<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-K/A
                               (Amendment No. 2)
             [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the fiscal year ended December 31, 1999.

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

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

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

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

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

       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.  [X]

Aggregate market value of the outstanding  voting stock held by non-affiliates
of the Registrant as of May 23, 2000 was approximately $141,630,725.  There were
13,364,222 shares of Common Stock outstanding as of May 23, 2000.

<PAGE>

                                    PART II

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

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


<TABLE>
<CAPTION>
                                            1998                                  1999
                             ---------------------------------     ---------------------------------
                                   High               Low                High               Low
                             --------------     --------------     ---------------    --------------
<S>                            <C>                <C>                <C>                <C>

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


  The closing price of the common stock on December 31, 1999 was $34.563 per
share.  As of May 9, 2000, the Company had 129 registered shareholders of
record.

  A total of 200,500 shares of Common Stock were issued in 1999 upon the
conversion of outstanding convertible preferred stock and notes without
registration in reliance upon exemption Section 3(a)(9) of the Securities Act of
1933, as amended.  A total of 1,263,460 shares of Common Stock were issued in
1999 upon the exercise of outstanding warrants without registration in reliance
on Section 4(2) of the Securities Act at exercise prices ranging from $7.425 to
$14.85 per share of Common Stock.  The Company also relied on the Section 4(2)
private placement exemption to issue Liraz Systems, Ltd. 60,000 shares of Common
Stock in exchange for Liraz's guaranty of the company's term loan used to fund
the cash portion of the purchase price for the acquisition of Template Software,
Inc.

                                       2
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of Registrant

  The Board of Directors of the Company consist of Arie Kilman, Michel Berty,
Robert Brill, Theodore Fine, Lenny Recanati, and Samuel Somech.  Each of these
directors was elected at the 1999 Annual Meeting of Stockholders and will serve
until the election and qualification of his successor or until his earlier
death, resignation or removal.  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 director of the Company.

Arie Kilman

Director since July 1997.    Age: 46

Mr. Kilman has served as Chairman of the Board of Directors of the Company since
July 1997. Mr. Kilman has also been Chief Executive Officer of the Company since
July 1996. He was President of the Company from July 1996 to October 1996. He
previously served as Chairman of the Board of Directors of the Company from
December 1994 to July 1996.  He is a citizen of Israel.

Michel Berty, Ph.D.

Director since July 1997.    Age: 60

Dr. Berty has served as a director of the Company since July 1997.  Since April
1997, Dr. Berty has been the owner of MBY Consultant, Inc. Dr. Berty currently
serves as a director of Sapiens International Corporation, N.V., I Gate Capital,
Merant, Elligent Consulting Group, Inc. and NetGain, Inc. Dr. Berty served as
the Chairman of the Board and Chief Executive Officer of Cap Gemini America (an
international information technology consulting firm) from 1993 to April 1997.
From 1986 to 1992, he served as the General Secretary of the Gemini Sogeti Group
(the parent corporation of Cap Gemini America).

Robert M. Brill, Ph.D.

Director since March 1998.    Age: 53

Dr. Brill has served as a director of the Company since March 1998.  Dr. Brill
also serves on the Audit Committee of the Board of Directors.  Dr. Brill is a
General Partner of New Light Management, L.P., Newlight Associates (BVI), L.P.,
and Poly Ventures II, L.P., venture capital funds specializing in investments in
high technology companies.  He is also a director of Standard MicroSystems
Corporation.  Prior to 1989, Dr. Brill had been the Chief Executive Officer of
several high technology companies and has held executive and technical positions
with Harris Corporation and IBM.  Dr. Brill received degrees in engineering
physics and physics from Lehigh University and a Ph.D. in physics from Brown
University.

                                       3
<PAGE>

Theodore Fine

Director since April 1995.    Age: 63

Mr. Fine has served as a director of the Company since April 1995.  He currently
serves on the Audit and Compensation Committees of the Board of Directors. Mr.
Fine co-founded Level 8 Technologies, a subsidiary of the Company, with Mr.
Somech in February 1994.  Mr. Fine is also a director and the Chief Executive
Officer of Buysmart Enterprises, Inc. Since January 1993, Mr. Fine has been a
management information systems consultant to the financial community and, from
April 1995 to July 1996, served as a marketing and sales consultant to the
Company.  From March 1974 to December 1992, Mr. Fine was Vice President of
Technology for Retail International Operations of CitiBank, N.A.

Lenny Recanati

Director since December 1994.  Age: 45

Mr. Recanati has served as a director of the Company since December 1994.
During the last twelve years, Mr. Recanati has been a Senior Manager and
Director of Discount Investment Corporation ("DIC").  He is Chairman of the
Board of Directors of Ilanot-Discounts Mutual Fund Management Company and is a
member of the Board of Directors of a number of Israeli industrial and other
enterprises affiliated with DIC, including Liraz Systems, Ltd., Klil Industries
Ltd., Elron Electronics Industries Ltd., Super-Sol Ltd., Bayside Land
Corporation Ltd., Tefron Ltd. and Tambour Ltd. Mr. Recanati currently serves as
Chairman of the Board of Liraz. Mr. Recanati is a citizen of Israel.

