Edgar Filing: ASTEA INTERNATIONAL INC

Astea 10Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q/A

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006

[ ] 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, PA	19044
(Address of principal executive offices)	(Zip Code)

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

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

As of November 7, 2006, 3,591,185 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

EXPLANATORY NOTE

This Form 10-Q/A is being filed to amend the Astea International Inc. (the “Company”) Form 10-Q/A for the period ended September 30, 2006 in order to reflect the restatement of the Company’s Consolidated Financial Statements and amendments to related disclosures as of September 30, 2006 and for the three and nine month periods ended September 30, 2006 and 2005. The restatements arose from the determination of the Company’s Audit Committee that all revenues, including license, services and maintenance, resulting from a contract from 2004 from the Company’s United Kingdom subsidiary should be deferred until the delivery and acceptance of the final undelivered element of such contract. The Company expects to recognize all of the revenues from such contract in the first quarter of 2007, with the exception of certain post contract support revenue, which will be recognized ratably over 2007 and 2008. The impact of the restatement for the periods presented in this report is to decrease revenues and increase deferred revenues.

Generally, no attempt has been made in this Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q except as required to reflect the effects of the restatement. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q with the Securities and Exchange Commission on November 9, 2006. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q. The following items have been amended as a result of the restatement:

·	Part I - Item 1 - Financial Statements

·	Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

ASTEA INTERNATIONAL INC.

FORM 10-Q

QUARTERLY REPORT

INDEX

	Page No.

Facing Sheet	1

Explanatory Note	2

Index	3

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets (Unaudited)	4

Consolidated Statements of Operations (Unaudited)	5

Consolidated Statements of Cash Flows (Unaudited)	6

Notes to Unaudited Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosure About Market Risk	21

Item 4. Controls and Procedures	21

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	23

Item 1A. Risk Factor	23

Item 6. Exhibits and Reports on Form 8-K	24

Signatures	25

PART I - FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

ASTEA INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2006 (Restated)			2005 (Restated)
ASSETS
Current assets:
Cash and cash equivalents	$	4,361,000		$	9,484,000
Restricted cash		225,000			225,000
Receivables, net of reserves of $108,000 and $333,000		5,923,000			5,037,000
Prepaid expenses and other		495,000			485,000
Total current assets		11,004,000			15,231,000

Property and equipment, net		518,000			1,038,000
Intangibles, net		1,789,000			1,999,000
Capitalized software, net		3,314,000			2,055,000
Goodwill		1,233,000			1,100,000
Other assets		189,000			189,000
Total assets	$	18,047,000		$	21,612,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	3,888,000		$	3,969,000
Deferred revenues		7,463,000			5,767,000
Total current liabilities		11,351,000			9,736,000

Long-term liabilities:
Deferred revenues		-			1,221,000
Deferred income taxes		7,000			7,000

Total long-term liabilities		7,000			1,228,000

Stockholders’ equity:
Common stock, $.01 par value, 25,000,000 shares authorized, issued 3,591,000 and 3,433,000		36,000			36,000
Additional paid-in capital		27,368,000			27,116,000
Cumulative translation adjustment		(876,000	)		(935,000	)
Accumulated deficit		(19,631,000	)		(15,361,000	)
Less: treasury stock at cost, 42,000 and 42,000 shares		(208,000	)		(208,000	)
Total stockholders’ equity		6,689,000			10,648,000
Total liabilities and stockholders’ equity	$	18,047,000		$	21,612,000

See accompanying notes to the consolidated financial statements.

ASTEA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006 (Restated)			2005 (Restated)		2006 (Restated)			2005 (Restated)
Revenues:
Software license fees	$	2,212,000		$	4,805,000	$	3,334,000		$	7,471,000
Services and maintenance		4,137,000			3,284,000		11,256,000			9,354,000
Total revenues		6,349,000			8,089,000		14,590,000			16,825,000
Costs and expenses:
Cost of software license fees		422,000			298,000		1,172,000			881,000
Cost of services and maintenance		2,418,000			2,034,000		7,721,000			5,813,000
Product development		896,000			454,000		2,761,000			1,729,000
Sales and marketing		1,881,000			1,944,000		4,496,000			4,606,000
General and administrative		735,000			771,000		2,893,000			1,968,000
Total costs and expenses		6,352,000			5,501,000		19,043,000			14,997,000

Loss from continuing operations		(3,000	)		2,588,000		(4,453,000	)		1,828,000
Interest income, net		48,000			41,000		183,000			90,000
Loss before income taxes		45,000			2,629,000		(4,270,000	)		1,918,000
Income tax expense		-			-		-			-
Net income (loss)	$	45,000		$	2,629,000	$	(4,270,000	)	$	1,918,000

Basic income (loss) per share	$	0.01		$	0.89	$	(1.20	)	$	0.64

Diluted income (loss) per share	$	0.01		$	0.85	$	(1.20	)	$	0.62

Shares outstanding used in computing basic income (loss) per share		3,549,000			2,968,000		3,546,000			2,976,000
Shares outstanding used in computing diluted income (loss) per share		3,567,000			3,106,000		3,546,000			3,072,000

See accompanying notes to the consolidated financial statements.

