AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2004

REGISTRATION NOS. 333-_____; 333-104892; 333-82768; 333-100983

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

LEVEL 8 SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 11-2920559
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

7372 SERVICES, PREPACKAGED SOFTWARE
------------------------------
(Primary Standard Industrial Classification Code)

214 CARNEGIE CENTER, SUITE 303, PRINCETON, NEW JERSEY 08540
(609) 987-9001
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)

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

JOHN P. BRODERICK
CHIEF FINANCIAL OFFICER
LEVEL 8 SYSTEMS, INC.
214 CARNEGIE CENTER, SUITE 303, PRINCETON, NEW JERSEY 08540
(609) 987-9001
------------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)

COPIES OF COMMUNICATIONS TO:

SCOTT D. SMITH, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
SIXTEENTH FLOOR
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303
(404) 572-6600

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time or at one time after the effective date of this registration statement
as determined by the selling stockholders.

If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
- --------------------------------------- ------------------- ------------------------ ------------------------- ---------------------
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PRICE PER UNIT PRICE REGISTRATION FEE
- --------------------------------------- ------------------- ------------------------ ------------------------- ---------------------

Common Stock, $.001 par value 13,307,135 (1) $ 0.29 (2) $ 3,859,069 (2) $ 595
- --------------------------------------- ------------------- ------------------------ ------------------------- ---------------------

(1) This Registration Statement also carries forward the registration of
21,079,805 shares by Level 8 Systems, Inc. of common stock, $.001 par
value on Form S-1, filed May 1, 2003, Registration Number 333-104892, and
4,583,540 shares by Level 8 Systems, Inc. of common stock, $.001 par
value, on Form S-3, filed February 14, 2002, Registration Number 333-82768
and 7,693,058 shares of common stock, $.001 par value, on Form S-3, filed
on November 4, 2002, Registration Number 33-100983. A Registration Fee of
was previously paid to register such securities.

(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(c) based on the average high and low sale prices of
the Company's stock on the Over-the-Counter Bulletin Board on May 10,
2004.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

PURSUANT TO RULE 429 OF THE SECURITIES ACT OF 1933, THE PROSPECTUS
WHICH IS A PART OF THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND
INCLUDES ALL THE INFORMATION CURRENTLY REQUIRED IN A PROSPECTUS RELATING TO THE
SECURITIES COVERED BY REGISTRATION STATEMENT NOS. 333-104892, 333-82768 AND
333-100983 PREVIOUSLY FILED BY REGISTRANT. THIS REGISTRATION STATEMENT, ALSO
CONSTITUTES A POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT NOS.
333-104892, 333-82768 AND 333-100983.

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

THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

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

SUBJECT TO COMPLETION, DATED MAY 17, 2004

PROSPECTUS

42,018,051 SHARES

LEVEL 8 SYSTEMS, INC.

[LEVEL 8 SYSTEMS, INC. LOGO]

This prospectus relates to the resale of up to 42,018,051 shares of our
common stock, $.001 par value, which are being offered for resale from time to
time by the stockholders named in the section entitled "Selling Stockholders" on
page 8. The number of shares the selling stockholders may offer and sell under
this prospectus includes common shares:

o the selling stockholders currently hold;

o issuable to them upon the conversion of outstanding convertible
preferred stock; and,

o issuable to them upon the exercise of warrants previously issued by
us. The selling stockholders may also offer additional shares of
common stock acquired upon conversion of convertible preferred stock
or exercise of the warrants as a result of anti-dilution provisions,
stock splits, stock dividends or similar transactions.

We are registering these shares to satisfy registration rights of the
selling stockholders.

We will not receive any of the proceeds from any resales by the selling
stockholders. We will, however, receive the proceeds from the exercise of the
warrants issued to the selling stockholders. The selling stockholders may sell
the shares of common stock from time to time in various types of transactions,
including on the Over-the-Counter Bulletin Board, and in privately negotiated
transactions. For additional information on methods of sale, you should refer to
the section entitled "Plan of Distribution" on page 16.

On May 11, 2004, the last sales price of the common stock quoted on the
Over-the-Counter Bulletin Board was $0.29 per share. Our company's common stock
is quoted on the Over-the-Counter Bulletin Board under the symbol "LVEL."

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

The date of this Prospectus is ____________

TABLE OF CONTENTS

Prospectus Summary..........................................................................1
Risk Factors................................................................................3
Use of Proceeds.............................................................................7
Price Range of Our Common Stock.............................................................7
Dividend Policy.............................................................................7
Selling Stockholders........................................................................8
Plan of Distribution.......................................................................16
Selected Consolidated Financial Data.......................................................18
Business ..................................................................................19
Properties.................................................................................28
Legal Proceedings..........................................................................28
Management's Discussion and Analysis of Financial Condition and Results of Operations.....29
Significant Accounting Policies and Estimates..............................................43
Management.................................................................................46
Executive Officers.........................................................................47
Executive Compensation.....................................................................49
Principal Stockholders.....................................................................51
Certain Relationships and Related Party Transactions.......................................53
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......53
Description of Capital Stock...............................................................53
Legal Matters..............................................................................54
Experts....................................................................................54
Available Information......................................................................55
Index to Financial Statements.............................................................F-1

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

ABOUT THIS PROSPECTUS

This prospectus is a part of a registration statement that we have filed
with the Securities and Exchange Commission using a "shelf registration"
process. You should read this prospectus and any accompanying prospectus
supplement, as well as any post-effective amendments to the registration
statement of which this prospectus is a part, together with the additional
information described under "Available Information" before you make any
investment decision.

The terms "Level 8," "we," "our" and "us" refer to Level 8 Systems, Inc.
and its consolidated subsidiaries unless the context suggests otherwise. The
term "you" refers to a prospective purchaser of our common stock.

You should rely only on the information contained in this prospectus or
any accompanying prospectus supplement. We have not authorized anyone to provide
you with information different from that contained in this prospectus or any
accompanying prospectus supplement. These securities are being offered for sale
and offers to buy these securities are only being solicited in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus and any accompanying prospectus supplement is accurate only as of the
date on their respective covers, regardless of the time of delivery of this
prospectus or any accompanying prospectus supplement or any sale of the
securities.

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements, including or
related to our future results, including certain projections and business
trends. Assumptions relating to forward-looking statements involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this prospectus, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward- looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this prospectus, you should not regard the inclusion of
such information as our representation that we will achieve any strategy,
objective or other plans. The forward-looking statements contained in this
prospectus speak only as of the date of this prospectus as stated on the front
cover, and we have no obligation to update publicly or revise any of these
forward-looking statements. These and other statements, which are not historical
facts are based largely on management's current expectations and assumptions and
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those contemplate by such forward-looking
statements. These risk and uncertainties include, among others, the risks and
uncertainties described in "Risk Factors" (page 3).

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision. References to "we," "our," "Level 8" and
the "Company" generally refer to Level 8 Systems, Inc., a Delaware corporation.

We provide next generation application integration products and services
that are based on open technology standards and are licensed to a varied range
of customers. Our software helps organizations leverage their extensive system
and business process investments, increase operational efficiencies, reduce
costs and strengthen valued customer relationships by uniting disparate
applications, systems, information and business processes.

Our focus is on the emerging desktop integration market with our Cicero(R)
product. Cicero is a business integration software product that maximizes
end-user productivity, streamlines business operations and integrates systems
and applications that would not otherwise work together. Cicero offers a proven,
innovative departure from traditional, costly and labor-intensive approaches to
application integration that enables clients to transform applications, business
processes and human expertise into a seamless, cost effective business solution
that provides a cohesive, task-oriented and role-centric interface that is
designed to work the way people think.

RECENT DEVELOPMENTS

In March 2004, we entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Anthony Pizi, the Company's
Chairman and Chief Executive Officer, in the amount of $125,000. Under the terms
of the agreement, the loan is convertible into 446,429 shares of our common
stock and warrants to purchase 446,429 shares of our common stock exercisable at
$0.28. The warrants expire in three years. We also entered into convertible loan
agreements with Frederick Mack and C. Glen Dugdale, each in the face amount of
$50,000. Under the terms of the agreement, each loan is convertible into 135,135
shares of our common stock and warrants to purchase 135,135 shares of our common
stock at $0.37 per share. The warrants expire in three years.

In March 2004, pursuant to an existing agreement, we issued 150,000 shares
of common stock to Liraz Systems Ltd. in consideration for extension of the debt
guarantee to Bank Hapoalim.

On January 9, 2004, we acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail(R). The
acquisition was completed using our common stock. The aggregate purchase price
of the assets and liabilities was seven hundred fifty thousand dollars
($750,000.00). We issued 2,027,027 common shares as consideration for the
purchase. The primary assets acquired in the acquisition were Critical Mail,
Inc.'s federally certified Ensuredmail(R) e-mail encryption technology and
products.

Concurrent with the acquisition of the assets of Critical Mass Mail, Inc.,
we completed a common stock financing round wherein we raised $1,247,000 of
capital from several new investors as well as certain investors of Critical Mass
Mail. We sold 3,369,192 shares of common stock at a price of $0.37 per share. As
part of the financing, we also issued warrants to purchase 3,369,192 shares of
our common stock at an exercise price of $0.37. The warrants expire three years
from the date of grant.

On October 15, 2003, we completed a private placement of 1,894,444
shares of common stock and warrants to purchase 473,611 shares of common stock.
The warrants are exercisable at $0.45 per share of common stock and have a three
year term. We received $852,500 in aggregate proceeds and used $200,000 of the
proceeds to pay down our term loan.

On November 15, 2003, we reached an agreement with Bank Hapoalim, the
holder of our term loan and Liraz Systems Ltd. ("Liraz"), the guarantor of the
term loan, to extend the maturity date of the term loan until November 14, 2004.
In consideration for the extension of the guaranty, we issued 150,000 shares of
our common stock to a designated subsidiary of Liraz and agreed to issue an
additional 150,000 shares on March 31, 2004.

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

We were incorporated in New York in 1988 and re-incorporated in
Delaware in 1999. Effective January 2003, our principal executive offices were
relocated to 214 Carnegie Center, Suite 303, Princeton, New Jersey 08540, and
our telephone number is (609) 987-9001. Our web site is located at
www.level8.com. Information contained on our web site is not a part of this
prospectus.

RISK FACTORS

An investment in our common stock involves a high degree of risk. You
should carefully consider the specific factors listed below together with the
other information included in this prospectus before you decide whether to
purchase shares of our common stock. Additional risks and uncertainties,
including those that are not yet identified or that we currently think are
immaterial, may also adversely affect our business, results of operations and
financial condition. The market price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment.

WE DEPEND ON AN UNPROVEN STRATEGY FOR ONGOING REVENUE.

In 2001, we determined that our best possibility of long- term success
would be to concentrate our sales efforts into the customer contact centers of
large companies, where the customer service representatives of our target market
interact with their customers via telephone, facsimile, electronic mail and
other means of communication. The success of our strategy is highly dependent on
market acceptance of Cicero, which we have licensed from Merrill Lynch. Cicero
has no track record of sales to the financial services industry and there is no
certainty that we will have strong market penetration with our Cicero offering.

Cicero was officially launched in a general release version in June 2001.
While we have limited significant sales of Cicero to date, we have yet to
establish a predictable revenue stream. A previous version of Cicero has been in
use on over 30,000 workstations at Merrill Lynch for approximately five years.
We have substantially modified the version of Cicero used at Merrill Lynch to
introduce a commercial product that may be implemented in our target markets.

Furthermore, we have ceased our sales and marketing efforts with respect
to our historical revenue producing products, the Geneva Integration Suite line
of products, and our historical business of Enterprise Application Integration
at the server level. We have sold all assets associated with the Geneva
AppBuilder software, which represented approximately 59% of our revenue in
fiscal year 2001. We also sold our Geneva Message Queuing and XIPC products in
the third quarter of 2001 and our Star/SQL and CTRC products in second quarter
of 2002. In October 2002, we sold our Systems Integration business, which
consisted of Geneva Enterprise Integrator, and Geneva Business Process
Automator. These sales represent substantially all of the products in our
Messaging and Application Engineering segment and all the products in our
Systems Integration Segment. Our past performance and revenues therefore provide
no indication of our future prospects and revenues.

Our new strategy is subject to the following specialized risks that may
adversely affect our long-term revenue and profitability prospects:

o Cicero was originally developed internally by Merrill Lynch and has
no track record of successful sales to organizations within the
financial services industry and may not gain market acceptance;

o We are approaching a different segment of the financial services
industry, the customer contact center, compared to our sales and
marketing efforts in the past and there can be no assurance that we
can successfully sell and market into this industry; and

o We have had very limited success because the financial condition of
the Company has caused concern for enterprise customers that would
be dependent on Cicero for their long-term needs.

WE HAVE A HISTORY OF LOSSES AND EXPECT THAT WE WILL CONTINUE TO EXPERIENCE
LOSSES AT LEAST THROUGH 2004.

We experienced operating losses and net losses in 1998, 1999, 2000, 2001,
2002, 2003 and for the three months ended March 31, 2004. We incurred a net loss
of $25.1 million for 1998, $15.5 million for 1999, $28.4 million for 2000,
$105.1 million for 2001, $18.2 million for 2002, $10.0 million for 2003 and $2.6
million for the three months ending March 31, 2004. As of March 31, 2004, we had
a working capital deficit of $6.7 million and an accumulated deficit of $215
million. Our ability to generate positive cash flow is dependent upon achieving
and sustaining certain cost reductions and generating sufficient revenues.

Therefore, due to these and other factors, we expect that we will continue
to experience net losses through the end of 2004. We have not generated
sufficient revenues to pay for all of our operating costs or other expenses and
have relied on financing transactions over the last three fiscal years to pay
our operating costs and other expenses. We cannot predict with accuracy our
future results of operations and believe that any period-to-period comparisons
of our results of operations are not meaningful. Furthermore, there can be no
assurance that if we are unable to generate sufficient revenue from operations
that we will be able to continue to access the capital markets to fund our
operations, or that if we are able to do so that it will be on satisfactory
terms.

THERE IS SUBSTANTIAL DOUBT AS TO WHETHER WE CAN CONTINUE AS A GOING CONCERN.

Because we incurred net operating losses of $2.6 million for the three
months ended March 31, 2004 and $10.0 million for the year ended December 31,
2003, we experienced negative cash flows from operations, had significant
working capital deficiencies at March 31, 2004, and because we are relying on
acceptance of a newly developed and marketed product, there is substantial doubt
that we can continue to operate as a going concern. While we have attracted some
additional capital to continue to fund operations, there can be no assurance
that we can obtain additional financing and if we do obtain financing that it
will be on terms that are favorable to us or our stockholders.

THE SO-CALLED "PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND
DEALERS TO TRADE IN OUR COMMON STOCK, MAKING THE MARKET FOR OUR COMMON STOCK
LESS LIQUID WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.

Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker-dealer to:

o make a special suitability determination for purchasers of our
shares;

o receive the purchaser's written consent to the transaction prior to
the purchase; and

o deliver to a prospective purchaser of our stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.

Consequently, penny stock rules may restrict the ability of broker-dealers
to trade and/or maintain a market in our common stock. Also, prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.

FUNDS FROM OUR SERIES D PREFERRED STOCK FINANCING REMAIN IN ESCROW AND ARE NOT
AVAILABLE TO THE COMPANY.

In March 2003, we closed the sale of Series D Preferred Stock and
warrants. Pursuant to the terms of the financing transaction, $2 million of the
$3.5 million proceeds of the financing were placed in escrow. $775,900 of these
proceeds remains in escrow. If we are unable to finalize arrangements for an
Asian joint venture with the lead investors, the lead investors have the right
to cause us to purchase $1 million of the Series D Preferred Stock with the
funds that were placed in escrow and to the extent the escrow is insufficient,
the Company would need to finance the rest of the repurchase right to the lead
investor.

BECAUSE WE CANNOT ACCURATELY PREDICT THE AMOUNT AND TIMING OF INDIVIDUAL SALES,
OUR QUARTERLY OPERATING RESULTS MAY VARY SIGNIFICANTLY, WHICH COULD ADVERSELY
IMPACT OUR STOCK PRICE.

Our quarterly operating results have varied significantly in the past, and
we expect they will continue to do so in the future. We have derived, and expect
to continue to derive in the near term, a significant portion of our revenue
from relatively large customer contracts or arrangements. The timing of revenue
recognition from those contracts and arrangements has caused and may continue to
cause fluctuations in our operating results, particularly on a quarterly basis.
Our quarterly revenues and operating results typically depend upon the volume
and timing of customer contracts received during a given quarter and the
percentage of each contract, which we are able to recognize as revenue during
the quarter. Each of these factors is difficult to forecast. As is common in the
software industry, the largest portion of software license revenues are
typically recognized in the last month of each fiscal quarter and the third and
fourth quarters of each fiscal year. We believe these patterns are partly
attributable to budgeting and purchasing cycles of our customers and our sales
commission policies, which compensate sales personnel for meeting or exceeding
periodic quotas.

Furthermore, individual Cicero sales are large and each sale can or will
account for a large percentage of our revenue and a single sale may have a
significant impact on the results of a quarter. The sales of both our historical
products and Cicero can be classified as generally large in size to a small
discrete number of customers. In addition, the substantial commitment of
executive time and financial resources that have historically been required in
connection with a customer's decision to purchase Cicero and our historical
products increases the risk of quarter-to-quarter fluctuations. Cicero sales
require a significant commitment of time and financial resources because it is
an enterprise product. Typically, the purchase of our products involves a
significant technical evaluation by the customer and the delays frequently
associated with customers' internal procedures to approve large capital
expenditures and to test, implement and accept new technologies that affect key
operations. This evaluation process frequently results in a lengthy sales
process of several months. It also subjects the sales cycle for our products to
a number of significant risks, including our customers' budgetary constraints
and internal acceptance reviews. The length of our sales cycle may vary
substantially from customer to customer.

We typically do not have any material backlog of unfilled software orders,
and product revenue may fluctuate from quarter to quarter due to the completion
or commencement of significant assignments, the number of working days in a
quarter and the utilization rate of services personnel. As a result of these
factors, we believe that a period-to-period comparison of our historical results
of operations is not necessarily meaningful and should not be relied upon as
indications of future performance. In particular, our revenues in the third and
fourth quarters of our fiscal years may not be indicative of the revenues for
the first and second quarters. Moreover, if our quarterly results do not meet
the expectations of our securities analysts and investors, the trading price of
our common stock would likely decline.

LOSS OF KEY PERSONNEL ASSOCIATED WITH CICERO DEVELOPMENT COULD ADVERSELY AFFECT
OUR BUSINESS.

Loss of key executive personnel or the software engineers we have hired
with specialized knowledge of the Cicero technology could have a significant
impact on our execution of our new strategy give that they have specialized
knowledge developed over a long period of time with respect to the Cicero
technology. Furthermore, because of our restructuring and reduction in the
number of employees, we may find it difficult to recruit new employees in the
future.

DIFFERENT COMPETITIVE APPROACHES OR INTERNALLY DEVELOPED SOLUTIONS TO THE SAME
BUSINESS PROBLEM COULD DELAY OR PREVENT ADOPTION OF CICERO.

Cicero is designed to address in a novel way the problems that large
companies face integrating the functionality of different software applications
by integrating these applications at the desktop. To effectively penetrate the
market for solutions to this disparate application problem, Cicero will compete
with traditional Enterprise Application Integration, or EAI, solutions that
attempt to solve this business problem at the server or back-office level.
Server level EAI solutions are currently sold and marketed by companies such as
NEON, Mercator, Vitria, and BEA. There can be no assurance that our potential
customers will determine that Cicero's desktop integration methodology is
superior to traditional middleware EAI solutions provided by the competitors
described above in addressing this business problem. Moreover, the information
systems departments of our target customers, large financial institutions, are
large and may elect to attempt to internally develop an internal solution to
this business problem rather than to purchase the Cicero product. Cicero itself
was originally developed internally by Merrill Lynch to solve these integration
needs.

Accordingly, we may not be able to provide products and services that
compare favorably with the products and services of our competitors or the
internally developed solutions of our customers. These competitive pressures
could delay or prevent adoption of Cicero or require us to reduce the price of
our products, either of which could have a material adverse effect on our
business, operating results and financial condition.

WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY AND
LICENSED TECHNOLOGY.

Our success depends to a significant degree upon our proprietary and
licensed technology. We rely on a combination of patent, trademark, trade secret
and copyright law, contractual restrictions and passwords to protect our
proprietary technology. However, these measures provide only limited protection,
and there is no guarantee that our protection of our proprietary rights will be
adequate. Furthermore, the laws of some jurisdictions outside the United States
do not protect proprietary rights as fully as in the United States. In addition,
our competitors may independently develop similar technology; duplicate our
products or design around our patents or our other intellectual property rights.
We may not be able to detect or police the unauthorized use of our products or
technology, and litigation may be required in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of our proprietary rights. Additionally, with respect to the
Cicero line of products, there can be no assurance that Merrill Lynch will
protect its patents or that we will have the resources to successfully pursue
infringers. Any litigation to enforce our intellectual property rights would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business.

We do not believe that any of our products infringe the proprietary rights
of third parties. However, companies in the software industry have experienced
substantial litigation regarding intellectual property and third parties could
assert claims that we have infringed their intellectual property rights. In
addition, we may be required to indemnify our distribution partners and end-
users for similar claims made against them. Any claims against us would divert
management resources, and could require us to spend significant time and money
in litigation, pay damages, develop new intellectual property or acquire
licenses to intellectual property that is the subject of the infringement
claims. These licenses, if required, may not be available on acceptable terms.
As a result, intellectual property claims against us could have a material
adverse effect on our business, operating results and financial condition.

WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND IT IS LIKELY THAT NO
DIVIDENDS WILL BE PAID IN THE FUTURE.

We have never declared or paid cash dividends on our common stock and we
do not anticipate paying any cash dividends on our common stock in the
foreseeable future.

PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS.

Section 203 of the Delaware General Corporation Law, which prohibits
certain persons from engaging in business combinations with Level 8, may have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
stockholder may consider to be in the holder's best interests. These provisions
of Delaware law also may adversely affect the market price of our common stock.
Our certificate of incorporation authorizes the issuance, without stockholder
approval, of preferred stock, with such designations, rights and preferences as
the board of directors may determine preferences as from time to time. Such
designations, rights and preferences established by the board may adversely
affect our stockholders. In the event of issuance, the preferred stock could be
used, under certain circumstances, as a means of discouraging, delaying or
preventing a change of control of Level 8. Although we have no present intention
to issue any shares of preferred stock in addition to the currently outstanding
preferred stock, we may issue preferred stock in the future.

OUR STOCKHOLDERS MAY BE DILUTED BY THE EXERCISE OF OPTIONS AND WARRANTS AND
CONVERSION OF PREFERRED STOCK OR BY THE REGISTRATION OF ADDITIONAL SECURITIES
FOR RESALE.

We have reserved 10,900,000 shares of common stock for issuance under our
employee incentive plans and 120,000 shares under our outside director incentive
plan. As of March 31, 2004, options to purchase an aggregate of 7,650,870 shares
of common stock were outstanding pursuant to our employee and director incentive
plans. As of March 31, 2004, warrants to purchase an additional 19,046,879
shares of common stock are outstanding. We have also reserved 188,528 shares of
common stock for issuance upon conversion of the outstanding Series A3 Preferred
Stock, 2,394,063 shares of common stock for issuance upon conversion of the
outstanding Series B3 Preferred Stock, 3,068,421 shares of common stock for
issuance upon conversion of the outstanding Series C Preferred Stock, and
8,411,125, shares of common stock for issuance upon the conversion of the
outstanding Series D Preferred Stock. The exercise of such options and warrants
or conversion of preferred stock and the subsequent sale of the underlying
common stock in the public market could adversely cause the market price of our
common stock to decline.

USE OF PROCEEDS

We will not receive any proceeds from the sale of shares by the selling
stockholders in this offering but will receive proceeds from the exercise of
warrants held by certain of the selling stockholders. We expect to use any
proceeds we receive for working capital and for other general corporate
purposes, including research and product development.

PRICE RANGE OF OUR COMMON STOCK

Our common stock was traded on the Nasdaq National Market under the symbol
"LVEL" from 1996 until December 23, 2002. From December 24, 2002, until January
23, 2003, our common stock traded on the Nasdaq SmallCap Market. As of January
24, 2003, our common stock was delisted from the Nasdaq SmallCap Market and is
currently quoted on the OTC Bulletin Board. The chart below sets forth the high
and low stock prices for the quarters of 2004 and for the quarters of the fiscal
years ended December 31, 2003, 2002 and 2001.

2004 2003 2002 2001
QUARTER High Low High Low High Low High Low
First .... $0.45 $0.35 $0.40 $0.15 $3.19 $1.26 $6.38 $2.39
Second ... N/A N/A $0.35 $0.24 $1.70 $0.34 $3.25 $2.75
Third .... N/A N/A $0.77 $0.24 $0.71 $0.25 $4.99 $1.45
Fourth ... N/A N/A $0.48 $0.28 $0.56 $0.17 $3.10 $1.20

The closing price of the common stock on May 10, 2004 was $0.29 per share.
As of May 10, 2004, we had 232 registered shareholders of record.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We
anticipate that all of our earnings will be retained for the operation and
expansion of our business and do not anticipate paying any cash dividends for
common stock in the foreseeable future.

SELLING STOCKHOLDERS

Our shares of common stock to which this prospectus relates are being
registered for resale by the selling stockholders. The following shows the name
and number of shares of our common stock owned by the selling stockholders who
may sell shares covered by this Prospectus.

The selling stockholders may resell all, a portion or none of such shares
of common stock from time to time. The table below sets forth with respect to
each selling stockholder, based upon information available to us as of May 10,
2004, the number of shares of common stock beneficially owned, the number of
shares of common stock registered by this prospectus and the number and percent
of outstanding common stock that will be owned after the sale of the registered
shares of common stock assuming the sale of all of the registered shares of
common stock under this prospectus and all other currently effective
prospectuses. Because the selling stockholders may offer all, some or none of
their respective shares of common stock, no definitive estimate as to the number
of shares thereof that will be held by the selling stockholders after such
offering can be provided.

Number of Shares of
Number of Shares Number of Shares Common Stock To Be
of Common Stock of Common Stock Which Owned After Offering
Name Owned (1) May Be Offered (1) Number Percent
----------------------------------------------------------------------- ---------------------------------

Brown Simpson 5,936,921 5,936,921 (2) -- --
SDS Merchant Fund, LP 4,869,659 4,869,659 (3) -- --
North Sound Legacy International 3,274,378 3,274,378 (4) -- --
North Sound Legacy Institutional 3,122,596 3,122,596 (5) -- --
Landis, Mark & Carolyn P 2,092,075 2,092,075 (6) -- --
Critical Mass Mail 2,027,027 2,027,027 (7) -- --
Seneca Capital LP 1,936,235 1,936,235 (8) -- --
Seneca Capital International, LTD 1,902,771 1,902,771 (9) -- --
Advanced Systems Europe, BV 1,481,561 1,481,561 (10) -- --
Mack, Fred 1,113,937 1,113,937 (11) -- --
Miller, Bruce 977,639 977,639 (12) -- --
Stevens, Jim 797,014 797,014 (13) -- --
Forman, Murray 772,796 772,796 (14) -- --
Dugdale, Glen & Joan 687,545 687,545 (15) -- --
Chalfin, Stuart 560,810 560,810 (16) -- --
Weiss, Joseph 560,810 560,810 (16) -- --
Spain, Bernard 540,540 540,540 (17) -- --
Pizi, Anthony 1,991,489 803,691 (18) 1,187,798 3.3%
Shah, Natwar 460,526 460,526 (19) -- --
Clement, Conrad 430,270 430,270 (20) -- --
Haines Family Assoc LP 424,474 424,474 (21) -- --
Vertical International Limited 400,000 400,000 (22) -- --
Mack, Fredrick 4-30-92 Trust 387,576 387,576 (23) -- --
Bank, Marvin 364,940 364,940 (24) -- --
North Sound Legacy 346,951 346,951 (25) -- --
Vertical Ventures Investments, LLC 340,557 340,557 (26) -- --
Delphi Partners Limited 309,367 309,367 (27) -- --
Grodko, Sandra 300,000 300,000 (28) -- --
Liraz Systems 234,869 234,869 (29) -- --
Weiss, Michael 211,579 211,579 (30) -- --
Mack, Earl 208,334 208,334 (31) -- --
Martino, Ralph 200,001 200,001 (32) -- --
Feldman, Michael 189,190 189,190 (33) -- --
Bank Hapoalim Warrants 172,751 172,751 (34) -- --

Forman, Irving 164,474 164,474 (35) -- --
Nager, Richard 164,474 164,474 (35) -- --
Shelanski, Joseph 143,250 143,250 (36) -- --
Whelden, Larry 138,889 138,889 (37) -- --
Yaakovian, Matthew (Trustee) 138,889 138,889 (37) -- --
Leavitt, Philip 135,136 135,136 (38) -- --
Turner, William & Barbara 120,000 120,000 (39) -- --
Baena, Douglas 108,108 108,108 (40) -- --
Pyxis Link Corp 100,000 100,000 (41) -- --
Simkovitz, Phillip 84,324 84,324 (42) -- --
Simpson, James 83,334 83,334 (43) -- --
Gable, Sidney 82,236 82,236 (44) -- --
Lustgarden, Scott 82,236 82,236 (44) -- --
Vegh, Robert 82,236 82,236 (44) -- --
Freeman, Don 81,082 81,082 (45) -- --
Diamond Investments II, LLC 80,000 80,000 (46) -- --
Keates, Richard M.D 80,000 80,000 (46) -- --
Emerson, Alice 69,445 69,445 (47) -- --
Robinson, John 69,445 69,445 (47) -- --
Weitzman, Hervey 69,445 69,445 (47) -- --
Wilkins, James 69,445 69,445 (47) -- --
Wittenbach, Roger 69,445 69,445 (47) -- --
Friedman, Mark 67,568 67,568 (48) -- --
Gordon, Allan 67,568 67,568 (48) -- --
Kushner, Ron 67,568 67,568 (48) -- --
Littman, Leslie 67,568 67,568 (48) -- --
Rothbard, Melvyn 67,568 67,568 (48) -- --
Rothbard, Norman 67,568 67,568 (48) -- --
Rutstein, Larry 67,568 67,568 (48) -- --
Dweck, Ike 57,697 57,697 (49) -- --
Corwin, Leonard 55,555 55,555 (50) -- --
Spivak, Virginia 55,555 55,555 (50) -- --
Blank, Richard 54,054 54,054 (51) -- --
Chugh, Narinder 54,054 54,054 (51) -- --
Krubiner, Paul & Marjorie 54,054 54,054 (51) -- --
Schneider, Steven 54,054 54,054 (51) -- --
Cleveland Overseas Ltd 53,333 53,333 (52) -- --
Lemery, John 41,666 41,666 (53) -- --
Wolfe, Jack 41,666 41,666 (53) -- --
Brooks, Marshall 37,838 37,838 (54) -- --
Tamberelli, Frank 32,895 32,895 (55) -- --
Whyte, Jacqueline 29,728 29,728 (56) -- --
Lerner, Arthur 27,028 27,028 (57) -- --
Mack, Fred Trust (Hailey Mack) 20,834 20,834 (58) -- --
Mack, Fred Trust (Jason Mack) 20,834 20,834 (58) -- --
Feder, Mark 16,447 16,447 (59) -- --
Grodko, Steven 12,500 12,500 (60) -- --
Kanevsky, Paul 100,000 100,000 -- --
DeFranco, Joseph 30,000 30,000 -- --
Seidle, Jay 30,000 30,000 -- --
Sandor, Patty 10,000 10,000 -- --

Totals 43,205,849 42,018,051

- --------

(1) The number of shares of common stock owned by each selling stockholder
includes the aggregate number of shares of common stock which may be
obtained by each stockholder upon conversion of all of the Series A3
Preferred Stock, Series B3 Preferred Stock, Series C Preferred Stock
and/or Series D Preferred Stock owned by the stockholder. It also includes
the aggregate number of shares of common stock that may be obtained upon
exercise of warrants to purchase common stock owned by such stockholder.
The shares offered by this prospectus may be sold by the selling
stockholder from time to time. The number of shares, if any, offered by
each selling stockholder and the corresponding number of shares
beneficially owned by each selling stockholder after each sale will vary
depending upon the terms of the individual sales.

(2) Brown Simpson Partners I, Ltd. owns and may offer from time to time under
this prospectus 1,197,031 shares of common stock issuable upon the
conversion of Series B3 Preferred Stock. It also owns and may offer from
time to time under this prospectus 460,526 shares of common stock issuable
upon the conversion of Series C Preferred Stock. It also owns and may
offer from time to time under this prospectus 4,009,093 shares issuable
upon the exercise of warrants. The exercise price of 115,132 warrants is
$0.38 per share of common stock. The exercise price of 270,270 warrants is
$0.37 per share of common stock. The exercise price of 3,623,691 warrants
is $0.40 per share of common stock. Also includes 270,270 shares of common
stock. Brown Simpson Partners I, Ltd. is not currently the beneficial
owner of all of such shares of common stock.

(3) SDS Merchant Fund, L.P. owns and may offer from time to time under this
prospectus 2,848,625 shares of common stock issuable upon conversion of
Series D Preferred Stock. It also owns and may offer from time to time
under this prospectus 1,625,362 shares of common stock issuable upon
exercise of Series D-1 Warrants at an exercise price of $0.07 per share.
It also owns and may offer from time to time under this prospectus 457,813
shares of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise. The holders may not exercise the warrants
into shares of our common stock or convert shares of Series D Preferred
Stock, if after the exercise or conversion, such holder, together with any
of its affiliates, would beneficially own over 4.99% of the outstanding
shares of our common stock. This restriction may not be altered, amended,
deleted or changed in any manner without the written approval of the
holders of a majority of the outstanding shares of our common stock and,
in the case of the Series D Preferred Stock, also the holders of a
majority of the outstanding shares of Series D Preferred Stock, and in the
case of any Series D-1 Warrant or Series D-2 Warrant, also the holder of
such warrant. However, the 4.99% limitation would not prevent the holders
from acquiring and selling in excess of 4.99% of our common stock through
a series of exercises and conversions. Also includes 967,500 shares of
common stock.

