
the business  performance and savings.  These KPI's are divided into the various
areas of the system.

      o       Staffing          Total staff required presently and after system
                                install
      o       Productivity      Overtime reduction anticipated
                                Reduced Travel times
      o       Inventory         Reduced Obsolescence
                                Reduced Inventory
      o       Revenues          Vendor Warranty Claims
                                Increased Contract Profit
                                Time Of Records Delay Reduced
      o       Expense           Reduced emergency shipments

Technical Services

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

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

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

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

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

Alliance Customer Support

         Astea's customer support organization provides customers with telephone
and online technical support, as well as product  enhancements,  updates and new
software releases.  The company provides 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 24X7 support and help desk services,  as well as software service
packs and release upgrades.



                                       10



Alliance Education & Training

Application Training

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

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

Technical Training

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

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

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

Customers

         The Company  estimates that it has sold  approximately  580 licenses to
customers ranging from small, rapidly growing companies to large,  multinational
corporations with geographically  dispersed operations and remote offices.  More
than 210  licenses  have been  sold for Astea  Alliance  and the  remainder  for
DISPATCH-1. The broad applicability of the Company's products is demonstrated by
the wide range of companies  across many markets and industries  that use one or
more of Astea's products, including customers in information technology, medical
devices and diagnostic systems, industrial controls and instrumentation,  retail
systems,   office   automation,    imaging   systems,   facilities   management,
telecommunications,  and other  industries  with  equipment  sales  and  service
requirements.  In 2003 and 2002, no single customer  accounted for more than 10%
of the  Company's  revenues.  In 2001,  one  customer  accounted  for 11% 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  (European
Operations)  and Australia  (Asia Pacific  Operations).  Sales partners  include
distributors  (value-added  resellers,  system integrators and sales agents) and
OEM  partners.  The Company  actively  seeks to expand its reseller  network and
establish  an  international  indirect  distribution  channel  targeted  at  the
mid-market  tier. See "Certain  Factors that May Affect Future Results-- Need to
Expand Indirect Sales."

         Astea's direct sales force employs a consultative  approach to selling,
working  closely with  prospective  clients to understand and define their needs
and determine how such needs can be addressed by the Company's  products.  These
clients  typically  represent  the mid- to high-end  of the  market.  A prospect
development  organization  comprised of telemarketing  representatives,  who are
engaged in outbound  telemarketing  and inbound inquiry response to a variety of
marketing vehicles, develops


                                       11



and  qualifies  sales  leads  prior  to  referral  to the  direct  sales  staff.
Additional  prospects are  identified  and qualified  through the  networking of
direct  sales  staff  and the  Company's  management  as part of daily  business
activities.

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

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

         Astea's international sales accounted for 34% of the Company's revenues
in 2003,  31% of the  Company's  revenues in 2002 and 33% in 2001.  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 be as  hardware-platform-independent
as possible for  client/server,  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 and Sybase,  Inc. for
Astea Alliance and Progress Software Corporation for DISPATCH-1.  These software
tools provide the Company's  customers  with the  flexibility  to deploy Astea's
products  across  a  variety  of  hardware  platforms,   operating  systems  and
relational database  management systems.  The latest Astea Alliance products are
currently being engineered for existing and emerging Microsoft technologies such
as COM+,  Microsoft  ComPlus  Transactions,  Microsoft  Message  Queuing (MSMQ),
Internet Information Server (IIS) and Microsoft.NET Enterprise Servers including
Windows 2000 Server, SQL Server and BizTalk Server.

         In  addition  to  product  development  that is  conducted  at  Company
facilities in the United States and Israel,  Astea  participates in partnerships
with  complementary  technology  companies  to  reduce  time-to-market  with new
product   capabilities  and  continually   increase  its  value  proposition  to
customers.   The  Company  also  works  with  OEM  partners  who  can  integrate
AllianceEnterprise  modules to complement and expand the  capabilities  of their
product offerings.

         The  Company's  total  expenses for product  development  for the years
ended  December  31,  2003,  2002 and  2001,  were  $2,490,000,  $1,781,000  and
$2,590,000,  respectively;  and these  expenses  amounted to 19%, 11% and 15% of
total revenues for 2003, 2002, and 2001,



                                       12



respectively. In addition, the Company incurred capitalized software development
costs of $479,000,  $807,000 and $600,000 in 2003, 2002 and 2001,  respectively.
The Company anticipates that it will continue to commit substantial resources to
product development in the future. See "Management's  Discussion and Analysis of
Financial  Condition and Results of  Operations"  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 by
e-mail. Included with the software products are security keys (a software piracy
protection) and documentation  available on CD ROM and hard copy.  Historically,
the Company has purchased media and  duplicating  and printing  services for its
product packaging from outside vendors.

Competition

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

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

Licenses and Intellectual Property

         Astea  considers its software  proprietary and licenses its products to
its customers  under  written  license  agreements.  The Company also employs an
encryption  system  that  restricts  a user's  access to source  code to further
protect the Company's  intellectual  property.  Because the  Company's  products
allow  customers to customize  their  applications  without  altering the source
code, the source code for the Company's  products is typically  neither licensed
nor provided to customers.  The Company does, however,  license source code from
time to time and maintains certain third-party source code escrow  arrangements.
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."



                                       13



         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, 2003, the Company, including its subsidiaries, had a
total of 136 full time employees  worldwide,  61 in the United States, 15 in the
United Kingdom,  5 in the Netherlands,  40 in Israel, 14 in Australia,  and 1 in
Japan. The Company's future performance  depends,  in significant part, upon the
continued  service  of its  key  technical  and  management  personnel  and  its
continuing  ability  to  attract  and  retain  highly  qualified  and  motivated
personnel in all areas of its operations.  See "Certain  Factors that May Affect
Future Results--Dependence on Key Personnel; Competition for Employees." None of
the Company's  employees is  represented  by a labor union.  The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.

Corporate History

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

Item 2.  Properties.

         The  Company's  headquarters  are  located  in  a  leased  facility  of
approximately  22,000  square feet in Horsham,  Pennsylvania.  The Company  also
leases facilities for operational activities in Houten, Netherlands,  and Tefen,
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.

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


                                       14



deliberations  with  customers  regarding  the  adequacy and  timeliness  of the
installation  or service,  product  functionality  and  features  desired by the
customer and additional work and product  requirements that were not anticipated
at the  commencement of the project.  These  deliberations  sometimes  result in
changes in services required, upward or downward price adjustments, or reworking
of  contract  terms.  The  Company  from  time to time  will  reserve  funds for
contingencies under contract deliberations. The Company is currently not a party
to any material legal proceedings, the adverse outcome of which, in management's
opinion,  would  have a  material  adverse  effect  on the  Company's  business,
financial condition or results of operations.

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

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


                                       15



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:

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

        2002                                         High               Low
        ------------------------------------ ------------- -----------------
        First quarter                               $5.00             $3.60
        Second quarter                               5.00              3.80
        Third quarter                                4.85              2.55
        Fourth quarter                               3.75              2.25


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

         As of March 15, 2004, there were  approximately 37 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,  2004,  the last  reported  sale  price of the  Common  Stock on the  Nasdaq
SmallCap Market was $3.45 per share.

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


                                       16







                                                                                                 

 Item 6.          Selected Financial Data.

Years ended December 31,                                 2003          2002           2001           2000           1999
----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (3)
Revenues:
     Software license fees                           $   1,935     $    6,504     $    6,384     $   6,554      $  11,312
     Services and maintenance                           10,906         10,294         10,973        13,763         22,509
                                                      ---------------------------------------------------------------------
            Total revenues                              12,841         16,798         17,357        20,317            821
                                                      ---------------------------------------------------------------------

Cost and Expenses:
     Cost of software license fees                         898          1,262          1,224         1,199          2,240
     Cost of services and maintenance                    6,963          6,345          6,808        10,928         17,849
     Product development                                 2,490          1,781          2,590         2,744          4,900
     Sales and marketing                                 5,875          6,218          5,396         6,857          8,463
     General and administrative (1)                      2,198          2,426          2,837         4,066          4,478
     Restructuring charge (2)                                -              -            333         1,101          1,630
                                                      ---------------------------------------------------------------------
           Total costs and expenses                     18,424         18,032         19,188        26,895            560
                                                      ---------------------------------------------------------------------

Loss from continuing operations
      before interest and taxes                         (5,583)        (1,234)        (1,831)       (6,578)        (5,739)
Net interest income                                         54            106            309         1,496          2,163
                                                      ---------------------------------------------------------------------
Loss from continuing
      operations before income taxes                    (5,529)        (1,128)        (1,522)        1,496)        (3,576)

Income tax expense                                           -            200              -
                                                                                                         -              -
                                                      ---------------------------------------------------------------------
Loss from continuing operations                         (5,529)        (1,328)        (1,522)       (5,082)        (3,576)
Gain on sale of discontinued operations,
       net of taxes (4)                                      -              -              -           293
                                                                                                                        -
                                                      ---------------------------------------------------------------------
Net loss                                             $  (5,529)    $   (1,328)    $   (1,522)   $   (4,789)     $  (3,576)
                                                      =====================================================================
Basic and diluted loss per share:
      Continuing operations                          $   (1.89)    $    (0.09)    $    (0.10)   $    (0.35)     $   (0.26)
      Gain on sale of discontinued operations                -              -              -          0.02
                                                                                                                        -
                                                      ---------------------------------------------------------------------
                                                     $   (1.89)    $    (0.09)    $    (0.10)    $   (0.33)     $   (0.26)
                                                      =====================================================================
Shares used in computing basic and diluted loss
      per share                                          2,922          2,921          2,926         2,914          2,780
Balance Sheet Data:
Working capital                                      $   1,820     $    6,449     $    7,313     $   9,668      $  44,170
Total assets                                            10,096         16,443         18,015        21,653         58,634
Long-term debt, less current portion                         -              -              -
                                                                                                        23             49
Accumulated deficit                                    (18,100)       (12,568)       (11,239)       (9,716)        (4,927)
Total stockholders' equity                               3,734          8,998         10,105        11,955         46,617




(1)  A one-time  accrual  for  consulting  fees of  $304,000  is included in the
     fourth quarter of 1999 general and administrative expense.
(2)  Included  in the  fourth  quarter  of 2001  is a  restructuring  charge  of
     $409,000,  which includes cost of consolidating  office space and severance
     of certain  personnel.  The second quarter of 2000 contains a restructuring
     charge of $1,101,000,  which includes  severance  costs, an office closing,
     and other actions aimed at reducing operating expenses.  The fourth quarter
     of 1999  contains  a  restructuring  charge of  $1,630,000  due to  reduced
     DISPATCH-1 development and billable service activity and includes severance
     payments,  the  write-off of  capitalized  software for certain  DISPATCH-1
     modules  which  will no longer be sold and  reserves  to settle  DISPATCH-1
     contractual  obligations.  See  Note 4 of  the  Notes  to the  Consolidated
     Financial Statements.
(3)  Certain  reclassifications  have  been  made  in  prior  years  due  to the
     implementation  of EITF 01-14 (See Note 2 of the Notes to the  Consolidated
     Financial  Statements)  and the 1:5 reverse  stock split which  occurred in
     September  2003  (See  Note 3 of the  Notes to the  Consolidated  Financial
     Statements).
(4)  During 2000, the Company reversed  $149,000 of excess reserves and received
     a distribution of unused escrow balance  totaling  $144,000  related to the
     1998 sales of two of its subsidiaries, Bendata Inc. and Abalon AB.


                                       17



PART II

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

Overview

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

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

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

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

         Software license fees accounted for 15% of the Company's total revenues
in 2003  which  was  comprised  entirely  of sales of Astea  Alliance.  Software
license fee revenues also include some fees from the sublicensing of third-party
software,  primarily  relational database licenses.  Typically,  customers pay a
license fee for the software based on the number of licensed users. Depending on
the contract  terms and  conditions,  software  license fees are  recognized  as
revenue upon delivery of the product if no significant vendor obligations remain
and collection of the resulting  receivable is deemed  probable.  If significant
vendor obligations exist at the time of delivery or if the product is subject to
uncertain  customer  acceptance,   revenue  is  deferred  until  no  significant
obligations remain or acceptance has occurred.

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


                                       18



invoiced  annually  upon the  expiration of the warranty  period,  is recognized
ratably over the term of the agreement, which is usually twelve months.

