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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2002.

              [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                        For the transition period from to

                         Commission File Number: 0-26392

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

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<S>                                                   <C>
         DELAWARE                                        11-2920559
(State of incorporation)                               (I.R.S. Employer
                                                      Identification No.)
</TABLE>

           214 CARNEGIE CENTER, SUITE 303, PRINCETON, NEW JERSEY 08540
          (Address of principal executive offices, including Zip Code)

                                 (609) 987-9001
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

                 Securities registered pursuant to Section 12(g)
                   of the Act: COMMON STOCK, $.001 PAR VALUE


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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]

Aggregate market value of the outstanding voting stock held by non-affiliates of
the Registrant as of June 28, 2002 was approximately $9,130,600.
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                              LEVEL 8 SYSTEMS, INC.

                           Annual Report on Form 10-K
                   For the Fiscal Year Ended December 31, 2002

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<CAPTION>
Item                                                                                              Page
Number                                                                                           Number
------                                                                                           ------
<S>            <C>                                                                               <C>
                                                  PART I
1.              Business                                                                           1
2.              Properties                                                                         11
3.              Legal Proceedings                                                                  12
4.              Submission of Matters to a Vote of Security Holders                                12

                                                 PART II
5.              Market for Level 8 Common Stock and Related Shareholder Matters                    13
6.              Selected Financial Data                                                            13
7.              Management's Discussion and Analysis of Financial Condition and Results
                of Operations                                                                      15
7A.             Quantitative and Qualitative Disclosures About Market Risk                         29
8.              Financial Statements and Supplementary Data                                        29
9.              Changes in Accountants                                                             29

                                                 PART III
10.             Directors and Executive Officers of Level 8                                        30
11.             Executive Compensation                                                             32
12.             Security Ownership of Certain Beneficial Owners and Management                     36
13.             Certain Relationships and Related Transactions                                     37
14.             Controls and Procedures                                                            39

                                                 PART IV
15.             Index Exhibits, Financial Statement Schedules, and Reports on Form 8-K             40

SIGNATURES                                                                                         44
CERTIFICATIONS                                                                                     45
INDEX TO FINANCIAL STATEMENTS                                                                     F-1
INDEX TO EXHIBITS                                                                                 E-1
</TABLE>
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PART I

ITEM 1: BUSINESS

                                    BUSINESS

OVERVIEW

     Level 8 Systems, Inc (the "Company" or "Level 8") provides next generation
application integration products and services that are based on open technology
standards, and are licensed to a wide range of customers. Level 8 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.

     The company's 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 works the way people think.

     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 which 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.

     Level 8 Systems, Inc was 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

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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, have reclassified those assets and
liabilities on the accompanying balance sheets for 2001 and 2002 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.

      The Company has incurred a loss of $18.2 million for the year ended
December 31, 2002 in addition to a loss of more than $105 million for the year
ended December 31, 2001. The Company has experienced negative cash flows from
operations for the past two years. At December 31, 2002, the Company had a
working capital deficiency of approximately $6.3 million. The Company's future
revenues are largely dependent on acceptance of a newly developed and marketed
product - Cicero. Accordingly, there is substantial doubt that the Company can
continue as a going concern. To address these issues and to obtain adequate
financing for the Company's operations for the next twelve months, the Company
is actively promoting its product line. The Company has successfully deployed
their product to several key customers which it hopes will act as a reference
point for new sales. 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.

MARKET OPPORTUNITY

Desktop Integration Segment Products - Cicero

     Our initial 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:

     -    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.

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     -    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.

     -    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 have been a provider of software that integrates an enterprise's
applications at the server level so that disparate applications can communicate
with each other. 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 our existing
technologies or with solutions from other EAI vendors, Cicero becomes the
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:

     -    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.

     -    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.


     -    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.

     -    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

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          environment. Cicero's publish and subscribe bus architecture provides
          for efficient inter-application communication. Its event management
          capabilities extend the usefulness and lifespan 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.

     -    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:

     -    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.

     -    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.

-        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.

     -    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.

     -    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.

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     -    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.

     -    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 short-term 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:

     -    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.

     -    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.

     -    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.

     -    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.

     -    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.

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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
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 service, 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,

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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 Bertlesmann A.G. and the Bank of America.

     Merrill Lynch and Winstar Wireless, Inc. individually accounted for more
than ten percent (10%) of our operating revenues in 2000. Merrill Lynch holds
approximately six percent (6%) 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.

SALES AND MARKETING

SALES

     To reach our potential customer base, we are pursuing several distribution
channels, including a direct sales force, as well as third party relationships
with systems integrators and IT consulting firms.

     Our direct sales force focuses on large customers and leverages our
industry experience to access target organizations within the financial services
vertical market. We believe the financial services' market is a business area to
which our products are particularly well suited and that its members possess the
financial resources and scale of operations necessary to support the engagement.

     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

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along with other products through OEM relationships. Level 8 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
Pyramid Consulting Services, Inc., Computer Horizons Corp., IP blue, Hewlett
Packard, House of Code, Titan Systems Corporation, FI Systems Italia S.r.L. and
NTS Soluzioni Informatiche S.r.L.

     Our direct sales staff has substantial knowledge of our products and
service offerings as well as general experience in the software industry. If we
augment our direct sales force, we will recruit sales people with direct
experience in the software industry and successful track records in selling
enterprise-class software products to the customer contact centers within
enterprise organizations.

     We believe that a key to our success is to be able to demonstrate tangible
return on investment results in the contact center markets. Almost all contact
centers measure operational and service efficiencies through the use of
benchmarking techniques. Typically, contact centers measure their performance
against industry norms for such metrics as length of call, abandonment rate,
length of queue, post call follow-up time, and the number of one-call
completions. We believe that Cicero can address each of these benchmarks and
yield tangible, visible improvements that can be realized in actual cost savings

     Our sales force is primarily in the United Sates. We maintain a
relationship with certain selling agents in Italy and rely on our partners for
International exposure.

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 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 anticipate 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.

                                       8
<PAGE>
     We incurred research and development expense of $1.9 million, $5.4 million,
and $8.9 million in 2002, 2001 and 2000, respectively. 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. In addition, the Company adopted a line of business approach to
analyzing its business segments in 2001 and further identified and reclassified
certain businesses as discontinued operations for 2001 and 2002. Prior year
information is not available and thus comparisons of the 2000 results are not
meaningful.

     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

     -    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.

     -    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.

     -    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 companies CRM technology. Siebel is a
          representative product in the CRM software category.

                                       9
<PAGE>
     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 December 31, 2002, we employed 34 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.

FORWARD LOOKING AND CAUTIONARY STATEMENTS

     Certain statements contained in this Annual Report may constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("Reform Act"). We may also make forward

                                       10
<PAGE>
looking statements in other reports filed with the Securities and Exchange
Commission, in materials delivered to shareholders, in press releases and in
other public statements. In addition, our representatives may from time to time
make oral forward-looking statements. Forward looking statements provide current
expectations of future events based on certain assumptions and include any
statement that does not directly relate to any historical or current fact. Words
such as "anticipates," "believes," "expects," "estimates," "intends," "plans,"
"projects," and similar expressions, may identify such forward looking
statements. In accordance with the Reform Act, set forth below are cautionary
statements that accompany those forward looking statements. Readers should
carefully review these cautionary statements as they identify certain important
factors that could cause actual results to differ materially from those in the
forward-looking statements and from historical trends. The following cautionary
statements are not exclusive and are in addition to other factors discussed
elsewhere in our filings with the Securities and Exchange Commission and in
materials incorporated therein by reference: there may be a question as to our
ability to operate as a going concern, our future success depends on the market
acceptance of the Cicero product and successful execution of the new strategic
direction; general economic or business conditions may be less favorable than
expected, resulting in, among other things, lower than expected revenues; an
unexpected revenue shortfall may adversely affect our business because our
expenses are largely fixed; our quarterly operating results may vary
significantly because we are not able to accurately predict the amount and
timing of individual sales and this may adversely impact our stock price; trends
in sales of our products and general economic conditions may affect investors'
expectations regarding our financial performance and may adversely affect our
stock price; our future results may depend upon the continued growth and
business use of the Internet; we may lose market share and be required to reduce
prices as a result of competition from its existing competitors, other vendors
and information systems departments of customers; we may not have the ability to
recruit, train and retain qualified personnel; rapid technological change could
render the Company's products obsolete; loss of any one of our major customers
could adversely affect our business; our business is subject to a number of
risks associated with doing business abroad including the effect of foreign
currency exchange fluctuations on our results of operations; our products may
contain undetected software errors, which could adversely affect our business;
because our technology is complex, we may be exposed to liability claims; we may
be unable to enforce or defend its ownership and use of proprietary technology;
because we are a technology company, our common stock may be subject to erratic
price fluctuations; and we may not have sufficient liquidity and capital
resources to meet changing business conditions.

MARKET RISK - NASDAQ

During the third quarter of 2002, the Company was cited by Nasdaq for its
failure to maintain the minimum bid standards of the Nasdaq National Market for
its common stock. Subsequently, the Company was cited for its failure to
maintain the minimum stockholders equity requirements of the National Market.
The Company filed an application to transfer to the Nasdaq SmallCap Market,
which was rejected by Nasdaq under the premise that the annualized loss history
would continue and further erode the stockholders equity balance and a delisting
notice was issued. The Company appealed the delisting notice and within the
appeal process, cited the circumstances under which it would be able to become
compliant with both deficiencies. Nasdaq approved a conditional transfer to the
SmallCap Market and requested that the Company show evidence by January 13, 2003
of compliance. The Company had filed its annual proxy statement with
shareholders and proposed approval of a range for a reverse stock split which,
if approved, would bring the Company into compliance with the minimum bid
requirements. In addition, the Company was prepared to close on an equity
funding which would bring the Company into compliance with the minimum equity
requirements for the Nasdaq SmallCap market. The Annual General Meeting of
Shareholders was held on December 21, 2002. The proposal to approve a reverse
stock split was not approved by both classes of voting stock and as such, the
Company could not remedy compliance with the minimum bid standards. The Company
notified Nasdaq of this development and in January 2003, Nasdaq issued a formal
delisting notice to the Company. The Company now trades over-the-counter. Its
symbol remains as LVEL.

ITEM 2: 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 our Cary, North
Carolina office pursuant to a lease expiring in 2004. The Company has closed all
its foreign offices except for an office in Limerick, Ireland, which we maintain
on a set fee arrangement. The research and development and customer support
groups are located in the Princeton, New Jersey and Cary, North Carolina
facilities.

                                       11

<PAGE>

ITEM 3: LEGAL PROCEEDINGS

      Various lawsuits and claims have been brought against the Company in the
normal course of business. As of December 31, 2002, an action was pending
against the Company in the United States District Court for the District of
Colorado by Access International Financial Services, Inc. claiming the Company
had breached a contract. This case was settled in February 2003 for $200, which
was accrued at December 31, 2002 and all parties executed mutual releases.
Subsequent to December 31, 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
plaintiff seeks damages of approximately $1,000 for rent in arrears, penalties
and interest. The Company will vigorously defend against this action. Should the
plaintiff be successful, this claim could have a material effect on the
financial position or results of operations of the Company.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      (a)   The Annual Meeting of Stockholders was held December 21, 2002.

      (b)   At the Company's Annual Meeting of Stockholders, the following
            directors were elected to serve until the 2003 Annual Meeting of
            Stockholders by the vote indicated.

<TABLE>
<S>                    <C>            <C>    <C>       <C>
 Anthony Pizi          18,033,567     FOR    339,624   WITHHELD
 Paul Rampel           18,033,567     FOR    339,624   WITHHELD
 Frank Artale          18,033,567     FOR    339,624   WITHHELD
 Nicholas Hatalski     18,033,567     FOR    339,624   WITHHELD
 Bruce Hasenyager      18,033,567     FOR    339,624   WITHHELD
 Ken Nielsen           18,033,567     FOR    339,624   WITHHELD
 Jay Kingley           18,033,567     FOR    339,624   WITHHELD
</TABLE>

      (c)   Matters other than the election of directors, brought for vote at
            the Company's Annual Meeting of Stockholders, passed or were
            defeated by the vote indicated.

<TABLE>
<CAPTION>
                                                                                          Number of Shares
                                                                                          ----------------
                 Matter                                                            FOR         AGAINST     ABSTAIN
                 ------                                                            ---         -------     -------
<S>                                              <C>                            <C>            <C>         <C>
To authorize the Board of Directors to
effect a reverse stock split within the
range of 1-for-4 through 1-for-12 and to
decrease the number of shares of authorized
capital stock from 50 million to 25 million,
comprised of 5 million shares of authorized
preferred stock and 20 million shares of         Common Stock as a class        16,043,396     219,028      9,659
authorized common stock                          Preferred Stock as a class            435      15,175         --

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              Common Stock as a class        16,049,513     215,186      7,384
40,000,000 to 60,000,000.                        Voting Stock as a class        18,152,621     215,186      7,384

To ratify the appointment of Deloitte & Touche
LLP as the Company's independent accountants
for the fiscal year ended December 31, 2002.     Voting Stock as a class        18,341,903      14,582     18,706
</TABLE>


                                       12
<PAGE>
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.

      Our common stock has been 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 over-the-counter bulletin board. 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. The chart below sets forth the high and low stock prices for
the quarters of the fiscal years ended December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                               2002                   2001
                                            ----------              ---------
QUARTER                                   HIGH       LOW         HIGH       LOW
-------                                   ----       ---         ----       ---
<S>                                      <C>        <C>         <C>        <C>
First...............................     $ 3.19     $ 1.26      $ 6.38     $ 2.39
Second..............................     $ 1.70     $ 0.34      $ 3.25     $ 2.75
Third...............................     $ 0.71     $ 0.25      $ 4.99     $ 1.45
Fourth..............................     $ 0.56     $ 0.17      $ 3.10     $ 1.20
</TABLE>

    The closing price of the common stock on December 31, 2002 was $0.38 per
share. As of March 22, 2002, we had 173 registered shareholders of record.

RECENT SALES OF UNREGISTERED SECURITIES

      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 the 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.

ITEM 6. SELECTED FINANCIAL DATA.

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

See Item 7 for a discussion of the entities included in operations.


<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                --------------------------------------------------------
                                                  1998        1999        2000        2001        2002
                                                --------    --------    --------    --------    --------
<S>                                             <C>         <C>         <C>         <C>         <C>
SELECTED STATEMENT OF OPERATIONS DATA
Revenue .....................................   $ 10,685    $ 52,920    $ 83,729    $ 17,357    $  3,101
Net loss from continuing operations .........   $(23,688)   $(15,477)   $(28,367)   $(58,060)   $(13,142)
Net loss from continuing operations per
    common share - basic & diluted ..........   $  (3.14)   $  (1.78)   $  (2.10)   $  (3.70)   $  (0.75)
Weighted average common and common equivalent
    shares outstanding -- basic and diluted .      7,552       8,918      14,019      15,958      18,877
</TABLE>


                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                                                      ---------------
                                                 1998         1999         2000        2001         2002
                                               ---------    ---------    ---------   ---------    ---------
<S>                                            <C>          <C>          <C>         <C>          <C>
SELECTED STATEMENT OF OPERATIONS DATA
Working capital (deficiency) ...............   $ (19,554)   $     (36)   $  28,311   $  (4,529)   $  (6,254)
Total assets ...............................      70,770      133,581      169,956      35,744       11,852
Long-term debt, net of current maturities ..       1,541       22,202       25,000       4,600         --
Loans from related companies, net of current
    maturities .............................      12,519        4,000         --          --           --
Stockholders' equity .......................       8,892       72,221      117,730      13,893        1,653
</TABLE>

                                       14
<PAGE>
ITEM 7. 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 "Item 1. Business -- 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 gain or loss from a discontinued business.
Because the Company adopted the line of business approach in early 2001 and
prior information is either unavailable or impractical to obtain, the 2000
results for the systems integration segment have not been presented as
discontinued operations. Unless otherwise indicated, all information is
presented in thousands (`000s).

      As a result of the Company's strategic realignment, the nature of its
operations has changed significantly over the past three years The results of
operations for the year ended December 31, 2000 include the acquisition of the
XIPC messaging product, the Company's Geneva Message Queuing product, the
acquisition of the Seer*HPS application engineering technology as well as
significant international operations and the acquisition of the Template
Software Geneva Enterprise Integrator and Geneva Business Process Automator
products. Seer*HPS was subsequently renamed Geneva AppBuilder.

      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.

      In November 2000, the Company acquired StarQuest. The total purchase price
of the acquisition was $11,638 and has been accounted for by the purchase method
of accounting.

      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.


                                       15
<PAGE>
      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 are 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.


                                       16
<PAGE>
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.

