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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 1999.

[_] 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: 0-26392

LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 11-2920559
(State of Incorporation) (I.R.S. Employer Identification No.)

8000 Regency Parkway, Cary, North Carolina 27511
(Address of principal executive offices, including Zip Code)

(919) 380-5000
(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value

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

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

Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 2000 was approximately $296,742,688. There were
13,364,222 shares of Common Stock outstanding as of March 20, 2000.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.

Exhibit Index appears on Page E-1.

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LEVEL 8 SYSTEMS, INC.

Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999

Table of Contents
PART I

Item Page
Number Number
------ ------

1. Business...................................................... 1

2. Properties.................................................... 14

3. Legal Proceedings............................................. 14

4. Submission of Matters to a Vote of Security Holders........... 15

PART II

Market for Registrant's Common Stock and Related Shareholder
5. Matters....................................................... 16

6. Selected Financial Data....................................... 16

Management's Discussion and Analysis of Financial Condition
7. and Results of Operations..................................... 17

7A. Quantitative and Qualitative Disclosures About Market Risk.... 25

8. Financial Statements and Supplementary Data................... 26

Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure...................................... 26

PART III

10. Directors and Executive Officers of the Registrant............ 27

11. Executive Compensation........................................ 27

Security Ownership of Certain Beneficial Owners and
12. Management.................................................... 27

13. Certain Relationships and Related Transactions................ 27

PART IV

Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K........................................................... 28

SIGNATURES............................................................ 34

INDEX TO FINANCIAL STATEMENTS......................................... F-1

INDEX TO EXHIBITS..................................................... E-1

PART I

Item 1. Business.

Overview

Level 8's software products and enabling services address three of the most
pervasive eBusiness challenges facing global 5000-sized organizations today:

.Using the Internet as the primary communications medium ("eBusiness")

.Using the Internet to enable buying and selling ("eCommerce")

.Optimizing an enterprise's value through the rapid adoption of digital
technology

These eBusiness challenges are driven by intensifying competition in the
global marketplace, which is forcing companies to make better and faster
business decisions and find new ways to attract and retain customers. To
accomplish this, a company must have access to enterprise-wide views of
business information and processes, and mechanisms for extending their
business applications to reach customers and business partners via the
Internet. Providing these capabilities requires an integration of existing
computer applications and platforms, enabling them to communicate with one
another and the Internet. However, the evolution of computing from mainframes
to client/server systems and then to the Internet and intranets has resulted
in these applications running on a diverse and typically incompatible mix of
new and legacy computing platforms.

Level 8 specializes in delivering software solutions that help companies
integrate new and existing computer applications and extend these applications
to the Internet to support eBusiness and eCommerce. This specialization is
called enterprise application integration or "EAI." Level 8's products and
services are designed to enable organizations to address business process
automation, application integration and application engineering in a simple
and cost effective way. Level 8 provides customers with software to link their
critical business applications internally across the enterprise and externally
directly with strategic business-to-business partners and business-to-business
consumers via the Internet.

Level 8 offers a suite of products for eBusiness and eCommerce under the
Geneva brand name. The Geneva Integration Suite has six core components which,
together, the Company believes provide the most complete suite of integration
software products available for eBusiness integration. These components
include Geneva Enterprise Integrator (formerly Enterprise Integration
Template), Geneva Business Process Automator (formerly Business Process
Template), Geneva Integration Broker (formerly Geneva Integrator), Geneva
Message Queuing, Geneva AppBuilder, and Geneva XIPC (formerly XIPC).

In addition to these products, Level 8 also provides technical support,
training and consulting services as part of its commitment to providing its
customers industry-leading enterprise application integration solutions. Level
8's worldwide consulting team has in-depth experience in developing successful
enterprise-class solutions as well as valuable insight into the business
information needs of customers in the Global 5000. Level 8 offers consulting
services around its products for eBusiness and eCommerce enablement. These
services include project management, application and platform integration,
application design and development, and application renewal along with
expertise in a wide variety of development environments and programming
languages.

In April 1999, the Company completed its acquisition of Seer Technologies,
Inc. ("Seer"). In connection with the acquisition of Seer, Level 8 acquired
significant intellectual property assets, including Geneva AppBuilder
(formerly Seer *HPS).

In December 1999, the Company acquired Template Software, Inc. ("Template").
Level 8's management team identified Template as a provider of technologies
that would enable Level 8 to be one of the first to market with a comprehensive
product portfolio representing the next generation of EAI solutions for
eBusiness. In connection with the acquisition of Template, Level 8 acquired
significant intellectual property assets, including Geneva Enterprise
Integrator and Geneva Business Process Automator. These products, together with
Level 8's existing software portfolio, provide customers a comprehensive suite
of eBusiness integration software.

To date, Level 8's products and services have been utilized by companies in a
wide variety of industries including financial services, insurance, retail,
manufacturing, telecommunications, transportation, and government. Level 8's
customer base includes major corporations around the world such as ABN AMRO
Information Technology Services Company, Action Performance Companies, Allstate
Insurance Company, AT&T Corp., Bell Atlantic Network Services, Inc., Citibank,
N.A., Borders Group, Inc., Credit Suisse, CVS Corporation, Drugstore.com, Inc.,
Telecom Italia S.p.A., Lockheed Martin Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Michelin North America, Inc., Montgomery Ward &
Co., Incorporated, National Association of Securities Dealers, Inc., Prudential
Insurance Company of America, Sikorsky Aircraft Corporation, Sprint
Communications Company LP, Sunrider International, EDB 4tel AS, and WinStar
Telecommunications, Inc.

Level 8 was incorporated in New York in 1988, and re-incorporated in Delaware
in 1999. The principal executive offices of Level 8 are located at 8000 Regency
Parkway, Cary, North Carolina, 27511, telephone number (919) 380-5000.

Industry Background

A significant challenge facing global 5000-sized organizations today is the
integration and management of critical business applications which run on
disparate or otherwise incompatible computer systems. Business and competitive
pressures are pushing companies to move towards an eBusiness model as quickly
as possible in order to remain competitive and viable in an increasingly
online, information-driven economy. eBusiness systems involve a combination of
consumer-oriented or business-to-business eCommerce, internal and external data
exchange, online customer service, customer relationship management, and value
chain integration processes. Inter-operability and information exchange between
new and legacy systems within the extended enterprise are key components for a
successful eBusiness strategy, as is the ability to link those applications and
processes in extremely secure and highly reliable ways. Organizations must also
ensure that large volumes of eBusiness transactions can be processed in
Internet time and incorporate the entire extended, integrated enterprise
processing environment into a reliable, scalable, robust, and manageable
infrastructure. The eBusiness model and the competitive need for rapid access
to business-critical information from across the enterprise are together
driving an increasing demand for Internet-enabled information systems that can
also offer enterprise-wide views of a company's business information. Further,
information systems departments of global 5000-sized companies are compelled by
both economic necessity and internal mandates to find ways to leverage their
existing investments in information technology.

Enterprise application integration solutions, including those developed by
Level 8, are designed to provide these capabilities through an open,
enterprise-wide infrastructure that can accomplish the complete integration of
a company's entire computing systems environment, including technologies
enabling eBusiness and eCommerce.

There is currently a movement toward "virtual enterprises" that must link
application systems from different companies in the supply chain. Additionally,
e-Commerce and customer service on the Web require communication between Web-
based, front-end systems (e.g., payment systems) and back-end systems, for
example inventory, accounts receivable, and invoicing systems.

Key factors driving the current need for enterprise application integration
solutions in the eBusiness integration software market include:

. The current computer systems of most companies were developed in an era
when systems tended to be self-contained and were not developed with the
Internet in mind. The ability of the systems to communicate with other
systems was not emphasized. As a result, many current systems are not
designed to accommodate communications with different systems. The
ability to integrate the Internet and Web-based technologies with a
company's core business systems provides business value by adding new
revenue models (eCommerce) and improving customer service.

. Web-based customer self-service is becoming the standard for forging
more meaningful customer relationships.

. Integrating with company business partners and supply chain partners is
now a key differentiator for business inventory costs and increases
profitability.

. Many global 5000-sized companies have made significant investments in
ensuring that their existing computer systems will function properly in
the Year 2000 and beyond. The size of the investments made by these
companies addressing Year 2000 problems is forcing information systems
departments to find ways to leverage such investments by extending the
life of current systems. By providing Web-based access to core business
systems, companies can leverage these investments.

. Many Global 5000-sized companies addressed computer system development
problems by adopting new technologies as they have emerged. This
approach has resulted in increasingly diverse computing environments
that mix a variety of hardware platforms, operating systems and
programming languages.

. Global 5000-sized companies have dramatically increased their use of the
Internet and intranets both to expedite internal communication and to
support business-to-business and business-to-consumer transactions. This
increased use has created strong demand for an entirely new class of
enterprise-wide computer applications. Meeting this demand in a cost
efficient manner requires modernizing existing systems to enable them to
support eBusiness and eCommerce applications, as well as developing new
applications.

. As a result of mergers and acquisitions, the computer systems of many
companies have become considerably more complex at an enterprise-wide
level. The increased complexity results from the fact that the newly-
acquired computer systems are rarely compatible with the existing
computer systems. Furthermore, there are often redundancies between the
respective systems that make integration more difficult.

The Level 8 Solution

Level 8 is a leading provider of eBusiness integration software for
integrating enterprise applications both within the enterprise and between
business-to-business partners. Different computer systems and the applications
developed for them vary widely in the ways in which they send, receive, view
and process information. As a result, diverse applications running on
different systems cannot work together because information cannot generally be
exchanged between them.

Level 8's products are designed to enable the sharing of information between
disparate systems by automatically transforming the data from one system into
the formats and representations that can be used by other application systems.
This means organizations can link legacy systems to other legacy systems, to
new systems, and also to the Web. In this way the Company's products can
facilitate the delivery of timely enterprise-wide views of critical business
information while substantially reducing the need for complex and costly
manual programming and ongoing software program modifications.

Level 8's software is flexible enough to link together a wide array of
applications operating on disparate systems, and can scale to meet the
challenges of growth and technological development in even the most

heterogeneous computing environments. Most significantly, Level's products
allow enterprises to utilize their core system functions for new uses
including Web access. This allows for the full support of eBusiness and
eCommerce and closer relationships with business-to-business partners and
suppliers.

Level 8's solution to solving business integration challenges provides the
following key benefits:

Supports Rapid Implementation of eBusiness Solutions. Level 8's Geneva
Integration Suite enables rapid eBusiness implementations, reducing
installation and integration costs, including the extension of ERP
packages, and provides an open platform for integrating new or acquired
applications, systems and architectures.

Links Existing Operational Systems to The Internet. The Geneva Integration
Suite can transmit communications via the Internet as well as between
applications. It can automatically collect messages or packets of
information and processing instructions, from existing legacy systems and
transform them into forms that can be exchanged via the Internet with other
applications running on diverse platforms, and vice versa. These powerful
features allow organizations to Web-enable existing application systems,
expanding their functionality and extending their life cycles by opening
them up for intranet and Internet-based eBusiness and eCommerce.

Preserves Existing Information Technology Investment. Traditionally, larger
organizations have relied on mainframe computers to run their core business
programs. To date, there has been a tremendous investment in these
mainframe legacy systems. More recently, there has been large investments
made in other computing platforms (e.g., midrange, client/server, LANS and
Web), which are not readily compatible with each other or with legacy
mainframe systems. Linking together newer computing platforms and
applications to existing systems helps preserve and increase the return on
the investments made by organizations in their information technology
systems.

Additionally, by linking the flexibility and innovations available on newer
computing platforms and applications to the rich databases and functions
that are typically maintained on the larger mainframe computers,
organizations can utilize this information in new ways. The Geneva
Integration Suite helps organizations bridge the gap between legacy systems
and newer platforms and the result is the extension of existing
capabilities to modern architectures, such as the Web, thereby preserving
the existing information technology investment.

Improves Efficiency of Existing Enterprise Infrastructure. The high
throughput capability of the Geneva Integration Suite of products enables
organizations to provide just-in-time data delivery across a wide variety
of systems and among people in a unified business process. By removing the
bottlenecks to the integration of people, process and data, Level 8's
software products support numerous business critical computing operations
such as business process automation, data replication, data warehousing and
transaction-based processing.

Supports Broad Range of Applications, Platforms and Standards. The IT
departments of larger enterprises need solutions to integrate a broad array
of applications and platforms using a wide variety of industry standards to
ensure ease of implementation and integration into existing environments.
Level 8's products provide enterprise application integration solutions
that support common industry standards and can handle a wide array of
disparate applications, platforms and data types. The Geneva Integration
Suite can be used to link custom or packaged applications together
regardless of the tools or programming language used. The Geneva
Integration Suite ties together applications running on a variety of
popular operating systems including; Windows NT, UNIX, Solaris, MVS, VMS,
OS/400 and many other operating systems that run on hardware platforms from
vendors such as Hewlett Packard, Sun, Compaq/Digital, Dell and IBM.

Ease of Implementation and Enhanced Information Technology
Productivity. The Geneva Integration Suite allows IT departments to create
comprehensive data transformation and information exchange solutions
without the need for custom coding. Level 8's products provide pre-built
adapters for a wide variety of different systems that are pre-programmed
for transforming data into the format required by that system and
transporting it using the appropriate transport mechanism. This greatly
simplifies and speeds

development of enterprise application integration solutions. The Geneva
Integration Suite allows the IT department to instantly integrate new and
existing systems with little or no customization required.

The Level 8 Strategy

Level 8's goal is to be a recognized global leader in the growing market for
enterprise application integration solutions for eBusiness and eCommerce. The
following are key elements of the Level 8 strategy:

The Geneva Integration Suite. No single product, technology or paradigm
answers all of a large organization's integration challenges. Level 8's
eBusiness integration software portfolio provides the most comprehensive
suite of integration software products available for eBusiness integration.
Level 8 offers a suite of integration products under the Geneva brand name.
The Geneva Integration Suite is a set of eBusiness integration software
products that supports business process automation, application
integration, enterprise messaging and application engineering. The
Company's strategy for evolving the Geneva Integration Suite is threefold:
1) make substantial investments in research and development focusing on
integrating the components of the suite, 2) add market-driven functionality
based on customer requirements and feedback, and 3) add complimentary
products and technologies via strategic acquisitions.

Expand Worldwide Sales and Marketing Capability. Level 8 is making
considerable investments in worldwide sales and marketing in an attempt to
acquire market share in a high growth market. Specifically, the Company is
increasing its sales and marketing personnel and programs around the globe.
Worldwide sales personnel grew approximately 230% during the third and
fourth quarter of 1999, and Worldwide marketing personnel grew 200% in the
same period. The sales team includes account executives, inside sales (or
telephone sales) personnel and sales engineers. Level 8 also intends to
continue to expand its global sales coverage through additional direct
sales offices and the expansion of indirect channels. To support indirect
sales Level 8 has already established joint marketing relationships with
original equipment manufacturers, independent software vendors and value
added resellers, including IBM, Microsoft, Hewlett-Packard, Unisys,
Cambridge Technology Partners, Clarus Corporation, Catalyst, and Crystal
Solutions.

Maintain Global Presence. Level 8's strategy for sales and marketing is to
become recognized among IT professionals as a global provider of eBusiness
integration software. More than 50 percent of Fortune Magazine's 1999
Global 500 were headquartered outside of the US. In recognition of this,
Level 8 continues to support its international sales and marketing efforts.
Level 8 had a strong international presence during 1999, accounting for 67%
of revenue.

Leverage Strategic Partners. Level 8 intends to expand sales through both
direct and indirect sales channels. As part of this strategy, Level 8
continues to work on strengthening and growing its relationships with
Microsoft, IBM, Hewlett-Packard and other strategic partners. Level 8's
strategy is to use the market visibility of key customers to engage
strategic partners to then leverage their lead generation capacity to
create new sales opportunities for Level 8's eBusiness integration
software.

Since 1996, Level 8 has been working with Microsoft to meet the
interoperability needs of enterprise developers. Microsoft is committed to
ensuring that the Windows platform works with other key platforms and
systems in the heterogeneous computing environment of its customers. To
that end, Microsoft has included a software product developed by Level 8 on
its Windows 2000 CD. By including the Level 8 Geneva Message Queuing
connector, Microsoft has made it easier for Windows developers to create
cross-platform applications.

Level 8 has also aggressively pursued original equipment manufacturer
("OEM") partners who wish to embed Level 8 eBusiness integration software
products into their own products or solutions. These OEM partners include
Clarus Corporation, which embedded Geneva Integration Broker into the
Company's eProcurement application; Catalyst, which embedded Geneva Message
Queuing into is warehouse management application; and Crystal Solutions,
which is using the Geneva products in their eBusiness solutions.

Expand into New Markets. In the past, Level 8 has served many customers
in the highly demanding financial services, insurance and
telecommunications markets. Level 8's strategy is to apply its experience
with these customers to other vertical markets. Specifically, Level 8
intends to further penetrate the retail and transportation sectors as well
as providing Internet integration solutions for any company trying to
establish a presence in the emerging eCommerce sector. Level 8 plans to
accomplish this objective by redirecting its sales and marketing efforts
worldwide.

Products

Geneva Integration Suite

Level 8 offers a suite of products under the Geneva brand name. These
products, ranging from business process automation, application integration,
enterprise messaging and application engineering, are all components of the
Geneva Integration Suite. The Geneva Integration Suite makes information
systems work together seamlessly for a totally connected, eBusiness-enabled
extended enterprise.

The primary use of Geneva technology is to provide an end-to-end
infrastructure for eBusiness, including:

. Integrating Web and legacy applications

. Real-time access to enterprise information over the Internet

. Linking business partners in an integrated supply chain across the
Internet

The primary benefits of the Geneva technology are:

. Acceleration of the creation and deployment of new eBusiness systems

. The leveraging of existing information systems when building new
eBusiness systems

. Robust, transactional infrastructures for eBusiness

Geneva Products

The Geneva Integration Suite has six core components which provide the most
complete suite of integration software products available for eBusiness
integration. These components include Geneva Enterprise Integrator (formerly
Enterprise Integration Template), Geneva Business Process Automator (formerly
Business Process Template), Geneva Integration Broker (formerly Geneva
Integrator), Geneva Message Queuing, Geneva AppBuilder and Geneva XIPC
(formerly XIPC).

Geneva Enterprise Integrator. Geneva Enterprise Integrator is an
integration tool that provides unified, real-time views of enterprise
business information for eBusiness applications. Real-time integration of
back-end enterprise business systems with Web-based applications is an
essential component in meeting rising customer expectations of eCommerce,
Web-based customer service, and enterprise portal applications. Geneva
Enterprise Integrator also leverages a high performance, memory-based
information cache to provide an infrastructure that will support the
performance demands of Internet-style computing.

Geneva Business Process Automator. Geneva Business Process Automator is a
product designed to work with Geneva Enterprise Integrator for automating
the many business processes that an organization uses to run its
operations. Business process automation enables the automation of
information workflows, designed by business experts, and spanning front and
back office systems. Business process automation provides business analysts
with a set of easy-to-use tools for defining, changing, and refining the
exchange of information and the workflow for a domain-specific business
process.

Geneva Integration Broker. Geneva Integration Broker is a transport
independent message broker that enables an organization to rapidly
integrate diverse business systems regardless of platform, transport,
format or protocol. The key feature of Geneva Integration Broker is its
support for XML and other standards for open data exchange on the Internet.
The product provides a robust platform for building eBusiness applications
that integrate with existing back-office systems. Geneva Integration
Broker's support for open data exchange and secure Internet transports make
it an excellent platform for building Internet-based business-to-business
solutions.

Geneva Message Queuing. Geneva Message Queuing is a reliable enterprise
connectivity product for Microsoft and non-Microsoft applications. The
primary use is for guaranteed, transactional, once and only once
connectivity of Windows-based Web applications to back-office information
resources like mainframes and other legacy systems. Microsoft's Web
application platform, called Windows DNA, is one of the dominant
architectural models for building eBusiness applications. Geneva Message
Queuing provides native interoperability essential for deploying Windows
DNA applications in a heterogeneous environment.

Geneva XIPC. Geneva XIPC (formerly XIPC) provides similar, guaranteed
delivery of information between applications. The difference being that
where Geneva Message Queuing is based around a Microsoft standard, Geneva
XIPC is for use with Linux and other brands of UNIX servers. The Linux
platform was the largest growing server platform during 1999. The
UNIX/Linux family of servers, from companies like Sun Microsystems, IBM and
Hewlett Packard, are the dominant Web Server and Web Application Server
platforms. Geneva XIPC enables Linux and UNIX Web and Applications Servers
to communicate reliably.

Geneva AppBuilder. Geneva AppBuilder is a set of application engineering
tools that assists customers in developing, adapting and managing
enterprise-wide computer applications for the Internet/intranets and
client/server networks. The product is designed to enable users to define
in a high level, simplified language tasks and operations the users would
like an application to perform. Users can then simply "push a button" and
Geneva AppBuilder automatically generates the necessary software
programming to perform the tasks and operations defined. This significantly
accelerates the development and deployment of highly complex, large-scale,
custom enterprise applications and greatly enhances the productivity of
programming resources.

Future Integration and Product Development

Level 8 intends to enhance the Geneva suite of products to meet marketplace
needs as they evolve. Level 8 is making substantial investments into all areas
of research and development to meet the demands of current and future markets.
Tighter integration between the Company's products, including the products
originating as a result of the Seer and Template acquisitions, is currently
the Company's key focus.

The Company feels that the strength of the Company's products is its
diversity. The Company believes that by creating native integration between
the different components of the Geneva Integration Suite, Level 8 will be able
to provide more comprehensive solutions for its customers, such as the use of
Geneva XIPC to enhance the functionality of Geneva Message Queuing Version
2.0.

Similarly, the Company's two primary application integration technologies,
Geneva Integration Broker and Geneva Enterprise Integrator, include a base
level of integration. Native robust integration between the two products will
provide the ability for customers to leverage the best attributes of both
products.

Other areas of product enhancement include monitoring the emerging Internet
standards such as XML and Java to provide the proper level of support and
integration for all our products.

Services

Level 8 provides a full spectrum of technical support, training and
consulting services as part of its commitment to providing its customers
industry-leading enterprise application integration solutions. Level 8

believes its worldwide consulting team has in-depth experience in developing
successful enterprise-class solutions as well as valuable insight into the
business information needs of Global 5000 companies.

Maintenance and Support

Level 8 offers customers varying levels of technical support tailored to
their needs, including periodic software upgrades, telephone support and
twenty-four hour, seven days a week access to support-related information via
the Internet.