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

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

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

Accounts Receivable

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




                                       19


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." Accordingly, all costs incurred subsequent to attaining technological
feasibility  are  capitalized  and  amortized  over a period not to exceed three
years.  Technological  feasibility is attained when software products reach Beta
release. Costs incurred prior to the establishment of technological  feasibility
are charged to product development  expense.  The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development  costs require  considerable  judgment by management with respect to
certain external  factors,  including,  but not limited to,  anticipated  future
revenues,   estimated  economic  life  and  changes  in  software  and  hardware
technologies.  Upon the general  release of the software  product to  customers,
capitalization  ceases and such  costs are  amortized,  using the  straight-line
method,  on a  product-by-product  basis  over  the  estimated  life,  which  is
generally three years. All research and development  expenditures are charged to
research and development expense in the period incurred.

Recent Accounting Pronouncements

         In November  2002,  the FASB issued  Interpretation  No. 45 ("FIN 45"),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  including
Indirect Guarantees of Indebtedness of Others"  ("Interpretation  No. 45"). This
Interpretation  elaborates  on the  existing  disclosure  requirements  for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies  that at the time a  company  issues a  guarantee,  the  company  must
recognize an initial  liability for the fair market value of the  obligations it
assumes under that  guarantee and must disclose that  information in its interim
and  annual  financial  statements.  The  initial  recognition  and  measurement
provisions of  Interpretation  No. 45 apply on a prospective basis to guarantees
issued or modified  after December 31, 2002. The adoption of FIN 45 did not have
a material impact on our consolidated results of operations,  financial position
or cash flows.

         In December 2002, the FASB issued  Statement No. 148,  "Accounting  for
Stock-Based   Compensation-Transition  and  Disclosure,  an  amendment  of  FASB
Statement  No. 123  ("SFAS  148").  SFAS 148  amends  FASB  Statement  No.  123,
Accounting  for  Stock-Based  Compensation,  to provide  alternative  methods of
transition for an entity that voluntarily changes to the fair value based method
of  accounting  for  stock-based  employee  compensation.  It  also  amends  the
disclosure  provisions of that Statement to require  prominent  disclosure about
the effects on reported net income of an entity's  accounting  policy  decisions
with respect to  stock-based  employee  compensation.  Finally,  this  Statement
amends  Accounting  Principles  Board ("APB") Opinion No. 28, Interim  Financial
Reporting,  to require  disclosure  about  those  effects  in interim  financial
information.  SFAS 148 is effective  for financial  statements  for fiscal years
ending after December 15, 2002.  The Company  expects to continue to utilize the
intrinsic valuation method for recording employee stock based compensation.

         In January  2003,  the FASB  issued  Interpretation  No. 46 ("FIN 46"),
Consolidation  of Variable  Interest  Entities,  clarifies  the  application  of
Accounting  Research Bulletin No. 51,  "Consolidated  Financial  Statements," to
certain entities in which equity investors do not have the  characteristics of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support  from other  parties.  FIN 46 is  applicable  immediately  for  variable
interest entities created after January 31, 2003. For variable interest entities
created prior to January 31, 2003,  the  provisions of FIN 46 have been deferred
to the first  quarter of 2004.  The adoption of FIN 46 is not expected to have a
material effect on the consolidated financial statements.



                                       20



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

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,                     2003          2002        2001
--------------------------------------------------------------------------------
Revenues:
    Software license fees                    15.1   %      38.7  %     36.8   %
    Services and maintenance                 84.9          61.3        63.2
                                        ----------------------------------------
        Total revenues                      100.0   %     100.0  %    100.0   %
                                        ----------------------------------------
Costs and expenses:
   Cost of software license fees              6.0   %       7.5  %      7.1   %
   Cost of services and maintenance          55.2          37.8        39.2
   Product development                       19.4          10.6        14.9
   Sales and marketing                       45.8          37.0        31.1
   General and administrative                17.1          14.4        16.3
   Restructuring charge                         -             -         1.9
                                        ----------------------------------------
        Total costs and expenses            143.5   %     107.3  %    110.5   %
                                        ----------------------------------------

Comparison of Years Ended December 31, 2003 and 2002

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

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

         Total services and  maintenance  revenues  increased  $612,000 or 6% to
$10,906,000  in 2003 from  $10,294,000  in 2002.  The  increase  in service  and
maintenance  revenues is  attributable  to an increase  of  $1,705,000  in Astea
Alliance  revenues  partially  offset by a decrease  in  DISPATCH-1  revenues of
$1,093,000.  Astea  Alliance  service  and  maintenance  revenues  increased  to
$8,244,000 in 2003 from  $6,540,000  in 2002 due to the growing  Astea  Alliance
customer base.  DISPATCH-1  service and  maintenance  revenues  decreased 29% to
$2,661,000  in 2003 from  $3,754,000  in 2002 due to an ongoing  decrease in the
number of customers under service and maintenance contracts.  As a result of the
decreasing  demand for  DISPATCH-1,  the  decrease  in service  and  maintenance
revenue is expected to continue in 2004.



                                       21



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

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

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

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

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

         General and Administrative. General and administrative expenses consist
of  salaries,   benefits   and  related   costs  for  the   Company's   finance,
administrative  and  executive  management  personnel,  legal costs,  accounting
costs,  bad debt  write-offs  and various  costs  associated  with the Company's
status as a public company.  The Company's general and  administrative  expenses
were $2,198,000 in 2003 and $2,426,000 in 2002 representing a 9% decrease.  This
decrease is primarily due to lower costs related to legal and investor relations
activity  and other  taxes.  Partially  offsetting  this  decrease,  the Company
experienced an increase in bad debt expense of $277,000 which is attributable to
the reserve of license and service  revenues related to a customer (See Note 5).
As a percentage of total revenues, general and administrative expenses increased
to 18% in 2003  compared to 14% in 2002.  The  increase in expenses  relative to
revenues  primarily results from the decrease in total revenues generated during
2003.

         Restructuring  Charge.  At  the  end of  December,  2001,  the  Company
recorded a  restructuring  charge of $409,000 in connection with severance costs
to downsize the Company's  employment  roles and eliminate  excess office space.
Additionally,  the Company reversed  $76,000 of restructuring  costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial Statements).  In the fourth quarter of 2002,
the  Company  determined  that  it  had  over-accrued   $24,000  from  its


                                       22



2001 restructuring  charge and, therefore,  reversed it. The expense reversal is
included in general and administrative expenses.

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

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

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

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

Comparison of Years Ended December 31, 2002 and 2001

         Revenues.  Total revenues decreased $559,000, or 3%, to $16,798,000 for
the year ended  December 31, 2002 from  $17,357,000  for the year ended December
31, 2001.  Software license revenues increased by 2% in 2002,  compared to 2001.
Services and maintenance  fees for 2002 amounted to  $10,294,000,  a 6% decrease
from 2001.

         Software license fee revenues increased $120,000 or 2% to $6,504,000 in
2002 from $6,384,000 in 2001. Astea Alliance  license fee revenues  increased to
$6,220,000 in 2002 from $5,888,000 in 2001, an increase of 6% which reflects the
growing acceptance of the Astea Alliance suite of software products. License fee
revenues  for  DISPATCH-1  decreased  $213,000  or 43% from  $496,000 in 2001 to
$283,000 in 2002 primarily due to the Company's planned movement from its legacy
software to the Astea Alliance suite.

         Total services and  maintenance  revenues  decreased  $679,000 or 6% to
$10,294,000  in 2002 from  $10,973,000  in 2001.  The  decrease  in service  and
maintenance  revenues is  attributable to a decrease of $1,760,000 in DISPATCH-1
revenues  partially  offset  by  an  increase  in  Astea  Alliance  revenues  of
$1,081,000.  Astea  Alliance  service  and  maintenance  revenues  increased  to
$6,540,000 in 2002 from  $5,459,000  in 2001 due to the growing  Astea  Alliance
customer base.  DISPATCH-1  service and  maintenance  revenues  decreased



                                       23



32% to $3,754,000 in 2002 from $5,514,000 in 2001 due to an ongoing  decrease in
the number of customers under service and maintenance contracts.  As a result of
the  DISPATCH-1  source code sales,  which  enables the users to  customize  the
software,  and  decreasing  demand for  DISPATCH-1,  the decrease in service and
maintenance revenue is expected to continue in 2003.

         In 2002, no customer  accounted  for more than 10% of its revenues.  In
2001,  the Company had one  significant  customer that  accounted for 11% of its
revenues.

         Costs of Revenues. Costs of software license fee revenues increased 3%,
or $38,000,  to $1,262,000 in 2002 from $1,224,000 in 2001. Included in the cost
of software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization increased to $870,000 in 2002 from $800,000 in
2001.  The  increase  in  amortization  of  capitalized  software  is due to the
increase in software capitalized.  The software licenses gross margin percentage
remained unchanged in 2002 at 81%, as compared to 2001.

         The  costs of  services  and  maintenance  revenues  decreased  7%,  or
$463,000,  to  $6,345,000  in 2002 from  $6,808,000  in 2001.  The  service  and
maintenance  gross  margin  percentage  remained  unchanged  at 38% in 2002,  as
compared to 2001.

         Product  Development.  Product  development  expenses decreased 31%, or
$809,000,  to $1,781,000 in 2002 from $2,590,000 in 2001. Product development as
a percentage of total revenue  decreased to 11% in 2002 compared to 15% in 2001.
The Company's total product development costs,  including  capitalized  software
development  costs  were  $2,588,000  or 15% of  revenues  in 2002  compared  to
$3,190,000,  which was 19% of revenues  in 2001,  a decrease of $602,000 or 19%.
The decrease in product  development  expenses is primarily  attributable to the
strengthening  of the U.S. dollar against the Israel shekel,  which is where the
Company  performs most of its  development.  Despite this decrease,  development
employee headcount remained  unchanged.  The Company has focused its development
effort  exclusively on the upgrade of the Astea  Alliance suite of products.  In
2003, the Company expects to slightly increase its development costs relative to
the amount spent in 2002.

         Sales and  Marketing.  Sales and marketing  expenses  increased 15%, or
$822,000,  to $6,218,000 in 2002 from $5,396,000 in 2001. The increase  supports
newly released  versions of its Astea Alliance suite of software  products.  The
Company  is  focused  on  improving  its  market  presence  through  intensified
marketing efforts to increase awareness of the Company's products. This occurred
through  the use of Webinars  focused in the  vertical  industries  in which the
Company operates, attendance at selected trade shows and increased investment in
lead generation for its sales force. Sales and marketing expense as a percentage
of total revenues increased to 37% in 2002 from 31% in 2001.

         General  and  Administrative.   General  and  administrative   expenses
decreased 14%, or $411,000,  to $2,426,000 in 2002 from $2,837,000 in 2001. As a
percentage of total revenues,  general and administrative  expenses decreased to
14% in 2002 compared to 16% in 2001.  This decrease  primarily  results from the
restructuring  that occurred in 2001, as well as ongoing  efforts to control all
operating costs.

         Restructuring  Charge.  At  the  end of  December,  2001,  the  Company
recorded a  restructuring  charge of $409,000 in connection with severance costs
to downsize the Company's  employment  roles and eliminate  excess office space.
Additionally,  the Company reversed  $76,000 of restructuring  costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial Statements).  In the fourth quarter of 2002,
the  Company  determined  that  it  had  over  accrued  $24,000  from  its  2001
restructuring charge. This was reversed in the last quarter of 2002 and included
in general and administrative expenses.



                                       24



         Net Interest Income. Net interest income decreased $203000, to $106,000
in 2002 from  $309,000 in 2001.  This  decrease was  primarily  attributable  to
significantly  lower  interest  rates  paid  in 2002 on  invested  cash  and the
reduction in cash balances which are used to fund operations.

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

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

         International   Operations.    Total   revenue   from   the   Company's
international  operations  declined by $486,000,  or 8.6% to  $5,141,000 in 2002
from $5,627,000 in 2001. The decrease in revenue from  international  operations
was primarily  attributable to the reductions in license revenues from the Astea
Alliance  suite.  The  economic  slowdown  in both  Europe and the  Pacific  Rim
severely impacted the operating results of the Company.  International  revenues
from  professional  services  and  maintenance  were  similar  to those in 2001.
International operations resulted in net income of $4,000 for 2002 compared to a
net income of $226,000 in 2001. The decrease in income  resulted  primarily from
the  decline in license  sales  resulting  from  depressed  worldwide  operating
conditions in both Europe and the Pacific Rim.