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                         2002            2001            2000
                                                         ----            ----            ----
<S>                                                    <C>             <C>              <C>
Revenue:
    Software ...................................          48.1%            9.6%           54.9%
    Maintenance ................................          18.4%           53.4%           19.1%
    Services ...................................          33.5%           37.1%           26.0%
                                                        ------          ------           -----
       Total ...................................         100.0%          100.0%          100.0%

Cost of revenue:
    Software ...................................         238.7%           85.3%           11.8%
    Maintenance ................................           5.8%           18.7%            6.8%
    Services ...................................          29.0%           31.6%           23.6%
                                                        ------          ------           -----
       Total ...................................         273.5%          135.6%           42.2%

Gross margin ...................................        (173.5)%         (35.6)%          57.8%

Operating expenses:
    Sales and marketing ........................          90.6%           63.6%           42.0%
    Research and product development ...........          61.3%           30.9%           10.6%
    General and administrative .................         126.9%           55.5%           15.1%
    Amortization  intangible assets ............           0.0%           36.1%           16.9%
    In-process research and development ........           0.0%            0.0%            2.2%
    Write-off of intangible assets .............           0.0%           45.7%           --
    (Gain)/Loss on disposal of asset ...........          14.9%          (36.6)%           0.5%
    Restructuring, net .........................          41.9%           49.8%           --
                                                        ------          ------           -----
       Total ...................................         335.6%          245.0%           87.3%
    Loss from operations .......................        (508.9)%        (280.6)%         (29.5)%
    Other income (expense), net ................          80.1%          (51.0)%          (3.1)%
                                                        ------          ------           -----
    Loss before taxes ..........................        (428.8)%        (331.6)%         (32.6)%
    Income tax provision (benefit) .............          (5.0)%           2.9%            1.3%
                                                        ------          ------           -----
Loss from continuing operations ................        (423.8)%        (334.5)%         (33.9)%
Loss from discontinued operations ..............        (162.5)%        (271.2)%           0.0%
                                                        ------          ------           -----
    Net loss ...................................        (586.3)%        (605.7)%         (33.9)%
                                                        ======          ======           =====
</TABLE>

      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:

<TABLE>
                  2002      2001      2000
                  ----      ----      ----
<S>               <C>       <C>       <C>
United States ..    96%       36%       54%
Europe .........     4%       55%       35%
Asia Pacific ...    --         3%        2%
Middle East ....    --         4%        8%
Other ..........    --         2%        1%
                   ---       ---       ---
  Total ........   100%      100%      100%
                   ===       ===       ===
</TABLE>


                                       17
<PAGE>
The table below presents information about reported segments for the twelve
months ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                               DESKTOP      MESSAGING/APPLICATION
                             INTEGRATION         ENGINEERING             TOTAL
                             -----------         -----------             -----
<S>                          <C>            <C>                         <C>
2002:

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

EBITA .....................   $(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 ..............     (9,293)               3,114               (6,179)
Total operating expenses ..     18,858                7,179
                                                                          26,037
EBITA .....................   $(28,151)            $ (4,065)            $(32,216)
</TABLE>


A reconciliation of segment operating expenses to total operating expense for
fiscal year 2002:

<TABLE>
<CAPTION>
                                         2002          2001
                                       --------      --------
<S>                                    <C>           <C>
Segment operating expenses .........   $  8,645      $ 26,037
Amortization of intangible assets ..         --         6,259
Write-off of intangible assets .....         --         7,929
(Gain)/loss on disposal of assets ..        461        (6,345)
Restructuring, net .................      1,300         8,650
                                       --------      --------
Total operating expenses ...........   $ 10,406      $ 42,530
                                       ========      ========
</TABLE>

The table below presents information about previously reported segments for the
fiscal years ended December 31:

<TABLE>
<CAPTION>
                                       2002                         2001                         2000
                                       ----                         ----                         ----
                               TOTAL         TOTAL          TOTAL         TOTAL          TOTAL         TOTAL
                              REVENUE        EBITA         REVENUE        EBITA         REVENUE        EBITA
                              --------      --------       --------      --------       --------      --------
<S>                           <C>           <C>            <C>           <C>            <C>           <C>
Software ..................   $  1,491      $(12,146)      $  1,658      $(30,355)      $ 45,998      $ (6,338)
Maintenance ...............        571           306          9,262         4,658         15,967         9,312
Services ..................      1,039          (279)         6,437        (1,154)        21,764          (958)
Research and development ..         --        (1,902)            --        (5,365)            --       (10,324)
                              --------      --------       --------      --------       --------      --------
Total .....................   $  3,101      $(14,021)      $ 17,357      $(32,216)      $ 83,729      $ (8,308)
                              ========      ========       ========      ========       ========      ========
</TABLE>


                                       18
<PAGE>
A reconciliation of total segment EBITA to net loss for the fiscal years ended
December 31:

<TABLE>
<CAPTION>
                                                   2002           2001           2000
                                                 --------       --------       --------
<S>                                              <C>            <C>            <C>
Total EBITA ..................................   $(14,021)      $(32,216)      $ (8,308)
Amortization of intangible assets ............         --         (6,259)       (14,191)
Impairment of intangible assets ..............         --         (7,929)            --
Gain/(loss) on disposal of assets ............       (461)         6,345           (379)
In-process research and development ..........         --             --         (1,800)
Restructuring ................................     (1,300)        (8,650)            --
Interest and other income/(expense), net .....     (2,485)        (8,850)         2,626
                                                 --------       --------       --------
Net loss before provision for income taxes ...   $(13,297)      $(57,559)      $(27,304)
                                                 ========       ========       ========
</TABLE>

      In accordance with SFAS 131, The Company measures segment profitability
using EBITA (see Note 16 to the financial statements). EBITA represents loss
before income taxes, interest and other income (expense), amortization of
goodwill, restructuring charges, gain (loss) on sale of assets and impairment
charges. The Company uses EBITA to measure segment performance and
profitability. EBITA 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 EBITA as
one measure of our cash flow and historical ability to service debt and because
we believe investors find this information useful. EBITA as defined herein may
not be comparable to similarly titled measures reported by other companies.

YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

      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 82% from $17,357 in 2001 to $3,101 in 2002 and
decreased 79% from $83,729 in 2000 to $17,357 in 2001. The significant decrease
in revenues is primarily the result of the sale of substantially all of the
Messaging and Application Engineering segment products (which represented
approximately $43 million of 2000 gross revenue and $17.2 million of 2001 gross
revenue) at the start of the fourth quarter of 2001. Because the Company adopted
the line of business approach in early 2001 and prior information is either
unavailable or impractical to obtain, the 2000 results of the Systems
Integration segment have not been reclassified to discontinued operations. As a
result, a comparison of 2000 and 2001 revenues is not meaningful. The Company
also believes that software sales in 2001 were relatively weak due to a poor
economic climate. Gross profit margins were (173)%, (36)%, and 58% for 2002,
2001 and 2000, respectively.

      The Desktop Integration segment had a negative gross margin of (204)% for
the year ended December 31, 2002 and a negative gross margin of (6,935)% for the
year ended December 31, 2001. 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


                                       19
<PAGE>
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. The Messaging and Application Engineering segment had a negative
gross margin of (105%) for the year ended December 31, 2002 and a positive gross
margin of 18% for the year ended December 31, 2001. As described above, the
Company adopted the line of business approach in managing its operations in
April 2001 and as such, there is no comparative data for 2000.

      SOFTWARE PRODUCTS. Software product revenue decreased approximately 10% in
2002 from those results achieved in 2001 and decreased 96% in 2001 as compared
to 2000. Software revenues in 2002 are primarily 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 Company adopted the line of business approach in early 2001 and
prior information is either unavailable or impractical to obtain. Accordingly,
the 2000 results of the systems integration segment have not been reclassified
to discontinued operations. As a result, a comparison of 2000 and 2001 revenues
is not meaningful. The Company also believes that software sales in 2001 were
relatively weak in general due to a poor economic climate.

      The gross margin on software products was (396)%, (793)% and 79% for the
2002, 2001 and 2000 years ended, respectively. Cost of software 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 for 2002 as compared with 2001 reflects the impact
of the sale of the AppBuilder product in the fourth quarter of 2001.
Amortization costs for the AppBuilder product for the nine months in 2001
amounted to $1.76 million. The increase in cost of software in 2001 as compared
to 2000 is attributable to the amortization of capitalized software from the
acquisition of the Cicero technology and StarQuest which were purchased in the
third and fourth quarters of 2000, respectively and the $3,070 write-down of
CTRC software acquired from StarQuest to its net realizable value during the
third quarter of 2001.

      The software product gross margin for the Desktop Integration segment was
(309)% in 2002 and (19,332)% in 2001. The software product gross margin on the
Messaging and Application Engineering segment was (1,162)% in 2002 and (334)% in
2001.

      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 decrease significantly along with related expenses as the majority of the
products comprising this segment have been sold.

      MAINTENANCE. Maintenance revenues for the year ended December 31, 2002
decreased by approximately 94% or $8,691 from 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. Maintenance revenue
for the year ended December 31, 2001 decreased by approximately 42% or $6,705 as
compared to the results for the year ended December 31, 2000. Because the
Company adopted the line of business approach in early 2001 and prior
information is either unavailable or impractical to obtain, the 2000 results of
the Systems Integration segment have not been reclassified to discontinued
operations. As a result, a comparison of 2000 and 2001 maintenance revenues is
not meaningful. Part of the decline however, would be attributed to the sale of
the majority of the Messaging and Application Engineering segment products at
the beginning of the fourth quarter of 2001.

      The Desktop Integration segment accounted for approximately 9% of total
maintenance revenue and the Messaging and Application Engineering segment
accounted for approximately 91% of total maintenance revenues in 2002.


                                       20
<PAGE>
      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. Gross margins on maintenance products increased
slightly for the year ended December 31, 2002 to 68%, up from 65% and 64% in the
previous two years.

      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, 2002 decreased
by approximately 84% or $5,398 from 2001. The decline in service revenues 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. Services revenue for the
year ended December 31, 2001 decreased by approximately 70% or $15,327 over the
same period in 2000. It is important to note the overall decline in software
sales between the two years as well as a reduction in capacity.

      Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins were 13%, 15% and 9% for the
years ended 2002, 2001 and 2000 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 decrease dramatically 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 75% or approximately $8,234 in 2002 due to a
reduction in the Company's sales and marketing workforce as well as decreased
promotional activities. Sales and marketing expenses decreased by 69% or
approximately $24,135 in 2001 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. Part of the decline can be
attributable to the fact that the results of operations for the systems
integration segment have been reclassified to discontinued operations in 2001
but not in 2000. As discussed, under "Revenue and Gross Margins", a comparison
of 2001 to 2000 is not meaningful.

      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 65% or $3,463 in 2002 over the same period in 2001 and decreased by 39% or
$3,496 in 2001 as compared to the same period in 2000. Because the results of
operations for the Systems Integration segment have been reclassified to
discontinued operations in 2001 but not in 2000, as discussed under "Revenue and
Gross Margins", a comparison of 2001 to 2000 is not meaningful. Part of the
decline, however, is attributable to the restructuring efforts completed during
the first two quarters of 2001 and the ability to capitalize certain development
costs during the year.

      The Company intends to continue to make a significant investment in
research and development 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, 2002 decreased by 59% or $5,695 over the prior year. In fiscal
2001, general and administrative expenses decreased by 24% or $3,052. The sharp
decline in general and administrative costs in 2002 reflect the restructuring
program conducted by the Company during 2001 and 2002 however, the single
biggest element of the decrease is that the


                                       21
<PAGE>
2001 expenses reflect a charge of approximately $3.8 million from a significant
customer who filed for Chapter 11 Bankruptcy. Part of the decrease in general
and administrative expenses, however, in 2001 from 2000 reflects the downsizing
of the operations and the closure of several overseas offices.

      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 additional office closings.

      AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill was $0 for 2002. Amortization of goodwill and other intangible assets
during 2001 amounted to $6,259, which represents a reduction of $7,932 from
2000. 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
an impairment on the intangible assets acquired from StarQuest. At December 31,
2002 and 2001, there was no remaining goodwill on the Company's balance sheet.

      RESTRUCTURING. 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 comprised of
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits do not include any amounts for
employment-related services prior to termination.

      Premises obligations primarily relate to the continuation of lease
obligations, brokers commissions and leasehold improvements for approximately
60,000 square feet of facilities no longer deemed necessary and costs to exit
short-term leases for various sales offices. Amounts expensed relating to lease
obligations represent estimates of undiscounted future cash outflows, offset by
anticipated third-party sub-lease payments.

      Other miscellaneous restructuring costs include professional fees, royalty
commitments, recruiting fees, excess equipment and other miscellaneous expenses
directly attributable to the restructuring.

      The following table sets forth a summary by category of accrued expenses
and cash paid:

2001:

<TABLE>
<CAPTION>
                                          RESTRUCTURING   NON-CASH     CASH PAID      ACCRUED
                                          -------------   --------     ---------      -------
<S>                                       <C>             <C>          <C>            <C>
Employee termination ...................     $ 5,319      $(1,045)      $(4,231)      $    43
Excess office facilities ...............       2,110         (156)       (1,307)          647
Other miscellaneous restructuring costs        1,221         (360)         (698)          163
                                             -------      -------       -------       -------
Total ..................................     $ 8,650      $(1,561)      $(6,236)      $   853
                                             =======      =======       =======       =======
</TABLE>

2002:

<TABLE>
<CAPTION>
                                            BEGINNING
                                             BALANCE   RESTRUCTURING  CASH PAID      ACCRUED
                                             -------   -------------  ---------      -------
<S>                                          <C>          <C>          <C>           <C>
Employee termination ...................     $    43      $   396      $  (257)      $   182
Excess office facilities ...............         647          880         (937)          590
Other miscellaneous restructuring costs          163           24         (187)           --
                                             -------      -------      -------       -------
Total ..................................     $   853      $ 1,300      $(1,381)      $   772
                                             =======      =======      =======       =======
</TABLE>


                                       22
<PAGE>
      The Company believes the accrued restructuring costs of $772 of December
31, 2002 represents its remaining cash obligations for the restructuring charges
indicated above.

      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. 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.

      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 are accounted for as a liability and are
re-measured at each balance sheet date. As of December 31, 2002, the warrant
liability had a fair value of $331 and the Company had recorded the change in
the fair value of the warrant liability of $2,947 for the year ended December
31, 2002 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 2002, 2001 or
2000. Because of the Company's inconsistent earnings history, the deferred tax
assets have been fully offset by a valuation allowance. The income tax provision
for the year ended December 31, 2002 is primarily related to income taxes from
profitable 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

      The Company utilized cash of $311 for the twelve months ended December 31,
2002.

      Operating activities utilized approximately $7.2 million in cash, which is
primarily comprised of the loss from operations of $18.2 million, offset by
non-cash charges for depreciation and amortization of approximately $8.0 million
and a non-cash decrease in the fair value of its warrant liability of $2.9
million. In addition, the Company had a reduction in assets held for sale of
approximately $6.4 million and used approximately $2.1 million in fulfillment of
its obligations to its creditors through its accounts payable.

      The Company generated approximately $3.9 million in cash from investing
activities, which is primarily comprised of approximately $2.5 million in
proceeds from the collection of various notes receivable and approximately $1.0
million in proceeds from the sale of a line of business.


                                       23
<PAGE>
      The Company generated approximately $3.2 million of cash during the year
from financing activities as a result of a proceeds from a private placement of
common stock and warrants in the amount of $2.0 million and cash proceeds of a
Preferred Stock offering in the amount of $1.4 million.

      By comparison, the Company utilized approximately $23.3 million in cash
during the year 2001.

      Operating activities utilized approximately $19.6 million of cash, which
is primarily comprised of the loss from operations of $105 million, offset by
non-cash charges for depreciation and amortization of approximately $27.8
million and non-cash charges for impairment of intangible assets and software
products technology of $46.9 million, $3.8 million for the realized loss on
certain marketable securities, and a provision for bad debts in the amount of
$3.8 million. In addition, the Company had a reduction in accounts receivable of
$10.5 million and used approximately $5.3 million in fulfillment of its
obligations to its creditors through its accounts payable. The significant
reduction in accounts receivable is the result of the sale of the Geneva
AppBuilder products to BluePhoenix Solutions in October 2001.

      In April 2001, a significant customer voluntarily filed for protection
under Chapter 11 of the U.S. bankruptcy Code with the U.S. bankruptcy Court for
the District of Delaware. Due to the uncertainty of the collection of this debt,
the Company wrote-off $3.8 million of related accounts receivable, which was
charged to general and administrative expenses in the consolidated statement of
operations. During 2001, total write-offs for accounts receivable amounted to
$5.4 million, of which, approximately $3.8 million related to this one
significant customer. The remaining $1.6 million represented write-offs of
certain customers reserved for at December 31, 2000.

