Exhibit
4.1
  **REGISTRATION
RIGHTS AGREEMENT**
   This
REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”), dated
as of ______ __, 2004, is entered into by and between LEVEL 8 SYSTEMS, INC., a
Delaware corporation (the “ Company ”), and
the investors signatory hereto (each investor is sometimes individually referred
to herein as a “ Purchaser ” and all
such investors are sometimes collectively referred to herein as the
“ Purchasers ”).
  **W
I T N E S S E T H** **:**
  This
Agreement is made pursuant to that certain Securities Purchase Agreement, dated
as of the date hereof, by and among the Company and the Purchasers (the
“ Purchase
Agreement ”).
  The
Company and the Purchasers hereby agree as follows:
  1.  Definitions . Unless
otherwise defined herein, terms defined in the Purchase Agreement are used
herein as therein defined, and the following shall have (unless otherwise
provided elsewhere in this Agreement) the following respective meanings (such
meanings being equally applicable to both the singular and plural form of the
terms defined):
  “ Affiliate ” means,
with respect to any Person, any other Person that directly or indirectly
controls or is controlled by or under common control with such Person. For the
purposes of this definition, “ control ,” when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise, and the terms “ affiliated ,”
“ controlling ” and
“ controlled ” have
meanings correlative to the foregoing.
  “ Agreement ” shall
mean this Registration Rights Agreement, including all amendments, modifications
and supplements and any exhibits or schedules to any of the foregoing, and shall
refer to the Agreement as the same may be in effect at the time such reference
becomes operative.
  “ Business
Day ” shall
mean any day that is not a Saturday, a Sunday or a day on which banks are
required or permitted to be closed in the State of New York.
  “ Commission ” shall
mean the Securities and Exchange Commission or any other federal agency then
administering the Securities Act and other federal securities laws.
  “ Holder or Holders ” means
the holder or holders, as the case may be, from time to time the Registrable
Securities.
  “ NASD ” shall
mean the National Association of Securities Dealers, Inc., or any successor
corporation thereto.
  1
 “ Registrable
Securities ” shall
mean the shares of Common Stock issuable pursuant to the terms of the Purchase
Agreement and any shares of Common Stock issued or issuable upon exercise of the
Warrants.
  2.  Registration . As soon
as practicable following the Closing Date and within sixty (60) days of the
Closing Date, the Company shall prepare and file with the Commission a
Registration Statement (the “ Registration
Statement ”) which
shall cover all of the Registrable Securities. The Registration Statement shall
be on Form S-1 or any successor form. The Company shall use its best efforts to
cause the Registration Statement to be declared effective under the Securities
Act within one hundred twenty (120) days of the Closing Date.
  3.  Registration
Procedures . Subject
to the provisions of Section 2, the Company will:
 