ASTEA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2006 (Restated)			2005 (Restated)
Cash flows from operating activities:
Net (loss) income	$	(4,270,000	)	$	1,918,000
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Depreciation and amortization		1,737,000			1,032,000
Increase in allowance for doubtful accounts		209,000			387,000
Stock based compensation		233,000			-
Changes in operating assets and liabilities:
Receivables		(955,000	)		666,000
Prepaid expenses and other		-			(61,000	)
Accounts payable and accrued expenses		(77,000	)		810,000
Deferred revenues		483,000			(189,000	)
Other assets		2,000			(11,000	)
Net cash (used) provided by operating activities		(2,638,000	)		4,552,000
Cash flows from investing activities:
Reduction in restricted cash		-			75,000
Purchases of property and equipment		(106,000	)		(213,000	)
Net cash from acquisition of FieldCentrix		-			616,000
Capitalized software development costs		(2,139,000	)		(826,000	)
Goodwill		(133,000	)		-
Net cash used in investing activities		(2,378,000	)		(348,000	)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan		19,000			34,000
Cash flow from financing activities		19,000			34,000
Effect of exchange rate changes on cash		(126,000	)		80,000
Net (decrease) increase in cash and cash equivalents		(5,123,000	)		4,318,000
Cash, beginning of period		9,484,000			4,483,000
Cash and cash equivalents balance, end of period	$	4,361,000		$	8,801,000

See accompanying notes to the consolidated financial statements.

Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ASTEA INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements at September 30, 2006 and for the three and nine month periods ended September 30, 2006 and 2005 of Astea International Inc. and subsidiaries (“Astea” or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated financial statements should be read in conjunction with the notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in this Form 10-Q/A and in the Company’s 2005 and 2006 Annual Report on Form 10-K which are hereby incorporated by reference in this quarterly report on Form 10-Q/A. Results of operations and cash flows for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the full year.

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

The impact of the adjustment on the quarters ended September 30, 2006 and 2005 contained in this Form 10-Q/A is to decrease service and maintenance revenue by $129,000 and $160,000, respectively on the Consolidated Statements of Operations. The impacts of the adjustment on the nine months ended September 30, 2006 and 2005, contained in this Form 10-Q/A, is to decrease service and maintenance revenue by $292,000 and $553,000, respectively on the Consolidated Statements of Operations and to increase deferred revenues by $1,512,000 and $1,212,000, respectively, on the Consolidated Balance Sheets. The Consolidated Statements of Cash Flows and Notes to Unaudited Financial Statements have been restated where applicable to reflect the adjustment.

The adjustment to net income (loss) for the three and nine months ended September 30, 2006 and 2005 is summarized below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005

Net income (loss), as previously reported	$	174,000		$	2,789,000		$	(3,978,000	)	$	2,471,000

Adjustment (pre-tax):

Service and maintenance revenue		(129,000	)		(160,000	)		(292,000	)		(553,000	)

Tax effect of restatement adjustment		-			-			-			-

Net income (loss), as restated	$	45,000		$	2,629,000		$	(4,270,000	)	$	1,918,000

The Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005, included in the Form 10-Q/A have been restated to include the effect of this adjustment as follows:

PART I - FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

ASTEA INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2006						December 31, 2005
	As previously reported			As restated			As previously reported			As restated

ASSETS
Current assets:
Cash and cash equivalents	$	4,361,000		$	4,361,000		$	9,484,000		$	9,484,000
Restricted cash		225,000			225,000			225,000			225,000
Receivables, net of reserves of $108,000 and $333,000		5,923,000			5,923,000			5,037,000			5,037,000
Prepaid expenses and other		495,000			495,000			485,000			485,000
Total current assets		11,004,000			11,004,000			15,231,000			15,231,000

Property and equipment, net		518,000			518,000			1,038,000			1,038,000
Intangibles, net		1,789,000			1,789,000			1,999,000			1,999,000
Capitalized software, net		3,314,000			3,314,000			2,055,000			2,055,000
Goodwill		1,233,000			1,233,000			1,100,000			1,100,000
Other assets		189,000			189,000			189,000			189,000
Total assets	$	18,047,000		$	18,047,000		$	21,612,000		$	21,612,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	3,888,000		$	3,888,000		$	3,969,000		$	3,969,000
Deferred revenues		5,950,000			7,463,000			5,767,000			5,767,000
Total current liabilities		9,838,000			11,351,000			9,736,000			9,736,000

Long-term liabilities:
Deferred revenues		-			-			-			1,221,000
Deferred income taxes		7,000			7,000			7,000			7,000

Total long-term liabilities		7,000			7,000			7,000			1,228,000

Stockholders’ equity:
Common stock, $.01 par value, 25,000,000 shares authorized, issued 3,591,000 and 3,433,000		36,000			36,000			36,000			36,000
Additional paid-in capital		27,368,000			27,368,000			27,116,000			27,116,000
Cumulative translation adjustment		(876,000	)		(876,000	)		(935,000	)		(935,000	)
Accumulated deficit		(18,118,000	)		(19,631,000	)		(14,140,000	)		(15,361,000	)
Less: treasury stock at cost, 42,000 and 42,000 shares		(208,000	)		(208,000	)		(208,000	)		(208,000	)

Total stockholders’ equity		8,202,000			6,689,000			11,869,000			10,648,000

Total liabilities and stockholders’ equity	$	18,047,000		$	18,047,000		$	21,612,000		$	21,612,000

See accompanying notes to the consolidated financial statements.

The Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005, included in the Form 10-Q/A have been restated to include the effects of the adjustment as follows:

ASTEA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,
	2006					2005
	As previously reported		As restated			As previously reported		As restated
Revenues:
Software license fees	$	2,212,000	$	2,212,000		$	4,805,000	$	4,805,000
Services and maintenance		4,266,000		4,137,000			3,444,000		3,284,000
Total revenues		6,478,000		6,349,000			8,249,000		8,089,000
Costs and expenses:
Cost of software license fees		422,000		422,000			298,000		298,000
Cost of services and maintenance		2,418,000		2,418,000			2,034,000		2,034,000
Product development		896,000		896,000			454,000		454,000
Sales and marketing		1,881,000		1,881,000			1,944,000		1,944,000
General and administrative		735,000		735,000			771,000		771,000
Total costs and expenses		6,352,000		6,352,000			5,501,000		5,501,000

Income (loss) from operations		126,000		(3,000	)		2,748,000		2,588,000
Interest income, net		48,000		48,000			41,000		41,000
Income (loss) before income taxes		174,000		45,000			2,789,000		2,629,000
Income tax expense		-		-			-		-
Net income (loss)	$	174,000	$	45,000		$	2,789,000	$	2,629,000

Basic and diluted (loss) per share:
Net (loss) per share	$	0.05	$	0.01		$	0.94	$	0.89

Shares outstanding used in computing basic (loss) per share		3,549,000		3,549,000			2,968,000		2,968,000
Shares outstanding used in computing diluted (loss) per share		3,567,000		3,567,000			3,106,000		3,106,000

See accompanying notes to the consolidated financial statements.

The Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005, included in the Form 10-Q/A have been restated to include the effects of the adjustment as follows:

ASTEA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine Months Ended
	September 30,
	2006						2005
	As previously reported			As restated			As previously reported		As restated

Revenues:
Software license fees	$	3,334,000		$	3,334,000		$	7,471,000	$	7,471,000
Services and maintenance		11,548,000			11,256,000			9,907,000		9,354,000
Total revenues		14,882,000			14,590,000			17,378,000		16,825,000
Costs and expenses:
Cost of software license fees		1,172,000			1,172,000			881,000		881,000
Cost of services and maintenance		7,721,000			7,721,000			5,813,000		5,813,000
Product development		2,761,000			2,761,000			1,729,000		1,729,000
Sales and marketing		4,496,000			4,496,000			4,606,000		4,606,000
General and administrative		2,893,000			2,893,000			1,968,000		1,968,000
Total costs and expenses		19,043,000			19,043,000			14,997,000		14,997,000

(Loss) income from operations		(4,161,000	)		(4,453,000	)		2,381,000		1,828,000
Interest income, net		183,000			183,000			90,000		90,000
(Loss) income before income taxes		(3,978,000	)		(4,270,000	)		2,471,000		1,918,000
Income tax expense		-			-			-		-
Net (loss) income	$	(3,978,000	)	$	(4,270,000	)	$	2,471,000	$	1,918,000

Basic and diluted (loss) income per share:
Net (loss) income per share	$	(1.12	)	$	(1.20	)	$	0.83	$	0.64

Diluted (loss) income per share	$	(1.12	)	$	(1.20	)	$	0.80	$	0.62

Shares outstanding used in computing basic income (loss) per share		3,546,000			3,546,000			2,976,000		2,976,000
Shares outstanding used in computing diluted income (loss) per share		3,546,000			3,546,000			3,072,000		3,072,000

See accompanying notes to the consolidated financial statements.

2. STOCKHOLDERS’ EQUITY/COMPREHENSIVE INCOME

The reconciliation of stockholders’ equity and comprehensive loss from December 31, 2005 to September 30, 2006 is summarized as follows:

	Common Stock		Additional Paid-In Capital		Cumulative Currency Translation Adjustment			Accumulated Deficit			Treasury Stock			Total Stock-holders’ Equity			Compre-hensive Income (loss)
Balance at December 31, 2005 (restated)	$	36,000	$	27,116,000	$	(935,000	)	$	(15,361,000	)	$	(208,000	)	$	10,648,000		$	-
Exercise of stock options				19,000		-			-			-			19,000			-
Stock based compensation				233,000											233,000
Cumulative translation adjustment		-		-		59,000			-			-			59,000			59,000
Net (loss) for the period, restated		-		-		-			(4,270,000	)		-			(4,270,000	)		(4,270,000	)
Balance at September 30, 2006 (restated)	$	36,000	$	27,368,000	$	(876,000	)	$	(19,631,000	)	$	(208,000	)	$	6,689,000		$	(4,211,000	)

3.	INCOME TAX EXPENSE

At September 30, 2006, the Company maintains a 100% valuation allowance for its remaining net deferred tax assets based on the uncertainty of the realization of future taxable income.

4. STOCK BASED COMPENSATION

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

Under the Company’s stock option plans, option awards generally vest over a four year period of continuous service and have a 10 year contractual term. The fair value of each option is amortized on a straight-line basis over the option’s vesting period. The fair value of each option is estimated on the date of the grant using the Black-Scholes option valuation model and the following weighed average assumptions for the nine months ending September 30, 2006.

	Nine Months Ended
	September 30, 2006
Weighted-average fair value of options granted	$	6.96
Risk-free interest rate		4.95	%
Expected life (in years)		6
Volatility		116	%
Expected dividends		-

Expected volatility is based on historical volatility of the Company’s stock. The expected life of options granted is estimated on historical option exercise and employee termination data. Executive level employees who hold a majority of the options outstanding, and non-executive level employees were each found to have similar historical option exercise and termination behavior and thus were grouped for valuation purposes. The risk-free rate for periods commensurate with the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the option grant.