      The Company generated approximately $20.2 million of cash from investing
activities, which is comprised of approximately $19.9 million in proceeds from
the sale of assets, including Geneva AppBuilder and $2.2 million from assets
being held for resale and approximately $75 resulting from the repayment of
notes receivable offset by capitalization of product software technology of $2.3
million. Geneva AppBuilder accounted for approximately 79% of total revenue
within the Messaging and Application Engineering segment and approximately 78%
of total revenue for all segments. The Messaging and Application Engineering
segment for the year ended December 31, 2001 generated EBITA of ($4,065).

      The Company utilized approximately $23.6 million of cash during the year
for financing activities for the payment of bank debt ($24.0 million) and the
payment of dividends (approximately $1.3 million) offset by $1.6 million from
bridge financing arrangements.

FINANCING ACTIVITIES

      The Company funded its cash needs during the year ended December 31, 2002
with cash on hand from December 31, 2001, through the use of proceeds from a
private placement of common stock and warrants and a private placement of
preferred stock and warrants and with cash from operations.

      The Company has a $2,512 term loan bearing interest at LIBOR plus 1%
(approximately 2.77% at December 31, 2002), which is payable quarterly. There
are no financial covenants and the term loan is guaranteed by Liraz, the
Company's former principal shareholder. During 2000, the loan and guaranty were
amended to extend the due date from May 31, 2001 to November 30, 2003 and to
provide the Company with additional borrowings. In exchange for the initial and
amended guarantees, the Company issued Liraz a total of 170,000 shares of the
Company's common stock. Based upon fair market value at the time of issuance,
the Company has recorded total deferred costs of $4,013 related to the guaranty.
These costs are being amortized in the statement of operations as a component of
interest expense over the term of the guaranty.

      In January 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 at $2.75 per share were
offered. At December 31, 2001, the Company had received bridge financing of $1.6
million, which was convertible to common stock subject to closing conditions.
The offering closed on January 16, 2002. The Company sold 2,381,952 shares of
common stock for a total of approximately $3,573 and granted 476,396 warrants to
purchase the Company's common stock at a 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. As part of an
agreement with Liraz


                                       24
<PAGE>
Systems Ltd., the guarantor of the Company's term loan, the Company utilized
$350 from the private placement and reduced the principal on the term loan to
$2,650.

      On August 14, 2002, the Company completed a $1.6 million 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
$1.6 million private placement, the Company received approximately $1.4 million
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 Mr. Pizi 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 $12.531 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.

      On October 25, 2002, the Company effected an exchange of all of our its
outstanding shares of Series A2 Convertible Redeemable Preferred Stock and
Series B2 Convertible Redeemable 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.

      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 $5.0 million, or up to


                                       25
<PAGE>
an aggregate 17.5 million 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 4.6 million
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 $5.0 million issuance cap or the 17.5 million
share issuance cap. As a result of the Series C Preferred Stock financing which
represented approximately $1.6 million of the Company's $5.0 million 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. 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.

      The Company has incurred a loss of $18.2 million for the year ended
December 31, 2002 in addition to a loss of more than $105 million for the year
ended December 31, 2001. The Company has experienced negative cash flows from
operations for the past two years. At December 31, 2002, the Company had a
working capital deficiency of approximately $6.3 million. The Company's future
revenues are largely dependent on acceptance of a newly developed and marketed
product - Cicero. Accordingly, there is substantial doubt that the Company can
continue as a going concern. To address these issues and to obtain adequate
financing for the Company's operations for the next twelve months, the Company
is actively promoting its product line. The Company has successfully deployed
their product to several key customers which it hopes will act as a reference
point for new sales. 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.

SUBSEQUENT FINANCING EVENT

      On March 19, 2003, the Company completed a $3.5 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 11,031,250 shares of common stock. As part of the financing, the
Company 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"). The
Company is also obligated to issue warrants to purchase an aggregate of
1,665,720 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 November 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. 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.

      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 provide that the Company is required to place
$1,000,000 of the gross proceeds from the financing into escrow to fund the
joint venture. If the joint venture is not formed and operational on or by July
17, 2003, the lead investors will have the right, but not the obligation, to
require the Company to purchase $1,000,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium.

      Another condition of the financing requires the Company to place an
additional $1,000,000 of the gross proceeds into escrow, pending the execution
of a definitive agreement with Merrill Lynch, Pierce, Fenner & Smith


                                       26
<PAGE>
Incorporated ("Merrill Lynch") providing for the sale of all right, title and
interest to the Cicero technology. If a transaction with Merrill Lynch for the
sale of Cicero is not consummated by May 18, 2003, the lead investors will have
the right, but not the obligation, to require the Company to purchase $1,000,000
in liquidation value of the Series D Preferred Stock at a 5% per annum premium.

      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 $4.9 million 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 million
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 $2.9 million, 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 $2.9 million threshold.

CONTRACTUAL OBLIGATIONS

      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,
2002 are as follows:

<TABLE>
<CAPTION>
           Lease                   Lease
        Commitments   Sublease   Commitments
           Total       Income       Net
           -----       ------       ---
<S>     <C>           <C>        <C>
2003 .     1,610        (662)         948
2004 .       827        (171)         656
2005 .       579          --          579
2006 .       418          --          418
                                   ------
                                   $2,601
                                   ======
</TABLE>

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 (7) 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:


                                       27
<PAGE>
      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 December 31, 2002 the
Company had notes receivable of $867. Should our actual experience with respect
to collections differ from our initial assessment, we could incur expense in
future periods.

      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, 2002, the Company recorded a
write down of software product technology totaling $8,064 and as of December 31,
2002 the Company had $7,996 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,
2002, we had a valuation allowance of $76,175 against $76,175 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.


                                       28
<PAGE>
      At December 31, 2002, the Company has net operating loss carryforwards of
approximately $179,000 which may be applied against future taxable income. These
carryforwards will expire at various times between 2005 and 2018. 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. As mentioned in Note 18 of our consolidated
financial statements, we incurred restructuring charges totaling $1,300 during
the year ended 2002. At December 31, 2002, the restructuring liabilities that
remain totaled $772 on our consolidated balance sheets. Of this amount, $182 is
related to employee termination benefits that we expect to be paid in early
2003. The remaining $590 is for estimated future payments, primarily for rent in
excess of anticipated sublease income. Certain assumptions went into this
estimate including sublease income expected to be derived from these facilities.
Should we negotiate more favorable subleases or reach a settlement with our
landlords to be released from our existing obligations, we could realize a
favorable benefit to our results of future operations. Should future lease
costs, in excess of sublease income, if any, related to these facilities exceed
our estimates, we could incur additional expense in future periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.


                                       29
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      As of March 28, 2003, the Board of Directors of the Company consisted of
Anthony Pizi, Paul Rampel, Frank Artale, Bruce Hasenyager, Nicholas Hatalski,
Kenneth Neilsen and Jay Kingley. All Directors were elected at the 2002 Annual
Meeting of Stockholders and will serve until the election and qualification of
their successors or until their earlier death, resignation or removal. Messrs.
Hasenyager, Hatalski, Neilsen and Kingley were appointed to the Board of
Directors to fill vacancies that occurred during 2002. During the year, the
Company received resignations from Michel Berty in August 2002 and Theodore Fine
in September 2002. Richard Daley resigned from the Board in July 2002 and John
Barbano resigned his position on the Board in August 2002. Byron Viehler
resigned his position on the Board in July 2002. None of the resignations were
the result of a disagreement with the Company or its management. Dr. Jon Anton,
who was appointed to the Board in May 2002, was not nominated for re-election.
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: 43

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.

PAUL RAMPEL

Director since February 2001.       Age: 49

Mr. Rampel has served as a director since February 1, 2001. He previously served
as President until June 2002. Mr. Rampel previously served as Senior Vice
President of Research and Development from November 2000 when he joined the
Company following the acquisition of StarQuest Software, Inc. ("StarQuest").
Previously, as chief executive officer, president and a founder of StarQuest,
Mr. Rampel directed the day-to-day management operations of StarQuest. In
addition, he was the design architect of StarQuest's software products and a
recognized expert on IBM connectivity with 25 years of industry experience.
Prior to StarQuest, Mr. Rampel was the founder and CEO of Orion Networking
Systems, which was acquired by Apple Computer, Inc. in 1988. Prior to that, he
was manager of data processing for McKesson and held other management positions
with Alfa Laval and Communications Solutions, Inc.

FRANK G. ARTALE

Director since June 2001.           Age: 37

Mr. Artale has been a director of Level 8 since June 2001. Since March 2002, Mr.
Artale has served as CEO of Consera Software. Prior to that and since July 2000,
Mr. Artale served as the Vice President and General Manager of the Windows
Platform Division at Veritas Software Corporation (NASDAQ: VRTS) where his group
is responsible for overall product strategy for Windows targeted software
products. Prior to joining Veritas, Mr. Artale spent nine years at Microsoft
Corporation where he held various positions including General Manager for
systems management during the Windows 2000 project and Director of Program
Management for Windows NT 4.0.


                                       30
<PAGE>
NICHOLAS HATALSKI

Director since September 2002       Age: 40

Mr. Hatalski has been a director of Level 8 since September 2002. Since December
2000, Mr. Hatalski has served as a Senior Vice President of the iServices Group
of Park City Solutions, Inc. Previously, he was a Practice Manager at Siemens
Health Services.

BRUCE W. HASENYAGER

Director since October 2002.        Age: 60

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: 43

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: 41

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. 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. Artale,
Rampel and Hatalski. None of the current members of the Compensation Committee
has served as an executive officer of the Company, except for Mr. Rampel, who
was an executive officer until June 2002, and no executive officer of the
Company has served as a member of the Compensation Committee of any other entity
of which Messrs. Artale, Rampel and Hatalski 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


                                       31
<PAGE>
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: 43

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: 53

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.


ITEM 11. EXECUTIVE COMPENSATION.

      The following summary compensation table sets forth the compensation
earned by all persons serving as the Company's during fiscal year 2002, the
executive officers serving or having served at the end of fiscal 2001 whose
salary and bonus exceeded $100,000 for services rendered to the Company during
fiscal 2002 and one other former executive officer who would be included but for
the fact that he no longer served as executive officer at the end of fiscal
2002. 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 2002, see
"Option Grants in Fiscal 2002."


                                       32
<PAGE>
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
               NAME AND                                                                  SECURITIES      ALL OTHER
              PRINCIPAL                        FISCAL                                    UNDERLYING        ANNUAL
              POSITION                          YEAR       SALARY            BONUS        OPTIONS       COMPENSATION
              --------                          ----       ------            -----        -------       ------------
<S>                                            <C>        <C>              <C>           <C>            <C>
Anthony C. Pizi                                 2002      $337,500(2)      $     --       500,000         $     --
Chief Executive Officer, Chief                  2001      $527,038         $     --       500,000         $     --
Technology Officer and Chairman (1)

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

Paul Rampel                                     2002      $133,333         $     --                       $ 76,400(4)
Former President (3)                            2001      $231,310         $ 60,000       404,300         $     --
                                                2000      $ 15,000         $     --            --
</TABLE>

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

(2)   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.

(3)   Mr. Rampel resigned his position as President in June 2002.

(4)   Represents the fair market value of stock issued to Mr. Rampel as part of
      his separation from the Company as well as a forgiveness of debt to the
      Company in the amount of $32,500.


                                       33

<PAGE>
      The following table sets forth information regarding each grant of stock
options to each of the Named Executives during fiscal 2002. The Company is
required to withhold from the shares issued upon exercise a number of shares
sufficient to satisfy applicable withholding tax obligations. The Company did
not award any stock appreciation rights ("SARs") during fiscal 2002.

                          OPTION GRANTS IN FISCAL 2002

                           POTENTIAL REALIZABLE VALUE

<TABLE>
<CAPTION>
                        NUMBER OF       PERCENT OF                                AT ASSUMED ANNUAL RATES
                       SECURITIES      TOTAL OPTIONS                                OF APPRECIATION FOR
                       UNDERLYING       GRANTED TO     EXERCISE                        OPTION TERM
                                                                                       -----------
                        OPTIONS        EMPLOYEES IN     PRICE      EXPIRATION
NAME                    GRANTED        FISCAL YEAR    ($/SHARE)       DATE         5% ($)        10% ($)
----                    -------        -----------    ---------       ----         ------        -------
<S>                    <C>             <C>            <C>          <C>            <C>           <C>
Anthony C. Pizi         163,600           8.42%       $   1.50      02/25/12      $154,330      $391,623

                        336,400          17.32%       $   0.53      11/25/12       112,127       284,151


John P. Broderick       100,000           5.15%       $   0.39      07/08/12        24,527        62,156


Paul Rampel             100,000             (1)       $   0.35      10/14/12        22,011        55,781
</TABLE>

      (1) Mr. Rampel received a grant of stock options as a member of the
Company's Board of Directors. See Item 10 Director Compensation for further
discussion.

      The following table sets forth information concerning the options
exercised during fiscal 2002 and held at December 31, 2002 by the Named
Executives.

                FISCAL 2002 YEAR - END OPTION HOLDINGS AND VALUES

<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES
                                                              UNDERLYING UNEXERCISED        VALUE OF UNEXERCISED IN-THE-MONEY
                                                           OPTIONS AT DECEMBER 31, 2002      OPTIONS AT DECEMBER 31, 2002(1)
                                                           ----------------------------      -------------------------------
                              SHARES
                             ACQUIRED        VALUE
 NAME                       ON EXERCISE     REALIZED      EXERCISABLE      UNEXERCISABLE      EXERCISABLE      UNEXERCISABLE
-----------------------     -----------     --------      -----------      -------------      ------------     -------------
<S>                         <C>             <C>           <C>              <C>              <C>              <C>
Anthony C. Pizi                     --           --           166,653           833,347                (2)              --

John P. Broderick                   --           --            55,295           210,605                (2)              --

Paul Rampel(3)                      --           --           237,633            66,670           $11,666          $23,335
</TABLE>

      (1)   Based on $0.38 per share, the December 31, 2002, closing price as
            quoted on the Nasdaq National Market.

      (2)   The exercisable stock options held by these executives were not
            in-the-money at December 31, 2002.


                                       34
<PAGE>
      (3)   Mr. Rampel holds 237,633 shares subject to stock options. As part of
            the separation agreement dated June 2002 between the Company and Mr.
            Rampel, all of Mr. Rampel's option holdings immediately vested and
            the period in which those options may be exercised was extended to
            12 months from the date of termination. Please see "Employment
            Agreements, Termination of Employment and Change in Control
            Arrangements" for a complete description of the severance
            arrangement.

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

      Under the employment agreement between the Company and Mr. Pizi effective
January 1, 2002, the Company is to pay Mr. Pizi an annual base salary of
$300,000, and a performance bonus in cash of up to $150,000 per annum based upon
certain revenue goals, as determined by the Compensation Committee of the Board
of Directors of the Company, in its discretion. Mr. Pizi and the Company have
agreed to modify his employment contract as of January 1, 2003 to provide for an
annual base salary of $200,000, and a performance bonus in cash of up to
$400,000 per annum as determined by the Compensation Committee of the Board of
Directors of the Company, in its discretion. A revised employment agreement has
not been finalized although the Company and Mr. Pizi are proceeding under the
new salary terms. 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. 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 two hundred thousand (200,000) 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, 2002, the Company pays Mr. Broderick a base salary of
$200,000 and a performance bonus of cash up to 20% of Mr. Broderick's base
salary. 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 grant Mr. Broderick
fifty thousand (50,000) shares of the Company's common stock, a salary
continuation amounting to six months of Mr. Broderick's then base salary 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.

      Under the separation agreement between the Company and Mr. Rampel dated
June 18, 2002, the Company has agreed, among other things, to provide to Mr.
Rampel: (a) forgiveness of a $32,500 debt owed to the Company by Mr. Rampel; (b)
immediate vesting of all unvested stock options and the extension of the period
for exercise of these options to 12 months from the date of separation; and (c)
a grant of 100,000 shares of common stock of the Company. All the payments above
were subject to applicable withholding. In return for this compensation, Mr.
Rampel executed a release of employment related claims and agreed to forfeit
310,000 vested stock options with exercise prices between $5.87 and $6.10.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers, directors and persons who own more than ten percent of the
Company's Common Stock (collectively, "Reporting Persons") to file reports of
ownership and changes in ownership with the SEC and Nasdaq. Reporting Persons
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely on its review of


                                       35
<PAGE>
the copies of such reports received by it and written representations all
Section 16(a) reports were timely filed except as follows: Mr. Hatalski did not
timely file a Form 3 upon his appointment to the Board of Directors in September
2002. Messrs. Hasenyager and Nielsen did not timely file a Form 3 upon their
appointment to the Board of Directors in October 2002. Mr. Kingley did not
timely file a Form 3 upon his appointment to the Board of Directors in September
2002. With the exception of Mr. Pizi who received no options, all the members of
the Board of Directors failed to timely file a Form 4 reporting the receipt of
options to purchase common stock in October 2002 except Mr. Kingley, who did not
timely file for the receipt of options in November 2002. The filing deficiencies
referenced above were not remedied until January 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      The following table sets forth information as of March 17, 2003 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.

