<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
                              ____________________

                                   FORM 10-Q


(Mark One)

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

For the Quarterly Period Ended September 30, 1999

                                       OR

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

For the Transition Period from _____ to _____


                         Commission file number 0-21921

                            TEMPLATE SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)


                    Virginia                        52-1042793
        (State or other jurisdiction of          (I.R.S. Employer
         incorporation or organization)         Identification No.)


            45365 Vintage Park Plaza                   20166
                Dulles, Virginia                     (Zip code)
    (Address of principal executive offices)


                                 (703) 318-1000
              (Registrant's telephone number, including area code)


     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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.


                                                 Outstanding at
     Class of Common Stock                      October 22, 1999
     ---------------------                      ----------------
     Common Stock, $.01 par value per              4,922,830
     share  4,922,830
<PAGE>

                            TEMPLATE SOFTWARE, INC.

                                     INDEX
                                     -----

PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>

<S>                                                                       <C>
ITEM 1.  FINANCIAL STATEMENTS.                                             3

CONSOLIDATED BALANCE SHEETS                                                3

CONSOLIDATED STATEMENTS OF OPERATIONS                                      4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                     4

TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES                                   5

CONSOLIDATED STATEMENTS OF CASH FLOWS                                      5

NOTES TO THE FINANCIAL STATEMENTS                                          6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.                              8

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       13

PART II - OTHER INFORMATION                                               14

ITEM 1.  LEGAL PROCEEDINGS                                                14

ITEM 5.  OTHER INFORMATION.                                               15

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.                                15

SIGNATURE                                                                 17
---------

</TABLE>


This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
                                                            --------------
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by the safe harbors created
-------------
thereby.  Investors are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, the ability of the Company
to develop its products, as well as general market conditions, competition and
pricing.  In addition, any forward-looking statements could be impacted by the
Company's pending merger with Level 8 Systems, Inc., which is described further
in this Report on Form 10-Q and in the Company's Report on Form 8-K dated
October 17, 1999 and filed November 2, 1999.  Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-Q
will prove to be accurate.  In light of the significant uncertainties inherent
in the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.

                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

                    Template Software, Inc. and Subsidiaries
                          Consolidated Balance Sheets
                             (Amounts in thousands)



<TABLE>
<CAPTION>

                                                  September 30, 1999    December 31, 1998
                                                     (Unaudited)            (Audited)
                                                 -------------------    -----------------
<S>                                              <C>                      <C>
ASSETS
Current assets:
  Cash and cash equivalents                            $2,527                  $1,831
  Marketable securities                                 4,346                   8,221
  Accounts receivable, net                              9,415                  15,752
  Deferred income taxes                                 4,511                   1,873
  Note receivable                                          --                     500
  Prepaid expenses                                      1,173                     732
  Other current assets                                    239                     486
                                                      -------                 -------
    Total current assets
Property and equipment, net                            22,211                  29,395
Software development costs, net                         5,135                   5,423
Goodwill, net                                           3,164                   2,601
Other assets                                            8,667                  10,298
                                                        1,427                   1,367
                                                      -------                 -------
      Total assets                                    $40,604                 $49,084
                                                      =======                 =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses                $6,262                  $6,791
  Current portion of long-term debt                       282                     451
  Deferred income                                         352                   1,437
                                                      -------                 -------
    Total current liabilities                           6,896                   8,679
                                                      -------                 -------

Long-term liabilities:
  Long-term debt, net of current portion                   68                      76
  Deferred income taxes                                 1,119                     827
  Other long-term liabilities                             474                     421
                                                      -------                 -------
    Total liabilities                                   8,557                  10,003
                                                      -------                 -------
Shareholders' equity:
Common stock                                               52                      52
Additional paid-in capital                             36,598                  36,619
Deferred compensation                                    (321)                   (727)
Accumulated other comprehensive income (loss)            (867)                    154
Retained earnings                                      (2,117)                  3,794
Treasury stock                                         (1,298)                   (811)
                                                      -------                 -------
    Total shareholders' equity                         32,047                  39,081
                                                      -------                 -------
      Total liabilities and shareholders' equity      $40,604                 $49,084
                                                      =======                 =======
</TABLE>

