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 Astea International Inc.'s ("Astea or the Company") Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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.

Astea Alliance, the Company's service management suite of solutions, supports the complete service lifecycle, from lead generation and project quotation to service and billing through asset retirement. It integrates and optimizes critical business processes for Contact Center, Field Service, Depot Repair, Logistics, Professional Services, and Sales and Marketing. Astea extends its application with portal, analytics and mobile solutions. Astea Alliance provides service organizations with technology-enabled business solutions that improve profitability, stabilize cash-flows, and reduce operational costs through automating and integrating key service, sales and marketing processes.

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 3, in the Company's 2007 Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The preparation of financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below; however, application of these accounting policies involves the exercise of judgments and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Revenue Recognition

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

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

Astea recognizes revenue on its software products in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, AICPA SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts; and Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") 104, Revenue Recognition.

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

Astea allocates revenue to each element in a multiple-element arrangement based on the elements' respective fair value, determined by the price charged when the element is sold separately. Specifically, Astea determines the fair value of the maintenance portion of the arrangement based on the price, at the date of sale, if sold separately, which is generally a fixed percentage of the software license selling price. The professional services portion of the

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

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

For the three months ended September 30, 2008 and 2007, the Company recognized $5,442,000 and $7,153,000, respectively, of revenue related to software license fees and service and maintenance. For the nine months ended September 30, 2008 and 2007, the Company recognized $17,939,000 and $23,547,000, respectively of revenue related to software license fees and service and maintenance. Included in revenue for the nine months ended September 30, 2008 and 2007 was $802,000 and $3,882,000, respectively, for which the Company's revenue recognition policy was met during this period.

Deferred Revenue

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

Accounts Receivable

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

Capitalized Software Research and Development Costs

The Company accounts for its internal software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company capitalizes software development costs subsequent to the establishment of technological feasibility through the product's availability for general release. Costs incurred prior to the

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 had occurred that indicate that the remaining useful life of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. The Company evaluates the recoverability of capitalized software based on the estimated future revenues of each product.

Goodwill

On September 21, 2005, the Company acquired the assets and certain liabilities of FieldCentrix, Inc. through its wholly-owned subsidiary, FC Acquisition Corp. Included in the allocation of the purchase price was goodwill valued at $1,100,000 at December 31, 2005. The Company tests goodwill for impairment annually during the first 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 more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. For the three months ended September 30, 2008, there was no change in goodwill.

Earnings Per Share

The Company follows SFAS 128 "Earnings Per Share" Under SFAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per share on the face of the statement of operations. Earnings per share are based on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Company's convertible preferred stock and exercise of options as if they were dilutive. In the calculation of basic earnings per share, weighted average numbers of shares outstanding are used as the denominator. The Company had a net loss available to the common shareholders for the three months ended September 30, 2008 and net income for the three months ended September 30, 2007. The Company had a net loss available to the common shareholders for the nine months ended September 30, 2008 and net income for the nine months ended September 30, 2007. (Loss) income per share is computed as follows:

                                                     Three Months                          Nine Months
                                                 Ended September 30,                   Ended September 30,
                                                2008              2007               2008               2007
Numerator:
Net (loss) income available to common
shareholders                               $     (976,000 )   $     192,000     $   (3,536,000 )   $    2,845,000

Denominator:
Weighted average shares used to compute
net (loss)
  income available to common
shareholders per
  common share-basic                            3,554,000         3,549,000          3,554,000          3,549,000
Effect of dilutive stock options                        -             2,000                  -             20,000

Weighted average shares used to compute
net (loss)
  income available to common
shareholders per
  common share-dilutive                         3,554,000         3,551,000          3,554,000          3,551,000

Basic net (loss) income per share to
common
  Shareholder                              $         (.27 )   $         .05     $        (0.99 )   $          .35

Dilutive net (loss) income per share to
common
  shareholder                              $         (.27 )   $         .05     $        (0.99 )   $          .35

All options outstanding for the three and nine months ended September 30, 2008 to purchase shares of common stock were excluded from the diluted loss per common share calculation as the inclusion of these options would have been antidilutive. For the three and nine months ended September 2007, the Company had net income. For the three months ended September 30, 2007 there were 1,906 net additional dilutive shares assumed to be converted at an average exercise price of $3.51 and for the nine months ended September 30, 2007 there were 9,797 net additional dilutive shares assumed to be converted at an average exercise price of $3.97.