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

	Three Months Ended			Nine Months Ended
	September 30, 2005 (as Restated)			September 30, 2005 (as Restated)

Net income - as reported	$	2,629,000		$	1,918,000
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		(132,000	)		(248,000	)

Net income - pro forma	$	2,497,000		$	1,670,000

Basic income per share - as reported	$	0.89		$	0.64
Diluted income per share as reported	$	0.85		$	0.62
Basic income per share - pro forma	$	0.84		$	0.56
Diluted income per share pro forma	$	0.80		$	0.54

For purposes of this proforma disclosure, the fair value of each option is amortized on a straight-line basis over the option’s vesting period. The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions for the quarter ending September 30, 2005:

	Nine Months Ended
	September 30, 2005
Weighted-average fair value of options granted	$	6.43
Risk-free interest rate		4.32	%
Expected life (in years)		6
Volatility		118	%
Expected Dividends		-

As of September 30, 2006, the total unrecognized compensation cost related to non-vested options granted amounted to $607,012, which is expected to be recognized over the options’ remaining vesting period which could be as long as four years. No income tax benefit was realized by the Company in the nine months ended September 30, 2006 as the Company reported an operating loss.

Activity under the Company’s stock option plan is as follows:

	Options Available for Grant			Number of Options Outstanding			Weighted Average Price per Share
Balance at December 31, 2005		35,822			291,664		$	7.04
Options authorized		350,000						-
Options granted		(160,000	)		160,000		$	8.14
Options exercised		-			(6,000	)	$	3.23
Options cancelled:
Options forfeited		98,200			(100,200	)	$	7.26
Options expired		(800	)		-			-
Balance at September 30, 2006		323,222			345,464		$	7.12

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

During the three month period ended September 30, 2006 no options were exercised.

The following table summarizes outstanding options that are vested and expected to vest and options under the Company’s stock option plans as of September 30, 2006.

	Number of Shares		Weighted Average Price Per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding Options (vested and expected to vest)		345,464	$	7.12		7.15	$	1,894,617

Options Exercisable		111,041	$	6.79		8.10	$	563,951

5. LINE OF CREDIT

On May 26, 2006 the Company entered into a secured revolving line of credit (Line) agreement with a bank. Maximum available borrowings under the Line represent the lesser of 80% of the Borrowing Base, which is defined as Eligible Accounts Receivables, or $4.0 million. Amounts outstanding on the line of credit were zero on September 30, 2006.

The Line bears interest at the Line Interest Rate, as defined by the agreement. The Line provides for payment of a quarterly commitment fee of .25% per annum on the unused portion of the maximum commitment, which can be as high as $2,500.

Borrowings under the Line are collateralized by all the Company’s assets.

6. MAJOR CUSTOMERS

In the third quarter of 2006, there was one major customer that accounted for 10% of total revenues. In the third quarter of 2005, the Company had one customer that accounted for 56% of its total revenue. For the first nine months of 2006 no customer accounted for 10% or more of total revenues and for the first nine months of 2005, there were two customers that accounted for 28% and 12% of total revenues.

Item 2. 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, assumptions made by management 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 herein and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and December 31, 2006.

Astea is a global provider of service management software that addresses the unique needs of companies who manage capital equipment, mission critical assets and human capital. Clients include Fortune 500 to mid-size companies, which Astea services through company facilities in the United States, United Kingdom, Australia, The Netherlands, and Israel. Since its inception in 1979, Astea has licensed applications to companies in a wide range of sectors including information technology, telecommunications, instruments and controls, business systems, and medical devices.

As a leading provider of service management solution, Astea has been helping companies across the globe achieve the highest level of customer satisfaction with faster response time and proactive communication. The result is a consistent and highly personalized experience at every touch point. Currently, Astea markets and sells Astea Alliance service management suite, FX Enterprise, FX Mobile and FX Service Center. Astea Alliance synchronizes and optimizes critical business processes for contact center, field service, depot repair, logistics, professional service and sales and marketing. The application suite is extended with portal, business intelligence, dynamic scheduling and mobile solutions. FX Enterprise, FX Mobile and FX Service Center are designed to help companies better manage their mobile workforce in the field.

Marketing and sales of licenses, services and maintenance related to the Company’s legacy system DISPATCH-1® products are limited to existing DISPATCH-1 customers.

FieldCentrix

On September 21, 2005, the Company, through a wholly owned subsidiary, FC Acquisition Corp., acquired substantially all of the assets of FieldCentrix, Inc, the industry’s leading mobile field force automation company. FieldCentrix develops and markets mobile field service automation (FSA) systems, which include the wireless dispatch and support of mobile field technicians using portable, hand-held computing devices. The FieldCentrix offering has evolved into a leading complementary service management solution that runs on a wide range of mobile devices (handheld computers, laptops and PC’s, and Pocket PC devices), and integrates seamlessly with popular CRM and ERP applications. FieldCentrix has licensed applications to Fortune 500 and mid-size companies in a wide range of sectors including HVAC, building and real estate services, manufacturing, process instruments and controls, and medical equipment.