      Stock ownership information has been furnished to the Company by the named
person. 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 May 16, 2003 upon the
exercise of stock options. The chart is based on 19,328,088 shares outstanding
as of March 17, 2003. 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.

<TABLE>
<CAPTION>
                                                                                      COMMON STOCK
                                                                                      ------------
NAME OF BENEFICIAL OWNER                                                  NO. OF SHARES       PERCENT OF CLASS
------------------------                                                  -------------       ----------------
<S>                                                                       <C>                 <C>
MLBC, Inc. (1).........................................................     1,166,000 (2)                6.0%
Seneca Capital International, Ltd.(3)..................................     1,369,311 (4)                7.1%
Seneca Capital, L.P.(5)................................................     1,017,911 (6)                5.2%
Anthony C. Pizi........................................................       871,564 (7)                4.5%
Paul Rampel............................................................       283,014 (8)                1.5%
John P. Broderick......................................................        55,299 (9)                  *
Frank G. Artale........................................................       33,333 (10)                  *
Nicholas Hatalski......................................................       33,333 (10)                  *
Kenneth W. Nielsen.....................................................       33,333 (10)                  *
Bruce W. Hasenyager....................................................       33,333 (10)                  *
Jay R. Kingley.........................................................       33,333 (10)                  *
All current directors and executive officers as a group (8 persons)....    1,364,673 (11)                7.1%
</TABLE>

-------------
*     Represents less than one percent of the outstanding shares.

(1)   The address of MLBC, Inc. is c/o Merrill Lynch & Co., Inc., Corporate Law
      Department, 222 Broadway- 17th Floor, New York, New York 10038.

(2)   MLBC, Inc. is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
      Incorporated. See "Certain Relationships and Related Transactions."

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


                                       36
<PAGE>
(4)   Includes 779,826 shares of common stock issuable upon conversion of Series
      B3 Preferred Stock and 589,785 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.

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

(6)   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 412,298 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.

(7)   Includes 266,643 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 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.

(8)   Includes 24,462 shares of common stock and 20,919 shares issuable upon the
      exercise of warrants at an exercise price of $30.00 per share. Also
      includes 237,633 shares subject to stock options exercisable within sixty
      (60) days.

(9)   Consists of 55,299 shares subject to stock options exercisable within
      sixty (60) days.

(10)  Consists of 33,333 shares subject to stock options exercisable within
      sixty (60) days.

(11)  Includes shares issuable upon exercise of options and warrants exercisable
      within sixty (60) days as described in Notes 8-10.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ASSIGNMENT OF NOTE RECEIVABLE FROM PROFIT KEY

      In October 2002, the Company assigned its interest in a Note Receivable
from Profit Key Acquisition LLC to a group of investors including Nicholas
Hatalski and Paul Rampel, members of our Board of Directors, and Anthony C.
Pizi, the Chief Executive Officer of the Company. Pursuant to the terms of the
agreement, Level 8 assigned its interest in a Note Receivable in the principal
amount of $500,000, due March 31, 2003 with interest at 9% per annum in return
for $400,000 cash. The Company solicited a competitive bid before finalizing the
transaction.

SALE OF STARQUEST ASSETS

      On June 18, 2002, the Company and its subsidiary Level 8 Technologies,
Inc. entered into an Asset Purchase Agreement with Starquest Ventures, Inc., a
California corporation and an affiliate of Paul Rampel, a member of the Board of
Directors of Level 8 and a former executive officer. Pursuant to the terms and
conditions of the Asset Purchase Agreement, Level 8 sold its Star/SQL and CTRC
software products to Starquest Ventures for $365,000 and the assumption of
certain maintenance liabilities. $150,000 of the proceeds of the sale
transaction was used to repay borrowings from Mr. Rampel. The Company solicited
and received a fairness opinion on the transaction.

LOAN FROM RELATED PARTIES

      In December 2001, the Company entered into an agreement with Messrs.
Rampel and Pizi which provided for borrowings from them for up to $250,000 and
is secured by notes and accounts receivable. The borrowings bear interest at 10%
and is payable quarterly. In connection with Mr. Rampel's resignation from the
Company in June 18, 2002 and the sale of the StarQuest assets to an entity
affiliated with Mr. Rampel as described above, the Company repaid $150,000 of
the borrowings to Mr. Rampel. In August 2002, Mr. Pizi elected to convert
approximately $150,000 of his indebtedness from the Company into equity and
participated in the Series C Convertible Redeemable Preferred Stock Offering on
the same terms as the other investors and as a result this agreement has been
terminated.


                                       37
<PAGE>
TRANSACTIONS WITH MERRILL LYNCH

      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 and entered into a
royalty sharing agreement for sales of Cicero. Under the royalty sharing
agreement, the Company is obligated to pay a royalty of 3% of the sales price
for each sale of Cicero or related maintenance services. The royalties are not
payable in excess of $20 million. As consideration for the issuance of the
shares and the royalty payments, Merrill Lynch has entered into an amendment to
the Cicero license agreement which extends our exclusive worldwide marketing,
sales and development rights to Cicero and granted us certain ownership rights
in the Cicero trademark. Pursuant to the Purchase Agreement, the Company also
entered into a Registration Rights Agreement granting MLBC certain rights to
have the shares of common stock it received under the Purchase Agreement
registered under the Securities Act.

      On July 31, 2000, the Company entered into a Purchase Agreement with
Merrill Lynch concerning technology owned by Merrill Lynch. On August 23, 2000,
pursuant to the Purchase Agreement, Merrill Lynch granted the Company exclusive
worldwide marketing, sales and public development rights for a period of two
years to Cicero(R), a comprehensive integrated desktop computer environment
developed by Merrill Lynch and used by more than 30,000 Merrill Lynch
professionals worldwide, subject to Merrill Lynch's retained right to use and
develop Cicero for its own use and the use of affiliates and the possible loss
of exclusivity if the Company's share price does not meet certain targets. As
consideration for this license, the Company issued 1,000,000 shares of Company
common stock to Merrill Lynch.

PREFERRED STOCK AND WARRANT EXCHANGE

      On October 25, 2002, we 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 potential conversion price adjustments 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.

      Under the terms of the agreement, we are authorized to issue equity
securities in a single or series of financing transactions representing
aggregate gross proceeds to the Company of approximately $5.0 million, or up to
an aggregate 17.5 million shares of common stock, whichever occurs first,
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, we repriced the
warrants as described above and have agreed to issue on a pro rata basis up to
4.6 million 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 $5.0 million issuance cap or the
17.5 million share issuance cap. As a result of the Series C Preferred Stock
financing which represented approximately $1.6 million of the Company's $5.0
million 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. 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


                                       38
<PAGE>
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 per share (adjusted for
recapitalizations, stock splits and the like), whichever is greater.

      Previously, on October 16, 2001, the Company effected an exchange of all
of its outstanding shares of Series A 4% Convertible Redeemable Preferred Stock
and Series B 4% Convertible Redeemable Preferred Stock and related warrants for
an equal number of shares of our newly created Series A1 Convertible Redeemable
Preferred Stock ("Series A1 Preferred Stock") and Series B1 Convertible
Redeemable Preferred Stock ("Series B1 Preferred Stock") and related warrants.
Advanced Systems Europe, B.V. ("ASE"), a wholly owned subsidiary of Level 8's
principal stockholder at the time, exchanged 10,000 shares of Series A Preferred
Stock for the newly created Series A1 Preferred Stock. The effect of the
exchange with respect to ASE is as follows: The conversion price for the Series
A1 Preferred Stock was reduced from $10.00 to $8.333 per share, and the total
number of shares of common stock into which such shares may be converted
increased from 1,000,000 to 1,200,048. No dividends are payable on the Series A1
Preferred Stock. Liraz and ASE may no longer be considered related parties
because of their divestments of capital stock of the Company.

LOANS TO RELATED PARTIES

      On January 27, 2001, the Company extended a loan to Paul Rampel, the then
President and a director of the Company, in the amount of $75,000. The loan
carried an interest rate of 10% per annum on the principal balance and the loan
was due and payable in full on January 27, 2002. The loan was secured by 15,000
shares of common stock of the Company held by Mr. Rampel under a Stock Pledge
agreement between the Company and Mr. Rampel. In March of 2002, Mr. Rampel, as
part of his new employment agreement with the Company, gave back the 15,000
shares of stock as partial payment on the Note and agreed to pay the rest of the
Note off monthly during 2002. The remainder of the balance was settled in
connection with Mr. Rampel's separation agreement entered into in June 2002.

BORROWINGS AND COMMITMENTS FROM LIRAZ

      As part of the acquisition of Template software, the Company obtained $10
million in financing in the form of a 17 month term loan. The financing was
guaranteed by Liraz, the Company's principal stockholder, in return for 60,000
shares of the Company's common stock. The number of shares of common stock
provided in exchange for the guarantee, was determined by the independent
directors of the Company in consultation with an outside appraisal firm and
based upon market conditions and the Company's anticipated financing needs at
closing. In the third quarter of 2000, this term loan was amended to provide the
Company with an additional $5 million in borrowings and to extend the due date
from May 31, 2001 to November 30, 2001. Liraz subsequently extended its
guarantee of the amended loan through November 30, 2001 in exchange for 110,000
shares of the Company's common stock. The value of the shares issued will be
capitalized and amortized over the term of the loan as a component of interest
expense. In May of 2001, Liraz extended its guarantee until April 30, 2002. The
commitment provides for an interest rate equal to the London Interbank Offered
Rate plus 1% annually. As of June 30, 2002 the interest rate was approximately
3.03%. As part of the sale of the Geneva AppBuilder Product to a subsidiary of
Liraz in October 2001, the company utilized the proceeds from the transaction
and other assets to liquidate approximately $12 million of the outstanding debt.
At the same time, Liraz extended its guarantee and the maturity date on the
balance of the Note until November 2003.

ITEM 14. CONTROLS AND PROCEDURES.

(a) Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's President and Chief Executive Officer, and
Vice President and Chief Financial Officer, have concluded that the Company's
disclosure controls and procedures are effective.

(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.


                                       39

<PAGE>


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) 1. FINANCIAL STATEMENTS

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

      Independent Auditors' Report

      Consolidated Balance Sheets as of December 31, 2002 and 2001

      Consolidated Statements of Operations for the years ended December 31,
      2002, 2001 and 2000

      Consolidated Statements of Changes in Shareholders' Equity for the years
      ended December 31, 2002, 2001 and 2000

      Consolidated Statements of Comprehensive Loss for the years ended December
      31, 2002, 2001 and 2000

      Consolidated Statements of Cash Flows for the years ended December 31,
      2002, 2001 and 2000

      Notes to Consolidated Financial Statements

      2. FINANCIAL STATEMENT SCHEDULES

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

      3. EXHIBITS

      The exhibits listed under Item 14(c) hereof are filed as part of this
      Annual Report on Form 10-K.

(B) REPORTS ON FORM 8-K

      On December 30, 2002, Level 8 Systems filed a Form 8-K reporting the
      completion of its asset sale agreement by and between Level 8 and EM
      Software Solutions, Inc.


                                       40
<PAGE>
EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION

<S>      <C>
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 December 30, 2002 (filed herewith).

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 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).

3.4      Certificate of Designation relating to Series B3 Convertible Redeemable
         Preferred Stock. (incorporated by reference to exhibit 3.2 to Level 8's
         Form 10-Q filed November 15, 2002).

3.5      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 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).

4.2      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).

4.3      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).

4.3A     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).

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

4.4A     First Amendment to Registration Rights Agreement, dated as of August 8,
         2001, to the Registration Rights Agreement dated as of June 13, 1995,
         by and between Across Data Systems, Inc. (Level 8's predecessor) and
         Liraz Systems Ltd. (incorporated by reference to exhibit 4.1 to Level
         8's Report on Form 8-K, filed August 14, 2001).

4.5      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).

4.6      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).

4.7      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).

4.8      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).

4.9      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).
</TABLE>


                                       41
<PAGE>
10.1     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).

10.2     Purchase Agreement, dated as of January 3, 2002, between Level 8
         Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 10.1
         to Level 8's Report on Form 8-K, filed January 11, 2002).

10.2A    Purchase Agreement, dated as of July 31, 2000, between Level 8 Systems,
         Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
         (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form
         8-K, filed August 11, 2000).

10.3     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).

10.4     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).

10.3     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).

10.3A    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).

10.3B    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).

10.3C    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).

10.4     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).

10.4A    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).

10.5     Asset Purchase Agreement by and among Level 8 Systems, Inc., Level 8
         Technologies, Inc. and Starquest Ventures, Inc., dated as of May 31,
         2002 (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K
         filed June 25, 2002).

10.5     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).

10.6     Employment Agreement between Anthony Pizi and the Company effective
         January 1, 2002 (incorporated by reference to exhibit 10.10 of Level
         8's Form 10-K filed April 1, 2002).*

10.7     Employment Agreement between John P. Broderick and the Company
         effective January 1, 2002 (incorporated by reference to exhibit 10.11
         of Level 8's Form 10-K filed April 1, 2002).*

10.8     Separation Agreement and Mutual Limited Release between Level 8
         Systems, Inc. and Paul Rampel (incorporated by reference to exhibit
         10.1 of Level 8's Form 8-K filed June 25, 2002).*

10.9     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).*

10.9A    Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan
         (incorporated by reference to exhibit 10.14A to Level 8's Form 10-K
         filed April 2, 2002).*


                                       42
<PAGE>
10.10    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).*

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

10.11A   Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July
         6, 1998 (incorporated by reference to exhibit 10.58 to Seer Technology
         Inc.'s Quarterly Report on Form 10-Q for the period ended June 30,
         1998, File No. 000-26194).

10.11B   Amendment to Lease Agreement for Cary, N.C. offices, dated January 21,
         1999 (incorporated by reference to exhibit 10.21A to Level 8's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1998).

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

10.12A   Amendment to Office Lease Agreement, dated August 18, 1997, between
         Template Software, Inc. and Vintage Park Two Limited Partnership
         (incorporated by reference to an exhibit to Template Software, Inc.'s
         Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
         File No. 000-21921).

10.13    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).

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

23.1     Consent of Deloitte & Touche LLP (filed herewith).

99.1     Certification of Anthony C. Pizi Pursuant to 18 USC Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         (filed herewith).

99.2     Certification of John P. Broderick Pursuant to 18 USC Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         (filed herewith).

*        Management contract or compensatory agreement.


                                       43

<PAGE>
                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                             LEVEL 8 SYSTEMS, INC.