Samuel Somech

Director since April 1995.    Age: 45

Mr. Somech served as President of the Company through June 1999, as Chairman
Emeritus since July 1999, as Chief Technology Officer of the Company since
October 1996, and as a director of the Company since April 1995.  Mr. Somech
served as Vice President of the Company from April 1995 to October 1996.  He
also served as the Technical Director, Messaging Group, of Apertus Technologies,
Inc. from January 1994 to March 1994 and Technical Director, Messaging Group, of
NYNEX from September 1990 to December 1993.  Mr. Somech co-founded Level 8
Technologies, Inc. with Theodore Fine in February 1994.  Level 8 Technologies,
Inc. was acquired by the Company in 1995 and remains a wholly-owned subsidiary.
Mr. Somech is a citizen of Israel.

Meetings and Committees of the Board of Directors

    The Board of Directors is responsible for the overall affairs of the
Company. The Board of Directors held seven meetings in 1999. Each director
attended over 75% of the meetings of the Board and of any committees on which he
served in fiscal 1999. To assist the Board of Directors in carrying out this
responsibility, the Board has delegated certain authority to several committees.
Information concerning those committees follows.

    Messrs. Fine, Kilman and Recanati presently serve on the Compensation
Committee of the Board of Directors.  The Compensation Committee has (i) full
power and authority to interpret the

                                       4
<PAGE>

provisions of and supervise the administration of the Company's 1995 Stock
Incentive Plan, the 1997 Stock Option Plan, the Company's Employee Stock
Purchase Plan (U.S.), the Company's International Stock Purchase Plan and the
Company's Outside Directors Stock Incentive Plan, and (ii) the authority to
review all compensation matters relating to the Company. The Compensation
Committee met ten times during fiscal 1999.

    During 1999, Mr. Frank J. Klein served as a member of the Company's Board of
Directors.  He tendered his resignation effective December 31, 1999.  During
1999, he served on the Compensation and Audit Committees.

    Messrs. Brill, Fine and Recanati presently serve on the Audit Committee of
the Board of Directors.  The Audit Committee recommends to the Board of
Directors the independent public accountants to be selected to audit the
Company's annual financial statements and approves any special assignments given
to such accountants.  The Audit Committee also reviews the planned scope of the
annual audit, any changes in accounting principles and the effectiveness and
efficiency of the Company's internal accounting staff.  The Audit Committee met
six times during fiscal 1999.

    The Board of Directors does not have a nominating committee.

    The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.

Compensation Committee Interlocks and Insider Participation

    The Compensation Committee is comprised of Messrs. Fine, Kilman and
Recanati. Mr. Kilman is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Except for Mr. Kilman, none of the other
members of the Compensation Committee has served as an executive officer of the
Company and no executive officer of the Company has served as a member of the
Compensation Committee of any other entity of which Messrs. Fine, Kilman or
Recanati 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.  These options
vest over a three year period in equal investments upon the eligible Director's
election to the Board.  Newly elected eligible directors are also eligible to
receive an option to purchase 12,000 shares upon initial election or
appointment. 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. Pursuant to the Outside Director Stock Incentive Plan,
Messrs. Berty, Brill and Fine received options to purchase 12,000 shares of
Common Stock at an exercise price of $9.00 per share. Dr. Brill received options
to purchase an additional 6,000 shares of Common Stock pursuant to the 1997
Stock Option Plan at an exercise price of $12.5781 for his service on the Audit
Committee.  Mr. Fine received options to purchase an

                                       5
<PAGE>

additional 16,000 shares of Common Stock at an exercise price of $9.00 per share
for his previous uncompensated service on the Board. Those options also vest
over a three-year period in equal installments upon their re-election to the
Board.

    Michel Berty is entitled to receive $12,000 each year for serving as a
Director, and, in addition to the above detailed options, he previously received
options to purchase 12,000 shares of Common Stock at an exercise price of $12.75
per share. None of the Company's other Directors received additional monetary
compensation for serving on the Board of Directors of the Company in 1999, other
than reimbursement of reasonable expenses incurred in attending meetings.

    Dr. Brill was previously granted options to purchase 12,000 shares of Common
Stock of the Company at an exercise price of $8.50. Those options vest in equal
installments over a four year period beginning in 1998.

                               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.

Arie Kilman        Age:  46

Mr. Kilman currently serves as the Chairman of the Board and Chief Executive
Officer of the Company.  Please refer to the section of this Annual Report on
Form 10-K/A entitled "Directors" for additional information regarding Mr.
Kilman's experience.

Steven Dmiszewicki      Age: 38

Mr. Dmiszewicki has served as Chief Operating Officer of the Company since
January 1999 and as President of the Company since June 1999. Mr. Dmiszewicki
served as Co-President and Chief Financial Officer of Seer Technologies, Inc.
("Seer") from May 1998 to January 1999.  From October 1996 to May 1998, he
served as Senior Vice President and Chief Financial Officer of Seer.  From July
1996 to October 1996, he was employed by Healthpoint G.P. as Vice President,
Chief Financial and Administrative Officer.  From February 1996 to July 1996,
Mr. Dmiszewicki served Seer as Vice President and Chief Financial Officer.  From
February 1993 until February 1996, Mr. Dmiszewicki served as Seer's Vice
President - Finance. Mr. Dmiszewicki, a Certified Public Accountant, obtained
his B.S. in Business Administration from Bucknell University.