Liquidity and Capital Resources

         Net cash used in operating activities was $1,200,000 for the year ended
December 31, 2003 compared to $455,000 for the year ended December 31, 2002. The
increase in cash used in operations was primarily  attributable  to the net loss
generated  during the year of $5,529,000.  Contributing  to the use of cash, the
Company realized a decline in deferred  revenues of $688,000 in 2003 compared to
a decline  of  $203,000  for the year  ended  December  31,  2002.  The  Company
experienced a greater  decline in deferred  revenues during 2003 due to a higher
non-renewal rate on maintenance  contracts primarily from DISPATCH-1  customers.
Cash used in operations  was partially  offset by a higher level of  collections
which decreased accounts receivable by $4,952,000 in 2003, compared to a $39,000
increase in 2002.

         The  Company  used  $64,000 of cash for  investing  activities  in 2003
compared  to  generating  $1,476,000  in 2002.  The  change  from  last year was
primarily attributable to the sale of $2,998,000 of investments in 2002 compared
to no sales of investments in 2003.  Capital  expenditures were $216,000 in 2003
compared to $404,000 in 2002.  Capitalized  software costs were $480,000 in 2003
compared to  $807,000  in 2002.  The Company  also  purchased a  certificate  of
deposit  in 2002,  which is  security  for a letter  of  credit,  for  $300,000.
Offsetting  cash used, in October 2003, the Company  terminated a life insurance
policy it held on behalf of its Chief Executive  Officer and received payment of
$632,000 on the cash surrender value of the policy.

         The Company generated $2,000 in financing activities for the year ended
December  31, 2003  compared to using  $30,000 for the year ended  December  31,
2002.  The  decrease  in cash  used for  financing  activities  was  principally
attributable to the elimination of all outstanding debt during 2002.



                                       25



         At  December  31,  2003,  the Company  had a working  capital  ratio of
approximately  1.3:1,  with total cash of $3,780,000.  The Company has projected
revenues  for 2004 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 2004.  In
addition, it does not anticipate that its operations or financial condition will
be affected materially by inflation.

Contractual Obligations and Commercial Commitments

         The following tables summarize our contractual and commercial
obligation as of December 31, 2003:





                              Payment Due By Period
                                   2004         2005-2006    2007-2008      2009 and after         Total
                                   ----         ---------    ---------      --------------         -----
Contractual Cash
  Obligations:
                                                                                   
  Long-term Debt               $     --       $     --       $     --       $     --              $  --
  Capital Leases
  Operating Leases                858,000      1,127,000      996,000      424,000    3,405,000

                              Amounts of Commitment Expiration Per Period
                                   2004         2005-2006     2007-2008      2009 and after         Total
                                   -----        ---------     ---------      --------------         -----
Other Commercial
  Commitments:
  Letters of Credit              $300,000          $--         $   --             $--             $300,000





Certain Factors That May Affect Future Results

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

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

Recent History of Net Losses

         The  Company has a history of net losses.  In  particular,  the Company
incurred net losses of  approximately  $5.5 million in fiscal 2003, $1.3 million
in fiscal  2002 and $1.5  million  in fiscal  2001.  As of


                                       26




December 31, 2003,  stockholders' equity is approximately $3.7 million, which is
net of an accumulated  deficit of  approximately  $18.1 million.  Moreover,  the
Company expects to continue to incur additional  operating expenses for research
and  development.  As a result,  the Company  will need to generate  significant
revenues to achieve and maintain  profitability.  The Company may not be able to
achieve the necessary  revenue  growth or  profitability  in the future.  If the
Company does not attain or sustain  profitability or raise additional  equity or
debt in the future, the Company may be unable to continue its operations.

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

         In each of 2003, 2002, and 2001, 21%, 24% and 35%, respectively, of the
Company's  total  revenues was derived from the licensing of DISPATCH-1  and the
providing  of  professional  services  in  connection  with the  implementation,
deployment  and  maintenance  of  DISPATCH-1  installations.  See  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations."  The
Company originally introduced Astea Alliance in August 1997 in order to target a
market  segment  in  which  DISPATCH-1  was not  cost-effective  or  attractive.
Subsequent,  rapid changes in technology  have now positioned the Astea Alliance
suite,  introduced in 2001 and which includes the Astea Alliance  functionality,
to supercede  DISPATCH-1 as the company's flagship product.  As a result,  there
are no license sales planned or  anticipated  for  DISPATCH-1 to new  customers.
Sales to existing  customers  comprised  100% of DISPATCH-1  license  revenue in
2002. There were no license sales of DISPATCH-1 during 2003. DISPATCH-1 revenues
have  declined in each of the last three fiscal years and that trend is expected
to continue and accelerate.

         While the Company has  licensed  Astea  Alliance to over 210  companies
worldwide in 1998 through 2003,  revenues from sales of Astea Alliance alone are
not yet sufficient to support the expenses of the Company.  The Company's future
success  will depend  mainly on its  ability to  increase  licenses of the Astea
Alliance suite offerings, on developing new products and product enhancements to
complement its existing  product  offerings,  on its ability to continue support
and  maintenance  revenues  from  DISPATCH-1,  and on its ability to control its
operating expenses.  Any failure of the Company's products to achieve or sustain
market  acceptance,  or of the Company to sustain  its  current  position in the
Customer Relationship  Management software market, would have a material adverse
effect on the  Company's  business  and results of  operations.  There can be no
assurance that the Company will be able to increase  demand for Astea  Alliance,
obtain an acceptable level of support and maintenance  revenues from DISPATCH-1,
or to lower its expenses, thereby avoiding future losses.

Need for Development of New Products

         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



                                       27



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  and  PowerSoft  Corporation,  a
subsidiary of Sybase, Inc., in the case of Astea Alliance, and Progress Software
Corporation,  in the case of  DISPATCH-1.  If alternative  software  development
tools were to be designed and generally accepted by the marketplace, we could be
at a competitive  disadvantage  relative to companies employing such alternative
developmental tools.

Burdens of Customization

         Certain of the Company's clients request customization of DISPATCH-1 or
Astea Alliance products to address unique characteristics of their businesses or
computing  environments.  In these  situations,  the  Company  applies  contract
accounting  to determine  the  recognition  of license  revenues.  The Company's
commitment to customization could place a burden on its client support resources
or delay  the  delivery  or  installation  of  products  which,  in turn,  could
materially  adversely  affect  its  relationship  with  significant  clients  or
otherwise adversely affect business and results of operations.  In addition, the
Company could incur  penalties or reductions in revenues for failures to develop
or timely  deliver  new  products  or  product  enhancements  under  development
agreements and other  arrangements with customers.  If customers are not able to
customize or deploy the Company's  products  successfully,  the customer may not
complete  expected  product  deployment,  which  would  prevent  recognition  of
revenues and  collection of amounts due, and could result in claims  against the
Company.

Risk of Product Defects; Failure to Meet Performance Criteria

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



                                       28




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

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

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

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

Fluctuations in Quarterly Operating Results May Be Significant

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

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



                                       29



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

General Economic Conditions May Affect Operations

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

Competition in the Customer Relationship Management Software Market is Intense

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

          o    they  compete for the same  customers  that the Company  tries to
               attract;
          o    if the Company  loses  customers  to its  competitors,  it may be
               difficult or impossible to win them back;
          o    lower prices and a smaller market share could limit the Company's
               revenue generating ability, reduce its gross margins and restrict
               its ability to become profitable or sustain profitability; and



                                       30



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

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

Risk of Dependence on Proprietary Technology

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

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

Possible Infringement of Third Party Intellectual Property Rights

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

          o    be time consuming to defend;

          o    result in costly litigation or damage awards;

          o    divert management's attention and resources;

          o    cause product shipment delays; or

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



                                       31



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

Dependence on Technology from Third Parties

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

Need to Expand Indirect Sales

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

Risks of Future Acquisitions

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

Risks Associated with International Sales

         Astea's international sales accounted for 34% of the Company's revenues
in 2003, 31% in 2002, and 33% in 2001.  The Company  expects that  international
sales will  continue  to be a  significant  component  of its  business.  In the
Company's  efforts to expand its  international  presence,  it will face certain
risks which it may not be successful in addressing. These risks include:

          o    difficulties   in   establishing   and   managing   international
               distribution  channels and in  translating  products into foreign
               languages;
          o    difficulties  finding  staff to  manage  foreign  operations  and
               collect accounts receivable;
          o    difficulties enforcing intellectual property rights;
          o    liabilities  and  financial   exposure  under  foreign  laws  and
               regulatory requirements;



                                       32


          o    fluctuations  in the value of  foreign  currencies  and  currency
               exchange rates; and
          o    potentially adverse tax consequences.

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

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

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

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

Dependence on Key Personnel that are Required to Perform Military Service

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

Risks Associated with Inflation and Currency Fluctuations

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

Dependence on Key Personnel; Competition for Employees

         The continued  growth and success largely depends on the managerial and
technical  skills  of  key  technical,   sales  and  management  personnel.   In
particular, the Company's business and operations are substantially dependent of
the performance of Zack B. Bergreen, the founder and chief executive officer. If



                                       33


Mr. Bergreen were to leave or become unable to perform services for the Company,
the business would likely be harmed.

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

Concentration of Ownership

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

Possible Volatility of Stock Price

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

Limitations of the Company Charter Documents

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

Nasdaq SmallCap Market Compliance Requirements

         The Company's common stock trades on The Nasdaq SmallCap Market,  which
has certain  compliance  requirements  for  continued  listing of common  stock,
including a series of financial  tests  relating to shareholder


                                       34



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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

         The  Company's  exposure to market  risk for changes in interest  rates
relates primarily to the Company's  investment  portfolio.  The Company does not
have any derivative financial  instruments in its portfolio.  The Company places
its  investments in instruments  that meet high credit  quality  standards.  The
Company is adverse to principal loss and ensures the safety and  preservation of
its invested funds by limiting default risk, market risk and reinvestment  risk.
The Company is currently in the process of revamping its  investment  portfolio.
As a result,  as of December 31, 2003,  the Company's  investments  consisted of
commercial  paper. The Company does not expect any material loss with respect to
its investment portfolio.

Foreign Currency Risk

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

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



                                       35


Item 8. Financial Statements and Supplementary Data.

Report of Independent Certified Public Accountants

Board of Directors
Astea International Inc. and Subsidiaries
Horsham, Pennsylvania

         We have audited the accompanying  consolidated  balance sheets of Astea
International  Inc. and  subsidiaries  as of December 31, 2002 and 2003, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 2003.  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 auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects,  the financial position of Astea International
Inc. and subsidiaries as of December 31, 2002 and 2003, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in the United States of America.


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




Philadelphia, PA
March 5, 2004











                                       36




                                  ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                                         CONSOLIDATED BALANCE SHEETS




        December 31,                                                        2003               2002
        ---------------------------------------------------------------------------------------------------

                                     ASSETS
                                                                                      
        Current assets:
          Cash and cash equivalents                                       $ 3,480,000       $ 4,967,000
          Restricted cash                                                     300,000           300,000
          Receivables, net of reserves of  $810,000 and $1,018,000          3,943,000         7,936,000
          Prepaid expenses and other                                          601,000           691,000
                                                                        -----------------------------------
                  Total current assets                                      8,324,000        13,894,000

        Property and equipment, net                                           509,000           586,000
        Capitalized software development costs, net                         1,229,000         1,349,000
        Other assets                                                           34,000           614,000
                                                                        -----------------------------------
                  Total assets                                          $  10,096,000       $16,443,000
                                                                        ===================================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
        Current liabilities:
          Accounts payable and accrued expenses                            $3,003,000        $3,418,000
          Deferred revenues                                                 3,359,000         4,027,000
                                                                        -----------------------------------
                  Total current liabilities                                 6,362,000         7,445,000


        Commitments and Contingencies (Note 11)

        Stockholders' equity:
           Preferred stock, $.01 par value, 5,000,000 shares
             authorized, none issued                                                -                 -
           Common stock, $.01 par value, 5,000,000 shares
             authorized, 2,965,000  shares issued                              30,000            30,000
           Additional paid-in capital                                      22,792,000        22,792,000
           Accumulated comprehensive loss -
             translation adjustment                                          (776,000)       (1,039,000)
           Accumulated deficit                                            (18,100,000)      (12,568,000)
           Less:  Treasury stock at cost, 43,000 and 44,000 shares           (212,000)         (217,000)
                                                                        -----------------------------------
                  Total stockholders' equity                                3,734,000         8,998,000
                                                                        -----------------------------------
                  Total liabilities and stockholders' equity              $10,096,000       $16,443,000
                                                                        ===================================


                      See accompanying notes to the consolidated financial statements.