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 year-end 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 Position (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. In instances where the aforementioned criteria have not been met, both the license and the consulting fees are recognized under the percentage of completion method of contract accounting.

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

Accounts Receivable

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

Capitalized Software Research and Development Costs

The Company does account for its internal software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” The Company capitalizes software development costs subsequent to the establishment of technological feasibility through the products 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 products marketability are also capitalized once technological feasibility has been established. Software development costs are amortized on a product-by-product basis over the greater of the ratio of current revenues to total anticipated revenues or on a straight-line basis over the estimated useful lives of the products (usually two years), beginning with the initial release to customers. The Company 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 September 30, 2006, management believes that no revisions to the remaining useful lives or write-downs of capitalized software development costs are required.

Goodwill

On September 21, 2005, the Company acquired the assets and certain liabilities of FieldCentrix, Inc. through its wholly-owned subsidiary, FC Acquisition Corp. Included in the allocation of the purchase price was goodwill valued at $1,100,000 at December 31, 2005. The Company tests goodwill for impairment annually on the first day of the fourth quarter of each fiscal year at the reporting unit level using a fair value approach, in accordance with the provision SFAS No. 142, Goodwill and Other Intangible Assets. If an event occurs or circumstances change that

would be more likely than not to reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests.

The purchase price agreement to acquire the assets of FieldCentrix includes earnout provisions to pay the sellers a percentage of certain future license sales and professional service revenue through June 30, 2007. Accordingly, future amounts paid under the earnout provisions will be added to goodwill when such sales occur. In the nine months ended September 30, 2006, goodwill was increased by $133,000 to $1,233,000 due to the adjustment on contingent payments due to the sellers of the assets of FieldCentrix, Inc.

Reclassifications

Certain reclassifications of prior interim period’s amounts have been made to conform to the current interim period presentations.

Results of Operations

Comparison of Three Months Ended September 30, 2006 and 2005

Revenues

Revenues decreased $1,740,000, or 22%, to $6,349,000 for the three months ended September 30, 2006 from $8,089,000 for the three months ended September 30, 2005. Software license fee revenues decreased $2,593,000 or 54%, from the same period last year. Services and maintenance fees for the three months ended September 30, 2006 increased 26 % to $4,137,000, from $3,284,000 from the same quarter in 2005.

The Company’s international operations contributed $1,130,000 of revenues in the third quarter of 2006, which was a 79% decrease from revenues generated during the third quarter of 2005. The Company’s revenues from international operations amounted to 18% of the total revenue for the third quarter in 2006 compared to 68% of total revenues for the same quarter in 2005.

Software license fee revenues decreased 54% to $2,212,000 in the third quarter of 2006 from $4,805,000 in the third quarter of 2005. Astea Alliance license revenues decreased $3,322,000 or 69%, to $1,482,000 in the third quarter of 2006 from $4,804,000 in the third quarter of 2005. The decrease is attributable to one major sale to a customer in 2005 that accounted for 56% of total license revenue in the third quarter of 2005. The Company sold $730,000 of software licenses from its recently acquired FieldCentrix subsidiary compared to $0 in the same period last year.

Services and maintenance revenues increased to $4,137,000 in the third quarter of 2006 from $3,284,000 in the third quarter of 2005. The Astea Alliance service and maintenance revenues increased by $364,000 or 19% compared to the third quarter of 2005. This increase was partially offset by an $85,000 decrease in DISPATCH-1 service and maintenance revenues, which resulted from an expected decrease in demand. Additionally, FieldCentrix contributed $687,000 in services and maintenance revenue during the third quarter of 2006, compared to $113,000 the same quarter of last year after the Company acquired the business on September 21, 2005.

Costs of Revenues

Cost of software license fees increased 42% to $422,000 in the third quarter of 2006 from $298,000 in the third quarter of 2005. Included in the cost of software license fees is the fixed cost of capitalized software amortization. The principle cause of the increase is the amortization of software acquired from FieldCentrix which was not a part of the Company’s expense during the same period of 2005 and certain third party software costs associated with license sales this quarter. The gross margin on software license sales was 81% in the third quarter of 2006 compared to 94% in the third quarter of 2005. The decline in gross margin was attributable to both a decrease in license revenue from the same period in 2005 and an increase in the cost of software licenses sold.

Cost of services and maintenance increased 19% to $2,418,000 in the third quarter of 2006 from $2,034,000 in the third quarter of 2005. The increase in cost of service and maintenance is primarily attributed to an increase in professional services staff from last year to this year plus the addition of the FieldCentrix professional services staff and the recruiting costs associated with those hires. The services and maintenance gross margin percentage was 42% in the third quarter of 2006 compared to 38% in the third quarter of 2005. The increase in services and

maintenance gross margin was primarily due to the increase in maintenance revenue, which generally has higher profit margins and the deferral of service and maintenance revenues related to a contract signed in 2004, which is described in more detail in the notes to the financial statements.

Product Development

Product development expense increased 97% to $896,000 in the third quarter of 2006 from $454,000 in the third quarter of 2005. The increase results from the Company’s ongoing program of improving product quality and the expansion of the development staff, principally through the addition of FieldCentrix development activities. The Company excludes capitalized software development costs from product development expense. Software development costs of $737,000 were capitalized in the third quarter of 2006 compared to $437,000 during the same period in 2005. Gross development expense before capitalization was $1,633,000 and $891,000 for the quarters ending September 30, 2006 and 2005, respectfully. The increase results from development efforts for both the next Astea Alliance release and development of FieldCentrix products. Product development expense as a percentage of revenues was 14% in the third quarter of 2006 compared to 6% in the third quarter of 2005.