                                             By: /s/ Anthony C. Pizi
                                                 -------------------------------
                                                  Anthony C. Pizi
                                                  Chairman of the Board and
                                                  Chief Executive Officer
                                                  Date: March 28, 2003

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

<TABLE>
<CAPTION>
       Signature                              Title                                   Date
       ---------                              -----                                   ----
<S>                             <C>                                             <C>
/s/ Anthony C. Pizi             Chairman of the Board and Chief                 March 31, 2003
------------------------        Executive Officer (Principal Executive
Anthony C. Pizi                 Officer)


/s/ John P. Broderick           Chief Financial and Operating Officer           March 31, 2003
------------------------        (Principal Chief Accounting Officer)
John P. Broderick

/s/ Paul Rampel                 Director                                        March 31, 2003
------------------------
Paul Rampel

/s/ Frank Artale                Director                                        March 31, 2003
------------------------
Frank Artale

/s/ Nicholas Hatalski           Director                                        March 31, 2003
------------------------
Nicholas Hatalski

/s/ Bruce Hasenyager            Director                                        March 31, 2003
------------------------
Bruce Hasenyager

/s/ Kenneth Neilsen             Director                                        March 31, 2003
------------------------
Kenneth Neilsen

/s/ Jay Kingley                 Director                                        March 31, 2003
------------------------
Jay Kingley
</TABLE>


                                       44
<PAGE>
                                 CERTIFICATIONS

I, Anthony C. Pizi, certify that:

1. I have reviewed this annual report on Form 10-K of Level 8 Systems, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c)    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003                         /s/ Anthony C. Pizi
                                             -----------------------------------
                                             Anthony C. Pizi
                                             Chairman of the Board and Chief
                                             Executive Officer
                                             (Principal Executive Officer)


                                       45
<PAGE>
I, John P. Broderick, certify that:

1. I have reviewed this annual report on Form 10-K of Level 8 Systems, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c)    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003                         /s/ John P. Broderick
                                             -----------------------------------
                                             John P. Broderick
                                             Chief Financial and Operating
                                             Officer
                                             (Principal Accounting Officer)


                                       46
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

                                    CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                      <C>
Independent Auditors' Report.......................................................      F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets........................................................      F-3

Consolidated Statements of Operations..............................................      F-4

Consolidated Statements of Changes in Stockholders' Equity.........................      F-5

Consolidated Statements of Comprehensive Loss......................................      F-6

Consolidated Statements of Cash Flows..............................................      F-7

Notes to Consolidated Financial Statements.........................................     F-10
</TABLE>


                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Level 8 Systems, Inc.
Cary, North Carolina


We have audited the accompanying consolidated balance sheets of Level 8 Systems,
Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity, cash flows
and comprehensive loss for each of the three years in the period ended December
31, 2002. 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 audits 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 the Companies as of December 31, 2002 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 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/ DELOITTE & TOUCHE LLP

Raleigh, North Carolina
March 28, 2003


                                      F-2

<PAGE>



                              LEVEL 8 SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,           DECEMBER 31,
                                                                                        2002                   2001
                                                                                    ------------          -------------
<S>                                                                                 <C>                   <C>
ASSETS

Cash and cash equivalents .....................................................      $     199             $     510
Available-for-sale securities .................................................             --                   155
Assets held for sale - systems integration ....................................             --                11,184
Assets of operations to be abandoned ..........................................            453                   853
Trade accounts receivable, net ................................................          1,291                   579
Receivable from related party .................................................             73                   805
Notes receivable, net .........................................................            867                 1,977
Note receivable from related party ............................................             --                 1,082
Prepaid expenses and other current assets .....................................            731                 1,650
                                                                                     ---------             ---------
        Total current assets ..................................................          3,614                18,795
Property and equipment, net ...................................................            162                   763
Software product technology, net ..............................................          7,996                15,415
Note receivable ...............................................................             --                   500
Other assets ..................................................................             80                   271
                                                                                     ---------             ---------
        Total assets ..........................................................      $  11,852             $  35,744
                                                                                     =========             =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Short term debt ...............................................................      $   2,893             $     245
Accounts payable ..............................................................          3,537                 2,577
Accrued expenses:
    Salaries, wages, and related items ........................................            107                   642
    Restructuring .............................................................            772                   853
    Other .....................................................................          1,332                 4,277
Due to related party ..........................................................             --                    56
Liabilities held for sale - systems integration ...............................             --                 3,918
Liabilities of operations to be abandoned .....................................            916                 1,174
Deferred revenue ..............................................................            311                   524
                                                                                     ---------             ---------
        Total current liabilities .............................................          9,868                14,266
Long-term debt, net of current maturities .....................................             --                 4,600
Warrant liability .............................................................            331                 2,985
Commitments and contingencies (Notes 20 and 21)
Stockholders' equity
    Convertible redeemable preferred stock, $0.001 par value, 10,000,000 shares
    authorized at December 31, 2002 and 2001, respectively ....................

      Series A1   - 11,570 shares issued and outstanding at December 31, 2001,
                    $1,000 per share liquidation preference (aggregate
                    liquidation value of $11,570).                                          --                    --

      Series A3   - 10,070 shares issued and outstanding at December 31, 2002,
                    $1,000 per share liquidation preference (aggregate
                    liquidation value of $10,070).                                          --                    --

      Series B1   - 30,000 shares issued and outstanding at December 31, 2001,
                    $1,000 per share liquidation preference (aggregate
                    liquidation value of $30,000).                                          --                    --

      Series B3   - 30,000 shares issued and outstanding at December 31, 2002,
                    $1,000 per share liquidation preference (aggregate
                    liquidation value of $30,000).                                          --                    --

      Series C    - 1,590 shares issued and outstanding at December 31, 2002 -
                    $1000 per share liquidation preference (aggregate
                    liquidation value of $1,590).                                           --                    --

    Common stock, $0.001 par value, 60,000,000 and 40,000,000 authorized at
      December 31, 2002 and 2001, respectively; 19,202,763 and 16,155,559
      issued and outstanding at December 31, 2002 and 2001, respectively.                   19                    16
    Additional paid-in-capital ................................................        202,916               196,043
    Accumulated other comprehensive loss ......................................           (717)                 (778)
    Accumulated deficit .......................................................       (200,565)             (181,388)
                                                                                     ---------             ---------
        Total stockholders' equity ............................................          1,653                13,893
                                                                                     ---------             ---------
        Total liabilities and stockholders' equity ............................      $  11,852             $  35,744
                                                                                     =========             =========
</TABLE>


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

                                       F-3

<PAGE>
                              LEVEL 8 SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                                            ----------------------------------------
                                                                              2002            2001            2000
                                                                            --------        ---------       --------
<S>                                                                         <C>             <C>             <C>
Revenue:
  Software ..........................................................       $  1,491        $   1,658       $ 45,998
  Maintenance .......................................................            571            9,262         15,967
  Services ..........................................................          1,039            6,437         21,764
                                                                            --------        ---------       --------
        Total operating revenue .....................................          3,101           17,357         83,729

Cost of revenue:
  Software ..........................................................          7,396           14,800          9,844
  Maintenance .......................................................            181            3,249          5,716
  Services ..........................................................            900            5,487         19,757
                                                                            --------        ---------       --------
        Total cost of revenue .......................................          8,477           23,536         35,317

Gross margin ........................................................         (5,376)          (6,179)        48,412

Operating expenses:
  Sales and marketing ...............................................          2,808           11,042         35,177
  Research and product development ..................................          1,902            5,365          8,861
  General and administrative ........................................          3,935            9,630         12,682
  In-process research and development ...............................             --               --          1,800
  Amortization of intangible assets .................................             --            6,259         14,191
  Impairment of intangible assets ...................................             --            7,929             --
  (Gain)/loss on disposal of assets .................................            461           (6,345)           379
  Restructuring, net ................................................          1,300            8,650             --
                                                                            --------        ---------       --------
        Total operating expenses ....................................         10,406           42,530         73,090
                                                                            --------        ---------       --------
Loss from operations ................................................        (15,782)         (48,709)       (24,678)

Other income (expense):
  Interest income ...................................................            180              820            976
  Interest expense ..................................................           (471)          (4,346)        (3,337)
  Other-than-temporary decline in fair value of marketable securities             --           (3,845)            --
  Change in fair value of warrant liability .........................          2,947             (885)            --
  Other expense .....................................................           (171)            (594)          (265)
                                                                            --------        ---------       --------
Loss before provision for income taxes ..............................        (13,297)         (57,559)       (27,304)
  Income tax provision (benefit) ....................................           (155)             501          1,063
                                                                            --------        ---------       --------
Loss from continuing operations .....................................       $(13,142)       $ (58,060)      $(28,367)
Loss from discontinued operations ...................................         (5,040)         (47,075)
                                                                            --------        ---------       --------
Net loss ............................................................       $(18,182)       $(105,135)      $(28,367)
                                                                            ========        =========       ========

  Preferred dividends ...............................................                             926          1,036
  Accretion of preferred stock & deemed dividends ...................            995               --             --
  Cumulative effect of accounting change (See Note 1.) ..............             --               --          4,785
                                                                            --------        ---------       --------
Net loss applicable to common stockholders ..........................       $(19,177)       $(106,061)      $(34,188)
                                                                            ========        =========       ========

Loss from continuing operations - basic and diluted .................          (0.75)           (3.70)         (2.10)
Loss from discontinued operations - basic and diluted ...............          (0.27)           (2.95)            --
Cumulative effect of accounting change -- basic and diluted .........             --               --          (0.34)
                                                                            --------        ---------       --------
Net loss applicable to common stockholders -- basic and diluted .....       $  (1.02)       $   (6.65)      $  (2.44)
                                                                            ========        =========       ========

Weighted average common shares outstanding -- basic and diluted .....         18,877           15,958         14,019
                                                                            ========        =========       ========
</TABLE>

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



                                       F-4
<PAGE>
                              LEVEL 8 SYSTEMS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                           ACCUMULATED
                                                 COMMON STOCK   PREFERRED STOCK  ADDITIONAL                   OTHER
                                                --------------  ---------------   PAID-IN    ACCUMULATED  COMPREHENSIVE
                                                SHARES  AMOUNT  SHARES  AMOUNT    CAPITAL     (DEFICIT)      INCOME        TOTAL
                                                ------  ------  ------  -------  ----------  -----------  -------------  ---------
<S>                                             <C>     <C>     <C>     <C>      <C>         <C>          <C>            <C>
Balance at December 31, 1999 .................  12,329  $  12    19     $  --    $ 113,507   $  (41,139)    $   (159)    $ 72,221
Shares issued for StarQuest ..................     492      1                       10,082                                 10,083
Shares issued for StarQuest debt .............     243     --                        2,175                                  2,175
Shares issued for private placement ..........                   30                 29,532                                 29,532
Shares issued for loan guarantee .............     110     --                        2,805                                  2,805
Shares issued for Cicero technology
purchase .....................................   1,000      1                       22,464                                 22,465
Shares issued for Momentum debt conversion ...      55     --                        1,904                                  1,904
Conversion of preferred shares ...............     738      1    (7)                                                            1
Conversion of warrants .......................     296     --                        2,529                                  2,529
Warrants issued for bank loan ................                                         775                                    775
Exercises of stock options ...................     523      1                        6,386                                  6,387
Preferred stock dividend .....................                                                   (1,036)                   (1,036)
Cumulative effect of accounting change .......                                       4,785       (4,785)                       --
Foreign currency translation adjustment ......                                                                  (332)        (332)
Unrealized losses on marketable securities ...                                                                (3,412)      (3,412)
Net loss .....................................                                                  (28,367)                  (28,367)
                                                ------  -----   ---       ---    ---------   ----------     --------     --------
Balance at December 31, 2000 .................  15,786  $  16    42     $  --    $ 196,944   $  (75,327)    $ (3,903)    $117,730
Shares issued as compensation ................     369     --                        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 .................  16,155  $  16    42     $  --    $ 196,043   $ (181,388)    $   (778)     $13,893
Shares issued as compensation ................     108     --                          139                                    139
Shares issued in private placement of
common stock .................................   2,382      3                        3,571                                  3,574
Shares issued for litigation settlement ......     142     --                          270                                    270
Shares issued for Cicero license agreement....     250     --                          622                                    622
Shares forfeited for repayment of notes
receivable ...................................    (15)     --                          (21)                                   (21)
Shares issued in private placement of
series C preferred ...........................             --     2                  1,590                                  1,590
Conversion of preferred shares to common .....     181     --    (2)                    --                                     --
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 .................  19,203  $  19    42     $  --    $ 202,916   $ (200,565)     $  (717)    $  1,653
                                                ======  =====   ===       ===    =========   ==========      =======     ========
</TABLE>


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


                                       F-5
<PAGE>
                              LEVEL 8 SYSTEMS, INC.
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                               -----------------------------------------------
                                                                 2002             2001                  2000
                                                               --------         ---------             --------
<S>                                                            <C>              <C>                   <C>
Net loss ................................................      $(18,182)        $(105,135)            $(28,367)
Other comprehensive income, net of tax ..................
  Foreign currency translation adjustment ...............          (199)             (287)                (332)
    Reclassification of accumulated foreign currency
      translation adjustments for dissolved subsidiaries            260
  Unrealized loss on available-for-sale securities ......            --              (353)              (3,412)
  Reclassification of unrealized loss included in income-
      other than temporary decline ......................            --             3,765                   --
                                                               --------         ---------             --------
Comprehensive loss ......................................      $(18,121)        $(102,010)            $(32,111)
                                                               ========         =========             ========
</TABLE>


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


                                      F-6
<PAGE>
                              LEVEL 8 SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                                                          -------------------------------------
                                                                                            2002          2001           2000
                                                                                          --------      ---------      --------
<S>                                                                                       <C>           <C>            <C>
Cash flows from operating activities:
 Net loss ...........................................................................     $(18,182)     $(105,135)     $(28,367)
 Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization ....................................................        8,042         27,758        26,078
   Change in fair value of warrant liability ........................................       (2,947)           885            --
   Stock compensation expense .......................................................          139          1,199            --
   Unrealized loss on marketable securities-other than temporary decline ............                       3,845            --
   Purchased in-process research and development ....................................                          --         1,800
   Impairment of intangible assets and software product technology ..................                      46,923            --
   Provision for doubtful accounts ..................................................         (477)         3,812           572
   (Gain)/loss on disposal of assets ................................................          461         (6,346)          379
   Other ............................................................................           98           (188)           42
   Changes in assets and liabilities, net of assets acquired and liabilities assumed:
     Trade accounts receivable and related party receivables ........................          352         10,454        (2,339)
         Assets and liabilities held for sale - systems integration .................        6,409             --
         Assets and liabilities of operations to be abandoned .......................          473             --
     Due from Liraz .................................................................          (56)           (3)            --
     Prepaid expenses and other assets ..............................................          803            834         1,854
     Accounts payable and accrued expenses ..........................................       (2,181)        (5,284)       (1,223)
     Merger-related and restructuring ...............................................                         952        (3,526)
     Deferred revenue ...............................................................         (122)           657        (1,236)
                                                                                          --------      ---------      --------
      Net cash used in operating activities .........................................       (7,188)       (19,637)       (5,966)
Cash flows from investing activities:
 Proceeds from sale of available for sale securities ................................          175             --            --
 Purchases of property and equipment ................................................          (11)          (198)       (1,972)
 Cash payments secured through notes receivable .....................................           --            (77)       (1,252)
 Repayment of note receivable .......................................................        2,460            675           500
 Purchase of available for sale securities ..........................................           --             --        (4,000)
 Investment in Access International .................................................           --             --          (350)
 Cash received from sale of property ................................................           --          2,236            --
 Cash received from sale of line of business assets .................................        1,300         19,900            --
 Payments for businesses acquired ...................................................           --             --        (2,674)
 Cash received from acquisitions, net ...............................................           --             --         1,839
 Additions to software product technology ...........................................           --         (2,310)         (726)
                                                                                          --------      ---------      --------
       Net cash provided by (used in) investing activities ..........................        3,924         20,226        (8,635)
Cash flows from financing activities:
 Proceeds from issuance of common shares, net of issuance costs .....................        1,974             --         8,915
 Proceeds from issuance of preferred shares, net of issuance costs ..................        1,380             --        29,532
 Dividends paid for preferred shares ................................................           --         (1,345)         (789)
 Proceeds from bridge financing .....................................................           --          1,600            --
 Issuance costs of common shares ....................................................           --             --          (187)
 Payments on loans to related party .................................................           --             --        (4,519)
 Payments under capital lease obligations and other liabilities .....................           --           (133)          (87)
 Net borrowings on line of credit ...................................................           --            245         5,175
 Borrowings under credit facility, term loans and notes payable .....................          381             --        15,000
 Repayments of term loans, credit facility and notes payable ........................         (583)       (24,000)      (20,945)
                                                                                          --------      ---------      --------
       Net cash (used in) provided by financing activities ..........................        3,152        (23,633)       32,095
Effect of exchange rate changes on cash .............................................         (199)          (302)         (147)
Net (decrease) increase in cash and cash equivalents ................................         (311)       (23,346)       17,347
Cash and cash equivalents:
 Beginning of period ................................................................          510         23,856         6,509
                                                                                          --------      ---------      --------
 End of period ......................................................................     $    199      $     510      $ 23,856
                                                                                          ========      =========      ========

Supplemental disclosures of cash flow information:
Cash paid during the period for:
      Income taxes ..................................................................     $    117      $     280      $    497
      Interest ......................................................................     $    224      $   1,339      $  2,104

</TABLE>

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



                                       F-7
<PAGE>
                              LEVEL 8 SYSTEMS, INC.
              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)


Non-cash Investing and Financing Activities

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 12.

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 8.

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 12.

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 effected 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 12.

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 12.

In December 2002, the Company received $744 and $617 in notes receivables
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. The bonus was valued at $1,199. See
Note 12.

In September and October 2001, the Company received $400 and $1,000 in notes
receivable related to the sale of assets related to the 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. See Note 4.

During 2001, the Company performed consulting services valued at $750 in
exchange for common shares of a strategic partner. See Note 6.

In September 2001, the Company retired a note receivable from related party
totaling $495 in exchange for the forfeiture by the director and officer of
certain retirement benefits. See Note 17.




                                       F-8

<PAGE>

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 Convertible Preferred Stock
("Series A1 Preferred Stock") and 30,000 shares of Series B1 Convertible
Preferred Stock ("Series B1 Preferred Stock"), respectively. See Note 12.

2000

During 2000, the Company issued 110,000 shares of common stock to a related
party in order to obtain a guarantee for an additional $5 million in borrowings
from a commercial lender and an extension of the guarantee for the amended term
loan. The amended guarantee was valued at $2,805.

During 2000, the Company obtained a credit facility from a commercial lender. In
connection with this facility, the Company provided warrants to the lender to
purchase approximately 173,000 shares of common stock that were valued at $775.