Dennis McKinnie    Age:  43

Mr. McKinnie has served as Senior Vice President, Chief Legal and Administrative
Officer and Corporate Secretary of the Company since January 1999.  Previously,
Mr. McKinnie served as Vice President, Chief Legal and Administrative Officer
and Corporate Secretary of Seer since April, 1998. Prior to that, Mr. McKinnie
was Vice President and General Counsel of Seer.  He has also served as Corporate
Secretary of Seer since February 1996 and as Assistant Secretary prior thereto.
From September 1989 to October 1994, he was associated with the Atlanta, Georgia
law firm of Powell, Goldstein, Frazer & Murphy LLP, where he was a member of
that firm's Technology Litigation Group.  Prior to becoming associated with
Powell Goldstein, he was Staff Counsel to the Supreme Court of the United
States.  During his 16 years of law practice, he also clerked for the Alabama

                                       6
<PAGE>

Supreme Court and the United States Court of Appeals for the Eleventh Circuit.
Mr. McKinnie holds a B.A. from Union University and a J.D. from the Cumberland
School of Law of Samford University.

Samuel Somech      Age:  45

Mr. Somech currently serves as Chairman Emeritus, Chief Technology Officer and a
director of the Company. Please refer to the section of this Annual Report on
Form 10-K/A entitled "Directors" for additional information regarding Mr.
Somech's experience.

Renee Fulk         Age:  31

Ms. Fulk currently serves as the Chief Financial Officer of the Company. Ms.
Fulk served as Vice President, Finance for the Company from January 1999 to
December 1999. Prior to this position, she served as Seer's Director of
Corporate Finance and Director of Finance for the Americas Operating Division.
From March 1996 to November 1996, she was employed as Seer's Manager of
Financial Reporting. Prior to joining Seer, Ms. Fulk was with Deloitte & Touche,
LLP from August 1990 to March 1996. Ms. Fulk, a Certified Public Accountant,
obtained her B.S. in Accounting from East Carolina University.


Item 11.  Executive Compensation

    The following summary compensation table sets forth the compensation earned
by the Company's current Chief Executive Officer and the four other executive
officers serving or having served at the end of fiscal 1999 whose salary and
bonus exceeded $100,000 for services rendered to the Company during fiscal 1999.
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 1999, see "Option
Grants in Fiscal 1999."

                                       7
<PAGE>

                           Summary Compensation Table



<TABLE>
<CAPTION>
                                         Annual Compensation

         Name and                                                   Other Annual             Securities
        Principal             Fiscal                                   Compen-               Underlying          All Other
         Position              Year            Salary                 sation/(1)/             Options           Compensation
--------------------------  ----------  ---------------------  -----------------------  --------------------  ----------------
<S>                         <C>         <C>                    <C>                      <C>                   <C>

Arie Kilman,                   1999            $120,000/(1)/           $ 90,000/(2)/          200,000/(3)/           $0
Chief Executive                1998            $115,000/(4)/           $ 96,350/(5)/                0                $0
Officer, Chairman              1997            $112,500                $      0                     0                $0
of the Board and
Director

Steven Dmiszewicki,            1999            $200,000                $200,000/(6)/           35,000/(7)/
President                      1998            $      0                $      0               200,000/(8)/

Samuel Somech,                 1999            $150,000                $  6,954/(9)/                0                $0
Chairman                       1998            $150,000                $  7,200/(9)/                0                $0
Emeritus Chief                 1997            $150,000                $      0                50,000                $0
Technology
Officer and
Director

Dennis McKinnie,               1999            $172,917                $ 50,000/(10)/          95,000/(11)/          $0
Senior Vice
President, Chief
Legal and
Administrative
Officer, and
Secretary

Renee Fulk, Chief              1999            $110,583                $ 65,000/(12)/          40,000/(13)/          $0
 Financial Officer
</TABLE>


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


 /(1)/ The indicated amounts do not reflect non-cash compensation in the form of
       personal benefits provided by the Company that may have value to the
       recipient. Although such compensation cannot be determined precisely, the
       Company has concluded that the aggregate value of such benefits awarded
       to any named executive officer did not exceed the lesser of $50,000 or
       10% of his or her salary and bonus for any fiscal year to which such
       benefits pertain.

                                       8
<PAGE>

 /(2)/ Consists of a $90,000 bonus for the successful completion of the
       acquisition of Template Software, Inc.

 /(3)/ Mr. Kilman previously held 200,000 options to purchase Common Stock of
       the Company at exercise prices ranging from $9.50 to $14.73. On March 30,
       1999, he forfeited all of those options, and in December 1999, he was
       issued options to purchase 200,000 shares of Common Stock at an exercise
       price of $30.25. In the first quarter of 2000, Mr. Kilman was also
       granted options to purchase an additional 50,000 shares of Common Stock

 /(4)/ Mr. Kilman's salary for 1998 includes an aggregate of $60,000 paid by the
       Company and $55,000 paid by Liraz.