                                       37





                                      ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF OPERATIONS


Years ended December 31,                                           2003                2002                2001
--------------------------------------------------------------------------------------------------------------------
                                                                                              
Revenues:
      Software license fees                                    $    1,935,000      $    6,504,000      $   6,384,000
      Services and maintenance                                     10,906,000          10,294,000         10,973,000
                                                                ----------------------------------------------------

          Total revenues                                           12,841,000          16,798,000         17,357,000
                                                                ----------------------------------------------------

Costs and expenses:
      Cost of software license fees                                   766,000           1,262,000          1,224,000
      Cost of services and maintenance                              7,095,000           6,345,000          6,808,000
      Product development                                           2,490,000           1,781,000          2,590,000
      Sales and marketing                                           5,875,000           6,218,000          5,396,000
      General and administrative                                    2,198,000           2,426,000          2,837,000
      Restructuring charges                                                 -                   -            333,000
                                                                ----------------------------------------------------

          Total costs and expenses                                 18,424,000          18,032,000         19,188,000
                                                                ----------------------------------------------------

Loss from operations                                               (5,583,000)         (1,234,000)        (1,831,000)

Interest income                                                        58,000             112,000            318,000
Interest expense                                                       (4,000)             (6,000)            (9,000)
                                                                ----------------------------------------------------
Loss before income taxes                                           (5,529,000)         (1,128,000)        (1,522,000)
Income tax expense                                                          -             200,000                  -
                                                                ----------------------------------------------------
Net loss                                                       $   (5,529,000)     $   (1,328,000)     $  (1,522,000)
                                                                ====================================================

Basic and diluted net loss per share                           $        (1.89)     $        (0.45)     $       (0.52)
                                                                ====================================================
Weighted average shares used in computing basic and
diluted net loss per share                                          2,922,000           2,921,000          2,926,000
                                                                ====================================================




                           See accompanying notes to the consolidated financial statements.





                                       38



                                           ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                             Additional    Accumulated                                  Total
                                  Common      Paid-in     Comprehensive   Accumulated    Treasury     Stockholders'  Comprehensive
                                   Stock      Capital         Loss         Deficit        Stock         Equity           Loss
                                 ---------------------------------------------------------------------------------------------------

                                                                                
Balance, January 1, 2001          $ 148,000  $ 22,671,000  $ (1,145,000)   $ (9,716,000)   $ (3,000) $ 11,955,000
  Issuance of common stock under
    employee stock purchase plan                    3,000                        (1,000)      4,000         6,000
  Purchases of treasury stock                                                              (223,000)     (223,000)
  Comprehensive loss                                           (111,000)         --        (111,000)                 $  (111 ,000)
  Net loss                                                                   (1,522,000)         --    (1,522,000)     (1,522,000)
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 2001          148,000    22,674,000    (1,256,000)    (11,239,000)   (222,000)   10,105,000    $ (1,633,000)
                                                                                                                 ===================
  Issuance of common stock under
    employee stock purchase plan       --            --            --            (1,000)      5,000         4,000
  Comprehensive income                 --            --         217,000            --          --         217,000    $    217,000
  Net loss                             --            --            --              --    (1,328,000)   (1,328,000)
                                                                                                                       (1,328,000)
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 2002          148,000    22,674,000    (1,039,000)    (12,568,000)   (217,000)    8,998,000    $  1,111,000
                                                                                                                 ===================
  Reverse stock split              (118,000)      118,000          --              --          --            --
  Issuance of common stock under
    employee stock purchase plan       --            --            --            (3,000)      5,000         2,000
  Comprehensive income                 --            --         263,000            --          --         263,000    $    263,000
  Net loss                             --            --            --              --    (5,529,000)   (5,529,000)     (5,529,000)
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 2003        $  30,000  $ 22,792,000  $   (776,000)   $(18,100,000)  $(212,000) $  3,734,000    $ (5,266,000)
                                                                                                                 ===================

                            See accompanying notes to the consolidated financial statements.











Years ended December 31,                                           2003               2002                2001
---------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
                                                                                           
   Net loss                                                  $ (5,529,000)        $ (1,328,000)     $ (1,522,000)
   Adjustments to reconcile net loss to net cash
       used in operating activities:
        Depreciation and amortization                             910,000            1,295,000         1,421,000
        Bad debt expense                                         (477,000)            (255,000)         (648,000)
        Officer's life insurance valuation                              -               59,000          (763,000)
        Deferred income taxes                                           -              200,000           370,000
        Changes in operating assets and liabilities:
            Receivables                                         4,952,000              (39,000)        1,108,000
            Prepaid expenses and other                             67,000              125,000           976,000
            Accounts payable and accrued expenses                (382,000)             186,000        (1,522,000)
            Accrued restructuring                                       -             (385,000)          409,000
            Deferred revenues                                    (688,000)            (203,000)         (268,000)
            Other                                                 (53,000)            (110,000)                -
                                                            --------------------------------------------------------

Net cash used in operating activities                          (1,200,000)            (455,000)         (439,000)
                                                            --------------------------------------------------------

Cash flows from investing activities:
        Proceeds from sales of investments                              -            2,987,000           519,000
        Purchases of property and equipment                      (216,000)            (404,000)         (244,000)
        Capitalized software development costs                   (480,000)            (807,000)         (600,000)
        Restricted cash                                                 -             (300,000)                -
        Proceeds from the termination of life insurance           632,000                    -                 -
policy
                                                            --------------------------------------------------------

Net cash (used in) provided by investing activities               (64,000)           1,476,000          (325,000)
                                                            --------------------------------------------------------

Cash flows from financing activities:
        Proceeds from exercise of stock options and
employee                                                            2,000                4,000             6,000
             stock purchase plan
        Net repayments of long-term debt                                -              (34,000)         (126,000)
        Purchases of treasury stock                                     -                    -          (223,000)
                                                            --------------------------------------------------------

Net cash provided by (used in) financing activities                 2,000              (30,000)         (343,000)
                                                            --------------------------------------------------------
Effect of exchange rate changes on cash and cash
   equivalents                                                   (225,000)             (95,000)          (30,000)
                                                            --------------------------------------------------------
Net (decrease) increase in cash and cash equivalents           (1,487,000)             896,000        (1,137,000)
Cash and cash equivalents balance, beginning of year            4,967,000            4,071,000         5,208,000
                                                            --------------------------------------------------------

Cash and cash equivalents balance, end of year                 $3,480,000           $4,967,000        $4,071,000
                                                            ========================================================

Supplemental disclosure of cash flow information:
        Cash paid for interest expense                             $4,000               $6,000            $9,000
                                                            ========================================================

                     See accompanying notes to the consolidated financial statements.






                    ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.   Company Background

              Astea  International  Inc.  and  Subsidiaries   (collectively  the
     "Company"  or  "Astea")  develops,   markets,  and  supports   front-office
     solutions for the service management software market.  Astea's applications
     are designed  specifically  for  organizations  for which field service and
     customer  support  are  considered  mission  critical  aspects of  business
     operations.  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.


2.   Summary of Significant Accounting Policies

     Principles of Consolidation

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

     Use of Estimates

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

     Revenue Recognition

              The  Company  licenses  software  under  noncancelable   perpetual
     license   agreements.   License  fee   revenues  are   recognized   when  a
     noncancelable license agreement is executed,  the product has been shipped,
     the  license  fee  is   determined   to  be  fixed  or   determinable   and
     collectibility  is  reasonably   assured.  If  the  fee  is  not  fixed  or
     determinable,  revenue  is  recognized  as  payments  become  due  from the
     customer.  If  collectibility  is  not  considered  probable,   revenue  is
     recognized when the fee is collected.  If the payment of the license fee is
     coincident   to  services,   which  are  deemed  to  be  essential  to  the
     functionality  of the software,  the license fee is deferred and recognized
     using  contract  accounting  over the period  during which the services are
     performed. The Company's software licensing agreements provide for customer
     support that begins after the warranty  period.  The portion of the license
     fee  associated  with  customer  support  during  the  warranty  period  is
     unbundled from the license fee and is recognized  ratably over the warranty
     period  (generally 90 days) as maintenance  revenue.  The Company's revenue
     recognition  policy  is  in  accordance  with  the  American  Institute  of
     Certified  Public  Accountants'  Statement of Position No. 97-2,  "Software
     Revenue Recognition."

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


                                       41


     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 EITF 01-14, "Income Statement
     Characterization of Reimbursements  Received for  `Out-of-Pocket'  Expenses
     Incurred,"  billings for out-of-pocket  expenses that are reimbursed by the
     customer  are to be  included in revenues  with the  corresponding  expense
     included in cost of sales.  During  fiscal years 2003,  2002 and 2001,  the
     Company  billed  $326,000,   $273,000,  and  $256,000,   respectively,   of
     reimbursable  expenses to customers.  During 2002, the Company adopted this
     new  guidance  and  restated  all prior  periods  presented  to reflect the
     appropriate reclassifications.

     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.

     Property and Equipment

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

              The Company reviews the carrying  values of its long-lived  assets
     for  possible  impairment  whenever  events  or  changes  in  circumstances
     indicate  that the  carrying  amount of the assets  may not be  recoverable
     based on undiscounted estimated future operating cash flows. As of December
     31, 2003, 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
     (three to four years), beginning with the initial release to customers. The
     Company continually evaluates whether events or circumstances have occurred
     that indicate that the remaining  useful life of the  capitalized  software
     development  costs should be revised or that the remaining  balance of such
     assets may not be recoverable.  The Company evaluates the recoverability of
     capitalized  software  based  on the  estimated  future  revenues  of  each
     product. As of December 31, 2003,  management believes that no revisions to
     the  remaining   useful  lives  or  write-downs  of  capitalized   software
     development costs are required.





                                       42


     Major Customers

              In 2003 and 2002, the Company had no significant  customers  which
     represented  10% of revenues.  In 2001,  the Company had one customer which
     represented 11% of revenue.

     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 and place  investments  with financial  institutions
     evaluated as being creditworthy, or in short-term money market and tax-free
     bond funds  which are  exposed to minimal  interest  rate and credit  risk.
     Concentration  of credit  risk,  with  respect to accounts  receivable,  is
     limited due to the Company's credit evaluation  process.  The Company sells
     its products to Original Equipment  Manufacturers  involved in a variety of
     industries including information technology, medical devices and diagnostic
     systems,  industrial controls and instrumentation and retail systems. While
     the Company does not require collateral from its customers, it does perform
     continuing credit evaluations of its customer's financial condition.

     Senior  management  reviews  accounts  receivable  on a  monthly  basis  to
     determine if any receivables will potentially be uncollectible. The Company
     includes  any  accounts  receivable  balances  that  are  determined  to be
     uncollectible in its allowance for doubtful accounts. After all attempts to
     collect a receivable have failed, the receivable is written off against the
     allowance.  Based on all information  available,  the Company  believes its
     allowance  for  doubtful  accounts  as of December  31,  2003 is  adequate.
     However, actual write-offs might exceed the recorded allowance.

     Fair Value of Financial Instruments

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

     Income Taxes

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

     Currency Translation

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




                                       43


     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.  Options with an exercise price less than
     market at December 31, 2003 to purchase  31,600 and 30,000 shares of common
     stock with an average  exercise  prices per share of $2.81 and $2.75,  were
     outstanding  as of  December  31,  2003 and  2002,  respectively,  but were
     excluded  from  the  diluted  loss  per  common  share  calculation  as the
     inclusion  of these  options  would have been  antidilutive.  There were no
     options whose exercise price was less than market at December 31, 2001.

     Comprehensive Income (Loss)

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

     Stock Compensation

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

              The Company  accounts for the employee  stock  purchase plan under
     the  recognition  and  measurement  principles  of APB 25.  No  stock-based
     employee  compensation cost is reflected in net income for options granted,
     as all options granted under those plans had an exercise price equal to the
     market value of the underlying common stock on the date of grant.  However,
     there are situations  that may occur,  such as the  accelerated  vesting of
     options, that require a current charge to income.






                                       44




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



                                                           2003                   2002                   2001
                                                     --------------------------------------------------------------------
                                                                                                
    Net loss - as reported                           $  (5,529,000)         $  (1,328,000)         $  (1,522,000)

    Add:  Stock based compensation
       included in net income as reported,
       net or related tax effects                                -                      -                      -
    Deduct stock based compensation
       determined under fair value based
       methods for all awards, net of
       related tax effects                                (329,000)              (303,000)              (386,000)
                                                     --------------------------------------------------------------------

    Net loss - pro forma                             $  (5,858,000)         $  (1,631,000)         $  (1,908,000)
                                                     ====================================================================

    Basic and diluted loss
       per share -  as reported                             $(1.89)                $(0.45)                $(0.52)
    Basic and diluted loss
        per share -   pro forma                             $(2.00)                $(0.56)                $(0.65)


              The weighted  average fair value of those options  granted  during
     the years ended  December 31, 2003,  2002 and 2001 was  estimated as $3.15,
     $3.52 and  $3.55,  respectively.  The fair  value of each  option  grant is
     estimated on the date of grant using the Black-Scholes option-pricing model
     with the following weighted average assumptions: risk-free interest rate of
     3.97%,  4.30% and 5.45% for 2003,  2002 and 2001 grants,  respectively;  an
     expected  life of six  years;  volatility  of 137%,  147%  and  85%;  and a
     dividend yield of zero for 2003, 2002 and 2001 grants, respectively.