During 2000, the Company acquired StarQuest Software, Inc. ("StarQuest") for
$850 in cash and approximately $10,138 in stock and warrants. A reconciliation
of the cost of the acquisition to the net cash paid for the acquisition is as
follows:

<TABLE>
<CAPTION>
 Fair value of:
<S>                                                          <C>
        Assets received .................................    $ 18,372
        Liabilities assumed..............................      (7,228)
        Additional direct costs..........................         (70)
        Stock and warrants issued........................     (10,138)
                                                             --------
        Cash paid .......................................        (936)
        Cash acquired ...................................          15
                                                             --------
        Net cash paid for acquisition....................    $   (921)
                                                             ========
</TABLE>

Total acquisition costs for StarQuest was $650, of which $70 were paid in 2000
and the remaining costs paid in 2001.

Immediately subsequent to the acquisition, the Company retired $2,175 of
StarQuest's debt obligations by issuing the debtholders approximately 243,000
shares of the Company's common stock.

During 2000, the Company purchased 500,000 shares of common stock and warrants
to purchase an additional 500,000 shares of common stock of a publicly traded
company. The investment was originally recorded at $4,000 and has been revalued
to $588, fair value as of December 31, 2000. These shares of common stock are
classified as available-for-sale securities.

During 2000, the Company acquired the rights to a comprehensive integrated
desktop computer environment from Merrill Lynch in exchange for 1,000,000 shares
of the Company's common stock. The total consideration including fair value of
common stock and transaction expenses was $22,523.

During 2000, the Company assigned collection on certain accounts receivable
totaling $408 to a strategic partner in exchange for a note receivable from the
partner.

During 2000, the Company performed consulting services valued at $1,250 in
exchange for common shares of a strategic partner.

During 2000, the Company converted $1,904 of the Momentum notes to approximately
55,000 shares of the Company's common stock. During August, 2000 the Company
paid off the remaining balances due under these notes.



                                       F-9
<PAGE>




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

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

Level 8 Systems, Inc. ("Level 8" or the "Company") is a global provider of
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 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
$18.2 million and has experienced negative cash flows from operations for the
year ended December 31, 2002. At December 31, 2002, the Company had a working
capital deficiency of approximately $6.3 million. The Company's future revenues
are largely dependent on acceptance of a newly developed and marketed product -
Cicero. These factors among others raises substantial doubt about the Company's
ability 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 Level 8 be unable to continue as a going concern. To
address these issues, the Company is actively promoting and expanding its
product line and has entered into preliminary sales negotiations with several
significant new customers and completed some very strategic sales to existing
customers. The Company has completed another round of financing wherein it
raised $3.5 million of new funds from several investors, of which approximately
$1.5 million was immediately available to the Company. 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.

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.

                                      F-10
<PAGE>

CASH AND CASH EQUIVALENTS

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

AVAILABLE-FOR-SALE SECURITIES

Investments in publicly traded entities are classified as available-for-sale and
are stated at fair value. Net unrealized gains or losses are recorded as a
component of stockholder's equity until realized or an other-than-temporary
decline in fair value has occurred. The market value is based on the closing
price as quoted by the respective stock exchange.

The Company has recorded a loss relating to an other-than-temporary decline in
the market value of the shares as an unrealized loss on marketable securities in
the accompanying consolidated statement of operations. See Note 4.

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 the estimated useful lives of
the related assets as follows:

<TABLE>
<S>                                             <C>
Leasehold improvements........................  The lesser of the lease term or
                                                estimated useful life
Furniture and fixtures........................  3 to 5 years
Office equipment..............................  3 to 5 years
Computer equipment............................  3 to 5 years
</TABLE>


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 Statement 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 8.

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 8.

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.

INTANGIBLE ASSETS

The Company had no recorded intangible assets at December 31, 2002 and 2001.
Prior to 2001 Intangible assets consisted of both identifiable and
unidentifiable assets (goodwill) and are amortized on a straight-line basis over
periods from three to seven years. On a periodic basis and whenever changes in
events or circumstances indicate that the asset may not be recoverable, the
Company

                                      F-11
<PAGE>

assessed the recoverability of intangible assets by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the related operations. If an
impairment exists, the amount of such impairment is calculated based on the
difference between the carrying amount of the asset and estimated fair value of
the asset, which is determined based upon anticipated cash flows discounted at a
rate commensurate with the risk involved. See Note 9.

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
an 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 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. No impairments of long-lived assets were
recorded in 2000 or 2001. During 2002, the Company recorded impairments
associated with the sale of the Geneva and Star SQL and CTRC operations. See
Note 8.

REVENUE RECOGNITION

The Company recognizes license revenue from end-users and third party resellers
in accordance with Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), as amended by Statement of Position 98-9, "Modification of SOP
97-2, 'Software Revenue Recognition,' with Respect to Certain Transactions"
("SOP 98-9"). 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 $53, $1,198, and $3,494 for the years ended December 31, 2002,
2001, and 2000, respectively.

RESEARCH AND PRODUCT DEVELOPMENT

Research and product development costs are expensed as incurred.

INCOME TAXES

The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" to account for income taxes. This statement
requires an asset and liability approach that recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future

                                      F-12
<PAGE>

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 11.

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 the SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" and the Company has reclassified the results of
operations for Systems Integration segment in 2002 and 2001 to Loss on
discontinued operations in the Consolidated Statements of Operations. The result
of the Systems Integration segment for 2000 have not been reclassified as the
Company did not utilize the line-of-business approach to manage the Company,
thus the information is not available and it is impractical to obtain. The
Consolidated Statements of Cash Flows for 2001 and 2000 have 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.

ACCOUNTING CHANGE

The Emerging Issues Task Force ("EITF") reached a consensus on EITF 00-27
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", which establishes accounting and
reporting standards for the determination of beneficial conversion features in
convertible securities. The EITF reached a consensus that an issuer should first
allocate the proceeds received in a financing transaction that includes
preferred stock convertible into common stock to the preferred stock and any
other detachable warrants on a relative fair value basis. The Company has
applied the provisions of EITF 00-27, which resulted in a beneficial conversion
feature of the Company's Series A and Series B preferred stock of $4,785. As
required by EITF 00-27 the beneficial conversion feature was reflected as a
cumulative effect of a change in accounting of $4,785 or $.34 per common share,
in the fourth quarter of 2000.

LOSS PER SHARE

Basic (loss) per share is computed based upon the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is computed based
upon the weighted average number of common shares outstanding and any
potentially dilutive securities. During 2002, 2001, and 2000, 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:

<TABLE>
<CAPTION>
                                                      2002        2001     2000
                                                     ------      ------    -----
<S>                                                  <C>         <C>       <C>
        Stock options...............................  3,834       4,366    3,876
        Warrants....................................  5,316       2,569    2,662
        Preferred stock.............................  7,812       3,782    2,354
                                                     ------      ------    -----
                                                     16,962      10,717    8,892
                                                     ======      ======    =====
</TABLE>


In 2002 no dividends were declared on preferred stock. In 2001 and 2000
dividends totaled $926 and $1,036, and were included in the loss per share
calculations.

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 income and diluted net income per common share would have
been the pro forma amounts indicated below.

<TABLE>
<CAPTION>

                                                                                           YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------------
                                                                                   2002           2001             2000
                                                                                ---------      ---------        ---------
<S>                                                                             <C>            <C>              <C>
Net loss applicable to common stockholders                                      $ (19,177)     $(106,061)       $ (34,188)
Less: Total stock-based employee compensation expense under
  fair value based method for all awards, net of related tax effects.........      (3,387)        (2,735)          (8,168)
                                                                                ---------      ---------        ---------
Pro forma loss applicable to common stockholders.............................   $ (22,563)     $(108,796)       $ (42,356)
                                                                                =========      =========        =========
Earnings per share:
</TABLE>

                                      F-13

<PAGE>

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------------
                                                                                   2002           2001             2000
                                                                                ---------      ---------        ---------
<S>                                                                             <C>            <C>              <C>
Basic and diluted --as reported..............................................   $   (1.02)     $   (6.65)       $   (2.44)
Basic and diluted - pro forma................................................   $   (1.20)     $   (6.82)       $   (3.02)
</TABLE>



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
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 2002 presentation. Such reclassifications had no
effect on previously reported net income or stockholders' equity.

RECENT ACCOUNTING PRONOUNCEMENTS

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 Company does not expect the adoption of this statement to
have a material effect on its financial statements.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No.
146".) 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.
We do not anticipate that the adoption of SFAS No. 146 will have a material
impact on our results of operations and financial conditions.

In November 2001, Emerging Issues Task Force Consensus No. 01-14, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred, was issued, and considered whether reimbursements received
for "out-of-pocket" expenses incurred would be characterized in the income
statement as revenue or as a reduction of expenses incurred. The FASB staff
believes that the reimbursements received should be characterized as revenue.
The Company has adopted this policy effective January 1, 2002 and as required
has reclassified comparative financial information for 2001 and 2000.
Reimbursements for "out-of-pocket" expenses of $223, $442, and $1,138 for the
year ended December 31, 2002, 2001, and 2000, respectively, have been included
in service revenues and service cost of revenues.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") which supersedes Accounting Principles
Board (APB) Opinion No. 16, Business Combinations. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations for all
transactions initiated after June 30, 2001 and modifies the application of the
purchase accounting method. The provisions of SFAS 141 will be effective for
transactions that account for using the purchase method that are completed after
June 30, 2001. The adoptions of this Statement did not have an impact on the
consolidated financial statements.

In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Intangible Assets" ("SFAS 142") which supersedes APB
Opinion No. 17, Intangible Assets. SFAS 142 eliminates the current requirement
to amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing for goodwill and intangible assets and the identification of
reporting units for purposes of assessing potential future impairment of
goodwill. SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. SFAS 142 will apply to
goodwill and intangible assets arising from transactions completed before and
after the statement's effective date. As of January 1, 2002, the Company adopted
SFAS 142. However, during 2001 the Company recorded an impairment of all of its
goodwill and intangible balances totaling $43.9 million and had no remaining
goodwill or intangible balances as of January 1, 2002. As the Company has no
goodwill remaining on its balance sheet, the adoption of the provisions of this
statement did not have a material impact on the consolidated financial
statements.

                                      F-14
<PAGE>

In June of 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 applies to the
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This Statement
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, and development and (or) the
normal operation of a long-lived asset, except for certain obligations of
lessees. Adoption of this Statement is required for fiscal years beginning after
June 15, 2002. The Company does not believe that adoption of this standard will
have an impact on its results of operations and financial position.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The adoption of this statement did not have an impact on the
consolidated financial statements.

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 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 has been 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 $3.7 million in 2002 and $5.7 million in 2001.

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 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 $4.9 million has been 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-15
<PAGE>

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.

SALE OF GOVERNMENT OPERATIONS

In connection with the acquisition of Template, the Company acquired certain
classified government contracts and employees who performed services for such.
As of May 1, 2000 the Company disposed of its government contracts and employees
and certain other related assets and obligations by selling them to a new
company formed by certain of the Company's employees. The Company received a
note for $1,000 to be paid in five annual payments beginning May 1, 2001 and
4.9% of the outstanding shares of the purchasing company. Due to the uncertainty
of collection on the note and valuation of the new company, Level 8 fully
reserved the value of the note and valued the investment at $0. During the first
quarter of 2001, the Company renegotiated the note to $850, collected this
amount and gave up the 4.9% ownership interest of the acquiring company. The
gain was included in the gain on sales of assets.

ASSETS AND LIABILITIES TO BE ABANDONED

At December 31, 2002, the Company had made the decision to close its remaining
foreign subsidiaries, except Level 8 Ireland. The Company is in the process of
filing for bankruptcy or liquidation in France, the United Kingdom, and Italy
and is currently awaiting the outcome of the proceedings in the United Kingdom
and Italy.

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.

NOTE 3. ACCOUNTS RECEIVABLE

Trade accounts receivable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                  2002      2001
                                                                 -------    -----
<S>                                                              <C>        <C>
        Current trade accounts receivable.....................   $ 1,434    $ 762
        Less: allowance for doubtful accounts.................      (143)    (183)
                                                                 -------    -----
                                                                 $ 1,291    $ 579
                                                                 =======    =====
</TABLE>

Approximately $9, $200, and $358 of current trade receivables were unbilled at
December 31, 2002, 2001, and 2000, respectively. There were no receivables with
payment terms in excess of one year recorded during the fiscal year ended
December 31, 2002.

The provision for uncollectible amounts was $(477), $3,812, and $572 for the
years ended December 31, 2002, 2001, and 2000, respectively. Write-offs (net of
recoveries) of accounts receivable were $(437), $5,364, and $35 for the years
ended December 31, 2002, 2001, and 2000, respectively. Included in the
write-offs for 2001 is approximately $3,800 from one customer who filed for
Chapter 11 Protection under the U.S. Bankruptcy laws.

NOTE 4.   AVAILABLE-FOR-SALE SECURITIES

On September 29, 2000, the Company purchased 500,000 shares of the common stock
and 500,000 warrants to purchase the common stock of a publicly traded
e-business service provider for total consideration of $4,000 in cash. The
500,000 shares of common stock represent approximately a seven percent interest
in the e-business service provider. The 500,000 warrants to purchase common
stock have an exercise price of $13.00 per share. At the time of purchase, the
fair value of the common stock was recorded using the quoted market price of
$6.50 per share and the fair value of the warrants were recorded using the Black
Scholes Option Pricing Model at $1.50 per warrant. The shares of common stock
are classified as available-for-sale securities. At December 31, 2001, the
market value of the common stock was $.29 per share and the fair value of the
warrants determined by using the Black Scholes pricing model was $0.02 per
share. The realized loss of $3,845 on the available for sale securities has been
recorded in the accompanying consolidated statement of operations for 2001, as
the Company deemed it to be an other-than-temporary decline in fair value. The
common stock was sold subsequent to December 31, 2001 for $175.

                                      F-16
<PAGE>

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                                  2002           2001
                                                                                                 ------        --------
<S>                                                                                              <C>           <C>
        Computer equipment...................................................................    $  206        $  2,366
        Furniture and fixtures...............................................................         8             651
        Office equipment.....................................................................       138           1,335
        Leasehold improvements...............................................................        --             542
        Land and buildings...................................................................        --              --
                                                                                                 ------        --------
                        Subtotal.............................................................       352           4,894
        Less: accumulated depreciation and amortization......................................      (190)         (4,131)
                                                                                                 ------        --------
                        Total................................................................    $  162        $    763
                                                                                                 ======        ========
</TABLE>

Depreciation and amortization expense was $402, $945, and $1,941, for the years
ended December 31, 2002, 2001, and 2000, respectively.

NOTE 6. INVESTMENT IN ACCESS INTERNATIONAL

During 2001 and 2000, the Company accepted the common stock of one of its
customers, Access International, in exchange for consulting services totaling
$750 and $1,250, respectively. The fair value of the stock was determined based
on the estimated fair value of the stock, which approximated the fair value of
the services. The Company also made a cash investment of $350 in July of 2000.
On October 1, 2001, the Company sold its interest in Access International to
BluePhoenix Solutions as part of the sale of the AppBuilder assets. See Note 2.

NOTE 7. NOTES RECEIVABLE AND NOTE RECEIVABLE FROM RELATED PARTY

As discussed in Note 2 - Dispositions, in conjunction with the sale of the
Systems Integration business to EM Software Solutions, Inc., the Company
received two notes receivable from the purchaser. The first note is due on
February 13, 2003 in the amount of $744 and bears interest at prime plus 2.25%.
This note was repaid in February 2003. The second note is in the amount of $617
and bears interest at prime plus 1%. Principal and interest are payable monthly
and the note matures in 2007. Due to the uncertainty of the collection of the
note, the Company recorded the note net of an allowance of $494.

In conjunction with the 2001 sale of Geneva Message Queuing and Geneva XIPC
products, the Company received a note receivable from the purchaser in the
amount of $400. As of December 31, 2001, approximately $275 was outstanding
under the note, which was repaid during 2002.

In February 2001, the Company loaned $75 to a director and officer of the
Company under a secured note, which bears interest at a rate of 6.5% per annum.
The note was payable in full in February 2002. In March 2002, the officer and
director returned to the Company 15,000 shares of stock to offset a portion of
the note. The balance of the note was repaid as part of the asset purchase
agreement entered into with the Company in June 2002.

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 payments
on the note total $1,000 and are due in equal annual installments beginning on
March 31, 2001. The note bears 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 current members of Level 8 Systems Board
of Directors, and Anthony Pizi, the Chairman of Level 8 Systems for $400 and
recorded a loss on the sale of $100.