Training Services

Level 8's training organization offers a full curriculum of courses and labs
designed to help customers become proficient in the use of Level 8's products
and related technology as well as enabling customers to take full advantage of
Level 8's field-tested best practices and methodologies.

Consulting Services

Level 8 offers consulting services around its product offerings in project
management, applications and platform integration, application design and
development, application renewal and eBusiness and eCommerce enablement, along
with expertise in a wide variety of development environments and programming
languages. Level 8 also has a very active partner program for recruiting
leading IT consulting and system integration firms to provide services for the
design, implementation and deployment of Level 8 eBusiness solutions. Level
8's consulting organization supports third party consultants by providing
architectural and enabling services.

Government Contracts

As a result of the acquisition of Template, the Company provides certain
technical services to federal government agencies under certain contracts,
some of which are classified. The nature of this work is technical design and
software development which was historically performed by Template since 1977.
On a proforma basis, including Template's operations approximately 13% and 19%
of total revenues in fiscal years 1998 and 1999, respectively, were derived
from contracts with the federal government.

Government contracts, by their terms, generally can be terminated at any
time by the government, without cause, for the convenience of the government.
If a government contract is so terminated, the Company would be entitled to
receive compensation for the services provided or costs incurred at the time
of termination and a negotiated amount of the profit on the contract to the
date of termination. In addition, all government contracts require compliance
with various contract provisions and procurement regulations. The adoption of
new or modified procurement regulations could adversely affect the Company or
increase its costs of competing for or performing government contracts. Any
violation (intentional or otherwise) of these regulations could result in the
termination of such government contracts, imposition of fines, and/or
debarment from award of additional government contracts.

Customers

Level 8's products and services are currently used by thousands of software
developers. In addition, hundreds of enterprise-wide applications built and
integrated through Level 8's products are used daily by over a million end
users worldwide. Level 8's customer base includes major corporations around
the world such as ABN AMRO Information Technology Services Company, Action
Performance Companies, Allstate Insurance Company, AT&T Corp., Bell Atlantic
Network Services, Inc., Citibank, N.A., Borders Group, Inc., Credit Suisse,
CVS Corporation, Drugstore.com, Inc., Telecom Italia S.p.A., Lockheed Martin
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Michelin
North America, Inc., Montgomery Ward & Co., Incorporated, National Association
of Securities Dealers, Inc., Prudential Insurance Company of America, Sikorsky
Aircraft Corporation, Sprint Communications Company LP, Sunrider
International, EDB 4tel AS, and WinStar

Telecommunications, Inc. Industries that are significantly represented in
Level 8's customer base include: financial services, insurance, retail,
manufacturing, telecommunications, transportation, and government. ABN AMRO
was Level 8's only customer accounting for more than 10% of 1997 and 1998
historical operating revenue. No one customer accounted for more than 10% of
operating revenues in 1999.

Level 8 seeks strong relationships with its customers in order to gain an
in-depth understanding of the business and technology challenges they face.
Level 8 has established an international customer advisory board that will
follow the Geneva Integration Suite. It will be used to present new
information, address customer requirements and concerns, and provide a
constructive and open forum for interaction. The volunteer members of the
customer advisory board will represent Level 8's global customer base and act
as a sounding board for new ideas and initiatives, as well as provide a means
for information flow and feedback regarding Level 8's products and services.

In many areas around the world, local customers also hold periodic regional
user group meetings that are supported and encouraged by Level 8.
Additionally, Level 8 receives a great deal of feedback through its consulting
services and technical support organization regarding the effectiveness of
Level 8's products in meeting customer needs.

Sales and Marketing

Sales

To reach a broad potential customer base, Level 8 has pursued multiple
distribution channels, including a direct sales force, as well as third party
relationships with distributors, value-added resellers, systems integrators
and IT consulting firms.

The Company's direct sales force focuses on large customers and leverages
its industry experience to access target organizations within particular
vertical markets. These markets are characterized by business areas to which
Level 8's products are particularly well suited, and businesses that possess
the financial resources and scale of operations necessary to support the
engagement.

Level 8 identifies leading organizations in each focus industry and seeks to
provide an initial solution that builds on one of Level 8's eBusiness
integration software products. After initial success, Level 8 will attempt to
sell a broader set of software solutions to the customer. Level 8 intends to
target additional industries in which its business area expertise and advanced
software technology can be applied.

An important element of Level 8's sales strategy is to expand its
relationships with third parties to increase market awareness and acceptance
of Level 8's integration software solutions. As part of these relationships,
Level 8 generally provides training and other support necessary to promote the
market acceptance of Level 8 products.

Level 8's current direct sales staff has substantial knowledge of Level 8's
products and service offerings as well as general experience in the software
industry. As the Company expands its direct sales force, it is recruiting
sales people with equivalent general experience in the software industry and
successful track records in selling enterprise-class software products.

Level 8 is organized worldwide into two major geographic divisions for sales
of its software products: the Americas and Europe/Asia Pacific. One general
manager heads each of these sales divisions. The international territories
currently include the United Kingdom, Germany, Scandinavia, Italy, France and
Australia. The General Managers' respective operations include sales and
consulting services for new and existing customers.

Approximately $18 million or 35% of Level 8's 1999 revenues were generated
from the Americas and approximately $35 million or 65% was generated outside
the Americas. The geographic distribution of Level 8's revenues may change in
the future.

Marketing

The target market for Level 8's products and services are Global 5000
companies. The rapid deployment of the Internet and intranet technology is
driving companies to find ways to take advantage of these new technologies out
of competitive necessity. As a result, information systems departments are
compelled by both economic necessity and internal mandates to find ways to
leverage their investment in current information technology.

In addition, the lines between "new" development and what has in the past
been considered "maintenance" are blurring. Level 8 believes more and more of
the "new" development going forward will be in the area of enhancing the
functionality of existing operational systems in an enterprise's current
computing infrastructure. This will result in the identification of new and
emerging opportunities for enterprise application integration solutions.

Level 8's marketing staff has an in-depth understanding of the global
software marketplace and the needs of customers in that marketplace, as well
as experience in all of the key marketing disciplines. The staff also has
broad knowledge of Level 8's products and services and how they can meet
customer needs.

Marketing is headed by a senior vice president of worldwide marketing who
manages an international staff. Core marketing functions including product
management, product marketing, marketing communications, strategic alliances
and public, which include investor and industry analysts, relations are
handled by the corporate marketing staff. Regional marketing programs are
supported by corporate staff as well as by marketing staff based in the
Company's European headquarters in the UK, with support from local marketing
resources in the regional offices.

Level 8 utilizes a wide variety of marketing programs that are intended to
attract potential customers and to promote Level 8 and its brands. Level 8
uses a mix of market research, analyst updates, seminars, advertising,
telemarketing, direct mail, tradeshows, webcasts, speaking engagements, public
relations, and website marketing in order to achieve these goals.

The marketing department also produces collateral material for distribution
to prospects including demonstrations, presentation materials, white papers,
case studies, articles, brochures and data sheets. Level 8 also intends to
implement an alliance cooperative marketing program to support its channel
partners with a variety of programs, incentives and support plans.

Level 8 intends to increase its investment in marketing significantly.
Management intends to continue to increase the Company's sales and marketing
staff worldwide and significantly increase the marketing budget.

Level 8 has a key strategic relationship with Microsoft. Microsoft has
licensed from Level 8 software originally developed by Level 8 that enables
its Windows NT server platforms to integrate with IBM's MQ Series message-
oriented middleware, which currently represents a significant share of the
worldwide message-oriented middleware market. Microsoft has shipped this
software as part of its Windows 2000 operating system and will make it
available to its Windows NT server platform customers through its website.
Microsoft also currently recommends Geneva Message Queuing as its preferred
implementation of the MSMQ functionality on operating systems other than
Microsoft Windows.

Research and Product Development

Level 8 has made substantial investments in research and development. Level
8 conducts research and development to enhance its existing products and to
develop new products. Level 8 intends to focus its research and development
efforts on integrating and evolving its Geneva product line in such a manner
that all products can interact with each other to provide customers a
comprehensive enterprise application integration solution. The Company had
research and development expense of $6.8 million, $2.8 million, and $1.1
million during 1999, 1998, and 1997, respectively. This resulted in increases
in research and development expenses of 145%

from 1998 to 1999, and 163% from 1997 to 1998. The increase in 1999 is
primarily attributable to the acquisitions of Seer and Template Software and
the Company's investments in new products, primarily version 2.0 of Geneva
Integration Broker, which was released in the second quarter of 1999 and
version 2.0 of Geneva Message Queuing, which was released in the fourth
quarter of 1999. This trend is expected to continue with the acquisition of
Template and the Company's ongoing efforts to strengthen and evolve its
messaging, enterprise application integration and application engineering
products.

The markets for Level 8's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Level 8's future success will depend to a
substantial degree upon its ability to enhance its existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
features that meet changing customer requirements and emerging and evolving
industry standards.

Level 8 budgets for research and development are based on planned product
introductions and enhancements. Actual expenditures, however, may
significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced software products is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends.

The introduction of new or enhanced products also requires Level 8 to manage
the transition from older products in order to minimize disruption in customer
ordering patterns, as well as ensure that adequate supplies of new products
can be delivered to meet customer demand. There can be no assurance that Level
8 will successfully develop, introduce or manage the transition to new
products.

Level 8 has in the past, and may in the future, experience delays in the
introduction of its products, due to factors internal and external to Level 8.
Any future delays in the introduction or shipment of new or enhanced products,
the inability of such products to gain market acceptance or problems
associated with new product transitions could adversely affect Level 8's
results of operations, particularly on a quarterly basis. For additional
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Years Ended December 31, 1999, 1998, and 1997--
Research and Development."

Competition

The eBusiness integration software market includes a large number of
participants, is subject to rapid changes, and is highly competitive. These
markets are highly fragmented and served by numerous firms, many of which
address only their respective local markets. Clients may elect to use their
internal information systems resources to satisfy their needs, rather than
using those offered by Level 8.

The rapid growth and long-term potential of the market for enterprise
application integration solutions make it attractive to new competition. Many
of the Company's comptetitors have greater name recognition, a larger
installed customer base and greater financial, technical, marketing, and other
resources than the Company. Level 8 believes it offers a broader range of
enterprise application integration solutions than its competitors, and
therefore generally competes on a product-by-product basis.

Representative Competitors

. In the Message Queuing market, primary competition comes from IBM with
its MQSeries product

. In the Enterprise Application Integration market, primary competition
comes from NEON, Active Software, Tibco, Mercator, IBM and Candle

. In the Business Process Automation market, primary competition comes
from Vitria and IBM

. In the Application Engineering market primary competition comes from
Sterling Software and Platinum Technology

Level 8 believes that its ability to compete depends in part on a number of
competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the
ownership by competitors of software used by potential clients, the
development by others of software that is competitive with Level 8's products
and services, the price at which others offer comparable services and the
extent of its competitor's responsiveness to customer needs.

Intellectual Property

Level 8's success is dependent upon developing, protecting and maintaining
its intellectual property assets. Level 8 relies upon combinations of
copyright, trademark and trade secrecy protections, along with contractual
provisions, to protect its intellectual property rights in software,
documentation, data models, methodologies, data processing systems and related
written materials in the international marketplace. In addition, Level 8 has
patents with respect to certain of its products. Copyright protection is
generally available under United States laws and international treaties for
Level 8's software and printed materials. The effectiveness of these various
types of protection can be limited, however, by variations in laws and
enforcement procedures from country to country.

Level 8 uses the trademarks "Level 8", "Level 8 Systems", "Level 8
Technologies", "Geneva", "Geneva Integration Suite", "Geneva Message Queuing",
"Geneva XIPC", "Geneva Integration Broker", "Geneva Enterprise Integrator",
"Geneva Business Process Automator", "Geneva AppBuilder" and "MonitorMQ".

There can be no assurance that the steps taken by Level 8 will prevent
misappropriation of its technology, and such protections do not preclude
competitors from developing products with functionality or features similar to
Level 8's products. Furthermore, there can be no assurance that third parties
will not independently develop competing technologies that are substantially
equivalent or superior to Level 8's technologies. Any failure by or inability
of Level 8 to protect its proprietary technology could have a material adverse
effect on Level 8's business, operating results and financial condition.

Although Level 8 does not believe its products infringe the proprietary
rights of any third parties, there can be no assurance that infringement
claims will not be asserted against Level 8 or its customers in the future. In
addition, Level 8 may be required to indemnify its distribution partners and
end users for similar claims made against them. Furthermore, Level 8 may
initiate claims or litigation against third parties for infringement of
Level 8's proprietary rights or to establish the validity of Level 8's
proprietary rights. Litigation, either as a plaintiff or defendant, would
cause Level 8 to incur substantial costs and divert management resources from
productive tasks whether or not said litigation is resolved in Level 8's
favor, which could have a material adverse effect on Level 8's business
operating results and financial condition.

As the number of software products in the industry increases and the
functionality of these products further overlaps, Level 8 believes that
software developers may become increasingly subject to infringement claims.
Any such claims, with or without merit, could be time consuming and expensive
to defend and could adversely affect Level 8's business, operating results and
financial condition.

Employees

As of February 29, 2000, Level 8 had a total of 470 employees. Of these
employees: 120 were engaged in software sales and marketing and technical
support; 60 in administration; 115 in research, development and technical
support; and 175 in consulting and training.

Level 8's continued success is dependent on its ability to attract and
retain qualified employees. During the second half of 1999, the Company
significantly increased its number of employees through the Template
acquisition and through internal hiring. Due to the competitiveness in the
market for employees, the Company may experience future difficulty in
recruiting and retaining staff.

Level 8 believes that to fully implement its business plan it will be
required to enhance its marketing functions by adding additional marketing
personnel. In addition, Level 8 believes additional sales executives will be
required to support Level 8's sales operations. Although Level 8 believes it
will be successful in attracting and retaining qualified employees to fill
these positions, no assurance can be given that Level 8 will be successful in
attracting and retaining these employees now or in the future.

Level 8's employees are not represented by a union or a collective
bargaining agreement.

Forward Looking and Cautionary Statements

Certain statements contained in this Annual Report may constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("Reform Act"). The Company may also make forward looking
statements in other reports filed with the Securities and Exchange Commission,
in materials delivered to shareholders, in press releases and in other public
statements. In addition, the Company's representatives may from time to time
make oral forward looking statements. Forward looking statements provide
current expectations of future events based on certain assumptions and include
any statement that does not directly relate to any historical or current fact.
Words such as "anticipates," "believes," "expects," "estimates," "intends,"
"plans," "projects," and similar expressions, may identify such forward
looking statements. In accordance with the Reform Act, set forth below are
cautionary statements that accompany those forward looking statements. Readers
should carefully review these cautionary statements as they identify certain
important factors that could cause actual results to differ materially from
those in the forward looking statements and from historical trends. The
following cautionary statements are not exclusive and are in addition to other
factors discussed elsewhere in the Company's filings with the Securities and
Exchange Commission and in materials incorporated therein by reference: the
Company's future success depends on the market acceptance of the new Geneva
Integration Suite; general economic or business conditions may be less
favorable than expected, resulting in, among other things, lower than expected
revenues; an unexpected revenue shortfall may adversely affect the Company's
business because its expenses are largely fixed; the Company's quarterly
operating results may vary significantly because the Company is not able to
accurately predict the amount and timing of individual sales and this may
adversely impact the Company's stock price; trends in sales of the Company's
products and general economic conditions may affect investors' expectations
regarding the Company's financial performance and may adversely affect the
Company's stock price; the Company's future results may depend upon the
continued growth and business use of the Internet; the Company's government
contracts business is subject to a number of risks associated with doing
business with the federal government; the Company may lose market share and be
required to reduce prices as a result of competition from its existing
competitors, other vendors and information systems departments of customers;
the Company may not have the ability to recruit, train and retain qualified
personnel; the Company may not have the resources to successfully manage the
integration of Template; the Company's future results may depend upon the
successful integration of future acquisitions; the Company may not have the
resources to successfully manage additional growth; rapid technological change
could render the Company's products obsolete; if the Company's relationship
with Microsoft weakens, it could adversely affect the Company's business; the
loss of any one of the Company's major customers could adversely affect the
Company's business; the Company's business is subject to a number of risks
associated with doing business abroad including the effect of foreign currency
exchange fluctuations on the Company's results of operations; the Company's
products may contain undetected software errors, which could adversely affect
its business; because the Company's technology is complex, the Company may be
exposed to liability claims; year 2000 issues may cause problems with the
Company's systems and expose the Company to liability; the failure of the
Company to meet product delivery dates could adversely affect its business;
the Company may be unable to enforce or defend its ownership and use of
proprietary technology; because the Company is a technology company, its
common stock may be subject to erratic price fluctuations; and the Company may
not have sufficient liquidity and capital resources to meet changing business
conditions.

Item 2. Properties.

The Company's worldwide corporate headquarters is located in approximately
54,000 square feet in Cary, North Carolina pursuant to a lease expiring in
2004. The United States operations groups are based in the Cary office, with
field offices in the following locations: Dulles and Arlington, Virginia;
Atlanta, Georgia; Boca Raton, Florida; California, Maryland; Chicago,
Illinois; Denver, Colorado; New Orleans, Louisiana, and Northtown,
Pennsylvania. The foreign operations groups are based in London, England with
field offices in the following locations: Sydney, Australia; Copenhagen,
Denmark; Manchester, England; Paris, France; Frankfurt, Germany; Milan, Italy;
Stockholm and Malmo, Sweden; and Nieuwegein, The Netherlands. The Company also
maintains an office in Limerick, Ireland on a set fee arrangement. The
research and development and customer support groups are located in New York,
New York; Dulles, Virginia; Cary, and London.

As of December 27, 1999, the Company owns a building in Windsor, England due
to the acquisition of Template. The Company is in the process of selling this
building.

Item 3. Legal Proceedings.

In December 1997, Seer , instituted litigation in London, England against
Saadi Abbas ("Abbas") and Cambridge Business Solutions (UK) Ltd. ("CBS")
concerning a dispute over a license agreement between Seer, CBS and Abbas.
These entities counterclaimed against Seer. The case has proceeded through
discovery and various other procedural events and all that remains of the
litigation at this point in time are various claims against Seer by Abbas and
CBS. In July, most of those claims were struck out by the court in London as
unarguable or otherwise time barred. The Company intends to continue to
vigorously defend against the few remaining claims. The Company has made
provision for its estimated costs to resolve this matter. Management does not
believe at this point in the litigation that any additional amounts required
to ultimately resolve this matter will have a material effect on the financial
position, cash flows, or results of operations of the Company.

During April 1998, the Company sold substantially all assets and operations
of its wholly owned subsidiary ProfitKey International, Inc. ("ProfitKey").
According to the terms of the ProfitKey sale agreement, the purchase price is
subject to adjustment to reflect any variance in working capital from a
specified amount. The purchaser has notified the Company that it believes
there are substantial adjustments which would require a reduction in the
purchase price. The Company and the purchaser pursuant to the terms of the
settlement agreement, entered arbitration proceedings to resolve this matter
and a discussion from the arbitrator is expected soon. The Company has made a
provision for its estimate of the purchase price adjustment and the costs to
resolve this matter. Management believes at this time that any additional
provision required to ultimately resolve this matter will not have a material
effect on the financial position, cash flows, or results of operations of the
Company.

On June 30, 1999, Template, filed a claim with the National Association of
Securities Dealers, Inc. for arbitration against Merrill Lynch Pierce Fenner &
Smith ("Merrill Lynch") seeking compensatory damages of $950,000, plus
attorney's fees and lost income resulting from advice rendered by Merrill
Lynch to purchase, and the failure of Merrill Lynch to divest at Template's
instruction, a portfolio of zero coupon long-term bonds held by Template. On
December 27, 1999, Template Software, Inc. was merged into TSAC, Inc., a
wholly owned subsidiary of the Company. Discovery has commenced in the
arbitration. TSAC expects that the arbitration will be completed by the end of
summer 2000. TSAC cannot at this time predict the outcome of these
proceedings. Management does not believe that the results of this arbitration
will have a material effect on the financial position, cash flows, or results
of operations of TSAC or the Company.

On July 15, 1999, Template filed an action against Manugistics, Inc. in the
United States District Court for the Eastern District of Virginia, seeking
compensatory damages of approximately $1.25 million resulting from breach of
certain representations contained in a license agreement for Manugistics-
developed software. Manugistics filed a counterclaim against the Company,
asserting breach of contract, breach of alleged settlement, and wrongful
hiring. On October 19, 1999, the Company filed an amended complaint to include
two additional claims, fraud in the inducement and constructive fraud, seeking
additional damages of $2 million. Subsequent to December 31, 1999, the Company
settled this litigation.

From time to time, the Company is a party to routine litigation incidental to
its business. As of the date of this Report, the Company was not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have
a material adverse effect on the Company.

Item 4. Submission Of Matters To A Vote Of Security Holders.

The following matters were submitted to the Company's shareholders for a vote
at a special meeting of shareholders held on December 24, 1999:

To approve the issuance of shares of Level 8 common stock in accordance with
the merger agreement between Template Software, Inc. and TSAC, Inc., a wholly
owned subsidiary of the Company.

For: 6,618,229
Against: 1,100
Abstain: 1,370
Broker non-votes: 1,890,106

To consider and vote upon an amendment to the Company's 1997 Stock Option
Plan increasing the number of shares of Level 8 common stock subject to awards
thereunder from 2,600,000 to 4,000,000.

For: 6,346,629
Against: 273,105
Abstain: 2,965
Broker non-votes: 1,890,106

There were 8,909,572 voting shares outstanding on November 15, 1999, the date
of record.

PART II

Item 5. Market For Registrant's Common Stock and Related Shareholder Matters.

During fiscal years 1998 and 1999, the common stock of the Company was
traded on the Nasdaq Stock Market under the symbol "LVEL." The Company has
never declared or paid any cash dividends on its Common Stock. The Company
anticipates that all of its earnings will be retained for the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's credit agreements require
the Company to obtain approval from its lenders prior to declaration or
payment of any cash dividends on its common stock. The chart below sets forth
the high and low stock prices for the quarters of the fiscal years ended
December 31, 1998 and 1999.

1998 1999
--------------- ---------------
Quarter High Low High Low
------- ------- ------- ------- -------

First........................................ $16.313 $10.375 $16.250 $ 7.625
Second....................................... $14.000 $ 8.375 $13.125 $ 7.938
Third........................................ $11.000 $ 6.563 $14.000 $ 9.375
Fourth....................................... $ 9.875 $ 5.000 $46.438 $11.500

The closing price of the common stock on December 31, 1999 was $34.563 per
share. As of February 25, 1999, the Company had 127 registered shareholders of
record.