(4) North Sound Legacy International Fund Ltd. owns and may offer from time to
time under this prospectus 2,359,375 shares of common stock issuable upon
conversion of Series D Preferred Stock. It also owns and may offer from
time to time under this prospectus 889,484 shares of common stock issuable
upon exercise of Series D-1 Warrants at an exercise price of $0.07 per
share. It also owns and may offer from time to time under this prospectus
113,501 shares of common stock issuable upon exercise of Series D-2
Warrants at an exercise price the lower of $0.20 or the trading price of
Level 8's common stock at the time of exercise. The holders may not
exercise the warrants into shares of our common stock or convert shares of
Series D Preferred Stock, if after the exercise or conversion, such
holder, together with any of its affiliates, would beneficially own over
4.99% of the outstanding shares of our common stock. This restriction may
not be altered, amended, deleted or changed in any manner without the
written approval of the holders of a majority of the outstanding shares of
our common stock and, in the case of the Series D Preferred Stock, also
the holders of a majority of the outstanding shares of Series D Preferred
Stock, and in the case of any Series D-1 Warrant or Series D-2 Warrant,
also the holder of such warrant. However, the 4.99% limitation would not
prevent the holders from acquiring and selling in excess of 4.99% of our
common stock through a series of exercises and conversions. Also includes
411,940 shares of common stock.

(5) North Sound Legacy Institutional Fund LLC owns and may offer from time to
time under this prospectus 2,250,000 shares of common stock issuable upon
conversion of Series D Preferred Stock. It also owns and may offer from
time to time under this prospectus 848,250 shares of common stock issuable
upon exercise of Series D-1 Warrants at an exercise price of $0.07 per
share. It also owns and may offer from time to time under this prospectus
108,239 shares of common stock issuable upon exercise of Series D-2
Warrants at an exercise price the lower of $0.20 or the trading price of
Level 8's common stock at the time of exercise. The holders may not
exercise the warrants into shares of our common stock or convert shares of
Series D Preferred Stock, if after the exercise or conversion, such
holder, together with any of its affiliates, would beneficially own over
4.99% of the outstanding shares of our common stock. This restriction may
not be altered, amended, deleted or changed in any manner without the
written approval of the holders of a majority of the outstanding shares of
our common stock and, in the case of the Series D Preferred Stock, also
the holders of a majority of the outstanding shares of Series D Preferred
Stock, and in the case of any Series D-1 Warrant or Series D-2 Warrant,
also the holder of such warrant. However, the 4.99% limitation would not
prevent the holders from acquiring and selling in excess of 4.99% of our
common stock through a series of exercises and conversions. Also includes
392,854 shares of common stock.

(6) Includes 263,158 shares of common stock issuable upon the conversion of
Series C Preferred Stock. Also owns and may offer from time to time under
this prospectus 747,353 shares of common stock issuable upon the exercise
of warrants. The exercise price of 446,429 shares is $0.28 per share of
common stock, 65,789 shares exercisable at $0.38 per share of common
stock, 135,135 shares exercisable at $0.37 per share of common stock, and
100,000 shares of common stock issuable upon the exercise of warrants at
an exercise price of $0.60 per share of common stock. Also includes
1,081,564 shares of common stock. Currently not the beneficial owner of
all such shares of common stock.

(7) Critical Mass Mail owns and may offer from time to time under this
prospectus 2,027,027 shares of common stock.

(8) Seneca Capital, L.P. owns and may offer from time to time under this
prospectus 417,205 shares of common stock issuable upon the conversion of
Series B3 Preferred Stock. It also owns and may offer from time to time
under this prospectus 188,408 shares of common stock issuable upon the
conversion of Series A3 Preferred Stock. It also owns and may offer from
time to time under this prospectus 1,060,352 shares issuable upon the
exercise of warrants. The exercise price of 790,082 warrants is $0.40 per
share of common stock. The exercise price of 270,270 warrants is $0.37 per
share of common stock. Also includes 270,270 shares of common stock.
Seneca Capital, L.P. is not currently the beneficial owner of all of such
shares of common stock.

(9) Seneca Capital International, Ltd. owns and may offer from time to time
under this prospectus 779,826 shares of common stock issuable upon the
conversion of Series B3 Preferred Stock. It also owns and may offer from
time to time under this prospectus 1,122,945 shares issuable upon the
exercise of warrants. The exercise price of the warrants is $0.40 per
share of common stock. Seneca Capital International, Ltd. is not currently
the beneficial owner of all of such shares of common stock.

(10) Advanced Systems Europe owns and may offer from time to time under this
prospectus 120 shares of common stock subject to adjustment, issuable upon
conversion of 1 share of Series A3 Preferred Stock it currently owns. It
also owns and may offer from time to time under this prospectus 886,997
shares issuable upon the exercise of warrants. The exercise price of
775,886 warrants is $0.40 per share of common stock. The exercise price of
111,111 warrants is $0.45 per share of common stock. Also includes 594,444
shares of common stock. Advanced Systems Europe B.V. is not currently the
beneficial owner of all of such shares of common stock.

(11) Includes 394,737 shares of common stock issuable upon conversion of Series
C Preferred Stock and 242,258 shares of common stock issuable upon the
exercise of warrants. The exercise price of 202,703 shares is $0.37 per
share of common stock. 22,222 shares issuable upon the exercise of
warrants at an exercise price of $0.45 per share of common stock and
17,333 shares of common stock issuable upon exercise of warrants at an
exercise price of $0.60 per share. Also includes 476,942 shares of common
stock.

(12) Includes 23,594 shares of common stock issuable upon exercise of Series
D-2 Warrants at an exercise price the lower of $0.20 or the trading price
of Level 8's common stock at the time of exercise. Also includes 350,000
shares of common stock issuable upon the exercise of warrants at an
exercise price of $0.37 per share. Also includes 27,778 shares of common
stock issuable upon the exercise of warrants at an exercise price of $0.45
per share of common stock Also includes 576,267 shares of common stock.

(13) Includes 234,375 shares of common stock issuable upon conversion of Series
D Preferred Stock, 88,359 shares of common stock issuable upon exercise of
Series D-1 Warrants at an exercise price of $0.07 per share, 35,391shares
of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise, 150,000 shares of common stock issuable
upon exercise of warrants at an exercise price of $0.37 per share, and
27,778 shares of common stock issuable upon exercise of warrants at an
exercise price of $0.45 per share. Also includes 261,111 shares of common
stock.

(14) Includes 78,125 shares of common stock issuable upon conversion of Series
D Preferred Stock, 29,453 shares of common stock issuable upon exercise of
Series D-1 Warrants at an exercise price of $0.07 per share, 11,797 shares
of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise. Also includes 394,737 shares of common
stock issuable upon conversion of Series C Preferred Stock, 98,684 shares
of common stock issuable upon exercise of warrants at an exercise price of
$0.38 and 26,667 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.60. Also includes 133,333 shares of common
stock.

(15) Includes 93,750 shares of common stock issuable upon conversion of Series
D Preferred Stock, 35,344 shares of common stock upon exercise of Series
D-1 Warrants at an exercise price of $0.07 and 14,156 shares of common
stock issuable upon exercise of Series D-2 Warrants at an exercise price
the lower of $0.20 or the trading price of Level 8's common stock at the
time of exercise. Also includes 202,703 shares of common stock issuable
upon exercise of warrants at an exercise price of $0.38 and 27,778 shares
of common stock issuable upon exercise of warrants at an exercise price of
$0.45. Also includes 313,814 shares of common stock. Currently is not the
beneficial owner of all of such shares of common stock.

(16) Owns and may offer from time to time under this prospectus 280,405 shares
of common stock. Also includes 280,405 shares issuable upon the exercise
of warrants at an exercise price of $0.37 per share.

(17) Includes 270,270 shares of common stock and 270,270 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(18) Includes 394,737 shares of common stock issuable upon conversion of Series
C Preferred Stock and 98,684 shares of common stock upon exercise of
warrants at an exercise price of $0.38 and 270,270 shares of common stock
upon exercise of warrants at an exercise price of $0.37. Also includes
40,000 shares of common stock. Mr. Pizi is the CEO and a director of the
Company. He also holds common stock and 1,187,798 stock options
exercisable within 60 days that are not being registered for resale by
means of this prospectus.

(19) Includes 368,421 shares of common stock issuable upon conversion of Series
C Preferred Stock and 92,105 shares of common stock upon exercise of
warrants at an exercise price of $0.38.

(20) Includes 135,135 shares issuable upon the exercise of warrants at an
exercise price of $0.37 per share and 26,667 shares issuable upon the
exercise of warrants at an exercise price of $0.60 per share of common
stock. Also includes 268,468 shares of common stock.

(21) Includes 131,579 shares of common stock issuable upon conversion of Series
C Preferred Stock and 32,895 shares of common stock upon exercise of
warrants at an exercise price of $0.38. Also includes100,000 shares
issuable upon the exercise of warrants at $0.37 per share and 10,000
shares issuable upon the exercise of warrants at a $0.60 exercise price
per share. Also includes 150,000 shares of common stock.

(22) Includes 66,667 shares issuable upon the exercise of warrants at an
exercise price of $0.60 per share of common stock. Also includes 33,333
shares of common stock.

(23) Includes 203,125 shares of common stock issuable upon conversion of Series
D Preferred Stock, 30,672 shares of common stock issuable upon exercise of
Series D-2 Warrants at an exercise price the lower of $0.20 or the trading
price of Level 8's common stock at the time of exercise and 9,334 shares
of common stock issuable upon exercise of warrants at an exercise price of
$0.60 per share. Also includes 144,445 shares of common stock.

(24) Includes 65,789 shares of common stock issuable upon the conversion of
Series C Preferred Stock and 16,447 shares of common stock issuable upon
the exercise of warrants at an exercise price of $0.38 per share of common
stock. Also includes 101,352 shares issuable upon the exercise of warrants
at $0.37 per share and 13,333 shares issuable upon the exercise of
warrants at a $0.60 exercise price. Also includes 168,019 shares of common
stock.

(25) North Sound Legacy Fund LLC owns and may offer from time to time under
this prospectus 250,000 shares of common stock issuable upon conversion of
Series D Preferred Stock. It also owns and may offer from time to time
under this prospectus 94,250 shares of common stock issuable upon exercise
of Series D-1 Warrants at an exercise price of $0.07 per share. It also
owns and may offer from time to time under this prospectus 12,026 shares
of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise. The holders may not exercise the warrants
into shares of our common stock or convert shares of Series D Preferred
Stock, if after the exercise or conversion, such holder, together with any
of its affiliates, would beneficially own over 4.99% of the outstanding
shares of our common stock. This restriction may not be altered, amended,
deleted or changed in any manner without the written approval of the
holders of a majority of the outstanding shares of our common stock and,
in the case of the Series D Preferred Stock, also the holders of a
majority of the outstanding shares of Series D Preferred Stock, and in the
case of any Series D-1 Warrant or Series D-2 Warrant, also the holder of
such warrant. However, the 4.99% limitation would not prevent the holders
from acquiring and selling in excess of 4.99% of our common stock through
a series of exercises and conversions. Also includes 43,647 shares of
common stock.

(26) Includes 176,719 shares of common stock issuable upon exercise of Series
D-1 Warrants at an exercise price of $0.07 per share, 70,781 shares of
common stock issuable upon exercise of Series D-2 Warrants at an exercise
price the lower of $0.20 or the trading price of Level 8's common stock at
the time of exercise and 93,057 shares of common stock issuable upon
exercise of warrants at an exercise price of $0.60 per share.

(27) Includes 11,797 shares of common stock issuable upon exercise of Series
D-2 Warrants at an exercise price the lower of $0.20 or the trading price
of Level 8's common stock at the time of exercise, 50,000 shares of common
stock issuable upon exercise of warrants at an exercise price of $0.37 per
share and 13,889 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also includes 233,681 shares of
common stock.

(28) Includes 150,000 shares of common stock and 150,000 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(29) Liraz owns and may offer from time to time under this prospectus 2,632
shares of common stock (subject to adjustment) issuable upon conversion of
1 shares of Series C Preferred Stock it currently owns, and shares of
common stock issuable upon warrants to purchase 82,237 shares of common
stock (subject to adjustment) for $0.38 per share. Also includes 150,000
shares of common stock for its guaranty of Level 8's term loan effective
to November 8, 2004.

(30) Includes 105,263 shares of common stock issuable upon the conversion of
Series C Preferred Stock and 26,316 shares of common stock issuable upon
the exercise of warrants at an exercise price of $0.38 per share of common
stock. Includes 13,333 shares issuable upon the exercise of warrants at an
exercise price of $0.60 per share of common stock. Also includes 66,667
shares of common stock.

(31) Includes 41,667 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also includes 166,667 shares of
common stock.

(32) Includes 200,001 shares.

(33) Includes 94,595 shares of common stock and 94,595 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(34) Includes 172,751 shares of common stock issuable upon the exercise of
warrants at an exercise price of $4.342 per share.

(35) Includes 131,579 shares of common stock issuable upon conversion of Series
C Preferred Stock and 32,895 shares of common stock upon exercise of
warrants at an exercise price of $0.38.

(36) Includes 93,750 shares of common stock issuable upon conversion of Series
D Preferred Stock, 35,344 shares of common stock issuable upon exercise of
Series D-1 Warrants at an exercise price of $0.07 per share and 14,156
shares of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise.

(37) Includes 27,778 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also includes 111,111 shares of
common stock.

(38) Includes 67,568 shares of common stock and 67,568 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(39) Includes 20,000 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.60 per share. Also includes 100,000 shares of
common stock.

(40) Includes 54,054 shares of common stock and 54,054 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(41) Includes 100,000 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.38 per share. Pyxis Link is not currently the
beneficial owner of all of such shares of common stock.

(42) Includes 42,162 shares of common stock and 42,162 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(43) Includes 16,667 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also includes 66,667 shares of
common stock.

(44) Includes 65,789 shares of common stock issuable upon the conversion of
Series C Preferred Stock and 16,447 shares of common stock issuable upon
the exercise of warrants at an exercise price of $0.38 per share of common
stock subject to adjustment.

(45) Includes 40,541 shares of common stock and 40,541 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(46) Includes 13,333 shares issuable upon the exercise of warrants at an
exercise price of $0.60 per share of common stock. Also includes 66,667
shares of common stock.

(47) Includes 13,889 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also includes 55,556 shares of
common stock.

(48) Includes 33,784 shares of common stock and 33,784 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(49) Includes 16,447 shares of common stock issuable upon the exercise of
warrants at an exercise price of $0.38 per share of common stock subject
to adjustment, 29,453 shares of common stock issuable upon exercise of
Series D-1 Warrants at an exercise price of $0.07 per share, 11,797 shares
of common stock issuable upon exercise of Series D-2 Warrants at an
exercise price the lower of $0.20 or the trading price of Level 8's common
stock at the time of exercise.

(50) Includes 11,111 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also include 44,444 shares of
common stock.

(51) Includes 27,027 shares of common stock and 27,027 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(52) Includes 53,333 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.60 per share.

(53) Includes 8,333 shares of common stock issuable upon the exercise of
warrants at an exercise price of $0.45 per share. Also include 33,000
shares of common stock.

(54) Includes 18,919 shares of common stock and 18,919 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(55) Includes 26,316 shares of common stock issuable upon the conversion of
Series C Preferred Stock and 6,579 shares of common stock issuable upon
the exercise of warrants at an exercise price of $0.38 per share of common
stock.

(56) Includes 14,864 shares of common stock and 14,864 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(57) Includes 13,514 shares of common stock and 13,514 shares of common stock
issuable upon exercise of warrants at an exercise price of $0.37 per
share.

(58) Includes 4,167 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share. Also include 16,667 shares of
common stock.

(59) Includes 16,477 shares of common stock issuable upon the exercise of
warrants at an exercise price of $0.38 per share of common stock subject
to adjustment.

(60) Includes 12,500 shares of common stock issuable upon exercise of warrants
at an exercise price of $0.45 per share.

PLAN OF DISTRIBUTION

We are registering the shares of common stock on behalf of the selling
stockholders. All costs, expenses and fees in connection with the registration
of the shares offered by this prospectus will be borne by us, other than
brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares which will be borne by the selling stockholders. We have agreed
to indemnify the selling stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act. Sales of shares
may be effected by selling stockholders from time to time in one or more types
of transactions (which may include block transactions) on the Nasdaq National
Market, the Nasdaq SmallCap Market, in the over-the-counter market, any exchange
or quotation system, in negotiated transactions, through put or call options
transactions relating to the shares, through short sales of shares, or a
combination of any such methods of sale, and any other method permitted pursuant
to applicable law, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinated broker acting in connection with the proposed sale of
shares by the selling stockholders.

The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares or of securities convertible into or exchangeable for the
shares in the course of hedging positions they assume with selling stockholders.
The selling stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction). The selling stockholders may pledge and/or loan these shares to
broker-dealers who may borrow the shares against their hedging short position
and in turn sell these shares under the prospectus to cover such short position.

The selling stockholders may make these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer is not expected to be in excess of customary commissions).

The selling stockholders and any broker-dealers that act in connection
with the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The selling stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.

Because selling stockholders may be deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders may be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.

Selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act
provided they meet the criteria and conform to the requirements of Rule 144.

Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:

o the name of each such selling stockholder and of the participating
broker-dealer(s);

o the number of shares involved;

o the initial price at which such shares were sold;

o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;

o that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this
prospectus; and

o other facts material to the transactions.

In addition, upon our being notified by a selling stockholder that a donee
or pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed. The selling stockholder may from time to time pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.

The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.

SELECTED CONSOLIDATED 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.

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 2000 2001 2002 2003 2003 2004
-------- -------- -------- -------- -------- -------- --------
SELECTED STATEMENT OF OPERATIONS DATA (unaudited)

Revenue ............................ $ 52,920 $ 83,729 $ 17,357 $ 3,101 $ 530 $ 143 $ 83
Loss from continuing operations .... $(15,477) $(28,367) $(58,060) $(13,142) $ (9,874) $ (2,974) $ (2,627)
Loss from continuing operations
per common share - basic and diluted $ (1.78) $ (2.10) $ (3.70) $ (0.75) $ (0.54) $ (0.19) $ (0.09)
Weighted average common and
common equivalent shares
outstanding- basic and diluted ..... 8,918 14,019 15,958 18,877 21,463 19,233 30,727

THREE MONTHS ENDED
AT DECEMBER 31, MARCH 31,
--------------- ---------
1999 2000 2001 2002 2003 2003 2004
-------- -------- -------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA (unaudited)

Working capital (deficiency) $ (36) $ 28,311 $ (4,529) $ (6,254) $ (6,555) $ (4,421) $ (6,654)
Total assets ................ 133,581 169,956 35,744 11,852 5,362 11,054 4,887
Long-term debt, including
current maturities ........ 27,593 27,133 4,845 2,893 2,756 2,497 2,587
Senior convertible redeemable
preferred stock ........... -- -- -- -- 3,355 3,530 2,692
Loans from related companies,
net of current maturities ... 4,000 -- -- -- -- -- --
Stockholders' equity (deficit) . 72,221 117,730 13,893 1,653 (6,103) (710) (5,964)

BUSINESS

OVERVIEW

We provide next generation application integration products and services
that are based on open technology standards and are licensed to a wide range of
customers. Our software helps organizations leverage their extensive system and
business process investments, increase operational efficiencies, reduce costs
and strengthen valued customer relationships by uniting disparate applications,
systems, information and business processes.

By using Cicero, companies can decrease their customer management costs,
increase their customer service level and more efficiently cross-sell the full
range of their products and services resulting in an overall increase in return
on their information technology investments. In addition, Cicero enables
organizations to reduce the business risks inherent in replacement of
mission-critical applications and extend the productive life and functional
reach of their application portfolio.

Cicero is engineered to harness diverse business applications and shape
them to more effectively serve the people who use them. Cicero provides an
intuitive environment that simplifies the integration of complex multi-platform
applications. Cicero provides a unique approach that allows companies to
organize components of their existing applications to better align them with
tasks and operational processes. Cicero streamlines all activities by providing
a single, seamless user interface for simple access to all systems associated
with a task. Cicero enables automatic information sharing among line-of-business
applications and tools. Cicero is ideal for deployment in contact centers where
its highly productive, task-oriented user interface promotes user efficiency.

Until October 2002, we also offered products under our Geneva brand name
to provide organizations with systems integration. Our systems integration
products included Geneva Enterprise Integrator and Geneva Business Process
Automator. These products were sold to EM Software Solutions Inc. in October
2002.

We were incorporated in New York in 1988, and re-incorporated in Delaware
in 1999. Effective January 2003, our principal executive offices were relocated
to 214 Carnegie Center, Suite 303, Princeton, New Jersey 08540 and our telephone
number is (609) 987-9001. Our web site is located at www.level8.com.

STRATEGIC REALIGNMENT

Historically, we have been a global provider of software solutions to help
companies integrate new and existing applications as well as extend those
applications to the Internet. This market segment is commonly known as
"Enterprise Application Integration" or "EAI." Historically, EAI solutions work
directly at the server or back-office level allowing disparate applications to
communicate with each other.

Until early 2001, we focused primarily on the development, sale and
support of EAI solutions through our Geneva product suite. After extensive
strategic consultation with outside advisors and an internal analysis of our
products and services, we recognized that a new market opportunity had emerged.
This opportunity was represented by the increasing need to integrate
applications that are physically resident on different hardware platforms, a
typical situation in larger companies. In most cases, companies with large
customer bases utilize numerous different, or "disparate," applications that
were not designed to effectively communicate and pass information. With Cicero,
which integrates the functionality of these disparate applications at the
desktop, we believe that we have found a novel solution to this disparate
application problem. We believe that our existing experience in and
understanding of the EAI marketplace coupled with the unique Cicero solution,
which approaches traditional EAI needs in a more effective manner, position us
to be a competitive provider of business integration solutions to the financial
services industry and other industries with large deployed call centers.

We originally licensed the Cicero technology and related patents on a
worldwide basis from Merrill Lynch, Pierce, Fenner & Smith Incorporated in
August of 2000 under a license agreement containing standard provisions and a
two-year exclusivity period. On January 3, 2002, the license agreement was
amended to extend our exclusive worldwide marketing, sales and development
rights to Cicero in perpetuity (subject to Merrill Lynch's rights to terminate
in the event of bankruptcy or a change in control of Level 8) and to grant
ownership rights in the Cicero trademark. We are indemnified by Merrill Lynch
with regard to the rights granted to us by them. Consideration for the original
Cicero license consisted of 1,000,000 shares of our common stock. In exchange
for the amendment, we granted an additional 250,000 shares of common stock to
MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing
agreement. Under the royalty sharing agreement, we pay a royalty of 3% of the
sales price for each sale of Cicero or related maintenance services. The
royalties over the life of the agreement are not payable in excess of
$20,000,000.

In connection with executing our strategic realignment and focusing on
Cicero, we have restructured our business, reduced our number of employees and,
in the fourth quarter of 2002, sold the remaining assets associated with Geneva
Enterprise Integrator and Geneva Business Process Automator. In April 2001,
management reassessed the methodology by which the Company would make operating
decisions and allocate resources. Operating decisions and performance
assessments were based on the following reportable segments: (1) Desktop
Integration (Cicero), (2) System Integration (Geneva Enterprise Integrator and
Geneva Business Process Automator) and (3) Messaging and Application Engineering
(Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva
AppBuilder). We have sold most of the assets comprising the Messaging and
Application Engineering Products segment and all of the assets in the Systems
Integration Segment. The Company has recognized the Systems Integration segment
as a discontinued business and accordingly, has reclassified those assets and
liabilities on the accompanying balance sheets for 2002 and 2003 and segregated
the results of operations under gain or loss from a discontinued business on the
accompanying statement of operations. As such, the Systems Integration segment
has been eliminated. Geneva Integration Broker is the only current software
product represented in the Messaging and Application Engineering segment.

Our future revenues are entirely dependent on acceptance of a newly
developed and marketed product, Cicero, which has limited success in commercial
markets to date. We have experienced negative cash flows from operations for the
past three years. At December 31, 2003, we had a working capital deficiency of
approximately $6,555. Accordingly, there is substantial doubt that the Company
can continue as a going concern. In order to address these issues and to obtain
adequate financing for our operations for the next twelve months, we are
actively promoting and expanding its product line and continues to negotiate
with significant customers that have begun or finalized the "proof of concept"
stage with the Cicero technology. We believe that we are experiencing difficulty
increasing sales revenue largely because of the inimitable nature of the product
as well as customer concerns about the financial viability of the Company. We
are attempting to solve the former problem by improving the market's knowledge
and understanding of Cicero through increased marketing and leveraging its
limited number of reference accounts. Additionally, we are continuously seeking
additional equity capital or other strategic transactions in the near term to
provide additional liquidity.

We closed the strategic acquisition of an encryption technology asset in
January 2004 and a private placement of our common stock wherein we raised
approximately $1,247. We expect that increased revenues will reduce our
operating losses in future periods, however, there can be no assurance that
management will be successful in executing as anticipated or in a timely manner.
If these strategies are unsuccessful, we may have to pursue other means of
financing that may not be on terms favorable to us or our stockholders. If we
are unable to increase cash flow or obtain financing, it may not be able to
generate enough capital to fund operations for the next twelve months.

MARKET OPPORTUNITY

DESKTOP INTEGRATION SEGMENT PRODUCTS - CICERO

Our target markets for Cicero are the customer contact centers of large
consumer oriented businesses, such as in the financial services, insurance and
telecommunications industries. Large-scale customer contact centers are
characterized by large numbers of customer service agents that process phone
calls, faxes, e-mails and other incoming customer inquiries and requests. Our
goal is to greatly increase the efficiency of customer service agents in our
target markets, thereby lowering operating costs and increasing customer
retention and customer satisfaction. This increased efficiency is attained in a
non-invasive manner, allowing companies to continue using their existing
applications in a more productive manner.

Generally, managers of customer contact centers are under pressure to
provide increased customer service at the lowest possible cost while dealing
with high employee turnover and training costs. Some of the primary challenges
faced by customer contact centers include:

o CUSTOMER SERVICE. Currently, most customer contact centers require
multiple transfers to different agents to deal with diverse customer
service issues. A one-call, one-contact system enhances customer
service by avoiding these multiple transfers. Ideally, the customer
service agent provides the call-in customer with multi-channel
customer interfaces with timely access to all information that the
customer needs. Increasing customer service and customer intimacy is
one of the primary metrics on which contact centers are evaluated by
management.

o CONTACT CENTER STAFFING. The contact center industry is
characterized by high training costs, operational complexity,
continuous turnover and increasing costs per call. These
difficulties stem from increased customer expectations, the
ever-increasing complexity and diversity of the business
applications used by customer service agents, and pressure to
decrease training time and increase the return on investment in
customer service agents.

o INDUSTRY CONSOLIDATION. Many industries in our target market,
including the financial services industry, are in a constant state
of consolidation. When companies consolidate, the customer contact
centers are generally merged to lower overall costs and to reduce
redundancies. This consolidation generally leads to re-training and
the use of multiple applications handling similar functions that can
be quite difficult to integrate successfully.

OUR SOLUTION

We were previously a provider of software that integrates an enterprise's
applications at the server level so that disparate applications can communicate
with each other, or the EAI industry. Based on our experience in the EAI
industry, we determined that a compelling product would be one that integrates
disparate applications at a visual level in addition to at the server level. As
a result, we proceeded to procure an exclusive license to develop and market
Cicero. Cicero was developed internally by Merrill Lynch to increase the
efficiency of 30,000 employees that have daily contact with Merrill Lynch
customers. When coupled with solutions from other EAI vendors, Cicero becomes a
comprehensive business solution and provides our customers with a front-to-back
integrated system that appears as a single application to the end-user.

Cicero is a software product that allows companies to integrate their
existing applications into a seamless integrated desktop. Cicero subordinates
and controls most Windows-based applications and provides a seamless environment
with a consistent look and feel. The end-user can navigate any number of
applications whether local, client-server, mainframe legacy or web-browser in a
consistent and intuitive way that is completely customizable by their firm.

The Cicero solution provides the following key features:

o INTEGRATED END-USER ENVIRONMENT. The end-user can use all of the
applications necessary for his or her job function from a single
environment with a consistent look and feel. Cicero integrates the
execution and functionality of a variety of custom or packaged
Windows-based applications. If a software product is designed to
provide output into a Windows environment, Cicero can subordinate
its presentation and control it through the Cicero environment. The
Cicero desktop is constructed at run-time, so selected applications
and user interface components are dynamically created and
initialized. This makes the desktop environment very flexible and
easily adapted and maintained as business conditions change.

o INFORMATION CENTER. The Information Center is a customizable hub of
critical information that facilitates the effective execution of
processes and minimizes the need to enter frequently accessed
information repeatedly. The Cicero Information Center provides a
configurable information hub to enable end users to interact with
selected applications on a continuous basis. The information center
is frequently used to support incoming message alerts, scrolling
headlines, key operational statistics, interaction with Integrated
Voice Response systems, and real-time video. Any information that is
time-sensitive or actionable can be displayed side-by-side with the
currently selected application page and information can be readily
exchanged between the Information Center and other applications.

o CONTEXT SHARING. Cicero's unique, patented architecture enables just
the right information in any workstation application to be shared
with the other applications that need it. Cicero's context-sharing
Application Bus largely eliminates the need for re-keying customer
data, simplifies customer information updates, and reduces errors
and re-work. Context is visually integrated into the Cicero desktop
through the Information Center, enabling more efficient customer
service.

o ADVANCED INTEGRATION ARCHITECTURE. Cicero is a sophisticated
application integration platform that subordinates and controls and
non-invasively integrates any applications with a "footprint" in the
Windows environment. Cicero's publish and subscribe bus architecture
provides for efficient inter-application communication. Its event
management capabilities extend the usefulness and life span of
legacy architectures and provide a common architecture for events
across all platforms. Cicero also supports an open platform
architecture for communication and interoperability, native
scripting languages and XML, and facilities to enable single sign-on
solutions while respecting security standards and directory
services.

o MANAGEMENT TOOLS. Comprehensive tools are built into the system for
version management, automatic component updates and user preference
configuration. Remote control and diagnostic tools are integrated to
provide off-site help desk and troubleshooting personnel with access
to assist them in their support duties.

Deployment of the Cicero solution can provide our customers with the following
key benefits:

o LOWER AVERAGE COST PER CALL AND AVERAGE CALL TIME. Cicero increases
the efficiency of the customer service agent by placing all
productivity applications within a few mouse clicks and
consolidating all standard applications into a single integrated
desktop. Cost per call is lowered because the customer service agent
is more productive in moving between disparate applications and is
able to handle different requests without having to transfer the
customer to another customer service agent.

o REDUCE STAFF COST. Cicero reduces staff cost in two ways. First, by
increasing the efficiency of each customer service agent, a contact
center can handle the same volume of customer service requests with
a smaller staff. Secondly, because Cicero simplifies the use of all
contact center applications, training costs and time can be reduced,
placing newly hired staff into productive positions faster than
other contract center applications.

o INCREASE CROSS-SELLING EFFICIENCY. The consolidation of all customer
data and customer specific applications can increase the efficiency
of cross selling of products and services. For instance, a Cicero
enabled contact center might be configured to inform the customer
service agent that the customer, while a brokerage services
customer, does not use bill paying or other offered services. On the
other hand, Cicero can help prevent customer service agents from
selling a product that is inappropriate for that customer or a
product or service that the customer already has through the
company. Increasing the efficiency of cross selling can both
increase revenues and avoid customer dissatisfaction.

o DELIVER BEST IN CLASS CUSTOMER SERVICE. Increasing customer service
is one of the primary methods by which a company in highly
competitive customer focused industries such as financial services
can differentiate itself from its competition. By increasing the
efficiency and training level of its agents, decreasing average time
per call and increasing effective cross-selling, the Cicero enabled
contact center presents its customers with a more intimate and
satisfying customer service experience that can aid in both customer
retention and as a differentiator for customer acquisition.

o PRESERVE EXISTING INFORMATION TECHNOLOGY INVESTMENT. Cicero
integrates applications at the presentation level, which allows
better use of existing custom designed applications and divergent
computing platforms (e.g., midrange, client/server, LAN and Web),
which are not readily compatible with each other or with legacy
mainframe systems. Linking together the newer computing applications
to existing systems helps preserve and increase the return on the
investments made by organizations in their information technology
systems.

Additionally, by visually and structurally 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 Cicero solution helps
organizations bridge the gap between legacy systems and newer
platforms and the result is the extension of existing capabilities
to a modern streamlined interface in which the underlying system
architectures, such as the Web, mainframe, mid-range or
client-server, are transparent to the end-user customer service
agent, thereby preserving the existing information technology
investments and increasing efficiency between applications.

o SUPPORT A 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 The Cicero
solution provides visual application integration solutions that
support common industry standards and can handle a wide array of
disparate applications and data types while operating on a Windows
NT, Windows XP or Windows 2000 platform. The Cicero solution can be
used to link custom or packaged applications together regardless of
the tools or programming language used to create the application by
integrating those applications at the presentation level.

o EASE OF IMPLEMENTATION AND ENHANCED INFORMATION TECHNOLOGY
PRODUCTIVITY. The Cicero solution allows contact center and
financial services managers to create comprehensive data
transformation and information exchange solutions without the need
for non-standard coding. Our 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 implementation of new solutions into
the deployed Cicero framework. For instance, while in operation at
Merrill Lynch, Cicero was updated to include software for Siebel
Systems over a period of only two days when Merrill Lynch decided to
implement the Siebel Systems solution. The Cicero solution allows
our target markets to rapidly integrate new and existing
applications with little or no customization required.