 (a)  prepare
and file with the Commission a Registration Statement with respect to such
securities and use its best efforts to cause such Registration Statement to
become and remain effective for a period of time required for the disposition of
such securities by the Holder thereof, but not to exceed two (2)
years;
  (b)  prepare
and file with the Commission such amendments and supplements to such
Registration Statement and the prospectus used in connection therewith as may be
necessary to keep such Registration Statement effective and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of all securities covered by such Registration Statement until the earlier of
such time as all of such securities have been disposed of in a public offering
or the expiration of two (2) years;
  (c)  furnish
to each Holder such number of copies of a summary prospectus or other
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as such Holder may
reasonably request;
  (d)  use its
best efforts to register or qualify the securities covered by such Registration
Statement under such other securities or blue sky laws of such jurisdictions
within the United States as each Holder shall reasonably request to the extent
such registration or qualification is required in such jurisdictions
( provided , however , that
the Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then qualified or
to file any general consent to service of process), and do such other reasonable
acts and things as may be required of it to enable such Holder to consummate the
disposition in such jurisdiction of the securities covered by such Registration
Statement;
  (e)  furnish,
at the request of any Holder during registration of Registrable Securities
pursuant to Section 2, on the date that such shares of Registrable Securities
are delivered to the underwriters for sale pursuant to such registration or, if
such Registrable Securities are not being sold through underwriters, on the date
that the Registration Statement with respect to such shares of Registrable
Securities becomes effective, (1) an opinion, dated as of such date, of the
independent counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and if such Registrable
Securities are not being sold through underwriters, then to the Holder making
such request, in customary form and covering matters of the type customarily
covered in such legal opinions; and (2) a comfort letter dated such date,
from the independent certified public accountants of the Company, addressed to
the underwriters, if any, and if such Registrable Securities are not being sold
through underwriters, then to the Holder making such request and, if such
accountants refuse to deliver such letter to such Holder, then to the Company,
in a customary form and covering matters of the type customarily covered by such
comfort letters and as the underwriters or such Holder shall reasonably
request;
  2
 (f)  enter
into customary agreements (including an underwriting agreement in customary
form) and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of such Registrable
Securities;
  (g)  notify
each Holder as promptly as practicable upon the occurrence of any event as a
result of which the prospectus included in a Registration Statement, as then in
effect, contains an untrue statement of material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and as
promptly as possible, prepare, file and furnish to such Holder a reasonable
number of copies of a supplement or an amendment to such prospectus as may be
necessary so that such prospectus does not contain an untrue statement of
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing;
  (h)  provide
each Holder and its representatives the opportunity to conduct reasonable
inquiry of the Company’s financial and other records during normal business
hours and make available its officers, directors and employees for questions
regarding information which such Holder may reasonably request in order to
conduct any due diligence; and
  (i)  otherwise
use its best efforts to comply with all applicable rules and regulations of the
Commission, and make available to the Holders, as soon as reasonably
practicable, but not later than eighteen (18) months after the effective date of
the Registration Statement, an earnings statement covering the period of at
least twelve (12) months beginning with the first full month after the effective
date of such Registration Statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act.
  4.  Expenses . All
expenses incident to the Company’s compliance with the terms of this Agreement,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, expenses of any
special audits incident to or required by any such registration and expenses of
complying with the securities or blue sky laws of any jurisdiction pursuant to
Section 3(d), shall be paid by the Company, except that:
  (a)  all such
expenses in connection with any amendment or supplement to the Registration
Statement or prospectus filed more than two (2) years after the effective date
of such Registration Statement because any Holder has not effected the
disposition of the securities requested to be registered shall be paid by such
Holder;
  3
 (b)  the
Company shall not be liable for any fees, discounts or commissions to any
underwriter or any fees or disbursements of counsel for any underwriter in
respect of the securities sold by such Holder; and
  (c)  any
incremental expenses incurred by the Company as a result of the inclusion of a
Holder’s Registrable Securities in an underwritten offering where the Holder or
any of its Affiliates is an underwriter of the Registrable Securities which
inclusion of such Holder’s Registrable Securities requires a “qualified
independent underwriter” under the applicable rules of the NASD shall be paid by
such Holder.
  5.  Indemnification
and Contribution . (a) In
the event of any registration of any Registrable Securities under the Securities
Act pursuant to this Agreement, the Company shall indemnify and hold harmless
the Holder of such Registrable Securities, such Holder’s directors and officers,
and each other person (including each underwriter) who participated in the
offering of such Registrable Securities and each other person, if any, who
controls such Holder or such participating person within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such Holder or any such director or officer or participating
person or controlling person may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any alleged untrue statement of any material fact contained, on the
effective date thereof, in any Registration Statement under which such
securities were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or (ii) any alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and shall reimburse such Holder or such director, officer or participating
person or controlling person for any legal or any other expenses reasonably
incurred by such Holder or such director, officer or participating person or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action. Notwithstanding anything to the contrary set
forth in this Section 5(a), the Company shall not be liable to indemnify any
person in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon (1) any actual or alleged untrue
statement or actual or alleged omission either (x) made in such Registration
Statement, preliminary prospectus, prospectus or amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such Holder specifically for use therein or so furnished for such
purposes by any underwriter or (y) that had been corrected in a preliminary
prospectus, prospectus supplement or amendment which had been furnished to such
Holder prior to any distribution of the document alleged to contain the untrue
statement or omission to offerees or purchasers, (2) any offer or sale of
Registrable Securities after receipt by such Holder of a Standstill Notice under
Section 3(g) and prior to the delivery of the prospectus supplement or amendment
contemplated by Section 3(g), or (3) the Holder’s failure to comply with the
prospectus delivery requirements under the Securities Act or failure to