Item 6. Selected Financial Data.

The following selected financial data is derived from the consolidated
financial statements of the Company. The data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included herein.

For 1999, the following data includes the Company, Level 8 Technologies,
Seer and Template since its acquisition on December 27, 1998. For 1998, the
following data includes the Company, Level 8 Technologies and Momentum since
its acquisition on March 26, 1998. For 1997, the following data includes the
Company, ASU, and Level 8 Technologies. For 1996, the following data includes
the Company, ASU, and Level 8 Technologies. For 1995, the following data
includes the Company for the full year and Level 8 Technologies since its
acquisition on April 1, 1995.

Year Ended December 31,
(in thousands, except per share data)
----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------

SELECTED STATEMENT OF
OPERATIONS DATA
Revenue....................... $ 3,012 $ 7,272 $ 14,680 $ 10,685 $ 52,920
Net income (loss) from
continuing operations........ (429) (845) 1,036 (23,688) (15,477)
Net income (loss) from
continuing operations per
common and common equivalent
share--basic................. (.10) (.14) .16 (3.14) (1.78)
Net income (loss) from
continuing operations per
common and common share--
diluted...................... (.10) (.14) .14 (3.14) (1.78)
Weighted average common and
common equivalent shares
outstanding--basic........... 4,314 6,076 6,992 7,552 8,918
Weighted average common and
common equivalent shares
outstanding--diluted......... 4,314 6,076 7,561 7,552 8,918

At December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------

SELECTED STATEMENT OF
OPERATIONS DATA
Working capital (deficiency).. $ 4,103 $ 11,007 $ 15,826 ($19,554) 1,464
Total assets.................. 15,059 20,787 23,482 70,770 133,581
Long-term debt, net of current
maturities................... 43 23 16 1,541 22,202
Loans from related companies,
net of current maturities.... 454 331 202 12,519 4,000
Stockholders' equity.......... 11,499 18,300 20,371 8,892 72,221

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

General Information and Recent Developments

Level 8 specializes in delivering software solutions that help companies
integrate new and existing computer applications and extend these applications
to the Internet to support eBusiness and eCommerce. This specialization is
called enterprise application integration or "EAI." Level 8's products and
services are designed to enable organizations to address business process
automation and application integration in a simple and cost effective way.
Level 8 provides customers with software to link their critical business
applications internally across the enterprise and externally with strategic
business-to-business partners and business-to-business consumers via the
Internet.

Level 8 offers a suite of products for eBusiness and eCommerce under the
Geneva brand name. The Geneva Integration Suite has six core components which,
together, provide the most complete suite of integration software products
available for eBusiness integration. These components include Geneva
Enterprise Integrator (formerly Enterprise Integration Template), Geneva
Business Process Automator (formerly Business Process Template), Geneva
Integration Broker (formerly Geneva Integrator), Geneva Message Queuing,
Geneva AppBuilder, and Geneva XIPC (formerly XIPC).

During April 1999, the Company completed its acquisition of Seer
Technologies, Inc. ("Seer"). The Company purchased the remaining minority
interest in Seer, for $0.35 per share of the outstanding common stock in cash.
The total purchase price for the remaining 31% of Seer was $1.7 million. As a
result of the completion of acquisition, Seer became a wholly owned subsidiary
of the Company.

In December 1999, the Company acquired Template for approximately $64
million in cash and stock. Level 8's management team identified Template as a
provider of technologies that enables Level 8 to be one of the first to market
with a comprehensive product portfolio representing the next generation of EAI
solutions for eBusiness. As part of the Template transaction, the Company
obtained an additional $10 million in financing in the form of a 17 month term
loan. The financing was guaranteed by Liraz Systems, Ltd. ("Liraz"), the
Company's principal stockholder, in return for 60,000 shares of the Company's
common stock. The number of shares of common stock provided in exchange for
the guarantee, was determined by the independent directors of the Company
based on market conditions and the Company's anticipated financing needs at
closing. The commitment provides for an interest rate equal to the London
InterBank Offered Rate plus 1% annually.

This discussion contains forward-looking statements relating to such matters
as anticipated financial performance, business prospects, technological
developments, new products, research and development activities, liquidity and
capital resources, Year 2000 issues and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause its actual results to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. See "Item 1. Business--Forward
Looking and Cautionary Statements."

Results Of Operations

The Company's results of operations include the operations of the Company
and its subsidiaries. Operations for the subsidiaries acquired during 1999 and
1998 are included from the date of acquisition. Accordingly, the 1999 and 1998
results of operations include the operations of Template, Seer, and Momentum
since December 27, 1999, December 31, 1998, and March 26, 1998, respectively.

The 1998 results of operations do not reflect any of Seer's operations since
the Company's 69% interest in Seer was not acquired until December 31, 1998.
The shareholders of the remaining 31% of the outstanding voting stock were
considered to have shared in the losses of Seer only for their proportionate
share of Seer's net assets. No minority interest for Seer is reflected in the
Company's consolidated balance sheet at December 31, 1998 because Seer had net
liabilities of $25 million at December 31, 1998. As of December 31, 1998, the
Company has only recorded 69% of the value of the Company's intangible assets,
including the value of in-process technology, which has been written off. On
April 15, 1999, the Company completed a tender offer for the remaining 31% of
Seer and recorded the remainder of the intangible assets, including an
additional write-off of in-process technology. Until the completion of the
tender offer, the Company reported only 69% of any net earnings and 100% of
any net losses of Seer.

Except as otherwise indicated, the discussion below relates to the actual
results of operations without giving pro forma effect to the acquisitions and
dispositions in 1998. Pro forma combined data assumes the acquisition of
Momentum and Seer had each occurred as of January 1, 1998 and does not purport
to be indicative of the results which would have actually been obtained had
the transactions taken place as of such date or of future results of
operations. The acquisitions made in 1998 make it difficult to compare the
actual results of operations for the periods presented. A discussion of 1999
to 1998 comparative results of operations on a pro forma combined basis has
been included below where considered meaningful for an understanding of the
Company's results of operations for the 1999 periods. However, pro forma
combined results reflect the operations of Level 8, Momentum, and Seer on a
separate basis without consideration for any synergies obtained through the
integration of the companies' operations. The operations of Template did not
have a material effect on the 1999 results; therefore, Template is not
included in the pro forma comparisons.

The following table sets forth, for the years indicated, the Company's
results of continuing operations expressed as a percentage of revenue.

Year Ended
December 31,
----------------------
1999 1998 1997
----- ------ -----

Revenue:
Software.............................................. 30.3 % 14.5 % 29.7%
Maintenance........................................... 28.3 % 10.2 % 0.2%
Services.............................................. 41.4 % 75.3 % 70.1%
----- ------ -----
Total............................................... 100.0 % 100.0 % 100.0%
Cost of revenue:
Software.............................................. 8.0 % 19.3 % 17.4%
Maintenance........................................... 10.2 % 4.5 % 0.1%
Services.............................................. 36.4 % 54.1 % 34.2%
----- ------ -----
Total............................................... 54.6 % 77.9 % 51.7%
Gross profit............................................ 45.4 % 22.1 % 48.3%
Operating expenses:
Sales and marketing................................... 22.7 % 22.3 % 10.4%
Research and product development...................... 12.8 % 26.0 % 7.2%
General and administrative............................ 12.9 % 60.3 % 20.0%
Amortization of goodwill and intangibles.............. 13.2 % 18.1 % 2.9%
Write-off of in-process research and development...... 5.6 % 55.1 % --
Write-off of goodwill................................. -- 43.1 % --
Restructuring charges................................. 0.7 % 14.4 % --
----- ------ -----
Total............................................... 67.9 % 239.3 % 40.5%
Income (loss) from Operations......................... (22.5)% (217.2)% 7.8%
Other income (expense), net........................... (5.4)% (0.8)% 3.0%
----- ------ -----
Income (loss) before taxes............................ (27.9)% (218.0)% 10.8%
Income tax provision.................................. 1.4 % 3.8 % 3.8%
----- ------ -----
Net income (loss) from continuing operations.......... (29.3)% (221.8)% 7.0%
===== ====== =====

The following table sets forth unaudited data for total revenue by
geographic origin as a percentage of total revenue for the periods indicated:

1999 1998 1997
----- ------ -----

United States........................................... 33% 99% 99%
Europe.................................................. 58% -- --
Asia Pacific............................................ 7% -- --
Other................................................... 2% 1% 1%
----- ------ -----
Total............................................... 100% 100% 100%
===== ====== =====

Years Ended December 31, 1999, 1998, and 1997

Revenue and Gross Margin. The Company has three categories of revenue:
software products, maintenance, and services. Software products revenue is
comprised primarily of fees from licensing the Company's proprietary software
products. Maintenance revenue is comprised of fees for maintaining,
supporting, and providing periodic upgrades to the Company's software
products. Services revenue is comprised of fees for consulting and training
services related to the Company's software products.

The Company's revenues vary from quarter to quarter, with the largest
portion of revenue typically recognized in the last month of each quarter. The
Company believes that these patterns are attributable to the

budgeting and purchasing cycles of customers and also, the Company's sales
commission policies, which compensate sales personnel for meeting or exceeding
quarterly quotas. The Company typically does not have any material backlog of
unfilled software orders, and product revenue in any quarter is substantially
dependent upon orders received in that quarter. Because the Company's
operating expenses are based on anticipated revenue levels and are relatively
fixed over the short term, variations in the timing of recognition revenue can
cause significant variations in operating results from quarter to quarter.
Fluctuations in operating results may result in volatility in the price of the
Company's common stock.

Total revenues increased 395% from 1998 to 1999 and decreased 27% from 1997
to 1998. Total revenues increased significantly from 1998 to 1999 primarily
due to the acquisitions of Momentum and Seer during 1998 and increased sales
of software products. The decrease from 1997 to 1998 was primarily
attributable to a decrease in software products revenue, along with a
reduction in services revenue. The gross margins were 45%, 22%, and 48% for
1999, 1998, and 1997, respectively.

On a pro forma combined basis, total revenues for 1998 were $67.2 million.
The $14.3 million decline in revenue on a pro forma combined basis is
primarily due to a decline in the number of former Seer consulting resources
employed in 1999 compared to 1998. The gross margin for 1998 on a pro forma
combined basis was approximately 23%.

Software Products. Software products revenue increased 933% in 1999 in
comparison to 1998 and decreased 64% from 1997 to 1998. The significant
increase from 1998 to 1999 is primarily due to the sales of products acquired
from Seer in 1998 coupled with sales of the Company's new Geneva Integration
Broker product (formerly Geneva Integrator).

During 1997, the Company's product sales were primarily resales of IBM's MQ
Series licenses. During 1998, the Company's software sales were primarily
resales of IBM's MQ Series licenses and sales of Geneva Message Queing
(formerly FalconMQ) and Geneva XIPC (formerly XIPC) messaging products. The
decrease in software revenue from 1997 to 1998 is the result of the Company's
shift in strategic direction primarily relating to the Company's dispositions
and acquisitions in 1998, as well as reduced emphasis on resales of IBM's MQ
Series licenses in favor of the Company's messaging products developed by the
Company.

Through its acquisitions in 1998, the Company acquired Momentum's XIPC
messaging product and Seer's HPS products, now known as Geneva AppBuilder,
which is used for application engineering. As discussed above, the Company
began selling Geneva Integration Broker, an EAI solution, during the second
quarter of 1999. Additionally, with the acquisition of Template, the Company
added their products to its offering and recorded initial sales of Template's
former Enterprise Integration Template and Business Process Template products
in the fourth quarter of 1999.

Software products revenue has continued to grow as a percentage of total
revenue, reflecting the Company's emphasis on expanding product sales.
Management believes software products revenue will continue to increase over
the next several quarters.

The gross margin on software products was 74%, (33)%, and 41% for the 1999,
1998, and 1997 fiscal periods, respectively. The improvement in gross margins
from 1998 to 1999 was due to the significant increase in software products
revenue. Cost of software is composed primarily of amortization of capitalized
software and royalties to third parties for the Company's Geneva Message
Queuing product and to a lesser extent production and distribution costs. This
increase in cost of software was primarily due to amortization of capitalized
software from Momentum's and Seer's developed technology, which was valued as
part of the purchase accounting for these business combinations, and royalties
which are principally for technology acquired in 1998 from Liraz, the
Company's principal shareholder. The decrease in gross margins between 1997
and 1998 is the effect of increased amortization costs, lower software product
revenues, royalties to Liraz under the joint development agreement, and a
write-off of approximately $.3 million of capitalized technology costs.
Software amortization will increase in 2000 due to the $12.2 million of
developed technology acquired in the Template acquisition resulting in
approximately $.5 million per quarter.

Services. Services revenue increased 172% from 1998 to 1999 and decreased by
22% from 1997 to 1998. Services gross margins were 12%, 28%, and 51% for 1999,
1998, and 1997 respectively. Cost of services primarily includes personnel and
travel costs related to the delivery of services.

The increase in services revenue from 1998 to 1999 was primarily a result of
the Seer acquisition, which resulted in adding an average of 115 consultants
during 1999. Changes in the composition of the Company's services revenue have
caused margins to decline in 1999, since the Geneva AppBuilder-related
services have historically generated lower margins than the Company's other
service offerings. The Company is seeking to improve its consulting margins
through improvement in the utilization of its consultants and attempting to
provide higher margin services for the Company's Geneva Integration Broker,
Geneva Message Queuing, and recently acquired Template products.

The services revenue decline from 1997 to 1998 was primarily attributable to
the decline in software products revenue and the resultant decline in
utilization of billable services. The decline in software products revenue
impacted services revenue as there were fewer new customers than in the prior
year, reducing the base of the customers utilizing the Company's consulting
and training services as part of an overall technology solution purchase.
Gross margins decreased in 1998 in relation to 1997 due to lower than normal
billable utilization of consultants caused by project delays.

On a pro forma combined basis, services revenue for 1998 was $47 million.
The decrease from 1998 to 1999 is chiefly due to a decline in the amount of
Geneva AppBuilder related services provided, due to the low level of software
products sold by Seer in the year preceding the acquisition, as well as a
decline in the number of consulting personnel on a pro forma basis.

Maintenance. Maintenance revenue increased significantly from 1998 to 1999
primarily due to the addition of Geneva AppBuilder to the Company's products,
which has historically had a significant revenue stream from maintenance. The
increase from 1997 to 1998 is primarily due to the addition of the Geneva XIPC
product acquired from Momentum. Prior to the Momentum acquisition, the Company
did not have a significant amount of maintenance revenue as its primary source
of license revenue was from reselling IBM's MQ Series licenses. On a pro forma
combined basis, maintenance revenue for 1998 was $14.4 million, which is
relatively consistent with 1999.

Gross margins on maintenance were 64%, 56%, and 47% for 1999, 1998, and
1997, respectively. Cost of maintenance is comprised of personnel costs and
related overhead, and beginning in 1999 includes the cost of third-party
contracts for the maintenance and support of the Company's Geneva AppBuilder
products. The increase in gross margins is primarily due to the addition of
the Geneva AppBuilder and Geneva XIPC to the Company's products from which the
Company has created additional economies of scale in 1999.

Sales and Marketing. Sales and marketing expenses primarily include
personnel costs for salespeople, travel, and related overhead, as well as
analyst subscriptions, trade show participation, and other promotional
expenses. Sales and marketing expenses increased fourfold from 1998 to 1999
and 57% from 1997 to 1998 due to an increase in the size of the Company's
sales force, both through acquisition and recruiting. During 1999, the number
of sales and marketing personnel doubled from the beginning of the year to the
end. This increase in personnel is due to the reorganization of the Company's
sales and promotional activities to correspond with its new product strategy,
as well as the Company's expansion into the global marketplace with the
acquisitions of Seer and Template. The Company intends to continue to increase
its spending in the sales and marketing area in an effort to increase software
products revenue through heightened market awareness and improved acceptance
of its products and expanding its indirect distribution network.

Research and Development. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation personnel. Research and development expense increased 145% from
1998 to 1999 and 163% from 1997 to 1998. The increases in 1998 and 1999 are a
result of the Company's investment in new products, primarily Geneva
Integration Broker, which was released in the

second quarter of 1999 and Version 2.0 of Geneva Message Queuing which was
released in the fourth quarter of 1999. The expense increase in 1999 is also
attributable to the acquisition of Seer and the personnel added to this area
of the Company as a result of the acquisition. Management expects this trend
to continue and has increased the number of personnel by approximately 50%
with the acquisition of Template, as the Company's continues to more tightly
integrate its products and attempts to strengthen its position in the EAI
marketplace.

General and Administrative. General and administrative expenses consist of
personnel costs for the executive, legal, financial, human resources, and
administrative staff and related overhead and non-allocable corporate costs of
operating the Company. General and administrative expenses increased 6% from
1998 to 1999 and 118% from 1997 to 1998. These expenses decreased as a
percentage of revenue for 1999 due to synergies obtained through the
integration of Seer and management's focus to bring general and administrative
expenses to a more reasonable level in relation to revenue.

Amortization of Goodwill and Other Intangible Assets. Amortization of
intangible assets, primarily goodwill, was $7 million, $1.9 million, and $.4
million for 1999, 1998, and 1997, respectively. The amortization of goodwill
in 1997 was related to the purchase of Level 8 Technologies in April 1995. The
amortization of goodwill in 1998 was related to the purchase of Level 8
Technologies and beginning in the second quarter included amortization related
to the purchase of Momentum in March, 1998. In 1999, amortization of
intangible assets also includes the amortization of goodwill and other
intangible assets related to the purchase of Seer. Due to the acquisition of
Template, the Company will incur approximately $1.8 million per quarter in
additional amortization expense beginning in the first quarter of 2000.

Purchased Research and Development. Based on the results of third-party
appraisals, the Company recorded charges in 1998 of $1.2 million in the first
quarter and $4.7 million in the fourth quarter in order to expense purchased
in-process research and development costs related to the acquisition of
Momentum and Seer, respectively. As a result of completing the acquisition of
the remaining 31% of Seer, the Company recorded a charge of $.7 million for
in-process research and development costs in the second quarter of 1999. As
part of the acquisition of Template, the Company recorded a charge to expense
in-process research and development costs related to the acquisition of
Template in the amount of $2.2 million.

For all in-process research and development charges recorded in 1998 and
1999, it was determined that the acquired in-process research and development
had not yet reached technological feasibility and had no alternative future
uses. The value of the in-process projects was adjusted to reflect the
relative value and contribution of the acquired research and development. In
doing so, management gave consideration to the stage of completion, the
difficulty of completing the remaining development costs already incurred, and
the projected cost to complete the projects. The value assigned to purchased
in-process technology was based on key assumptions, including revenue growth
rates for each technology considering, among other things, current and
expected industry trends, acceptance of the technologies and historical growth
rates for similar industry products.

Other charges. As a result of the acquisitions of Template, Momentum, and
Seer, the Company recorded several charges. In 1998, as a consequence of the
Company's transition to an enterprise application integration solutions
provider, the Company abandoned certain planned development efforts for
products acquired in the Momentum transaction and reassessed the remaining
undiscounted projected cash flows related to the identifiable and
unidentifiable intangible assets acquired from Momentum. It was concluded
that, with the principal exception of the Momentum technology utilized in the
Level 8's product suite and the Geneva XIPC products, the goodwill and
intangible acquired in the Momentum transaction should be written off.
Accordingly, during the fourth quarter of 1998, the Company adjusted the
carrying value of its identifiable and unidentifiable assets to their fair
value of $32.2 million, resulting in a non-cash impairment loss of $4.6
million.

During the fourth quarter of 1999, the Company reorganized its existing
operations due to its acquisition of Template. The Company's restructuring,
included a management change in its development and operations areas, the
abandonment of certain leased facilities, and the closure of its French
subsidiary. The Company recorded a restructuring charge of $.55 million, which
consisted of approximately $.28 million in costs associated with

improving leased space to be subleased, approximately $.23 million in
personnel-related charges, and approximately $.04 million in professional fees
to close its French subsidiary. Through December 31, 1999, the Company had not
paid any cash related to these restructuring charges.

At December 31, 1999, the Company revised its estimate of the 1998
restructuring charge by reducing it by $.16 million based on a review of the
costs paid through December 31, 1999 and the remaining estimated costs. The
change in estimate is reflected in the 1999 Consolidated Statement of
Operations as a reduction of the restructuring charge for 1999.

During the fourth quarter of 1998, the Company reorganized its existing
operations due to its acquisition of Seer. The restructuring included a staff
reduction in its development and administrative areas of 20% (15 employees),
the abandonment of certain leased facilities, and the write-down to fair value
of certain capitalized software costs for product lines which were being
discontinued. The Company recorded a restructuring charge of approximately
$1.54 million, which consisted of approximately $.71 million in personnel-
related charges, approximately $.29 million in costs associated with carrying
vacated space until the lease expiration date, approximately $.19 million of
property and equipment related charges, approximately $.24 million in write-
down of capitalized software costs, approximately $.1 million in professional
fees related to the restructuring, and approximately $.01 million for other
charges. Through December 31, 1999, the Company has paid approximately $.86
million in cash related to the restructuring.

The Company believes the accrued restructuring cost of $.63 million at
December 31, 1999 represents its remaining cash obligations for the
restructuring charges included above.

Provision for Income Taxes. The Company's effective income tax rate for
continuing operations differs from the statutory rate primarily because an
income tax benefit was not recorded for the net losses incurred during 1999
and 1998. The provision for income taxes in 1997, was approximately 35% due to
income from operations. Because of the Company's inconsistent earnings
history, the deferred tax assets have been fully offset by a valuation
allowance. The income tax provision for 1999 is primarily related to income
taxes from profitable foreign operations and foreign withholding taxes.

Discontinued Operations. The loss on disposal of ProfitKey during 1998 was
approximately $1.2 million. The loss on discontinued operations related to
ProfitKey was $.14 million for 1998.

Impact Of Inflation. Inflation has not had a significant effect on the
Company's operating results during the periods presented.

Liquidity and Capital Resources

Cash and cash equivalents increased $3.7 million during 1997 to $7.0 million
at year end. The increase was due primarily to the Company's redemption of
investments in marketable securities offset by a $1.7 million investment for
capitalized software development costs and equipment, and a $.9 million use of
cash in investing activities by the Company's discontinued operations. The
Company funded its operations in 1997 with cash remaining from the $9.1
million in net proceeds from its 1996 offering.