OUR STRATEGY

Our goal is to be the recognized global leader in providing complete
desktop level application integration to the financial services industry. The
following are the key elements of our strategy:

o LEVERAGE OUR EXISTING CUSTOMERS AND EXPERIENCE IN THE FINANCIAL
SERVICES INDUSTRY. We have had success in the past with our Geneva
products in the financial services industry. We intend to utilize
these long-term relationships and our understanding of the business
to create opportunities for sales of the Cicero solution.

o BUILD ON OUR SUCCESSES TO EXPAND INTO NEW MARKETS. Our short-term
goal is to gain a significant presence in the financial services
industry with the Cicero solution. The financial services industry
is ideal for Cicero because each entity has a large base of
installed users that use the same general groups of applications.
Cicero, however, can be used in any industry that has large contact
centers, such as telecommunications and insurance.

o DEVELOP STRATEGIC PARTNERSHIPS. The critical success factor for
customers implementing Customer Relationship Management (CRM)
solutions in their contact centers is to have the right balance of
technology and service provision. We are implementing a tightly
focused strategic teaming approach with a selected group of
well-known consultancy and systems integration firms that specialize
in financial services as well as eCRM integrated solutions.
Leveraging these organizations, who will provide such integration
services as architecture planning, technology integration and
business workflow improvement, allows us to focus on core
application system needs and how Cicero best addresses them, while
our partners will surround the technology with appropriate industry
and business knowledge.

o LEVERAGE OUR IN-HOUSE EXPERTISE IN THE CICERO SOFTWARE. Merrill
Lynch originally developed Cicero internally for use by
approximately 30,000 professionals worldwide. To approach the market
from a position of strength, we have added members of the Merrill
Lynch development team to our Cicero development team. We recruited
and hired Anthony Pizi, First Vice President and Chief Technology
Officer of Merrill Lynch's Private Technology's Architecture and
Service Quality Group, and the Cicero project director as our
Chairman, Chief Executive Officer and Chief Technology Officer as
well as several of the primary Cicero engineers from Merrill Lynch
to support our ongoing Cicero development efforts.

o UTILIZE MARKET ANALYSES TO DEMONSTRATE TANGIBLE RETURN-ON-INVESTMENT
RESULTS. Most contact centers benchmark their operational and
services levels against established industry norms. Metrics such as
average waiting time in the call queue, call abandonment rates,
after call service work and percentage of one-call completion are
typically measured against norms and trends. We believe that use of
Cicero will provide tangible, demonstrable improvements to these
metrics.

PRODUCTS

DESKTOP INTEGRATION SEGMENT PRODUCTS - CICERO

Cicero runs on Windows NT, Windows XP, and Windows 2000 to organize
applications under a book-chapter-section metaphor that keeps all the
application functionality that the user needs within easy reach. For instance,
selecting the "memo" tab might cause a Microsoft Word memo-template to be
created within the Cicero desktop. The end-user need not even know that they are
using Microsoft Word. Moreover, a customer-tracking database can be linked with
a customer relationship management software package. Virtually any application
that is used in a customer contact center can be integrated under the Cicero
book-chapter metaphor and be used in conjunction with other contact center
applications.

The patented Cicero technology, as exclusively licensed from Merrill
Lynch, consists of several components: The Event Manager, a Component Object
Model (COM)-based messaging service; The Context Manager, which administers the
"publish and subscribe" protocols; The Shell Script Interpreter, which supports
communication with applications that do not support the required COM interfaces;
and The Resource Manager, which starts and shuts down applications and ensures
recovery from system errors. The system incorporates an application bus with
underlying mechanisms to handle the inter-application connections.

Cicero provides non-intrusive integration of desktop and web applications,
portals, third-party business tools, and even legacy mainframe and client server
applications, so all co-exist and share their information seamlessly. Cicero's
non-invasive technology means that clients don't risk modifying either fragile
source code or sensitive application program interfaces - and they can easily
integrate off-the-shelf products and emerging technologies.

Cicero allows end-users to access applications in the most efficient way
possible, by only allowing them to use the relevant portions of that
application. For instance, a contact center customer service representative does
not use 90% of the functionality of Microsoft Word, but might need access to a
memorandum and other custom designed forms as well as basic editing
functionality. Cicero can be set to control access to only those templates and,
in a sense, turn-off the unused functionality by not allowing the end-user
direct access to the underlying application. Under the same Cicero
implementation, however, a different Cicero configuration could allow the
employees in the Marketing department full access to Word because they have need
of the full functionality. The functionality of the applications that Cicero
integrates can be modulated by the business goals of the ultimate client, the
parent company. This ability to limit user access to certain functions within
applications enables companies to reduce their training burden by limiting the
portions of the applications on which they are required to train their customer
service representatives.

Cicero is an ideal product for large customer contact centers. We believe
that Cicero, by combining ease of use, a shorter learning curve and consistent
presentation of information will allow our clients to leverage their exiting
investments in Customer Relationship Management or CRM applications and further
increase customer services, productivity, return on investment and decrease cost
both per seat and across the contact center.

MESSAGING AND APPLICATION ENGINEERING SEGMENT PRODUCTS - 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 Integration Broker does not represent a
significant portion of the Company's current business or prospects.

SERVICES

We provide a full spectrum of technical support, training and consulting
services across all of our operating segments as part of our commitment to
providing our customers industry-leading business integration solutions. Our
services organization is staffed by experts in the field of systems integration
with backgrounds in development, consulting, and business process reengineering.
In addition, our services professionals have substantial industry specific
backgrounds with extraordinary depth in our focus marketplace of financial
services.

MAINTENANCE AND SUPPORT

We offer 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.
Cicero is frequently used in mission-critical business situations, and our
maintenance and support services are accustomed to the critical demands that
must be meet to deliver world-class service to our clients. Many of the members
of our staff have expertise in lights-out mission critical environments and are
ready to deliver service commensurate with those unique client needs.

TRAINING SERVICES

Our training organization offers a full curriculum of courses and labs
designed to help customers become proficient in the use of our products and
related technology as well as enabling customers to take full advantage of our
field-tested best practices and methodologies. Our training organization seeks
to enable client organizations to gain the proficiency needed in our products
for full client self-sufficiency but retains the flexibility to tailor their
curriculum to meet specific needs of our clients.

CONSULTING SERVICES

We offer consulting services around our product offerings in project
management, applications and platform integration, application design and
development and application renewal, along with expertise in a wide variety of
development environments and programming languages. We also have an active
partner program in which we recruit leading IT consulting and system integration
firms to provide services for the design, implementation and deployment of our
customer contact center solutions. Our consulting organization supports third
party consultants by providing architectural and enabling services.

CUSTOMERS

Approximately 30,000 Merrill Lynch personnel are currently using the
Cicero technology. We licensed the Cicero technology from Merrill Lynch during
2000 and have developed it to initially sell to the contact center industry. Our
significant customers include Nationwide Financial Services, Arvato Services, a
division of Bertelsmann A.G., Bank of America and Gateway Electronic Medical
Management Systems (GEMMS).

Merrill Lynch holds approximately three percent (3%) of the outstanding
shares of our common stock. No one customer accounted for more than ten percent
(10%) of operating revenues in 2001. Bank of America and Nationwide Financial
Services individually accounted for more than ten percent (10%) of our operating
revenues in 2002. In 2003, Bank of America, Nationwide Financial Services, and
Gateway Electronic Medical Management Systems (GEMMS) each accounted for more
than ten percent (10%) of our operating revenues

SALES AND MARKETING

SALES

An important element of our sales strategy is to expand our relationships
with third parties to increase market awareness and acceptance of our business
integration software solutions. As part of these relationships, we will jointly
sell and implement Cicero solutions with strategic partners such as systems
integrators and embed Cicero along with other products through OEM
relationships. We will provide training and other support necessary to systems
integrators and OEMs to aid in the promotion of our products. To date we have
signed partner agreements with ThinkCentric, Hewlett Packard, House of Code,
Titan Systems Corporation, Silent Systems, Inc., Arvato Services, a division of
Bertelsmann A.G, GEMMS, FI Systems Italia S.r.L. and Centrix Communications
Services S.p.A.

MARKETING

The target market for our products and services are large companies
providing financial services and or customer relationship management to a large
existing customer base. Increasing competitiveness and consolidation is driving
companies in such businesses to increase the efficiency and quality of their
customer contact centers. As a result, customer contact centers are compelled by
both economic necessity and internal mandates to find ways to increase internal
efficiency, increase customer satisfaction, increase effective cross-selling,
decrease staff turnover cost and leverage their investment in current
information technology.

Our marketing staff has an in-depth understanding of the financial
services customer contact center 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 our products and services and
how they can meet customer needs.

Core marketing functions include product marketing, marketing
communications and strategic alliances. We utilize focused marketing programs
that are intended to attract potential customers in our target vertical
industries and to promote Level 8 and our brands. Our programs are specifically
directed at our target market such as speaking engagements, public relations
campaigns, focused trade shows and web site marketing, while devoting
substantial resources to supporting the field sales team with high quality sales
tools and collateral. As product acceptance grows and our target markets
increase, we will shift to broader marketing programs.

The marketing department also produces collateral material for
distribution to prospects including demonstrations, presentation materials,
white papers, case studies, articles, brochures, and data sheets. We also intend
to implement a high level strategic partnership program to educate and support
our partners with a variety of programs, incentives and support plans.

As part of our increased focus on the Cicero product line and initially
the financial services customer contact center market, we have significantly
decreased our marketing costs while increasing our marketing focus. We intend to
continue to fine-tune our sales and marketing staff through continued training
to meet our revised needs. We have decreased the marketing and sales budget to
conserve financial resources and appropriately direct expenditures in line with
our revised business strategy

RESEARCH AND PRODUCT DEVELOPMENT

In connection with the narrowing of our strategic focus, and in light of
the sale of our Systems Integration products, we have experienced an overall
reduction in research and development costs. Since Cicero is a new product in a
relatively untapped market, it is imperative to constantly enhance the feature
sets and functionality of the product.

We incurred research and development expense of approximately $1,000,
$1,900, and $5,400, in 2003, 2002, and 2001, respectively. The decrease in
research and development costs in 2003 as compared with 2002 is the result of
the impact of the closing of the Berkeley, California facility in June 2002. The
decrease in research and development costs in 2002 is related to the sale of the
Geneva AppBuilder line of business in October 2001. Approximately 100 employees,
including the Geneva AppBuilder software development group, were transferred to
the purchaser at that time.

The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our 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.

Our 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 us 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 we will
successfully develop, introduce or manage the transition to new products.

We have in the past, and may in the future, experience delays in the
introduction of our products, due to factors internal and external to our
business. 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 our results of
operations, particularly on a quarterly basis.

COMPETITION

The provision of custom contact center integration software includes a
large number of participants in various segments, is subject to rapid changes,
and is highly competitive. These markets are highly fragmented and served by
numerous firms, many of which address only specific contact center problems and
solutions. 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 business
integration solutions to the contact centers of the financial services industry
make it an attractive market for new competition. Many of our current and
possible future competitors have greater name recognition, a larger installed
customer base and greater financial, technical, marketing and other resources
than we have.

REPRESENTATIVE COMPETITORS FOR CICERO

o Portal software offers the ability to aggregate information at a single
point, but not the ability to integrate transactions from a myriad of
information systems on the desktop. Plumtree is a representative company
in the Portal market.

o Middleware software provides integration of applications through messages
and data exchange implemented typically in the middle tier of the
application architecture. This approach requires modification of the
application source code and substantial infrastructure investments and
operational expense. Reuters, TIBCO and IBM MQSeries are representative
products in the middleware market.

o CRM software offers application tools that allow developers to build
product specific interfaces and custom applications. This approach is not
designed to be product neutral and is often dependent on deep integration
with the company's CRM technology. Siebel is a representative product in
the CRM software category.

We believe that our ability to compete depends in part on a number of
competitive factors outside our control, including the ability of our
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 our products and services, the price at
which others offer comparable services and the extent of our competitors'
responsiveness to customer needs.

INTELLECTUAL PROPERTY

Our success is dependent upon developing, protecting and maintaining our
intellectual property assets. We rely upon combinations of copyright, trademark
and trade secrecy protections, along with contractual provisions, to protect our
intellectual property rights in software, documentation, data models,
methodologies, data processing systems and related written materials in the
international marketplace. In addition, Merrill Lynch holds a patent with
respect to the Cicero technology. Copyright protection is generally available
under United States laws and international treaties for our 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. We use the registered trademarks "Level 8 Systems" and "Cicero", and
the trademarks "Level 8", "Level 8 Technologies", and "Geneva Integration
Broker".

All other product and company names mentioned herein are for
identification purposes only and are the property of, and may be trademarks of,
their respective owners.

There can be no assurance that the steps we have taken will prevent
misappropriation of our technology, and such protections do not preclude
competitors from developing products with functionality or features similar to
our products. Furthermore, there can be no assurance that third parties will not
independently develop competing technologies that are substantially equivalent
or superior to our technologies. Additionally, with respect to the Cicero line
of products, there can be no assurance that Merrill Lynch will protect its
patents or that we will have the resources to successfully pursue infringers.

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

As the number of software products in the industry increases and the
functionality of these products further overlaps, we believe that software
developers and licensors 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 our business, operating results and financial
condition.

EMPLOYEES

As of March 31, 2004, we employed 33 employees. Our employees are not
represented by a union or a collective bargaining agreement.

We believe that to fully implement our business plan we will be required
to enhance our ability to work with the Microsoft Windows NT, Windows XP, and
Windows 2000 operating systems by adding additional development personnel as
well as additional direct sales personnel to complement our sales plan. Although
we believe that we will be successful in attracting and retaining qualified
employees to fill these positions, no assurance can be given that we will be
successful in attracting and retaining these employees now or in the future.

PROPERTIES

Our corporate headquarters is located in approximately 4,882 square feet
in Princeton, New Jersey pursuant to a lease expiring in 2006. The United States
operations group and administrative functions are based in offices of
approximately 2,956 square feet in our Cary, North Carolina office pursuant to a
lease expiring in 2006. The research and development and customer support groups
are located in the Princeton, New Jersey and Cary, North Carolina facilities.

LEGAL PROCEEDINGS

Various lawsuits and claims have been brought against the Company in the
normal course of business. In January 2003, an action was brought against the
Company in the Circuit Court of Loudon County Virginia for a breach of a real
estate lease. The case was settled in August 2003. Under the terms of the
settlement agreement, the Company agreed to assign a note receivable with
recourse equal to the unpaid portion of the note should the note obligor default
on future payments. The unpaid balance of the note was $545 and it matures in
December 2007. The Company assessed the probability of liability under the
recourse provisions using a weighted probability cash flow analysis and has
recognized a long-term liability in the amount of $131.

In October 2003, the Company was served with a summons and complaint in
Superior Court of North Carolina regarding unpaid invoices for services rendered
by one of its subcontractors. The amount in dispute is approximately $200 and is
included in accounts payable. Subsequent to March 31, 2004, the Company settled
this litigation. Under the terms of the settlement agreement, the Company agreed
to pay a total of $189 plus interest over a nineteen month period ending
November 15, 2005.

In March 2004, the Company was served with a summons and complaint in
Superior Court of North Carolina regarding a security deposit for a sublease in
Virginia. The amount in dispute is approximately $247. The Company disagrees
with this allegation although it has reserved for this contingency.

Under the indemnification clause of the Company's standard reseller
agreements and software license agreements, the Company agrees to defend the
reseller/licensee against third party claims asserting infringement by the
Company's products of certain intellectual property rights, which may include
patents, copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL INFORMATION

Level 8 Systems is a global provider of business integration software that
enables organizations to integrate new and existing information and processes at
the desktop with our Cicero product. Business integration software addresses the
emerging need for a company's information systems to deliver enterprise-wide
views of the company's business information processes.

In addition to software products, Level 8 also provides technical support,
training and consulting services as part of its commitment to providing its
customers industry-leading integration solutions. Level 8's 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 services around its integration software products.

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 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 "Forward Looking and Cautionary Statements."

The Company's results of operations include the operations of the Company
and its subsidiaries from the date of acquisition. During 2002, the Company
identified the assets of the Systems Integration segment as being held for sale
and thus a discontinued operation. Accordingly, the assets and liabilities have
been reclassified to assets held for sale and the results of operations of that
segment are now reclassified as loss from discontinued operations.

In August 2000, the Company acquired the rights to Cicero, a comprehensive
integrated desktop computer environment from Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") in exchange for 1,000,000 shares of its
common stock valued at $22,750. The cost of the technology acquired had been
capitalized and amortized over a three-year period. In January 2002, the Company
extended the exclusive perpetual license to develop and sell the Cicero
application integration software from Merrill Lynch.

Due to the Company's acquisition and divestiture activities, year-to-year
comparisons of results of operations are not necessarily meaningful.
Additionally, as a result of the Company's pursuit of a growth strategy focusing
on its software product sales and synergies gained as a result of eliminating
duplicative functions, the results of operations are significantly different
than the result of combining the previous operations of each acquired company
into Level 8. Pro forma comparisons are therefore not necessarily meaningful. In
2001, the Company began to shift its primary focus from selling multiple
Enterprise Application Integration ("EAI") products to selling Cicero, a desktop
integration package, to the financial services industry with a decreased focus
on services. During the last two fiscal quarters of 2001, the Company sold most
of the products that comprised its Messaging and Application Engineering
segment.

In 2002, the Company continued to reorganize and concentrate on the
emerging desktop integration market and continued to dispose of non-strategic
assets with the sale of the Star SQL and CTRC products from the Messaging and
Application Engineering segment and the Geneva Enterprise Integrator and
Business Process Automator from what was formerly the Systems Integration
segment.

BUSINESS STRATEGY

During the second quarter of 2001, management reassessed how the Company
would be managed and how resources would be allocated. At that time management
then made operating decisions and assessed performance of the Company's
operations based on the following reportable segments: (1) Desktop Integration,
(2) System Integration and (3) Messaging and Application Engineering. Previous
reportable segments were: (1) software, (2) maintenance, (3) services, and (4)
research and development. As noted above, the assets comprising the System
Integration segment were identified as being held for resale and accordingly,
the results of operations have been reclassified to gain or loss from a
discontinued business and no segment information is presented.

The principal product in the Desktop Integration segment is Cicero. Cicero
is a business integration software product that maximizes end-user productivity,
streamlines business operations and integrates disparate systems and
applications.

The products that comprise the Messaging and Application Engineering
segment were Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and
Geneva AppBuilder. 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. Geneva Message
Queuing is an enterprise connectivity product for Microsoft and non-Microsoft
applications. The primary use is for transactional, once and only once
connectivity of Window-based Web applications to back-office information
resources like mainframes and other legacy systems. Geneva XIPC provides similar
delivery of information between applications. While Geneva Message Queuing is
based around a Microsoft standard, Geneva XIPC is for use with Linux and other
brands of UNIX operating systems. 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.

On October 1, 2001, the Company completed the sale of its Geneva
AppBuilder product. Under the terms of the agreement, the Company sold the
rights, title and interest in the Geneva AppBuilder product along with all
receivables, unbilled and deferred revenues as well as all maintenance
contracts. The Geneva AppBuilder product accounted for approximately 85% of
total revenue within the Messaging and Application Engineering segment and
approximately 99% of total revenue for all segments. As more fully described in
Note 2 to the Consolidated Financial Statements, the Company received
approximately $19 million in cash plus a note receivable for $1 million due
February 2002. The Company subsequently liquidated $22 million of its short-term
debt using the proceeds received and cash on hand. As part of the sale
transaction, approximately 100 employees were transferred over to the acquiring
company who also assumed certain facility and operating leases and entered into
a sublease arrangement at the Cary, North Carolina facility. While future
revenues have been negatively impacted by the sale of Geneva AppBuilder, the
associated costs of doing business have been positively impacted by the overall
reduction in operating costs.

During the quarter ended September 30, 2001, the Company sold two of its
messaging products - Geneva Message Queuing and Geneva XIPC to Envoy
Technologies, Inc. for $50 in cash and a note receivable for $400. Under the
terms of the agreement, Envoy acquired all rights, title and interest to the
products along with all customer and maintenance contracts.

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
2003 2002 2001 2004 2003
--------- --------- --------- --------- ---------

Revenue:
Software ........................ 19.3% 48.1% 9.6% 12.0% 25.2%
Maintenance ..................... 59.6% 18.4% 53.3% 88.0% 58.0%
Services ........................ 21.1% 33.5% 37.1% 0.0% 16.8%
---------- ---------- ---------- ---------- ----------
Total ................... 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of revenue:

Software ........................ 783.4% 238.5% 85.3% 866.3% 585.3%
Maintenance ..................... 70.4% 5.8% 18.7% 125.3% 64.3%
Services ........................ 171.3% 29.0% 31.6% 337.3% 175.5%
---------- ---------- ---------- ---------- ----------
Total ................... 1,025.1% 273.3% 135.6% 1,328.9% 825.2%

Gross margin (loss) ................. (925.1)% (173.3)% (35.6)% (1,228.9)% (725.2)%

Operating expenses:

Sales and marketing ............. 317.0% 90.6% 63.6% 403.6% 385.3%
Research and product development 191.9% 61.3% 30.9% 375.9% 176.9%
General and administrative ...... 482.6% 126.9% 55.5% 567.5% 548.2%
Amortization of intangible assets 0.0% 0.0% 36.1% 0.0% 0.0%
Impairment of intangible assets . 0.0% 0.0% 45.7% 707.2% 0.0%
(Gain)/loss on disposal of assets 78.3% 14.9% (36.6)% 0.0% 340.6%
Restructuring, net .............. (157.4)% 41.9% 49.8% 0.0% 0.0%
---------- ---------- ---------- ---------- ----------
Total ................... 912.4% 335.6% 245.0% 2,054.2% 1,451.0%
Loss from operations ............ (1,837.5)% (508.9)% (280.6)% (3,283.1)% (2,176.2)%
Other income (expense), net ..... (25.5)% 80.1% (51.0)% 118.0% 96.5%
---------- ---------- ---------- ---------- ----------
Loss before taxes ............... (1,863.0)% (428.8)% (331.6)% (3,165.1)% (2,079.7)%
Income tax provision (benefit) .. 0.0% (5.0)% 2.9% 0.0% 0.0%
---------- ---------- ---------- ---------- ----------

Loss from continuing operations ..... (1,863.0)% (423.8)% (334.5)% (3,165.1)% (2,079.7)%
Loss from discontinued operations ... (24.9)% (162.5)% (271.2)% (10.8)% (32.2)%
---------- ---------- ---------- ---------- ----------
Net loss ........................ (1,887.9)% (586.3)% (605.7)% (3,175.9)% (2,111.9)%
========== ========== ========== ========== ==========

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

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
MARCH 31,
2003 2002 2001 2004 2003
---- ---- ---- ---- ----

United States 90% 96% 36% 94% 85%
Europe ...... 9% 4% 55% 6% 15%
Asia Pacific -- -- 3% -- --
Middle East . -- -- 4% -- --
Other ....... 1% -- 2% -- --
---- ---- ---- ---- ----
Total .... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----

The table below presents information about reported segments for the twelve
months ended December 31, 2003, 2002 and 2001:

MESSAGING/
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
----------- ----------- -----

2003:
Total revenue ................ $ 466 $ 64 $ 530
Total cost of revenue ........ 5,371 62 5,433
Gross margin (loss) .......... (4,905) 2 (4,903)
Total operating expenses ..... 4,999 256 5,255
Segment profitability (loss) . $ (9,904) $ (254) $(10,158)

2002:
Total revenue ................ $ 2,148 $ 953 $ 3,101
Total cost of revenue ........ 6,527 1,950 8,477
Gross margin (loss) .......... (4,379) (997) (5,376)
Total operating expenses ..... 8,211 434 8,645
Segment profitability (loss) . $(12,590) $ (1,431) $(14,021)

2001:
Total revenue ................ $ 134 $ 17,223 $ 17,357
Total cost of revenue ........ 9,427 14,109 23,536
Gross margin (loss) .......... (9,293) 3,114 (6,179)
Total operating expenses ..... 18,858 7,179 26,037
Segment profitability (loss) . $(28,151) $ (4,065) $(32,216)

The table below presents information about reported segments for the three
months ended March 31, 2004 and 2003:

MESSAGING/
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
----------- ----------- -----

2004:
Total revenue ........................ $ 77 $ 6 $ 83
Total cost of revenue ................ 1,058 45 1,103
Gross margin (loss) .................. (981) (39) (1,020)
Total operating expenses ............. 988 130 1,118
Segment profitability (loss) ......... $(1,969) $ (169) $(2,138)

2003:
Total revenue ........................ $ 119 $ 24 $ 143
Total cost of revenue ................ 1,138 42 1,180
Gross margin (loss) .................. (1,019) (18) (1,037)
Total operating expenses ............. 1,500 88 1,588
Segment profitability (loss) ......... $(2,519) $ (106) $(2,625)

A reconciliation of segment operating expenses to total operating expense
follows:

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
2003 2002 2001 2004 2003
----------- ----------- ---------- ---------- ----------
(unaudited)

Segment operating expenses ...... $ 5,255 $ 8,645 $ 26,037 $ 1,118 $ 1,588
Amortization of intangible assets -- -- 6,259 -- --
Write-off of intangible assets .. -- -- 7,929 587 --
(Gain)loss on disposal of assets . 415 461 (6,345) -- 487
Restructuring, net .............. (834) 1,300 8,650 -- --
-------- -------- -------- -------- --------
Total operating expenses ........ $ 4,836 $ 10,406 $ 42,530 $ 1,705 $ 2,075
======== ======== ======== ======== ========

A reconciliation of total segment profitability to net loss as follows:

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------- ----------------------------
2003 2002 2001 2004 2003
-------- -------- -------- -------- --------
(unaudited)

Total segment profitability (loss) ....... $(10,158) $(14,021) $(32,216) $ (2,138) $ (2,625)
Amortization of intangible assets ........ -- -- (6,259) -- --
Impairment of intangible assets .......... -- -- (7,929) (587) --
Gain/(loss) on disposal of assets ........ (415) (461) 6,345 -- (487)
Restructuring ............................ 834 (1,300) (8,650) -- --
Interest and other income/(expense), net . (135) 2,485 (8,850) 98 138
-------- -------- -------- -------- --------
Net loss before provision for income taxes $ (9,874) $(13,297) $(57,559) $ (2,627) $ (2,974)
======== ======== ======== ======== ========

COMPARISON OF QUARTER ENDED MARCH 31, 2004 TO MARCH 31, 2003

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, due to market
conditions, the budgeting and purchasing cycles of customers and the
effectiveness of the Company's sales force. 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 the
recognition of revenue can cause significant variations in operating results
from quarter to quarter. Fluctuations in operating results may result in
volatility of the price of the Company's common stock.

Total revenues decreased 42% for the quarter ended March 31, 2004 from the
same period in 2003. The decrease in revenues, while insignificant in total
dollars, reflects the Company's inability to successfully penetrate its key
markets. The Company believes that there are a number of factors that contribute
including the relatively new category for the product, the environment for IT
spending as well as the fragility of the Company's financial condition. While
the Company is actively pursuing strategic partners to resell the product and
the Company has made significant progress on displaying the product's
capabilities to targeted customers, there is no assurance that the Company will
be successful in this endeavor. Gross margin/ (loss) was (1,229)% for the
quarter ended March 31, 2004 and (725)% for the quarter ended March 31, 2003.

SOFTWARE PRODUCTS. Software product revenue decreased approximately 72% in
2004 from those results achieved in 2003, however, the absolute dollar change
was immaterial.

The gross margin (loss) on software products was (7,090)% for the quarter ended
March 31, 2004 and reflects the amortization of acquired software not offset by
revenues. In the similar quarter in 2003, gross margin (loss) on software
products was (2,225)%. Cost of software revenue is composed primarily of
amortization of software product technology, amortization of capitalized
software costs for internally developed software and royalties to third parties,
and to a lesser extent, production and distribution costs. The decrease in cost
of software was primarily due to a change in the amortization of capitalized
software from the acquisition of the Cicero technology, which was purchased in
the third quarter of 2000.

The Company expects to see significant increases in software sales related
to the Desktop Integration segment coupled with improving margins on software
products as Cicero gains acceptance in the marketplace. The Company's
expectations are based on its review of the sales cycle that has developed
around the Cicero product since being released by the Company, its review of the
pipeline of prospective customers and their anticipated capital expenditure
commitments and budgeting cycles, as well as the status of in-process proof of
concepts or beta sites with select corporations. The Messaging and Application
Engineering segment revenue is expected to increase marginally with on-line
sales of its products.

MAINTENANCE. Maintenance revenue for the quarter ended March 31, 2004
decreased by approximately 12% or $10 as compared to the similar quarter for
2003. The decline in overall maintenance revenues is primarily due to the
termination of one maintenance contract for the Geneva Integration Broker
product within the Messaging and Application Engineering segment.

The Desktop Integration segment accounted for approximately 93% of total
maintenance revenue for the quarter. The Messaging and Application Engineering
segment accounted for approximately 7% of total maintenance revenues. The
increase in the Desktop Integration maintenance as a percentage of the total is
primarily due to amortization of deferred maintenance revenues that resulted
from 2003 maintenance contracts.

Cost of maintenance revenue is comprised of personnel costs and related
overhead and the cost of third-party contracts for the maintenance and support
of the Company's software products. Gross margin (loss) on maintenance products
for the quarters ended March 31, 2004 and March 31, 2003 was (42.5)%, and
(10.8%), respectively. The increase in gross margin (loss) reflects a
realignment of personnel from general and administrative duties to support for
product maintenance.

The Desktop Integration segment had a negative gross margin (1,274)% for
the quarter ended March 31, 2004 as amortization of software costs far exceeded
revenues. The Messaging and Application Engineering segment also had a negative
gross margin of approximately (650)% for the quarter.

Maintenance revenues are expected to increase in the Desktop Integration
segment and increase slightly in the Messaging and Application Engineering
segment. The cost of maintenance should remain constant for the Desktop
Integration segment and the Messaging and Application Engineering segment.

SERVICES. The Company recognized zero services revenue for the quarter
ended March 31, 2004. Services revenues are expected to increase for the Desktop
Integration segment as the Cicero product gains acceptance. The Messaging and
Application Engineering segment service revenues should be insignificant as the
majority of the relevant products are commercial off-the-shelf applications.

Cost of services revenue primarily includes personnel and travel costs
related to the delivery of services. Services gross margins were (946)%, for the
quarter ended March 31, 2003.

SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, marketing personnel, travel and related
overhead, as well as trade show participation and promotional expenses. Sales
and marketing expenses decreased by 39% or approximately $216 due to a reduction
in the Company's sales and marketing workforce and sales compensation structure.
Specifically, the Company reduced its headcount within sales and marketing by
two employees and changed the compensation structure to lower fixed costs and
increase variable success-based costs.

The Company's emphasis for the sales and marketing groups will be the
Desktop Integration segment.

RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation and related overhead. Research and development expense increased
by 23.3% or approximately $59 in the period ended March 31, 2004 as compared to
the same period in 2003. The increase in costs in 2004 reflects the additional
costs of encryption technology development personnel as well as certain other
costs.

The Company intends to continue to make a significant investment in
research and development on its Cicero product while enhancing efficiencies in
this area.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for the legal, financial, human resources and administrative
staff, related overhead, and all non-allocable corporate costs of operating the
Company. General and administrative expenses for the quarter ended March 31,
2004 decreased by 39.8% or $313 over the same period in the prior year. The
reason for the decrease in costs is the reduction of IT service staff who have
been moved to add resources for customer maintenance support and an overall
reduction in the costs of business fees.

General and administrative expenses are expected to decrease slightly
going forward as the Company continues to create certain efficiencies and
consolidations.

RESTRUCTURING. At March 31, 2003, the Company's accrual for restructuring
was $633, which was primarily comprised of excess facility costs and which the
Company believed represented its remaining cash obligations for the
restructuring changes. Subsequent to September 30, 2003, the Company settled
litigation relating to these excess facilities. Accordingly, the Company
reversed the restructuring balance during the fourth quarter of 2003. Under the
terms of the settlement agreement, the Company agreed to assign the note
receivable from the sale of Geneva to EM Software Solutions, Inc., with recourse
equal to the unpaid portion of the note receivable should the note obligor, EM
Software Solutions, Inc., default on future payments. The unpaid principal
portion of the note receivable assigned was approximately $463 and matures
December 2007. The Company assessed the probability of liability under the
recourse provisions using a probability weighted cash flow analysis and has
recognized a long-term liability in the amount of $131.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY. The Company has recorded a
warrant liability for derivatives in accordance with EITF 00-19 for its common
stock warrants with redemption features outside the control of the Company. The
fair value of the warrants as of March 31, 2004 has been determined using
valuation techniques consistent with the valuation performed as of December 31,
2003 and recorded as a warrant liability. As a result of the valuation, the
Company has recorded a reduction in the fair value of the warrant liability of
$19.

SEGMENT PROFITABILITY. Segment profitability represents loss before income
taxes, interest and other income (expense), amortization of goodwill,
restructuring charges, gain (loss) on sale of assets, and impairment charges.
Segment profitability for the three months ended March 31, 2004 was
approximately ($2,100) as compared to ($2,600) for the same period of the
previous year. The decrease in the loss before income taxes, interest and other
income and expense, restructuring charges, gain or loss on sale of assets and
impairment charges is primarily attributable to the reduced operations of the
Company as a result of the significant restructuring of operations.

Segment profitability is not a measure of performance under accounting
principles generally accepted in the United States of America, and should not be
considered as a substitute for net income, cash flows from operating activities
and other income or cash flow statement data prepared in accordance with
accounting principles generally accepted in the United States of America, or as
a measure of profitability or liquidity. We have included information concerning
segment profitability as one measure of our cash flow and historical ability to
service debt and because we believe investors find this information useful.
Segment profitability as defined herein may not be comparable to similarly
titled measures reported by other companies.

IMPACT OF INFLATION. Inflation has not had a significant effect on the
Company's operating results during the periods presented.

COMPARISON OF YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

The Company's revenues vary from quarter to quarter, due to market
conditions, the budgeting and purchasing cycles of customers and the
effectiveness of the Company's sales force. The Company typically does not have
any material backlog of unfilled software orders and product revenue in any
period 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 the
recognition of revenue can cause significant variations in operating results
from period to period. Fluctuations in operating results may result in
volatility of the price of the Company's common stock.

Total revenues decreased 83% from $3,101 in 2002 to $530 in 2003 and
decreased 82% from $17,357 in 2001 to $3,101 in 2002. During 2002, the Company
executed software contracts with two major companies that totaled more than
$1,200 in license revenues as well as significant integration services revenues.
During 2003, no such contracts were executed. The decline in revenues may also
be affected by the Company's financial condition as well as the overall economy
as certain prospective customers have deferred purchasing activity. The
significant decrease in revenues from 2001 to 2002 is primarily the result of
the sale of substantially all of the Messaging and Application Engineering
segment products (approximately $17,200 of total revenues) at the start of the
fourth quarter of 2001. Gross profit margin (loss) was (925)%, (173)%, and (36)%
for 2003, 2002 and 2001, respectively.