     Reclassifications

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






                                       45




     Recent Accounting Standards or Accounting Pronouncements

              In  November  2002,  the FASB issued  Interpretation  No. 45 ("FIN
     45"),  "Guarantor's  Accounting and Disclosure Requirements for Guarantees,
     including Indirect  Guarantees of Indebtedness of Others"  ("Interpretation
     No.  45").  This  Interpretation  elaborates  on  the  existing  disclosure
     requirements for most guarantees, including loan guarantees such as standby
     letters of credit.  It also  clarifies  that at the time a company issues a
     guarantee,  the company must  recognize an initial  liability  for the fair
     market value of the  obligations  it assumes under that  guarantee and must
     disclose that information in its interim and annual  financial  statements.
     The initial recognition and measurement provisions of Interpretation No. 45
     apply on a  prospective  basis  to  guarantees  issued  or  modified  after
     December 31, 2002. The adoption of FIN 45 did not have a material impact on
     our consolidated results of operations, financial position or cash flows.

              In December 2002, the FASB issued  Statement No. 148,  "Accounting
     for Stock-Based  Compensation-Transition  and  Disclosure,  an amendment of
     FASB  Statement  No. 123 ("SFAS 148").  SFAS 148 amends FASB  Statement No.
     123,  Accounting  for  Stock-Based  Compensation,  to  provide  alternative
     methods of transition  for an entity that  voluntarily  changes to the fair
     value based method of accounting for stock-based employee compensation.  It
     also  amends  the  disclosure  provisions  of  that  Statement  to  require
     prominent  disclosure  about  the  effects  on  reported  net  income of an
     entity's  accounting policy decisions with respect to stock-based  employee
     compensation.  Finally,  this Statement amends Accounting  Principles Board
     ("APB") Opinion No. 28, Interim Financial Reporting,  to require disclosure
     about those effects in interim financial information. SFAS 148 is effective
     for financial  statements  for fiscal years ending after December 15, 2002.
     The Company expects to continue to utilize the intrinsic  valuation  method
     for recording employee stock based compensation.

              In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
     Consolidation of Variable Interest  Entities,  clarifies the application of
     Accounting Research Bulletin No. 51, "Consolidated  Financial  Statements,"
     to  certain   entities  in  which   equity   investors   do  not  have  the
     characteristics  of  a  controlling  financial  interest  or  do  not  have
     sufficient equity at risk for the entity to finance its activities  without
     additional  subordinated  financial  support from other parties.  FIN 46 is
     applicable immediately for variable interest entities created after January
     31, 2003. For variable interest entities created prior to January 31, 2003,
     the  provisions  of FIN 46 have been deferred to the first quarter of 2004.
     The  adoption of FIN 46 is not  expected  to have a material  effect on the
     consolidated financial statements.

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

3.   Reverse Stock Split

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




                                       46


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

4.   Restructuring and Other Charges

              During  2001,  the  Company  recorded  a  restructuring  charge of
     $409,000 in  connection  with  severance  costs to downsize  the  Company's
     employment  roles and eliminate  office space.  For the year ended December
     31, 2002, the Company made payments  totaling $386,000 and reversed $23,000
     that the Company deemed unnecessary for the purposes of the 2001 plan.

5.   Receivables



              December 31,                                          2003          2002
              ------------------------------------------- ----------------- -----------------
                                                                           
              Billed receivables                               $ 3,013,000       $ 5,701,000
              Unbilled receivables                                 930,000         2,235,000
                                                          ----------------- -----------------
                                                               $ 3,943,000       $ 7,936,000
                                                          ================= =================


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

              For the years ended December 31, 2003,  2002 and 2001, the Company
     recorded  bad  debt  expense  of  $477,000,   $255,000  and  $648,000,  and
     write-offs of $687,000,  $470,000, and $1,293,000. The increase in activity
     from 2002 to 2003 is primarily  attributable  to the reserve of license and
     service revenues related to one customer.

6.   Property and Equipment



                                                                                 December 31,
                                                        Useful Life          2003                2002
                                                        -----------          ----                ----
                                                                                     
             Computers and related
                equipment                                   3               $ 3,484,000       $ 3,564,000
             Furniture and fixtures                         10                  470,000           470,000
             Leasehold improvements                     Lease term              111,000           111,000
             Office equipment                              3-7                  843,000           633,000
                                                                         ---------------- -----------------
                                                                              4,908,000         4,778,000
             Less:  Accumulated
                depreciation and amortization                                (4,399,000)       (4,192,000)
                                                                         ---------------- -----------------
                                                                            $   509,000       $   586,000
                                                                         ================ =================


              Depreciation and amortization expense for the years ended December
     31, 2003, 2002 and 2001 was $310,000, $425,000 and $769,000, respectively.

              In 2002 and 2003, the Company acquired the equipment under capital
     leases,  which  had a gross  asset  value of  $988,000.  The  equipment  is
     included in computers and related equipment.



                                       47



7.   Capitalized Software Development Costs



                                                                       Remaining
                                                                  Weighted Average
              December 31,                                               Life                2003                  2002
              -------------                                              ----                ----                  ----
                                                                                                      
              Capitalized software development costs                    1.68                $ 4,984,000        $ 4,505,000
              Less:  Accumulated amortization                                                (3,755,000)        (3,156,000)
                                                                                      -------------------------------------
                                                                                            $ 1,229,000        $ 1,349,000
                                                                                      =====================================


              The Company capitalized  software  development costs for the years
     ended December 31, 2003, 2002 and 2001 of $479,000,  $807,000 and $600,000,
     respectively.  Amortization  of  software  development  costs for the years
     ended December 31, 2003, 2002 and 2001 was $599,000, $870,000 and $800,000,
     respectively.

              Estimated amortization for the next five years is as follows:

                           2004             $         618,000
                           2005                       441,000
                           2006                       161,000
                           2007                        29,000
                           2008                             -
                                                 ------------------
                                            $       1,249,000
                                                 ==================

8.   Other Assets



                  December 31,                                                 2003          2002
             ---------------------------------------------------------------------------------------------
                                                                                      
             Cash surrender value of life insurance policies           $           -  $    574,000
             Security deposit                                                 34,000        40,000
                                                                       ----------------------------------
                                                                       $      34,000  $    614,000
                                                                       ==================================


              As of January 1, 2003, the Company ceased making premium  payments
     on behalf of the Chief Executive  Officer for split-dollar  life insurance.
     In October 2003, the Company  terminated  this policy and received  payment
     for the cash surrender value of the policy in the amount of $632,000.

9.   Accounts Payable and Accrued Expenses



                  December 31,                                               2003                2002
             ---------------------------------------------------------------------------------------------
                                                                                         
             Accounts payable                                        $       656,000           $  926,000
             Accrued compensation and related benefits                     1,029,000            1,409,000
             Income taxes payable                                            153,000              153,000
             Accrued professional services                                   241,000              175,000
             Sales and payroll taxes                                         298,000              228,000
             Other accrued liabilities                                       626,000              527,000
                                                                  ---------------------------------------
                                                                         $ 3,003,000          $ 3,418,000
                                                                  =======================================






                                       48




10.  Income Taxes

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



             Years ended December 31,                            2003                 2002                 2001
             -----------------------------------------------------------------------------------------------------------
                                                                                           
             Current:
                 Federal                                  $               -    $               -    $      (170,000)
                 State                                                    -                    -                  -
                 Foreign                                                  -                    -                  -
                                                          -------------------- -------------------- --------------------
                                                                          -                    -           (170,000)
             Deferred:
                 Federal                                                  -               200,000           170,000
                                                          -------------------- -------------------- --------------------
                                                          $               -    $          200,000   $             -
                                                          ==================== ==================== ====================


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



              December 31,                                                  2003               2002
              -------------------------------------------------------- ---------------- -------------------
                                                                                       
              Deferred income tax assets:
                  Revenue recognition                                     $    20,000        $    27,000
                  Accruals and reserves not
                      currently deductible for tax                            313,000            461,000
                  Benefit of net operating loss carryforward                5,377,000          3,693,000
                  Depreciation                                                 94,000            119,000
                  Alternative minimum tax                                     370,000            370,000
                  Capital loss carryforward                                    10,000             10,000
                                                                       -----------------------------------
                                                                            6,184,000          4,680,000
              Deferred income tax liabilities:
                  Capitalized software development costs                     (455,000)         (499,000)
                                                                       -----------------------------------
                                                                            5,729,000          4,181,000
                  Valuation reserve                                        (5,729,000)        (4,181,000)
                                                                       -----------------------------------
                  Net deferred income tax asset                           $         -        $         -
                                                                       ===================================


              In 2003 and 2002, the Company  provided a valuation  allowance for
     all  of its  net  deferred  tax  asset  based  on  the  uncertainty  of the
     realization of future taxable income.

              In the years  ended  December  31,  2003 and 2001,  there  were no
     income taxes owed,  due to the Company's  loss  position.  During 2002, the
     Company increased its valuation  allowance to fully offset its deferred tax
     asset of $200,000.

              The Company has a tax holiday in Israel which expires in 2005. The
     net impact on 2002 and 2001 of the tax  holiday  was a decrease in net loss
     and net  loss  per  share  by  $100,193,  $172,938  and  $0.01  and  $0.01,
     respectively.  In 2003,  the  Israeli  subsidiary  sustained  a net loss of
     $54,243.

              As of December  31,  2003,  the Company had a net  operating  loss
     carryforward for United States federal income tax purposes of approximately
     $23,600,000.  Included in the aggregate net operating loss  carryforward is
     $7,761,000 of tax deductions related to equity transactions, the benefit of
     which will be credited to stockholders'  equity, if and when realized after
     the other tax deductions in the carryforwards  have been realized.  The net
     operating loss carryforward begins to expire in 2016.

              The  Company  does not provide  for  federal  income  taxes or tax
     benefits  on the  undistributed  earnings  or losses  of its  international
     subsidiaries  because  earnings  are  reinvested  and,  in the  opinion  of





                                       49


     management,  will continue to be reinvested  indefinitely.  At December 31,
     2003,  the Company had not  provided  federal  income  taxes on  cumulative
     earnings of individual  international  subsidiaries  of $1,244,000.  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.

11.  Commitments and Contingencies

              The Company leases  facilities and equipment  under  noncancelable
     operating  leases.Rent  expense  under all  operating  leases for the years
     ended  December  31,  2003,  2002  and  2001  was  $867,000,  $970,000  and
     $1,002,000, respectively.

              Future  minimum lease  payments  under the Company's  leases as of
     December 31, 2003 are as follows:

                                                    Operating Leases
              2004                                  $       858,000
              2005                                          622,000
              2006                                          505,000
              2007                                          497,000
              2008                                          499,000
              Thereafter                                    424,000
                                                   ---------------------
              Total minimum lease payments              $ 3,405,000
                                                   =====================

              On September 11, 2002,  $300,000 of cash was pledged as collateral
     on an outstanding  letter of credit  related to a lease  obligation and was
     classified as restricted  cash on the balance  sheet.  The  certificate  of
     deposit,   which  represents  the  collateral  on  the  letter  of  credit,
     automatically  renews  every  six  months.  The  letter of credit is due to
     expire in February 2009.

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

12.  Profit Sharing Plan/Savings Plan

              The Company maintains a voluntary profit sharing plan, including a
     Section  401(k)  feature,  covering all qualified  and eligible  employees.
     Company  contributions  to the 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  $61,000,
     $57,000 and $33,000 for the years ended  December 31, 2003,  2002 and 2001,
     respectively.