During 1998, cash and cash equivalents decreased by $1 million to $6 million
at year end. The decrease in cash was due to the purchase of $.9 million in
equipment, spending of $1.2 million for capitalized software development
costs, and debt service of $1.5 million. This decrease was offset by $1.7
million of cash provided by operations, $.5 million from the sale of
ProfitKey, and $.4 million of net cash acquired from acquisitions.
Additionally, the Company borrowed $12 million from Liraz which was used to
pay down Seer's bank debt on December 31, 1998.

During 1999, cash and cash equivalents increased by $.4 million to $6.5
million at year end. The increase in cash is due to cash provided by financing
activities, including $19.2 million in net proceeds from issuance of

shares of preferred stock and $17.3 million in proceeds from the issuance of
shares of common stock due to the exercise of stock options and warrants.
These financing inflows, combined with approximately $16.7 million of
additional borrowings, were used to retire $12.6 million of debt obligations,
fund additional acquisition activity, and fund the $12.9 million net cash used
in operations.

On December 27, 1999, the Company acquired all of the outstanding common
stock of Template for a combination of stock and cash. Purchase consideration
was $21.6 million in cash. The Company partially funded this acquisition with
a $10 million term loan from a commercial bank, which was guaranteed by the
Company's principal shareholder in exchange for 60,000 shares of common stock.
The term loan is due on May 31, 2001 and has an interest rate of LIBOR plus
1%, approximately 7.2% at December 31, 1999.

In June 1999, the Company agreed to sell 21,000 shares of Series A 4%
Convertible Redeemable Preferred Stock, for $21 million, convertible into an
aggregate of 2,100,000 shares of the Company's common stock. During the second
quarter, the Company used $4 million to pay down the Credit Facility. During
the third quarter, the Company paid down $8 million of the $12 million loan
from Liraz.

Holders of the Series A Preferred Stock are entitled to receive 4% annual
cash dividends payable quarterly. The Series A Preferred Stock may be redeemed
at the option of the Company at a redemption price equal to the original
purchase price at any time after June 29, 2000 if the closing price of the
Company's common stock over 20 consecutive trading days is greater than $20
per share. In the event the Company breaches its obligations to pay dividends
when due or issue common stock upon conversion, or the Company's common stock
is delisted, the dividend rate on the Series A Preferred Stock would increase
to 18% per annum (partially payable in shares of common stock at the option of
Level 8 during the first 60 days of such increased dividend rate). As part of
the $21 million financing, the Company also issued the investors warrants to
purchase 2.1 million shares of common stock at an exercise price of $10 per
share. These warrants are callable by the Company on the same terms as the
preferred stock, which is outlined above. Investors in the Series A Preferred
Stock and warrants include Advanced Systems Europe B.V., which purchased $10
million of Series A Preferred Stock and warrants in the transaction, and is a
subsidiary of Liraz Systems, Ltd., Level 8's the Company's principal
stockholder.

Subsequent to the issuance of the Series A Preferred Stock, shareholders
have exercised warrants resulting in the issuance of approximately 1.26
million shares of the Company's common stock and resulting in net proceeds of
approximately $12.6 million.

On April 15, 1999, the Company acquired the remaining 31% minority interest
in Seer, through a tender offer and merger for approximately $1.7 million in
cash.

During the fourth quarter of 1998, the Company issued $3 million in notes to
the sellers of Momentum as additional consideration, as provided for in the
purchase agreement. These notes bear interest at 10% per year retroactive to
the Momentum acquisition date of March 26, 1998, payable in four equal
installments plus interest on December 1, 1998, November 26, 1999, November
20, 2000, and November 15, 2001. There are no financial covenants in these
notes. As of December 31, 1999 $2.25 million was outstanding. Subsequent to
December 31, 1999, the Company offered to exchange notes held by former
Momentum stockholders for shares of the Company's common stock based on the
average market price of the common stock for a set period prior to the date of
offer acceptance. The Company converted $1.9 million of the Momentum notes to
common stock in the first quarter of 2000.

In addition to the debt obligations related to its acquisitions activity,
the Company uses an asset-based lending arrangement to finance working capital
needs from operations, if necessary. As of December 31, 1999, the Company had
outstanding borrowings of $15 million under a credit facility with a
commercial bank shared between the Company and it's wholly-owned subsidiary,
Seer, (the "Credit Facility") at an interest rate of 10.5%. The Credit
Facility was amended and currently provides for borrowings up to the lesser of
$25 million or the sum of 80% of eligible receivables and a $10 million term
loan payable on December 31, 2001. The receivables-based borrowings under the
Credit Facility are due on demand. The Credit Facility bears interest at the
prime

rate plus 2% per annum and has no financial covenant provisions. The
receivables based borrowing instrument terminates on September 1, 2000;
however, it is automatically renewed for successive additional terms of one
year each, unless terminated by either party. The Credit Facility is
collateralized by the Company's accounts receivable, equipment and
intangibles, including intellectual property. All debt payable to Liraz and
other lenders is subordinate in right of payment to the Credit Facility.

As of December 31, 1999, the Company did not have any material commitments
for capital expenditures. Future maturities on the Company's outstanding debt
at December 31, 1999 include $5.9 million in 2000 and $26.2 million in 2001.
Of such amounts, $.5 million in 2000 and $4 million in 2001 are due to Liraz,
the Company's principal shareholder.

During 1999, the Company had EBITDA, exclusive of acquisition related
charges, of $3.1 million and incurred a net loss of $15.5 million. The Company
has working capital of $1.5 million and an accumulated deficit of $41.1
million at December 31, 1999. The Company believes that existing cash on hand,
cash provided by future operations and additional borrowings under the Credit
Facility will be sufficient to finance its operations and expected working
capital and capital expenditure requirements for at least the next twelve
months so long as the Company continues to perform to its operating plan.
However, there can be no assurance that the Company will be able to continue
to meet its cash requirements through operations or, if needed, obtain
additional financing on acceptable terms, and the failure to do so may have an
adverse impact on the Company's business and operations. The Company may also
explore additional debt or equity financing to expand its operations and take
advantage of market opportunities.

Year 2000

The Company was aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approached. The "Year 2000 Problem"
was perceived to be pervasive and complex as virtually every computer
operation was affected in some way by the rollover of the two digit year value
to 00. The issue is whether computer systems would properly recognize date
sensitive information when the year changed to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.

To date, the Company has not suffered any disruptions in its computer
systems or software when the expanded date code field was first used on
January 1, 2000. In addition, to date, the Company has not been made aware
that any third-party systems relied on by the Company, the manufacturing
systems of its vendors or the systems its customers use to order its services
have suffered disruptions in their systems.

Although the costs of the steps to achieve Year 2000 compliance were not
separately tracked, management believes the costs specifically incurred to
obtain Year 2000 compliance were not material. At this time, the Company does
not expect to incur future material expenditures relating to Year 2000
compliance matters.

Euro Conversion

Several European countries adopted a Single European Currency (the "Euro")
as of January 1, 1999 with a transition period continuing through January 1,
2002. The Company is reviewing the anticipated impact the Euro may have on its
internal systems and on its competitive environment. The Company believes its
internal systems will be Euro capable without material modification cost.
Further, the Company does not presently expect the introduction of the Euro
currency to have an adverse material impact on the Company's financial
condition, cash flows, or results of operations.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

Approximately 67% of the Company's 1999 revenues were generated by sales
outside the United States. The Company is exposed to significant risks of
foreign currency fluctuation primarily from receivables

denominated in foreign currency and are subject to transaction gains and
losses, which are recorded as a component in determining net income.
Additionally, the assets and liabilities of the Company's non-U.S. operations
are translated into U.S. dollars at exchange rates in effect as of the
applicable balance sheet dates, and revenue and expense accounts of these
operations are translated at average exchange rates during the month the
transactions occur. Unrealized translation gains and losses will be included
as an adjustment to shareholders' equity.

Based upon the foregoing, the Company began hedging its foreign currency
receivables in the third quarter of 1999 in an effort to reduce its exposure
to currency exchange rates. However, as a matter of procedure, the Company
will not invest in speculative financial instruments as a means of hedging
against such risk. The Company's accounting policies for these contracts are
based on the Company's designation of the contracts as hedging transactions.
The criteria the Company uses for designating a contract as a hedge include
the contract's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. Gains and losses on forward
foreign exchange contracts are recognized in income in the same period as
gains and losses on the underlying transactions. If an underlying hedged
transaction is terminated earlier than initially anticipated, the offsetting
gain or loss on the related forward exchange contract would be recognized in
income in the same period. In addition, since the Company enters into forward
contracts only as a hedge, any change in currency rates would not result in
any material net gain or loss, as any gain or loss on the underlying foreign
currency denominated balance would be offset by the gain or loss on the
forward contract. Information regarding the Company's foreign currency forward
exchange contracts is set forth in Note 13 of Item 14(a)(1) of this Form 10-K
and is incorporated herein by reference.

Item 8. Financial Statements And Supplementary Data.

The information required by this item appears beginning on page F-1 of this
report. See Items 14(a)(1) and (2).

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

On January 21, 1999, the Company engaged PricewaterhouseCoopers LLP to
replace Grant Thornton LLP as its independent auditors. For further
information regarding this change, reference is made to the Company's Forms 8-
K filed with the Securities and Exchange Commission (the "Commission") on
December 22, 1998 and January 21, 1999 and the Form 8-K/A filed with the
Commission on January 11, 1999. Reference is also made to the Letter to the
Commission from Grant Thornton LLP dated January 11, 1999 and filed as Exhibit
99.2 to the Form 8-K/A on January 11, 1999.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors,"
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders.

Item 11. Executive Compensation.

The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors--Director
Compensation" and "--Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," "Compensation Committee Report on
Executive Compensation" and "Stock Performance Graph" in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders.

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

The information required by this item is incorporated by reference to
information to be included under the caption "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders.

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to
information to be included under the caption, "Certain Relationships and
Related Party Transactions" and "Election of Directors--Compensation Committee
Interlocks and Insider Participation" in the Company's Proxy Statement for the
2000 Annual Meeting of Shareholders.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following documents are filed as part of this Report:

1.Financial Statements:

The Company's financial statements were previously filed with a Form
8-K on March 17, 2000. The Company is including the same financial
statements within this Form 10-K for the readers' convenience.

The following financial statements of the Company and the related
report of independent accountants thereon are set forth immediately
following the Index of Financial Statements which appears on page F-
1 of this report:

Reports of Independent Certified Public Accountants

Consolidated Balance Sheets as of December 31, 1999 and 1998

Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997

Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997

Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997

Notes to Consolidated Financial Statements

2.Financial Statement Schedules:

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.

3. (a) Exhibits: The following exhibits are filed as part of this
Report. Parenthetical references indicate incorporation by reference
to documents previously filed by the Company with the Securities and
Exchange Commission.

2.1 Agreement and Plan of Reorganization by and among Level 8,
Middleware Acquisition Corporation, Momentum Software Corporation,
and Robert Brill, Bruns Grayson and Hubertus Vandervoort, as
Trustees of the Momentum Liquidating Trust, on Behalf of the
Securityholders of Momentum Software Corporation dated February 27,
1998 (filed as exhibit 10.42 to Level 8's Annual Report on Form 10-K
February 27, 1998 (filed as exhibit 10.42 to Level 8's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, filed
March 31, 1998, File No. 000-26392).

2.2 Agreement dated November 23, 1998 among Level 8 and Welsh, Carson,
Anderson & Stowe VI L.P. ("WCAS") and related parties (the "WCAS
Parties") named therein relating to the acquisition of capital stock
of Seer Technologies, Inc. by the Company (filed as exhibit 2.1 to
the Seer Technologies, Inc. Annual Report on Form 10-K405 for the
fiscal year ended September 30, 1998, filed January 12, 1999, File
No. 000-26194).

2.2A Amendment No. 1 to the Agreement dated November 23, 1998 among the
Level 8 and WCAS and the WCAS Parties relating to the acquisition of
capital stock of Seer (filed as exhibit (c)(2) to Seer Technologies,
Inc.'s Schedule 13e-3 filed on April 8, 1999, File No. 005-54373).

2.3 Agreement and Plan of Merger providing for the reincorporation of
Level 8 Systems under Delaware Law (filed as Appendix A (page 48) to
Level 8's definitive proxy statement for its 1999 annual meeting
filed on Form DEF 14A, filed April 30, 1999, File No. 000-26392).

2.4 Agreement and Plan of Merger, dated as of October 19, 1999, by and
among Level 8 Systems, Inc., TSAC, Inc., and Template Software, Inc.
(filed as exhibit 2.1 to Level 8's Report on Form 8-K, filed
November 5, 1999, File No. 000-26392 (exhibits and schedules 15
omitted but will be furnished supplementally to the Securities and
Exchange Commission upon request)).

3.1 Certificate of Incorporation of Level 8 Systems, Inc., a Delaware
corporation (filed as Annex B to Level 8's definitive proxy
statement for its 1999 annual meeting filed on Form DEF 14A, filed
April 30, 1999, File No. 000-26392).

3.2 Bylaws of Level 8 Systems, Inc., a Delaware corporation (filed as
Annex C to Level 8's definitive proxy statement for its 1999 annual
meeting filed on Form DEF 14A, filed April 30, 1999, File No. 000-
26392).

3.3 Certificate of Designation relating to Series A 4% Convertible
Redeemable Preferred Stock (filed as exhibit 3.3 Level 8's Form 8-K
filed July 23, 1999, File No. 000-26392).

4.1 Warrant to Purchase Common Stock, dated September 1, 1998, between
Template Software, Inc. and Eagle Eye Technologies, Inc. (filed as
Exhibit 10.26 to Template Software, Inc.'s Quarterly Report on Form
10-Q for the period ended August 31, 1998, File No. 000-21921).

4.2 Form of Warrant Agreement, between the Company and Hampshire
Securities Corporation for 135,000 shares of common stock (filed as
exhibit 10.27 to Across Data Systems, Inc.'s (Level 8's predecessor)
Registration Statement on Form S-1, filed May 12, 1995, File No. 33-
92230).

4.3 Form of Warrants issued June 29, 1999 in connection with the sale of
Series A 4% Convertible Redeemable Preferred Stock (filed as exhibit
10.2 to Level 8's Form 8-K filed July 23, 1999, File No. 0-26392).

4.4 Form of Warrant(s) representing the 250,000 Level 8 warrants issued
to the WCAS Parties (filed as exhibit 8.2(A) to the Seer
Technologies, Inc. Annual Report on Form 10-K for the year ended
September 30, 1998, filed on January 12, 1999, File No. 000-26194).

4.5 Registration Rights Agreement dated June 29, 1999 among Level 8
Systems, Inc. and the investors named on the signature pages thereof
(filed as exhibit 10.3 to Level 8's Form 8-K filed July 23, 1999,
File No. 0-26392).

4.6 Registration Rights Agreement, dated June 13, 1995, between the
Company and Liraz (filed as exhibit 10.24 to Across Data Systems,
Inc.'s (Level 8's predecessor) Registration Statement on Form S-1,
filed May 12, 1995, File No. 33-92230).

9.1 Stockholders Agreement by and among Level 8 Systems, Inc., Template
Software, Inc., and various stockholders of Level 8 and Template
(filed as exhibit 10.1 to Level 8's Report on Form 8-K filed
November 5, 1999, File No. 000-26392).

10.1 Level 8's February 2, 1995 Non-Qualified Option Plan (filed as
exhibit 10.1 to Across Data Systems, Inc.'s (Level 8's predecessor)
Registration Statement on Form S-1, filed May 12, 1995, File No. 33-
92230).*

10.2 Template Software, Inc. 1992 Non-Statutory Stock Option Plan. (filed
as an exhibit to Template Software, Inc.'s Registration Statement on
Form S-1, filed on November 27, 1996, File No. 333-17063).

10.3 Template Software, Inc. 1992 Incentive Stock Option Plan (filed as
an exhibit to Template Software, Inc.'s Registration Statement on
Form S-1, filed on November 27, 1996, File No. 333-17063).

10.4 Template Software, Inc. 1996 Equity Incentive Plan, as amended
(filed as an exhibit to Template Software, Inc.'s Registration
Statement on Form S-8, filed May 8, 1998, File No. 333-52241).

10.5 Form of Consultant's Non Competition, Confidentiality and Invention
Assignment (filed as exhibit 10-7 to Seer's Registration Statement
No. 33-92050 on Form S-1 and incorporated herein by reference).

10.6 Employment Agreement between Steven Dmiszewicki and the Company
dated December 4, 1998 (filed as exhibit 10.19 to Level 8's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998,
filed April 1, 1999, File No. 000-26392).*

10.7 Amended and Restated Employment Agreement, effective November 8,
1996, between Level 8 Technologies, Inc. ("Level 8 Technologies")
and Samuel Somech (filed as exhibit 10.12 to Registration Statement
No. 33-92230 on Form S-1/A).*

10.7A Amendment dated February 26, 1999 to the Employment Agreement
between the Company and Samuel Somech dated November 8, 1996 (filed
as exhibit 10.2A to Level 8's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, filed April 1, 1999, File No.
000-26392).*

10.8 Employment Agreement, dated as of April 30, 1999, between Template
Software, Inc. and E. Linwood Pearce (filed as exhibit 10.2 to
Template Software, Inc.'s Form 10-Q for the period ending March 31,
1999, filed May 14, 1999).

10.9 License Agreement, dated as of December 17, 1998, between BULL and
Template Software, Inc. (filed as exhibit 10.31 to Template
Software, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1998, File No. 26392).

10.10 Development Agreement dated July 17, 1995 between Microsoft
Corporation and the Company (filed as exhibit 10.38 to Across Data
Systems, Inc.'s (Level 8's predecessor) Registration Statement on
Form S-1, filed May 12, 1995, File No. 33-92230).

10.11 Development Agreement dated December 19, 1995 between Liraz and the
Company (filed as exhibit 10.38 to Across Data Systems, Inc.'s
(Level 8's predecessor) Registration Statement on Form S-1, filed
May 12, 1995, File No. 33-92230).

10.11A Amendment No. 1 to the Development Agreement dated December 15, 1995
between Liraz and the Company (filed as exhibit 10.14A to Level 8's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998, filed April 1, 1999, File No. 000-26392).

10.12 Agreement, dated June 13, 1995, between the Company and Liraz (filed
as exhibit 10.23 to Across Data Systems, Inc.'s (Level 8's
predecessor) Registration Statement on Form S-1, filed May 12, 1995,
File No. 33-92230).

10.13 Sales and Purchase Agreement, dated April, 1997, between Template
Software (UK) Limited and British American Financial Services IT &
Group Services Limited (filed as an exhibit to Template Software,
Inc.'s Quarterly Report on Form 10-Q for the period ended May 31,
1997, File No. 0-21921).

10.14 Agreement, dated March 30, 1999, by and between Template Software,
Inc. and PCS Precise Connectivity Solutions Ltd. (filed as exhibit
10.2 to Template Software, Inc.'s Form 10-Q for the period ending
March 31, 1999, filed May 14, 1999).

10.15 Agreement NMA201-98-C-0089, dated September 30, 1998, Modification
PZ0001, dated November 30, 1998 and Modification PZ0002 dated
December 31, 1998, by and between Template Software, Inc. and
National Imagery and Mapping Agency (filed as exhibit 10.1 to
Template Software, Inc.'s Form 10-Q for the period ending June 30,
1999, filed August 16, 1999).

10.16 Lease Agreement for Cary, N.C. offices, dated March 31, 1997, between
Seer Technologies, Inc. and Regency Park Corporation (filed as exhibit
10.47 to Seer Technologies, Inc.'s Quarterly Report on Form 10-Q for the
period ended March 31, 1997, File No. 000-26194).

10.16A Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July 6,
1998 (filed as exhibit 10.58 to Seer Technology Inc.'s Quarterly Report
on Form 10-Q for the period ended June 30, 1998, File No. 000-26194).

10.16B Amendment to Lease Agreement for Cary, N.C. offices, dated January 21,
1999 (filed as exhibit 10.21A to Level 8's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, filed April 1, 1999, File No.
000-26392).

10.17 Office Lease Agreement, dated April 25, 1996, between Template Software,
Inc. and Vintage Park Two Limited Partnership (filed as an exhibit to
Template Software, Inc.'s Registration Statement on Form S-1, filed
November 27, 1996, File No. 333-17063).

10.17A Amendment to Office Lease Agreement, dated August 18, 1997, between
Template Software, Inc. and Vintage Park Two Limited Partnership (filed
as an exhibit to Template Software, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, dated March 2, 1998, File No.
000-21921).

10.18 Lease Agreement, dated December 25, 1992, between Seer Technologies, Inc.
and Capital & Counties (London, England) (filed as exhibit 10.22 to Seer
Technologies, Inc.'s Registration Statement on Form S-1, file No. 33-
92050).

10.19 Credit Agreement between Seer and Greyrock Business Credit, dated March
26, 1997 (filed as exhibit 10.46 to Seer Technologies, Inc.'s Quarterly
Report on Form 10-Q for the period ended March 31, 1997, No. 000-26194).

10.19A Amendment to Credit Agreement between Seer and Greyrock Business Credit,
dated May 5, 1998 (filed as exhibit 10.53 to Seer Technologies, Inc.'s
Quarterly Report on Form 10-Q for the period ended March 31, 1998, File
No. 000-26194).

10.19B Amendment dated December 31, 1998 between Greyrock Capital, a division of
NationsCredit Corporation (formerly Greyrock Business Credit) and Seer to
the Loan and Security Agreement between Greyrock Business Credit and Seer
dated March 26, 1997, as amended (filed as exhibit 10.60 to Seer's Annual
Report on Form 10-K for the year ended September 30, 1998, File No. 000-
26194).

10.19C Amendment dated March 31, 1999, to the Loan and Security Agreement among
Seer, the Company and Greyrock Capital, a division of NationsCredit
Commercial Corporation (filed as exhibit 10.30 to Level 8's Form 10-Q for
the period ending March 31, 1999, filed May 14, 1999).

10.20 Level 8 Guaranty Agreement dated December 31, 1998 (filed as exhibit 10.1
to Level 8's Form 8-K filed as of January 15, 1999, File No. 0-26392).

10.21 Level 8 Promissory Note dated December 31, 1998, in favor of Liraz
Systems Ltd. in the principal amount of $12,000,000 (filed as exhibit
10.2 to the Company's Form 8-K filed as of January 15, 1999, File No. 0-
26392).

10.21A Amendment dated May 31, 1999 to amend the Loan document between the
Company and Liraz Systems, Ltd. (filed as exhibit 10.4 to Level 8's Form
10-Q for the period ending June 30, 1999, filed August 16, 1999, File No.
000-26392).

10.22 Seer Promissory Note dated December 31, 1998, in favor of Level 8 in the
principal amount of $12,000,000 (filed as exhibit 10.3 to the Company's
Form 8-K filed as of January 15, 1999, File No. 000-26392).