The Desktop Integration segment had a gross margin (loss) of (1,053)% for
the year ended December 31, 2003 and a gross margin (loss) of (204)% for the
year ended December 31, 2002. Cicero is still a relatively new product and the
software amortization expense was being recognized over a three-year period. In
July 2002, the Company reassessed the life of the Cicero technology in light of
the extension of the license and exclusivity provisions in perpetuity. As a
result, the Company changed the estimated useful life to be 5 years, which
resulted in a reduction in 2002 amortization expense by $2,407. At each balance
sheet date, the Company reassesses the recoverability of the Cicero technology
in accordance with FASB 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed". This assessment was completed due to the
Company's continued operating losses and the limited software revenue generated
by the Cicero technology over the past twelve to eighteen months. Currently, the
Company is in negotiations with numerous customers to purchase licenses, which
would have a significant impact on the cash flows from the Cicero technology and
the Company. Since the negotiations have been in process for several months and
expected completion of the transactions has been delayed, the Company has
reduced its cash flow projections. Historical cash flows generated by the Cicero
technology do not support the long-lived asset and accordingly the Company has
impaired the excess of the unamortized book value of the technology in excess of
the expected net realizable value as of September 30, 2003 and at December 31,
2003. These charges, in the amount of $745 and $248 respectively, have been
recorded as cost of software revenue.

The Messaging and Application Engineering segment gross margin for the
year ended December 31, 2003 was insignificant. No future revenues are
anticipated in that segment as all the products have been either sold or
discontinued. For the year ended December 31, 2002, the Messaging and
Application Engineering segment had a gross margin (loss) of (105%).

SOFTWARE PRODUCTS. Software product revenue decreased approximately 93% in
2003 from those results achieved in 2002 and decreased 10% in 2002 as compared
to 2001. Software revenues in 2003 and 2002 are from the new Cicero product as
the Company changed its strategic focus to the Desktop Integration segment. In
2001, software revenues primarily resulted from the Messaging and Application
Engineering products, which were sold in the beginning of the fourth quarter of
that year.

The gross margin on software products was (3,971)%, (396)% and (793)% for
the 2003, 2002 and 2001 years ended, respectively. Cost of software is composed
primarily of amortization of software product technology, amortization of
capitalized software costs for internally developed software, impairment of
software product technology, and royalties to third parties, and to a lesser
extent, production and distribution costs. The decrease in cost of software for
2003 as compared with 2002 is due to the change in the amortization period from
three years to five years, offset by impairment charges totaling $993. The
decrease in cost of software from 2001 to 2002 reflects the impact of the sale
of the AppBuilder product in the fourth quarter of 2001 of approximately $1,760,
an impairment of $3,070 in the net realizable value of the CTRC technology in
third quarter of 2001 and the impact of the change in the amortization period
for the Cicero technology in July 2002 of $2,407.

The software product gross margin (loss) for the Desktop Integration
segment was (3,971)% in 2003 and (309)% in 2002. The software product gross
margin (loss) on the Messaging and Application Engineering segment was zero for
2003 and (1,162)% in 2002.

The Company expects to see significant increases in software sales related
to the Desktop Integration segment coupled with improving margins on software
products as Cicero gains acceptance in the marketplace. The Company's
expectations are based on its review of the sales cycle that has developed
around the Cicero product since being released by the Company, its review of the
pipeline of prospective customers and their anticipated capital expenditure
commitments and budgeting cycles, as well as the establishment of viable
reference points in terms of an installed customer base with Fortune 500
Companies. The Messaging and Application Engineering segment revenue is expected
to be deminimus as the majority of the products comprising this segment have
been sold.

MAINTENANCE. Maintenance revenues for the year ended December 31, 2003
decreased by approximately 45% or $255 from 2002. The decline in maintenance
revenues in 2003 as compared to 2002 is the result of the sale of the CTRC and
Star SQL products in June 2002. Maintenance revenues declined by approximately
$8,691 or 94% in 2002 as compared to 2001. The decline in maintenance revenue is
directly related to the sale of the Messaging and Application Engineering
segment products in the fourth quarter of 2001.

The Desktop Integration segment accounted for approximately 80% of total
maintenance revenue and the Messaging and Application Engineering segment
accounted for approximately 20% of total maintenance revenues in 2003.

Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of the
Company's software products. The Company experienced a gross margin (loss) on
maintenance products of (18)% for 2003. Gross margins on maintenance products
for 2002 and 2001 were 68% and 65% respectively.

Maintenance revenues are expected to increase, primarily in the Desktop
Integration segment. The majority of the products comprising the Messaging and
Application Engineering segment have been sold and thus future revenues will be
significantly lower as will the cost of maintenance associated with this
segment. The cost of maintenance should increase slightly for the Desktop
Integration segment.

SERVICES. Services revenue for the year ended December 31, 2003 decreased
by approximately 89% or $927 from 2002. The decline in service revenues is
directly attributed to the lack of software license revenues in 2003. Service
revenues for 2002 as compared to 2001 declined by 84% or $5,398. This decline is
attributed to the sale of the Messaging and Application Engineering segment
products in 2001. The principal product within the Messaging and Application
Engineering segment products was AppBuilder. This product enabled companies to
build new applications and typically, those customers utilized the Company's
consultants to assist in the application development.

Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margin (loss) was (711)%, 13% and 15%
for the years ended 2003, 2002 and 2001 respectively.

Services revenues are expected to increase for the Desktop Integration
segment as the Cicero product gains acceptance. The Messaging and Application
Engineering segment service revenues will continue to be deminimus as the
majority of the relevant products have been sold.

SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, marketing personnel, travel and related
overhead, as well as trade show participation and promotional expenses. Sales
and marketing expenses decreased by 40% or approximately $1,128 in 2003 due to a
reduction in the Company's sales and marketing workforce, decreased promotional
activities and a reduction in the sales compensation structure. Sales and
marketing expenses decreased by 75% or approximately $8,234 in 2002 as a result
of the Company's restructuring activities and the sale of most of the Messaging
and Application Engineering segment products in the fourth quarter of 2001.

Sales and marketing expenses are expected to increase slightly as the
Company adds additional direct sales personnel and supports the sales function
with collateral marketing materials. The Company's emphasis for the sales and
marketing groups will be the Desktop Integration segment.

RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation and related overhead. Research and development expense decreased
by 47% or $885 in 2003 over the same period in 2002 and decreased by 65% or
$3,463 in 2002 as compared to the same period in 2001. The decline in both
periods is attributed to operational restructurings and reduction in workforce.

The Company intends to continue to make a significant investment in
research and development on its Cicero product while enhancing efficiencies in
this area.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for the executive, legal, financial, human resources, IT and
administrative staff, related overhead, and all non-allocable corporate costs of
operating the Company. General and administrative expenses for the year ended
December 31, 2003 decreased by 35% or $1,377 over the prior year. In fiscal
2002, general and administrative expenses decreased by 59% or $5,695. The sharp
decline in general and administrative costs in 2003 and 2002 reflect the
restructuring program conducted by the Company during 2001 and 2002. In
addition, during 2001, the Company recognized a charge of approximately $3,800
from a significant customer who filed for Chapter 11 Bankruptcy.

General and administrative expenses are expected to decrease going forward
as the Company experiences the synergies of its smaller size and the cost
reductions associated with previous office closings.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill was $0 for 2003 and 2002. Amortization of goodwill and other intangible
assets during 2001 amounted to $6,259. The reduction in amortization expense in
2002 is primarily attributable to the sale of Geneva AppBuilder products in
October 2001 as well as the effect of impairment on the intangible assets
acquired from StarQuest. At December 31, 2003, 2002 and 2001, there was no
remaining goodwill on the Company's balance sheet.

RESTRUCTURING. As part of the Company's plan to focus on the emerging
desktop integration marketplace with its new Cicero product, the Company has
completed substantial restructurings in 2002 and 2001. As of December 31, 2002,
the Company's accrual for restructuring was $772, which was primarily comprised
of excess facility costs. As more fully discussed in Note 20 Contingencies, in
2003 the Company settled litigation relating to these excess facilities.
Accordingly, the Company has reversed the restructuring balance. Under the terms
of the settlement agreement, the Company agreed to assign the note receivable
from the sale of Geneva to EM Software Solutions, Inc., (see Note 2
Dispositions), with recourse equal to the unpaid portion of the note receivable
should the note obligor, EM Software Solutions, Inc., default on future
payments. The current unpaid principal portion of the note receivable assigned
is approximately $545 and matures December 2007. The Company assessed the
probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liability in the
amount of $131.

During the second quarter of 2002, the Company announced an additional
round of restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closure of the Company's
Berkeley, California facility as well as a significant reduction in the
Company's European personnel.

During the first quarter of 2001, the Company announced and began
implementation of an initial operational restructuring. The Company recorded
restructuring charges of $6,650 during the quarter ended March 31, 2001 and an
additional charge of $2,000 for the quarter ended June 30, 2001. Restructuring
charges have been classified in "Restructuring" on the consolidated statements
of operations. These operational restructurings involved the reduction of
employee staff throughout the Company in all geographical regions in sales,
marketing, services, development and all administrative functions.

The overall restructuring plan included the termination of 236 employees.
The plan included a reduction of 107 personnel in the European operations and
129 personnel in the US operations. Employee termination costs comprised
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits did not include any amounts for
employment-related services prior to termination.

IMPAIRMENT OF INTANGIBLE ASSETS. In May 2001, management reevaluated and
modified its approach to managing the business and opted to conduct business and
assess the efficiency of operations under a line-of-business approach. As such,
the Company performed an assessment of the recoverability of its long-lived
assets under a line-of-business approach, representing a change in accounting
principle inseparate from the effect of the change in accounting estimates. This
represents an accounting change from the Company's previous policy of assessing
impairment of intangible assets at the enterprise level, which is accounted for
as a change in estimate. The change reflects management's changed approach to
managing the business.

During the third quarter of 2001, the Company was notified by one of its
resellers that they would no longer engage in re-sales of the Company's CTRC
product, a component of the Messaging and Application Engineering segment. This
reseller accounted for substantially all of the CTRC product sales. As a result,
the Company performed an assessment of the recoverability of the Messaging and
Application Engineering segment. The results of the Company's analysis of
undiscounted cash flows indicated that an impairment charge would be
appropriate. The Company estimated the fair market value of the related assets
through a discounted future cash flow valuation technique. The results of this
analysis indicated the carrying value of these intangible assets exceeded their
fair market values. The Company reduced the carrying value of the intangible
assets and software product technology by approximately $7,929 and $3,070,
respectively, as of September 30, 2001.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY. The Company has issued warrants
to Series A3 and Series B3 preferred stockholders which contain provisions that
allow the warrant holders to force a cash redemption for events outside the
control of the Company. The fair value of the warrants is accounted for as a
liability and is re-measured at each balance sheet date. As of December 31,
2003, the warrant liability had a fair value of $198 and the Company had
recorded the change in the fair value of the warrant liability of $133 for the
year ended December 31, 2003 in the consolidated statements of operations.

PROVISION FOR 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 loss incurred in 2003, 2002 or
2001. Because of the Company's inconsistent earnings history, the deferred tax
assets have been fully offset by a valuation allowance. The income tax provision
(credit) for the years ended December 31, 2002 and 2001 is primarily related to
income taxes associated with foreign operations and foreign withholding taxes.

IMPACT OF INFLATION. Inflation has not had a significant effect on the
Company's operating results during the periods presented.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING AND INVESTING ACTIVITIES

For the three months ended March 31, 2004, the Company generated
approximately $100 of cash.

Operating activities utilized approximately $1,000 of cash, which is
primarily comprised of the loss from operations of approximately $2,600, offset
by non-cash charges for depreciation and amortization of approximately $700, and
an impairment of goodwill from the acquisition of the Ensuredmail technology in
the amount of approximately $600. In addition, the Company's cash increased by
approximately $200 from the reduction in prepaid expenses and other assets,
approximately $100 for an increase in deferred revenues from maintenance
contracts and $50 for the increase in accounts payable and accrued expenses to
vendors for services rendered.

The Company generated approximately $1,100 in cash during the quarter from
financing activities from the proceeds of an additional round of investment from
several new investors totaling $1,200, net short term borrowings of $100, offset
by a net reduction in the Company's short-term debt in the amount of $200.

By comparison, in 2003, the Company generated approximately $500 in cash
during the quarter.

Operating activities in the first quarter of 2003 utilized approximately
$1,500 of cash, which is primarily comprised of the loss from operations of
$3,000, offset by non-cash charges for depreciation and amortization of
approximately $800. In addition, the Company had a reduction in accounts
receivable of approximately $1,200 and used approximately $1,000 in fulfillment
of its obligations to its creditors through its accounts payable and other
accrued liabilities. The significant reduction in accounts receivable is the
result of the reduction in overall revenues resulting from the sale of
substantially all of the Messaging and Application Engineering products.

In the first quarter of 2003, the Company utilized approximately $1,000 in
cash from investing activities, which is comprised of approximately $1,800 of
cash placed in escrow from the proceeds of the sale of Senior Convertible
Redeemable Preferred Shares offset by the collection of approximately $800 in
Notes Receivable.

In the first quarter of 2003, the Company generated approximately $3,100
in cash during the quarter from financing activities from the proceeds of the
sale of senior convertible redeemable shares of approximately $3,500, offset by
a reduction in the Company's short-term debt in the amount of approximately
$400.

For the twelve months ended December 31, 2003, the Company utilized $180
of cash.

Operating activities utilized approximately $4,800 in cash, which was
primarily comprised of the loss from operations of $10,000, offset by non-cash
charges for depreciation and amortization of approximately $3,100, an impairment
of software technology of $1,000 and a non-cash decrease in the fair value of
its warrant liability of $100. In addition, the Company had a reduction in
accounts receivable of $1,400, a reduction in assets and liabilities of
discontinued operations of $100 and a reduction of prepaid expenses and other
assets of $400.

The Company generated approximately $800 in cash from investing
activities, which was primarily the result of the collection of various notes
receivable.

The Company generated approximately $3,800 of cash during the year from
financing activities as a result of proceeds from a private placement of common
stock and warrants in the amount of $800, cash proceeds from warrant exercises
of $400 and cash proceeds from the sale of Series D Preferred Stock of
approximately $3,500 offset by cash held in escrow of $776. In addition, the
Company incurred gross borrowings of $1,000 and repaid $1,200 against those
borrowings.

By comparison, the Company utilized approximately $311 in cash during the
year ended December 31, 2002.

Operating activities utilized approximately $7,200 of cash, which was
primarily comprised of the loss from operations of $18,200, offset by non-cash
charges for depreciation and amortization of approximately $8,000 and a non-cash
decrease in the fair value of its warrant liability of $2,900. In addition, the
Company had a reduction in assets held for sale of approximately $6,400 and used
approximately $2,100 in fulfillment of its obligations to its creditors through
its accounts payable.

The Company generated approximately $3,900 of cash from investing
activities, which was primarily comprised of approximately $2,500 in proceeds
from the collection of various notes receivable and approximately $1,000 in
proceeds from the sale of a line of business.

The Company generated approximately $3,200 of cash during the year from
financing activities as a result of proceeds from a private placement of common
stock and warrants in the amount of $2,000 and cash proceeds of a Preferred
Stock offering in the amount of $1,400.

FINANCING ACTIVITIES

The Company funded its cash needs during the quarter ended March 31, 2004
with cash on hand from December 31, 2003, with cash from operations and with the
cash realized from a private placement of its common stock and with the cash
received from short-term convertible note obligations.

In March 2004, the Company converted a promissory note into a
convertible loan agreement with Mark and Carolyn Landis, who are related by
marriage to Anthony Pizi, the Company's Chairman and Chief Executive Officer, in
the amount of $125,000. Under the terms of the agreement, the loan is
convertible into 446,429 shares of our common stock and warrants to purchase
446,429 shares of our common stock exercisable at $0.28. The warrants expire in
three years. The Company also entered into convertible loan agreements with two
other individual investors, each in the face amount of $50,000. Under the terms
of the agreement, each loan is convertible into 135,135 shares of common stock
and warrants to purchase 135,135 shares of common stock at $0.37 per share. The
warrants expire in three years.

The Company has a $1,971 term loan bearing interest at LIBOR plus 1%
(approximately 2.2% at March 31, 2004), interest on which is payable quarterly.
There are no financial covenants. On November 15, 2003, the Company reached an
agreement with Bank Hapoalim, the holder of the term loan and Liraz Systems Ltd.
("Liraz"), the guarantor of the term loan, to extend the maturity date of the
term loan until November 14, 2004. In consideration for the extension of the
guaranty, the Company issued 150,000 shares of our common stock to a designated
subsidiary of Liraz at the time of the extension and subsequently issued an
additional 150,000 shares to Liraz on March 31, 2004.

The Company funded its cash needs during the year ended December 31, 2003
with cash on hand from December 31, 2002, through the use of proceeds from a
private placement of common stock and warrants, a private placement of preferred
stock and warrants, and with cash from operations.

On March 19, 2003, the Company completed a $3,500 private placement of
Series D Convertible Redeemable Preferred Stock ("Series D Preferred Stock"),
convertible at a conversion ratio of $0.32 per share of common stock into an
aggregate of 11,031,250 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 4,158,780 shares of
common stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in the allocation of $2,890 to the Series D Preferred Stock and $640
to the detachable warrants. Based upon the allocation of the proceeds, the
Company determined that the effective conversion price of the Series D Preferred
Stock was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because the Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

As part of the financing, the Company and the lead investors have agreed
to form a joint venture to exploit the Cicero technology in the Asian market.
The terms of the agreement required that the Company deposit $1,000 of the gross
proceeds from the financing into escrow to fund the joint venture. The escrow
agreement allows for the immediate release of funds to cover organizational
costs of the joint venture. During the quarter ended March 31, 2003, $225 of
escrowed funds were released. Since the joint venture was not formed and
operational on or by July 17, 2003, the lead investors have the right, but not
the obligation, to require the Company to purchase $1,000 in liquidation value
of the Series D Preferred Stock at a 5% per annum premium, less their pro-rata
share of expenses. The Company and the lead investor have mutually agreed to
extend the escrow release provisions until May 31, 2004.

Another condition of the financing required the Company to place an
additional $1,000 of the gross proceeds into escrow, pending the execution of a
definitive agreement with Merrill Lynch providing for the sale of all right,
title and interest to the Cicero technology. Since a transaction with Merrill
Lynch for the sale of Cicero was not consummated by May 18, 2003, the lead
investors have the right, but not the obligation, to require the Company to
purchase $1,000 in liquidation value of the Series D Preferred Stock at a 5% per
annum premium. During the second quarter, $390 of escrowed funds was released.
In addition, the Company and the lead investor agreed to extend the escrow
release provisions until the end of July 2003 when all remaining escrow monies
were released to the Company.

In connection with the sale of Series D Preferred Stock, the holders of
the Company's Series A3 Preferred Stock and Series B3 Preferred Stock
(collectively, the "Existing Preferred Stockholders"), entered into an agreement
whereby the Existing Preferred Stockholders have agreed to waive certain
applicable price protection anti-dilution provisions. Under the terms of the
waiver agreement, the Company is also permitted to issue equity securities
representing aggregate proceeds of up to an additional $4,900 following the sale
of the Series D Preferred Stock. Additionally, the Existing Preferred
Stockholders have also agreed to a limited lock-up restricting their ability to
sell common stock issuable upon conversion of their preferred stock and warrants
and to waive the accrual of any dividends that may otherwise be payable as a
result of the Company's delisting from Nasdaq. As consideration for the waiver
agreement, the Company has agreed to issue on a pro rata basis up to 1,000,000
warrants to all the Existing Preferred Stockholders on a pro rata basis at such
time and from time to time as the Company closes financing transactions that
represent proceeds in excess of $2,900, excluding the proceeds from the Series D
Preferred Stock transaction and any investments made by a strategic investor in
the software business. Such warrants will have an exercise price that is the
greater of $0.40 or the same exercise price as the exercise price of the
warrant, or equity security, that the Company issues in connection with the
Company's financing or loan transaction that exceeds the $2,900 threshold.

In October 2003, the Company completed a common stock financing round
wherein it raised $853 of capital. The offering closed on October 15, 2003. The
Company sold 1,894,444 shares of common stock at a price of $0.45 per share for
a total of $853 in proceeds and issued warrants to purchase 473,611 shares of
the Company's common stock at an exercise price of $0.45. The warrants expire
three years from the date of grant. As part of an agreement with Liraz Systems
Ltd, the guarantor of the Company's term loan, the Company used $200 of the
proceeds to reduce the principal outstanding on the term loan to $1,971.

In January 2004, the Company acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail, a federally
certified encryption software company. Under the terms of the purchase
agreement, Level 8 issued 2,027,027 shares of common stock at a price of $0.37.
The total purchase price of the assets acquired plus the assumption of certain
liabilities being acquired was $750 and has been accounted for by the purchase
method of accounting. The Company agreed to register the common stock for resale
under the Securities Act of 1933, as amended.

Also in January 2004, and simultaneously with the asset purchase of
Critical Mass Mail, Inc., the Company completed a common stock financing round
wherein it raised $1,247 of capital from several new investors as well as
certain investors of Critical Mass Mail, Inc. The Company sold 3,369,192 shares
of common stock at a price of $0.37 per share. As part of the financing, the
Company has also issued warrants to purchase 3,369,192 shares of the Company's
common stock at an exercise price of $0.37. The warrants expire three years from
the date of grant. The Company also agreed to register the common stock and the
warrants for resale under the Securities Act of 1933, as amended.

The Company has incurred losses of approximately $10,000 and $18,000 in
the past two years and has experienced negative cash flows from operations for
each of the past three years. For the quarter ended March 31, 2004 the Company
incurred an additional loss of approximately $2,600 and has a working capital
deficiency of approximately $6,700. The Company's future revenues are entirely
dependent on acceptance of a newly developed and marketed product, Cicero, which
has limited success in commercial markets to date. Accordingly, there is
substantial doubt that the Company can continue as a going concern. In order to
address these issues and to obtain adequate financing for the Company's
operations for the next twelve months, the Company is actively promoting and
expanding its product line and continues to negotiate with significant customers
that have begun or finalized the "proof of concept" stage with the Cicero
technology. The Company is experiencing difficulty increasing sales revenue
largely because of the inimitable nature of the product as well as customer
concerns about the financial viability of the Company. The Company is attempting
to solve the former problem by improving the market's knowledge and
understanding of Cicero through increased marketing and leveraging its limited
number of reference accounts. Additionally, the Company is seeking additional
equity capital or other strategic transactions in the near term to provide
additional liquidity.

The Company closed a strategic acquisition of an encryption technology
asset in January 2004 and a private placement of its common stock wherein it has
raised approximately $1,247. The Company expects that increased revenues will
reduce its operating losses in future periods, however, there can be no
assurance that management will be successful in executing as anticipated or in a
timely enough manner. If these strategies are unsuccessful, the Company may have
to pursue other means of financing that may not be on terms favorable to the
Company or its stockholders. If the Company is unable to increase cash flow or
obtain financing, it may not be able to generate enough capital to fund
operations for the next twelve months. The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The financial statements presented herein do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should Level 8 be unable to continue as a going concern.

CONTRACTUAL OBLIGATIONS

Future minimum payments for all contractual obligations for years
subsequent to December 31, 2003 are as follows:

2004 2005 2006 2007 TOTAL
------ ------ ------ ------ ------

Short and long-term debt, including interest $2,625 $ -- $ -- $ 131 $2,756
payments

Service purchase commitments 400 -- -- -- 400
Operating leases 214 221 84 -- 519
------ ------ ------ ------ ------
Total $3,239 $ 221 $ 84 $ 131 $3,675
====== ====== ====== ====== ======

The Company is also obligated to file a Form S-1 registration statement
for sales of Level 8 Systems securities. The Company anticipates the cost of
such filing to approximate $52.

At March 31, 2004, the Company had $2,692 of Series D Convertible
Redeemable Preferred Stock outstanding. Under the terms of the agreement, a
redemption event may occur if any one person, entity or group shall control more
than 35% of the voting power of the Company's capital stock.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any off balance sheet arrangements. We have no
subsidiaries or other unconsolidated limited purpose entities, and we have not
guaranteed or otherwise supported the obligations of any other entity.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The policies discussed below are considered by us to be critical to an
understanding of our financial statements because they require us to apply the
most judgment and make estimates regarding matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. With respect to the policies discussed below, we
note that because of the uncertainties inherent in forecasting, the estimates
frequently require adjustment.

Our financial statements and related disclosures, which are prepared to
conform with accounting principles generally accepted in the United States of
America, require us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and accounts receivable and expenses
during the period reported. We are also required to disclose amounts of
contingent assets and liabilities at the date of the financial statements. Our
actual results in future periods could differ from those estimates. Estimates
and assumptions are reviewed periodically, and the effects of revisions are
reflected in the Consolidated Financial Statements in the period they are
determined to be necessary.

We consider the most significant accounting policies and estimates in our
financial statements to be those surrounding: (1) revenue recognition; (2)
allowance for doubtful trade accounts receivable; (3) valuation of notes
receivable; (4) capitalization and valuation of software product technology; (5)
valuation of deferred tax assets; and (6) restructuring reserves. These
accounting policies, the basis for any estimates and potential impact to our
Consolidated Financial Statements, should any of the estimates change, are
further described as follows:

REVENUE RECOGNITION. Our revenues are derived principally from three
sources: (i) license fees for the use of our software products; (ii) fees for
consulting services and training; and (iii) fees for maintenance and technical
support. We generally recognize revenue from software license fees when a
license agreement has been signed by both parties, the fee is fixed or
determinable, collection of the fee is probable, delivery of our products has
occurred and no other significant obligations remain. For multiple-element
arrangements, we apply the "residual method". According to the residual method,
revenue allocated to the undelivered elements is allocated based on vendor
specific objective evidence ("VSOE") of fair value of those elements. VSOE is
determined by reference to the price the customer would be required to pay when
the element is sold separately. Revenue applicable to the delivered elements is
deemed equal to the remainder of the contract price. The revenue recognition
rules pertaining to software arrangements are complicated and certain
assumptions are made in determining whether the fee is fixed and determinable
and whether collectability is probable. For instance, in our license
arrangements with resellers, estimates are made regarding the reseller's ability
and intent to pay the license fee. Our estimates may prove incorrect if, for
instance, subsequent sales by the reseller do not materialize. Should our actual
experience with respect to collections differ from our initial assessment, there
could be adjustments to future results.

Revenues from services include fees for consulting services and training.
Revenues from services are recognized on either a time and materials or
percentage of completion basis as the services are performed and amounts due
from customers are deemed collectible and non-refundable. Revenues from fixed
price service agreements are recognized on a percentage of completion basis in
direct proportion to the services provided. To the extent the actual time to
complete such services varies from the estimates made at any reporting date, our
revenue and the related gross margins may be impacted in the following period.

ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS RECEIVABLE. In addition to assessing
the probability of collection in conjunction with revenue arrangements, we
continually assess the collectability of outstanding invoices. Assumptions are
made regarding the customer's ability and intent to pay and are based on
historical trends, general economic conditions, and current customer data.
Should our actual experience with respect to collections differ from our initial
assessment, there could be adjustments to bad debt expense.

VALUATION OF NOTES RECEIVABLE. We continually assess the collectability of
outstanding notes receivable. Assumptions are made regarding the counter party's
ability and intent to pay and are based on historical trends and general
economic conditions, and current financial data. As of March 31, 2004 the
Company had no notes receivable.

CAPITALIZATION AND VALUATION OF SOFTWARE PRODUCT TECHNOLOGY. Our policy on
capitalized software costs determines the timing of our recognition of certain
development costs. In addition, this policy determines whether the cost is
classified as development expense or cost of software revenue. Management is
required to use professional judgment in determining whether development costs
meet the criteria for immediate expense or capitalization. Additionally, we
review software product technology assets for net realizable value at each
balance sheet date. For the year ended December 31, 2003, the Company recorded a
write down of software product technology totaling $993 and as of December 31,
2003 the Company had $4,063 in capitalized software product technology. Should
we experience reductions in revenues because our business or market conditions
vary from our current expectations, we may not be able to realize the carrying
value of these assets and will record a write down at that time.

VALUATION OF DEFERRED TAX ASSETS. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established to the extent that it is more likely than not, that we will be
unable to utilize deferred income tax assets in the future. At December 31,
2003, we had a valuation allowance of $80,511 against $80,511 of gross deferred
tax assets. We considered all of the available evidence to arrive at our
position on the net deferred tax asset; however, should circumstances change and
alter our judgment in this regard, it may have an impact on future operating
results.

At December 31, 2003, the Company has net operating loss carryforwards of
approximately $186,293, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2023. 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.

RESTRUCTURING RESERVES. At December 31, 2002, the Company's restructuring
liabilities totaled $772, which represented estimated excess facilities costs.
In August 2003, the Company settled litigation relating to these excess
facilities. Accordingly, the Company has reversed the restructuring balance.
Under the terms of the settlement agreement, the Company agreed to assign the
note receivable from the sale of Geneva to EM Software Solutions, Inc., (see
Note 2 Dispositions), with recourse equal to the unpaid portion of the note
receivable should the note obligor, EM Software Solutions, Inc., default on
future payments. The current unpaid principal portion of the note receivable at
assignment is approximately $545 and matures December 2007. The Company assessed
the probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liability in the
amount of $131.

RECENT ACCOUNTING PRONOUNCEMENTS:

In January 2003, the FASB issued Interpretation No. 46 or FIN 46
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements". In October 2003,
the FASB issued FASB Staff Position FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities" deferring
the effective date for applying the provisions of FIN 46 for public entities'
interests in variable interest entities or potential variable interest entities
created before February 1, 2003 for financial statements of interim or annual
periods that end after December 15, 2003. FIN 46 establishes accounting guidance
for consolidation of variable interest entities that function to support the
activities of the primary beneficiary. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities." This
revised interpretation is effective for all entities no later than the end of
the first reporting period that ends after March 15, 2004. The Company has no
investment in or contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of this interpretation did
not have any impact on its consolidated financial position or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of
operations might be materially impacted.

DISCLOSURES ABOUT MARKET RISK

As the Company has sold most of its European based business and has closed
several European sales offices, the majority of revenues are generated from US
sources. The Company expects that trend to continue for the next year. As such,
there is minimal foreign currency risk at present. Should the Company continue
to develop a reseller presence in Europe and Asia, that risk will be increased.

MANAGEMENT

As of May 10, 2004, the Board of Directors of the Company consisted of
Anthony Pizi, Bruce Hasenyager, Nicholas Hatalski, Kenneth Neilsen and Jay
Kingley. All Directors were elected at the 2003 Annual Meeting of Stockholders
and will serve until the election and qualification of their successors or until
their earlier death, resignation or removal. Mr. Frank Artale resigned from the
Board in January 2004. Mr. Artale's resignation was not the result of a
disagreement with the Company or its management. Set forth below with respect to
each director is his name, age, principal occupation and business experience for
the past five years and length of service as a director of the Company.

ANTHONY C. PIZI

Director since August 2000. Age: 44

Mr. Pizi has served as Chairman of the Board of Directors and as Chief
Technology Officer since December 1, 2000. He has served as Chief Executive
Officer since February 1, 2001. Mr. Pizi has been a director since August 2000.
Until December 2000, he was First Vice President and Chief Technology Officer of
Merrill Lynch's Private Client Technology Architecture and Service Quality
Group. Mr. Pizi's 16 years with Merrill Lynch included assignments in Corporate
MIS, Investment Banking and Private Client. Mr. Pizi earned his BS in
Engineering from West Virginia University.

NICHOLAS HATALSKI, MBA

Director since September 2002. Age: 42

Mr. Hatalski has been a director of Level 8 since September 2002. Since
January 2004, Mr. Hatalski has served as the Vice President of Business
Development and Product Strategy at MedSeek, Inc., a company dedicated to
providing web-based solutions to the healthcare sector. Since December 2000, he
was the Senior Vice President of the iServices Group of Park City Solutions,
Inc. Prior to joining PCS, he was the Practice Manager for Technology Consulting
at Siemens Health Services. His tenure at Siemens (and their acquisition Shared
Medical Systems) was 1984-2000.

BRUCE W. HASENYAGER

Director since October 2002. Age: 62

Mr. Hasenyager has been a director of Level 8 since October 2002. Since
April 2002, Mr. Hasenyager has served as Director of Business and Technology
Development at the Hart eCenter at Southern Methodist University. Prior to that,
Mr. Hasenyager served as Senior Vice President and CTO of Technology and
Operations at MobilStar Network Corporation since April 1996.

KENNETH W. NIELSEN

Director since October 2002. Age: 44

Mr. Nielsen has been a director of Level 8 since October 2002. Since
December 1998, Mr. Nielsen has served as President and CEO of Nielsen Personnel
Services, inc., a personal staffing firm. Prior to that, Mr. Nielsen was
District Operations Manager for Outsource International, Inc.

JAY R. KINGLEY

Director since November 2002. Age: 42

Mr. Kingley has been a director of Level 8 since November 2002. Since
2001, Mr. Kingley has served as CEO of Warren Partners, LLC, a software
development and consultancy company. Mr. Kingley is also currently the CEO of
Kingley Institute LLC, a medical wellness company. Prior to that, Mr. Kingley
was Managing Director of a business development function of Zurich Financial
Services Group from 1999-2001. Prior to joining Zurich Financial Services Group,
Mr. Kingley was Vice President of Diamond Technology Partners, Inc., a
management-consulting firm.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is currently comprised of Messrs. Hatalski,
Kingley and Neilsen. Mr. Artale also served on the Committee until his
resignation from the Board in January 2004. None of the current members of the
Compensation Committee has served as an executive officer of the Company, and no
executive officer of the Company has served as a member of the Compensation
Committee of any other entity of which Messrs. Hatalski, Kingley and Neilsen
have served as executive officers. There were no interlocking relationships
between the Company and other entities that might affect the determination of
the compensation of the directors and executive officers of the Company.