 /(5)/ The indicated amounts reflect compensation for 1998 paid to Mr. Kilman to
       pay for travel expenses to and from New York and living expenses in New
       York, including rent for an apartment, an automobile lease and
       miscellaneous expenditures related thereto. Liraz has agreed to reimburse
       the Company at a rate of $3,000 per month for Mr. Kilman's travel
       expenses.

 /(6)/ Includes a $100,000 performance based bonus and a bonus of $100,000 for
       the successful completion of the acquisition of Template Software, Inc.

 /(7)/ Mr. Dmiszewicki received options to purchase 35,000 shares of Common
       Stock at an exercise price of $11.9375.

 /(8)  In December  1998, Mr. Dmiszewicki received options to purchase 200,000
       shares of Common Stock at an exercise price of $7.25.

 /(9)/ Includes compensation paid to Mr. Somech for an automobile lease and
       mobile telephone lease.

/(10)/ Includes a $50,000 performance based bonus.

/(11)/ Mr. McKinnie received options to purchase 95,000 shares of Common Stock
       at exercise prices ranging from $9.50 to $11.9375.

/(12)/ Consists of performance based bonuses totaling $65,000.

/(13)/ Ms. Fulk received options to purchase 40,000 shares of Common Stock at
       exercise prices ranging from $9.50 to $11.9375.

   The following table sets forth information regarding each grant of stock
options to each of the named executives during fiscal 1999.  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 1999.

                                       9
<PAGE>

                         Option Grants in Fiscal 1999
<TABLE>
<CAPTION>

                                             Individual Grants
                    ------------------------------------------------------------------
                                                                                          Potential Realizable Value
                      Number of         Percent of                                         at Assumed Annual Rates
                      Securities      Total Options                                            of Appreciation
                      Underlying        Granted to         Exercise                            for Option Term
                       Options         Employees in         Price         Expiration     ---------------------------
Name                   Granted         Fiscal Year        ($/share)          Date            5% ($)       10% ($)
------------------  --------------  ------------------   ------------   --------------   -------------   -----------
<S>                 <C>             <C>                  <C>            <C>              <C>             <C>
Arie Kilman            200,000           10.94%            $  30.25        12/15/09        $4,756,015    $12,052,677

Steven                  35,000            1.91%            $11.9375        11/04/09        $  262,760    $   665,886
Dmiszewicki

Samuel Somech                0               0             $      0               -        $        0    $         0
Dennis McKinnie         80,000             5.2%            $   9.50        02/26/09        $  477,960    $ 1,211,244
                        15,000                             $11.9375        11/04/09        $  112,611    $   285,379

Renee Fulk              25,000            2.19%            $   9.50        02/26/09        $  149,362    $   378,514
                         5,000                             $  9.875        06/10/09        $   31,052    $    78,691
                        10,000                             $11.9375        11/04/09        $   75,074    $   190,253
</TABLE>

   The following table sets forth information concerning the options exercised
during fiscal 1999 and held at December 31, 1999 by the named executives.


                Fiscal 1999 Year-End Option Holdings and Values
<TABLE>
<CAPTION>
                                                       Number of Securities               Value of Unexercised
                                Shares              Underlying Unexercised Options        In-the-Money Options
                               Acquired                at December 31, 1999              at December 31, 1999/(1)/
                                  on      Value    -------------------------------   -------------------------------
Name                           Exercise  Realized     Exercisable     Unexercisable     Exercisable     Unexercisable
-----------------------------  --------  --------  -----------------  -------------  -----------------  -------------
<S>                            <C>       <C>       <C>                <C>            <C>                <C>
Arie Kilman/(2)/                  0        $0                  0        200,000                  0                 0
Steven Dmiszewicki                0        $0            135,000        100,000          3,522,788         2,731,000
Samuel Somech                     0        $0            477,805              0         12,695,279                 0
Dennis McKinnie                   0        $0             35,000         60,000            840,538         1,503,600
Renee Fulk                        0        $0             21,250         18,750            506,275           496,875
</TABLE>
------------
/(1)/ Calculated by subtracting the exercise price from $34.56 per share, the
      closing price of the Company's Common Stock as reported by the Nasdaq
      Stock Market on December 31, 1999, and multiplying the difference by the
      number of shares underlying each option.

/(2)/ On March 30, 1999, Mr. Kilman voluntarily terminated all of his
      outstanding options to purchase 200,000 shares of Common Stock with
      exercise prices of $10.45 to $14.73. In December 1999, Mr. Kilman was
      issued 200,000 options at an exercise price of $30.25. In the first
      quarter of 2000, Mr. Kilman was also granted options to purchase an
      additional 50,000 shares of Common Stock.