                                       50



13.  Equity Plans

     Stock Option Plans

              The  Company  has Stock  Option  Plans (the  "Plans")  under which
     incentive and non-qualified  stock options may be granted to its employees,
     officers,  directors  and others.  Generally,  incentive  stock options are
     granted at fair value,  become exercisable over a four-year period, and are
     subject to the employee's continued  employment.  Non-qualified options are
     granted at exercise  prices  determined  by the Board of Directors and vest
     over  varying  periods.  A summary  of the  status of the  Company's  stock
     options as of December 31, 2003, 2002 and 2001 and changes during the years
     then ended is as follows:



                                                                                                     OPTIONS
                                                                 OPTIONS OUTSTANDING               EXERCISABLE
                                                                 -------------------               -----------
                                             Shares                           Wtd. Avg.                       Wtd. Avg.
                                             Available                        Exercise                        Exercise
                                           for Grant           Shares           Price            Shares         Price
                                         ---------------------------------------------------------------------------------
                                                                                                
    Balance, January 1, 2001                     368,000          230,000          $13.79        55,000           $23.13
       Granted at market                        (150,000)         150,000
       Cancelled                                  35,000          (35,000)
       Expired                                    (3,000)               -
                                         ---------------------------------------------------------------------------------
    Balance, December 31, 2001                   250,000          345,000          $ 8.38         101,000          $10.78
       Granted at market                        (174,000)         174,000
       Cancelled                                  72,000          (72,000)
       Expired                                    (1,000)               -               -
                                         ---------------------------------------------------------------------------------

    Balance, December 31, 2002                   147,000          447,000          $ 6.24        138,000          $8.96
       Granted at market                        (127,000)         127,000
       Cancelled                                  96,000          (96,000)
                                         ---------------------------------------------------------------------------------
    Balance, December 31, 2003                   116,000          478,000          $ 6.05        213,000          $7.91
                                         =================================================================================


              The following  table  summarizes  information  about stock options
     outstanding at December 31, 2003:



                                              OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                                 ----------------------------------------------------    --------------------------------
                                                    Weighted
                                                     Average
              Range of                              Remaining          Weighted                           Weighted
              Exercise              Number         Contract            Average             Number          Average
            Prices               Outstanding     Life (Years)       Exercise Price       Exercisable   Exercise Price
            ------               -----------     ------------       --------------       -----------   --------------
                                                                                        
        $ 2.75    -    $  4.85        348,000        6.99                 $ 3.99          125,000            $ 4.38
        $ 5.31    -    $  8.45         80,000        6.56                 $ 7.15           51,000            $ 7.43
       $ 12.50    -    $ 31.25         41,000        4.51                 $ 21.26          37,000            $ 20.29
       --------         -------        ------                                              ------
        $ 2.75    -    $ 31.25        478,000        6.70                 $ 6.05          213,000            $ 7.91


     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  2003,  2002 and 2001,  shares
     purchased were 1,100, 1,200 and 1,629, respectively.  At December 31, 2003,
     there were 30,021 shares available for future purchases.


                                       51



14.  Related Party Transactions

              In 2002 and  2001,  the  Company  paid  premiums  on behalf of the
     majority  stockholder  and his wife of  $69,600  under  split  dollar  life
     insurance policies.  During 2003, the Company terminated these policies and
     received $632,000 on the cash surrender value of the policies.

              In November 2001, the Company entered into a five year development
     and license agreement with a third party owned in part by a Director of the
     Company.  The  agreement  requires  the third party to design,  develop and
     deliver a product to be re-sold by the  Company in  exchange  for a royalty
     fee. In  accordance  with the  agreement,  the Company  paid  royalty  fees
     totaling $22,500,  $37,500 and $7,500 in 2003, 2002 and 2001, respectively.
     During 2003, the owner of the third party terminated his relationship  with
     the Company as a Director  and was engaged as a sales  consultant.  In this
     capacity,  the Company made payments  totaling  $17,000 in 2003. In January
     2004, this relationship was terminated.










                                       52




15.  Geographic Segment Data

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



    Year ended December 31,                                           2003                2002                 2001
    -------------------------------------------------------------------------------------------------------------------
                                                                                            
    Revenues:
         Software license fees
              United States
                    Domestic                                $     1,151,000    $       4,296,000     $      3,470,000
                    Export                                                -               72,000              209,000
                                                         --------------------------------------------------------------
                         Total United States
                             software license fees                1,151,000            4,368,000            3,679,000

              Europe                                                337,000            1,151,000            1,625,000
              Other foreign                                         447,000              985,000            1,080,000
                                                         --------------------------------------------------------------
                         Total foreign software
                             license fees                           784,000            2,136,000            2,705,000
                                                         --------------------------------------------------------------
                         Total software license fees              1,935,000            6,504,000            6,384,000

         Services and maintenance
              United States
                    Domestic                                      6,239,000            7,037,000            7,700,000
                    Export                                        1,140,000              252,000              351,000
                                                         --------------------------------------------------------------
                          Total United States
                              service and
                              maintenance revenue                 7,379,000            7,289,000            8,051,000
                                                         --------------------------------------------------------------

              Europe                                              2,300,000            2,126,000            2,104,000
              Other foreign                                       1,227,000              879,000              818,000
                                                         --------------------------------------------------------------
                          Total foreign service and
                              maintenance revenue                 3,527,000            3,005,000            2,922,000
                                                         --------------------------------------------------------------
                          Total service and
                              maintenance revenue                10,906,000           10,294,000           10,973,000
                                                         --------------------------------------------------------------
                              Total revenue                 $    12,841,000    $      16,798,000     $     17,357,000
                                                         ==============================================================

         Loss from continuing operations
              United States                                 $    (3,757,000)   $      (1,332,000)    $      1,748,000
              Europe                                             (1,361,000)            (454,000)            (908,000)

              Other foreign                                        (411,000)             458,000            1,134,000
                                                         --------------------------------------------------------------
                    Total loss from
                       continuing operations                $    (5,529,000)   $      (1,328,000)    $     (1,522,000)
                                                         ==============================================================

         Identifiable assets
              United States                                 $     6,493,000    $      11,786,000     $     13,274,000
              Europe                                              2,404,000            2,753,000            3,240,000
              Other foreign                                       1,199,000            1,904,000            1,501,000
                                                         --------------------------------------------------------------
                    Total assets                            $    10,096,000    $      16,443,000     $     18,015,000
                                                         ==============================================================






                                       53




16.  Selected Consolidated Quarterly Financial Data (Unaudited)



    2003 Quarter Ended                                Dec 31,            Sep 30,             Jun 30,            Mar 31,
    --------------------------------------------------------------------------------------------------------------------
                                                                                                
    Revenues                                       $2,871,000         $2,844,000         $ 3,138,000        $ 3,988,000
    Gross profit                                      755,000            983,000           1,127,000          2,114,000
    Net loss                                       (1,979,000)        (1,580,000)         (1,503,000)          (467,000)

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

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


    2002 Quarter Ended                                Dec 31,            Sep 30,             Jun 30,            Mar 31,
    --------------------------------------------------------------------------------------------------------------------
    Revenues                                      $ 4,697,000        $ 4,846,000         $ 3,302,000        $ 3,953,000
    Gross profit                                    2,975,000          2,875,000           1,295,000          2,046,000
    Net income (loss)                                 299,000            229,000          (1,562,000)          (294,000)

    Basic and diluted net income (loss)                  0.10               0.08               (0.53)             (0.10)
      per share

    Shares used in computing basic
      and diluted net income (loss)
      per share (in thousands)                          2,921              2,921               2,920              2,920



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

         None.

Item 9A. Controls and Procedures.

         Our management, under the supervision and with the participation of the
Chief  Executive  Officer  and  Chief  Financial  Officer,  have  evaluated  the
effectiveness  of our  controls  and  procedures  related to our  reporting  and
disclosure  obligations as of December 31, 2003,  which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation,  the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are sufficient to provide that (a) material  information
relating to us, including our consolidated subsidiaries,  is made known to these
officers by our and our consolidated subsidiaries other employees,  particularly
material  information  related to the period for which this  periodic  report is
being prepared;  and (b) this  information is recorded,  processed,  summarized,
evaluated and reported, as applicable,  within the time periods specified in the
rules and forms promulgated by the Securities and Exchange Commission.

         There were no changes that  occurred  during the fiscal  quarter  ended
December 31, 2003 that have  materially  affected,  or are reasonable  likely to
materially affect, our internal controls over financial reporting.






                                       54




                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

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

         Zack B.  Bergreen,  58,  founded  the Company in  November  1979.  From
November 1979 to January 1998, he served as President, Treasurer and Director of
the Company.  In April 1995, he was elected Chief Executive Officer and Chairman
of the Board of Directors.  From January 1998 through  August 1999 Mr.  Bergreen
served as Chairman of the Board and Chief  Executive  Officer.  Mr. Bergreen has
served as  Chairman  of the Board  since  August  1999,  when Bruce R. Rusch was
elected President and Chief Executive Officer.  Following the resignation of Mr.
Rusch on May 30, 2000, Mr. Bergreen resumed the positions of President and Chief
Executive Officer, and on June 27, 2000, was elected as Secretary.  Mr. Bergreen
holds  Bachelor  of  Science  and  Master  of  Science   degrees  in  Electrical
Engineering from the University of Maryland.

         Adrian A. Peters,  54, joined the Company's  Board of Directors in June
2000 and is a member of the Audit Committee.  He is the President and founder of
Tellstone  (previously  Boston  Partners),  a firm that specializes in providing
strategic  advice to high-tech  firms.  From 1986 through  1995, he held various
positions as President  and CEO of Siemens AG  companies.  Prior to that he held
senior positions at Federale, an investment firm, Arthur Andersen Consulting and
IBM.  Mr.  Peters  studied   science  and   engineering  at  the  University  of
Stellenbosch in South Africa as well as management at Harvard Business School.

         Thomas J. Reilly,  Jr., 64, joined Astea's Board in September  2003. He
is also  Chairman of the Audit  Committee.  A thirty-one  year veteran of Arthur
Andersen,  he brings  extensive  experience  auditing  both  public and  private
corporations  in the  manufacturing,  professional  services,  construction  and
distribution  industries  to  the  Company.  He was  partner  in  charge  of the
Philadelphia  Audit Division of Arthur Andersen for seven years and participated
in Quality  Control  reviews of several U.S. and  International  offices  before
retiring in 1996.

         Eric Siegel, 47, joined the Astea Board of Directors in September 2002.
In 1983,  he  founded  Siegel  Management  Company,  a strategy  consulting  and
investment banking advisory for a diverse client base, principally middle market
firms.  His expertise  and  experience  has been  utilized by growth  companies,
public market and acquisition candidates, industry consolidators and turnarounds
alike. He also serves on the Board of NCO Group (NASDAQ: NCOG) and PSCInfoGroup.
An  established  author,  he has been a lecturer  in  management  at the Wharton
School for over twenty years.  Mr.  Siegel is a magna cum laude  graduate of the
University  of  Pennsylvania  and  received an MBA from the Wharton  School with
honors.

         Rick Etskovitz, 49, joined the Company in June 2000 when he was elected
Chief Financial  Officer and Treasurer.  He is a certified public accountant and
shareholder of a local  accounting  firm. From 1986 through 1993, he worked with
the Company as the engagement partner with its independent  accounting firm. Mr.
Etskovitz  received his Bachelor of Science degree from the  Pennsylvania  State
University  in 1976 and his Masters of Business  Administration  Degree from the
Wharton Graduate School at the University of Pennsylvania in 1980.

         John  Tobin,  38,  joined  the  Company in June 2000 and serves as Vice
President and General  Counsel.  Mr. Tobin is responsible for handling the legal
affairs of the Company,  along with various  corporate  development and business
development initiatives. Prior to joining Astea, John worked at the Philadelphia





                                       55


law  firms  of  Pepper  Hamilton  and  Wolf  Block,  specializing  in  corporate
transactions and intellectual  property.  Prior to returning to the Philadelphia
area in 1998, he worked as a corporate and entertainment  lawyer in Los Angeles,
specializing in motion picture, television and music transactions and licensing,
most  recently  with PolyGram  Filmed  Entertainment.  Mr. Tobin holds a B.S. in
Economics from the Wharton School of the University of Pennsylvania in 1987, and
received his law degree from the University Of Pennsylvania in 1992.

         Kenneth Roy, 44, Vice President of Sales, is chartered with leading the
Company's  sales  operations to drive  revenue and market share.  A seasoned and
successful sales executive with over 17 years' experience,  Ken has directed and
developed multiple sales organizations focused on value-based selling within the
manufacturing and supply chain domains.  Most recently,  Ken came from PTC where
he was  responsible  for global  accounts in the Aerospace  and Defense  sector.
Prior to that, Ken was a Regional V.P. for  VerticalNet  Solutions  where he led
the sales force and architected their go to market strategy.  He has also served
as a global account manager at Oracle and has enjoyed successful achievements at
Sybase and Lotus  Development  Corp.  He is a graduate of Eastern  College and a
veteran of the Marine Corps.