DIRECTOR COMPENSATION

In May 1999, stockholders of the Company approved the Outside Director
Stock Incentive Plan of the Company. Under this plan, the outside directors may
be granted an option to purchase 12,000 shares of common stock at a price equal
to the fair market value of the common stock as of the grant date. In January
2002, the Board of Directors approved an amendment to the Outside Director Stock
Incentive Plan to provide an increase in the number of options to be granted to
outside directors to 24,000. These options vest over a three-year period in
equal increments upon the eligible Director's election to the Board, with the
initial increment vesting on the date of grant. The Outside Director Stock
Incentive Plan also permits eligible directors to receive partial payment of
director fees in common shares in lieu of cash, subject to approval by the Board
of Directors. In addition, the plan permits the Board of Directors to grant
discretionary awards to eligible directors under the plan. None of the Company's
Directors received additional monetary compensation for serving on the Board of
Directors of the Company in 2001, other than reimbursement of reasonable
expenses incurred in attending meetings.

In October 2002, the Board of Directors approved an amendment to the stock
incentive plan for all non-management directors. Under the amendment, each
non-management director will receive 100,000 options to purchase common stock of
the Company at the fair market value of the common stock on the date of grant.
These shares will vest in three equal increments with the initial increment
vesting on the date of grant. The option grant contains an acceleration of
vesting provision should the Company incur a change in control. A change in
control is defined as a merger or consolidation of the Company with or into
another unaffiliated entity, or the merger of an unaffiliated entity into the
Company or another subsidiary thereof with the effect that immediately after
such transaction the stockholders of the Company immediately prior to the
transaction hold less than fifty percent (50%) of the total voting power of all
securities generally entitled to vote in the election of directors, managers or
trustees of the entity surviving such merger or consolidation. Under the
amendment, there will be no additional compensation awarded for committee
participation. The shares allocated to the Board of Directors are being issued
out of the Level 8 Systems, Inc. 1997 Employee Stock Plan.

EXECUTIVE OFFICERS

The Company's current executive officers are listed below, together with
their age, position with the Company and business experience for the past five
years.

ANTHONY C. PIZI Age: 44

Mr. Pizi currently serves as the Chairman of the Board, Chief Executive Officer
and Chief Technology Officer of the Company since February 1, 2001. Prior to
joining the Company, Mr. Pizi was First Vice President and Chief Technology
Officer of Merrill Lynch's Private Client Technology Architecture and Service
Quality Group. Mr. Pizi's 16 years with Merrill Lynch included assignments in
Corporate MIS, Investment Banking and Private Client. Mr. Pizi earned his BS in
Engineering from West Virginia University.

JOHN P. BRODERICK Age: 54

Mr. Broderick has served as the Chief Operating Officer of the Company since
June 2002, as the Chief Financial Officer of the Company since April 2001, and
as Corporate Secretary since August 2001. Prior to joining the Company, Mr.
Broderick was Executive Vice President of Swell Inc., a sports media e-commerce
company where he oversaw the development of all commerce operations and served
as the organization's interim CFO. Previously, Mr. Broderick served as chief
financial officer for Programmer's Paradise, a publicly held (NASDAQ: PROG)
international software marketer. Mr. Broderick received his B.S. in accounting
from Villanova University.

The Board of Directors has determined that the members of the Audit
Committee are independent as defined in Rule 4200(a)(15) of the Nasdaq
Marketplace Rules. Until his resignation in January 2004, Mr. Frank Artale was
designated the "audit committee financial expert" as defined in Item 401(h) of
Regulation S-K. Following the resignation of Mr. Artale in January 2004, the
Company has not appointed a replacement "audit committee financial expert" and
continues to look for a candidate to fill this role on the Board or Directors
and the Audit Committee.

Our Board of Directors has adopted a code of ethics and a code of conduct
that applies to all of our directors, Chief Executive Officer, Chief Financial
Officer, and employees. We will provide copies of our code of conduct and code
of ethics without charge upon request. To obtain a copy of the code of ethics or
code of conduct, please send your written request to Level 8 Systems, Suite 542,
8000 Regency Pkwy, Cary, North Carolina 27511, Attn: Corporate Secretary. The
code of ethics is also available on the Company's website at www.level8.com.

EXECUTIVE COMPENSATION

The following summary compensation table sets forth the compensation
earned by all persons serving as the Company's executive officers during fiscal
year 2003, serving or having served at the end of fiscal 2003 whose salary and
bonus exceeded $100,000 for services rendered to the Company during fiscal 2003.
The table reflects compensation earned for each of the last three years or for
such shorter period of service as an executive officer as is reflected below.
For the principal terms of the options granted during fiscal 2003, see "Option
Grants in Fiscal 2003."

SUMMARY COMPENSATION TABLE

NAME AND SECURITIES ALL OTHER
PRINCIPAL ISCAL UNDERLYING ANNUAL
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
-------- ---- ------ ----- ------- ------------

Anthony C. Pizi 2003 $ 200,000(2) $ 100,000 500,000 $ --
Chief Executive Officer, Chief 2002 $ 337,500(3) $ -- 500,000 $ --
Technology Officer and Chairman (1) 2001 $ 527,038 $ -- 500,000 $ --

John P. Broderick 2003 $ 200,000(4) $ 60,000 500,000 $ --
Chief Operating and Financial 2002 $ 200,000 $ 40,000 100,000 $ --
Officer, Corporate Secretary 2001 $ 146,788 $ 40,000 165,900 $ --

(1) Mr. Pizi began his service as Chief Executive Officer of the Company in
February 2001.

(2) Mr. Pizi's base salary for fiscal 2003 was $200,000. Mr Pizi had
voluntarily elected to defer $31,250 of salary from 2003. During 2003, a
salary deferral of $37,500 from 2002 was repaid to Mr. Pizi.

(3) Mr. Pizi's base salary for fiscal 2002 was $300,000. Mr. Pizi had
voluntarily elected to defer $75,000 of salary from 2001, which was paid
in 2002, and to defer $37,500 of 2002 salary.

(4) Mr. Broderick's base salary for 2003 was $200,000. Mr. Broderick
voluntarily elected to defer $31,250 of salary from 2003.

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

Under the employment agreement between the Company and Mr. Pizi effective
January 1, 2004, the Company is to pay Mr. Pizi an annual base salary of $200,
and a performance bonus in cash of up to $400 per annum based upon certain
revenue goals, as determined by the Compensation Committee of the Board of
Directors of the Company, in its discretion. Upon termination of Mr. Pizi's
employment by the Company without cause, the Company has agreed to pay Mr. Pizi
(a) a lump sum payment of one year of Mr. Pizi's then base salary within thirty
(30) days of termination and (b) two hundred thousand (200,000) shares of the
Company's common stock and immediately vest all unvested stock options held by
Mr. Pizi. In the event there occurs a substantial change in Mr. Pizi's job
duties, there is a decrease in or failure to provide the compensation or vested
benefits under the employment agreement or there is a change in control of the
Company, the Company has agreed to grant Mr. Pizi five hundred thousand
(500,000) shares of the Company's common stock. If Mr. Pizi's employment is
terminated for any reason, Mr. Pizi has agreed that, for one (1) year after such
termination, he will not directly or indirectly solicit or divert business from
the Company or assist any business in attempting to do so or solicit or hire any
person who was an employee of the Company during the term of his employment
agreement or assist any business in attempting to do so.

Under the employment agreement between the Company and Mr. Broderick
effective January 1, 2004, the Company pays Mr. Broderick a base salary of $200,
and a performance bonus of cash up to $100 per annum based upon certain revenue
goals, as determined by the Compensation Committee of the Board of Directors of
the Company, in its discretion. Upon termination of Mr. Broderick's employment
by the Company without cause, the Company has agreed to provide Mr. Broderick
with salary continuation of six months of Mr. Broderick's then base salary
beginning on the first payday after the date of termination. In the event there
occurs a substantial change in Mr. Broderick's job duties, there is a decrease
in or failure to provide the compensation or vested benefits under the
employment agreement or there is a change in control of the Company, the Company
has agreed to pay Mr. Broderick (a) a lump sum payment of one year of Mr.
Broderick's then base salary within thirty (30) days of termination and (b) two
hundred fifty thousand (250,000) shares of the Company's common stock and
immediately vest all unvested stock options held by Mr. Broderick. Mr. Broderick
will have thirty (30) days from the date written notice is given about either a
change in his duties or the announcement and closing of a transaction resulting
in a change in control of the Company to resign and execute his rights under
this agreement. If Mr. Broderick's employment is terminated for any reason, Mr.
Broderick has agreed that, for one (1) year after such termination, he will not
directly or indirectly solicit or divert business from the Company or assist any
business in attempting to do so or solicit or hire any person who was an
employee of the Company during the term of his employment agreement or assist
any business in attempting to do so.

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of May 10, 2004 with respect
to beneficial ownership of shares by (i) each person known to the Company to be
the beneficial owner of more than 5% of the outstanding common stock, (ii) each
of the Company's directors, (iii) the executive officers of the Company named in
the Summary Compensation Table (the "Named Executives") and (iv) all current
directors and executive officers of the Company as a group. Unless otherwise
indicated, the address for each person listed is c/o Level 8 Systems, Inc., 214
Carnegie Center Suite 303, Princeton, New Jersey 08540.

The named person has furnished stock ownership information to the Company.
Beneficial ownership as reported in this section was determined in accordance
with Securities and Exchange Commission regulations and includes shares as to
which a person possesses sole or shared voting and/or investment power and
shares that may be acquired on or before June 20, 2004 upon the exercise of
stock options. The chart is based on 35,571,383 shares outstanding as of May 10,
2004. Except as otherwise stated in the footnotes below, the named persons have
sole voting and investment power with regard to the shares shown as beneficially
owned by such persons.

COMMON STOCK
----------------------------------------
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS
- ------------------------ ------------- ----------------

Seneca Capital International, Ltd.(1)................................ 1,902,771 (2) 5.1%
Seneca Capital, L.P.(3).............................................. 1,207,288 (4) 3.3%
Anthony C. Pizi...................................................... 1,991,489 (5) 5.3%
John P. Broderick.................................................... 660,539 (6) 1.8%
Nicholas Hatalski.................................................... 66,660 (7) *
Kenneth W. Nielsen................................................... 66,660 (7) *
Bruce W. Hasenyager.................................................. 66,660 (7) *
Jay R. Kingley....................................................... 66,660 (7) *
All current directors and executive officers as a group (6 persons).. 2,918,668 (8) 7.6%

* Represents less than one percent of the outstanding shares.

(1) The address of Seneca Capital International, Ltd. is 527 Madison Avenue,
11th Floor, New York, New York 10022.

(2) Includes 779,826 shares of common stock issuable upon conversion of Series
B3 Preferred Stock and 1,122,945 shares issuable upon exercise of warrants
at an exercise price of $0.40. Mr. Douglas Hirsch exercises sole voting or
dispositive power with respect to the shares held of record by Seneca
Capital International, Ltd.

(3) The address of Seneca Capital L.P. is 527 Madison Avenue, 11th Floor, New
York, New York 10022.

(4) Includes 417,205 shares of common stock issuable upon conversion of Series
B3 Preferred Stock, 188,408 shares of common stock issuable upon
conversion of Series A3 Preferred Stock and 790,083 shares issuable upon
exercise of warrants at an exercise price of $0.40 per share. Mr. Douglas
Hirsch exercises sole voting or dispositive power with respect to the
shares held of record by Seneca Capital L.P.

(5) Includes 1,187,798 shares subject to stock options exercisable within
sixty (60) days, 394,737 shares of common stock issuable upon the
conversion of Series C Preferred Stock, 270,270 shares of common stock
exercisable upon the exercise of warrants at an exercise price of $0.37
and 98,684 shares of common stock issuable upon the exercise of warrants
at an exercise price of $0.38 per share of common stock subject to
adjustment.

(6) Consists of 660,539 shares subject to stock options exercisable within
sixty (60) days.

(7) Consists of 66,660 shares subject to stock options exercisable within
sixty (60) days.

(8) Includes shares issuable upon exercise of options and warrants exercisable
within sixty (60) days as described in Notes 5-7.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

LOAN FROM RELATED PARTIES

In March 2004, we converted a promissory note into a convertible loan
agreement with Mark and Carolyn Landis, who are related by marriage to Anthony
Pizi, the Company's Chairman and Chief Executive Officer, in the amount of
$125,000. Under the terms of the agreement, the loan is convertible into 446,429
shares of our common stock and warrants to purchase 446,429 shares of our common
stock exercisable at $0.28. The warrants expire in three years.

From time to time during 2003, the Company entered into short term notes
payable with Anthony Pizi, the Company's Chairman and Chief Executive Officer
for various working capital needs. The Notes bear interest at 1% per month and
are unsecured. At December 31, 2003, the Company was indebted to Mr. Pizi in the
amount of $85. In January 2004, the Company repaid Mr. Pizi $75. On April 12,
2004, the Company entered into a short term note payable with Mr. Pizi. The
note, in the face amount of $100,000 bears interest at 1% per month and is
convertible into common stock of the Company at a conversion rate of $0.37 per
share. In addition, Mr. Pizi was granted 270,270 warrants to purchase the
Company's common stock at $0.37 per share. These warrants expire three years
from the date of grant.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

On November 24, 2003, Deloitte & Touche LLP resigned as the Company's
independent public accountants. During the two most recent fiscal years
preceding such resignation, neither of Deloitte & Touche's reports on our
financial statements contained an adverse opinion or a disclaimer of opinion,
however, both reports contained qualifications as to uncertainty. During this
same period, there were no qualifications as to audit scope or accounting
principles, nor were there disagreements between the Company and Deloitte &
Touche on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Deloitte & Touche, would have caused them to make a reference to
the subject matter of the disagreements in connection with their reports on the
financial statements for such years. There were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K. The Company has provided
Deloitte & Touche with a copy of the foregoing disclosures and Deloitte & Touche
has furnished the Company with a letter addressed to the SEC indicating
agreement with the statements provided therein.

On February 2, 2004, Level 8 Systems appointed Margolis & Company P.C. as
the Company's new independent public accountants.

DESCRIPTION OF CAPITAL STOCK

The following descriptions of certain provisions of the certificate of
incorporation and bylaws of Level 8 are necessarily general and do not purport
to be complete and are qualified in their entirety by reference to the
certificate of incorporation and bylaws of Level 8 which have been incorporated
by reference herein.

COMMON STOCK

The authorized capital stock of our company consists of 85 million shares,
of which 75 million shares have been designated common stock, par value $.001
per share. As of May 10, 2004, there were 35,571,383 shares of common stock
issued and outstanding, held by approximately 232 holders of record. The holders
of common stock are entitled to one vote for each share on all matters submitted
to a vote of stockholders. Holders of common stock are entitled to such
dividends as may be declared from time to time by the board of directors out of
funds legally available therefore, subject to the dividend and liquidation
rights of any preferred stock (as described below) that may be issued, and
subject to the dividend restrictions in certain credit facilities and various
other agreements. In the event of the liquidation, dissolution or winding-up of
our company, the holders of common stock are entitled to share equally and
ratably in our assets, if any, remaining after provision for payment of all
debts and liabilities of the Company and satisfaction of the liquidation
preference of any shares of preferred stock that may be outstanding. The holders
of common stock have no preemptive, subscription, redemptive or conversion
rights. The outstanding shares of common stock are fully paid and nonassessable.

PREFERRED STOCK

Our company is authorized to issue 10 million shares of preferred stock,
par value $.001 per share. The board of directors of our company has authority,
without stockholder approval, to issue shares of preferred stock in one or more
series and to determine the number of shares, designations, dividend rights,
conversion rights, voting power, redemption rights, liquidation preferences and
other terms of any such series. The issuance of preferred stock, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting power of the holders of common stock
and the likelihood that such holders will receive dividend payments and payments
upon liquidation and could have the effect of delaying, deferring, or preventing
a change in control of our company.

As of the date of this prospectus, 21,000 shares have been designated as
Series A 4% Convertible Redeemable Preferred Stock and none of which are
currently outstanding; 30,000 shares have been designated Series B 4%
Convertible Redeemable Preferred Stock, and none of which are currently
outstanding; 11,570 shares have been designated Series A1 Convertible Redeemable
Preferred Stock, and none of which are currently outstanding; 30,000 shares have
been designated Series B1 Convertible Redeemable Preferred Stock, and none of
which are currently outstanding; 11,570 shares have been designated Series A2
Convertible Redeemable Preferred Stock, and none of which are currently
outstanding; 30,000 shares have been designated Series B2 Convertible Redeemable
Preferred Stock, and none of which are currently outstanding; 11,570 shares have
been designated Series A3 Convertible Redeemable Preferred Stock, all of which
were issued October 25, 2002, and 1,571 of which are currently outstanding;
30,000 have been designated Series B3 Convertible Redeemable Preferred Stock,
all of which were issued October 25, 2002, and all of which all are currently
outstanding; 1,600 shares have been designated Series C Convertible Redeemable
Preferred Stock, 1,590 of which were issued August 13, 2002 and 1,166 of which
are currently outstanding; 3,705 shares have been designated Series D
Convertible Preferred Stock, 3,530 of which were issued March 19, 2003 and 2,692
of which are currently outstanding.

Each series of preferred stock is entitled to vote on an as-converted
basis, subject to certain conversion restrictions, as to all matters presented
to the stockholders of the Company.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.

LEGAL MATTERS

Certain legal matters in connection with the shares of common stock
offered by this prospectus have been passed on for Level 8 Systems, Inc. by
Powell, Goldstein, Frazer & Murphy LLP, Atlanta, Georgia.

EXPERTS

The financial statements for the year ended December 31, 2003 have been
audited by Margolis & Company P.C., independent auditors, and the financial
statements for the years ended December 31, 2002 and 2001 included in this
prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein (which reports express an unqualified
opinion and include an explanatory paragraph referring to the Company's ability
to continue as a going concern), and are included in reliance upon the report of
such firms given upon their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can receive copies
of such reports, proxy and information statements, and other information, at
prescribed rates, from the Securities and Exchange Commission by addressing
written requests to the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Securities and Exchange Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants such as Level 8 Systems, Inc. that file electronically with the
Securities and Exchange Commission. The address of the Securities and Exchange
Commission Web site is http://www.sec.gov. We have filed with the Securities and
Exchange Commission a Registration Statement on Form S-1 to register the shares
that we will issue in this offering. This prospectus is a part of the
Registration Statement. This prospectus does not include all of the information
contained in the Registration Statement. For further information about us and
the securities offered in this prospectus, you should review the Registration
Statement. You can inspect or copy the Registration Statement, at prescribed
rates, at the Securities and Exchange Commission's public reference facilities
at the addresses listed above.

Index to Financial Statements

Independent Auditors' Reports F-2 & F-3

Financial Statements:

Audited Consolidated Financial Statements as of December 2002 and 2003
and for the years ended December 31, 2001,2002, and 2003..................... F-4

Unaudited Consolidated Financial Statements as of March 31, 2003 and 2004
and for the three months ended March 31, 2003 and 2004....................... F-33

F-1

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of
Level 8 Systems, Inc.
Princeton, New Jersey

We have audited the accompanying consolidated balance sheet of Level 8 Systems,
Inc. and subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity (deficit), cash
flows, and comprehensive loss for the year then ended. 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 of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Level 8 Systems, Inc. and
subsidiaries as of December 31, 2003, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Margolis & Company P.C.

Bala Cynwyd, PA
February 12, 2004

F-2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Level 8 Systems, Inc.
Princeton, New Jersey

We have audited the accompanying consolidated balance sheet of Level 8 Systems,
Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), cash
flows, and comprehensive loss for the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Level 8 Systems, Inc. and subsidiaries as of
December 31, 2002, and the results of their operations and their cash flows for
the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.

/s/ Deloitte & Touche LLP

Raleigh, North Carolina
March 28, 2003

F-3

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

DECEMBER 31, DECEMBER 31,
2003 2002
ASSETS

Current assets:
Cash and cash equivalents .......................................................... $ 19 $ 199
Cash held in escrow ................................................................ 776 --
Assets of operations to be abandoned ............................................... 149 453
Trade accounts receivable, net ..................................................... 12 1,291
Receivable from related party ...................................................... -- 73
Notes receivable, net .............................................................. -- 867
Prepaid expenses and other current assets .......................................... 270 731
--------- ---------
Total current assets ........................................................ 1,226 3,614
Property and equipment, net ........................................................... 26 162
Software product technology, net ...................................................... 4,063 7,996
Other assets .......................................................................... 47 80
--------- ---------
Total assets ................................................................ $ 5,362 $ 11,852
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

Short term debt .................................................................... $ 2,625 $ 2,893
Accounts payable ................................................................... 2,545 3,537
Accrued expenses:
Salaries, wages, and related items ............................................... 508 107
Restructuring .................................................................... -- 772
Other ............................................................................ 1,613 1,332
Liabilities of operations to be abandoned .......................................... 451 916
Deferred revenue ................................................................... 39 311
--------- ---------
Total current liabilities ................................................... 7,781 9,868
Long-term debt ........................................................................ 131 --
Warrant liability ..................................................................... 198 331
Senior convertible redeemable preferred stock ......................................... 3,355 --
Commitments and contingencies (Notes 19 and 20) Stockholders' equity (deficit):

Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized .........
Series A3 - 10,070 shares issued and 4,070 and 10,070 shares outstanding at
December 31, 2003 and 2002, respectively, $1,000 per share liquidation preference
(aggregate liquidation value of $4,070) ...................................... -- --
Series B3 - 30,000 shares issued and outstanding, $1,000 per share liquidation
preference (aggregate liquidation value of $30,000)
Series C - 1,590 shares issued and 1,340 and 1,590 outstanding at December 31, 2003 -- --
and 2002, respectively, $1,000 per share liquidation preference (aggregate
liquidation value of $1,340) ................................................. -- --
Common stock, $0.001 par value, 85,000,000 and 60,000,000 shares authorized at
December 31, 2003 and 2002, respectively; 26,645,062 and 19,202,763 issued
and outstanding at December 31, 2003 and 2002, respectively ...................... 27 19
Additional paid-in-capital ......................................................... 206,149 202,916
Accumulated other comprehensive loss ............................................... (6) (717)
Accumulated deficit ................................................................ (212,273) (200,565)
--------- ---------

Total stockholders' equity (deficit) ........................................ (6,103) 1,653
--------- ---------
Total liabilities and stockholders' equity (deficit) ........................ $ 5,362 $ 11,852
========= =========

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)

YEAR ENDED DECEMBER 31,
2003 2002 2001
--------- --------- ---------

Revenue:
Software ............................................... $ 102 $ 1,491 $ 1,658
Maintenance ............................................ 316 571 9,262
Services ............................................... 112 1,039 6,437
--------- --------- ---------
Total operating revenue .......................... 530 3,101 17,357
--------- --------- ---------

Cost of revenue:
Software ............................................... 4,152 7,396 14,800
Maintenance ............................................ 373 181 3,249
Services ............................................... 908 900 5,487
--------- --------- ---------
Total cost of revenue ............................ 5,433 8,477 23,536
--------- --------- ---------
Gross margin (loss) ...................................... (4,903) (5,376) (6,179)
--------- --------- ---------

Operating expenses:
Sales and marketing .................................... 1,680 2,808 11,042
Research and product development ....................... 1,017 1,902 5,365
General and administrative ............................. 2,558 3,935 9,630
Amortization of intangible assets ...................... -- -- 6,259
Impairment of intangible assets ........................ -- -- 7,929
(Gain)/loss on disposal of assets ...................... 415 461 (6,345)
Restructuring, net ..................................... (834) 1,300 8,650
--------- --------- ---------
Total operating expenses ......................... 4,836 10,406 42,530
--------- --------- ---------
Loss from operations ..................................... (9,739) (15,782) (48,709)
--------- --------- ---------

Other income (charges):
Interest income ........................................ 33 180 820
Interest expense ....................................... (196) (471) (4,346)
Other-than-temporary decline in fair value of marketable
securities ............................................ -- -- (3,845)
Change in fair value of warrant liability .............. 133 2,947 (885)
Other expense .......................................... (105) (171) (594)
-------- --------- ---------
(135) 2,485 (8,850)
-------- --------- ---------
Loss before provision for income taxes ................... (9,874) (13,297) (57,559)
Income tax provision (benefit) ........................... -- (155) 501
-------- --------- ---------
Loss from continuing operations .......................... (9,874) (13,142) (58,060)
Loss from discontinued operations ........................ (132) (5,040) (47,075)
--------- --------- ---------
Net loss ................................................. ($ 10,006) ($ 18,182) ($105,135)
========= ========= =========
Preferred dividends .................................... -- -- 926
Accretion of preferred stock and deemed dividends ...... 1,702 995 --
--------- --------- ---------
Net loss applicable to common stockholders ............... ($ 11,708) ($ 19,177) ($106,061)
========= ========= =========

Loss per share:
Loss from continuing operations - basic and diluted ... ($ 0.54) ($ 0.75) ($ 3.70)
Loss from discontinued operations - basic and diluted . -- (0.27) (2.95)
--------- --------- ---------
Net loss applicable to common stockholders - basic and ... ($ 0.54) ($ 1.02) ($ 6.65)
diluted
========= ========= =========

Weighted average common shares outstanding - basic and
diluted .................................................. 21,463 18,877 15,958
--------- --------- ---------

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

F-5

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------- ------- ------- ---------

Balance at December 31, 2000............................................ 15,786 $ 16 42 $ --
Shares issued as compensation........................................... 369 --
Preferred stock dividend................................................
Reclassification of warrant liability...................................
Foreign currency translation adjustment.................................
Reclassification of unrealized loss included in income-other than
temporary decline.......................................................
Unrealized losses on marketable securities..............................
Net loss................................................................
------- ------- ------- ---------
Balance at December 31, 2001............................................ 16,155 16 42 --
Shares issued as compensation........................................... 108 --
Shares issued in private placement of common stock...................... 2,382 3
Shares issued for litigation settlement................................. 142 --
Shares issued for Cicero license agreement ............................. 250 --
Shares forfeited for repayment of notes receivable ..................... (15) --
Shares issued in private placement of series C preferred -- 2
Conversion of preferred shares to common................................ 181 -- (2)
Warrants issued for financing...........................................
Accretion of preferred stock............................................
Deemed dividend.........................................................
Foreign currency translation adjustment.................................
Net loss..................................................................
------- ------- ------- ---------

Balance at December 31, 2002............................................ 19,203 19 42 --
Conversion of preferred shares to common................................ 1,378 1 (6)
Shares issued as compensation........................................... 95 --
Shares issued for bank guarantee........................................ 150 --
Exercises of stock options.............................................. 27 --
Conversion of warrants.................................................. 3,352 4
Conversion of senior convertible redeemable preferred stock............. 546 1
Accretion of preferred stock............................................
Shares issued in private placement of common stock...................... 1,894 2
Deemed dividend.........................................................
Foreign currency translation adjustment.................................
Reclassification of unrealized loss included in income..................
Net loss................................................................
------- ------- ------- ---------
Balance at December 31, 2003............................................ 26,645 $ 27 36 $ --
------- ------- ------- ---------

ACCUMULATED
ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE
CAPITAL (DEFICIT) INCOME TOTAL
----------- ------------ ---------- ---------

Balance at December 31, 2000......................................... $ 196,944 $ (75,327) $ (3,903) $ 117,730
Shares issued as compensation........................................ 1,199 1,199
Preferred stock dividend............................................. (926) (926)
Reclassification of warrant liability................................ (2,100) (2,100)
Foreign currency translation adjustment.............................. (287) (287)
Reclassification of unrealized loss included in income-other than
temporary decline.................................................... 3,765 3,765
Unrealized losses on marketable securities........................... (353) (353)
Net loss............................................................. (105,135) (105,135)
----------- ------------ ---------- ---------
Balance at December 31, 2001......................................... 196,043 (181,388) (778) 13,893
Shares issued as compensation........................................ 139 139
Shares issued in private placement of common stock................... 3,571 3,574
Shares issued for litigation settlement.............................. 270 270
Shares issued for Cicero license agreement .......................... 622 622
Shares forfeited for repayment of notes receivable .................. (21) (21)
Shares issued in private placement of series C preferred 1,590 1,590
Conversion of preferred shares to common............................. -- --
Warrants issued for financing........................................ 373 (373) --
Accretion of preferred stock......................................... 329 (329) --
Deemed dividend...................................................... (293) (293)
Foreign currency translation adjustment.............................. 61 61
Net loss............................................................. (18,182) (18,182)
----------- ------------ ---------- ---------

Balance at December 31, 2002......................................... 202,916 (200,565) (717) 1,653
Conversion of preferred shares to common............................. -- 1
Shares issued as compensation........................................ 48 48
Shares issued for bank guarantee..................................... 51 51
Exercises of stock options........................................... 6 6
Conversion of warrants............................................... 402 406
Conversion of senior convertible redeemable preferred stock.......... 174 175
Accretion of preferred stock......................................... 640 (640) --
Shares issued in private placement of common stock................... 850 852
Deemed dividend...................................................... 1,062 (1,062) --
Foreign currency translation adjustment.............................. (6) (6)
Reclassification of unrealized loss included in income............... 717 717
Net loss............................................................. (10,006) (10,006)
----------- ------------ ---------- ---------
Balance at December 31, 2003......................................... $ 206,149 $ (212,273) $ (6) $$ (6,103)
----------- ------------ ---------- ---------

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

F-6

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
--------- --------- ---------

Net loss .................................................. ($ 10,006) ($ 18,182) ($105,135)
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment ................ (6) (199) (287)
Reclassification of accumulated foreign currency
translation adjustments for dissolved subsidiaries .. -- 260 --
Unrealized loss on available-for-sale securities ....... -- -- (353)
Reclassification of unrealized loss included in income -
other than temporary decline ........................ 717 -- 3,765
--------- --------- ---------
Comprehensive loss ........................................ ($ 9,295) ($ 18,121) ($102,010)
========= ========= =========

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

F-7

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

2003 2002 2001
--------- --------- ---------

Cash flows from operating activities:
Net loss .................................................................. ($ 10,006) ($ 18,182) ($105,135)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Depreciation and amortization ........................................... 3,116 8,042 27,758
Change in fair value of warrant liability ............................... (133) (2,947) 885
Stock compensation expense .............................................. 48 139 1,199
Unrealized loss on marketable securities-other than temporary decline ... -- -- 3,845
Impairment of intangible assets and software product technology ......... 993 -- 46,923
Provision for doubtful accounts ......................................... (52) (477) 3,812
(Gain) loss on disposal of assets ....................................... (23) 461 (6,346)
Other ................................................................... -- 98 (188)
Changes in assets and liabilities, net of assets acquired and liabilities
assumed:
Trade accounts receivable and related party receivables .............. 1,404 352 10,454
Assets and liabilities held for sale - systems integration ....... -- 6,409 --
Assets and liabilities of operations to be abandoned ............. 101 473 --
Due from Liraz ....................................................... -- (56) (3)
Prepaid expenses and other assets .................................... 420 803 834
Accounts payable and accrued expenses ............................ (351) (2,181) (5,284)
Merger-related and restructuring ..................................... -- -- 952
Deferred revenue ..................................................... (273) (122) 657
--------- --------- ---------
Net cash (used in) operating activities ............................. (4,756) (7,188) (19,637)
--------- --------- ---------

Cash flows from investing activities:
Proceeds from sale of available for sale securities ....................... -- 175 --
Purchases of property and equipment ....................................... (36) (11) (198)
Cash payments secured through notes receivable ............................ -- -- (77)
Repayment of note receivable .............................................. 867 2,460 675
Cash received from sale of property ....................................... -- -- 2,236
Cash received from sale of line of business assets ........................ -- 1,300 19,900
Additions to software product technology .................................. -- -- (2,310)
--------- --------- ---------
Net cash provided by investing activities ........................... 831 3,924 20,226
--------- --------- ---------

Cash flows from financing activities:
Proceeds from issuance of common shares, net of issuance costs ............ 859 1,974 --
Proceeds from issuance of preferred shares, net of issuance costs ......... -- 1,380 --
Proceeds from issuance of convertible redeemable stock, less escrow of $776 2,754 -- --
Proceeds from exercise of warrants ........................................ 406 -- --
Dividends paid for preferred shares ....................................... -- -- (1,345)
Bank note guarantee ....................................................... -- -- 1,600
Payments under capital lease obligations and other liabilities ............ -- -- (133)
Net borrowings on line of credit .......................................... -- -- 245
Borrowings under credit facility, term loans and notes payable ............ 980 381 --
Repayments of term loans, credit facility and notes payable ............... (1,248) (583) (24,000)
--------- --------- ---------
Net cash provided by (used in) financing activities ................. 3,751 3,152 (23,633)
--------- --------- ---------
Effect of exchange rate changes on cash ..................................... (6) (199) (302)
--------- --------- ---------
Net (decrease) in cash and cash equivalents ................................. (180) (311) (23,346)
Cash and cash equivalents at beginning of year .............................. 199 510 23,856
--------- --------- ---------
Cash and cash equivalents at end of year .................................... $ 19 $ 199 $ 510
========= ========= =========

Cash paid (refunds) during the year for:
Income taxes .............................................................. ($ 18) $ 117 $ 280
--------- --------- ---------

Interest .................................................................. $ 218 $ 274 $ 1,339
--------- --------- ---------

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

F-8

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Non-Cash Investing and Financing Activities

2003

During 2003, the Company issued 161,438 shares of common stock to vendors for
outstanding liabilities valued at $73. Of this total, 66,667 shares or $25, were
issued as part of the 1,894,444 shares issued in the October 2003 private
placement.

In November 2003, the Company issued 150,000 shares of common stock to a
designated subsidiary of Liraz Systems Ltd. as compensation for extension of a
bank debt guarantee valued at $51.

During 2003, the Company issued 546,875 shares of Level 8 Systems common stock
upon conversion of 175 shares of Series D Convertible Redeemable Preferred
Stock.

In October 2003, the Company issued 3,048,782 warrants to holders of the Series
A3 Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40 valued at $1,062. (See Note 11.)

In April 2003, the Company agreed to exchange the warrants issued in the January
2002 private placement priced at $2.50 each for new warrants priced at $0.60
each and has extended the expiration date to until March 2007. This exchange was
made as a result of a waiver by such warrant holders of certain terms and
conditions that would trigger payments by the Company if the Company did not
keep such shares registered under the Securities Act of 1933, as amended.

2002

During 2002, the Company issued 109,672 shares of common stock to employees for
retention bonuses and severance. The bonus was valued at $92. (See Note 11.)