10.23 Liraz Agreement dated December 31, 1998 (filed as exhibit 10.4 to the
Company's Form 8-K filed as of January 15, 1999, File No. 000-26392).

10.24 Amended and Restated Loan and Security Agreement among Seer, the Company
and Greyrock Capital, a division of NationsCredit Commercial Corporation,
dated March 30, 1999 (filed as exhibit 10.29 to Level 8's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed April 1,
1999, File No. 000-26392).

10.24A Amendment dated September 24, 1999, to the Loan and Security Agreement
among Seer, the Company and Greyrock Capital, a division of Banc of
America Commercial Finance Corporation, dated March 31, 1999 (filed as
exhibit 10.34 to the Level 8 10-Q for the period ending September 30,
1999, No. 000-26392).

10.24B Amendment dated March 9, 2000, to the Loan and Security Agreement among
Seer, the Company and Greyrock Capital, a Bank of America Company, dated
March 31, 1999 (filed herewith).

10.25 Financing Agreement, dated September 1, 1998, between Template Software,
Inc. and Eagle Eye Technologies, Inc. (filed as exhibit Incorporated by
reference to Template Software, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended August 31, 1998 (File No. 0-21921).

10.26 Convertible Promissory Note, dated September 1, 1998, of Eagle Eye
Technologies, Inc. (filed as Exhibit 10.25 to Template Software, Inc.'s
Quarterly Report on Form 10-Q for the period ended August 31, 1998, File
No. 0-21921).

10.27 Assignment of Indebtedness, dated as of February 19, 1997, between
Template Software, Inc. and Alain Kuhner (filed as an exhibit to Template
Software, Inc.'s Report on Form 8-K, dated March 4, 1997 and filed March
19, 1997, File No. 000-21921).

10.28 Securities Purchase Agreement dated June 29, 1999 among Level 8 Systems,
Inc. and the investors named on the signature pages thereof (filed as
exhibit 10.1 to Level 8's Form 8-K filed July 23, 1999, File No. 000-
26392).

10.29 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and Jansen relating to the purchase of Milestone (filed as an exhibit to
Template Software, Inc.'s Report on Form 8-K, dated June 27, 1997 and
filed July 14, 1997, File No. 000-21921).

10.30 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and NeSBIC III, C.V. relating to the purchase of Milestone (filed as an
exhibit to Template Software, Inc.'s Report on Form 8-K, dated June 27,
1997 and filed July 14, 1997, File No. 000-21921).

11.1 Statement Regarding Computation of Per Share Earnings (filed herewith).

16.2 Letter from Grant Thornton LLP regarding change in certifying accountant,
dated December 22, 1998 (filed as exhibit 16 to Level 8's Form 8-K filed
as of December 22, 1998, File No. 0-26392).

16.3 Letter from Grant Thornton LLP regarding change in certifying accountant,
dated January 11, 1999 (filed as exhibit 99.2 to the Company's Form 8-K/A
filed as of January 11, 1999, No. 0-26392, and incorporated herein by
reference).

21.1 List of subsidiaries of the Company (filed herewith).

23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).

23.2 Consent of Grant Thornton LLP (filed herewith)

27.1 Financial Data Schedule for Company (filed herewith).

* Management contract or compensatory agreement.

(b) Reports on Form 8-K

On November 5, 1999 the Company filed a Form 8-K to announce that it had
entered into an Agreement and Plan of Merger with Template Software, Inc. On
January 11, 2000 the Company filed a Form 8-K to announce the completion of
the merger with Template Software, Inc. That filing was amended on March 13,
2000 to include pro forma financial statements on the consolidate company. The
Company filed its financial statements for the fiscal year ending December 31,
1999 on March 17, 2000.

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.

LEVEL 8 SYSTEMS, INC.

/s/ Arie Kilman
By: _________________________________
Arie Kilman
Chairman of the Board and Chief
Executive Officer

Date: March 22, 2000

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

Signature Title Date
--------- ----- ----

/s/ Arie Kilman Chairman of the Board and March 22, 2000
______________________________________ Chief Executive Officer
Arie Kilman

/s/ Steven Dmiszewicki President March 22, 2000
______________________________________
Steven Dmiszewicki

/s/ Renee D. Fulk Chief Financial Officer March 22, 2000
______________________________________
Renee D. Fulk

/s/ Samuel Somech Chairman Emeritus, March 22, 2000
______________________________________ Director
Samuel Somech

/s/ Robert M. Brill Director March 22, 2000
______________________________________
Robert M. Brill

/s/ Michael Berty Director March 22, 2000
______________________________________
Michael Berty

/s/ Theodore Fine Director March 22, 2000
______________________________________
Theodore Fine

/s/ Lenny Recanati Director March 22, 2000
______________________________________
Lenny Recanati

INDEX TO FINANCIAL STATEMENTS

----------------

Contents

Reports of Independent Accountants......................................... F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets................................................ F-4

Consolidated Statements of Operations...................................... F-5

Consolidated Statements of Changes in Stockholders' Equity................. F-6

Consolidated Statements of Comprehensive Income............................ F-7

Consolidated Statements of Cash Flows...................................... F-8

Notes to Consolidated Financial Statements................................. F-11

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

----------------

To the Stockholders of Level 8 Systems, Inc.

In our opinion, the accompanying consolidated balance sheets as of December
31, 1999 and 1998 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Level 8 Systems, Inc. (the "Company") and
its subsidiaries at December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia
February 18, 2000

F-2

REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

Board of Directors
Level 8 Systems, Inc. and Subsidiaries

We have audited the consolidated statements of operations, stockholders'
equity, comprehensive income and cash flows of Level 8 Systems, Inc. and
Subsidiaries for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated statements of operations, stockholders' equity, comprehensive
income and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated statements of operations, stockholders' equity, comprehensive
income and cash flows. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the results of operations. We believe
that our audit of the consolidated statements of operations, stockholders'
equity, comprehensive income and cash flows provides a reasonable basis for
our opinion.

In our opinion, the consolidated statements of operations, stockholders'
equity, comprehensive income and cash flows referred to above present fairly,
in all material respects, the consolidated results of operations of Level 8
Systems, Inc. and Subsidiaries for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.

/s/ GRANT THORNTON LLP

New York, New York
February 23, 1998 (except for Note 2, as to which the date is February 27,
1998 and Note 3, as to which the date is April 6, 1998)

F-3

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

December 31, December 31,
1999 1998
------------ ------------

ASSETS
Cash and cash equivalents............................ $ 6,509 $ 6,078
Accounts receivable, less allowance for doubtful
accounts............................................ 22,199 16,992
Due from related company............................. -- 271
Notes receivable..................................... 2,000 --
Prepaid expenses and other current assets............ 5,134 2,606
-------- --------
Total current assets............................. 35,842 25,947

Property and equipment, net.......................... 5,845 2,682
Intangible assets, net............................... 69,948 32,217
Software development costs, net...................... 20,488 6,753
Notes receivable..................................... -- 2,000
Other assets......................................... 1,458 1,171
-------- --------
Total assets..................................... $133,581 $ 70,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand......................... $ 4,996 $ 12,275
Current maturities of loan from related company...... 519 628
Current maturities of long-term debt................. 395 799
Accounts payable..................................... 2,194 3,691
Accrued expenses:
Salaries, wages, and related items................. 3,379 1,339
Restructuring...................................... 630 973
Merger-related..................................... 4,075 4,803
Other.............................................. 9,129 10,056
Due to related party................................. 41 82
Deferred revenue..................................... 9,020 10,855
-------- --------
Total current liabilities........................ 34,378 45,501

Long-term debt, net of current maturities............ 22,202 1,541
Loan from related company, net of current
maturities.......................................... 4,000 12,519
Deferred revenue..................................... 780 2,317

Commitments and contingencies (Note 18)

Stockholders' equity
Preferred stock, $0.001 par value, 1,000,000
authorized; 18,945 and 0 issued and outstanding at
December 31, 1999 and 1998, respectively; $1,000
per share liquidation preference (aggregate
liquidation value of $18,945)..................... -- --
Common stock, $0.001 par value, 21,000,000
authorized; 12,328,610 and 8,708,231 issued and
outstanding at December 31, 1999 and 1998,
respectively...................................... 12 87
Additional paid-in-capital......................... 113,507 34,045
Accumulated other comprehensive income............. (159) --
Accumulated deficit................................ (41,139) (25,240)
-------- --------
Total stockholders' equity....................... 72,221 8,892
-------- --------
Total liabilities and stockholders' equity....... $133,581 $ 70,770
======== ========

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

For the Years Ended
December 31,
1999 1998 1997
-------- -------- -------

Revenue:
Software......................................... $ 16,030 $ 1,552 $ 4,354
Maintenance...................................... 14,981 1,091 30
Services......................................... 21,909 8,042 10,296
-------- -------- -------
Total operating revenue........................ 52,920 10,685 14,680

Cost of revenue:
Software......................................... 4,245 2,060 2,554
Maintenance...................................... 5,391 481 16
Services......................................... 19,270 5,776 5,019
-------- -------- -------
Total cost of revenue.......................... 28,906 8,317 7,589

Gross profit...................................... 24,014 2,368 7,091

Operating expenses:
Sales and marketing.............................. 12,009 2,384 1,521
Research and development......................... 6,796 2,777 1,057
General and administrative....................... 6,822 6,443 2,952
In-process research and development.............. 2,944 5,892 --
Amortization of intangible assets................ 6,959 1,933 422
Write-off of intangible assets................... -- 4,601 --
Restructuring, net............................... 383 1,540 --
-------- -------- -------
Total operating expenses....................... 35,913 25,570 5,952
-------- -------- -------
Income (loss) from operations.................. (11,899) (23,202) 1,139

Other income (expense)
Interest income.................................. 579 283 410
Gain on sale of ASU.............................. -- -- 60
Interest expense................................. (2,742) (364) (20)
Net foreign currency loss........................ (695) -- --
-------- -------- -------
Income (loss) before provision for income taxes... (14,757) (23,283) 1,589
Income tax provision.............................. 720 405 553
-------- -------- -------
Income (loss) from continuing operations.......... (15,477) (23,688) 1,036

Discontinued operations:
Income (loss) from discontinued operation, net of
tax............................................. -- (135) 53
Income (loss) on disposal, net of tax............ -- (1,233) --
-------- -------- -------
Income (loss) from discontinued operations..... -- (1,368) 53

Net income (loss)................................. $(15,477) $(25,056) $ 1,089
======== ======== =======

Income (loss) per common share:
Income (loss) from continuing operations--basic.. $ (1.78) $ (3.14) $ 0.15
Income (loss) from discontinued operations--
basic........................................... -- (0.18) 0.01
-------- -------- -------
Net income (loss) per share--basic................ $ (1.78) $ (3.32) $ 0.16
======== ======== =======

Income (loss) per common share:
Income (loss) from continuing operations--
diluted......................................... $ (1.78) $ (3.14) $ 0.13
Income (loss) from discontinued operations--
diluted......................................... -- (0.18) 0.01
-------- -------- -------
Net income/(loss) per share--diluted.............. $ (1.78) $ (3.32) $ 0.14
======== ======== =======
Weighted average common shares outstanding--
basic............................................ 8,918 7,552 6,992
======== ======== =======
Weighted average common shares outstanding--
diluted.......................................... 8,918 7,552 7,561
======== ======== =======

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)

Accumulated
Preferred Additional Retained Other
Common Stock Stock Paid-in Unearned Earnings Comprehensive
Shares Amount Shares Amount Capital Compensation (Deficit) Income Total
------ ------ ------ ------ ---------- ------------ --------- ------------- --------

Balance at 12/31/96..... 6,955 $ 69 -- -- $ 19,506 $ (3) $ (1,273) $ -- $ 18,299
Exercises of stock
options and warrants... 90 1 507 508
Additional public
offering costs......... (137) (137)
Unearned compensation
related to issuance of
non-employee stock
options................ 263 (263) --
Tax benefit from stock
plans.................. 464 464
Adjustment of unearned
compensation........... 148 148
Net income.............. 1,089 1,089
------ ---- --- ---- -------- ---- -------- ------ --------
Balance at 12/31/97..... 7,045 70 -- -- 20,603 (118) (184) -- 20,371

Shares issued for
Momentum............... 595 6 6,480 6,486
Shares Issued for Seer.. 1,000 10 6,088 6,098
Warrants issued for
Momentum 654 654
Warrants issued for
Seer................... 280 280
Exercises of stock
options................ 68 1 58 59
Adjustment of unearned
compensation........... (118) 118 --
Net income (loss)....... (25,056) (25,056)
------ ---- --- ---- -------- ---- -------- ------ --------
Balance at 12/31/98..... 8,708 87 -- -- 34,045 -- (25,240) -- 8,892

Reclass par value to
$0.001................. (79) (79)
Shares issued for
Template acquisition... 1,531 2 41,586 41,588
Shares issued for
Private Placement...... 21 -- 19,149 19,149
Shares issued for loan
guarantee.............. 60 -- 1,207 1,207
Conversion of preferred
shares................. 206 -- (2) -- -- --
Warrants issued for
Private Placement...... -- --
Conversion of warrants.. 1,263 1 12,637 12,638
Exercises of stock
options................ 561 1 4,883 4,884
Preferred stock
dividend............... (422) (422)
Cumulative translation
adjustment............. (159) (159)
Net income (loss)....... (15,477) (15,477)
------ ---- --- ---- -------- ---- -------- ------ --------
Balance at 12/31/99..... 12,329 $ 12 19 $-- $113,507 $-- $(41,139) $ (159) $ 72,221
====== ==== === ==== ======== ==== ======== ====== ========

The accompanying notes are an integral part of the financial statements.

F-6

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

1999 1998 1997
-------- -------- ------

Net income (loss).................................... $(15,477) $(25,056) $1,089
Other comprehensive income, net of tax............... -- -- --
Foreign currency translation adjustment............. (159) -- --
-------- -------- ------
Comprehensive income (loss).......................... $(15,636) $(25,056) $1,089
======== ======== ======

The accompanying notes are an integral part of the financial statements.

F-7

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)

For the Years Ended December 31,
1999 1998 1997
----------- ----------- ----------

Cash flows from operating activities:
Net income/(loss)......................... $ (15,477) $ (25,056) $ 1,089
Adjustments to reconcile net income/(loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 11,633 3,175 788
Deferred income taxes..................... 2 (129) 281
Income (loss) from discontinued
operations............................... -- 135 (53)
(Gain) loss on sale of business........... -- 1,233 (60)
Loss on disposal of property.............. -- 407 --
Purchased in-process research and
development.............................. 2,944 5,892 --
Write-down of goodwill and other
intangible assets........................ -- 4,601 --
Write-down of capitalized software
costs.................................... -- 723 --
Provision for doubtful accounts........... 757 838 332
Other..................................... 170 -- 120
Changes in assets and liabilities, net of
assets acquired and liabilities assumed:
Trade accounts receivable................ 1 3,255 (4,376)
Due from Liraz........................... 271 -- --
Net assets of discontinued operations.... -- -- 507
Prepaid expenses and other assets........ (557) (755) (156)
Accounts payable and accrued expenses.... (4,275) (3,326) 969
Merger-related and restructuring......... (4,545) 5,776 --
Deferred revenue......................... (3,811) 4,888 42
----------- ----------- ---------
Net cash provided by (used in) operating
activities............................. (12,887) 1,657 (517)
Cash flows from investing activities:
Purchases of property and equipment....... (353) (941) (516)
Proceeds from sale of subsidiaries........ -- 464 65
Change in net assets of discontinued
operations............................... -- -- (888)
Purchase of marketable securities......... -- -- (1,998)
Redemption of marketable securities....... -- -- 8,523
Payment for acquisitions.................. (25,340) (484) --
Cash received from acquisitions........... 160 916 --
Capitalization of software development
costs.................................... (1,427) (1,177) (1,156)
----------- ----------- ---------
Net cash provided by (used in) investing
activities............................. (26,960) (1,222) 4,030
Cash flows from financing activities:
Issuance of common shares................. 17,272 59 507
Issuance of preferred shares, net of
issuance costs........................... 19,215 -- --
Dividends on preferred shares............. (250) -- --
Cost of issuance of common shares......... -- -- (137)
Change in net assets of discontinued
operations............................... -- -- (7)
Borrowings from related party............. -- 12,000 --
Payments on loans to related company...... (8,628) (683) (123)
Payments under capital lease obligations.. (47) (45) --
Net borrowings on line of credit.......... 6,717 -- --
Borrowing on term loan.................... 10,000
Payments on line of credit................ (4,000) (12,000) --
Payments on other long-term debt.......... -- (750) (9)
----------- ----------- ---------
Net cash provided by (used in) financing
activities............................. 40,279 (1,419) 231
Effect of exchange rate changes on cash.... (1) -- --
Net increase (decrease) in cash and cash
equivalents............................... 431 (984) 3,744
Cash and cash equivalents:
Beginning of period....................... 6,078 7,062 3,318
----------- ----------- ---------
End of period............................. $ 6,509 $ 6,078 $ 7,062
=========== =========== =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes.............................. $ 949 $ -- $ 11
Interest.................................. $ 1,604 $ 293 $ 20

The accompanying notes are an integral part of the consolidated financial
statements.

F-8

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands, except share data)

Noncash Investing and Financing Activities

During 1999, the Company acquired all of the common stock of Template
Software, Inc. ("Template") for approximately $63,972. In connection with the
acquisition, the Company purchased 5,394,959 shares of Template common stock
for $21,579 in cash and 1,531,089 shares of Level 8 common stock.
Additionally, Level 8 also issued stock options exercisable for 1,124,023
shares of the Company's common stock in exchange for all of the outstanding
Template stock options. See Note 2.

A reconciliation of the cost of the acquisition to the net cash paid for the
acquisition is as follows:

Fair value of:
Assets received............................................... $ 73,160
Liabilities assumed........................................... (7,712)
Additional direct costs....................................... (1,129)
Stock and stock options issued................................ (41,526)
---------
Cash paid..................................................... (22,793)
Cash acquired................................................. 160
---------
Net cash paid for acquisition................................. $ (22,633)
=========

During 1999, the Company obtained a guarantee from a related party in order to
secure a $10 million term loan to partially finance the Template acquisition.
The guarantee was received in exchange for 60,000 shares of the Company's
common stock and was valued at $1,208. See Note 8.

During 1998, the Company acquired all of the common stock of Momentum Software
Corporation ("Momentum") for approximately $10,717. In connection with the
acquisition, the Company issued 594,866 shares of common stock, warrants to
purchase an additional 200,000 shares of common stock, and a $3,000 note. See
Note 2.

A reconciliation of the cost of the acquisition to the net cash received from
the acquisition is as follows:

Fair value of:
Assets received................................................. $ 11,703
Liabilities assumed............................................. (986)
Additional direct costs......................................... (503)
Stock issued.................................................... (6,485)
Warrants issued................................................. (654)
Note payable issued............................................. (3,000)
--------
Cash paid....................................................... 75
Cash acquired................................................... 437
--------
Net cash received from acquisition.............................. $ 362
========

During 1998, the Company acquired 69% of the voting stock of Seer for
approximately $7,754. In connection with the acquisition, the Company issued
1,000,000 shares of common stock and warrants to purchase an additional
250,000 shares of common stock. See Note 2.

F-9

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands, except share data)

A reconciliation of the cost of the acquisition to the net cash received from
the acquisition is as follows:

Fair value of:
Assets received................................................. $ 55,081
Liabilities assumed............................................. (47,327)
Additional direct costs......................................... (966)
Stock issued.................................................... (6,099)
Warrants issued................................................. (280)
--------
Cash paid....................................................... 409
Cash acquired................................................... 479
--------
Net cash received from acquisition.............................. $ 70
========

On April 15, 1999, the Company acquired the remaining minority interest in
Seer, for $0.35 in cash per share of the outstanding common stock of Seer. The
total cost of completing the Seer acquisition was $1,697, which was equal to
the cash paid. During 1999, the Company paid $850 in direct acquisition costs
related to the acquisition of the initial 69% of Seer.

During 1998, the Company renegotiated a royalty arrangement with its majority
stockholder. The arrangement was financed through a $1,500 note. See Note 15.

During 1998, the Company sold its subsidiary ProfitKey International, Inc. in
exchange for $464 in cash at closing and a $2,000 note receivable. See Note 3.

During 1997, the Company acquired certain computer equipment through the
issuance of capital leases totaling $60.

During 1997, the Company recognized deferred unearned compensation expense
related to the issuance of nonemployee stock options totaling $25.

During 1997, the Company sold its ASU consulting division for $65, resulting
in a gain of $60. See Note 3.

The accompanying notes are an integral part of the consolidated financial
statements.

F-10

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)

NOTE 1. SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT
ACCOUNTING PRONOUNCEMENTS

Level 8 Systems, Inc. ("Level 8" or the "Company") is a global provider of
rapid business integration solutions for eBusiness and eCommerce. Business
integration solutions address the emerging need for a company's information
systems to deliver enterprise-wide views of the company's business information
processes.

Liraz Systems, Ltd. ("Liraz") and its wholly-owned subsidiaries own
approximately 38% of Level 8's outstanding common stock at December 31, 1999
and hold preferred stock convertible into an additional one million shares of
common stock.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. See Notes 2 and 3 regarding the acquisitions and
sales of subsidiaries. All of the Company's subsidiaries are wholly-owned for
the periods presented, except for Seer Technologies, Inc. ("Seer"). The
Company acquired a 69% interest in Seer on December 31, 1998 and the remaining
31% interest on April 30, 1999. Prior to the completion of the Seer
acquisition, the Company assumed Seer's net liabilities. The stockholders of
the remaining 31% of the outstanding voting stock were deemed to have shared
in the losses of Seer only for their proportionate share of Seer's net assets
until April 30, 1999. Accordingly, there is no minority interest for the Seer
subsidiary reflected in the consolidated balance sheet at December 31, 1998.

All significant intercompany accounts and transactions are eliminated in
consolidation.

Use of Estimates

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

Foreign Currency Translation

The assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at the current exchange rate as of the balance sheet date. The
resulting translation adjustment is recorded in other comprehensive income as
a component of stockholders' equity. Statements of operations items are
translated at average rates of exchange during each reporting period.

Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency, are
included in the results of operations as incurred.

Revenue Recognition

Statement of Position 98-9, "Modification of SOP 97-2, "Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") was effective
for the Company's fiscal year beginning January 1, 1999. SOP 98-9 amends SOP
97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-
specific objective evidence ("VSOE") of the fair values of all of the
undelivered elements that are not accounted for by means of long-term contract
accounting, (2) VSOE of fair value does not exist for one or more of the
delivered elements, and (3) all revenue recognition criteria of SOP 97-2
(other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. Prior to January 1, 1998, the Company recognized
revenue in accordance with SOP 91-1 "Software Revenue Recognition."