         Marikit Klein-Smith, 37, brings to Astea over 14 years of experience in
high-tech  marketing,   with  progressive   management   experience  at  leading
enterprise  software and service companies  including  eOnline,  SAP America and
Deloitte  Consulting.  She is responsible for the Company's branding initiatives
and  oversees  product  marketing,  lead  generation,  PR and  analyst  relation
efforts.  At eOnline,  Inc.,  Marikit supported the company's start-up growth as
Vice  President of Marketing  Communications.  She was a member of the executive
management team, established the company's branding and marketing communications
programs,  participated in its IPO as well as international  expansion  process,
and provided internal communications strategies for an acquisition. She has held
marketing management positions at SAP America and Deloitte Consulting with North
American  and Global  responsibilities.  Marikit  holds a Bachelor of Science in
Economics from Ursinus College.

         Sami  Quazi,  36,  is  responsible  for  managing  the  North  American
consulting services and staff at Astea. He brings to Astea extensive  experience
in leading  large  software  development  and  support  teams.  He has worked in
various  management roles managing multiple projects across multiple  verticals,
while maintaining P&L responsibility,  strategic planning,  employee management,
hiring,  solution  design,  software  development,   software  and  IT  support,
training,  and  management  consulting.  He is  technology  agnostic  and client
centric in his approach. Sami graduated from the University of Pennsylvania with
a BA and an MA in Philosophy.

         Mark L. Kent, 52, is responsible  for growing  Astea's  business in the
European,  middle Eastern and African  ("EMEA")  regions.  He brings  tremendous
drive,  energy and substantial  operational and commercial  experience to Astea,
having run a variety of UK/EMEA  operations as either CEO,  Managing Director or
General Manager for Information Builders inc., Bachman Information Systems Inc.,
Bluestone  Software/HP,  Aonix  Europe/THALES  and  eGrail  Inc./FILENET.   More
recently he has acted as an advising  and  business  consultant  to a variety of
Venture Capital firms and "angel"  investors,  assisting them in the restructure
of data  management/database  vendors,  real-time data management  providers and
multi-media/telecommunications  enterprises.  Mark is a qualified Accountant and
studied business and computer management at Southampton University.

         Paul  Buzby,  46, is  responsible  for  growing  Astea  International's
overall Asia Pacific  business with direct  responsibility  for sales,  service,
marketing,  finance and administrative teams. Paul brings to Astea his extensive
sales experience in the IT industry in Australia,  having previously held senior
sales executive  positions at Onyx,  Saleslogix,  Sun  Microsystems and Computer
Associates. The Philadelphia native has been living in Australia for the last 18
years.  He  holds  a  BS  in  Mechanical  Engineering  and  a MS  in  Electrical
Engineering, both from Drexel University.




                                       56


         Danny  Klein,  44,  is Vice  President  of  Development.  Mr.  Klein is
responsible for managing the development center in Israel which brings to market
value-driven  solutions.  In this  capacity,  he executes new product  lines and
provides second-level support to Astea offices and customers all over the world.
He is also  chartered with  enhancing the company's  technology  infrastructure.
With over 20 years of  experience  managing the  development  of  market-leading
software,  Danny  comes to Astea with a strong  background  in  programming  and
development methodologies. Previously, he was a software development and project
manager at MLL  Jerusalem,  a service  bureau for  banking  software  solutions.
During his tenure, Danny managed the development of financial  applications.  He
also led the company's technology upgrade to rapid application development tools
to meet the needs for rapid innovation, scalability and security required in the
industry. Prior to MLL, he managed various systems in the Israeli Defense Forces
(IDF).  Danny holds a Bachelors  degree in computer  programming  from  C.E.I.E.
Institute  and a degree in senior  business  management  from the  University of
Haifa.

         Section  16(a) of the Exchange Act  requires the  Company's  Directors,
executive  officers and holders of more than 10% of the  Company's  Common Stock
(collectively,  "Reporting Persons") to file with the Commission initial reports
of ownership and reports of changes in ownership of Common Stock of the Company.
Such  persons  are  required by  regulations  of the  Commission  to furnish the
Company  with copies of all such  filings.  Based on its review of the copies of
such filings  received by it with respect to the fiscal year ended  December 31,
2003 and written  representations  from certain Reporting  Persons,  the Company
believes  that all  Reporting  Persons  complied  with all Section  16(a) filing
requirements in the fiscal year ended December 31, 2003.

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

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






                                       57




Item 11. Executive Compensation.

     The following table sets forth information  concerning the compensation for
services in all  capacities  to the Company for the fiscal years ended  December
31, 2003, 2002, and 2001, of the following persons (i) each person who served as
Chief  Executive  Officer during the year ended December 31, 2003, and (ii) four
other  executive  officers  of the  Company in office at  December  31, 2003 who
earned more than $100,000 in salary and bonus in fiscal 2003 (collectively,  the
"Named Executive Officers").

                                               SUMMARY COMPENSATION TABLE




                                                   Annual Compensation                 Long-Term
                                                                                      Compensation
                                        -------------------------------------------   ------------
                                                                                       Securities
                                                                                      Underlying
                                                                                        Options         All Other
       Name and Principal Position         Year        Salary ($)     Bonus ($)      (# of shares)   Compensation ($)
       ---------------------------         -----       -----------    ----------     -------------   ----------------
                                                                                                     
 Zack B. Bergreen                           2003        $   210,000             --                --                 --
 Chairman of the Board and Chief            2002            130,000             --                --            69,600 (2)
     Executive Officer                      2001            130,000             --       400,000 (1)            69,600 (2)

 Rick Etskovitz                             2003        $   129,525             --        10,000 (3)                 --
 Chief Financial Officer                    2002            127,050             --        10,000 (3)                 --
                                            2001            119,160             --         5,000 (3)                 --

 John Tobin (5)                             2003        $   150,306             --        10,000 (3)                 --
 Vice President and General Counsel         2002            151,033 (4)         --        10,000 (3)                 --
                                            2001            126,895 (4)         --         5,000 (3)                 --

 Ken Roy (6)                                2003        $    15,865             --        35,000 (4)                 --
 Vice President, North American Sales

 Marikit Klein-Smith (7)                    2003        $    90,192        $ 9,700        10,000 (4)                 --
 Vice President, Marketing


(1)  Represents options to purchase shares of Common Stock, which was awarded as
     compensation for a decrease taken in salary.
(2)  Includes premiums for term, split-dollar life insurance paid by the Company
     on behalf of the Named Executive Officer.
(3)  Represents  options to purchase  shares of Common Stock,  which was awarded
     based on merit.
(4)  Compensation paid to Coleman Legal, a third party legal services provider.
(5)  Hired as employee effective January 1, 2003.
(6)  Ken Roy joined Astea in November 2003.
(7)  Marikit Klein-Smith joined Astea in March 2003.















                                       58



Option Grants in Last Fiscal Year

     The following  table sets forth each grant of stock options made during the
year ended December 31, 2003 to each of the Named Executive Officers:



                                                                          Individual Grants
                                                                          -----------------
                                               Percent of
                                                 Total                                      Potential Realizable Value at
                               Number of        Options                                                Assumed
                               Securities      Granted to                                     Annual Rates of Stock Price
                               Underlying      Employees      Exercise                           Appreciation for Option
                                Options        In Fiscal       Price     Expiration                     Terms(2)
 Name                         Granted (#)        Year       ($/Share)(1)    Date                5%($)           10%($)
 ----                         -----------        ------     ------------    ----                -----           ------
                                                                                           
 Rick Etskovitz                    10,000(3)          9%       $3.34       11/12/2013           $54,405         $86,631

 John Tobin                        10,000(3)          9%       $3.34       11/12/2013           $54,405         $86,631

 Ken Roy                           35,000(3)         30%       $3.34       11/12/2013          $190,418        $303,208

 Marikit Klein-Smith               10,000(3)          9%       $2.90       03/27/2013           $47,238         $75,219



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



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

         The  following  table  sets  forth,  for  each of the  Named  Executive
Officers,  information  with respect to the exercise of stock options during the
year ended December 31, 2003 and the year-end value of unexercised options:



                                                                                   Value of Unexercised
                               Shares                  Numbers of Unexercised      In-the-Money Options
                            Acquired on     Value       Options at Year End            at Year End
               Name          Exercise(#)  Realized($)  Exercisable/Unexercisable Exercisable/Unexercisable
               ----          -----------  -----------  ------------------------- -------------------------
                                                             
      Zack B. Bergreen           --           --            40,000/40,000                   --

      Rick Etskovitz             --           --            8,750/21,250                    --

      John Tobin                 --           --            10,000/20,000                   --

      Ken Roy                    --           --             --/35,000                      --

      Marikit Klein-Smith        --           --             -- /10,000                 --/$29,000







                                       59




Employment Agreements and Severance Arrangements with Executive Officers

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

Board Interlocks and Insider Participation

         No executive  officer of the Company served as a member of the Board of
Directors,  compensation  committee,  or other committee  performing  equivalent
functions,  of  another  entity  one of whose  executive  officers  served  as a
Director  of the  Company.  Other than Mr.  Bergreen,  no person who served as a
member of the Board was,  during  the  fiscal  year  ended  December  31,  2003,
simultaneously  an officer,  employee or consultant of the Company or any of its
subsidiaries.  Mr. Bergreen did not participate in any Company  determination of
his own personal compensation matters.

Compensation of Directors

          Directors who are not employees of the Company receive a $5,000 annual
retainer and a fee of $1,500 for attendance at each regular and special  meeting
of the  Board  of  Directors,  and are  also  reimbursed  for  their  reasonable
out-of-pocket  expenses incurred in attending meetings.  Non-Employee  Directors
may elect to receive,  in lieu of the foregoing cash compensation,  unrestricted
shares of Common  Stock of the  Company.  Shares of Common Stock in lieu of cash
compensation  are  acquired at the fair market  value of the Common Stock on the
last day of the calendar  quarter during which the cash  compensation was earned
and foregone.  Non-employee  Directors are also eligible to receive annual stock
option grants under the Company's 1995 Non-Employee  Director Stock Option Plan.
Directors who are employees are not  compensated  for their service on the Board
of Directors or any committee thereof.




















                                       60



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

         The  following  table sets  forth as of March 5, 2004:  (i) the name of
each person who, to the knowledge of the Company,  owned  beneficially more than
5% of the shares of Common Stock of the Company  outstanding at such date;  (ii)
the name of each Director;  and (iii) the name of each current executive officer
of the  Company.  The  following  table  also sets forth as of March 5, 2004 the
number  of  shares  owned  by each of such  persons  and the  percentage  of the
outstanding shares represented thereby, and also sets forth such information for
Directors, nominees and executive officers as a group.



 Name and Address Of Beneficial Owner                       Amount of Ownership(1)    Percent of Class(2)
-------------------------------------                       ----------------------    -------------------
                                                                                    
 Zack B. Bergreen(3)                                                  1,398,000              47.2%
     c/o Astea International
     240 Gibraltar Road
    Horsham, Pennsylvania 19044

 Adrian Peters (4)                                                        8,500                *

 Eric Siegel                                                              4,700                *

 Thomas J. Reilly, Jr.                                                    1,000                *

 Rick Etskovitz (5)                                                      16,500                *

 John Tobin (6)                                                          13,750                *

 Ken Roy                                                                      0                *

 Marikit Klein-Smith                                                      2,500                *

 Leviticus Partners, L.P.                                               224,920              7.7%

 All current directors, nominees and executive officers               1,444,950              47.5%
 as a group (8 persons)(1)-(8)


*    Less than 1% of the outstanding shares of Common Stock.
(1)  Except as noted in the footnotes to this table, each person or entity named
     in the table has sole  voting  and  investment  power  with  respect to all
     shares of Common  Stock  owned,  based  upon  information  provided  to the
     Company by  Directors,  officers  and  principal  stockholders.  Beneficial
     ownership is determined in accordance  with the rules of the Securities and
     Exchange  Commission (the  "Commission") and includes voting and investment
     power with respect to shares of Common Stock  subject to options  currently
     exercisable or exercisable within 60 days after the Record Date ("presently
     exercisable stock options").
(2)  Applicable  percentage  of  ownership  as of the Record  Date is based upon
     2,921,901  shares of Common Stock  outstanding as of that date.  Beneficial
     ownership is determined in accordance  with the rules of the Commission and
     includes  voting and  investment  power with  respect to shares.  Presently
     exercisable  stock  options  are  deemed   outstanding  for  computing  the
     percentage ownership of the person holding such options, but are not deemed
     outstanding for computing the percentage of any other person.
(3)  Includes  1,093,203  shares  of  Common  Stock  held by trusts of which Mr.
     Bergreen and his wife are the only trustees,  209,192 shares held by trusts
     with  independent  trustees,  and 55,803  shares of Common  Stock held by a
     family  limited  partnership  of which  Mr.  Bergreen  is the sole  general
     partner.  Also  included  are 40,000  options,  all of which are  currently
     exercisable.
(4)  Board Of Directors.  Represents  options to purchase  8,500 shares,  all of
     which are currently  exercisable.
(5)  Chief Financial  Officer.  Represents 4,000 shares of common stock and also
     options  to  purchase   12,500   shares,   8,750  of  which  are  currently
     exercisable, and 3,750 of which shall become exercisable within the next 60
     days.
(6)  Vice President and General Counsel.  Represents  options to purchase 13,750
     shares,  10,000 of which are currently exercisable and 3,750 of which shall
     become exercisable within the next 60 days.