Convertible Preferred Stock

On September 24, 2008 the Company sold 826,446 shares of Series-A Convertible Preferred Stock ("preferred stock") to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000. Dividends accrue daily on the preferred stock at an initial rate of 6% and shall be payable only when, as and if declared by the Company's Board of Directors, quarterly in arrears.

The preferred stock may be converted into common stock at the initial rate of one share of common for each share of preferred stock. The holder has the right during the first six months following issuance to convert up to 40% of the shares purchased, except in the event of a change in control of the Company, at which time there is no limit. After six months there is no limit on the number of shares that may be converted.

The Company has the right to redeem, subject to board approval, up to 60% of the shares of preferred stock at its option during the first six months after issuance at a price equal to 110% of the purchase price plus all accrued and unpaid dividends. The limitations on conversion and the redemption rights during this initial six-month period are not applicable in the event of certain change of control events. Commencing two years after issuance, the Company shall have certain rights to cause conversion of all of the shares of preferred stock then outstanding. Commencing four years after issuance, the Company may redeem, subject to board approval, all of the shares of preferred stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the preferred stock would be entitled to receive had the redeemed preferred stock been converted immediately prior to the redemption.

In accordance with relevant accounting pronouncements, the Company recorded the preferred stock on the Company's consolidated balance sheet within Stockholders' Equity. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 68, "Increasing Rate Preferred Stock," the preferred stock is recorded on the consolidated balance sheet at the amount of net proceeds received less an imputed dividend cost. The imputed dividend cost of $218,000 was the result of the preferred stock having a dividend rate during the first two years after its issuance (6%) that is lower than the rate that becomes fixed (10%) after the initial two year period. The imputed dividend cost of $218,000 will be amortized over the first two years from the date of issuance and is based upon the present value of the dividend discount using a 10% yield.

Results of Operations

Comparison of Three Months Ended September 30, 2008 and 2007

Revenues

Revenues decreased $1,711,000 or 24%, to $5,442,000 for the three months ended September 30, 2008 from $7,153,000 for the three months ended September 30, 2007. Software license fee revenues decreased $1,978,000, or 93%, from the same period last year. Services and maintenance fees for the three months ended September 30, 2008 amounted to $5,301,000, a 5% increase from the same quarter in 2007.

The Company's international operations contributed $1,598,000 of revenues in the third quarter of 2008, which is a 20% decrease compared to revenues generated during the third quarter of 2007. The Company's revenues from international operations amounted to 30% of the total revenue for the third quarter in 2008, compared to 28% of total revenues for the same quarter in 2007.

Services and maintenance revenues increased to $5,301,000 from $5,034,000 in the third quarter of 2007, an increase of 5%. Astea Alliance service and maintenance revenues increased by $518,000 or 15% compared to the third quarter of 2007. The increase resulted from increased demand for professional services in the U.S. and Asia Pacific. Service and maintenance revenue generated by FieldCentrix decreased by $188,000 or 14% from $1,352,000 to $1,164,000 during the same period in 2007. The decrease in revenue resulted from a decrease in both headcount as well as utilization in both implementations and pilot projects. In addition, DISPATCH-1 service and maintenance revenues decreased $63,000 to $81,000 from $144,000 in the prior year. The decline in service and maintenance revenue for DISPATCH-1 is expected as the Company discontinued development of DISPATCH-1 at the end of 1999.

Costs of Revenues

Cost of software license fees decreased 18% to $706,000 in the third quarter of 2008 from $861,000 in the third quarter of 2007. Included in the cost of software license fees are the fixed cost of capitalized software amortization, amortization of software acquired from FieldCentrix and any third party software embedded in the Company's software licenses sold to customers. The principal cause of the decrease in cost of revenues is lower third party costs due to a decline in license revenue. Partially offsetting the reduced third party software costs is a slight increase in the amortization of capitalized software development costs related to both Astea Alliance and the FieldCentrix software. Amortization of capitalized software development costs was $664,000 for the quarter ended September 30, 2008 compared to $650,000 for the same quarter in 2007. The software license gross margin percentage was (401%) in the third quarter of 2008 compared to 59% in the third quarter of 2007. The dramatic decline in license margin resulted primarily from the significant decrease in license revenues and the significant amount of amortization of capitalized software costs, which is not impacted by the volume of license sales.