F-11

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenue from recurring maintenance contracts is recognized ratably over the
maintenance contract period, which is typically twelve months. Maintenance
revenue that is not yet earned is included in deferred revenue.

Revenue from consulting and training services is recognized as services are
performed. Any unearned receipts from service contracts result in deferred
revenue.

Cost of Revenue

The primary components of the Company's cost of revenue for its software
products are software amortization on internally developed and acquired
technology, royalties on certain products, and packaging and distribution
costs. The primary component of the Company's cost of revenue for maintenance
and services is compensation expense.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less from the date of purchase.
For these instruments, the carrying amount is considered to be a reasonable
estimate of fair value. The Company places substantially all cash and cash
equivalents with various financial institutions in both the United States and
several foreign countries. At times, such cash and cash equivalents may be in
excess of FDIC insurance limits.

Property and Equipment

Property and equipment is stated at cost and depreciated using the straight-
line method over the estimated useful lives of the related assets as follows:

Leasehold improvements........................ The lesser of the lease term
or estimated useful life
Furniture and fixtures........................ 3 to 5 years
Office equipment.............................. 3 to 5 years
Computer equipment............................ 3 to 5 years

Expenditures for repairs and maintenance are charged to expense as incurred.
The cost and related accumulated depreciation of property and equipment are
removed from the accounts upon retirement or other disposition and any
resulting gain or loss is reflected in operations.

Software Development Costs

The Company capitalizes certain software costs after technological feasibility
of the product has been established. Additionally, the Company has recorded
software development costs for its purchases of developed technology through
its acquisitions of Momentum, Seer, and Template. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technologies.

Capitalized software costs are amortized over related sales on a product-by-
product basis at the greater of the amount computed using (a) the ratio of
current gross revenues for a product to the total of current and anticipated
future gross revenues or (b) the straight-line method over the remaining
estimated economic life of the product. Generally, an original estimated
economic life of three years is assigned to capitalized software costs, once
the product is available for general release to customers. Costs incurred
prior to the establishment of technological feasibility are charged to
research and development expense. Each quarter, the Company evaluates the
value of its capitalized software costs based on the estimated discounted
future cash flows. See Note 6.

F-12

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Excess of Cost Over Net Assets of Business Acquired

Excess of Cost over Net Assets of Business Acquired consists of both
identifiable and unidentifiable assets (goodwill) and is amortized on a
straight-line basis over periods from three to seven years. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the balance over its remaining life can be
recovered through undiscounted future operating cash flows of the related
operations. See Note 7.

Comprehensive Loss

Components of comprehensive loss are included in the consolidated statement of
stockholders' equity and consist of foreign currency translation adjustments.

Advertising Expenses

The Company expenses advertising costs as incurred. Sales brochures and
materials are carried as prepaid expenses until they are consumed or
determined to be obsolete. Advertising expenses were approximately $108, $770,
and $358, for the years ended December 31, 1999, 1998 and 1997, respectively.

Research and Product Development

Research and product development costs are expensed as incurred.

Acquired In-process Research and Development

The fair value of acquired in-process research and development ("IPR&D")
projects acquired in business combinations is expensed immediately. The amount
of purchase price allocated to IPR&D is determined based on appraisals, using
appropriate valuation techniques, including percentage-of-completion which
utilizes the key milestones to estimate the stage of development of each
project at the date of acquisition, estimating cash flows resulting from the
expected revenue generated from such projects, and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of
the purchased in-process technology. At the respective dates of acquisition,
the IPR&D projects had not yet reached technological feasibility and did not
have alternative future uses. As discussed in Note 2, material risks existed
with each IPR&D project, however, management expects that such projects will
be completed.

Income Taxes

The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" to account for income taxes. This statement
requires an asset and liability approach that recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are generally considered. A
valuation allowance is recorded when it is "more probable than not" that
recorded deferred tax assets will not be realized.

Earnings (loss) Per Share

Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding
and any potentially dilutive securities. During 1999 potentially dilutive
securities included stock options, warrants to purchase common stock, and
preferred stock. Potentially dilutive securities outstanding during 1998 and
1997 include stock options and warrants to purchase common stock of the
Company.

F-13

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock-Based Compensation

The Company has adopted the disclosure provisions of SFAS 123 and has applied
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized in the Consolidated Statement of
Operations for its stock option plans. See Note 10.

Derivative Financial Instruments

During 1999, the Company began using foreign currency forward exchange
contracts ("forward contracts") to manage exposure related to accounts
receivable denominated in foreign currencies. The Company does not enter into
derivative financial instruments for trading purposes. All outstanding forward
contracts at the end of the period are marked-to-market, with unrealized gains
and losses included in net income as a component of other income (expense),
net. The costs of the forward contracts are recorded as expense over the lives
of the contracts. Cash flows related to forward exchange contracts are
classified in the Consolidated Statement of Cash Flows in the same categories
as the hedged assets or liabilities.

Government Contracts

As a result of the acquisition of Template Software, Inc. ("Template"), the
company provides certain technical services to federal government agencies
under certain contracts, some of which are classified. The nature of this work
is technical design and software development, which was historically performed
by Template since 1977.

Government contracts, by their terms, generally can be terminated at any time
by the government, without cause, for the convenience of the government. If a
government contract is so terminated, the Company would be entitled to receive
compensation for the services provided or costs incurred at the time of
termination and a negotiated amount of the profit on the contract to the date
of termination. In addition, all government contracts require compliance with
various contract provisions and procurement regulations. The adoption of new
or modified procurement regulations could adversely affect the Company or
increase its costs of competing for or performing government contracts. Any
violation (intentional or otherwise) of these regulations could result in the
termination of such government contracts, imposition of fines, and or
debarment from award of additional government contracts.

Reclassifications

Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 1999 presentation. Such reclassifications had
no effect on previously reported net income or stockholders' equity.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. The Company, to date, has engaged in limited
derivative and hedging activities, and accordingly, does not believe that the
adoption of SFAS No. 133 will have a material impact on the financial
reporting and related disclosures of the Company. The Company will adopt SFAS
No. 133 as required by SFAS 137, "Deferral of the Effective Date of the FASB
Statement No. 133," on January 1, 2001.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
specific guidance, among other things, as to the recognition of revenue
related to up-front non-refundable fees and services charges received in
connection with a contractual arrangement. The Company has applied the
provisions of SAB 101 for the year ended December 31, 1999. The adoption of
SAB 101 did not have a material impact on the Company's financial condition or
results of operations.

F-14

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 2. ACQUISITIONS AND PRO FORMA FINANCIAL STATEMENTS

Acquisition of Template

On December 27, 1999, the Company acquired Template Software, Inc.
("Template"). Under the terms of the agreement, Level 8 purchased 5,394,959
shares of Template common stock for $21,579 in cash and 1,531,089 shares of
Level 8 common stock. Additionally, Level 8 also issued stock options
exercisable for 1,124,023 shares of the Company's common stock to assume all
of the outstanding Template stock options. The total purchase price of the
acquisition was $63,972 and has been accounted for by the purchase method of
accounting. The operations of Template are included in the Company's
consolidated results of operations from the date of acquisition.

Prior to completing the acquisition, the Company had determined not to
continue with certain non-strategic operations of Template in Germany and
Austria. These operations were primarily reselling third party software and
providing related consulting services. At the time of merger, the Company had
entered into an agreement in principle to sell the assets of these operations,
which consist principally of its consulting workforce and certain lease
agreements. Accordingly, the Company has recorded the estimated fair value of
these operations at the acquisition date based on its estimate of the net
future cash flows from the transactions and associated operations
through the wind up period. The fair value of the German and Austrian
operating liability was estimated at $25.

The purchase price of the acquisition was allocated as follows:

Cash................................................................ $ 160
Accounts receivable................................................. 6,123
Prepaid expenses and other current assets........................... 597
Property and equipment.............................................. 4,183
Capitalized software and developed technology....................... 12,200
In-process research and development................................. 2,200
Goodwill and other intangibles...................................... 47,291
Other assets........................................................ 431
Assets held for resale.............................................. (25)
Accounts payable.................................................... (668)
Accrued expenses and other liabilities.............................. (6,445)
Deferred revenue.................................................... (439)
Deferred tax liability.............................................. (1,476)
Long-term debt...................................................... (160)
-------
Cost of net assets acquired......................................... $63,972
=======

Approximately $2,200 of the purchase price represents purchased in-process
research and development that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was immediately
expensed in the Consolidated Statement of Operations upon consummation of the
acquisition. The value assigned to in-process research and development, based
on a valuation prepared by an independent third-party appraisal company, was
determined by identifying research projects in areas for which technological

F-15

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

feasibility had not been established. The efforts considered included projects
related to Template's Enterprise Integration Template("EIT") product ($1,298),
and projects related to new versions of Template's Business Process Template
("BPT") product ($902). The value of the in-process projects was adjusted to
reflect the relative value and contributions of the required research and
development. In doing so, consideration was given to the stage of completion,
the difficulty of completing the remaining development costs already incurred,
and the projected cost to complete the projects. The discount rate included a
factor that takes into account the uncertainty surrounding successful
development of the purchased in-process research and development.

Acquisition of Seer Technologies, Inc.

On December 31, 1998, the Company, as the first step in its acquisition of the
entire equity interest in Seer, acquired beneficial ownership of approximately
69% of the outstanding voting stock of Seer, which was held by Welsh, Carson,
Anderson and Stowe VI L.P. ("WCAS") and certain other parties affiliated or
associated with WCAS ("WCAS Parties") in exchange for 1,000,000 shares of the
Company common stock and warrants to purchase an additional 250,000 shares of
the Company common stock at an exercise price of $12.00 per share ("Step 1").
On April 15, 1999, the Company acquired the remaining minority interest in
Seer, for $0.35 in cash per share of the outstanding common stock of Seer
("Step 2"). As a result of Step 2 of the acquisition, Seer became a wholly-
owned subsidiary of the Company. The total cost of the acquisition was $7,754
for Step 1 and $1,697 for Step 2 and has been accounted for by the purchase
method of accounting. The net book value of Seer's liabilities exceeded its
assets on the acquisition dates, no minority interest in Seer was recorded.
Step 1 of the acquisition occurred on December 31, 1998, there are no
operations of Seer included in the Company's consolidated results of
operations for 1998.

The purchase price was allocated to the assets acquired and liabilities
assumed based on the Company's estimates of fair value at the acquisition
date. The fair value assigned to intangible assets acquired was based on
valuations prepared by an independent third-party appraisal company of the
purchased in-process research and development, developed technology, installed
customer base, assembled workforce, and trademarks of Seer at the completion
of Step 1. The purchase price exceeded the amounts allocated to tangible and
intangible assets acquired less liabilities assumed by approximately $18,684
in Step 1. For Step 2, the fair value assigned to intangible assets acquired
was based on a valuation of the purchased in-process research and development,
developed technology, installed customer base, and assembled workforce of
Seer. The Step 2 purchase price was less than the amounts allocated to the
tangible and intangible assets acquired by approximately $1,307. This
difference between the purchase price and the fair values of assets acquired
less liabilities assumed was allocated to goodwill.

The cost of the acquisition was allocated as follows:

Step 1 Step 2 Total
-------- ------- --------

Cash.................... $ 479 $ -- $ 479
Accounts receivable..... 14,505 -- 14,505
Prepaid expenses and
other current assets... 1,418 -- 1,418
Property and equipment.. 1,614 -- 1,614
Capitalized software and
developed technology... 3,659 3,410 7,069
In-process research and
development............ 4,692 744 5,436
Goodwill and other
intangibles............ 28,344 (1,307) 27,037
Other assets............ 370 -- 370
Accounts payable........ (1,949) -- (1,949)
Accrued expenses and
other liabilities...... (13,228) (1,150) (14,378)
Deferred revenue........ (7,875) -- (7,875)
Notes payable, due on
demand................. (12,275) -- (12,275)
Long-term debt.......... (12,000) -- (12,000)
-------- ------- --------
Cost of net assets
acquired............... $ 7,754 $ 1,697 $ 9,451
======== ======= ========

F-16

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Approximately $4,692 for Step 1 and $744 for Step 2, of the purchase price
represents purchased in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the Consolidated
Statement of Operations upon consummation of the acquisition. The value
assigned to in-process research and development, based on a valuation prepared
by an independent third-party appraisal company, was determined by identifying
research projects in areas for which technological feasibility had not been
established. For Step 1, this included Java based projects ($3,105) and
application warehousing projects ($1,587). For Step 2, the amount was related
to Java based projects only, as there was no change in the status of the
application warehouse projects. The value of the in-process projects was
adjusted to reflect the relative value and contributions of the required
research and development. In doing so, consideration was given to the stage of
completion, the complexity of the work completed to date, the difficulty of
completing the remaining development costs already incurred, and the projected
cost to complete the projects. The discount rate included a factor that takes
into account the uncertainty surrounding successful development of the
purchased in-process research and development.

In connection with the Company's purchase of Seer's capital stock from the
WCAS Parties, WCAS contributed approximately $17 million to Seer and the
Company provided a $12 million subordinated loan to Seer to pay down Seer's
bank debt. The funds used by the Company to make the subordinated loan to Seer
were obtained from Liraz Systems Ltd. ("Liraz"), a principal stockholder of
the Company. See Note 8.

Under the agreement between Company and the WCAS Parties, the WCAS Parties
agreed that, prior to January 1, 2001, at any meeting of stockholders of the
Company, WCAS Parties shall grant a proxy to one or more individuals named by
the Company to vote all of the WCAS Parties' shares of common stock acquired
by the WCAS Parties in connection with the transaction. Also, subject to
limited exceptions, prior to January 1, 2001, the WCAS Parties may not sell,
exchange or otherwise assign any of its shares of the Company without the
prior written consent of the Company.

Acquisition of Momentum

On March 26, 1998, the Company acquired Momentum Software Corporation
("Momentum"). Under the agreement, Level 8 issued 594,866 shares of common
stock and warrants to purchase 200,000 common shares at an exercise price of
$13.108 per share. During the fourth quarter of 1998, the Company issued a
$3,000 note as additional consideration as provided in the purchase agreement.
The total cost of the acquisition was approximately $10,717. The acquisition
was recorded utilizing purchase accounting. As a result of the acquisition of
Momentum, the Company incurred a one-time charge to earnings of approximately
$1,200 related to the estimated value of the purchase of in-process research
and development costs. The remaining amount was allocated to other
intangibles, goodwill and software development costs. The results of
operations of Momentum are included in the financial statements since the date
of acquisition.

F-17

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The cost of the acquisition was allocated as follows:

Cash................................................................ $ 437
Accounts receivable................................................. 125
Prepaid expenses and other current assets........................... 52
Property and equipment.............................................. 174
In-process research and development................................. 1,200
Developed technology................................................ 1,100
Goodwill............................................................ 8,615
Accounts payable.................................................... (507)
Deferred revenue.................................................... (367)
Long-term debt...................................................... (112)
-------
Cost of net assets acquired......................................... $10,717
=======

Approximately $1,200 of the purchase price represents purchased in-process
research and development that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was immediately
expensed in the Consolidated Statement of Operations upon consummation of the
acquisition. The value assigned to in-process research and development, based
on a valuation prepared by an independent third-party appraisal company, was
determined by identifying research projects, all of which related to either
add-ons or enhancements of Momentum's existing XIPC product, in areas for
which technological feasibility had not been established. The value of the in-
process projects was adjusted to reflect the relative value and contributions
of the required research and development. In doing so, consideration was given
to the stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development costs already incurred, and
the projected cost to complete the projects. The discount rate included a
factor that takes into account the uncertainty surrounding successful
development of the purchased in-process research and development.

The following unaudited pro forma results of continuing operations assume the
acquisitions of Template, Seer, and Momentum, as described above, occurred as
of January 1, 1998 after giving effect to certain adjustments, including
amortization of the excess of cost over underlying net assets.

1999 1998
-------- --------

Net sales.............................................. $ 74,977 $ 96,115
Net loss from continuing operations before income taxes
and extraordinary items............................... (36,458) (64,826)
Net loss............................................... (35,831) (87,367)
Loss per share--basic and diluted...................... $ (3.45) $ (8.61)
Weighted average shares outstanding--basic and
diluted............................................... 10,509 10,143

The pro forma financial information does not purport to be indicative of the
results of operations which would have actually resulted had the transactions
taken place at the beginning of the periods presented or of future results of
operations.

NOTE 3. DISCONTINUED OPERATIONS AND OTHER DISPOSITIONS

Sale of Profitkey

From October 3, 1994 through the first quarter of 1998, the Company's
operations included the operations of ProfitKey International, Inc.
("ProfitKey"). ProfitKey offered turnkey manufacturing resource planning and
scheduling software packages, and related installation, training and support
services for use by manufacturing businesses.

F-18

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On April 6, 1998, the Company sold substantially all assets and operations of
ProfitKey for $464 at closing and a note receivable from the purchaser of
$2,000. The note is due on April 6, 2000 and bears interest at 9%. According
to the terms of the ProfitKey sale agreement, the purchase price is subject to
adjustment to reflect any variance in working capital from a specified amount.
The purchaser has notified the Company that it believes there are adjustments
totaling $1,466, which would require a reduction in the purchase price. The
Company has attempted to negotiate a settlement with the purchaser and has,
pursuant to the terms of the settlement agreement, entered into arbitration
proceedings to resolve this matter and is currently awaiting the report of the
arbitrator. The Company has made provision for its estimate of the purchase
price adjustment and the costs to resolve this matter as part of discontinued
operations. Management believes at this time that any additional provisions
required to ultimately resolve this matter will not have a material effect on
the financial position, cash flows, or results of operations of the Company.
The Company recorded a net loss from the sale of ProfitKey of $1,233.

The disposition of ProfitKey was accounted for as a discontinued operation
and, accordingly, prior periods have been restated. Results of the
discontinued operations of ProfitKey consisted of the following for the years
ended December 31:

1998 1997
------ ------

Net sales.................................................... $1,156 $5,545
Income (loss) from operations before tax..................... (225) 191
Income tax expense (benefit)................................. (90) 138
Income (loss) from discontinued operations................... $ (135) $ 53

For 1998, discontinued operations of ProfitKey includes ProfitKey's results of
operations through the date of sale.

Sale of ASU

Effective December 31, 1997, the Company sold the business and related assets
of the ASU Consulting division for $65, resulting in a gain of $60 for the
year ended December 31, 1997. The sale of the ASU Consulting division was not
accounted for as a discontinued operation.

NOTE 4. ACCOUNTS RECEIVABLE

Trade accounts receivable consists of the following at December 31:

1999 1998
------- -------

Current trade accounts receivable.......................... $23,349 $20,244
Less: Allowance for doubtful accounts...................... (1,150) (3,252)
------- -------
$22,199 $16,992
======= =======

Approximately $4,230 and $4,165 of current trade receivables were unbilled at
December 31, 1999 and 1998, respectively. There were no receivables with
payment terms in excess of one year recorded during the fiscal year ended
December 31, 1999.

During 1998 and 1999, the Company acquired certain trade receivables, net of
allowances for doubtful accounts, in conjunction with its acquisition of
Momentum, Seer, and Template. See Note 2.

The provision for uncollectible amounts was $757, $838 and $332 for the years
ended December 31, 1999, 1998, and 1997, respectively. Write-offs of accounts
receivable were $3,044, $736, and $95 for the years ended December 31, 1999,
1998, and 1997, respectively.

F-19

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

1999 1998
------- ------

Computer equipment.......................................... $ 4,038 $1,922
Furniture and fixtures...................................... 1,369 286
Office equipment............................................ 1,221 312
Leasehold improvements...................................... 1,808 544
Land and buildings.......................................... 1,979 --
------- ------
Subtotal................................................ 10,415 3,064
Less accumulated depreciation and amortization.............. (4,570) (382)
------- ------
Total................................................... $ 5,845 $2,682
======= ======

Depreciation and amortization expense was $1,373, $426, and $228 for the
fiscal years ended December 31, 1999, 1998, and 1997, respectively.

During the fourth quarter of fiscal year 1998, property and equipment was
written down for obsolescence and retirement of assets based in part on the
Company's restructured operations. The write-down totaled $595, of which $188
is included in the restructuring charges in the Consolidated Statement of
Operations, see Note 16.

The Company now owns a building in Windsor, England from the acquisition of
Template Software, Inc.

NOTE 6. CAPITALIZED SOFTWARE COSTS

For the fiscal years ended December 31, 1999, 1998 and 1997, the Company
capitalized $1,427, $1,177, and $1,156, respectively, of internal costs
related to developing software for sale. During fiscal year 1999, the Company
acquired $3,410 and $12,200 in capitalized software costs through its
acquisitions of Seer and Template, respectively. During fiscal year 1998, the
Company acquired $1,100 and $3,659 in capitalized software costs through its
acquisitions of Momentum and Seer, respectively.

During the fiscal years ended December 31, 1999, 1998 and 1997, the Company
recognized $3,301, $816, and $137, respectively, of expense related to the
amortization of these costs, which is recorded as cost of software in the
Consolidated Statements of Operations. During the first and fourth quarters of
fiscal year 1998, capitalized software cost was written down to its fair value
based upon an evaluation of its net realizable value. The write downs totaled
$535, of which $241 is included in the restructuring charges in the
Consolidated Statement of Operations. Accumulated amortization of capitalized
software costs is $3,907 and $606 at December 31, 1999 and 1998, respectively.

NOTE 7. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS

Identifiable and unidentifiable intangible assets primarily include goodwill,
existing customer base, assembled workforce and trademarks recorded in
connection with the acquisitions of Template Software on December 27, 1999 and
Seer Technologies on December 31, 1998 and April 30, 1999. Goodwill and
intangible assets from these acquisitions are being amortized using the
straight-line method over periods ranging from three to seven years. Also
included are goodwill amounts acquired in the purchase of Momentum Software on
March 26, 1998 and Level 8 Technologies on April 1, 1995. These assets are
being amortized over three years and seven years,

F-20

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

respectively. At December 31, 1999 and 1998, identifiable and unidentifiable
intangible assets consist of the following:

1999 1998
-------- -------

Goodwill, Level 8 Technologies............................ $ 2,954 $ 2,954
Goodwill, Momentum........................................ 4,014 4,014
Goodwill, Seer Technologies............................... 12,545 18,684
Goodwill, Template Software............................... 44,371 --
Assembled workforce, Seer Technologies.................... 5,673 4,278
Assembled workforce, Template Software.................... 2,920 --
Customer base, Seer Technologies.......................... 6,900 4,761
Trademark, Seer Technologies.............................. 623 623
-------- -------
Subtotal.............................................. 80,000 35,314
Less accumulated amortization............................. (10,052) (3,097)
-------- -------
Total..................................................... $ 69,948 $32,217
======== =======

Amortization expense was $6,959, $1,933, and $422 for the fiscal years ended
December 31, 1999, 1998, and 1997, respectively.