                                       61



Item 13. Certain Relationships and Related Transactions.

Over the  years,  the  Company  has paid  premiums  on  behalf  of the  majority
stockholder  and his wife under split  dollar life  insurance  policies.  During
2003, the Company  terminated  these policies and received  $632,000 on the cash
surrender value of the policies.

Item 14. Principal Accountant Fees and Services

The following table presents fees for  professional  audit services  rendered by
BDO  Seidman,  LLP  for  the  audit  of  the  Company's  consolidated  financial
statements  for the years ended  December 31, 2003 and 2002, and fees billed for
other services rendered by BDO Seidman, LLP during those periods:



                                                              2003                  2002
                                                        -----------------      ----------------
                                                                        
              Audit Fees (1)                              $   145,500            $  127,800
              Audit-related Fees (2)                            9,000                 8,000
              Tax Fees (3)                                     62,200                67,900
              All Other Fees (4)                                    -                      -
                                                        -----------------      ----------------

              Total (5)                                   $   216,700            $  203,700
                                                        =================      ================


(1)      Audit fees consisted of fees for professional services performed by BDO
         Seidman,  LLP  for  the  audit  of the  Company's  annual  consolidated
         financial  statements and review of consolidated  financial  statements
         included in the Company's 10-Q filings,  and services that are normally
         provided  in  connection  with  statutory  and  regulatory  filings  or
         engagements.
(2)      Audit-related fees consisted of fees for assurance and related services
         performed by BDO Seidman,  LLP.  This  includes  employee  benefit plan
         audit and consulting on financial accounting and reporting standards.
(3)      Tax fees  consisted  of fees for tax  compliance,  tax  advice  and tax
         planning.  (4) All other fees include fees for services not included in
         the other three categories.  (5) The Audit Committee  pre-approved 100%
         of the fees for 2003.







                                       62




                                     PART IV


Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

         (a)(1)(A) Consolidated Financial Statements.
               i)   Consolidated Balance Sheets at December 31, 2003 and 2002
               ii)  Consolidated  Statements of  Operations  for the years ended
                    December 31, 2003, 2002, and 2001
               iii) Consolidated  Statements  of  Stockholders'  Equity  for the
                    years ended December 31, 2003, 2002, and 2001
               iv)  Consolidated  Statements  of Cash Flows for the years  ended
                    December 31, 2003, 2002, and 2001
               v)   Notes to the Consolidated Financial Statements

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

         (a)(2)    Schedules.

               a)   Schedule II - Valuation and Qualifying Accounts

                    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

            2.1         Stock Purchase Agreement, dated August 14, 1998, among
                        the Company, Ixchange Technology Holdings Limited,
                        Network Data, Inc., Bendata, Inc., Bendata (Europe)
                        Limited LLC, and Bendata Holding, Inc. (Incorporated
                        herein by reference to Exhibit 10.1 to the Company's
                        Current Report on Form 8-K dated September 4, 1998).
            2.2         Stock Purchase Agreement, dated December 31, 1998, among
                        the Company, Network Data, Inc. and Industri-Matematik
                        International Corporation (Incorporated herein by
                        reference to Exhibit 2.1 to the Company's Current Report
                        on Form 8-K dated December 31, 1998).
            3(i).1      Certificate of Incorporation of the Company
                        (Incorporated herein by reference to Exhibit 3.1 to the
                        Company's Registration Statement on Form S-1, as amended
                        (File No. 33-92778)).
            3(ii).1     By-Laws of the Company (Incorporated herein by reference
                        to Exhibit 3.2 to the Company's Registration Statement
                        on Form S-1, as amended (File No. 33-92778)).
            3.2*        Certificate of Amendment of Certificate of Incorporation
                        of the Company.
            4.1         Specimen certificate representing the Common Stock
                        (Incorporated herein by Reference to Exhibit 4.1 to the
                        Company's Registration Statement on Form S-1, as amended
                        (File No. 33-92778)).




                                       63


            10.1        1994 Amended Stock Option Plan (Incorporated herein by
                        reference to Exhibit 10.1 to the Company's Registration
                        Statement on Form S-1, as amended (File No. 33-92778)).
            10.2        Form of Non-Qualified Stock Option Agreement under the
                        1994 Amended Stock Option Plan (Incorporated herein by
                        reference to Exhibit 10.2 to the Company's Registration
                        Statement on Form S-1, as amended (File No. 33-92778)).
            10.3        Form of Incentive Stock Option Agreement under the 1994
                        Amended Stock Option Plan (Incorporated herein by
                        reference to Exhibit 10.3 to the Company's Registration
                        Statement on Form S-1, as amended (File No. 33-92778)).
            10.4        1991 Amended Non-Qualified Stock Option Plan
                        (Incorporated herein by reference to Exhibit 10.4 to the
                        Company's Registration Statement on Form S-1, as amended
                        (File No. 33-92778)).
            10.5        Form of Non-Qualified Stock Option Agreement under the
                        1991 Amended Non- Qualified Stock Option Plan
                        (Incorporated herein by reference to Exhibit 10.5 to the
                        Company's Registration Statement on Form S-1, as amended
                        (File No. 33-92778)).
            10.6        1995 Employee Stock Purchase Plan (Incorporated herein
                        by reference to Exhibit 10.6 to the Company's
                        Registration Statement on Form S-1, as amended (File No.
                        33-92778)).
            10.7        Amendment No. 1 to 1995 Employee Stock Purchase Plan
                        (Incorporated herein by reference to Exhibit 10.2 to the
                        Company's Quarterly Report on Form 10-Q for the fiscal
                        quarter ended September 30, 1997).
            10.8        1995 Employee Stock Purchase Plan
                        Enrollment/Authorization Form (Incorporated herein by
                        reference to Exhibit 4.7 to the Company's Registration
                        Statement on Form S-8, filed on September 19, 1995 (File
                        No. 33-97064)).
            10.9        Amended and Restated 1995 Non-Employee Director Stock
                        Option Plan (Incorporated herein by reference to Exhibit
                        10.9 to the Company's Annual Report on Form 10-K for the
                        year ended December 31, 1997).
            10.10       Form of Non-Qualified Stock Option Agreement under the
                        1995 Non-Employee Director Stock Option Plan
                        (Incorporated herein by reference to Exhibit 4.5 to the
                        Company's Registration Statement on Form S-8, filed on
                        September 19, 1995 (File No. 33-97064)).
            10.11       1997 Stock Option Plan (Incorporated herein by reference
                        to Exhibit 10.10 to the Company's Annual Report on Form
                        10-K for the fiscal year ended December 31, 1996).
            10.12       Form of Non-Qualified Stock Option Agreement under the
                        1997 Stock Option Plan. (Incorporated herein by
                        reference to Exhibit 10.11 to the Company's Annual
                        Report on Form 10-K for the fiscal year ended December
                        31, 1996).
            10.13       Form of Incentive Stock Option Agreement under the 1997
                        Stock Option Plan (Incorporated herein by reference to
                        Exhibit 10.12 to the Company's Annual Report on Form
                        10-K for the fiscal year ended December 31, 1996).
            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).
            10.17       Loan and Security Agreement, dated August 1, 1999,





                                       64


                        between the Company and Silicon Valley Bank
                        (Incorporated herein by reference to Exhibit 10.1 to the
                        Company's Quarterly Report on Form 10-Q for the fiscal
                        quarter ended September 30, 1999).
            10.20       Modification Agreement dated April 30, 1998 by and among
                        the Company, PNC Bank, National Association and PNC
                        Leasing Corp. (Incorporated herein by reference to
                        Exhibit 10.1 to the Company's Quarterly Report on Form
                        10-Q for the quarter ended March 31, 1998).
            10.22       Letter to John G. Phillips regarding severance terms
                        (Incorporated herein by reference to Exhibit 10.22 to
                        the Company's Annual Report on Form 10-K for the year
                        ended December 31, 1999).
            10.23       Letter to Bruce R. Rusch regarding employment terms.
                        (Incorporated herein by reference to Exhibit 10.1 to the
                        Company's Quarterly Report on Form 10-Q for the quarter
                        ended June 30, 1999).
            10.24       Letter to Howard P. Kamins regarding employment terms
                        (Incorporated herein by reference to Exhibit 10.24 to
                        the Company's Annual Report on Form 10-K for the year
                        ended December 31, 1999).
            10.25       Consulting Agreement between the Company and Zack B.
                        Bergreen (Incorporated herein by reference to Exhibit
                        10.25 to the Company's Annual Report on Form 10-K for
                        the year ended December 31, 1999).
            10.26       Transfer of Rights Agreement regarding PowerHelp
                        (Incorporated herein by reference to Exhibit 10.26 to
                        the Company's Annual Report on Form 10-K for the year
                        ended December 31, 1999)
            10.27       Guaranty in connection with Transfer of Rights Agreement
                        regarding PowerHelp (Incorporated herein by reference to
                        Exhibit 10.27 to the Company's Annual Report on Form
                        10-K for the year ended December 31, 1999).
            10.28       2001 Stock Option Plan (Incorporated herein by reference
                        to Exhibit 99.1 to the Company's Registration Statement
                        on Form S-8 (File No. 333-107757)).
            21.1*       Subsidiaries of the Registrant.
            23.1*       Consent of BDO Seidman, LLP.
            24.1*       Powers of Attorney (See the Signature Page).
            31.1*       Certification pursuant to Section 302 of the
                        Sarbanes-Oxley Act of 2002 - President and Chief
                        Executive Officer
            31.2*       Certification pursuant to Section 302 of the
                        Sarbanes-Oxley Act of 2002 - Chief Financial Officer
            32.1*       Certification pursuant to 18 U.S.C. Section 1350, as
                        adopted pursuant to Section 906 of the Sarbanes-Oxley
                        Act of 2002 - President and Chief Executive Officer
            32.2*       Certification pursuant to 18 U.S.C. Section 1350, as
                        adopted pursuant to Section 906 of the Sarbanes-Oxley
                        Act of 2002 - Chief Financial Officer
                                    -------------------
         *        Filed herewith

         (b) Reports on Form 8-K.

         On November 13, 2003,  the Company filed with the SEC a current  report
on Form 8-K announcing its issuance of a press release relative to its financial
statements for the third quarter ended September 30, 2003.

         (c) Exhibits.

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





                                       65



                                   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 29th day of March
2004.

                                  ASTEA INTERNATIONAL INC.


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

                                POWER OF ATTORNEY

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

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



            Signature                               Title                               Date
                                                                          
   /s/Zack Bergreen                  President and Chief Executive               March 29, 2004
   ---------------------------       Officer (Principal Executive Officer)
   Zack Bergreen

   /s/Rick Etskovitz.                Vice President and Chief                    March 29, 2004
   ---------------------------       Financial Officer (Principal
   Rick Etskovitz                    Financial and Accounting
                                     Officer)


   /s/Nicolette L. Daniels           Controller                                  March 29, 2004
   ---------------------------
   Nicolette L. Daniels

   /s/Thomas J. Reilly, Jr.          Director                                    March 29, 2004
   ---------------------------
   Thomas J. Reilly, Jr.

   /s/Zack Bergreen                  Director                                    March 29, 2004
   ---------------------------
   Zack Bergreen

   /s/Adrian Peters                  Director                                    March 29, 2004
   ---------------------------
   Adrian Peters

   /s/Eric Siegel                    Director                                    March 29, 2004
   ---------------------------
   Eric Siegel





                                       66





               Consent of Independent Certified Public Accountants


Astea International Inc. Subsidiaries
Horsham, Pennsylvania



We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements  (Nos.  333-33825,  333-34865,  and  333-61981) on Form S-8 and (Nos.
333-11949  and  333-17459)  on  Form  S-3  of  Astea  International,   Inc.  and
subsidiaries  of our report  dated March 5, 2004,  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, 2003.




BDO Seidman, LLP
Philadelphia, PA


March 29, 2004





















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