Employment Agreements, Termination of Employment and Change-In-Control
Arrangements

  Under the employment agreement between the Company and Mr. Kilman, Mr. Kilman
will serve as Chief Executive Officer of the Company.  In February 1999, Mr.
Kilman's annual base salary

                                       10
<PAGE>

was set at $120,000 and he was eligible for an incentive bonus based upon the
Company achieving certain performance goals. In February 2000, Mr. Kilman's base
salary was increased to $225,000. In February 1999, Mr. Kilman was granted an
option to purchase 150,000 shares of Common Stock. Twenty-five (25%) of these
stock options vested on February 26, 1999, and the remainder would have vested
in three increments of twenty-five (25%) percent each over the next three years.
On March 30, 1999, Mr. Kilman voluntarily terminated all of his outstanding
options to purchase 200,000 shares of Common Stock at exercise prices ranging
from $10.45 to $14.73. In December 1999, Mr. Kilman was issued 200,000 options
at an exercise price of $30.25. During the first quarter of 2000, Mr. Kilman was
issued options to purchase an additional 50,000 shares of Common Stock. If Mr.
Kilman's employment by the Company is terminated for any reason, Mr. Kilman has
agreed that, for one year after such termination and except for his services for
Liraz, he will not engage in any business that competes with the Company's
business at the time of the termination.

  Under the employment agreement between the Company and Mr. Somech, the Company
pays Mr. Somech (a) an annual base salary of $150,000, (b) an annual increase in
base salary as determined by the Board of Directors of the Company, in its
discretion, (c) a performance bonus determined by the Board of Directors of the
Company and (d) a car and telephone allowance of $2,000 a month.  If Mr.
Somech's employment is terminated for any reason (other than by the Company
without cause), Mr. Somech has agreed that, for one year after such termination,
he will not directly or indirectly (i) compete with Level 8 Technologies'
consulting services in the United States regarding middleware, messaging or
fault-tolerant transaction processing, (ii) engage or participate in any
business that provides consulting services within the United States with respect
to middleware, messaging or fault-tolerant transaction processing, (iii) solicit
or divert business from Level 8 Technologies or assist any business in
attempting to do so, (iv) cause any business to refrain from doing business with
Level 8 Technologies or (v) solicit or hire any person who was an employee of
Level 8 Technologies during the term of his employment agreement or assist any
business in attempting to do so.  On February 26, 1999, Mr. Somech and the
Company entered into an amendment to his employment agreement that permits Mr.
Somech to retire from the Company at any time during his employment upon three
months notice to the Company. Upon his retirement, Mr. Somech will receive
retirement benefits of $20,000 per month for a period of two years and his
health care benefits will continue during this time or until he obtains
alternative health care coverage, whichever is sooner.  During his first year of
retirement, Mr. Somech has agreed to make himself available to assist the
Company and its employees on transition matters.

  Mr. Dmiszewicki was elected to serve as the Chief Operating Officer of the
Company on January 27, 1999 and as President in June 1999.  Under the employment
arrangement between the Company and Steven Dmiszewicki effective December 4,
1998, the Company will pay to Mr. Dmiszewicki an annual base salary of $200,000.
His base salary was increased to $225,000 in February 2000. In addition, he is
eligible to participate in an incentive bonus program based upon the Company's
attainment of certain performance goals.  During the first year of his
employment, Mr. Dmiszewicki had a bonus potential of up to $200,000.  In the
event of termination of Mr. Dmiszewicki's employment, other than voluntarily or
for cause, his base salary will be continued for twelve (12) months. In December
of 1998, Mr. Dmiszewicki was granted options to purchase 200,000 shares of
common stock, twenty-five percent (25%) of this stock option vested on December
4, 1998, twenty-five percent (25%) of this stock option vested on December 4,
1999 and the remainder vests in increments of twenty-five percent (25%) over the
next two years. In November 1999, he was granted an option to purchase 35,000
shares of Common Stock all of which vested immediately. He is eligible, at the
discretion of the Compensation Committee of the Board of

                                       11
<PAGE>

Directors, to receive additional options from time to time.

Section 162(m) of the Internal Revenue Code

  It is the responsibility of the Compensation Committee to address the issues
raised by Section 162(m) of the Internal Revenue Code, as amended (the "Code").
The revisions to this Code section made certain non-performance based
compensation in excess of $1,000,000 to executives of public companies non-
deductible to the companies beginning in 1994. The Compensation Committee has
reviewed these issues and has determined that no portion of compensation payable
to any executive officer for fiscal 1999 is non-deductible. The Company's 1995
Stock Incentive Plan and 1997 Stock Option Plan limit to 200,000 and 200,000,
respectively, the number of options or shares that may be awarded to any
individual in a single year under these plans.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

  Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and regulations of the Securities and Exchange Commission
thereunder require the Company's directors and executive officers and persons
who own more than 10% of the Company's Common Stock, as well as certain
affiliates of such persons, to file initial reports of their ownership of the
Company's Common Stock and subsequent reports of changes in such ownership with
the Securities and Exchange Commission.  Directors, executive officers and
persons owning more than 10% of the Company's Common Stock are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) reports they file.  Based solely on its review of
the copies of such reports received by it and written representations that no
other reports were required for those persons, management believes that the
Company's directors, executive officers and owners of more than 10% of the its
Common Stock complied with all filing requirements in a timely manner during
fiscal 1999, except that Liraz has not filed reports under Section 16 reflecting
its purchase of Series A 4% Convertible Redeemable Preferred Stock or the shares
granted in exchange for Liraz's guaranty of borrowings under the Company's $10
million term loan.  See "Certain Relationships and Related Party Transactions"
below.  The outside directors of the Company also failed to timely file Form 4
reports evidencing the stock option grants due to the automatic nature of these
grants when the Outside Directors Stock Incentive Plan was approved by the
Company's stockholders in May 1999.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The following table sets forth updated and corrected information as of May 15,
2000 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 directors and executive officers of the Company as a group.