Sales and Marketing

Sales and marketing expense decreased 3% to $1,881,000 in the third quarter of 2006 from $1, 944,000 in the third quarter of 2005. The decrease in sales and marketing expense is attributable to a reduction in headcount in sales staffing costs, as well as lower commission expenses related to the decrease of license sales from the same period in 2005. As a percentage of revenues, sales and marketing expenses increased to 30% in 2006 from 24% in the third quarter of 2005.

General and Administrative

General and administrative expenses decreased 5% to $735,000 during the third quarter of 2006 from $771,000 in the third quarter of 2005. The decrease in general and administrative expenses is due to a decrease in the Company’s bad debt expense. In addition, the Company incurred indirect operating costs in connection to the FieldCentrix acquisition during the third quarter of 2005, primarily professional fees and travel. As a percentage of revenue, general and administrative expenses increased to 12% in the third quarter of 2006 from 10% in the third quarter of 2005.

Interest Income, Net

Net interest income increased $7,000 to $48,000 in the third quarter of 2006 from $41,000 in the third quarter of 2005. The increase in interest income is generally attributable to an increase in the level of investments as well as higher interest rates earned on the Company’s portfolio of invested funds.

International Operations

Total revenue from the Company’s international operations decreased during the third quarter of 2006 to $1,129,000 compared to $5,480,000 for the third quarter of 2005. The decrease in revenue from international operations was primarily attributable to a very large sale that occurred in 2005 that accounted for 56% of the Company’s total revenues and was not repeated in 2006. International operations generated a net loss of $264,000 for the third quarter ended September 30, 2006 compared to net income of $1,862,000 in the same quarter in 2005.

Comparison of Nine Months Ended September 30, 2006 and 2005

Revenues

Revenues decreased $2,235,000, or 13%, to $14,590,000 for the nine months ended September 30, 2006 from $16,825,000 for the nine months ended September 30, 2005. Software license fee revenues decreased $4,137,000, or 55%, from the same period last year. Services and maintenance fees for the nine months ended September 30, 2006 amounted to $11,256,000, a 20% increase from the same quarter in 2005.

The Company’s international operations contributed $3,662,000 of revenues in the first nine months of 2006 compared to $8,555,000 in the first nine months of 2005. This represents a 57% decrease from the same period last year. The decrease in revenues is due to the decrease in sales from the Company’s foreign operations, primarily in Europe which accounted for one significant sale that represented 56% of the Company’s revenue.

Software license fee revenues decreased 55% to $3,334,000 in the first nine months of 2006 from $7,471,000 in the first nine months of 2005. The decrease is primarily attributable to lower license sales during the first nine months of 2006 including one significant sale that represented 56% of revenue during the first nine months of 2005. Astea Alliance license revenues decreased $5,145,000 or 69% in the first nine months of 2006 from $7,455,000 in the first nine months of 2005. Partially offsetting the decline were $1,022,000 of software licenses from the Company’s newly acquired subsidiary, FieldCentrix. There were no DISPATCH-1 license revenue during the first nine months of 2006 compared to $16,000 for the same period in 2005.

Services and maintenance revenues increased 20% to $11,256,000 in the first nine months of 2006 from $9,354,000 in the first nine months of 2005. The increase primarily relates to service and maintenance revenues of $2,123,000 from FieldCentrix which was acquired on September 21, 2005, compared to $113,000 in 2005. In addition, Astea Alliance service and maintenance revenue increased by $219,000 or 3% from 2005. Slightly offsetting the increases was a decline of $326,000 in DISPATCH-1 service and maintenance revenue.

Costs of Revenues

Cost of software license fees increased 33% to $1,172,000 in the first nine months of 2006 from $881,000 in the first nine months of 2005. Included in the cost of software license fees is the fixed cost of capitalized software amortization. The principal cause of the increase is the amortization of software acquired from FieldCentrix which was not a part of the Company’s expenses during the same period in 2005 and third party license costs included in certain licenses sold in 2006. The software license gross margin percentage was 65% in the first nine months of 2006 compared to 88% during the same period in 2005. The decrease in gross margin was attributable to both the decrease in license sales and the increase in the cost of software license fees.

Cost of services and maintenance increased 33% to $7,721,000 in the first nine months of 2006 from $5,812,000 in the first nine months of 2005. The increase in cost of service and maintenance is primarily attributed to an increase in headcount from last year to this year, including the addition of FieldCentrix staff. The services and maintenance gross margin percentage was 31% in the first nine months of 2006 compared to 38% in the first nine months of 2005. The decline in gross margin from professional services and maintenance is principally due to lower utilization of the professional staff, resulting from a large investment in product quality assurance activities during the first nine months of 2006 and the deferral of service and maintenance revenue related to a contract signed with a customer of the company’s U.K. subsidiary in December 2004, for which services were provided in the periods reported.