In January 2002, the Company extended the exclusive, perpetual license to
develop and sell the Cicero application integration software and obtain
ownership of the registered trademark from Merrill Lynch in exchange for 250,000
shares of common stock. Total consideration was valued at $622. (See Note 6.)

In June 2002, the Company issued 141,658 shares of common stock to a former
reseller of the Company as part of a settlement agreement. The settlement
agreement was valued at $270.

In August 2002, as part of the Series C Convertible Redeemable Preferred Stock
offering, ("Series C Preferred Stock") the Company exchanged approximately $150
of indebtedness to Anthony Pizi, the Chairman of the Company, for Series C
Preferred Stock.

In August 2002, the Company completed an exchange of 11,570 shares of Series A1
Convertible Redeemable Preferred Stock ("Series A1 Preferred Stock") and 30,000
shares of Series B1 Convertible Redeemable Preferred Stock ("Series B1 Preferred
Stock") for 11,570 shares of Series A2 Convertible Preferred Stock ("Series A2
Preferred Stock") and 30,000 shares of Series B2 Convertible Preferred Stock
("Series B2 Preferred Stock"), respectively.
(See Note 11.)

F-9

In October 2002, the Company completed an exchange of all of the outstanding
shares of Series A2 Convertible Redeemable Preferred Stock ("Series A2 Preferred
Stock") and Series B2 Convertible Redeemable Preferred Stock ("Series B2
Preferred Stock") and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock ("Series A3 Preferred
Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series B3
Preferred Stock") and related warrants. This exchange was affected to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants. (See Note 11.)

In December 2002, the Company issued 1,462,801 warrants to holders of the Series
A3 Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40. (See Note 11.)

In December 2002, the Company received $744 and $617 in notes receivable related
to the sale of assets related to Systems Integration segment products. (See Note
2.)

2001

During 2001, the Company issued 369,591 shares of common stock to employees for
retention bonuses, severance and consulting. These amounts were valued at
$1,199. (See Note 11.)

In September and October 2001, the Company received $400 and $1,000 in notes
receivable related to the sale of Message Queuing/XIPC and AppBuilder assets,
respectively. (See Note 2.)

During 2001, the Company recorded a $3,765 unrealized loss on marketable
securities related to an other-than-temporary decline in fair value.

During 2001, the Company performed consulting services valued at $750 in
exchange for common shares of a strategic partner.

In September 2001, the Company retired a note receivable from a related party,
(director and officer) totaling $495 in exchange for the forfeiture of certain
retirement benefits.

On October 16, 2001, the Company completed an exchange of 11,570 shares of
Series A 4% Convertible Redeemable Preferred Stock ("Series A Preferred Stock")
and 30,000 shares of Series B 4% Convertible Redeemable Preferred Stock ("Series
B Preferred Stock") for 11,570 shares of Series A1 Preferred Stock and 30,000
shares of Series B1 Preferred Stock, respectively. (See Note 11.)

F-10

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

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

Level 8 Systems, Inc. ("Level 8" or the "Company") is a global provider of
business integration software that enables organizations to integrate new and
existing information and processes at the desktop. Business integration software
addresses the emerging need for a company's information systems to deliver
enterprise-wide views of the company's business information processes.

GOING CONCERN:

The financial statements presented herein do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should Level 8 be unable to continue as a going concern. In
order to address these issues and to obtain adequate financing for the Company's
operations for the next twelve months, the Company is actively promoting and
expanding its Cicero-related product line and continues to negotiate with
significant customers that have begun or finalized the "proof of concept" stage
with the Cicero technology. The Company is experiencing difficulty increasing
sales revenue largely because of the inimitable nature of the product as well as
customer concerns about the financial viability of the Company. The Company is
attempting to address the financial concerns of potential customers by pursuing
strategic partnerships with companies that have significant financial resources,
although the Company has not experienced significant success to date with this
approach. In January 2004, the Company completed a private placement of its
common stock wherein it raised approximately $1,247 of new capital. Management
expects that it will be able to raise additional capital and to continue to fund
operations and also expects that increased revenues will reduce its operating
losses in future periods, however, there can be no assurance that management's
plan will be executed as anticipated.

PRINCIPLES OF CONSOLIDATION:

The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. See Note 2 regarding the sales of subsidiaries.
All of the Company's subsidiaries are wholly-owned for the periods presented.

All significant inter-company accounts and transactions are eliminated in
consolidation.

USE OF ESTIMATES:

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

F-11

FINANCIAL INSTRUMENTS:

The carrying amount of the Company's financial instruments, representing
accounts receivable, notes receivable, accounts payable and debt approximate
their fair value.

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.

CASH AND CASH EQUIVALENTS:

Cash and cash equivalents include all cash balances and highly liquid
investments with 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 in the United States
may be in excess of FDIC insurance limits.

PROPERTY AND EQUIPMENT:

Property and equipment purchased in the normal course of business is stated at
cost, and property and equipment acquired in business combinations is stated at
its fair market value at the acquisition date. All property and equipment is
depreciated using the straight-line method over estimated useful lives.

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 the Consolidated Statements of Operations.

SOFTWARE DEVELOPMENT COSTS:

The Company capitalizes certain software costs after technological feasibility
of the product has been established. 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.

Additionally, the Company has recorded software development costs for its
purchases of developed technology through acquisitions. (See Note 6.)

Capitalized software costs are amortized over related sales on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product. (See Note 6.)

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.

F-12

LONG-LIVED ASSETS:

The Company reviews the recoverability of long-lived intangible assets when
circumstances indicate that the carrying amount of assets may not be
recoverable. This evaluation is based on various analyses including undiscounted
cash flow projections. In the event undiscounted cash flow projections indicate
impairment, the Company would record an impairment based on the fair value of
the assets at the date of the impairment. Effective January 1, 2002, the Company
accounts for impairments under the Financial Accounting Standards Board ("FSAB")
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". Prior to the adoption of this
standard, impairments were accounted for using SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which was superceded by SFAS No. 144. During 2003, the Company recorded
impairments associated with its Cicero technology. During 2002, the Company
recorded impairments associated with the sale of the Geneva and Star SQL and
CTRC operations. (See Note 6.)

REVENUE RECOGNITION:

The Company recognizes license revenue from end-users and third party resellers
in accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as
amended by SOP 98-9, "Modification of SOP 97-2, 'Software Revenue Recognition,'
with Respect to Certain Transactions". The Company reviews each contract to
identify elements included in the software arrangement. SOP 97-2 and SOP 98-9
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. VSOE of the fair value
of undelivered elements is established on the price charged for that element
when sold separately. Software customers are given no rights of return and a
short-term warranty that the products will comply with the written
documentation. The Company has not experienced any product warranty returns.

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. Any unearned
receipts from service contracts result 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.

ADVERTISING EXPENSES:

The Company expenses advertising costs as incurred. Advertising expenses were
approximately $9, $53, and $1,198 for the years ended December 31, 2003, 2002
and 2001, respectively.

RESEARCH AND PRODUCT DEVELOPMENT:

Research and product development costs are expensed as incurred.

F-13

INCOME TAXES:

The Company uses 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 likely
than not" that recorded deferred tax assets will not be realized. (See Note 9.)

DISCONTINUED OPERATIONS:

During the third quarter of 2002, the Company made a decision to dispose of the
Systems Integration segment and entered into negotiations with potential buyers.
The Systems Integration segment qualified for treatment as a discontinued
operation in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", and the Company reclassified the results of
operations for the Systems Integration segment in 2002 and 2001 to "loss from
discontinued operations" in the Consolidated Statements of Operations. The
Consolidated Statements of Cash Flows for 2001 has not been restated to reflect
the discontinued operations as the information is not available and is
impractical to obtain. The sale of the Systems Integration segment was completed
in December 2002. (See Note 2.)

LOSS PER SHARE:

Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted loss per share is computed based upon the
weighted average number of common shares outstanding and any potentially
dilutive securities. During 2003, 2002, and 2001, potentially dilutive
securities included stock options, warrants to purchase common stock, and
preferred stock.

The following table sets forth the potential shares that are not included in the
diluted net loss per share calculation because to do so would be anti-dilutive
for the periods presented:

YEAR ENDED DECEMBER 31,
-----------------------

2003 2002 2001
---------- ---------- ----------
Stock options . 5,625,878 3,834,379 4,366,153
Warrants ...... 10,926,706 5,315,939 2,568,634
Preferred stock 16,893,174 7,812,464 3,782,519
---------- ---------- ----------
33,445,758 16,962,782 10,717,306
========== ========== ==========

In 2003 and 2002, no dividends were declared on preferred stock. In 2001,
dividends totaled $926, and were included in the loss per share calculations.

STOCK-BASED COMPENSATION:

The Company has adopted the disclosure provisions of SFAS 123, "Accounting for
Stock-Based Compensation", and has applied Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations
in accounting for its stock-based compensation plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at the
grant dates for awards under the plans, consistent with the method required by
SFAS No. 123, the Company's net loss and diluted net loss per common share would
have been the pro forma amounts indicated below.

2003 2002 2001
--------- --------- ---------

Net loss applicable to common stockholders, as reported ...... ($ 11,708) $ (19,177) ($106,061)
Less: Total stock-based employee compensation expense under
fair value based method for all awards, net of related tax
effects ............................................... (1,016) (3,387) (2,735)
--------- --------- ---------

Pro forma loss applicable to common stockholders ............. ($ 12,724) ($ 22,564) ($108,796)
========= ========= =========

Loss per share:

Basic and diluted, as reported ............................. $ (0.54) $ (1.02) $ (6.65)
Basic and diluted, pro forma ............................... $ (0.59) $ (1.20) $ (6.82)

F-14

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:

2003 2002 2001
---- ---- ----
Expected life (in years) 8.33 years 10 years 5 years
Expected volatility .... 126% 96% 90%
Risk free interest rate 4.00% 4.25% 4.50%
Expected dividend yield 0% 0% 0%

WARRANTS LIABILITY:

The Company has issued warrants to Series A3 and Series B3 preferred
stockholders which contain provisions that allow the warrant holders to force a
cash redemption for events outside the control of the Company. The fair value of
the warrants are accounted for as a liability and are re-measured through the
Consolidated Statements of Operations at each balance sheet date.

RECLASSIFICATIONS:

Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 2003 presentation. Such reclassifications had no
effect on previously reported net income or stockholder's equity.

RECENT ACCOUNTING PRONOUNCEMENTS:

In January 2003, the FASB issued Interpretation No. 46 or FIN 46"Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". In October 2003, the FASB
issued FASB Staff Position FIN 46-6, "Effective Date of FASB Interpretation No.
46, Consolidation of Variable Interest Entities" deferring the effective date
for applying the provisions of FIN 46 for public entities' interests in variable
interest entities or potential variable interest entities created before
February 1, 2003 for financial statements of interim or annual periods that end
after December 15, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities that function to support the
activities of the primary beneficiary. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities." This
revised interpretation is effective for all entities no later than the end of
the first reporting period that ends after March 15, 2004. The Company has no
investment in or contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of this interpretation did
not have any impact on its consolidated financial position or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of
operations might be materially impacted.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, "Elements of Financial Statements". The adoption of this
statement did not have a material impact on the Company's results of operations
and financial condition.

F-15

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement requires that companies having a year-end after December 15, 2002
follow the prescribed format and provide the additional disclosures in their
annual reports. The adoption of this statement did not have a material impact on
the Company's results of operations and financial condition.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statement did not have a
material impact on our results of operations and financial condition.

NOTE 2. DISPOSITIONS

SALE OF GENEVA:

Effective October 1, 2002, the Company sold its Systems Integration software
business to EM Software Solutions, Inc. Under the terms of the agreement, EM
Solutions acquired all rights, title and interest to the Geneva Enterprise
Integrator and Geneva Business Process Automator products along with certain
receivables, deferred revenue, maintenance contracts, fixed assets and certain
liabilities. The Company had identified these assets as being held for sale
during the third quarter of 2002 and, as such, reclassified the results of
operations to "income/loss from discontinued operations". The Company received
total proceeds of $1,637; $276 in cash, a short-term note in the amount of $744
and a five-year note payable monthly in the aggregate amount of $617. The
short-term note was due by February 13, 2003 and was repaid subsequent to
December 31, 2002. The five-year note was recorded net of an allowance of $494.
The carrying value of the assets sold was approximately $374 resulting in a loss
on the disposal of discontinued operations of $769. Revenues for the Systems
Integration segment were $3,700 in 2002 and $5,700 in 2001. (See Note 6.)

SALE OF STAR SQL AND CTRC:

In June 2002, the Company entered into an Asset Purchase Agreement with
StarQuest Ventures, Inc., a California company and an affiliate of Paul Rampel,
a former member of the Board of Directors of Level 8 Systems and a former
executive officer. Under the terms of the Asset Purchase Agreement, Level 8 sold
its Star SQL and CTRC products and certain fixed assets to StarQuest Ventures
for $365 and the assumption of certain maintenance liabilities. The Company
received $300 in cash and a note receivable of $65. The loss on sale of the
assets was $74. The Company used $150 from the proceeds to repay borrowings from
Mr. Rampel.

SALE OF APPBUILDER ASSETS:

On October 1, 2001, the Company sold its Geneva AppBuilder software business to
BluePhoenix Solutions, a wholly owned subsidiary of Liraz Systems Ltd. Under the
terms of the agreement, the Company sold the rights, title and interest in the
AppBuilder product and certain receivables, unbilled, deferred revenue,
maintenance contracts, fixed assets and certain liabilities. The AppBuilder
product accounted for approximately 99% of total revenues for the year and
approximately 85% of total revenues within the messaging and application
engineering segment. The Company received total proceeds of $20,350; $19,000 in
cash, a note receivable for $1,000 due February 2002 and a cash payment for the
net assets. The carrying value of the net assets sold was approximately $15,450.
The resulting gain of approximately $4,900 was recorded in the gain on disposal
of asset. The Company subsequently repaid $22,000 of its short-term debt using
the proceeds received and cash on hand. In March 2002, the $1,000 note was
repaid with cash of $825 and settlement of other liabilities. At December 31,
2001, the $1,000 note was recorded as note receivable from related party and
$863, including $57 classified as assets to be abandoned, was recorded as a
receivable from a related party representing amounts due to the Company from
BluePhoenix Solutions for the net asset amount noted above and the reimbursement
for certain general and administrative expenses performed by the Company.

F-16

SALE OF MESSAGE QUEUING AND XIPC ASSETS:

Also during the quarter ended September 30, 2001, the Company sold two of its
messaging products - Geneva Message Queuing and Geneva XIPC to Envoy
Technologies, Inc. Under the terms of the agreement, Envoy acquired all rights,
title and interest to the products along with all customer and maintenance
contracts. The Company retained all accounts receivable, received $50 in cash
and a note receivable for $400. The resulting gain of $342 has been recorded in
the gain on disposal of assets.

ASSETS AND LIABILITIES TO BE ABANDONED:

At December 31, 2002, the Company had made the decision to close its remaining
foreign subsidiaries.

In December 2002, the Company received notification of the finalization of the
bankruptcy proceeding in France and recorded a gain on the closure of the
subsidiary of $332 in Gain (loss) on disposal of assets.

In March 2003, the Company received notification of the finalization of the
bankruptcy proceeding in the United Kingdom and recorded a gain on the closure
of the subsidiary of $216 in Gain (loss) on disposal of assets.

In December 2003, the Company received notification of the liquidation of the
Denmark subsidiary and the Company recorded a gain on the closure of the
subsidiary of $62 in Gain (loss) on disposal of assets.

NOTE 3. ACCOUNTS RECEIVABLE

Trade accounts receivable was composed of the following at December 31:

2003 2002
------- -------
Current trade accounts receivable ............ $ 20 $ 1,434
Less: allowance for doubtful accounts ........ (8) (143)
------- -------
$ 12 $ 1,291
======= =======

Approximately $0 and $9 of current trade receivables were unbilled at December
31, 2003 and 2002, respectively.

The (credit) provision for uncollectible amounts was ($623), ($477) and $3,812
for the years ended December 31, 2003, 2002 and 2001 respectively. Write-offs
(net of recoveries) of accounts receivable were ($488), ($437) and $6,047 for
the years ended December 31, 2003, 2002 and 2001, respectively. Included in the
write-offs for 2001 was approximately $3,800 from one customer who filed for
Chapter 11 Protection under the U.S. Bankruptcy laws.

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment was composed of the following at December 31:

2003 2002
----- -----
Computer equipment ................................. $ 242 $ 206
Furniture and fixtures ............................. 8 8
Office equipment ................................... 138 138
----- -----
388 352
Less: accumulated depreciation and amortization .... (362) (190)
----- -----

$ 26 $ 162
===== =====

Depreciation and amortization expense of property and equipment was $167, $402
and $945 for the years ended December 31, 2003, 2002, and 2001, respectively.

F-17

NOTE 5. NOTES RECEIVABLE

As discussed in Note 2, in 2002 the Company disposed of the remaining assets of
the Systems Integration segment through a sale to EM Software Solutions, Inc. As
part of the proceeds, the Company received two notes receivable from the
purchaser. The first note was due on February 13, 2003 in the amount of $744 and
bore interest at prime plus 2.25%. This note was repaid in February 2003. The
second note was in the principal amount of $617 and bears interest at prime plus
1%. Principal and interest is payable monthly and the note matures in 2007. Due
to the uncertainty of the collection of the note at the time, the Company
recorded the note net of an allowance of $494.

As more fully discussed in Note 20, the Company had been party to litigation for
breach of a real estate lease. That case was settled in August 2003. Under the
terms of the settlement agreement, the Company agreed to assign the note
receivable due from EM Software Solutions, with recourse equal to the unpaid
portion of the Note should the Note obligor default on future payments. The
principal balance outstanding on the Note at the time of assignment was $545.
The Company assessed the probability of liability under the recourse provisions
using a weighted probability cash flow analysis and has recognized a long-term
liability in the amount of $131. In addition, the Company wrote off the
unreserved portion of the Note or $51.

In conjunction with the sale of Profit Key on April 6, 1998, the Company
received a note receivable from the purchaser for $2,000. The remaining balance
on the note totaled $1,000 and was due in equal annual installments beginning on
March 31, 2001. The note bore interest at 9% per annum. In 2002, the Company
sold its remaining interest in the note to a group of investors including
Nicholas Hatalski and Paul Rampel, both members of the Company's Board of
Directors at the time, and Anthony Pizi, the Company's Chairman for $400, and
recorded a loss on the sale of $100.

NOTE 6. SOFTWARE PRODUCT TECHNOLOGY

As of December 31, 2003, all of the Company's software product technology
relates to the Cicero technology. Effective July 2002, the Company determined
that the estimated asset life of the Cicero technology has been extended as a
result of the January 2002 amended license agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") wherein the exclusive right to
modify, commercialize, and distribute the technology was extended in perpetuity.
Accordingly, the Company reassessed the estimated life of the technology and
extended it from three years to five years. The effect of the change in the
estimated life resulted in a reduction of $4,608 and $2,407 of amortization
expense for the years ended December 31, 2003 and 2002, respectively. The impact
on the net loss applicable to common stockholders - basic and diluted was
$(0.21) per share for December 31, 2003 and $(0.13) per share for December 31,
2002.

In accordance with FASB 86 "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", the Company completed an assessment of the
recoverability of the Cicero product technology as of September 30, 2003 and
again at December 31, 2003. This assessment was completed due to the Company's
continued operating losses and the limited software revenue generated by the
Cicero technology over the past twelve months. Currently, the Company is in
negotiations with numerous customers to purchase licenses, which would have a
significant impact on the cash flows from the Cicero technology and the Company.
Since the negotiations have been in process for several months and expected
completion of the transactions has been delayed, the Company has reduced its
cash flow projections. Historical cash flows generated by the Cicero technology
do not support the long-lived asset and accordingly the Company has impaired the
unamortized book value of the technology in excess of the expected net
realizable value as of December 31, 2003. This impairment charge, in the amount
of $993, has been recorded in cost of software revenue.

During the third quarter of 2001, the Company reduced its carrying value by
$3,070 of the capitalized software cost recorded as part of the StarQuest
acquisition to its fair value based upon an evaluation of its net realizable
value. In May 2002, based upon the potential sale of the assets to a third
party, the Company determined that an additional impairment had occurred in the
amount of $1,564, which was recorded as software amortization. The Company has
been assessing its assets to determine which assets if any are to be considered
non-strategic and, in May 2002, the Company received an unsolicited offer to
purchase the Star/SQL and CTRC products. In June 2002, the Company sold the
Star/SQL and CTRC asset. (See Note 2.)

F-18

During the years ended December 31, 2003, 2002 and 2001, the Company recognized
$3,933 of which $993 is an impairment charge, and $7,375 and $11,600,
respectively, of expense related to the amortization of these costs, which is
recorded as cost of software revenue in the consolidated statements of
operations. Accumulated amortization of capitalized software costs was $20,436
and $16,503 at December 31, 2003 and 2002, respectively.

NOTE 7. IDENTIFIABLE AND UNIDENTIABLE INTANGIBLE ASSETS

Identifiable and unidentifiable intangible assets primarily included goodwill,
existing customer base, assembled workforce and trademarks recorded in
connection with the Company's previous acquisitions. At December 31, 2003 and
2002, the Company had no identifiable and unidentifiable intangible assets. Pro
forma net loss applicable to common stockholders as if the provisions of SFAS
142, "Goodwill and Other Intangible Assets", had been adopted for the year ended
December 31, 2001 would have been ($98,023).

SALE OF SEER TECHNOLOGIES ASSETS (APPBUILDER):

As described in Note 2, Sale of AppBuilder Assets, the Company sold the
intangible assets acquired from Seer Technologies to BluePhoenix Solutions (a
wholly-owned subsidiary of Liraz Systems Ltd.) in October 2001, which resulted
in a net reduction of $11,052 in intangible assets.

ASSET IMPAIRMENTS:

During the quarter ended September 30, 2001, the Company was notified by one of
its resellers that they would no longer engage in re-sales of the Company's CTRC
products acquired from StarQuest. This reseller accounted for substantially all
of the product sales and as a result, the Company performed an assessment of the
recoverability of the Message Application Engineering Segment. The results of
the Company's analysis of undiscounted cash flows indicated that an impairment
had occurred. The Company estimated the fair market value of the related assets
through a discounted future cash flow valuation technique. The results of this
analysis indicated that the carrying value of these intangible assets exceeded
their fair market values. The Company has reduced the carrying value of these
intangible assets by approximately $10,999 as of September 30, 2001, of which
$3,070 was recorded as software amortization costs. (See Note 6.)

NOTE 8. SHORT TERM DEBT

Short-term debt was composed of the following at December 31:

2003 2002
------ ------
Term loan (a) ................................ $1,971 $2,512
Note payable; related party (b) .............. 85 --
Notes payable (c) ............................ 444 381
Short term convertible note (d) .............. 125 --
------ ------
$2,625 $2,893
====== ======

(a) The Company has a $1,971 term loan bearing interest at LIBOR plus 1%
(approximately 2.13% at December 31, 2003). Interest is payable quarterly.
There are no financial covenants and the term loan is guaranteed by Liraz
Systems Ltd., the Company's former principal shareholder. The loan matures
on November 8, 2004. (See Note 16.)

(b) In December 2003, the Company entered into a promissory note with the
Company's Chairman. The Note bears interest at 12% per annum.

(c) The Company is attempting to secure a revolving credit facility and on an
interim basis and from time to time has issued a series of short term
promissory notes with private lenders, which provides for short term
borrowings both unsecured and secured by accounts receivable. The Notes
bear interest at 12% per annum.

(d) In December 2003, the Company entered into a promissory note with a
private lender. The Note bears interest at 12% per annum and allows for
the conversion of the principal amount due into common stock of the
Company. The Note is convertible at $0.28 per share.

F-19

NOTE 9. INCOME TAXES

Income tax expense were composed of the following for the years ended December
31:

2003 2002 2001
----------- ----------- -----------

Federal - current ...................... $ -- $ -- $ --
State and local - current .............. -- -- --
----------- ----------- -----------

Foreign taxes (benefit) and withholdings -- (155) 501
----------- ----------- -----------
Current taxes .......................... -- (155) 501

Federal - deferred ..................... -- -- --
State and local - deferred ............. -- -- --
----------- ----------- -----------
Deferred taxes ......................... -- -- --

Total income tax provision (benefit) ... $ -- $ (155) $ 501
=========== =========== ===========

A reconciliation of expected income tax at the statutory federal rate with the
actual income tax provision is as follows for the years ended December 31:

2003 2002 2001
-------- -------- --------

Expected income tax benefit at statutory rate (34%) .... $ (3,402) $ (6,235) $(35,200)
State taxes, net of federal tax benefit ................ (405) (358) (5,158)
Effect of foreign operations including withholding taxes (31) (68) 801
Effect of change in valuation allowance ................ 3,769 6,362 37,076
Amortization and write-off of non-deductible goodwill .. -- -- 1,906
Non-deductible expenses ................................ 69 144 1,076
-------- -------- --------
Total ........................................ $ -- $ (155) $ 501
======== ======== ========

Significant components of the net deferred tax asset (liability) at December 31
were as follows:

2003 2002
-------- --------
Current assets:
Allowance for doubtful accounts .... $ 85 $ 41
Accrued expenses, non-tax deductible 200 200

Noncurrent assets:
Loss carry forwards ................ 74,517 71,448
Depreciation and amortization ...... 5,709 4,486
-------- --------
80,511 76,175

Less: valuation allowance ............. (80,511) (76,175)
-------- --------

$ -- $ --
======== ========

At December 31, 2003, the Company had net operating loss carryforwards of
approximately $186,293, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2023. 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. 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 $21,177.

F-20

The undistributed earnings of certain foreign subsidiaries are not subject to
additional foreign income taxes nor considered to be subject to U.S. income
taxes unless remitted as dividends. The Company intends to reinvest such
undistributed earnings indefinitely; accordingly, no provision has been made for
U.S. taxes on those earnings. The determination of the amount of the
unrecognized deferred tax liability related to the undistributed earnings is not
practicable.

The Company provided a full valuation allowance on the total amount of its
deferred tax assets at December 31, 2003 since management does not believe that
it is more likely than not that these assets will be realized.

NOTE 10. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK

On March 19, 2003, the Company completed a $3,500 private placement of Series D
Convertible Preferred Stock ("Series D Preferred Stock"), convertible at a
conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in an allocation of $2,890 to the Series D Preferred Stock and $640 to
the detachable warrants. Based upon the allocation of the proceeds, the Company
determined that the effective conversion price of the Series D Preferred Stock
was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

As part of the financing, the Company and the lead investors have agreed to form
a joint venture to exploit the Cicero technology in the Asian market. The terms
of the agreement require that the Company place $1,000 of the gross proceeds
from the financing into escrow to fund the joint venture. The escrow agreement
allows for the immediate release of funds to cover organizational costs of the
joint venture. During the quarter ended March 31, 2003, $225 of escrowed funds
was released. Since the joint venture was not formed and operational on or by
July 17, 2003, the lead investors have the right, but not the obligation, to
require the Company to purchase $1,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses. The Company and the lead investor have mutually agreed to extend the
escrow release provisions until April 15, 2004.

Another condition of the financing requires the Company to place an additional
$1,000 of the gross proceeds into escrow, pending the execution of a definitive
agreement with Merrill Lynch, providing for the sale of all right, title and
interest to the Cicero technology. Since a transaction with Merrill Lynch for
the sale of Cicero was not consummated by May 18, 2003, the lead investors have
the right, but not the obligation, to require the Company to purchase $1,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
During the second quarter, $390 of escrowed funds was released. In addition, the
Company and the lead investor agreed to extend the escrow release provisions
until the end of July 2003 when all remaining escrow monies were released to the
Company.

F-21

NOTE 11. STOCKHOLDERS' EQUITY

COMMON STOCK:

In October 2003, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell 1,894,444 shares of its
common stock and issue 473,611 warrants to purchase the Company's common stock
at a price of $0.45 per share for a total of $853 in proceeds. This offering
closed on October 15, 2003. The warrants expire in three years from the date of
grant. These shares were issued in reliance upon the exemption from registration
under Rule 506 of Regulation D and on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.

In January 2002, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell up to 3,000,000 shares of
its common stock and warrants. The common stock was valued at $1.50 per share
and warrants to purchase additional shares were issued with an exercise price of
$2.75 per share. This offering closed on January 16, 2002. Of the 3,000,000
shares, the Company sold 2,381,952 shares of common stock for a total of $3,574
and granted 476,396 warrants to purchase the Company's common stock at an
exercise price of $2.75 per share. The warrants expire in three years from the
date of grant and have a call feature that forces exercise if the Company's
common stock exceeds $5.50 per share. These shares were issued in reliance upon
the exemption from registration under Rule 506 of Regulation D and on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 for transactions by an issuer not involving a public offering. Under this
Private Placement, the Company had agreed to certain terms and conditions that
would trigger payments by the Company if the Company did not keep such shares
registered under the Securities Act of 1933, as amended. In April 2003, in
exchange for a waiver of such provisions the Company agreed to exchange the
warrants from the January 2002 Private Placement priced at $2.50 for new
warrants priced at $0.60 and has extended the expiration date until March 2007.
Each participant is required to execute a waiver prior to receiving the repriced
warrants.

STOCK GRANTS:

During 2002, the Company issued 109,672 shares of common stock to employees for
retention bonuses and severance. The grants represented compensation for
services previously performed and were valued and recorded based on the fair
market value of the stock on the date of grant, which totaled $92. During 2003,
no stock awards were made to employees.

STOCK OPTIONS:

The Company maintains two stock option plans, the 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 employees, officers, directors, consultants, and advisors. In July
2003, stockholders approved a proposal to increase the number of shares reserved
within these plans to a combined total of 10,900,000 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.

F-22

Activity for stock options issued under these plans for the fiscal years ending
December 31, 2003, 2002 and 2001 was as follows:

OPTION PRICE WEIGHTED AVERAGE
PLAN ACTIVITY PER SHARE EXERCISE PRICE
------------- --------- --------------

Balance at December 31, 2000.... 3,857,517 1.37-39.31 15.83

Granted...................... 3,037,581 1.74-6.13 3.60
Forfeited.................... (2,528,945) 1.37-39.31 16.38
---------------

Balance at December 31, 2001.... 4,366,153 1.37-39.31 6.92
Granted...................... 1,942,242 0.34-1.70 0.58
Forfeited.................... (2,474,016) 0.39-39.31 6.76
---------------

Balance at December 31, 2002 3,834,379 0.34-39.31 3.81
Granted.................... 2,566,126 0.22-0.57 0.24
Exercised.................. (121,434) 0.22-0.22 0.22
Forfeited................. (653,193) 0.22-39.31 2.60
---------------

Balance at December 31, 2003... 5,625,878 0.20-39.31 2.43
===============

The weighted average grant date fair value of options issued during the years
ended December 31, 2003, 2002, and 2001 was equal to $0.24, $0.58, and $2.59 per
share, respectively. There were no option grants issued below fair market value
during 2003, 2002 or 2001.

At December 31, 2003, 2002 and 2001, options to purchase approximately
2,770,126, 1,409,461, and 1,313,826 shares of common stock were exercisable,
respectively, pursuant to the plans at prices ranging from $0.22 to $39.32. The
following table summarizes information about stock options outstanding at
December 31, 2003:

REMAINING
CONTRACTUAL WEIGHTED
LIFE FOR OPTIONS AVERAGE
EXERCISE PRICE NUMBER OUTSTANDING NUMBER EXERCISE
OUTSTANDING EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------------

$0.22-3.93 4,514,878 8.8 1,870,153 $ 0.62
3.94-7.86 846,650 5.4 635,623 6.27
7.87-11.79 93,650 4.3 93,650 8.92
11.80-15.72 40,000 0.5 40,000 12.29
15.73-19.66 7,500 6.6 7,500 18.81
19.67-23.59 3,000 6.5 3,000 20.00
23.60-27.52 0 0.0 0 0.00
27.53-31.45 3,000 6.0 3,000 30.25
31.46-35.38 0 0.0 0 0.00
35.39-39.32 117,200 1.0 117,200 38.03
--------------------- ---------------------

5,625,878 8.0 2,770,126 $ 4.05
===================== =====================

PREFERRED STOCK:

In connection with the sale of Series D Preferred Stock, the holders of the
Company's Series A3 Preferred Stock and Series B3 Preferred Stock (collectively,
the "Existing Preferred Stockholders"), entered into an agreement whereby the
Existing Preferred Stockholders have agreed to waive certain applicable price
protection anti-dilution provisions. Under the terms of the waiver agreement,
the Company is also permitted to issue equity securities representing aggregate
proceeds of up to an additional $4,900 following the sale of the Series D
Preferred Stock. Additionally, the Existing Preferred Stockholders have also
agreed to a limited lock-up restricting their ability to sell common stock
issuable upon conversion of their preferred stock and warrants and to waive the
accrual of any dividends that may otherwise be payable as a result of the
Company's delisting from Nasdaq. As consideration for the waiver agreement, the
Company has agreed to issue on a pro rata basis up to 1,000 warrants to all the
Existing Preferred Stockholders on a pro rata basis at such time and from time
to time as the Company closes financing transactions that represent proceeds in
excess of $2,900, excluding the proceeds from the Series D Preferred Stock
transaction. Such warrants will have an exercise price that is the greater of
$0.40 or the same exercise price as the exercise price of the warrant, or equity
security, that the Company issues in connection with the Company's financing or
loan transaction that exceeds the $2,900 threshold.