  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 July 23, 2000 upon the
exercise of stock options.  Except as otherwise stated in the footnotes below,
the named persons have

                                       12
<PAGE>

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>
Liraz Systems Ltd. ("Liraz")/(1)/                          5,743,120/(2)/           39.3%

Welsh, Carson, Anderson & Stowe ("WCAS")/(3)/              1,250,000/(4)/            9.0%

Brown Simpson Strategic Growth Fund, Ltd. /(5)/              455,000/(6)/            3.2%

Brown Simpson Strategic Growth Fund, L.P./(7)/               245,000/(8)/            1.8%

Brown Simpson Partners I, Ltd./(9)/                          266,300                 2.0%

Arie Kilman                                                   10,000/(10)/             *

Samuel Somech                                                485,607/(11)/           3.4%

Theodore Fine                                                138,887/(12)/           1.0%

Lenny Recanati                                                     0/(13)/             *

Michel Berty                                                   8,000/(14)/             *

Robert M. Brill                                               64,359/(15)/             *

Steven Dmiszewicki                                           135,000/(16)/           1.0%

Dennis McKinnie                                               55,000/(17)/             *

Renee Fulk                                                    27,500/(18)/             *

All current directors and executive officers                 924,353                 6.4%
 as a group (9 persons)/(19)/
</TABLE>
-----------
  *  Represents less than one percent of the outstanding shares.

 (1) The address of Liraz is 5 Hazoref Street, Holon 58856 Israel.

 (2) Includes 821,257 shares that Liraz may be deemed to share voting power and
     dispositive power of common stock with Liraz Export (1990) Ltd., an Israeli
     corporation and a wholly-owned subsidiary of Liraz and 2,000,000 shares
     (1,000,000 of which are shares of common stock issuable upon the conversion
     of Series A 4% Convertible Redeemable Preferred Stock) that Liraz may be
     deemed to share voting and dispositive power with Advanced Systems Europe
     B.V., a Dutch corporation and a wholly-owned subsidiary of Liraz. Mr. Arie

                                       13
<PAGE>

     Kilman is a shareholder of Liraz. We have been advised that, as of May 11,
     2000, Mr. Kilman owned 1,183,170 ordinary shares of Liraz, which was
     approximately 19.4% of the ordinary shares of Liraz. Mr. Kilman may, by
     reason of his ownership in and relationship with Liraz, be deemed to share
     voting power and dispositive power with respect to the shares beneficially
     owned by Liraz and therefore may be deemed to be the beneficial owner of
     such shares.

     IDB Holding Corporation Ltd. ("IDB Holding") owns approximately 71% of the
     outstanding shares of IDB Development Corporation Ltd. ("IDB Development").
     IDB Development, in turn, owns approximately 71.7% of the outstanding
     Discount Investment Corporation Ltd. ("DIC") common stock which owns all of
     the outstanding capital stock of PEC Israel Electric Corporation ("EOC").
     By reason of the IDB Holdings ownership of IDB Development voting
     securities, IDB Holding may be deemed to be the beneficial owner of PEC
     common stock and DIC common stock held by IDB Development. By reason of
     their positions with, and control of voting securities of, IDB Holding, Mr.
     Oudi Recanati of Tel Aviv, Israel, Mr. Leon Recanati of Tel Aviv, Israel,
     Judith Yovel Recanati of Herzlya, Israel and Mrs. Elaine Recanati, may be
     each deemed to share the power to direct the voting and disposition of the
     outstanding shares of PEC common stock and DIC common stock owned by IDB
     Development and may each, under existing regulations of the Securities and
     Exchange Commission therefore be deemed a beneficial owner of the shares.
     Mrs. Elaine Recanati is the aunt of Mr. Leon Recanati and Mrs. Judith Yovel
     Recanati, who are brother and sister, and of Mr. Oudi Recanati, who is the
     cousin of Mr. Leon Recanati and Judith Yovel Recanati. Companies that the
     Recanati family control hold approximately 51.6% of the outstanding shares
     of IDB Holding.

     Excludes 1,250,000 shares of Common Stock held by Welsh, Carson, Anderson
     and Stowe VI, L.P. ("WCAS VI") and certain parties affiliated or associated
     with WCAS VI (collectively, the "WCAS Parties"), which Liraz and the
     Company may be deemed to share voting power and/or investment power
     pursuant to an agreement between the Company and the WCAS Parties dated
     November 23, 1998.

 (3) The address of WCAS is 320 Park Avenue, Suite 2500, New York, New York
     10022.