distribute its Registrable Securities in a manner consistent with its intended
plan of distribution as provided to the Company and disclosed in the
Registration Statement. Notwithstanding the foregoing, the Company shall not be
required to indemnify any person for amounts paid in settlement of any claim
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Holder or such
director, officer or participating person or controlling person, and shall
survive the transfer of such securities by such Holder.
  4
 (b)  Each
Holder, by acceptance hereof, agrees to indemnify and hold harmless the Company,
its directors and officers and each person who participated in such offering and
each other person, if any, who controls the Company within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director or officer or any such person
may become subject under the Securities Act or any other statute or at common
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) information in writing
provided to the Company by the Holder specifically for use in the following
documents and contained, on the effective date thereof, in any Registration
Statement under which securities were registered under the Securities Act at the
request of the Holder, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, (ii) Holder’s offer or sale of
Registrable Securities after receipt by such Holder of a Standstill Notice under
Section 3(g) and prior to the delivery of the prospectus supplement or amendment
contemplated by Section 3(g), (iii) Holder’s failure to comply with the
prospectus delivery requirements under the Securities Act or failure to
distribute its Registrable Securities in a manner consistent with its intended
plan of distribution as provided to the Company and disclosed in the
Registration Statement, (iv) Holder’s failure to comply with Regulation M under
the Exchange Act, or (v) Holder’s failure to comply with any rules and
regulations applicable because the Holder is, or is an Affiliate of, a
registered broker-dealer. Notwithstanding the provisions of this paragraph (b)
or paragraph (c) below, no Holder shall be required to indemnify any person
pursuant to this Section 5 or to contribute pursuant to paragraph (c) below in
an amount in excess of the amount of the aggregate net proceeds received by such
Holder in connection with any such registration under the Securities
Act.
  (c)  If the
indemnification provided for in this Section 5 from the indemnifying party is
unavailable to an indemnified party hereunder in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or
proceeding.
  The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(c) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
  5
 6.  Certain
Limitations on Registration Rights .
Notwithstanding the other provisions of this Agreement:
  (a)  the
Company shall not be obligated to register the Registrable Securities of Holders
if, in the opinion of counsel to the Company reasonably satisfactory to the
Holder and its counsel (or, if the Holder has engaged an investment banking
firm, to such investment banking firm and its counsel), the sale or other
disposition of such Holder’s Registrable Securities, in the manner proposed by
such Holder (or by such investment banking firm), may be effected without
registering such Registrable Securities under the Securities Act;
  (b)  the
Company shall not be obligated to register the Registrable Securities of any
Holder pursuant to Section 2 if the Company has had a registration statement,
under which the Holder had a right to have its Registrable Securities included
pursuant to Section 2, declared effective within one hundred and twenty (120)
days prior to the date of the request pursuant to Section 2; and
  (c)  the
Company shall have the right to delay the filing or effectiveness of the
registration statement required pursuant to Section 2 hereof during one or more
periods aggregating not more than forty five (45) days in any twelve-month
period in the event that (i) the Company would, in accordance with the advice of
its counsel, be required to disclose in the prospectus information not otherwise
then required by law to be publicly disclosed and (ii) in the judgment of the
Company’s Board of Directors, there is a reasonable likelihood that such
disclosure would materially and adversely affect any existing or prospective
material business situation, transaction or negotiation or otherwise materially
and adversely affect the Company.
  7.  Selection
of Managing Underwriters . The
managing underwriter or underwriters for any offering of Registrable Securities
to be registered pursuant to Section 2 shall be selected by the Holders of a
majority of the shares being so registered and shall be reasonably acceptable to
the Company.
  8.  Holder
Agreements . (a) No
Holder may participate in an underwritten offering provided for hereunder unless
such Holder (i) agrees to sell the Holder’s Registrable Securities on the basis
provided in the underwriting arrangements contemplated for such offering as
reasonably requested by the managing underwriter, (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements as reasonably requested by the managing underwriter, and (iii)
agrees to bear the Holder’s pro rata portion of all underwriting discounts and
commissions.
  6
 (b)  Each
Holder agrees to comply with Regulation M under the Exchange Act in connection
with its offer and sale of Registrable Securities.
  (c)  Each
Holder agrees that it will not sell any Registrable Securities registered under
the Securities Act pursuant to the terms of this Agreement until a Registration
Statement (and any associated post-effective amendment) relating thereto has
been declared effective and the Holder has been provided copies of the related
prospectus, as amended or supplemented to date.
  (d)  Each
Holder agrees to comply with the prospectus delivery requirements of the
Securities Act as applicable in connection with the sale of Registrable
Securities registered under the Securities Act pursuant to a Registration
Statement.
  (e)  Each
Holder agrees that upon receipt of a Standstill Notice pursuant to Section 3(g),
the Holder shall immediately discontinue offers and sales of Registrable
Securities registered under the Securities Act pursuant to any Registration
Statements covering such Registrable Securities until such Holder receives
copies of the supplemented or amended prospectus contemplated by Section 3(g) or
notice from the Company that no such supplement or amendment is
required.
  9.  Miscellaneous .
  (a)  No
Inconsistent Agreements . The
Company will not hereafter enter into any agreement with respect to its
securities which conflicts with the rights granted to the Holders in this
Agreement.
  (b)  Remedies . Each
Holder, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The Company agrees that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach by it of
the provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate. In any
action or proceeding brought to enforce any provision of this Agreement or where
any provision hereof is validly asserted as a defense, the successful party
shall be entitled to recover reasonable attorneys’ fees in addition to any other
available remedy.
  (c)  Amendments
and Waivers . Except
as otherwise provided herein, the provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departure from the
provisions hereof may not be given unless the Company has obtained the written
consent of the Holder.
  (d)  Notice
Generally . Any
notice, demand, request, consent, approval, declaration, delivery or other
communication hereunder to be made pursuant to the provisions of this Agreement
shall be sufficiently given or made if in writing and either delivered in person
with receipt acknowledged or sent by registered or certified mail, return
receipt requested, postage prepaid, or by telecopy and confirmed by telecopy
answerback, addressed as follows:
  7
 *If to
the Company:*   Level 8
Systems, Inc.
 214
Carnegie Center, Suite 303
 Princeton,
New Jersey 08540
 Attn:  John P.
Broderick
 