In the fourth quarter of 1999, the Company revised its estimates of certain
Seer merger costs and assumed liabilities, which resulted in an approximately
$1,300 reduction in goodwill.

The Company assesses whether its identifiable and unidentifiable intangible
assets are impaired as required by SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset determined based
upon anticipated cash flows discounted at a rate commensurate with the risk
involved. As a consequence of the Company's transition to an enterprise
application integration solutions provider during 1998, the Company abandoned
certain planned development efforts for products acquired in the Momentum
transaction and reassessed the remaining undiscounted projected cash flows
related to the identifiable and unidentifiable intangible assets acquired from
Momentum. It was concluded that, with the principal exception of the Momentum
technology utilized in the Level 8's Geneva Message Queuing product set and
the Geneva XIPC products, the goodwill and intangible assets acquired in the
Momentum transaction should be written off. Accordingly, during the fourth
quarter of 1998, the Company adjusted the carrying value of its identifiable
and unidentifiable assets to their fair value of $32,217, resulting in a non-
cash impairment loss of $4,601.

NOTE 8. LONG-TERM DEBT AND CREDIT FACILITIES

Notes payable, long-term debt, and notes payable to a related party consist of
the following at December 31:

1999 1998
------- -------

Credit facility............................................ $ 4,996 $ 2,775
Notes payable--Momentum.................................... 2,250 2,250
Term loans................................................. 20,242 9,500
Capital leases............................................. 105 90
------- -------
27,593 14,615
Less current maturities.................................... (5,391) (13,074)
------- -------
$22,202 $ 1,541
======= =======
Related party:
Notes payable to a related party........................... 4,519 13,147
Less current maturities.................................... (519) (628)
------- -------
$ 4,000 $12,519
======= =======

F-21

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has a credit facility with a commercial bank to provide for
borrowings up to the lesser of $25,000 or the sum of 80% of eligible
receivables and a $10,000 term loan. The receivables-based borrowings under
this credit facility are due on demand. This credit facility bears interest at
prime rate plus 2%, which was 10.5% at December 31, 1999, and has no financial
covenant provisions. The balance was $4,996 and $2,775 at December 31, 1999
and 1998, respectively. The credit facility terminates on December 31, 2001 at
which time the term loan is also due; however, it is automatically renewed for
successive terms of one year each, unless terminated by either party. This
credit facility is collateralized by the Company's accounts receivable,
equipment and intangibles including intellectual property. The credit facility
requires the Company to obtain approval from its lender prior to declaration
or payment of any cash dividends on its common stock.

On December 20, 1999, the Company entered into a term loan with a commercial
bank for $10,000. The loan bears interest at LIBOR plus 1% (7.2% at December
31, 1999), which is payable quarterly. This term loan will be due May 31, 2001
and has no financial covenants. The proceeds from this loan were used to
partially fund the purchase of Template, see Note 2. This note is guaranteed
by a related party. This guarantee was provided in exchange for 60,000 shares
of the Company's common stock and a deferred loan origination costs of $1,208
were recorded as assets to reflect the fair market value of the stock issued.

On December 1, 1998, in connection with the acquisition of Momentum Software
Corporation as described in Note 2, the Company issued notes totaling $3,000
payable over three years and bearing an interest of 10% per annum. The
remaining three installments total $2,250, plus interest. One installment was
due on November 26, 1999 with the remaining two payments due on November 20,
2000, and November 15, 2001. There are no financial covenants in this note.
Subsequent to December 31, 1999, the Company offered to exchange the notes
held by former Momentum shareholders for shares of the Company's common stock
at a per share price based on the average market price for a set period prior
to the date the noteholder accepts the offer. The Company converted $1,904 of
the Momentum notes to common stock in the first quarter of 2000 as a result of
this exchange offer.

The Company is obligated under various capital leases for certain computer and
office equipment providing for aggregate payment, excluding interest, of $60
during 2000 and $45 during 2001.

On December 31, 1998 in connection with the acquisition of Seer Technologies,
Inc. as described in Note 2, the Company issued a note payable to Liraz, the
Company's principal shareholder in the amount of $12,000. The note bears
interest at 12% per year, payable at maturity, and is due on December 15,
2001. The Company used $8,000 of proceeds from the issuance of preferred stock
and warrants in June 1999 to reduce the outstanding balance under this note to
$4,000.

On April 1, 1998 in connection with an amendment to a custom computer
programming agreement, the Company issued a note payable to Liraz in the
amount of $1,500. The note bears interest at 8% per year and is payable in
three annual installments. The first two installments, including accrued
interest, were paid during 1998 and 1999, respectively. The third installment
of $450 plus interest is due on April 1, 2000.

On September 1, 1995, the Company issued a note payable to Liraz in the amount
of $628. The note bears interest at 4% per year and is payable in equal
quarterly installments of $35, including interest. As of December 31, 1999,
the principal amount outstanding on the note payable is $110.

Principal amounts of notes payable and long-term debt and notes payable to
Liraz maturing in each of the next five years ending December 31 are as
follows:

Notes Payable Notes Payable
And to
Long-term Debt Liraz
-------------- -------------

2000............................................ $ 5,391 $ 519
2001............................................ 22,202 4,000
------- ------
Total......................................... $27,593 $4,519
======= ======

F-22

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 9. INCOME TAXES

Income tax expense consists of the following as of December 31:

1999 1998 1997
----- ----- ----

Federal--current............................................ $ -- $ -- $239
State and local--current.................................... -- -- 42
----- ----- ----
-- -- 281
Foreign taxes and withholdings.............................. 720 -- --
----- ----- ----
Current taxes............................................... 720 -- --
Federal--deferred........................................... -- 344 231
State and local--deferred................................... -- 61 41
----- ----- ----
Deferred taxes.............................................. -- 405 272
Total income tax expense.................................... $ 720 $ 405 $553
===== ===== ====

A reconciliation of expected income tax at the statutory Federal rate with the
actual income tax expense (benefit) is as follows for the fiscal years ended
December 31:

1999 1998 1997
------- ------- -----

Expected income tax benefit at statutory rate
(34%)............................................ $(5,017) $(7,916) $ 540
Loss on sale of discontinued operations........... -- (331) --
Discontinued operations........................... -- (77) 65
State taxes, net of federal tax benefit........... (335) (1,082) 97
Effect of foreign operations including withholding
taxes............................................ 503 -- --
Effect of change in valuation allowance........... 4,497 6,246 (304)
Amortization and write-off of non-deductible good-
will............................................. 521 2,787 197
In-process research and development--Momentum..... -- 408 --
In-process research and development--Template..... 748 -- --
Write-off of income tax receivable................ -- 406 --
Non-deductible expenses........................... 17 12 34
Other............................................. (214) 121 61
------- ------- -----
Total......................................... $ 720 $ 574 $ 690
======= ======= =====

The total income tax expense is allocated as follows:
Continuing operations......................... 720 405 553
Sale of discontinued operations............... -- 259 --
Discontinued operations....................... -- (90) 137

F-23

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Significant components of the net deferred tax asset (liability) are as
follows:

1999 1998
-------- -------

Current assets:
Allowance for uncollectible accounts receivable......... $ 720 $ 240
Accrued expenses non-tax deductible..................... 371 660
Deferred revenue........................................ 2,192 1,621
Noncurrent assets:
Loss carryforwards...................................... 11,751 5,539
Depreciation and amortization........................... -- 577
-------- -------
15,034 8,637
-------- -------
Noncurrent liabilities:
Depreciation and amortization........................... (3,230) --
-------- -------
(3,230) --
-------- -------
Valuation allowance....................................... (11,804) (8,637)
-------- -------
$ -- $ --
======== =======

At December 31, 1999, the Company has net operating loss carryforwards of
approximately $29,300, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2020. A
substantial portion of these carryforwards is restricted to future taxable
income of certain of the Company's subsidiaries or limited by Internal Revenue
Code Section 382. Thus, the utilization of these carryforwards cannot be
assured. Approximately $2,200 of the valuation allowance relates to deferred
tax assets for which any subsequently recognized tax benefits will be
allocated directly to reduce goodwill or other noncurrent intangible assets of
Momentum. Additionally, Template's net operating loss carryforwards include
tax deductions for the disqualifying dispositions of incentive stock options.
When the Company utilizes the net operating loss related to these deductions,
the tax benefit will be reflected in additional paid in capital and not as a
reduction of tax expense. The total amount of these deductions included in the
net operating loss carryforwards is $5,300.

During 1999, the Company acquired the stock of Template Software. This
acquisition was accounted for using the purchased method of accounting. The
purchase price of the acquired company was in excess of the carryover tax
basis of the assets acquired, resulting in the recognition of a deferred tax
liability of $1,476. Since the acquired company and the Company may elect to
file a consolidated return on an ongoing basis, the future taxable difference
may be offset by the Company's future deductible differences, primarily its
net operating loss carryforwards. Therefore, the Company's valuation allowance
against its deferred tax asset and its investment in the acquired subsidiary
was reduced by $1,476.

The Company provided a full valuation allowance on the total amount of its
deferred tax assets at December 31, 1999 since management does not believe
that it is more likely than not that these assets will be realized.

NOTE 10. STOCKHOLDERS' EQUITY

Stock Options

The Company has 1995 and 1997 Stock Incentive Plans, which permit the issuance
of incentive and nonstatutory stock options, stock appreciation rights,
performance shares, and restricted and unrestricted stock to

F-24

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

employees, officers, directors, consultants, and advisors. The Plans reserve a
combined total of 4,000,000 shares of common stock for issuance upon the
exercise of awards and provide that the term of each award be determined by
the Board of Directors. The Company also has a stock incentive plan for
outside directors and the Company has set aside 120,000 shares of common stock
for issuance under this plan.

Under the terms of the Plans, the exercise price of the incentive stock
options may not be less than the fair market value of the stock on the date of
the award and the options are exercisable for a period not to exceed ten years
from date of grant. Stock appreciation rights entitle the recipients to
receive the excess of the fair market value of the Company's stock on the
exercise date, as determined by the Board of Directors, over the fair market
value on the date of grant. Performance shares entitle recipients to acquire
Company stock upon the attainment of specific performance goals set by the
Board of Directors. Restricted stock entitles recipients to acquire Company
stock subject to the right of the Company to repurchase the shares in the
event conditions specified by the Board are not satisfied prior to the end of
the restriction period. The Board may also grant unrestricted stock to
participants at a cost not less than 85% of fair market value on the date of
sale. Options granted vest at varying periods up to five years and expire in
ten years.

In December 1999, as part of its acquisition of Template Software, Inc. the
Company has assumed the three Stock Option Plans of Template; the 1992
Incentive Stock Option Plan, the 1992 Non-Statutory Stock Option Plan and the
1996 Equity Incentive Plan. No further grants may be made under these plans.
The options granted under these plans were converted to options for the
Company's common stock upon the assumption of these plans by the Company at
the acquisition date. There are 1,124,023 options outstanding under these
plans.

Activity for stock options issued under these plans for the fiscal years
ending December 31, 1999, 1998 and 1997 is as follows:

Weighted Average
Plan Activity Option Price per Share Exercise Price
------------- ---------------------- ----------------

Balance at December 31,
1996................... 783,155 0.69-11.00 7.31
Granted................ 444,500 10.69-16.62 8.14
Exercised.............. (91,646) 0.69-16.62 7.01
Forfeited.............. (45,705) 0.69-16.62 11.38
--------- -----
Balance at December 31,
1997................... 1,090,304 0.69-16.62 7.51
Granted................ 1,293,000 7.25-12.75 8.14
Exercised.............. (38,175) 0.69-11.76 9.13
Forfeited.............. (433,035) 0.69-16.62 10.88
--------- -----
Balance at December 31,
1998................... 1,912,094 0.69-16.62 8.85
Granted................ 1,797,210 8.38-30.25 14.15
Assumed Template
options............... 1,124,023 3.39-39.29 17.22
Exercised.............. (386,440) 0.69-16.62 9.26
Forfeited.............. (646,995) 7.88-11.76 9.0
--------- -----
Balance at December 31,
1999................... 3,799,892 1.37-39.29 13.65
========= =====

The weighted average grant date fair value of options issued during the years
ended December 31, 1999, 1998, and 1997 was equal to $9.77, $4.37, and $9.35
aper share, respectively. The fair value of options granted during the fiscal
years ended December 31, 1999, 1998 and 1997 was equal to $17,550, $5,652 and
$4,156, respectively. There were no option grants issued below fair market
value during 1999, 1998 or 1997.

F-25

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of the Company's stock-based awards to employees was estimated
as of the date of the grant using the Black-Scholes option-pricing model,
using the following weighted-average assumptions:

1999 1998 1997
------- ------- -------

Expected life (in years).......................... 5 years 5 years 5 years
Expected volatility............................... 82% 52% 77%
Risk free interest rate........................... 5.44% 5.00% 6.05%
Expected dividend yield........................... 0% 0% 0%

For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
fiscal years December 31, 1999, 1998, and 1997 would have been increased to
the pro forma amounts indicated below. The Company's adjusted information
follows (in thousands, except for per share information):

1999 1998 1997
-------- --------- -------

Net income (loss), as reported............... $(15,477) $ (25,056) $ 1,089
Net income (loss), as adjusted............... (22,538) (27,697) (821)
Net income (loss) per share, as reported--
basic....................................... (1.80) (3.32) 0.16
Pro forma net income (loss) per share, as
adjusted--basic............................. (2.57) (3.67) (0.12)
Net income (loss) per share, as reported--
diluted..................................... (1.80) (3.32) 0.14
Pro forma net income (loss) per share, as
adjusted--diluted........................... (2.57) (3.67) (0.11)

At December 31, 1999, 1998 and 1997, options to purchase approximately
1,850,087, 908,638, and 539,980 shares of common stock were exercisable,
respectively, pursuant to the plans at prices ranging from $1.37 to $39.29.
The following table summarizes information about stock options outstanding at
December 31, 1999:

Remaining Contractual
Number Life for Options Number
Exercise Price Outstanding Outstanding Exercisable
- -------------- ----------- --------------------- -----------

1.37-- 2.00 5,134 4.4 5,134
3.39-- 4.87 207,516 4.4 195,302
5.00-- 7.25 480,782 7.0 377,657
7.88--11.76 1,845,313 8.5 736,714
11.94--16.62 445,569 8.1 303,477
18.88--18.88 186,924 8.2 89,789
30.25--39.29 628,654 9.0 142,014
--------- ---------
3,799,892 1,850,087
========= =========

Preferred Stock

On June 29, 1999, Level 8 Systems, Inc. completed its agreement to sell 21,000
shares of Series A 4% Convertible Redeemable Preferred Stock ("Series A
Preferred Stock"), for $21,000, convertible into an aggregate of 2.1 million
shares of common stock of Level 8. The proceeds, net of accrued issuance
costs, of $19,150, will be used to pay down debt and for other general
corporate purposes. The sale of the Series A Preferred Stock was made in a
private transaction exempt from the registration requirements of the federal
securities laws.

F-26

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Holders of the Series A Preferred Stock are entitled to receive 4% annual cash
dividends payable quarterly and will have one vote per share of Series A
Preferred Stock, voting together with the common stock and not as a separate
class except on certain matters adversely affecting the rights of holders of
the Series A Preferred Stock. The Series A Preferred Stock may be redeemed at
the option of Level 8 at a redemption price equal to the original purchase
price at any time after June 29, 2000 if the closing price of Level 8's common
stock over 20 consecutive trading days is greater than $20 per share. The
conversion price of the Series A Preferred Stock is subject to certain anti-
dilution provisions, including adjustments in the event of certain sales of
common stock at a price of less than $10 per share. In the event Level 8
breaches its obligations to pay dividends when due or issue common stock upon
conversion, or Level 8's common stock is delisted, the dividend rate on the
Series A Preferred Stock would increase to 18% per annum (partially payable in
shares of common stock at the option of Level 8 during the first 60 days of
such increased dividend rate). As part of the $21 million financing, Level 8
also issued the investors warrants to purchase 2.1 million shares of common
stock at an exercise price of $10 per share. Level 8 has agreed to register
the common stock issuable upon conversion of the Series A Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933. Level 8
is required to make certain payments in the event it is unable to meet its
obligations in connection with the Series A Preferred Stock and warrants, such
as registration under the Securities Act or issuance of shares of common stock
upon conversion or exercise. The aggregate amount of all such payments,
together with dividends on the Series A Preferred Stock, is limited to 19% of
the liquidation value of the Series A Preferred Stock. One of the investors in
the Series A Preferred Stock included Advanced Systems Europe B.V., which
purchased $10 million of Series A Preferred Stock and warrants in the
transaction, and is a subsidiary of Liraz, Level 8's principal stockholder.

During 1999, 2,005 shares of preferred stock were converted into 200,500
shares of the Company's common stock. Subsequent to December 31, 1999, 7,000
shares of preferred stock were converted into 700,000 shares of the Company's
common stock.

Stock Warrants

In connection with the issuance of preferred stock in June 1999, the Company
issued warrants to purchase 2,100,00 shares of the Company's common stock,
including warrants to purchase 1,000,000 shares of common stock that were
issued to a related party. The warrants have an exercise price of $10.00 per
share and expire on June 29, 2004. The Company may cause the redemption of
these warrants at any time after June 29, 2000 if the closing price of the
Company's common stock over 20 consecutive trading days is greater than $20
per share.

Warrants totaling 1,260,460 were exercised at an exercise price of $10.00
during the year ended December 31, 1999. A related party exercised warrants to
purchase 1,000,000 shares of common stock.

In connection with the acquisition of Momentum during 1998, the Company issued
warrants to purchase 200,000 shares of the Company's common stock. The
warrants have an exercise price of $13.108 per share and expire on March 26,
2003. The warrants were valued at $654 or $3.27 per share. See Note 2.

In connection with the acquisition of Seer during 1998, the Company issued
warrants to purchase 250,000 shares of the Company's common stock. The
warrants have an exercise price of $12 per share and expire on December 31,
2002. The warrants were valued at $280 or $1.12 per share. See Note 2.

In connection with the initial and secondary public offerings, the Company
issued 140,000 and 110,000 warrants, respectively, to the underwriter. The
warrants are exercisable for four years, commencing one year from the
effective dates of the public offerings at exercise prices of $7.43 and $14.85
per share, respectively, and have grant date fair values of $3.82 and $6.85
per share, respectively. Warrants totaling 3,000, 1,200 and 18,168 were
exercised at an exercise price of $7.43 during the years ended December 31,
1999, 1998 and 1997, respectively.

F-27

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Reincorporation and Common Stock

Effective June 23, 1999, the Company completed its re-incorporation under
Delaware law. As a result of the re-incorporation of the Company under
Delaware law, the rights of stockholders of the Company are now governed by
the Certificate of Incorporation and Bylaws of Level 8 Systems, Inc., a
Delaware corporation, and the General Corporation Law of the State of
Delaware. In conjunction with the re-incorporation, the Company changed the
par value of its common stock from $.01 to $.001.

NOTE 11. EMPLOYEE BENEFIT PLANS

As of January 1, 1999 the Company had separate 401(k) plans for employees of
Momentum, Seer, and Level 8. Effective January 27, 1999, the Company merged
the Momentum 401(k) Plan and the Level 8 401(k) Plan into the Seer 401(k) Plan
and changed the name of the Seer 401(k) Plan to the Level 8 Systems 401(k) and
Profit Sharing Plan (the "Plan"). Participants in the former Momentum 401(k)
Plan and the Level 8 401(k) Plan are allowed to roll over the balance of their
accounts into the Plan, with recognition of certain protected benefits. Also
effective January 27, 1999, the Company amended the Plan to provide a 50%
matching contribution for an employee's contribution, up to 2% of an
employee's salary, and a discretionary match of up to $0.50 on the dollar up
to 2% of the employees salary based on the Company's performance and board of
directors discretion. Participants must be eligible Plan participants and
employed at December 31 of each calendar year to be eligible for employer
matching contributions. Matching contributions made by the Company totaled
$156 were accrued during 1999 and were paid out in January of 2000.

The Company also has employee benefit plans for each of its foreign
subsidiaries, as mandated by each country's laws and regulations. For fiscal
year ended December 31, 1999 there was $408 in expense recognized under this
plan. There was no expense recognized under these plans for the years ended
December 31, 1998, and 1997 as these subsidiaries were acquired with the
acquisition of Seer.

Effective January 27, 1999, the Company adopted an Employee Stock Purchase
Plan (U.S.) for its U.S. employees and the International Stock Purchase Plan,
currently available to its UK employees, (collectively, the "Stock Purchase
Plans"). The Stock Purchase Plans allow employees to purchase shares of the
Company's common stock for 85% of fair market value. The Stock Purchase Plans
are authorized to grant rights to purchase an aggregate maximum of 250,000
shares of common stock. The Company is responsible for the administrative
costs of the plans.

NOTE 12. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

No customers accounted for more than 10% of operating revenue in fiscal year
1999. For the fiscal years ended December 31, 1998 and 1997, one customer
accounted for more than 10% of operating revenue.

As a result of its acquisition of Seer, the Company has entered into several
marketing and distribution agreements with IBM, primarily in the European
market. The percentage of outstanding receivables from IBM and its
subsidiaries, transactions as of December 31, 1999 and 1998, is approximately
23% and 25%, respectively.

As of December 31, 1999, the Company had significant balances outstanding from
individual customers due to the nature of its operations. It is the policy of
the Company to closely monitor all accounts receivable and to record a
provision for uncollectible accounts as they become estimable. Generally, no
collateral is required.

NOTE 13. FOREIGN CURRENCIES AND FORWARD EXCHANGE CONTRACTS

At December 31, 1999, the Company had approximately $526 and $8,190 U.S.
dollar equivalent cash and trade receivable balances, respectively,
denominated in foreign currencies. As of December 31, 1998, the amount of US
dollar equivalent cash and trade receivable balances were $219 and $8,527,
respectively.