Product Development

Product development expense increased 60% to $2,761,000 in the first nine months of 2006 from $1,729,000 in the first nine months of 2005. The increase results from the Company’s ongoing program of improving product quality, increasing product functionality and the addition of FieldCentrix development activities. The Company excludes capitalized software costs from product development expense. Software development costs of $2,139,000 were capitalized in the first nine months of 2006 compared to $826,000 during the same period in 2005. The increase results from development efforts for the next Astea Alliance release and upgrades to FieldCentrix products. Product development as a percentage of revenues was 19% in the first nine months of 2006 compared with 10% in the first nine months of 2005. Gross product development expenses were $4,900,000 in the first nine months of 2006, compared to $2,555,000 of gross development expense in 2005. The increase in cost is due to the continued effort of the Company to improve the quality and functionality of its product, which required adding more development staff. Additionally, the Fieldcentrix acquisition increased the Company’s development staff and costs.

Sales and Marketing

Sales and marketing expense decreased 2% to $4,496,000 in the first nine months of 2006 from $4,607,000 in the first nine months of 2005. The decrease in sales and marketing costs is attributable to lower sales commissions paid in the first nine months of 2006 due to lower license revenues. As a percentage of revenues, sales and marketing expenses increased slightly to 31% from 27% from the first nine months of 2006.

General and Administrative

General and administrative expenses increased 47% to $2,893,000 in the first nine months of 2006 from $1,967,000 in the first nine months of 2005. The increase in general and administrative expenses is attributable to $457,000 in administrative costs connected with the operation of FieldCentrix, $200,000 associated with the insurance retention of the class action lawsuit, $115,000 increase in executive compensation, $50,000 in outside consulting and $63,000 in taxes unrelated to income. As a percentage of revenues, general and administrative expenses increased to 20% from 12% in the first nine months of 2006.

Interest Income, Net

Net interest income increased $93,000 from $90,000 in the first nine months of 2005 to $183,000 in the first nine months of 2006. The increase resulted primarily from an increase in the amount of investments as well as higher interest rates paid on the Company’s portfolio of invested funds.

International Operations

Total revenue from the Company’s international operations decreased by $4,893,000, or 57%, to $3,662,000 in the first nine months of 2006 from $8,555,000 in the first nine months in 2005. International operations generated a net loss of $1,064,000 for the first nine months ended September 30, 2006 compared to income of $1,735,000 in the same period in 2005. The principal cause of the decline in revenue and income was one large license sale in 2005 that accounted for 56% of the Company’s license revenue.

Liquidity and Capital Resources

Net cash used in operating activities was $2,638,000 for the nine months ended September 30, 2006 compared to net cash provided by operating activities of $4,552,000 for the nine months ended September 30, 2005, a change of $7,190,000. The largest component accounting for the change in cash used was a $6,188,000 change from net income of $1,918,000 earned during the first nine months of 2005 compared to a loss of $4,270,000 in the first nine months of 2006. In addition, accounts receivable increased by $955,000 in 2006 compared to a decrease of $666,000 in 2005. Accounts payable decreased by $77,000 in 2006 compared to an increase of $810,000 in 2005. Partially offsetting the use of cash is an increase of $705,000 in depreciation and amortization in 2006, resulting primarily from the additional depreciable assets acquired from FieldCentrix, $233,000 in non-cash compensation expense related to accounting for the cost of stock options and an increase of $483,000 in deferred revenues compared to a decrease of $189,000 in 2005.

The Company used $2,378,000 for investing activities in the first nine months of 2006 compared to using $348,000 in the first nine months of 2005. The principal reason for the increase is $1,313,000 of increased capitalized software development costs, $133,000 in additional goodwill resulting from contingent payments associated with the acquisition of FieldCentrix as well as $661,000 of cash received last year as part of the FieldCentrix acquisition.

The Company generated $19,000 of cash from financing activities during the nine months ended September 30, 2006 compared to $34,000 for the same period in 2005 both resulting in the exercise of stock options during the respective periods.

At September 30, 2006, the Company had a working capital ratio of .97:1, with cash, cash equivalents and restricted cash of $4,586,000. The Company believes that it has adequate cash resources to make the investments necessary to maintain or improve its current position and to sustain its continuing operations for the next twelve months. 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 anticipate that its operations or financial condition will be affected materially by inflation.

Variability of Quarterly Results and Potential Risks Inherent in the Business

The Company’s operations are subject to a number of risks, which are described in more detail in the Company’s prior SEC filings, including in its annual report on Form 10-K for fiscal year ended December 31, 2005 and 2006. Risks which are peculiar to the Company on a quarterly basis, and which may vary from quarter to quarter, include but are not limited to the following:

The Company’s quarterly operating results have in the past varied and may in the future vary significantly depending on factors such as the size, timing and recognition of revenue from significant orders, the timing of new product releases and product enhancements, and market acceptance of these new releases and enhancements, increases in operating expenses, and seasonality of its business.

The market price of the Company’s common stock could be subject to significant fluctuations in response to, and may be adversely affected by, variations in quarterly operating results, changes in earnings estimates by analysts, developments in the software industry, adverse earnings or other financial announcements of the Company’s customers and general stock market conditions, as well as other factors.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the Company’s financial position due to adverse changes in financial market prices and rates. The Company’s market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. The Company does not hold or issue financial instruments for trading purposes.

Interest Rate Risk. The Company’s exposure to market risk for changes in interest rates relate primarily to the Company’s investment portfolio. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of September 30, 2006, the Company’s investments consisted of U.S. government commercial paper. The Company does not expect any material loss with respect to its investment portfolio. In addition, the Company does not believe that a 10% change in interest rates would have a significant effect on its interest income.