 (4) Includes 944,844 shares of Common Stock, and 236,209 additional shares of
     Common Stock issuable upon the exercise of warrants held by WCAS VI; 11,290
     shares of Common Stock, and 2,823 additional shares of Common Stock
     issuable upon the exercise of warrants held by WCAS Information Partners
     II, L.P.; 806 shares of Common Stock, and 202 additional shares of Common
     Stock issuable upon the exercise of warrants held by Trust U/A dated
     November 26, 1984 for the Benefit of Eric Welsh; 806 shares of Common
     Stock, and 202 additional shares of Common Stock issuable upon the exercise
     of warrants held by Trust U/A dated November 26, 1984 for the benefit of
     Randall Welsh; 806 shares of Common Stock, and 202 additional shares of
     Common Stock issuable upon the exercise of warrants held by Trust U/A dated
     November 26, 1984 for the benefit of Jennifer Welsh; 1,613 shares of Common
     Stock, and 403 additional shares of Common Stock issuable upon the exercise
     of warrants held by Reboul, MacMurray, Hewitt, Maynard and Kristol; and
     39,835 shares of Common Stock, and 9,959 additional shares of Common Stock
     issuable upon the exercise of warrants held by general partners of WCAS.
     WCAS is general partner of each of the foregoing limited partnerships.  The
     principals of WCAS are Bruce K. Anderson, Russell L. Carson, Anthony J. de
     Nicola, James B. Hoover, Thomas E. McInerney, Robert A. Minicucci, Andrew
     M. Paul, Richard A. Stowe, Laura Van Buren and Patrick J. Welsh.

 (5) The address of Brown Simpson Strategic Growth Fund, Ltd. is Citco Fund
     Services, Corporation Center, West Bay Road, P.O. Box 31106, SMB Grand
     Cayman, Cayman Islands.

 (6) Represents shares issuable upon the exercise of warrants at an exercise
     price of $10.00 per share.

 (7) The address of Brown Simpson Strategic Growth Fund, L.P. is 152 West 57th
     Street, 40th Floor, New York, New York 10019.

 (8) Represents shares issuable upon the exercise of warrants at an exercise
     price of $10.00 per share.

 (9) The address of Brown Simpson Partners I, Ltd. is Walkers P.O. Box 265GT,
     Walkers' House, Grand Cayman, Cayman Islands.

(10) Excludes shares owned by Liraz, which may be deemed beneficially owned by
     Mr. Kilman as a result of his position as a shareholder of Liraz and owner
     of approximately 19.4% of Liraz. On March 30, 1999, Mr.

                                       14
<PAGE>

     Kilman voluntarily terminated all of his outstanding options exercisable
     for 200,000 shares of Common Stock at exercise prices ranging from $10.45
     to $14.73. In December 1999, he was granted options to purchase 200,000
     shares at an option price of $30.25 per share, which are not exercisable
     within sixty (60) days. In the first quarter of 2000, Mr. Kilman was also
     granted options to purchase an additional 50,000 shares of Common Stock,
     which are not exercisable within sixty (60) days.

(11) Includes 477,805 shares subject to stock options exercisable within sixty
     (60) days; excludes 50,000 shares subject to stock options not exercisable
     within sixty (60) days.

(12) Includes 112,402 shares subject to stock options exercisable within sixty
     (60) days; excludes 14,500 shares subject to stock options not exercisable
     within sixty (60) days.

(13) Excludes shares owned by Liraz, see Note 2, which may be deemed
     beneficially owned by Mr. Recanati as a result of his position as an
     executive officer of Discount Investment Corporation Ltd. ("DIC"), which
     owns approximately 20.75% of Liraz.

(14) Includes 8,000 shares subject to stock options exercisable within sixty
     (60) days; excludes 8,000 shares subject to stock options not exercisable
     within sixty (60) days.

(15) Includes 24,235 shares of Common Stock and 28,124 additional shares of
     Common Stock issuable upon the exercise of warrants held by Poly Ventures
     II, L.P., which may be deemed beneficially owned by Dr. Brill as a result
     of his position as a General Partner of Poly Ventures II, L.P.; includes
     12,000 shares subject to stock options exercisable within sixty (60) days;
     excludes 18,000 shares subject to stock options not exercisable within
     sixty (60) days.

(16) Includes 135,000 shares subject to stock options exercisable within sixty
     (60) days; excludes 200,000 shares subject to stock options not exercisable
     within sixty (60) days.

(17) Includes 55,000 shares subject to stock options exercisable within sixty
     (60) days; excludes 55,000 shares subject to stock options not exercisable
     within sixty (60) days.

(18) Includes 27,500 shares subject to stock options exercisable within sixty
     (60) days; excludes 27,500 shares subject to stock options not exercisable
     within sixty (60) days.

(19) Excludes shares owned by Liraz as described in Note 2 and includes 855,831
     shares issuable upon exercise of options and warrants exercisable within
     sixty (60) days as described in Notes 11 through 19.