 *With
a Copy to:*  Lemery
Greisler, LLC
 10
Railroad Place
 Saratoga
Springs, New York 12866
 Attn:  Robert J.
May, Jr., Esq.
 *If to
the Holders:*   At the
address set forth with such Holder's name on Schedule
I to the
Purchase Agreement.
 
 or at
such other address as may be substituted by notice given as herein provided. The
giving of any notice required hereunder may be waived in writing by the party
entitled to receive such notice. Every notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback or
three (3) Business Days after the same shall have been deposited in the United
States mail.
  (e)  Rule
144 . With a
view to making available to the Holders the benefits of Rule 144 under the
Securities Act (“ Rule
144 ”) and
any other rule or regulation of the Commission that may at any time permit the
Holder to sell securities of the Company to the public without registration, the
Company agrees that it will:
  (i)  make and
keep public information available, as those terms are understood and defined in
Rule 144;
  (ii)  file with
the Commission in a timely manner all reports and other documents required of
the Company under the Exchange Act; and
  (iii)  furnish
to a Holder, so long as such Holder owns any Registrable Securities, forthwith
upon request (A) a written statement by the Company, if true, that it has
complied with the reporting requirements of Rule 144, the Securities Act and the
Exchange Act, (B) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (C)
such other information as may be reasonably requested in availing such Holder of
any rule or regulation of the Commission which permits the selling of any such
securities without registration.
  (f)  Successors
and Assigns . This
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto including any person to whom Registrable
Securities are transferred.
  (g)  Headings . The
headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.
  8
 (h)  Governing
Law; Jurisdiction . This
Agreement shall be governed by, construed and enforced in accordance with the
laws of the State of Delaware without giving effect to the conflict of laws
provisions thereof. Service of process on the parties in any action arising out
of or relating to this Agreement shall be effective if mailed to the parties in
accordance with Section 9(d) hereof. The parties hereto waive all right to trial
by jury in any action or proceeding to enforce or defend any rights hereunder.
  (i)  Severability .
Wherever possible, each provision of this Agreement shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
  (j)  Entire
Agreement . This
Agreement, together with the Purchase Agreement, represents the complete
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to the subject
matter hereof.
  (k)  Counterparts . This
Agreement may be executed in any number of counterparts, all of which taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile signature page were an original
thereof.
  
  [SIGNATURE
PAGES ATTACHED HERETO]
   9
  
  
 IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.
 
 **LEVEL
8 SYSTEMS, INC.**
  By:  _____________________________
 John P.
Broderick,
 Chief
Operating and Financial Officer
  
  **PURCHASERS:**
 
 [COUNTERPART
SIGNATURE PAGES FOLLOW]
 
    10
   IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.
 
 **PURCHASER:**
 
 
 _______________________________
 (Name of
Purchaser)
 
 By:
____________________________
 (Signature
of Purchaser(s))
 
 Name:
_________________________
 (Name of
Signatory if Purchaser is an Entity)
 
 
 Title:
__________________________
 (if
Purchaser is an Entity)
  
  11