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. For the three month period ending September 30, 2006, approximately 18% of the Company’s overall revenue resulted from sales to customers outside the United States. A 10% change in the value of the U.S. dollar relative to each of the currencies of the Company’s non-U.S.-generated sales would not have resulted in a material change to its results of operations. The Company does not expect any material loss with respect to foreign currency risk.

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such phrase is defined under Rule 13Aa-15(e) promulgated under the Securities and Exchange Act of 1934, related to the Company’s reporting and disclosure obligations as of September 30, 2006, which is the end of the period covered by this Quarterly Report on Form 10-Q/A. In connection with the original filing of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, the Chief Executive Officer and Chief Financial Officer had concluded that the Company’s disclosure controls and procedures as of September 30, 2006 were effective. Following the original filing of Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, the Company determined that its consolidated financial statements for the periods included therein should be restated and therefore should not be relied upon. In light of the restatement process, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has reevaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2006. Based on this reevaluation and following the identification of the “material weaknesses” in the Company’s internal control over financial reporting described below, the Company’s Chief Executive Officer and

Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2006 at the reasonable assurance level.

Except as noted below, there have been no significant changes in the Company’s internal controls over financial reporting during the fiscal quarter ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, its internal controls over reporting.

Management has concluded that the Company needed to adjust certain internal controls to ensure that accounting for capitalized software development costs was correctly applied pursuant to generally accepted accounting principles. Specifically, the Company had overcapitalized software development costs and restated its financial results in April 2006 for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. Management has determined that this process did not constitute a material weakness in internal controls over financial reporting as of December 30, 2005.

Management has revised the Company’s internal reporting policies and procedures in order to meet the standard of capitalized software development cost under FAS No. 86 by expanding the Company’s internal reporting procedures. By implementing these internal control improvements, management has refined the reporting process for the first quarter of 2006.

Restatement

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

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

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

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Purported Shareholder Class Action and Derivative Lawsuit

On and shortly after April 6, 2006, certain purported shareholder class action and derivative lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania against the Company and certain of its directors and officers. The lawsuits, alleging that the Company and certain of its officers and directors violated federal securities laws and state laws, relate to the company’s March 31, 2006 announcement of the accounting restatement for overcapitalized software development costs during the first two quarters of 2005 and undercapitalized software development costs during the third quarter of 2005. Pursuant to a Stipulation and Order of the Court entered July 12, 2006, the putative class actions were consolidated, certain persons were appointed as lead plaintiffs, and a consolidated amended complaint was filed on September 11, 2006. The defendants filed a motion to dismiss the consolidated amended complaint on October 26, 2006, and the Court will decide this motion once briefing has been completed. On September 14, 2006, the Court consolidated the putative derivative actions, appointed certain persons to serve as co-lead plaintiffs, and ordered co-lead plaintiffs to file a consolidated amended derivative complaint within thirty (30) days after a decision is rendered on defendants’ motion to dismiss the consolidated class action.

The Company believes these lawsuits are without merit and intends to defend them vigorously

Item 1A. Risk Factors

In addition to the other information set forth in this report, including the risk factors set forth below, you should carefully consider the factors discussed in Part 1, “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Company’s business, financial condition or future results. The risks described in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 are not the only risks facing the Company. Additional risks and uncertainties no currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

We are subject to a pending civil litigation action and which, if decided against us or as a result of settlement, could require us to pay substantial judgments, settlements, fines or other penalties, and we cannot predict the timing of developments in this litigation.

The Company is currently subject to pending civil litigation, which may become time consuming, expensive and distracting from the conduct of the Company’s daily business. The Company is unable at this time to estimate what its ultimate liability in this matter may be, and it is possible that it will be required to pay substantial judgments, settlements, fines or other penalties and incur expenses that could have a material adverse effect on the Company’s business, results of operations and/or financial condition, and such effects could be very significant. Although the Company maintains certain insurance coverage, a substantial amount of any such payments may not be covered by insurance. Expenses incurred in connection with these matters (which include substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors who may be parties to such actions) could adversely affect the Company’s cash position. The Company recorded a charge during the second quarter 2006 of $200,000 for pending litigation as it relates to the Company’s insurance deductible. The Company has not taken any additional reserves for any potential judgments, settlements, fines or other penalties that may arise from this litigation. The Company cannot predict the timing of developments in respect of this litigation. For additional information related to this litigation, see the “Legal Proceedings” section of this report on Form 10-Q.

Item 6. Exhibits and Reports on Form 8-K

(A)

Exhibits

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CEO and Principal Executive Officer

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CFO and Principal Financial and Chief Accounting Officer

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - President and Principal Executive Officer

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO and Principal Financial and Chief Accounting Officer

(B) Reports on Form 8-K

On August 11, 2006, the Company filed a report on Form 8-K with respect to the press release issued as of that date reporting the results for the six months ended June 30, 2006.

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 13th day of April 2007.

	ASTEA INTERNATIONAL INC.

By:	/s/Zack Bergreen
	Zack Bergreen
	Chief Executive Officer
	(Principal Executive Officer)

By:	/s/Fredric Etskovitz
	Fredric Etskovitz
	Chief Financial Officer
	(Principal Financial and Chief
	Accounting Officer)

Exhibit Descriptions

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CEO and Principal Executive Officer

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CFO and Principal Financial and Chief Accounting Officer

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - President and Principal Executive Officer

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO and Principal Financial and Chief Accounting Officer