Item 13.  Certain Relationships And Related Transactions

Borrowings and Commitments from Liraz

   Under an agreement between Liraz and the Company dated December 31, 1998
(the "Liraz Agreement"), Liraz made a $12 million loan to the Company, which
bears simple interest at a rate of 12% a year and matures on June 30, 2000.  On
May 31, 1999, the Liraz Agreement was amended to change the maturity date from
June 30, 2000 to December 15, 2000, and to provide for semiannual interest
payments rather than payment of interest at maturity.  No other terms of the
loan were amended. The Company used part of the proceeds from the issuance of
the Series A 4% Convertible Redeemable Preferred Stock to make an $8 million
payment to Liraz to pay down the balance of the loan.  Liraz had previously
committed to provide the Company with up to $7.5 million of working capital
payable upon the earlier of March 31, 2001 or the successful completion of an
earlier financing providing more than $7.5 million in proceeds to the Company.
As a result of raising more than $7.5 million from the issuance of preferred
stock and warrants in June 1999, the Liraz commitment terminated.  At March 31,
2000 the Company's total indebtedness to Liraz was $4,519,000.

                                       15
<PAGE>

Template Software, Inc. Acquisition

   In December 1999, the Company acquired Template Software, Inc. ("Template")
for approximately $64 million in cash and stock.  The Company's management team
identified Template as a provider of technologies that enables the Company to be
one of the first to market with a comprehensive product portfolio representing
the next generation of EAI solutions for eBusiness.  As part of the Template
transaction, the Company obtained an additional $10 million in financing in the
form of a 17 month term loan.  The financing was guaranteed by Liraz, 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.  The commitment provides
for an interest rate equal to the London Interbank Offered Rate plus 1%
annually.

Joint Development Arrangement with Liraz

   The Company and Liraz previously had an agreement for the joint development
of certain software for a Microsoft contract.  Under the agreement, Liraz and
the Company were each to pay 50% of the total project development costs.  In
exchange for providing 50% of such costs, Liraz was previously entitled to
receive royalties of 30% of the first $2 million in contract revenue, 20% of the
next $1 million, and 8% thereafter.  On April 1, 1998, the agreement was amended
to provide that the Company would reimburse Liraz's costs of development of $1.5
million and would pay Liraz royalties of 3% of program revenues generated from
January 1, 1998 until December 31, 2000.  The $1.5 million reimbursement is
being amortized over the term of the revised royalty agreement and was paid to
Liraz by the delivery of an 8% note payable in three installments in 1998, 1999
and 2000. Additional royalties of $.13 million were paid to Liraz in 1999 for
1998 sales.

   See "Security Ownership of Certain Beneficial Owners and Management" for a
description of the relationships among Liraz and Messrs.  Kilman and Recanati,
directors of the Company.

Preferred Stock and Warrants

   June 29, 1999, the Company completed a $21 million private placement of
21,000 shares of Series A 4% Convertible Redeemable Preferred Stock (the "Series
A Preferred Stock"), convertible into an aggregate of 2.1 million shares of
common stock of the Company. Holders of the Series A Preferred Stock are
entitled to receive 4% annual cash dividends payable quarterly and will have one
vote per share of Series A Preferred Stock, voting together with the common
stock and not as a separate class except on certain matters adversely affecting
the rights of holders of the Series A Preferred Stock.  The Series A Preferred
Stock may be redeemed at the option of the Company at a redemption price equal
to the original purchase price at any time after June 29, 2000 if the closing
price of the Company's common stock over 20 consecutive trading days is greater
than $20 per share.  The conversion price of the Series A Preferred Stock is
subject to certain anti-dilution provisions, including adjustments in the event
of certain sales of common stock at a price of less than $10 per share.  In the
event the Company breaches its obligations to pay dividends when due or issue
common stock upon conversion, or the

                                       16
<PAGE>

Company's common stock is delisted, the dividend rate on the Series A Preferred
Stock would increase to 18% per annum (partially payable in shares of common
stock at the option of the Company during the first 60 days of such increased
dividend rate). As part of the $21 million financing, the Company also issued
the investors warrants to purchase 2.1 million shares of common stock at an
exercise price of $10 per share, subject to adjustment. As long as the Series A
Preferred Stock is outstanding, the Company may not purchase shares of its
common stock or make distributions on its common stock without the consent of
the holders of 85% of the outstanding Series A Preferred Stock. The Company has
agreed to register the common stock issuable upon conversion of the Series A
Preferred Stock and exercise of the warrants for resale under the Securities Act
of 1933. The Company is required to make certain payments in the event it is
unable to meet its obligations in connection with the Series A Preferred Stock
and warrants, such as registration under the Securities Act or issuance of
shares of common stock upon conversion or exercise. The aggregate amount of all
such payments, together with dividends on the Series A Preferred Stock, is
limited to 19% of the liquidation value of the Series A Preferred Stock.
Investors in the Series A Preferred Stock and warrants include Advanced Systems
Europe B.V., which purchased $10 million of Series A Preferred Stock and
warrants in the transaction and is a subsidiary of Liraz Systems Ltd., the
Company's principal stockholder.

                                       17
<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 Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                       LEVEL 8 SYSTEMS, INC.
Date:  May 26, 2000

                                       By: /s/ Dennis McKinnie
                                           -------------------
                                           Dennis McKinnie
                                           Senior Vice President,
                                           Chief Legal and Administrative
                                           Officer and Corporate Secretary

                                       18