F-23

On August 14, 2002, the Company completed a $1,600 private placement of Series C
Convertible Preferred Stock ("Series C Preferred Stock"), convertible at a
conversion ratio of $0.38 per share of common stock into an aggregate of
4,184,211 shares of common stock. As part of the financing, the Company has also
issued warrants to purchase an aggregate of 1,046,053 shares of common stock at
an exercise price of $0.38 per share. As consideration for the $1,600 private
placement, the Company received approximately $1,400 in cash and allowed certain
debt holders to convert approximately $150 of debt and $50 accounts payable to
equity. The Chairman and CEO of the Company, Anthony Pizi, converted $150 of
debt owed to him into shares of Series C Preferred Stock and warrants. Both
existing and new investors participated in the financing. The Company also
agreed to register the common stock issuable upon conversion of the Series C
Preferred Stock and exercise of the warrants for resale under the Securities Act
of 1933, as amended. The Company allocated the proceeds received from the sale
of the Series C Preferred Stock and warrants to the preferred stock and the
detachable warrants on a relative fair value basis, resulting in the allocation
$1,271 to the Series C Preferred Stock and $329 to the detachable warrants.
Based on the allocation of the proceeds, the Company determined that the
effective conversion price of the Series C Preferred Stock was less than the
fair value of the Company's common stock on the date of issuance. As a result,
the Company recorded a beneficial conversion feature in the amount of $329 based
on the difference between the fair market value of the Company's common stock on
the closing date of the transaction and the effective conversion price of the
Series C Preferred Stock. The beneficial conversion feature was recorded as a
discount on the value of the Series C Preferred Stock and an increase in
additional paid-in capital. Because the Series C Preferred Stock was convertible
immediately upon issuance, the Company fully amortized such beneficial
conversion feature on the date of issuance.

In connection with the sale of Series C Preferred Stock, the Company agreed with
the existing holders of its Series A1 Convertible Preferred Stock (the "Series
A1 Preferred Stock") and the Series B1 Convertible Preferred Stock (the "Series
B1 Preferred Stock"), in exchange for their waiver of certain anti-dilution
provisions, to reprice an aggregate of 1,801,022 warrants to purchase common
stock from an exercise price of $1.77 to $0.38. The Company entered into an
Exchange Agreement with such holders providing for the issuance of 11,570 shares
of Series A2 Convertible Preferred Stock ("Series A2 Preferred Stock") and
30,000 Series B2 Convertible Preferred Stock ("Series B2 Preferred Stock"),
respectively. Series A2 Preferred Stock and Series B2 Preferred Stock are
convertible into an aggregate of 1,388,456 and 2,394,063 shares of the Company's
common stock at $8.33 and $12.53 per share, respectively. The exchange is being
undertaken in consideration of the temporary release of the anti-dilution
provisions of the Series A1 Preferred Stockholders and Series B1 Preferred
Stockholders. Based on a valuation performed by an independent valuation firm,
the Company recorded a deemed dividend of $293, to reflect the increase in the
fair value of the preferred stock and warrants as a result of the exchange. (See
"Stock Warrants" for fair value assumptions.) The dividend increased the fair
value of the warrant liability. As of December 31, 2003, no warrants had been
exercised.

F-24

On October 25, 2002, the Company effected an exchange of all of our outstanding
shares of Series A2 Convertible Redeemable Preferred Stock ("Series A2 Preferred
Stock") and Series B2 Convertible Redeemable Preferred Stock ("Series B2
Preferred Stock") and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock ("Series A3 Preferred
Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series B3
Preferred Stock") and related warrants. This exchange was made to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002. The conversion price for the Series A3
Preferred Stock and the conversion price for the Series B3 Preferred Stock
remain the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.33 and $12.53, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock ("Series A3 Warrants") was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercise price of the warrants
relating to the Series A1 Preferred Stock. The exercise price for the aggregate
1,047,382 warrants relating to the Series B3 Preferred Stock ("Series B3
Warrants") was increased from $0.38 to $0.40 per share which is a reduction from
the $1.77 exercise price of the warrants relating to the Series B1 Preferred
Stock. The adjusted exercise price was based on the closing price of the
Company's Series C Convertible Redeemable Preferred Stock and warrants on August
14, 2002, plus $0.02, to reflect accurate current market value according to
relevant Nasdaq rules. This adjustment was made as part of the agreement under
which the holders of the Company's Preferred Stock agreed to waive their
price-protection anti-dilution protections to allow the Company to issue the
Series C Preferred Stock and warrants without triggering the price-protection
anti-dilution provisions and excessively diluting its common stock. The Company
may cause the redemption of the Series A3 Preferred Stock warrants and the
Series B3 Preferred Stock warrants for $.0001 at any time if the closing price
of the Company's common stock over 20 consecutive trading days is greater than
$5.00 and $7.50 per share, respectively. The holders of the Series A3 and Series
B3 Warrants may cause the warrants to be redeemed for cash at the difference
between the exercise price and the fair market value immediately preceding a
redemption event as defined in the contract. As such, the fair value of the
warrants at issuance has been classified as a warrant liability in accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in a Company's Own Stock". As of December 31, 2003, no
warrants have been exercised and the fair value of the liability is $198.

Under the terms of the agreement, the Company is authorized to issue equity
securities in a single or series of financing transactions representing
aggregate gross proceeds to the Company of approximately $5,000, or up to an
aggregate 17,500 shares of common stock, without triggering the price-protection
anti-dilution provisions in the Series A3 Preferred Stock and B3 Preferred Stock
and related warrants. In exchange for the waiver of these price-protection
anti-dilution provisions, the Company repriced the warrants as described above
and have agreed to issue on a pro rata basis up to 4,600 warrants to the holders
of Series A3 Preferred Stock and Series B3 Preferred Stock at such time and from
time to time as the Company closes subsequent financing transactions up to the
$5,000 issuance cap or the 17,500 share issuance cap. As a result of the Series
C Preferred Stock financing, which represented approximately $1,600 of the
Company's $5,000 in allowable equity issuances, the Company is obligated to
issue an aggregate of 1,462,801 warrants at an exercise price of $0.40 per share
to the existing preferred stockholders. The warrants were issued on December 31,
2002 and had a fair value of $373, which was recorded as a dividend to,
Preferred stockholders. As a result of the Series D preferred Stock financing
which represented approximately $3,500 against the allowable equity issuances,
the Company was obligated to issue an aggregate of 3,048,782 warrants at an
exercise price of $0.40 per share to the existing Series A3 and Series B3
preferred shareholders. The warrants were issued on October 8, 2003 and had a
fair value of $1,062, which was recorded as a deemed dividend to preferred
stockholders. Additionally, the Company has agreed to issue a warrant to
purchase common stock to the existing preferred stockholders on a pro rata basis
for each warrant to purchase common stock that the Company issues to a
third-party lender in connection with the closing of a qualified loan
transaction. The above referenced warrants will have the same exercise price as
the exercise price of the warrant, or equity security, that the Company issues
in connection with the Company's subsequent financing or loan transaction or
$0.40, whichever is greater. These warrants are not classified as a liability
under EITF 00-19.

During 2003 and 2002 there were 6,250 shares of preferred stock converted into
1,377,921 shares of the Company's common stock and 1,500 shares of preferred
stock converted into 180,007 shares of the Company's common stock, respectively.
There were 4,070 shares of the Series A3 Preferred Stock and 30,000 shares of
Series B3 Preferred Stock, 1,340 shares of Series C Preferred Stock, and 3,355
shares of Series D Preferred Stock outstanding at December 31, 2003.

F-25

STOCK WARRANTS:

The Company values warrants based on the Black-Scholes pricing model. Warrants
granted in 2003, 2002, and 2001were valued using the following assumptions:

EXPECTED EXPECTED RISK FREE EXPECTED FAIR VALUE OF
LIFE IN YEARS VOLATILITY INTEREST RATE DIVIDEND COMMON STOCK
------------- ---------- ------------- -------- ------------

December 2000 Commercial Lender Warrants 4 87% 5% None $6.19

Preferred Series A3 and B3 Warrants 4 107.5% 4% None $1.89

2002-2003 Financing Warrants 5 97% 2% None $0.40

Preferred Series C Warrants 5 117% 3% None $0.38

Preferred Series D-1 Warrants 5 117% 3% None $0.07

Preferred Series D-2 Warrants 5 102% 3% None $0.20

Private Placement 3 102% 3% None $0.45

During December 2000, the Company issued a commercial lender rights to purchase
up to 172,751 shares of the Company's common stock at an exercise price of $4.34
in connection with a new credit facility. The warrants were valued at $775 or
$4.49 per share and are exercisable until December 28, 2004. As of December 31,
2003, no warrants have been exercised.

INCREASE IN CAPITAL STOCK:

In July 2003, the stockholders approved a proposal to amend the Amended and
Restated Certificate of Incorporation to increase the aggregate number of shares
of Common Stock that the Company is authorized to issue from 60,000,000 to
85,000,000.

NOTE 12. EMPLOYEE BENEFIT PLANS

As of January 1, 2001, the Company sponsored one defined contribution plan for
its U.S. employees - the Level 8 Systems 401(k). On December 31, 2000, the
Company amended the Level 8 Systems 401(k) plan to provide a 50% matching
contribution up to 6% of an employee's salary. Participants must be eligible
Level 8 plan participants and employed at December 31 of each calendar year to
be eligible for employer matching contributions. Matching contributions to the
Plan included in the Consolidated Statement of Operations totaled $14, $7, and
$7 for the years ended December 31, 2003, 2002, and 2001, respectively.

The Company also had employee benefit plans for each of its foreign
subsidiaries, as mandated by each country's laws and regulations. There was $0,
$12, and $260 in expense recognized under these plans for the years ended
December 31, 2003, 2002, and 2001, respectively. The Company no longer maintains
foreign subsidiaries.

NOTE 13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2003, three customers accounted for 42.1%, 19.5% and 12.7% of operating
revenues. In 2002, two customers accounted for 38.7% and 26.7% of operating
revenues.

NOTE 14. FOREIGN CURRENCIES

As of December 31, 2003, the Company had $0 and $8 of U.S. dollar equivalent
cash and trade receivable balances, respectively, denominated in foreign
currencies.

F-26

As of December 31, 2002, the Company had $73 and $87 of U.S. dollar equivalent
cash and trade receivable balances, respectively, denominated in foreign
currencies. The Company's net foreign currency transaction losses were $31,
$171, and $198 for the years ended 2003, 2002 and 2001, respectively.

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

2003 2002
---- ----
Euro .................................... 41.2% 4.0%
Pound Sterling .......................... -- 2.1%

NOTE 15. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

During the first quarter of 2001, management reassessed how the Company would be
managed and how resources would be allocated. Management now makes operating
decisions and assesses performance of the Company's operations based on the
following reportable segments: (1) Desktop Integration segment, and (2)
Messaging and Application Engineering segment. The Company previously had three
reportable segments but the Company has reported the Systems Integration segment
as discontinued operations.

The principal product in the Desktop Integration segment is Cicero. Cicero is a
business integration software product that maximizes end-user productivity,
streamlines business operations and integrates disparate systems and
applications.

The products that comprise the Messaging and Application Engineering segment are
Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC, Geneva
AppBuilder, CTRC and Star/SQL. During 2001, the Company sold three of its
messaging products, Geneva Message Queuing, Geneva XIPC and AppBuilder. During
2002, the Company sold its CTRC and Star/SQL products.

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. During 2002, the Company reported the operations of its Systems
Integration segment as discontinued operations and has reallocated the corporate
overhead for the Systems Integration segment in 2002 and 2001. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings (loss) before interest and other income/(expense), taxes, in-process
research and development, and restructuring.

F-27

The table below presents information about reported segments for the twelve
months ended December 31, 2003 and 2002:

MESSAGING/
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
----------- ----------- -----
2003:
Total revenue .................. $ 466 $ 64 $ 530
Total cost of revenue .......... 5,371 62 5,433
Gross margin (loss) ............ (4,905) 2 (4,903)
Total operating expenses ....... 4,999 256 5,255
Segment profitability (loss) ... $ (9,904) $ (254) $(10,158)

2002:

Total revenue .................. $ 2,148 $ 953 $ 3,101
Total cost of revenue .......... 6,527 1,950 8,477
Gross margin (loss) ............ (4,379) (997) (5,376)
Total operating expenses ....... 8,211 434 8,645
Segment profitability (loss) ... $(12,590) $ (1,431) $(14,021)

2001:

Total revenue .................. $ 134 $ 17,223 $ 17,357
Total cost of revenue .......... 9,427 14,109 23,536
Gross margin (loss) ............ (9,293) 3,114 (6,179)
Total operating expenses ....... 18,858 7,179 26,037
Segment profitability (loss) ... $(28,151) $ (4,065) $(32,216)

A reconciliation of segment operating expenses to total operating expense
follows:

2003 2002 2001
-------- -------- --------
Segment operating expenses ...... $ 5,255 $ 8,645 $ 26,037
Amortization of intangible assets -- -- 6,259
Write-off of intangible assets .. -- -- 7,929
(Gain)Loss on disposal of assets 415 461 (6,345)
Restructuring, net .............. (834) 1,300 8,650
-------- -------- --------
Total operating expenses ........ $ 4,836 $ 10,406 $ 42,530
======== ======== ========

A reconciliation of total segment profitability to net loss for the fiscal
years ended December 31:

2003 2002 2001
-------- -------- --------

Total segment profitability (loss) ....... $(10,158) $(14,021) $(32,216)
Amortization of intangible assets ........ -- -- (6,259)
Impairment of intangible assets .......... -- -- (7,929)
Gain/(loss) on disposal of assets ........ (415) (461) 6,345
Restructuring ............................ 834 (1,300) (8,650)
Interest and other income/(expense), net . (135) 2,485 (8,850)
-------- -------- --------
Net loss before provision for income taxes $ (9,874) $(13,297) $(57,559)
======== ======== ========

F-28

The following table presents a summary of long-lived assets by segment as of
December 31:

2003 2002
------ ------
Desktop Integration .......................... $4,089 $8,096
Messaging/Application Engineering ............ -- 62
------ ------

Total assets ................................. $4,089 $8,158
====== ======

The following table presents a summary of revenue by geographic region for the
years ended December 31:

2003 2002 2001
------- ------- -------
Australia ................ $ -- $ -- $ 141
Denmark .................. 32 20 2,333
France ................... -- 7 30
Germany .................. -- 35 757
Israel ................... -- 4 659
Italy .................... 18 32 813
Norway ................... -- 1 491
Switzerland .............. -- -- 667
United Kingdom ........... -- 13 1,929
USA ...................... 476 2,989 6,402
Other .................... 4 -- 3,135
------- ------- -------

$ 530 $ 3,101 $17,357
======= ======= =======

Presentation of revenue by region is based on the country in which the customer
is domiciled. As of December 31, 2003 and 2002, all of the long-lived assets of
the Company are located in the United States. The Company reimburses the
Company's foreign subsidiaries for their costs plus an appropriate mark-up for
profit. Intercompany profits and losses are eliminated in consolidation.

NOTE 16. RELATED PARTY INFORMATION

Liraz Systems Ltd. guarantees certain debt obligations of the Company. In
November 2003, the Company and Liraz agreed to extend the guarantee and with the
approval of the lender, agreed to extend the maturity of the debt obligation
until November 8, 2004. The Company issued 150,000 shares of common stock to
Liraz in exchange for this debt extension and will issue additional stock on
March 31, 2004, June 30, 2004 and September 30, 2004 unless the debt is repaid
before those dates. (See Note 8.)

From time to time during 2003, the Company entered into short term notes payable
with Anthony Pizi, the Company's Chairman and Chief Executive Officer. The Notes
bear interest at 1% per month and are unsecured. At December 31, 2003, the
Company was indebted to Mr. Pizi in the amount of $85. In January 2004, the
Company repaid Mr. Pizi $75.

On December 26, 2003, the Company entered into a short term note payable with
Mark Landis who is related by marriage to Anthony Pizi, the Company's Chairman
and Chief Executive Officer. The note, in the amount of $125, bears interest at
1% per month and is convertible into common stock of the Company at a conversion
rate of $0.32 per share.

In October 2001, the Company sold its AppBuilder assets to BluePhoenix (a wholly
owned subsidiary of Liraz) for $19,000 cash, a note receivable of $1,000 and of
payment for net assets of $350. See Note 2.

Liraz paid the salaries and expenses of certain company employees and was
reimbursed by the Company. Salaries and expenses paid by Liraz amounted to $67
during 2001.

F-29

NOTE 17. RESTRUCTURING CHARGES

As part of the Company's plan to focus on the emerging desktop integration
marketplace with its new Cicero product, the Company completed substantial
restructurings in 2002 and 2001. At December 31, 2002, the Company's accrual for
restructuring was $772, which was primarily comprised of excess facility costs.
As more fully discussed in Note 20 Contingencies, subsequent to September 30,
2003, the Company settled litigation relating to these excess facilities.
Accordingly, the Company has reversed the restructuring balance, as of September
30, 2003. Under the terms of the settlement agreement, the Company agreed to
assign the note receivable from the sale of Geneva to EM Software Solutions,
Inc., (see Note 2 Dispositions), with recourse equal to the unpaid portion of
the note receivable should the note obligor, EM Software Solutions, Inc.,
default on future payments. The current unpaid principal portion of the note
receivable assigned is approximately $545 and matures December 2007. The Company
assessed the probability of liability under the recourse provisions using a
probability weighted cash flow analysis and has recognized a long-term liability
in the amount of $131.

During the second quarter of 2002, the Company announced an additional round of
restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closure of the Company's
Berkeley, California facility as well as a significant reduction in the
Company's European personnel.

During the first quarter of 2001, the Company announced and began implementation
of an initial operational restructuring. The Company recorded restructuring
charges of $6,650 during the quarter ended March 31, 2001 and an additional
charge of $2,000 for the quarter ended June 30, 2001. Restructuring charges have
been classified in "Restructuring" on the consolidated statements of operations.
These operational restructuring involved the reduction of employee staff
throughout the Company in all geographical regions in sales, marketing,
services, development and all administrative functions.

The overall restructuring plan included the termination of 236 employees. The
plan included a reduction of 107 personnel in the European operations and 129
personnel in the US operations. Employee termination costs were comprised of
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits did not include any amounts for
employment-related services prior to termination.

NOTE 18. FUNDED RESEARCH AND DEVELOPMENT

In July 2001, the Company and a significant customer entered into a multi-year
agreement to fund the development of the next generation of Level 8's Geneva
Enterprise Integrator and Geneva Business Process Automator software. The terms
of the agreement provided $6,500 in funding for research and development for 18
months in exchange for a future fully paid and discounted licensing arrangement.
In May 2002, the Company and Amdocs Ltd. agreed to terminate the funded
development agreement and enter into a non-exclusive license to develop and sell
its Geneva J2EE technology. Under the terms of the agreement to terminate the
funded research and development program, Amdocs Ltd. assumed full responsibility
for the development team of professionals located in the Company's Dulles,
Virginia facility. The Geneva products comprised the Systems Integration segment
and were subsequently identified as being held for sale. Accordingly, the
Company reclassified the Systems Integration segment to discontinued operations.
The business was eventually sold to EM Software Solutions, Inc, in December
2002.

NOTE 19. 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,
2003 were as follows:

Lease
Commitments
-----------
2004 ................................................ $214
2005 ................................................ 221
2006 ................................................ 84
----
$519
====

F-30

Rent expense for the years ended December 31, 2003, 2002 and 2001 was $586,
$2,980 and $1,835, respectively. Sublease income was $241, $2,487 and $221 for
the fiscal years ended December 31, 2003, 2002 and 2001, respectively. As of
December 31, 2003, the Company had no sublease arrangements.

NOTE 20. CONTINGENCIES

Various lawsuits and claims have been brought against the Company in the normal
course of business. In January 2003, an action was brought against the Company
in the Circuit Court of Loudon County Virginia for a breach of a real estate
lease. The case was settled in August 2003. Under the terms of the settlement
agreement, the Company agreed to assign a note receivable with recourse equal to
the unpaid portion of the note should the note obligor default on future
payments. The unpaid balance of the note being transferred was $545 and matures
in December 2007. The Company assessed the probability of liability under the
recourse provisions using a weighted probability cash flow analysis and has
recognized a long-term liability in the amount of $131.

In October 2003, the Company was served with a summons and complaint regarding
unpaid invoices for services rendered to the Company by one of its vendors. The
amount in dispute is approximately $200 and is included in accounts payable.

Subsequent to 2003, the Company has been served with an additional summons and
complaint regarding a security deposit for a sublease in Virginia. The amount in
dispute is approximately $247. The Company disagrees with this allegation
although it has reserved for this contingency.

Under the indemnification clause of the Company's standard reseller agreements
and software license agreements, the Company agrees to defend the
reseller/licensee against third party claims asserting infringement by the
Company's products of certain intellectual property rights, which may include
patents, copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee.

F-31

NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003:

Net revenues ............................................... $ 143 $ 177 $ 113 $ 97
Gross profit/(loss) ........................................ (1,037) (968) (1,734) (1,164)
Net loss from continuing operations ........................ (2,974) (2,424) (2,468) (2,008)
Net loss discontinued operations ........................ (46) (20) (58) (8)
Net loss ................................................... (3,020) (2,444) (2,526) (2,016)
Net loss/share continued operations - basic and diluted . $ (0.19) $ (0.12) $ (0.12) $ (0.11)
Net loss/share discontinued operations -- basic and diluted -- -- -- --
Net loss/share -basic and diluted ....................... $ (0.19) $ (0.12) $ (0.12) $ (0.11)

2002:
Net revenues ............................................... $ 446 $ 630 $ 823 $ 1,202
Gross profit/(loss) ........................................ (3,548) (1,749) (422) 343
Net loss from continuing operations ........................ (5,409) (5,062) (1,948) (723)
Net loss discontinued operations ........................ (676) (5,481) 484 633
Net loss ................................................... (6,085) (10,543) (1,464) (90)
Net loss/share continued operations - basic and diluted . $ (0.29) $ (0.26) $ (0.12) $ (0.07)
Net loss/share discontinued operations -- basic and diluted $ (0.04) $ (0.29) $ 0.03 $ 0.03
Net loss/share -basic and diluted ....................... $ (0.33) $ (0.55) $ (0.09) $ (0.04)

NOTE 22. SUBSEQUENT EVENTS

In January 2004, the Company acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail, a federally
certified encryption software company. Under the terms of the purchase
agreement, the Company issued 2,027,027 shares of common stock at a price of
$0.37. The total purchase price of the assets and certain liabilities being
acquired was $750 and has been accounted for by the purchase method of
accounting. The Company agreed to register the common stock for resale under the
Securities Act of 1933, as amended.

Also in January 2004, and simultaneously with the asset purchase of Critical
Mass Mail, Inc., the Company completed a common stock financing round wherein it
raised $1,247 of capital from several new investors as well as certain investors
of Critical Mass Mail, Inc. The Company sold 3,369,192 shares of common stock at
a price of $0.37 per share. As part of the financing, the Company has also
issued warrants to purchase 3,369,192 shares of the Company's common stock at an
exercise price of $0.37. The warrants expire three years from the date of grant.
The Company also agreed to register the common stock and the warrants for resale
under the Securities Act of 1933, as amended.

F-32

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

MARCH 31, DECEMBER 31,

2004 2003

ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 122 $ 19
Cash held in escrow .................................................... 777 776
Assets of operations to be abandoned ................................... 137 149
Trade accounts receivable, net ......................................... 13 12
Prepaid expenses and other current assets .............................. 146 270
--------- ---------
Total current assets ....................................... 1,195 1,226
Property and equipment, net ............................................. 23 26
Software product technology, net ........................................ 3,622 4,063
Other assets ............................................................ 47 47
--------- ---------
Total assets ............................................... $ 4,887 $ 5,362
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Short-term debt ......................................................... $ 2,456 $ 2,625
Accounts payable ........................................................ 2,487 2,545
Accrued expenses:
Salaries, wages, and related items ................................... 668 508
Other ................................................................ 1,616 1,613
Liabilities of operations to be abandoned ............................... 442 451
Deferred revenue ........................................................ 180 39
--------- ---------
Total current liabilities .................................. 7,849 7,781
Long-term debt .......................................................... 131 131
Warrant liability ....................................................... 179 198
Senior convertible redeemable preferred stock ........................... 2,692 3,355
Stockholders' equity (deficit):
Preferred Stock ................................................. -- --
Common Stock ....................................................... 35 27
Additional paid-in-capital ......................................... 208,915 206,149
Accumulated other comprehensive loss ............................... (5) (6)
Accumulated deficit ................................................ (214,909) (212,273)
--------- ---------
Total stockholders' equity (deficit) ....................... (5,964) (6,103)
--------- ---------
Total liabilities and stockholders' equity (deficit) ....... $ 4,887 $ 5,362
========= =========

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

F-33

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------

Revenue:
Software ............................................................ $ 10 $ 36
Maintenance ......................................................... 73 83
Services ............................................................ -- 24
-------- --------
Total operating revenue ....................................... 83 143

Cost of revenue:
Software ............................................................ 719 837
Maintenance ......................................................... 104 92
Services ............................................................ 280 251
-------- --------
Total cost of revenue ......................................... 1,103 1,180

Gross margin (loss) ................................................... (1,020) (1,037)

Operating expenses:
Sales and marketing ................................................. 335 551
Research and product development .................................... 312 253
General and administrative .......................................... 471 784
Loss on disposal of assets .......................................... -- 487
Impairment of intangible assets ..................................... 587 --
-------- --------
Total operating expenses ...................................... 1,705 2,075
-------- --------
Loss from operations .................................................. (2,725) (3,112)

Other income (expense):
Interest income ..................................................... 1 18
Interest expense .................................................... (39) (47)
Change in fair value of warrant liability ........................... 19 148
Other income ........................................................ 117 19
-------- --------
Loss before provision for income taxes ................................ (2,627) (2,974)
Income tax provision ................................................ -- --
-------- --------

Loss from continuing operations ....................................... (2,627) (2,974)
Loss from discontinued operations ..................................... (9) (46)
-------- --------
Net loss .............................................................. $ (2,636) $ (3,020)
======== ========

Loss per share from continuing operations--basic and diluted .......... (0.09) (0.19)

Loss per share from discontinued operations-basic and diluted ......... (0.00) (0.00)
-------- --------
Net loss per share applicable to common shareholders--basic and diluted $ (0.09) $ (0.19)
======== ========

Weighted average common shares outstanding -- basic and diluted ...... 30,727 19,233

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

F-34

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
2004 2003
------- -------
Cash flows from operating activities:

Net loss ........................................................................... $(2,636) $(3,020)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................... 657 815
Change in fair value of warrant liability ........................................ (19) (148)
Stock compensation expense ....................................................... 61 10
Impairment of intangible assets .................................................. 587 --
Provision for doubtful accounts .................................................. (8) 39
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Trade accounts receivable and related party receivables ........................ 7 1,249
Assets & liabilities - discontinued operations ................................. 3 606
Prepaid expenses and other assets .............................................. 186 (13)
Accounts payable and accrued expenses .......................................... 45 (968)
Deferred revenue ............................................................... 141 (85)
------- -------
Net cash used in operating activities ........................................ (976) (1,515)
Cash flows from investing activities:
Repayment of note receivable ....................................................... -- 764
Cash held in escrow ................................................................ -- (1,775)
------- -------
Net cash used in - investing activities ...................................... -- (1,011)
Cash flows from financing activities:
Proceeds from issuance of common shares, net of issuance costs ..................... 1,247 --
Proceeds from issuance of preferred shares ......................................... -- 3,455
Borrowings under credit facility, term loans and notes payable ..................... 100 --
Repayments of term loans, credit facility and notes payable ........................ (269) (396)
------- -------
Net cash provided by financing activities .................................... 1,078 3,059
Effect of exchange rate changes on cash .............................................. 1 (70)
Net increase in cash and cash equivalents ............................................ 103 463
Cash and cash equivalents:
Beginning of period ................................................................ 19 199
------- -------
End of period ...................................................................... $ 122 $ 662
======= =======

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

F-35

LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
2004 2003
------- -------
Net loss ................................. $(2,636) $(3,020)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 1 (70)
------- -------
Comprehensive loss ....................... $(2,635) $(3,090)
------- -------

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

F-36

LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)

NOTE 1. INTERIM FINANCIAL STATEMENTS

The accompanying financial statements are unaudited, and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles of the United States of America have been condensed or omitted
pursuant to those rules and regulations. Accordingly, these interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in the Level 8 Systems, Inc.'s (the "Company")
Annual Report on Form 10-K for the year ended December 31, 2003. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results to be expected for other interim periods or for the full
fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary for a fair statement of the interim results
of operations. All such adjustments are of a normal, recurring nature. Certain
reclassifications have been made to the prior year amounts to conform to the
current year presentation.

The year-end condensed balance sheet data was derived from audited financial
statements in accordance with the rules and regulations of the SEC, but does not
include all disclosures required for financial statements prepared in accordance
with generally accepted accounting principles of the United States of America.

The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All of the Company's subsidiaries are wholly owned
for the periods presented.

LIQUIDITY

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred a loss of
$10,006 and $18,182 in the past two years and has experienced negative cash
flows from operations for each of the past three years. For the quarter ended
March 31, 2004, the Company incurred a loss of $2,636 and had a working capital
deficiency of $6,654. The Company's future revenues are largely dependent on
acceptance of a newly developed and marketed product, Cicero, which has had
limited success in commercial markets to date. Accordingly, there is substantial
doubt that the Company can continue as a going concern. In order to address
these issues and to obtain adequate financing for the Company's operations for
the next twelve months, the Company is actively promoting and expanding its
Cicero related product line and continues to negotiate with significant
customers that have begun or finalized the "proof of concept" stage with the
Cicero technology. The Company is experiencing difficulty increasing sales
revenue largely because of the inimitable nature of the product as well as
customer concerns about the financial viability of the Company. The Company is
attempting to solve the former problem by improving the market's knowledge and
understanding of Cicero through increased marketing and leveraging its limited
number of reference accounts. The Company is attempting to address the financial
concerns of potential customers by pursuing strategic partnerships with
companies that have significant financial resources although the Company has not
experienced significant success to date with this approach. Additionally, the
Company is seeking additional equity capital or other strategic transactions in
the near term to provide additional liquidity. There can be no assurance that
management will be successful in executing these strategies as anticipated or in
a timely manner or that increased revenues will reduce further operating losses.
If the Company is unable to significantly increase cash flow or obtain
additional financing, it will likely be unable to generate sufficient capital to
fund operations for the next twelve months and may be required to pursue other
means of financing that may not be on terms favorable to the Company or its
stockholders. These factors among others may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.

The financial statements presented herein do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
As discussed in Notes 3 and 8, the Company recently completed a private
placement of its common stock wherein it raised $1,247 of new capital.
Management expects that it will be able to raise additional capital and to
continue to fund operations and also expects that increased revenues will reduce
its operating losses in future periods, however, there can be no assurance that
management's plan will be executed as anticipated.

F-37

USE OF ACCOUNTING ESTIMATES

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. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method required by SFAS No.
123, the Company's net loss and diluted net loss per common share would have
been the pro forma amounts indicated below.

THREE MONTHS ENDED MARCH 31,
2004 2003
------- -------
(unaudited)

Net loss applicable to common stockholders ................. $(2,636) $(3,020)
Less: Total stock-based employee compensation expense under
fair value based method for all awards, net of related tax
effects .................................................... (332) (202)
------- -------
Pro forma loss applicable to common stockholders ........... $(2,968) $(3,222)
======= =======
Earnings per share:

Basic and diluted, as reported ............................. $ (0.09) $ (0.19)
Basic and diluted, pro forma ............................... $ (0.10) $ (0.20)

Expected life (in years)................ 4.36 years
Expected volatility..................... 113.17%
Risk free interest rate................. 4.00%
Expected dividend yield................. 0%

The following table sets forth certain information as of March 31, 2004, about
shares of Common Stock outstanding and available for issuance under the
Company's existing equity compensation plans: the Level 8 Systems, Inc. 1997
Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan and the Outside
Director Stock Option Plan. The Company's stockholders approved all of the
Company's Equity Compensation Plans.

SHARES
-----------
Outstanding on January 1, 2004 ....................... 5,625,878
Granted .............................................. 2,557,754
Exercised ............................................ (47,754)
Forfeited ............................................ (485,008)
Outstanding on March 31, 2004 ........................ 7,650,870

Weighted average exercise price of outstanding options $ 1.12
Shares available for future grants on March 31, 2004 . 2,038,319

F-38

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 or FIN 46 "Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". In October 2003, the FASB
issued FASB Staff Position FIN 46-6, "Effective Date of FASB Interpretation No.
46, Consolidation of Variable Interest Entities" deferring the effective date
for applying the provisions of FIN 46 for public entities' interests in variable
interest entities or potential variable interest entities created before
February 1, 2003 for financial statements of interim or annual periods that end
after December 15, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities that function to support the
activities of the primary beneficiary. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities." This
revised interpretation is effective for all entities no later than the end of
the first reporting period that ends after March 15, 2004. The Company has no
investment in or contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of this interpretation did
not have any impact on its consolidated financial position or results of
operations. However, if the Company enters into any such arrangement with a
variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company's consolidated financial position or results of
operations might be materially impacted.

NOTE 3. ACQUISITIONS

In January 2004, the Company acquired certain and liabilities of Critical Mass
Mail, Inc., d/b/a Ensuredmail, a federally certified encryption software
company. The Company has classified this acquisition in the Messaging and
Application segment. Under the terms of the purchase agreement, the Company
issued 2,027,027 shares of common stock at a price of $0.37. The total purchase
price of the assets and certain liabilities being acquired was $750, plus
certain liabilities and has been accounted for by the purchase method of
accounting. The Company agreed to register the common stock for resale under the
Securities Act of 1933, as amended.

The purchase price of $800 was allocated to software technology acquired valued
at $213 of which $168 is remaining and accrued expenses of $50 based on the
Company's estimates of fair value at the acquisition date. The Company assessed
the net realizable value of the Ensuredmail software technology acquired. The
purchase price exceeded the amounts allocated to the software technology and
liabilities acquired by approximately $587. This excess of the purchase price
over the fair values of the assets acquired less liabilities assumed was
allocated to goodwill and charged to the Statement of Operations for the period
ended March 31, 2004. The results of operation are included in the Company's
consolidated statements of operations as of and since January 9, 2004, the
effective date of the acquisition. Pro forma results of operations have not been
presented because the effects of the acquisition was not material to the
consolidated results of operations.

NOTE 4. SOFTWARE PRODUCT TECHNOLOGY

As noted above, in January 2004, the Company acquired substantially all of the
assets assumed and certain liabilities of Critical Mass Mail, Inc., d/b/a
Ensuredmail. The purchase price of the assets, net of certain liabilities, was
$750. The Company has assessed the net realizable value of the Ensuredmail
software technology acquired. The purchase price exceeded the amounts allocated
to the software technology and liabilities assumed by approximately $587. This
excess of the purchase price over the fair values of the assets acquired less
liabilities assumed was allocated to goodwill and charged to the Statement of
Operations for the period ended March 31, 2004. Software technology acquired
will be amortized over three years.