During 2000, the Company loaned $1,165 to a strategic partner in the form of
$757 in cash and $408 by assignment of accounts receivable. The note bears
interest at prime plus 2% and was to be repaid in installments during 2001. The
note is guaranteed by the CEO of the strategic partner and secured by stock in
the Company. The payer was in default under the repayment schedule and was
subsequently acquired by another concern who assumed the payment obligation. In
March 2002 the note was repaid.

NOTE 8. SOFTWARE PRODUCT TECHNOLOGY

Effective July 2002, the Company determined that the estimated asset life of the
Cicero technology has been extended as a result of the amended license agreement
with 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

                                      F-17
<PAGE>
from three years to five years. The remaining amortization period as of
December 31, 2002 is 33 months. The effect of the change in the estimated life
resulted in a reduction of 2002 amortization expense by $2,407 and a reduction
in the net loss applicable to common stockholders - basic and diluted by ($.13)
per share.

During the third quarter of 2000, the Company acquired license rights to Cicero,
a comprehensive integrated desktop computer environment from Merrill Lynch in
exchange for 1,000,000 shares of its common stock valued at $22,750. The Company
is amortizing the assets over its useful life of 5 years. In January 2002, the
Company issued 250,000 shares to MLBC, Inc., an affiliate of Merrill Lynch
valued at $625 as consideration for amending the license agreement so as to
extend the exclusivity in perpetuity.

During the fourth quarter of 2000, the Company acquired $6,600 in developed
technology through its acquisition of StarQuest. The Company is amortizing the
asset over its useful life of 5 years. During the third quarter of fiscal year
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.

During the fiscal years ended December 31, 2002, 2001, and 2000, the Company
recognized $7,375, $11,600, and $8,629, respectively, of expense related to the
amortization of these costs, which is recorded as cost of software in the
consolidated statements of operations. Accumulated amortization of capitalized
software costs is and $16,503 and $19,355 at December 31, 2002 and 2001,
respectively.

NOTE 9. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS

Identifiable and unidentifiable intangible assets primarily include goodwill,
existing customer base, assembled workforce and trademarks recorded in
connection with the Company's previous acquisitions. At December 31, 2002 and
2001, the Company had no identifiable and unidentifiable intangible asssets.
Amortization expense was $0, $10,212, and $14,191 for the fiscal years ended
December 31, 2002, 2001, and 2000, respectively. Pro forma net loss applicable
to common stockholders as if the provisions of SFAS 142 had been adopted for the
years ended December 31, 2001 and 2000, would have been $(98,023) and $(23,749),
respectively.

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) 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 8.

                                      F-18
<PAGE>

NOTE 10. LONG-TERM DEBT AND CREDIT FACILITIES

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

<TABLE>
<CAPTION>
                                                                                   2002                      2001
                                                                                  -------                  --------
<S>                                                                               <C>                      <C>
        Bridge financing (a).......................................               $    --                  $  1,600
        Term loan (b)..............................................                 2,512                     3,000
        Note payable; related parties (c)..........................                    --                       245
        Note payable (d)...........................................                   381                        --
                                                                                  -------                  --------
                                                                                    2,893                     4,845
        Less current maturities....................................                (2,893)                     (245)
                                                                                  -------                  --------
                                                                                  $     0                  $  4,600
                                                                                  =======                  ========
</TABLE>


(a)   In December 2001, the Company entered into a stock purchase agreement to
      sell common stock. As part of the agreement, the Company received a $1,600
      advance from investors. The amount was converted to common stock upon the
      closing of the transaction in January 2002.

(b)   The Company has a $2,512 term loan bearing interest at LIBOR plus 1%
      (approximately 2.77% at December 31, 2002), interest on which is payable
      semi-annually. There are no financial covenants and the term loan is
      guaranteed by Liraz, the Company's former principal shareholder. The loan
      matures on November 15, 2003.

(c)   In December 2001, the Company entered into an agreement with two of the
      executive officers of the Company, which provided for borrowings up to
      $250 and was secured by accounts and notes receivable. The agreement was
      terminated June 2002, when the Company sold its Star SQL and CTRC products
      to one of the executive officers who has since left the Company, while
      continuing as a member of the Board of Directors. The company used
      proceeds from the sale to repay the borrowings from the former executive
      officer. See Note 2. The remaining portion was converted to Series C
      preferred stock in August 2002. See Note 12.

(d)   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 a private lender, which provides for short term
      borrowings secured by accounts and notes receivable. The Notes bear
      interest at 12% per annum.

NOTE 11. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                            2002          2001        2000
                                                                           ------        ------      -------
<S>                                                                        <C>           <C>         <C>
        Federal -- current..............................................   $   --       $    --      $    --
        State and local -- current......................................       --            --           --
                                                                           ------        ------      -------
                                                                               --            --           --

        Foreign taxes  (benefit) and withholdings.......................     (155)          501        1,063
                                                                           ------        ------      -------
        Current taxes...................................................     (155)          501        1,063

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

        Total income tax provision (benefit)............................   $ (155)       $  501      $ 1,063
                                                                           ======        ======      =======
</TABLE>

                                      F-19



<PAGE>


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:

<TABLE>
<CAPTION>
                                                                2002         2001         2000
                                                              --------     --------     --------
<S>                                                           <C>          <C>          <C>
Expected income tax benefit at statutory rate (34%) ......    $ (6,235)    $(35,200)    $ (9,283)
State taxes, net of federal tax benefit ..................        (358)      (5,158)      (1,148)
Effect of foreign operations including withholding taxes .         (68)         801          538
Effect of change in valuation allowance ..................       6,362       37,076        7,719
Amortization and write-off of non-deductible goodwill ....          --        1,906        2,676
In-process research and development -- StarQuest .........          --           --           30
Non-deductible expenses ..................................         144        1,076          531
Other ....................................................          --           --           --
                                                              --------     --------     --------
  Total ..................................................    $   (155)    $    501     $  1,063
                                                              ========     ========     ========
</TABLE>

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

<TABLE>
<CAPTION>
                                          2002         2001
                                        --------     --------
<S>                                     <C>          <C>
Current assets:
 Allowance for doubtful accounts .....  $     41     $    (73)
 Accrued expenses non-tax deductible .       200          200
 Deferred revenue ....................        --          637
Noncurrent assets:
 Loss carryforwards ..................    71,448       68,736
 Depreciation and amortization .......     4,486         (534)
                                        --------     --------
                                          76,175       68,966
                                        --------     --------
Noncurrent liabilities:
 Depreciation and amortization .......        --           --
                                        --------     --------
Valuation allowance ..................   (76,175)     (68,966)
                                        --------     --------
                                        $     --     $     --
                                        ========     ========
</TABLE>

At December 31, 2002, the Company has net operating loss carryforwards of
approximately $179,000 which may be applied against future taxable income. These
carryforwards will expire at various times between 2005 and 2018. 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 $21,200.

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 Company provided a full valuation allowance on the total amount of its
deferred tax assets at December 31, 2002 since management does not believe that
it is more likely than not that these assets will be realized.

NOTE 12.   STOCKHOLDERS' EQUITY

COMMON STOCK

In January 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 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


                                      F-20
<PAGE>
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.

STOCK GRANTS

During 2002 and 2001, the Company issued 109,672 and 369,591 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 and $1,199, respectively.

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. The Plans
reserve a combined total of 7,400,000 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.

Activity for stock options issued under these plans for the fiscal years ending
December 31, 2002, 2001, and 2000 is as follows:


<TABLE>
<CAPTION>
                                                              WEIGHTED
                                                               AVERAGE
                                    PLAN       OPTION PRICE   EXERCISE
                                  ACTIVITY       PER SHARE      PRICE
                                  --------       ---------      -----

<S>                              <C>           <C>            <C>
Balance at December 31, 1999 .    3,799,892       1.37-39.29    13.65

 Granted ......................   2,082,337       7.06-39.31    24.84
 Exercised ....................    (629,554)      4.87-39.31    10.42
 Forfeited ....................  (1,395,158)      1.37-39.29    26.56
                                 ----------
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
                                 ==========
</TABLE>


The weighted average grant date fair value of options issued during the years
ended December 31, 2002, 2001, and 2000 was equal to $0.58, $2.59, and $17.60
per share, respectively. There were no option grants issued below fair market
value during 2002, 2001, or 2000. Exercises reported in the Consolidated
Statements of Stockholder's Equity in 2000 are reported net of repurchases of
106,000.


                                      F-21

<PAGE>
                              LEVEL 8 SYSTEMS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

<TABLE>
<CAPTION>
                                             2002              2001              2000
                                             ----              ----              ----
<S>                                      <C>                <C>               <C>
Expected life (in years) .............   10 years           5 years           5 years
Expected volatility ..................        96%               90%               85%
Risk free interest rate ..............      4.25%             4.50%             6.09%
Expected dividend yield ..............         0%                0%                0%
</TABLE>

At December 31, 2002, 2001, and 2000, options to purchase approximately
1,409,461, 1,313,826, and 1,667,179 shares of common stock were exercisable,
respectively, pursuant to the plans at prices ranging from $0.34 to $39.32. The
following table summarizes information about stock options outstanding at
December 31, 2002:



<TABLE>
<CAPTION>
                            REMAINING
                           CONTRACTUAL               WEIGHTED
                            LIFE FOR                  AVERAGE
   EXERCISE     NUMBER       OPTIONS      NUMBER     EXERCISE
    PRICE     OUTSTANDING  OUTSTANDING  EXERCISABLE    PRICE
    -----     -----------  -----------  -----------    -----
<S>           <C>          <C>          <C>          <C>
$  0.34-3.93   2,640,075       8.6        668,400     $ 1.22
   3.94-7.86     867,713       6.3        432,228       6.49
  7.87-11.79     140,895       5.2        132,373       8.75
 11.80-15.72      40,915       1.5         40,915      12.29
 15.73-19.66       7,500       7.6          4,999      18.81
 19.67-23.59       6,257       3.6          5,257      21.30
 23.60-27.52       2,036       0.1          2,036      25.78
 27.53-31.45       3,000       7.0          3,000      30.25
 31.46-35.38       5,090       0.1          5,090      34.38
$35.39-39.32     120,898       1.9        115,163      38.01
               ---------                 --------
               3,834,379       7.6      1,409,461       7.22
               =========                =========
</TABLE>



PREFERRED STOCK

On August 14, 2002, the Company completed a $1.6 million 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 $1.6 million
private placement, the Company received approximately $1.4 million 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, Tony Pizi,
converted $150 of debt owed to Mr. Pizi 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 $12.531 per share,


                                      F-22
<PAGE>
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 "Warrants" for fair value assumptions). The dividend
increased the fair value of the warrant liability. As of December 31, 2002, no
warrants had been exercised.

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 ("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 have 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, 2002, no
warrants have been exercised and the fair value of the liability is $331.

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 $5.0 million, or up to
an aggregate 17.5 million 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 4.6 million
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 $5.0 million issuance cap or the 17.5 million
share issuance cap. As a result of the Series C Preferred Stock financing which
represented approximately $1.6 million of the Company's $5.0 million 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.
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.

In connection with the required issuances to the holders of the Series A3
Preferred Stock and Series B3 Preferred Stock, all new issuances of warrants are
subject to the Company getting stockholder approval for an increase in the
number of shares that it is authorized to issue. If the Company's stockholders
do not approve an increase in the authorized shares or a reverse split to
increase the available authorized shares, for any reason, the Company will be
obligated to make dividend payments to such holders at 14% per annum.

In October 2001, the Company exchanged its Series A preferred stock and Series B
preferred stock for Series A1 and Series B1 preferred stock. The exchange
eliminated the preferred dividend, reduced the conversion price and the Series A
and Series B warrant exercise price, and the temporary elimination of the
anti-dilution provisions. The fair value of the exchange, as determined by an
independent third party valuation firm, was not accretive to the stockholders
thus no dividend was recorded.

During 2002 and 2000, there were 1,500 and 7,375 shares of preferred stock
converted into 180,007 and 737,500 shares of the Company's common stock,
respectively. There were 10,070 shares of the Series A3 Preferred Stock and
30,000 shares of Series B3 Preferred Stock and 1,590 shares of Series C
Preferred Stock outstanding at December 31, 2002.


                                      F-23
<PAGE>
STOCK WARRANTS

The Company values warrants based on the Black Scholes pricing model. Warrants
granted in 2002, 2001 and 2000 were valued using the following assumptions:

<TABLE>
<CAPTION>                                                       PREFERRED    2002
                                     DECEMBER 2000              SERIES A3  FINANCING  PREFERRED
                                      COMMERCIAL     STARQUEST    AND B3    WARRANTS   SERIES C
                                    LENDER WARRANTS   WARRANTS   WARRANTS   WARRANTS   WARRANTS
                                    ---------------   --------   --------   --------   --------
<S>                                 <C>              <C>        <C>        <C>        <C>
Expected life (in years) .........          4               3         4            5         5
Expected volatility ..............         87%            121%    107.5%          97%      117%
Risk free interest rate ..........          5%              6%        4%           2%        3%
Expected dividend ................       None            None       None        None      None
Fair value of common stock .......      $6.19          $17.28      $1.89       $0.38     $0.38
</TABLE>


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
$4.3415 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, 2002, no warrants have been exercised.

In connection with the acquisition of StarQuest during 2000, the Company issued
warrants to purchase 250,000 shares of the Company's common stock. The warrants
will have an exercise price of $30 per share. The warrants were valued at $1,500
or $6.00 per share and are exercisable until November 28, 2003. As of December
31, 2002, no warrants have been exercised.

In connection with the acquisition of Momentum during 1998, the Company issued
warrants to purchase 200,000 shares of the Company's common stock. The warrants
have an exercise price of $13.108 per share and expire on March 26, 2003. The
warrants were valued at $654 or $3.27 per share. During 2000, 104,597 warrants
were exercised, net of 31,248 warrants forfeited in lieu of purchase price,
leaving 95,403 of these warrants outstanding at December 31, 2001.

INCREASE IN CAPITAL STOCK

In December 2002 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 40,000,000 to
60,000,000.

NOTE 13. 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
Level 8 Plan included in the Consolidated Statement of Operations totaled $7, $7
and $363 for fiscal years 2002, 2001, and 2000, respectively.

The Company also has employee benefit plans for each of its foreign
subsidiaries, as mandated by each country's laws and regulations. There was $12,
$260, and $470 in expense recognized under these plans for the years ended
December 31, 2002, 2001, and 2000, respectively.

The Company also had an Employee Stock Purchase Plan (U.S.) for its U.S.
employees and the International Stock Purchase Plan, currently available to its
UK employees, (collectively, the "Stock Purchase Plans"). The Stock Purchase
Plans allow employees to purchase shares of the Company's common stock for 85%
of fair market value. The Stock Purchase Plans are authorized to grant rights to
purchase an aggregate maximum of 250,000 shares of common stock. The Company is
responsible for the administrative costs of the plans. Expenses related to these
plans totaled $6 and $95 during the years ended December 31, 2002 and 2001,
respectively. The Employee Stock Purchase Plan was discontinued in February
2002.


                                      F-24
<PAGE>
NOTE 14.   SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2002, two customers accounted for 38.71% and 26.67% of operating revenues. In
2001, no customer accounted for more than 10% of operating revenue. Two
customers accounted for 11.4% and 11.2% of operating revenues in 2000.

As of December 31, 2002, the Company had significant balances outstanding from
individual customers due to the nature of its operations. Approximately 93% of
accounts receivable was from 1 customer. It is the policy of the Company to
closely monitor all accounts receivable and to record a provision for
uncollectible accounts as they become estimable. Generally, no collateral is
required.

NOTE 15.   FOREIGN CURRENCIES

As of December 31, 2002, the Company had $73 and $87 US dollar equivalent cash
and trade receivable balances, respectively, denominated in foreign currencies.

As of December 31, 2001, the Company had $321 and $898 US dollar equivalent cash
and trade receivable balances, respectively, denominated in foreign currencies.
The Company's net foreign currency losses were $171, $198 and $265 for the years
ended 2002, 2001 and 2000, respectively.

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

<TABLE>
<CAPTION>
                       2002     2001
                       -----    ----
<S>                    <C>      <C>
Euro .............      4.0%    32.2%
Pound Sterling ...      2.1%      --
</TABLE>


NOTE 16.   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 historical segments have not
been restated prior to 2001, as it is impractical to do so. The Company
previously had three reportable segments but the Company has reported the
Systems Integration segment as discontinued operations and has restated 2001
segment information to the current year presentation.

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, restructuring and amortization of goodwill (EBITA).

While EBITA 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. EBITA 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.