Cost of services and maintenance decreased 1% to $3,100,000 in the third quarter of 2008 from $3,140,000 in the third quarter of 2007 The decrease in cost of service is due to a slight decrease in headcount compared to the same quarter in 2007. The services and maintenance gross margin percentage was 42% in the third quarter of 2008 compared to 38% in the third quarter of 2007. The increase in services and maintenance gross margin was primarily due to the increase in billable projects and decrease in expense.

Product development expense decreased 9% to $746,000 in the third quarter of 2008 from $823,000 in the third quarter of 2007. The decrease results from a decrease in headcount of 14% from the same quarter in 2007. The Company excludes the capitalization of software costs from product development. Development costs of $757,000 were capitalized in the third quarter of 2008 compared to $527,000 during the same period in 2007. The increase in capitalized software development costs results from the completion of a new FieldCentrix software release at the end of the quarter and work on a new version of Astea Alliance. Gross product development expense was $1,503,000 in the quarter which is 11% more than the same quarter in 2007. The principal reason for the cost increase is due to the unfavorable exchange rate increase of the Israeli shekel compared to the U.S. Dollar. Israel is the home of the Astea Alliance development staff. Product development expense as a percentage of revenues increased slightly to 14% in the third quarter of 2008 compared with 12% in the third quarter of 2007. The increase in costs relative to revenues is due to the overall decrease in revenues compared to the same quarter in 2007.

Sales and Marketing

Sales and marketing expense decreased 25% to $1,029,000 in the third quarter of 2008 from $1,368,000 in the third quarter of 2007. The decrease in sales and marketing is attributable to a reduction in sales commission due to lower license sales, and costs incurred in 2007 that were not repeated in 2008, consisting of a customer dispute, and higher

General and Administrative

General and administrative expenses increased 6% to $839,000 during the third quarter of 2008 from $791,000 in the third quarter of 2007. The increase in general and administrative expenses is principally attributable to costs associated with outside consultants. As a percentage of revenue, general and administrative expenses increased to 15% in the third quarter of 2008 from 11% in the third quarter of 2007.

Interest Income, Net

Net interest income decreased $9,000 to $13,000 in the third quarter of 2008 from the third quarter of 2007. The decrease resulted primarily from a decline in interest rates.

Income Tax Expense

The Company recorded a provision of $11,000 for the three months ended September 30, 2008 compared to $0 for the same period in 2007 for income taxes which resulted from a difference between an indefinite-lived asset, goodwill, which is amortized for tax, but not amortized for financial purposes.

International Operations

Total revenue from the Company's international operations decreased by 20% during the third quarter of 2008 to $1,598,000 compared to $1,995,000 for the third quarter of 2007. The decrease in revenue from international operations was primarily attributable to a decrease in license revenue in Europe. International operations generated a net loss of $167,000 for the third quarter ended September 30, 2008 compared to a net profit of $345,000 in the same period in 2007.

Net (Loss) Income

Net loss for the three months ended September 30, 2008 was $976,000 compared to net income of $192,000 for the three months ended September 30, 2007. The decline results from a decrease in revenues of $1,711,000 partially offset by a decrease in expenses of $563,000 during the three months ended September 30, 2008 compared to the same period in 2007.

Comparison of Nine Months Ended September 30, 2008 and 2007

Revenues

For the nine months ended September 30, 2008, the Company recognized $802,000 in licenses and service and maintenance fees from contracts that previously did not meet the Company's revenue recognition policy. For the nine months ended September 30, 2007, the Company recognized $3,882,000 in license and service and maintenance revenues from contracts that previously did not meet the Company's revenue recognition policy. All costs related to generating these revenues were expensed in the periods in which they were incurred. The results from operations for the periods include all of the revenue discussed, but no related costs. Therefore, the gross profit on revenue in these periods may appear higher than other periods. Such operating results are not typical for the Company and are not expect to recur.

Revenues decreased $5,608,000, or 24%, to $17,939,000 for the nine months ended September 30, 2008 from $23,547,000 for the nine months ended September 30, 2007. The decrease in revenues is principally the net result of recognizing . . .