Amortization expense for the three months ended March 31, 2003 and 2004 was
respectively $775 and $654. Estimated amortization expense for the next five
years is as follows:

2004 (remaining 9 months) $1,873
2005 1,685
2006 59
2007 5
2008 --

F-39

NOTE 5. RESTRUCTURING CHARGES

At March 31, 2003, the Company's accrual for restructuring was $633, which was
primarily comprised of excess facility costs, which the Company believed
represented its remaining cash obligations for the restructuring changes.
Subsequent to September 30, 2003, the Company settled litigation relating to
these excess facility costs. Accordingly, the Company reversed the restructuring
balance during the fourth quarter of 2003. Under the terms of the settlement
agreement, the Company agreed to assign the note receivable from the sale of
Geneva to EM Software Solutions, Inc., with recourse equal to the unpaid portion
of the note receivable should the note obligor, EM Software Solutions, Inc.,
default on future payments. The unpaid principal portion of the note receivable
assigned was approximately $463 and matures December 2007. The Company assessed
the probability of liability under the recourse provisions using a probability
weighted cash flow analysis and has recognized a long-term liability in the
amount of $131.

NOTE 6. SHORT TERM CONVERTIBLE NOTES

Also in March 2004, the Company entered into convertible loan agreements with
two other individual investors, each in the face amount of $50. Under the terms
of the agreement, each loan is convertible into 135,135 shares of our common
stock and warrants to purchase 135,135 shares of our common stock at $0.37 per
share. The warrants expire in three years.

These obligations are included in Short-term debt on the Company's Balance Sheet
as of March 31, 2004.

NOTE 7. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK

On March 19, 2003, the Company completed a $3,500 private placement of Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock"), convertible
at a conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share ("Series D-1 Warrants"). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise ("Series D-2 Warrants"). The Series D-2 Warrants became exercisable on
November 1, 2003 because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company's capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in the allocation of $2,890 to the Series D Preferred Stock and $640
to the detachable warrants. Based upon the allocation of the proceeds, the
Company determined that the effective conversion price of the Series D Preferred
Stock was less than the fair value of the Company's common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because the Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.

As part of the financing, the Company and the lead investors have agreed to form
a joint venture to exploit the Cicero technology in the Asian market. The terms
of the agreement required that the Company deposit $1,000 of the gross proceeds
from the financing into escrow to fund the joint venture. The escrow agreement
allows for the immediate release of funds to cover organizational costs of the
joint venture. During the quarter ended March 31, 2003, $225 of escrowed funds
was released. Since the joint venture was not formed and operational on or by
July 17, 2003, the lead investors have the right, but not the obligation, to
require the Company to purchase $1,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses. The Company and the lead investor have mutually agreed to extend the
escrow release provisions until May 31, 2004.

F-40

Another condition of the financing required the Company to place an additional
$1,000 of the gross proceeds into escrow, pending the execution of a definitive
agreement with Merrill Lynch providing for the sale of all rights, title and
interest to the Cicero technology. Since a transaction with Merrill Lynch for
the sale of Cicero was not consummated by May 18, 2003, the lead investors have
the right, but not the obligation, to require the Company to purchase $1,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
During the second quarter of 2003, $390 of escrowed funds was released. In
addition, the Company and the lead investor agreed to extend the escrow release
provisions until the end of July 2003 when all remaining escrow monies were
released to the Company.

NOTE 8. STOCKHOLDERS EQUITY

As described in Note 3, Acquisitions, in January 2004, the Company acquired
substantially all of the assets and assumed certain liabilities of Critical Mass
Mail, Inc., d/b/a Ensuredmail, a federally certified encryption software
company. Under the terms of the purchase agreement, the Company issued 2,027,027
shares of common stock at a price of $0.37 per share. The total purchase price
of the assets acquired and liabilities assumed, was $750 and has been accounted
for by the purchase method of accounting.

Also in January 2004, and simultaneously with the asset purchase of Critical
Mass Mail, Inc., the Company completed a Securities Purchase Agreement with
several new investors as well as certain investors of Critical Mass Mail, Inc.,
wherein the Company raised $1,247 through the sale of 3,369,192 shares of common
stock at a price of $0.37 per share. As part of the financing, the Company has
also issued warrants to purchase 3,369,192 shares of the Company's common stock
at an exercise price of $0.37. The warrants expire three years from the date of
grant.

NOTE 9. INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company's
effective tax rate differs from the statutory rate primarily due to the fact
that no income tax benefit was recorded for the net loss for the first quarter
of fiscal year 2004 or 2003. Because of the Company's recurring losses, the
deferred tax assets have been fully offset by a valuation allowance.

NOTE 10. LOSS PER SHARE

Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted loss per share is computed based upon the
weighted average number of common shares outstanding and any potentially
dilutive securities. Potentially dilutive securities outstanding during the
periods presented include stock options, warrants and preferred stock.

The following table sets forth the reconciliation of net loss to loss available
to common stockholders:

THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------

Net loss, as reported ................................... $ (2,636) $ (3,020)
Accretion of preferred stock ............................ -- 640
-------- --------
Loss applicable to common stockholders, as adjusted ..... $ (2,636) $ (3,660)
======== ========

Basic and diluted loss per share:
Loss per share continuing operations ............... $ (0.09) $ (0.19)
Loss per share discontinued operations ............. -- --
-------- --------
Net loss per share applicable to common shareholders $ (0.09) $ (0.19)

Weighted common shares outstanding - basic and diluted 30,727 19,233

F-41

The following table sets forth the potential shares that are not included in the
diluted net loss per share calculation because to do so would be anti-dilutive
for the periods presented:

MARCH 31,
2004 2003
---------- ----------
Stock options, common share equivalent . 7,650,870 4,982,028
Warrants, common share equivalent ...... 14,295,898 9,957,579
Preferred stock, common share equivalent 14,062,136 18,695,440
---------- ----------
36,008,904 33,635,047
========== ==========

Accretion of the preferred stock arises as a result of the beneficial conversion
feature realized in the sale of preferred stock.

NOTE 11. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

Management makes operating decisions and assesses performance of the Company's
operations based on the following reportable segments: Desktop Integration
segment and Messaging and Application Engineering segment.

The principal product in the Desktop Integration segment is Cicero. Cicero is a
business integration software product that maximizes end-user productivity,
streamlines business operations and integrates disparate systems and
applications.

The products that comprise the Messaging and Application Engineering segment is
Geneva Integration Broker and the encryption technology products, Email
Encryption Gateway, Software Development Kit (SDK), Digital Signature Module,
Business Desktop, and Personal Desktop.

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 and other
income/(expense), taxes, and in-process research and development.

While segment profitability should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with accounting
principles generally accepted in the United States of America, it is included
herein to provide additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
Segment profitability is not necessarily a measure of our ability to fund our
cash needs. The non-GAAP measures presented may not be comparable to similarly
titled measures reported by other companies.

The table below presents information about reported segments for the three
months ended March 31, 2004 and 2003:

MESSAGING AND
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
----------- ----------- -----
2004:
Total revenue ........................ $ 77 $ 6 $ 83
Total cost of revenue ................ 1,058 45 1,103
Gross margin (loss) .................. (981) (39) (1,020)
Total operating expenses ............. 988 130 1,118
Segment profitability (loss) ......... $(1,969) $ (169) $(2,138)

F-42

A reconciliation of total segment operating expenses to total operating expenses
for the quarters ended March 31:

THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
------ ------
Total segment operating expenses ............. $1,118 $1,588
Loss on disposal of assets ................... -- 487
Impairment of intangible assets .............. 587 --
------ ------
Total operating expenses ..................... $1,705 $2,075
====== ======

A reconciliation of total segment profitability (loss) to loss before provision
for income taxes for the quarters ended March 31:

THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
------- -------
Total segment profitability (loss) ........... $(2,138) $(2,625)
Change in fair value of warrant liability .... 19 148
Loss on disposal of assets ................... -- (487)
Impairment of intangible assets .............. (587) --
Interest and other income/(expense), net ..... 79 (10)
------- -------
Total loss before income taxes ............... $(2,627) $(2,974)
======= =======

The following table presents a summary of assets by segment:

MARCH 31,
----------------------
2004 2003
------ ------
Desktop Integration ............................ $3,477 $7,312
Messaging and Application Engineering .......... 168 31
------ ------
Total assets ................................... $3,645 $7,343
====== ======

NOTE 12. CONTINGENCIES

Litigation. Various lawsuits and claims have been brought against the Company in
the normal course of business. In October 2003, the Company was served with a
summons and complaint in Superior Court of North Carolina regarding unpaid
invoices for services rendered to the Company by one of its vendors. The amount
in dispute is approximately $200 and is included in accounts payable. Subsequent
to March 31, 2004, this litigation was settled. Under the terms of the
settlement agreement, the Company agreed to pay a total of $189 plus interest
over a nineteen month period ending November 15, 2005.

In March 2004, the Company was served with a summons and complaint in Superior
Court of North Carolina regarding a security deposit for a sublease in Virginia.
The amount in dispute is approximately $247. The Company disagrees with this
allegation although it has reserved for this contingency.

Under the indemnification clause of the Company's standard reseller agreements
and software license agreements, the Company agrees to defend the
reseller/licensee against third party claims asserting infringement by the
Company's products certain intellectual property rights, which may include
patents, copyrights, trademarks or trade secrets, and to pay any judgements
entered on such claims against the reseller/licensee.

NOTE 13. SUBSEQUENT EVENTS

On April 12, 2004, the Company entered into a short term note payable with
Anthony Pizi, the Company's Chairman and Chief Executive Officer. The note, in
the face amount of $100, bears interest at 1% per month and is convertible into
common stock of the Company at a conversion rate of $0.37 per share. In
addition, Mr. Pizi was granted 270,270 warrants to purchase the Company's common
stock at $0.37 per share. These warrants expire three years from the date of
grant.

F-43

PART II INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses to be paid in
connection with the common stock being registered, all of which will be paid by
Level 8 Systems, Inc. (on behalf of itself and the selling stockholders) in
connection with this offering. All amounts are estimates except for the
registration fee.

SEC Registration Fee ..................... $ 548
Accounting Fees and Expenses ............. 20,000
Legal Fees and Expenses .................. 30,000
Miscellaneous ............................ 1,452
Total .................................... $52,000

ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits
indemnification of directors, officers, employees and agents of corporations for
liabilities arising under the Securities Act of 1933, as amended.

The registrant's certificate of incorporation and bylaws provide for
indemnification of the registrant's directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law. Statutory
Provisions Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to eliminate or limit the
personal liability of members of its board of directors to the corporation or
its stockholders for monetary damages for violations of a director's fiduciary
duty of care. The provision would have no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. In addition, no provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, failing to act in good faith,
engaging in intentional misconduct or knowingly violating a law, paying an
unlawful dividend or approving an illegal stock repurchase, or obtaining an
improper personal benefit.

Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. No indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for expenses which the court shall deem proper. Additionally, a
corporation is required to indemnify its directors and officers against expenses
to the extent that the directors or officers have been successful on the merits
or otherwise in any action, suit or proceeding or in defense of any claim, issue
or matter.

An indemnification can be made by the corporation only upon a
determination that indemnification is proper in the circumstances because the
party seeking indemnification has met the applicable standard of conduct as set
forth in the Delaware General Corporation Law. The indemnification provided by
the Delaware General Corporation Law shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise. A
corporation also has the power to purchase and maintain insurance on behalf of
any person, whether or not the corporation would have the power to indemnify him
against such liability. The indemnification provided by the Delaware General
Corporation Law shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of the person. The Company's certificate of incorporation limits a director's
liability for monetary damages to our company and our stockholders for breaches
of fiduciary duty except under the circumstances outlined in the Delaware
General Corporation Law as described above.

II-1

The registrant's certificate of incorporation extends indemnification
rights to the fullest extent authorized by the Delaware General Corporation Law
to directors and officers involved in any action, suit or proceeding where the
basis of the involvement is the person's alleged action in an official capacity
or in any other capacity while serving as a director or officer of the
registrant.

ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES

In April 2004, we entered into a convertible loan agreement with Anthony
Pizi, the Company's Chairman and Chief Executive Officer in the amount of
$100,000. Under the terms of the agreement, the loan is convertible into 270,270
shares of our common stock and warrants to purchase 270,270 shares of our common
stock exercisable at $0.37. The warrants expire in three years. These shares are
being issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.

On March 1, 2004, we entered into a consulting services agreement with Mr.
Ralph F. Martino. Under the terms of the agreement, the Company agreed to issue
66,667 shares per month, up to an aggregate of 200,001 shares of our common
stock, as compensation for services rendered over the following three month
period. These shares are being issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.

On March 1, 2004, we entered into a reseller/consulting agreement with
Pyxislink. Under the terms of the agreement, we agreed to issue warrants to
purchase 25,000 shares of our common stock quarterly, over the next four
quarters. The warrants are exercisable for five years from the issue date and
the exercise price is $0.38 per share. These shares are being issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 for transactions by an issuer not involving a public offering.

In January 2004, the Company acquired substantially all of the assets and
certain liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail, a federally
certified encryption software company. Under the terms of the purchase
agreement, Level 8 issued 2,027,027 shares of common stock at a price of $0.37.
These shares were issued in reliance upon the exemption from registration under
Rule 506 of Regulation D and on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.

Also in January 2004, and simultaneously with the asset purchase of
Critical Mass Mail, Inc., the Company completed a common stock financing round
wherein it raised $1,247 of capital from several new investors as well as
certain investors of Critical Mass Mail, Inc. The Company sold 3,369,192 shares
of common stock at a price of $0.37 per share. As part of the financing, the
Company has also issued warrants to purchase 3,369,192 shares of the Company's
common stock at an exercise price of $0.37. The warrants expire three years from
the date of grant. These shares were issued in reliance upon the exemption from
registration under Rule 506 of Regulation D and on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.

On March 19, 2003, the Company completed a $3.7 million private placement
of Series D Convertible Preferred Stock ("Series D Preferred Stock"),
convertible at a conversion ratio of $0.32 per share of common stock into an
aggregate of 11,578,125 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 4,364,952 shares of
common stock at an exercise price of $0.07 per share ("Series D-1 Warrants").
The Company is also obligated to issue warrants to purchase an aggregate of
1,748,298 shares of common stock at an exercise price the greater of $0.20 per
share or market price at the time of issuance on or before September 1, 2003
("Series D-2 Warrants"). The Series D-2 Warrants will become exercisable on
November 1, 2003, but only if the Company fails to report $6 million in gross
revenues for the nine month period ended September 30, 2003. These shares were
issued in reliance upon the exemption from registration under Rule 506 of
Regulation D and on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 for transactions by an issuer not involving a public
offering.

On December 31, 2002, the Company issued an aggregate of 1,462,801
warrants to purchase common stock to the holders of Series A3 Preferred Stock
and Series B3 Preferred Stock. These shares were issued pursuant to our
agreement with such stockholders to issue warrants upon the closing of the sale
of Series C Preferred Stock on August 14, 2002. The warrants are exercisable at
$0.40 per share and are exercisable for 5 years. Such warrants were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, for transactions by an issuer not involving
a public offering. The Company did not receive proceeds from the issuance of the
warrants. When the warrants are exercised, the Company expects to use the
proceeds from the exercise for general corporate purposes.

II-2

On October 25, 2002, the Company effected an exchange of all of our
outstanding shares of Series A2 Convertible Redeemable Preferred Stock ("Series
A2 Preferred Stock") and Series B2 Convertible Redeemable Preferred Stock
("Series B2 Preferred Stock") and related warrants for an equal number of shares
of newly created Series A3 Convertible Redeemable Preferred Stock ("Series A3
Preferred Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series
B3 Preferred Stock") and related warrants. This exchange was made to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002. The conversion price for the Series A3
Preferred Stock and the conversion price for the Series B3 Preferred Stock
remain the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.333 and $12.531, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock was increased from $0.38 to $0.40 per share which is a reduction
from the $1.77 exercise price of the warrants relating to the Series A1
Preferred Stock. The exercise price for the aggregate 1,047,382 warrants
relating to the Series B3 Preferred Stock was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercise price of the warrants
relating to the Series B1 Preferred Stock. The adjusted exercise price was based
on the closing price of the Company's Series C Convertible Redeemable Preferred
Stock and warrants on August 14, 2002, plus $0.02, to reflect accurate current
market value according to relevant Nasdaq rules. This adjustment was made as
part of the agreement under which the holders of the Company's Preferred Stock
agreed to waive their price-protection anti-dilution protections to allow the
Company to issue the Series C Preferred Stock and warrants without triggering
the price-protection anti-dilution provisions and excessively diluting its
common stock. The shares issued pursuant to the exchange agreement were issued
in reliance upon the exemption from registration provided by Section 3(a)(9) of
the Securities Act of 1933 for an exchange by an issuer with its exiting
security holders.

On August 29, 2002, the Company entered into an exchange agreement with
its existing preferred shareholders. Under the terms of the agreement, the
holders of the Series A1 and Series B1 4% convertible redeemable preferred stock
and related common stock warrants received an equal number of preferred shares
of the new Series A2 and Series B2 convertible redeemable preferred stock and
related warrants. The conversion price of both the Series A1 and Series B1
preferred stock remained the same. The exercise price for the warrants received
in the exchange was reduced to $0.38 per share. A total of 1,801,022 warrants
were exchanged. The shares issued pursuant to the exchange agreement were issued
in reliance upon the exemption from registration provided by Section 3(a)(9) of
the Securities Act of 1933 for an exchange by an issuer with its exiting
security holders.

On August 14, 2002, the Company completed a $1.6 million private placement
of Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"),
convertible at a conversion ratio of $0.38 per share of common stock into an
aggregate of 4,184,211 shares of common stock. As part of the financing, the
Company has also issued warrants to purchase an aggregate of 1,046,053 shares of
common stock at an exercise price of $0.38 per share. As consideration for the
$1.6 million private placement, the Company received approximately $1.4 million
in cash and allowed certain debt holders to convert approximately $200,000 of
debt to equity. The Chairman and CEO of the Company, Tony Pizi, converted
$150,000 of debt owed to Mr. Pizi into shares of Series C Preferred Stock and
warrants. Both existing and new investors participated in the financing. These
shares were issued in reliance upon the exemption from registration under Rule
506 of Regulation D and on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 for transactions by an issuer not involving a
public offering.

On June 27, 2002, the Company issued 60,901 shares of common stock to a
former executive officer of the company as part of a separation agreement. These
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.

On January 16, 2002, the Company issued 141,658 shares of common stock to
a former reseller of the company as part of a settlement agreement with that
company. Such shares were issued in reliance upon the exemption from
registration under Rule 506 of Regulation D and on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.

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On January 16, 2002, the Company entered into a Securities Purchase
Agreement with several investors wherein the Company agreed to sell up to three
million shares of its common stock and warrants. The common stock was valued at
$1.50 per share and warrants to purchase additional shares were issued with an
14 exercise price of $2.75 per share. This offering closed on January 16, 2002.
Of the 3,000,000 shares, the Company sold 2,381,952 shares of common stock for a
total of $3.5 million and granted 476,396 warrants to purchase the Company's
common stock at an exercise price of $2.75 per share. The warrants expire in
three years from the date of grant and have a call feature that forces exercise
if the Company's common stock exceeds $5.50 per share. These shares were issued
in reliance upon the exemption from registration under Rule 506 of Regulation D
and on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for transactions by an issuer not involving a public
offering.

On January 3, 2002, the Company entered into a purchase agreement with
MLBC, Inc., an affiliate of Merrill Lynch. Pursuant to the Purchase Agreement,
the Company issued 250,000 shares of its common stock to MLBC, Inc. These shares
were issued in reliance on the exemption from registration under Rule 506 of
Regulation D and on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 for transactions by an issuer not involving a public
offering.

In December 2001, the Company issued 141,658 shares of common stock to a
former reseller of the company as part of a settlement agreement with that
company. Such shares were issued in reliance upon the exemption from
registration under Rule 506 of Regulation D and on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.

In October 2001, the Company entered into an exchange agreement with its
existing preferred shareholders. Under the terms of the agreement, the holders
of the Series A and Series B 4% convertible redeemable preferred stock and
related common stock warrants received an equal number of preferred shares of
the new Series A1 and Series B1 convertible redeemable preferred stock and
related warrants. The conversion price of both the Series A1 and Series B1
preferred stock was reduced by 16.7% and 50% respectively, which increased the
number of shares of common stock to be issued upon conversion of the preferred
shares by 1,428,512 shares to a total of 3,782,519 shares. Additionally, the
exercise price for the warrants received in the exchange was reduced to $1.77
per share and the call prices have been reduced accordingly to $5.00 per share
for the Series A1 warrants and $7.50 per share for the Series B1 warrants. At
total of 1,801,022 warrants were exchanged. The shares issued pursuant to the
exchange agreement were issued in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Securities Act of 1933 for an exchange by an
issuer with its exiting security holders.

On May 21, 2001, the Company issued Arik Kilman, former CEO and Chairman
of the Company, 250,000 shares of common stock as part of Mr. Kilman's severance
agreement with the Company. Such shares were issued in reliance upon the
exemption from registration under Rule 506 of Regulation D and on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.

ITEM 16: EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

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.

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Exhibits

The exhibits listed under here below are filed as part of this Form S-1 :

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

2.1 Asset Purchase Agreement, dated as of December 13, 2002, by and
among Level 8 Systems, Inc., Level 8 Technologies, Inc. and
EMSoftware Solutions, Inc. (exhibits and schedules omitted but
will be furnished supplementally to the Securities and Exchange
Commission upon request) (incorporated by reference to exhibit
2.1 to Level 8's Form 8-K filed December 30, 2002).

3.1 Certificate of Incorporation of Level 8 Systems, Inc., a Delaware
corporation, as amended August 4, 2003 (incorporated by reference
to exhibit 3.1 to Level 8's Form 10-K filed March 30, 2004).

3.2 Bylaws of Level 8 Systems, Inc., a Delaware corporation
(incorporated by reference to exhibit 3.2 to Level 8's Form 10-K
filed April 2, 2002).

3.3 Certificate of Designations, Preferences and Rights dated March
19, 2003 relating to Series D Convertible Redeemable Preferred
Stock (incorporated by reference to exhibit 3.1 to Level 8's Form
8-K, filed March 31, 2003).

3.4 Certificate of Designation relating to Series A3 Convertible
Redeemable Preferred Stock. (incorporated by reference to exhibit
3.1 to Level 8's Form 10-Q filed November 15, 2002).

3.5 Certificate of Designation relating to Series B3 Convertible
Redeemable Preferred Stock. (incorporated by reference to exhibit
3.1 to Level 8's Form 10-Q filed November 15, 2002).

3.6 Certificate of designation relating to Series C Convertible
Redeemable Preferred Stock (incorporated by reference to exhibit
3.1 to Level 8's Form 8-K filed August 27, 2002).

4.1 Registration Rights Agreement dated as of March 19, 2003 by and
among Level 8 Systems, Inc. and the Purchasers listed on Schedule
I thereto relating to the Series D Convertible Redeemable
Preferred Stock (incorporated by reference to exhibit 4.1 to
Level 8's Form 8-K, filed March 31, 2003).

4.2 Registration Rights Agreement dated as of October 15, 2003 by and
among Level 8 Systems, Inc. and the Purchasers in the October
Private Placement listed on schedule I thereto (incorporated by
reference to exhibit 4.2 to Level 8's Form 10-K filed March 30,
2004)

4.3 Registration Rights Agreement, dated as of January 16, 2002, by
and among Level 8 Systems, Inc. and the Purchasers in the January
Private Placement listed on Schedule I thereto (incorporated by
reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed
January 25, 2002).

4.4 Registration Rights Agreement, dated as of January 3, 2002,
between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by
reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed
January 11, 2002).

4.5 Registration Rights Agreement, dated as of August 29, 2002,
entered into by and between Level 8 Systems, Inc. and the holders
of Series A2/A3 Preferred Stock and Series B2/B3 Preferred Stock
(incorporated by reference to exhibit 10.4 to Level 8's Form 8-K
filed August 30, 2002).

4.5A First Amendment to Registration Rights Agreement, dated as of
October 25, 2002, entered into by and between Level 8 Systems,
Inc. and the holders of Series A2/A3 Preferred Stock and Series
B2/B3 Preferred Stock (incorporated by reference to exhibit 10.4
to Level 8's Form 10-Q filed November 15, 2002).

4.7 Registration Rights Agreement, dated as of August 14, 2002,
entered into by and between Level 8 Systems, Inc. and the
investors in Series C Preferred Stock (incorporated by reference
to exhibit 4.1 to Level 8's Form 8-K filed August 27, 2002).

4.8 Form of Registration Rights Agreement issued to Purchasers in the
January 2004 Private Placement (incorporated by reference to
exhibit 4.1 to Level 8's Form 10-Q filed May 12, 2004).

4.9 Form of Registration Rights Agreement issued to Purchasers of
Convertible Promissory Note (incorporated by reference to exhibit
4.2 to Level 8's Form 10-Q filed May 12, 2004).

4.10 Form of Stock Purchase Warrant issued to Purchasers in the
January 2004 Private Placement (incorporated by reference to
exhibit 4.3 to Level 8's Form 10-Q filed May 12, 2004).

4.11 Form of Stock Purchase Warrant issued to Purchasers of
Convertible Promissory Note (incorporated by reference to exhibit
4.4 to Level 8's Form 10-Q filed May 12, 2004).

II-5

4.12 Form of Warrant issued to the Purchasers in the Series D
Preferred Stock transaction dated as of March 19, 2003
(incorporated by reference to exhibit 4.2 to Level 8's Form 8-K,
filed March 31, 2003)

4.12A Form of Warrant issued to the Purchasers in the Series D
Preferred Stock transaction dated as of March 19, 2003
(incorporated by reference to exhibit 4.2 to Level 8's Form 8-K,
filed March 31, 2003).

4.13 Form of Stock Purchase Warrant issued to Purchasers in the
October 2003 Private Placement (incorporated by reference to
exhibit 4.9 to Level 8's Form 10-K filed March 30, 2004).

4.14 Form of Stock Purchase Warrant issued to the Purchasers in the
January Private Placement (incorporated by reference to exhibit
10.2 to Level 8's Report on Form 8-K, filed January 25, 2002).

4.15 Form of Series A3 Stock Purchase Warrant (incorporated by
reference to exhibit 10.2 of Level 8's Form 10-Q filed November
15, 2002).

4.16 Form of Series B3 Stock Purchase Warrant (incorporated by
reference to exhibit 10.3 of Level 8's Form 10-Q filed November
15, 2002).

4.17 Form of Series C Stock Purchase Warrant (incorporated by
reference to exhibit 10.2 to Level 8's Form 8-K filed August 27,
2002).

5.1 Legal Opinion of Powell, Goldstein, Frazer & Murphy LLP (filed
herewith).

10.1 Form of Securities Purchase Agreement dated January 2004 by and
among Level 8 Systems, Inc. and the Purchasers in the January
Private Placement (incorporated by reference to exhibit 10.1 to
Level 8's Form 10-Q filed May 12, 2004).

10.2 Form of Securities Purchase Agreement dated March 2004 by and
among Level 8 Systems, Inc. and the Purchasers of Convertible
Promissory Note (incorporated by reference to exhibit 10.2 to
Level 8's Form 10-Q filed May 12, 2004).

10.3 Form of Convertible Promissory Note dated March 2004 by and among
Level 8 Systems, Inc. and the Purchasers of Convertible
Promissory Note (incorporated by reference to exhibit 10.3 to
Level 8's Form 10-Q filed May 12, 2004).

10.4 Securities Purchase Agreement dated as of March 19, 2003 by and
among Level 8 Systems, Inc. and the Purchasers (incorporated by
reference to exhibit 10.1 to Level 8's Form 8-K, filed March 31,
2003).

10.5 Securities Purchase Agreement dated as of October 15, 2003 by and
among Level 8 Systems, Inc. and the Purchasers in the October
Private Placement (incorporated by reference to exhibit 10.2 to
Level 8's Form 10-K filed March 30, 2004).

10.6 Securities Purchase Agreement, dated as of January 16, 2002, by
and among Level 8 Systems, Inc. and the Purchasers in the January
Private Placement (incorporated by reference to exhibit 10.1 to
Level 8's Report on Form 8-K, filed January 25, 2002).

10.7 Securities Purchase Agreement, dated as of August 14, 2002, by
and among Level 8 Systems, Inc. and the purchasers of the Series
C Preferred Stock (incorporated by reference to exhibit 10.1 to
Level 8's Form 8-K filed August 27, 2002).

10.8 Agreement by and among Level 8 Systems, Inc. and the holders of
Series A1/A2/A3 and B1/B2/B3 Preferred Stock, dated as of August
14, 2002 (incorporated by reference to exhibit 10.3 to Level 8's
Form 8-K filed August 27, 2002).

10.9 Exchange Agreement among Level 8 Systems, Inc., and the various
stockholders identified and listed on Schedule I, dated as of
August 29, 2002 (incorporated by reference to exhibit 10.1 to
Level 8's Form 8-K filed August 30, 2002).

II-6

10.9A First Amendment to Exchange Agreement, dated as of October 25,
2002, among Level 8 Systems, Inc., and the various stockholders
identified and listed on Schedule I to that certain Exchange
Agreement, dated as of August 29, 2002 (incorporated by reference
to exhibit 10.1 to Level 8's Form 10-Q filed November 15, 2002).

10.9B Securities Purchase Agreement, dated as of June 29, 1999, among
Level 8 Systems, Inc. and the investors named on the signature
pages thereof for the purchase of Series A Preferred Stock
(incorporated by reference to exhibit 10.1 to Level 8's Form 8-K
filed July 23, 1999).

10.9C Securities Purchase Agreement, dated as of July 20, 2000, among
Level 8 Systems, Inc. and the investors named on the signature
pages thereof for the purchase of Series B Preferred Stock
(incorporated by reference to Exhibit 10.1 to Level 8's Report on
Form 8-K filed July 31, 2000).

10.10 Amended PCA Shell License Agreement, dated as of January 3, 2002,
between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated (incorporated by reference to exhibit 10.2 to
Level 8's Form 8-K, filed January 11, 2002).

10.10A PCA Shell License Agreement between Level 8 Systems, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated
by reference to exhibit 10.2 to Level 8's Report on Form 8-K,
filed September 11, 2000).

10.11 Promissory Note of Level 8 Systems, Inc., dated as of September
28, 2001, among Level 8 Systems, Inc. and Bank Hapoalim
(incorporated by reference to exhibit 10.2 to Level 8's Form 10-K
filed April 2, 2002).

10.11 A Amendment to Promissory Note of Level 8 Systems, Inc., dated as
of November 15,2003 among Level 8 Systems, Inc. and Bank Hapoalim
(incorporated by reference to exhibit 10.10A to Level 8's Form
10-K filed March 30, 2004).

10.12 Employment Agreement between Anthony Pizi and the Company
effective January 1, 2004 (filed herewith).*

10.13 Employment Agreement between John P. Broderick and the Company
effective January 1, 2004 (filed herewith).*

10.14 Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and
Restated (incorporated by reference to exhibit 10.2 to Level 8's
Registration Statement of Form S-1/A, filed September 22, 2000,
File No. 333-44588).*

10.14A Seventh Amendment to Level 8 Systems Inc. 1997 Stock Option Plan
(incorporated by reference to exhibit 10.14B to Level 8's Form
10-K filed March 30, 2004).*

10.15 Level 8's February 2, 1995 Non-Qualified Option Plan
(incorporated by reference to 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).*

10.16 Lease Agreement for Cary, N.C. offices, dated November 7, 2003,
between Level 8 Systems, Inc. and Regency Park Corporation
(incorporated by reference to exhibit 10.17 to Level 8's Form
10-K filed March 30, 2004).).

10.17 Lease Agreement, dated February 23, 2001, between Level 8
Systems, Inc. and Carnegie 214 Associates Limited Partnership
(incorporated by reference to exhibit 10.15 to Level 8's Annual
Report on Form 10-K, filed March 29, 2001).

16.1 Letter from Deloitte & Touche LLP regarding change of accountant
(incorporated by reference to Exhibit 16 to Level 8's Current
Report on Form 8-K, filed November 26, 2003).

II-7

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

23.1 Consent of Margolis & Company LLP (filed herewith).

23.2 Consent of Deloitte & Touche LLP (filed herewith).

23.3 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in
exhibit 5.1 filed herewith).

24.1 Power of Attorney (included on signature page).

* Management contract or compensatory agreement.

ITEM 17: UNDERTAKINGS

(a) (1) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement:

(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering price may be reflected in the form of Prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement.

(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Princeton, State of New
Jersey, on May 17, 2004.

LEVEL 8 SYSTEMS, INC.

By: /S/ ANTHONY C. PIZI
-------------------------
Anthony C. Pizi
Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose signature
appears below appoints and constitutes Anthony C. Pizi and John P. Broderick,
and each of them, his or her true and lawful attorney-in-fact and agent, each
acting alone, with full power of substitution and resubstitution, for him and
her and in his or her name, place and stead, in any and all capacities, to
execute any and all amendments (including post-effective amendments) to the
within registration statement, and to file the same, together with all exhibits
thereto and all other documents in connection therewith, with the Securities and
Exchange Commission and such other agencies, offices and persons as may be
required by applicable law, granting unto each said attorney-in-fact and agent,
each acting alone, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, each
acting alone may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

/S/ ANTHONY C. PIZI Chairman of the Board and Chief Executive May 17, 2004
- -----------------------------
Anthony C. Pizi Officer (Principal Executive Officer)

/S/ JOHN P. BRODERICK Chief Financial and Operating Officer May 17, 2004
- -----------------------------
John P. Broderick (Principal Accounting Officer)

/S/ NICHOLAS HATALSKI Director May 17, 2004
- -----------------------------
Nicholas Hatalski

/S/ BRUCE HASENYAGER Director May 17, 2004
- -----------------------------
Bruce Hasenyager

/S/ KENNETH NEILSEN Director May 17, 2004
- -----------------------------
Kenneth Neilsen

/S/ JAY KINGLEY Director May 17, 2004
- -----------------------------
Jay Kingley

II-9