F-28

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The more significant trade accounts receivable denominated in foreign
currencies as a percentage of total trade accounts receivable were as follows:

1999 1998
----- -----

Pound Sterling................................................... 8.68% 8.53%
Deutsche Mark.................................................... 5.62% 2.43%
Italian Lira..................................................... 5.33% 8.33%
Danish Krona..................................................... 4.64% 8.73%

In 1999, the Company began entering into forward exchange contracts to hedge
the exposures that arise from foreign exchange movements between dates that
foreign currency denominated receivables are recorded and the dates they are
paid. The Company does not engage in foreign currency speculation. The forward
contracts are generally 90 to 120 day forward window contracts having
maturities of less than one year and relate to specific transactions or
balances. The table below summarizes, by currency, the contractual amounts of
the Company's forward contracts for the year ended December 31, 1999.

As of December 31, 1999
---------------------------
Original Contract Contract Fair Unrealized
Currency Contracts Drawdowns Balance Value Gain/(Loss)
- -------- --------- --------- -------- ------ -----------

Pound Sterling.................. 1,556 (1,181) 375 379 (4)
Danish Krona.................... 2,704 (1,730) 974 969 5
Euro............................ 5,043 (3,173) 1,870 1,827 43
Norwegian Krone................. 1,053 (791) 262 265 (3)
Swedish Krone................... 461 (328) 133 135 (2)
------- ------- ------ ------ ---
Total......................... $10,817 $(7,203) $3,614 $3,575 $39
======= ======= ====== ====== ===

Unrealized gains and losses on forward contracts reflect changes in exchange
rates and are recorded directly in income, as they offset corresponding
unrealized gains and losses on the foreign currency denominated assets being
hedged (see Note 1). Forward contract liabilities related to unrealized losses
are recorded as other accrued expenses in the Consolidated Balance Sheet.

The Company is exposed to exchange related losses on forward contracts should
a transaction with a related forward exchange contract not be consummated by
the forward contract expiration date. In such instances, the Company extends
or repurchases the contact at the then prevailing market rates. Net realized
losses on the extension or repurchase of contracts totaled $3 for the fiscal
year ended December 31, 1999.

NOTE 14. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

Management of the Company makes operating decisions and assesses performance
of its operations based on the following reportable segments: (1) Software,
(2) Maintenance, (3) Services, and (4) Research and Development.

Segment data includes a charge allocating all corporate-headquarters costs to
each of its operating segments based on each segment's proportionate share of
expenses. The Company evaluates the performance of its segments and allocates
resources to them based on earnings (loss) before interest, taxes,
restructuring and amortization of goodwill (EBITA).

Comparative information is not available for the same period of 1998 and 1997
because the Company previously reviewed its operations as one reportable
segment and did not have international operations.

F-29

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The table below presents information about reported segments for the fiscal
year ending December 31, 1999:

Research
And
Software Maintenance Services Development Total
-------- ----------- -------- ----------- -------

Total Revenue................ $16,030 $14,981 $21,909 $ -- $52,920
Total EBITA.................. $(2,549) $ 8,819 $ (116) $(7,767) $(1,613)

A reconciliation of total segment EBITA to loss before provision for income
taxes for the fiscal year ended December 31, 1999 is as follows:

EBITA............................................................. $ (1,613)
Amortization of goodwill.......................................... (6,959)
In-process research and development............................... (2,944)
Restructuring..................................................... (383)
Other income/(expense), net....................................... (2,858)
--------
Loss before provision for income taxes............................ $(14,757)
========

The following table presents a summary of revenue by geographic region for the
fiscal year ended December 31, 1999:

Year ended
December 31, 1999
-----------------

Australia.................................................. $ 2,429
Denmark.................................................... 4,861
Germany.................................................... 3,553
Italy...................................................... 3,370
Norway..................................................... 2,128
Switzerland................................................ 2,782
United Kingdom............................................. 5,055
USA........................................................ 18,134
Other...................................................... 10,608
-------
Total revenue............................................ $52,920
=======

Presentation of revenue by region is based on the country in which the
customer is domiciled. Only countries with greater than 4% of total revenue
are disclosed individually.

The following table represents a summary of long-lived assets by geographic
region as of December 31:

1999 1998 1997
------- ------- ------

United States......................................... $93,946 $41,136 $4,935
United Kingdom........................................ 2,168 416 --
France................................................ 119 -- --
Other................................................. 48 100 --
------- ------- ------
Total assets........................................ $96,281 $41,652 $4,935
======= ======= ======

The Company's foreign operations are reimbursed by the Company for their costs
plus an appropriate mark-up for profit. Intercompany profits and losses are
eliminated in consolidation.

F-30

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 15. RELATED PARTY INFORMATION

During 1995, the Company and Liraz entered into a custom computer programming
agreement for the joint development of certain software. Liraz and the Company
were each to pay 50% of the total project development costs. In exchange for
providing 50% of the project development costs, Liraz was to receive royalties
of 30% of the first $2,000 in contract revenue from the sale of products
developed under this agreement, 20% of the next $1,000, and 8% thereafter.

Due to a change in the Company's development plans for this product, during
the first quarter of 1998, the Company and Liraz entered into an amendment to
the original custom computer programming agreement, whereby the original
royalty payment provisions were repealed. Under the new agreement, the Company
agreed to reimburse Liraz's costs of development of $1,500 and to pay Liraz
royalties of 3% of program revenues, as defined in the agreement, generated
from January 1, 1998 until December 31, 2000. The Company issued a note to
Liraz for $1,500 for cost reimbursement pursuant to this agreement and is
amortizing the cost of reimbursement over the term of the agreement. See Note
8. The amortization of the cost reimbursement is included as a component of
cost of software in the Consolidated Statement of Operations. Total royalties
paid to Liraz were $15 and $130 for the years ended December 31, 1999 and
1998, respectively.

In addition, the Company and Liraz were awarded an Israel--U.S. Binational
Industrial Research and Development Foundation ("BIRD") grant totaling $432.
The BIRD grant provided for reimbursement of up to 50% of the development
costs of the above project. At the point at which the products developed under
this grant are available for sale, BIRD will be paid a royalty of 2.5% of
related sales in the first year and 5% in subsequent years until BIRD recovers
110% to 150% (depending on the elapsed time) of its reimbursement of
development costs. The Company capitalized the software development costs
associated with Level 8's project development costs and reduced the
capitalized costs by any grant funds received from BIRD. At December 31, 1999,
the Company had capitalized approximately $1,249, after reimbursement of BIRD
funds totaling approximately $400. This product was completed during fiscal
year 1998.

The Company sold software licenses to Liraz for $15 and $160 in 1998 and 1997,
respectively, for resale to unrelated third parties.

Liraz also pays the salaries and expenses of certain company employees and is
reimbursed by the Company. Salaries and expenses paid by Liraz amounted to
$372, $568, and $14 during 1999, 1998, and 1997 respectively.

At December 31, 1999 and 1998, the Company had accounts receivable of $- and
$271 and accounts payable of $41 and $82 from and to Liraz, respectively.

In June 1999, a subsidiary of Liraz purchased convertible preferred stock and
warrants from the Company for $10,000 on the same terms as the other investors
in the $21,000 offering. In December, 1999, Liraz exercised its warrants for
one million shares of common stock for an aggregate exercise price of $10,000.

The Company issued Liraz 60,000 shares of common stock in exchange for Liraz's
guaranty of a $10,000 term loan to the Company used to finance the Template
acquisition.

See Note 8 regarding notes payable to Liraz.

NOTE 16. RESTRUCTURING CHARGES

During the fourth quarter of 1999, the Company reorganized its existing
operations due to its acquisition of Template. The Company's restructuring
included a management change in its development and operations areas, the
abandonment of certain leased facilities, and the closure of its French
subsidiary. The Company recorded a restructuring charge of $545, which
consisted of approximately $275 in costs associated with subleasing excess

F-31

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

space, approximately $235 in personnel-related charges, and approximately $35
in professional fees to close its French subsidiary. Through December 31,
1999, the Company had not paid any cash related to these restructuring
charges.

During the fourth quarter of 1998, the Company reorganized its existing
operations due to its acquisition of Seer. The restructuring included a staff
reduction in its development and administrative areas of 20% (15 employees),
the abandonment of certain leased facilities, and the write-down to fair value
of certain capitalized software costs for product lines which were being
discontinued. The Company recorded a restructuring charge of approximately
$1,540, which consisted of approximately $706 in personnel-related charges,
approximately $292 in costs associated with carrying vacated space until the
lease expiration date, approximately $188 of property and equipment related
charges, approximately $241 in write-down of capitalized software costs,
approximately $100 in professional fees related to the restructuring, and
approximately $13 for other charges. Through December 31, 1999, the Company
has paid approximately $864 in cash related to the restructuring.

At December 31, 1999 the Company revised its estimate of the 1998
restructuring charge by reducing it by $162 based on a review of the costs
paid through December 31, 1999 and the remaining estimated costs. The change
in estimate is reflected in the 1999 Consolidated Statement of Operations as a
reduction of the restructuring charge for 1999.

The Company believes the accrued restructuring cost of $630 at December 31,
1999 represents its remaining cash obligations for the restructuring charges
included above.

NOTE 17. LEASE COMMITMENTS

The Company leases certain facilities and equipment under various operating
leases. Future minimum lease commitments on operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December
31, 1999 are as follows:

2000............................................................... $ 3,816
2001............................................................... 3,400
2002............................................................... 2,964
2003............................................................... 2,574
2004............................................................... 1,671
Thereafter......................................................... 4,040
-------
$18,465
=======

Rent expense for the fiscal years ended December 31, 1999, 1998 and 1997 was
$2,940, $790, and $378, respectively.

NOTE 18. CONTINGENCIES

Litigation. Various lawsuits and claims have been brought against the Company
in the normal course of business. Management is of the opinion that the
liability, if any, resulting from these claims would not have a material
effect on the financial position or results of operations of the Company.

In December 1997, Seer Technologies, Inc. ("Seer"), a wholly-owned subsidiary
of the Company, instituted litigation in London, England against Saadi Abbas
("Abbas") and Cambridge Business Solutions (UK) Ltd. ("CBS") concerning a
dispute over a license agreement between Seer, CBS and Abbas. These entities
counterclaimed against Seer. The case has proceeded through discovery and
various other procedural events and all that remains of the litigation at this
point in time are various claims against Seer by Abbas and CBS. In July, most
of those claims were struck out by the court in London as unarguable or
otherwise time barred. The

F-32

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company intends to continue to vigorously defend against the few remaining
claims. The Company has made provision for its estimated costs to resolve this
matter. Management does not believe at this point in the litigation that any
additional amounts required to ultimately resolve this matter will have a
material effect on the financial position, cash flows, or results of
operations of the Company.

On April 6, 1998, the Company sold substantially all assets and operations of
its wholly owned subsidiary ProfitKey International, Inc. ("ProfitKey").
According to the terms of the ProfitKey sale agreement, the purchase price is
subject to adjustment to reflect any variance in working capital from a
specified amount. The purchaser has notified the Company that it believes
there are substantial adjustments which would require a reduction in the
purchase price. The Company and the purchaser pursuant to the terms of the
settlement agreement, entered arbitration proceedings to resolve this matter
and a discussion from the arbitrator is expected soon. The Company has made a
provision for its estimate of the purchase price adjustment and the costs to
resolve this matter. Management believes at this time that any additional
provision required to ultimately resolve this matter will not have a material
effect on the financial position, cash flows, or results of operations of the
Company.

On June 30, 1999, Template Software, Inc., filed a claim with the National
Association of Securities Dealers for arbitration against Merrill Lynch Pierce
Fenner & Smith ("Merrill Lynch") seeking compensatory damages of $950,000 plus
attorney's fees and lost income resulting from advice rendered by Merrill
Lynch to purchase, and the failure of Merrill Lynch to divest at Template's
instruction, a portfolio of zero coupon long-term bonds held by Template. On
December 27, 1999, Template Software, Inc. was merged into TSAC, Inc., a
wholly owned subsidiary of the Company. Discovery has commenced in the
arbitration. The Company expects that the arbitration will be completed by the
end of summer 2000. The Company cannot at this time predict the outcome of
these proceedings. Management does not believe that the results of this
arbitration will have a material effect on the financial position, cash flows,
or results of operations of the Company.

On July 15, 1999, Template filed an action against Manugistics, Inc.
("Manugistics") in the United States District Court for the Eastern District
of Virginia, seeking compensatory damages of approximately $1.25 million
resulting from breach of certain representations contained in a license
agreement for Manugistics-developed software. Manugistics filed a counterclaim
against the Company, asserting breach of contract, breach of alleged
settlement, and wrongful hiring. On October 19, 1999, the Company filed an
amended complaint to include two additional claims, fraud in the inducement
and constructive fraud, seeking additional damages of $2 million. Subsequent
to December 31, 1999, the Company settled this litigation matter at no loss to
the Company. The terms of this settlement are confidential.

NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
(In thousands, except per share data)

1999:
Net revenues.................... $ 13,205 $ 13,007 $ 12,803 $ 13,905
Gross profit.................... 4,749 5,398 6,178 7,689
Net loss........................ (3,828) (4,224) (2,544) (4,881)
Net loss per share -- basic and
diluted........................ ($0.44) ($0.49) ($0.31) ($0.54)
1998:
Net revenues.................... $ 3,093 $ 3,155 $ 2,349 $ 2,088
Gross profit.................... 901 1,308 358 (199)
Net loss........................ (2,484) (2,026) (2,918) (17,628)
Net loss per share -- basic and
diluted........................ ($0.35) ($0.26) ($0.38) ($2.29)

F-33

LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During the fourth quarter of 1999, the Company recorded significant
nonrecurring adjustments totaling $2,583. The fourth quarter adjustments
related primarily to the acquisition of Template and restructuring charges.
See Notes 2 and 16.

During the fourth quarter of 1998, the Company recorded significant
nonrecurring adjustments totaling $14,025. These adjustments related primarily
to the acquisition of Seer, the impairment of the note receivable from the
sale of a subsidiary, the impairment of goodwill recorded in connection with
the acquisition of Momentum, and the restructuring charges. See Notes 2, 3, 7,
and 16.

F-34

Index to Exhibits

2.1 Agreement and Plan of Reorganization by and among Level 8, Middleware
Acquisition Corporation, Momentum Software Corporation, and Robert
Brill, Bruns Grayson and Hubertus Vandervoort, as Trustees of the
Momentum Liquidating Trust, on Behalf of the Securityholders of
Momentum Software Corporation dated February 27, 1998 (filed as exhibit
10.42 to Level 8's Annual Report on Form 10-K February 27, 1998 (filed
as exhibit 10.42 to Level 8's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, filed March 31, 1998, File No. 000-
26392).

2.2 Agreement dated November 23, 1998 among Level 8 and Welsh, Carson,
Anderson & Stowe VI L.P. ("WCAS") and related parties (the "WCAS
Parties") named therein relating to the acquisition of capital stock of
Seer Technologies, Inc. by the Company (filed as exhibit 2.1 to the
Seer Technologies, Inc. Annual Report on Form 10-K405 for the fiscal
year ended September 30, 1998, filed January 12, 1999, File No. 000-
26194).

2.3 Agreement and Plan of Merger providing for the reincorporation of Level
8 Systems under Delaware Law (filed as Appendix A (page 48) to Level
8's definitive proxy statement for its 1999 annual meeting filed on
Form DEF 14A, filed April 30, 1999, File No. 000-26392).

2.4 Agreement and Plan of Merger, dated as of October 19, 1999, by and
among Level 8 Systems, Inc., TSAC, Inc., and Template Software, Inc.
(filed as exhibit 2.1 to Level 8's Report on Form 8-K, filed November
5, 1999, File No. 000-26392 (exhibits and schedules 15 omitted but will
be furnished supplementally to the Securities and Exchange Commission
upon request)).

3.1 Certificate of Incorporation of Level 8 Systems, Inc., a Delaware
corporation (filed as Annex B to Level 8's definitive proxy statement
for its 1999 annual meeting filed on Form DEF 14A, filed April 30,
1999, File No. 000-26392).

3.2 Bylaws of Level 8 Systems, Inc., a Delaware corporation (filed as Annex
C to Level 8's definitive proxy statement for its 1999 annual meeting
filed on Form DEF 14A, filed April 30, 1999, File No. 000-26392).

3.3 Certificate of Designation relating to Series A 4% Convertible
Redeemable Preferred Stock (filed as exhibit 3.3 Level 8's Form 8-K
filed July 23, 1999, File No. 000-26392).

4.1 Warrant to Purchase Common Stock, dated September 1, 1998, between
Template Software, Inc. and Eagle Eye Technologies, Inc. (filed as
Exhibit 10.26 to Template Software, Inc.'s Quarterly Report on Form 10-
Q for the period ended August 31, 1998, File No. 000-21921).

4.2 Form of Warrant Agreement, between the Company and Hampshire Securities
Corporation for 135,000 shares of common stock (filed as exhibit 10.27
to Across Data Systems, Inc.'s (Level 8's predecessor) Registration
Statement on Form S-1, filed May 12, 1995, File No. 33-92230).

4.4 Form of Warrant(s) representing the 250,000 Level 8 warrants issued to
the WCAS Parties (filed as exhibit 8.2(A) to the Seer Technologies,
Inc. Annual Report on Form 10-K for the year ended September 30, 1998,
filed on January 12, 1999, File No. 000-26194).

E-1

4.6 Registration Rights Agreement, dated June 13, 1995, between the Company
and Liraz (filed as exhibit 10.24 to Across Data Systems, Inc.'s (Level
8's predecessor) Registration Statement on Form S-1, filed May 12,
1995, File No. 33-92230).

9.1 Stockholders Agreement by and among Level 8 Systems, Inc., Template
Software, Inc., and various stockholders of Level 8 and Template (filed
as exhibit 10.1 to Level 8's Report on Form 8-K filed November 5, 1999,
File No. 000-26392).

10.1 Level 8's February 2, 1995 Non-Qualified Option Plan (filed as exhibit
10.1 to Across Data Systems, Inc.'s (Level 8's predecessor)
Registration Statement on Form S-1, filed May 12, 1995, File No.
33-92230).*

10.2 Template Software, Inc. 1992 Non-Statutory Stock Option Plan (filed as
an exhibit to Template Software, Inc.'s Registration Statement on Form
S-1, filed on November 27, 1996, File No. 333-17063).

10.3 Template Software, Inc. 1992 Incentive Stock Option Plan (filed as an
exhibit to Template Software, Inc.'s Registration Statement on Form S-
1, filed on November 27, 1996, File No. 333-17063).

10.4 Template Software, Inc. 1996 Equity Incentive Plan, as amended (filed
as an exhibit to Template Software, Inc.'s Registration Statement on
Form S-8, filed May 8, 1998, File No. 333-52241).

10.5 Form of Consultant's Non Competition, Confidentiality and Invention
Assignment (filed as exhibit 10-7 to Seer's Registration Statement No.
33-92050 on Form S-1 and incorporated herein by reference).

10.6 Employment Agreement between Steven Dmiszewicki and the Company dated
December 4, 1998 (filed as exhibit 10.19 to Level 8's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, filed April 1,
1999, File No. 000-26392).*

10.7 Amended and Restated Employment Agreement, effective November 8, 1996,
between Level 8 Technologies, Inc. ("Level 8 Technologies") and Samuel
Somech (filed as exhibit 10.12 to Registration Statement No. 33-92230
on Form S-1/A).*

10.7A Amendment dated February 26, 1999 to the Employment Agreement between
the Company and Samuel Somech dated November 8, 1996 (filed as exhibit
10.2A to Level 8's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, filed April 1, 1999, File No. 000-26392).*

10.8 Employment Agreement, dated as of April 30, 1999, between Template
Software, Inc. and E. Linwood Pearce (filed as exhibit 10.2 to Template
Software, Inc.'s Form 10-Q for the period ending March 31, 1999, filed
May 14, 1999).

E-2

10.9 License Agreement, dated as of December 17, 1998, between BULL and
Template Software, Inc. (filed as exhibit 10.31 to Template Software,
Inc.'s Report on Form 10-K for the fiscal year ended December 31, 1998,
File No. 26392).

10.10 Development Agreement dated July 17, 1995 between Microsoft Corporation
and the Company (filed as exhibit 10.38 to Across Data Systems, Inc.'s
(Level 8's predecessor) Registration Statement on Form S-1, filed May 12,
1995, File No. 33-92230).

10.11 Development Agreement dated December 19, 1995 between Liraz and the
Company (filed as exhibit 10.38 to Across Data Systems, Inc.'s (Level 8's
predecessor) Registration Statement on Form S-1, filed May 12, 1995, File
No. 33-92230).

10.12 Agreement, dated June 13, 1995, between the Company and Liraz (filed as
exhibit 10.23 to Across Data Systems, Inc.'s (Level 8's predecessor)
Registration Statement on Form S-1, filed May 12, 1995, File No. 33-
92230).

10.13 Sales and Purchase Agreement, dated April, 1997, between Template
Software (UK) Limited and British American Financial Services IT & Group
Services Limited (filed as an exhibit to Template Software, Inc.'s
Quarterly Report on Form 10-Q for the period ended May 31, 1997, File No.
0-21921).

10.14 Agreement, dated March 30, 1999, by and between Template Software, Inc.
and PCS Precise Connectivity Solutions Ltd. (filed as exhibit 10.2 to
Template Software, Inc.'s Form 10-Q for the period ending March 31, 1999,
filed May 14, 1999).

10.15 Agreement NMA201-98-C-0089, dated September 30, 1998, Modification
PZ0001, dated November 30, 1998 and Modification PZ0002 dated December
31, 1998, by and between Template Software, Inc. and National Imagery and
Mapping Agency (filed as exhibit 10.1 to Template Software, Inc.'s Form
10-Q for the period ending June 30, 1999, filed August 16, 1999).

E-3

10.20 Level 8 Guaranty Agreement dated December 31, 1998 (filed as exhibit 10.1
to Level 8's Form 8-K filed as of January 15, 1999, File No. 0-26392).

10.23 Liraz Agreement dated December 31, 1998 (filed as exhibit 10.4 to the
Company's Form 8-K filed as of January 15, 1999, File No. 000-26392).

10.24B Amendment dated March 9, 2000, to the Loan and Security Agreement among
Seer, the Company and Greyrock Capital, a Bank of America Company, dated
March 31, 1999 (filed herewith).

E-4

11.1 Statement Regarding Computation of Per Share Earnings (filed herewith).

16.2 Letter from Grant Thornton LLP regarding change in certifying accountant,
dated December 22, 1998 (filed as exhibit 16 to Level 8's Form 8-K filed
as of December 22, 1998, File No. 0-26392).

21.1 List of subsidiaries of the Company (filed herewith).

23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)

23.2 Consent of Grant Thornton LLP (filed herewith)

27.1 Financial Data Schedule for Company (filed herewith).

* Management contract or compensatory agreement.

E-5