                                      F-25
<PAGE>
The table below presents information about reported segments for the twelve
months ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                   MESSAGING/
                                  DESKTOP         APPLICATION
                                INTEGRATION       ENGINEERING          TOTAL
                                -----------       -----------          -----
<S>                             <C>               <C>               <C>
2002:
Total revenue ............        $  2,148         $    953         $  3,101
Total cost of revenue ....           6,527            1,950            8,477
Gross margin .............          (4,379)            (997)          (5,376)
Total operating expenses .           8,211              434            8,645
EBITA ....................        $(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 .............          (9,293)           3,114           (6,179)
Total operating expenses .          18,858            7,179           26,037
EBITA ....................        $(28,151)        $ (4,065)        $(32,216)
</TABLE>


A reconciliation of segment operating expenses to total operating expense for
fiscal year 2002:

<TABLE>
<CAPTION>
                                       2002         2001
                                       ----         ----
<S>                                  <C>         <C>
Segment operating expenses ......    $  8,645    $ 26,037
Amortization of intangible assets          --       6,259
Write-off of intangible assets ..          --       7,929
(Gain)/loss on disposal of assets         461      (6,345)
Restructuring, net ..............       1,300       8,650
                                     --------    --------
Total operating expenses ........    $ 10,406    $ 42,530
                                     ========    ========

</TABLE>


The table below presents information about reported segments for the fiscal
years ended December 31:

<TABLE>
<CAPTION>
                                       2002                       2001                           2000
                              ----------------------      -----------------------       ----------------------
                               TOTAL         TOTAL         TOTAL          TOTAL          TOTAL           TOTAL
                              REVENUE        EBITA        REVENUE         EBITA         REVENUE          EBITA
                              -------        -----        -------         -----         -------          -----
<S>                           <C>           <C>           <C>            <C>           <C>            <C>
Software .....                $  1,491      $(12,146)      $  1,658      $(30,355)      $ 45,998      $ (6,338)
Maintenance ..                     571           306          9,262         4,658         15,967         9,312
Services .....                   1,039          (279)         6,437        (1,154)        21,764          (958)
Research and development            --        (1,902)            --        (5,365)            --       (10,324)
                              --------      --------       --------      --------       --------      --------
Total ........                $  3,101      $(14,021)      $ 17,357      $(32,216)      $ 83,729      $ (8,308)
                              ========      ========       ========      ========       ========      ========
</TABLE>


                                      F-26
<PAGE>
A reconciliation of total segment EBITA to loss before provision for income
taxes for the fiscal years ended December 31:

<TABLE>
<CAPTION>
                                               2002          2001          2000
                                               ----          ----          ----
<S>                                          <C>           <C>           <C>
Total EBITA ............................     $(14,021)     $(32,216)     $ (8,308)
Amortization of intangible assets ......           --        (6,259)      (14,191)
Impairment of intangible assets ........           --        (7,929)           --
(Gain)/loss on disposal of assets ......         (461)        6,345          (379)
In-process research and development ....           --            --        (1,800)
Restructuring ..........................       (1,300)       (8,650)           --
Interest and other income/(expense), net        2,485        (8,850)       (2,626)
                                             --------      --------      --------
Total loss before income taxes .........     $(13,297)     $(57,559)     $(27,304)
                                             ========      ========      ========
</TABLE>


The following table presents a summary of long-lived assets by segment as of
December 31, 2002:

<TABLE>
<CAPTION>
                                        2002        2001
                                        ----        ----
<S>                                   <C>         <C>
Desktop Integration .............     $ 8,096     $13,623
Messaging/Application Engineering          62       2,555
                                      -------     -------
Total assets ....................     $ 8,158     $16,178
</TABLE>

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

<TABLE>
<CAPTION>
                             DECEMBER 31,
                   -------------------------------
                    2002         2001        2000
                   -------     -------     -------
<S>                <C>         <C>         <C>
Australia ....     $    --     $   141     $   988
Denmark ......          20       2,333       4,170
France .......           7          30       2,939
Germany ......          35         757       1,664
Israel .......           4         659       6,078
Italy ........          32         813       2,262
Norway .......           1         491       2,019
Switzerland ..          --         667       1,852
United Kingdom          13       1,929       9,624
USA ..........       2,989       6,402      45,327
Other ........          --       3,135       6,806
                   -------     -------     -------
Total revenue      $ 3,101     $17,357     $83,729
                   =======     =======     =======
</TABLE>

Presentation of revenue by region is based on the country in which the customer
is domiciled. Only countries with greater than 3% of total revenue are disclosed
individually. As of December 31, 2002 and 2001, all of the long-lived assets of
the Company are located in the United States. The Company's foreign operations
are reimbursed by the Company for their costs plus an appropriate mark-up for
profit. Intercompany profits and losses are eliminated in consolidation.

NOTE 17. RELATED PARTY INFORMATION

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

Liraz guarantees certain debt obligations of the Company through November 15,
2003. The Company issued common stock to Liraz in exchange for the guaranty. See
Note 10.

In the third quarter of 2000, the Company had software sales of $6,000 to a
shareholder.

In 2001 the Company entered into an agreement with two of the executive officers
of the Company, which provides for borrowings up to $250 and was secured by
accounts and notes receivable. That facility has since terminated. See Note 10.


                                      F-27
<PAGE>
In the fourth quarter of 2000, the Company loaned $495 to a director and officer
of the Company under an unsecured note, which bears an interest rate of 6.5%.
The note is payable over a period of five years in equal annual installments. In
the third quarter of 2001, the Company retired the note in exchange for the
forfeiture by the director and officer of certain retirement benefits.

The Company paid royalties to Liraz of $48 for the year ended December 31, 2000
for products which were developed under a joint development agreement. The
agreement expired on December 31, 2000

Liraz also paid the salaries and expenses of certain company employees and was
reimbursed by the Company. Salaries and expenses paid by Liraz amounted to $67
and $259, during 2001, and 2000, respectively.

NOTE 18.   RESTRUCTURING CHARGES

During the second quarter of 2002, the Company began another round of
operational restructurings to further reduce its operating costs and streamline
its operations. The restructuring plan includes the closure of the development
facility in Berkeley, California and the significant reduction of its employees
in Europe and terminated approximately 12 people. The Company recorded a
restructuring charge in the amount of $1.3 million during the second quarter of
2002. The Company anticipates that all remaining obligations as of the balance
sheet date will be expended by November 2006.

In the first quarter of 2001, the Company began an operational restructuring to
reduce its operating costs and streamline its organizational structure. This
operational restructuring involves the reduction of employee staff throughout
the Company in all geographical regions in sales, marketing, services and
development and administrative functions. The Company recorded restructuring
charges of $6,650 during the quarter March 31, 2001 and an additional $2,000
during the quarter ending June 30, 2001.

The overall restructuring plan included the termination of 236 employees, all of
whom had been notified by November 2000. The plan included a reduction of 107
personnel in the European operations and 129 personnel in the U.S. Operations.
Employee termination costs comprised of severance-related payments for all
employees terminated in connection with the operational restructuring.
Termination benefits do not include any amounts for employment-related services
prior to termination.

Premises obligations primarily relate to the continuation of lease obligations,
brokers commissions and leasehold improvements for approximately 60,000 square
feet of facilities no longer deemed necessary and costs to exit short-term
leases for various sales offices. Amounts expenses relating to lease obligations
represent estimates of undiscounted future cash outflows, offset by anticipated
third-party sub-lease payments. Marketing obligations related to contracts and
services relating to the prior focus of the Company and are no longer expected
to be utilized.

Other miscellaneous restructuring costs include professional fees, royalty
commitments, recruiting fees, excess equipment and other miscellaneous expenses
directly attributable to the restructuring.

        The following table sets forth a summary by category of accrued expenses
and cash paid:

2001:

<TABLE>
<CAPTION>
                                            RESTRUCTURING     NON-CASH       CASH PAID        ACCRUED
                                            -------------     --------       ---------        -------
<S>                                         <C>               <C>            <C>              <C>
Employee termination ..................        $ 5,319        $(1,045)        $(4,231)         $  43
Excess office facilities ..............          2,110           (156)         (1,307)           647
Other miscellaneous restructuring costs          1,221           (360)           (698)           163
                                               -------        -------         -------          -----
Total .................................        $ 8,650        $(1,561)        $(6,236)         $ 853
                                               =======        =======         =======          =====
</TABLE>

2002:

<TABLE>
<CAPTION>
                                              BEGINNING
                                               BALANCE      RESTRUCTURING    CASH PAID       ACCRUED
                                               -------      -------------    ---------       -------
<S>                                           <C>           <C>              <C>             <C>
Employee termination ..................        $    43        $   396        $  (257)        $   182
Excess office facilities ..............            647            880           (937)            590
Other miscellaneous restructuring costs            163             24           (187)             --
                                               -------        -------        -------         -------
Total .................................        $   853        $ 1,300        $(1,381)        $   772
                                               =======        =======        =======         =======
</TABLE>

The Company believes the accrued restructuring cost of $772 at December 31, 2002
represents its remaining cash obligations for the restructuring changes included
above.


                                      F-28
<PAGE>
NOTE 19.   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 $6.5 million in funding for research and development
for 18 months in exchange for future fully paid and discounted licensing
arrangement. In May 2002, the Company and Amdocs 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
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 20.  LEASE COMMITMENTS

The Company leases certain facilities and equipment under various operating
leases. Some of these facilities have been subleased. 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, 2002 are as follows:

<TABLE>
<CAPTION>
             Lease                    Lease
          Commitments   Sublease   Commitments
             Total       Income        Net
             -----       ------        ---
<S>       <C>           <C>         <C>
2003........ 1,610       (662)        $  948
2004........   827       (171)           656
2005........   579          0            579
2006........   418          0            418
                                      ------
                                      $2,601
                                      ======
</TABLE>


Rent expense for the fiscal years ended December 31, 2002, 2001, and 2000 was
$2,980, $1,835, and $3,255, respectively. Sublease income was $2,548, $221, and
$171 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.

NOTE 21.   CONTINGENCIES

Various lawsuits and claims have been brought against the Company in the normal
course of business. As of December 31, 2002, an action was pending against the
Company in the United States District Court for the District of Colorado by
Access International Financial Services, Inc. claiming the Company had breached
a contract. This case was settled in February 2003 for $200, which was accrued
at December 31, 2002 and all parties executed mutual releases. Subsequent to
December 31, 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 plaintiff
seeks damages of approximately $1,000 for rent in arrears, penalties and
interest. The Company will vigorously defend against this action. Should the
plaintiff be successful, this claim could have a material effect on the
financial position or results of operations of the Company.

NOTE 22.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    FIRST           SECOND        THIRD            FOURTH
                                                                   QUARTER         QUARTER       QUARTER          QUARTER
                                                                   -------         -------       -------          -------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                <C>            <C>            <C>            <C>
2002:
  Net revenues .................................................   $    446       $    630       $    823       $  1,202
  Gross profit/(loss) ..........................................     (3,548)        (1,749)          (422)           343
  Net loss from continuing operations ..........................     (5,409)        (5,071)        (1,998)          (663)
  Net loss discontinued operations .............................       (676)        (5,472)           534            573
  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)
2001:
  Net revenues .................................................   $  5,965       $  5,666       $  5,026       $    700
  Gross profit/(loss) ..........................................         10             71         (1,058)        (5,202)
  Net loss from continuing operations ..........................    (23,900)       (10,262)       (23,645)          (253)
  Net loss discontinued operations .............................    (25,011)        (2,246)        (1,313)       (18,505)
  Net loss .....................................................    (48,911)       (12,508)       (24,958)       (18,758)
</TABLE>



                                      F-29

<PAGE>
<TABLE>
<S>                                                                <C>            <C>            <C>            <C>
  Net loss/share continued operations - basic and diluted ......   $  (1.54)      $  (0.67)      $  (1.50)      $   0.00
  Net loss/share discontinued operations -- basic and diluted ..   $  (1.58)      $  (0.14)      $  (0.08)      $  (1.15)
  Net loss/share  - basic and diluted ..........................   $  (3.12)      $  (0.81)      $  (1.58)      $  (1.15)
</TABLE>

NOTE 23.  SUBSEQUENT EVENTS

      On March 19, 2003, Level 8 Systems, Inc. (the "Company") completed a $3.5
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 11,031,250 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"). The Company is also obligated to issue warrants to
purchase an aggregate of 1,665,720 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 November 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.
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.

      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 $1,000,000 of the
gross proceeds from the financing into escrow to fund the joint venture. If the
joint venture is not formed and operational on or by July 17, 2003, the lead
investors will have the right, but not the obligation, to require the Company to
purchase $1,000,000 in liquidation value of the Series D Preferred Stock at a 5%
per annum premium.

      Another condition of the financing requires the Company to place an
additional $1,000,000 of the gross proceeds into escrow, pending the execution
of a definitive agreement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") providing for the sale of all right, title and
interest to the Cicero technology. If a transaction with Merrill Lynch for the
sale of Cicero is not consummated by May 18, 2003, the lead investors will have
the right, but not the obligation, to require the Company to purchase $1,000,000
in liquidation value of the Series D Preferred Stock at a 5% per annum premium.

      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 $4.9 million 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 million
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 $2.9 million, 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 $2.9 million threshold.

      In January 2003, the Company was delisted from the Nasdaq Small Cap Market
and is currently traded on the over-the-counter bulletin board.

                                      F-30
<PAGE>
EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
------                        -----------

<S>      <C>
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 December 30, 2002 (filed herewith).

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 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).

3.4      Certificate of Designation relating to Series B3 Convertible Redeemable
         Preferred Stock. (incorporated by reference to exhibit 3.2 to Level 8's
         Form 10-Q filed November 15, 2002).

3.5      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 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).

4.2      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).

4.3      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).

4.3A     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).

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

4.4A     First Amendment to Registration Rights Agreement, dated as of August 8,
         2001, to the Registration Rights Agreement dated as of June 13, 1995,
         by and between Across Data Systems, Inc. (Level 8's predecessor) and
         Liraz Systems Ltd. (incorporated by reference to exhibit 4.1 to Level
         8's Report on Form 8-K, filed August 14, 2001).

4.5      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).

4.6      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).

4.7      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).

4.8      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).

4.9      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).

10.1     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).
</TABLE>


                                      E-1
<PAGE>
<TABLE>
<S>      <C>
10.2     Purchase Agreement, dated as of January 3, 2002, between Level 8
         Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 10.1
         to Level 8's Report on Form 8-K, filed January 11, 2002).

10.2A    Purchase Agreement, dated as of July 31, 2000, between Level 8 Systems,
         Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
         (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form
         8-K, filed August 11, 2000).

10.3     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).

10.4     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).

10.3     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).

10.3A    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).

10.3B    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).

10.3C    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).

10.4     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).

10.4A    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).

10.5     Asset Purchase Agreement by and among Level 8 Systems, Inc., Level 8
         Technologies, Inc. and Starquest Ventures, Inc., dated as of May 31,
         2002 (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K
         filed June 25, 2002).

10.5     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).

10.6     Employment Agreement between Anthony Pizi and the Company effective
         January 1, 2002 (incorporated by reference to exhibit 10.10 of Level
         8's Form 10-K filed April 1, 2002).*

10.7     Employment Agreement between John P. Broderick and the Company
         effective January 1, 2002 (incorporated by reference to exhibit 10.11
         of Level 8's Form 10-K filed April 1, 2002).*

10.8     Separation Agreement and Mutual Limited Release between Level 8
         Systems, Inc. and Paul Rampel (incorporated by reference to exhibit
         10.1 of Level 8's Form 8-K filed June 25, 2002).*

10.9     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).*

10.9A    Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan
         (incorporated by reference to exhibit 10.14A to Level 8's Form 10-K
         filed April 2, 2002).*

10.10    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).*

10.11    Lease Agreement for Cary, N.C. offices, dated March 31, 1997, between
         Seer Technologies, Inc. and Regency Park Corporation (incorporated by
         reference to exhibit 10.47 to Seer Technologies, Inc.'s Quarterly
         Report on Form 10-Q for the period ended March 31, 1997, File No.
         000-26194).
</TABLE>


                                      E-2
<PAGE>
<TABLE>
<S>      <C>
10.11A   Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July
         6, 1998 (incorporated by reference to exhibit 10.58 to Seer Technology
         Inc.'s Quarterly Report on Form 10-Q for the period ended June 30,
         1998, File No. 000-26194).

10.11B   Amendment to Lease Agreement for Cary, N.C. offices, dated January 21,
         1999 (incorporated by reference to exhibit 10.21A to Level 8's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1998).

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

10.12A   Amendment to Office Lease Agreement, dated August 18, 1997, between
         Template Software, Inc. and Vintage Park Two Limited Partnership
         (incorporated by reference to an exhibit to Template Software, Inc.'s
         Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
         File No. 000-21921).

10.13    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).

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

23.1     Consent of Deloitte & Touche LLP (filed herewith).

99.1     Certification of Anthony C. Pizi Pursuant to 18 USC Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         (filed herewith).

99.2     Certification of John P. Broderick Pursuant to 18 USC Section 1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         (filed herewith).
</TABLE>

*     Management contract or compensatory agreement.



                                      E-3