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

                                       3
<PAGE>

                    Template Software, Inc. and Subsidiaries
                     Consolidated Statements of Operations
            (Amounts in thousands, except per share and share data)
                                  (Unaudited)



<TABLE>
<CAPTION>

                                                  For the Three Months          For the Nine Months
                                                   Ended September 30,          Ended September 30,
                                               --------------------------   --------------------------
                                                     1999         1998           1999         1998
                                               --------------------------   --------------------------
<S>                                            <C>             <C>          <C>            <C>
  Products                                      $     490      $    1,214    $    3,887     $    5,106
  Services                                          8,598           8,646        27,482         23,559
                                               ----------      ----------    ----------     ----------
    Total Revenues                                  9,088           9,860        31,369         28,665
                                               ----------      ----------    ----------     ----------
Cost of revenues:
  Products                                            500             349         1,583          1,102
  Services                                          6,422           5,447        21,057         14,727
                                               ----------      ----------    ----------     ----------
    Total cost of revenues                          6,922           5,796        22,640         15,829
                                               ----------      ----------    ----------     ----------
Gross profit                                        2,166           4,064         8,729         12,836
                                               ----------      ----------    ----------     ----------

Operating expenses:
  Selling and marketing                             2,950           2,348         8,029          7,157
  Product development                                 586             354         1,497          1,021
  General and administrative                        1,690           1,289         7,337          4,098
                                               ----------      ----------    ----------     ----------
    Total operating expenses                        5,226           3,991        16,863         12,276
                                               ----------      ----------    ----------     ----------
Income (loss) from operations                      (3,060)             73        (8,134)           560
  Interest income                                      58             128           231            437
  Other income (expense)                               (7)             36            (8)           210
                                               ----------      ----------    ----------     ----------
Net income (loss) before income taxes              (3,009)            237        (7,911)         1,207
Income tax provision (benefit)                       (762)            207        (2,000)           557
                                               ----------      ----------    ----------     ----------
Net income (loss)                               $  (2,247)            $30       $(5,911)          $650
                                               ==========      ==========    ==========     ==========
Earnings (loss) per share - basic                  $(0.46)          $0.01        $(1.19)         $0.13
                                               ==========      ==========    ==========     ==========
Shares used in computing basic
 earnings (loss) per share                      4,901,909       5,120,860     4,951,050      5,021,608
                                               ==========      ==========    ==========     ==========
Earnings (loss) per share - diluted                $(0.46)          $0.01        $(1.19)         $0.11
                                               ==========      ==========    ==========     ==========
Shares used in computing diluted
 earnings (loss) per share                      4,901,909       5,669,497     4,951,050      5,803,578
                                               ==========      ==========    ==========     ==========

</TABLE>

             Consolidated Statements of Comprehensive Income (Loss)
                             (Amounts in thousands)
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                              For the Three Months           For the Nine Months
                                                              Ended September 30,            Ended September 30,
                                                         ----------------------------    -------------------------
                                                              1999           1998            1999          1998
                                                         ----------------------------    -------------------------
<S>                                                      <C>              <C>             <C>            <C>
Net income (loss)                                           $(2,247)          $30           $(5,911)         $650
Foreign currency translation adjustment                         283           338              (474)          280
Unrealized loss on marketable
 securities, net of taxes                                       (48)          --               (547)          --
                                                           --------          ----           -------          ----
Comprehensive income (loss)                                 $(2,012)         $368           $(6,932)         $930
                                                           ========          ====           =======          ====
</TABLE>

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

                                       4
<PAGE>

                    Template Software, Inc. and Subsidiaries
                     Consolidated Statements of Cash Flows
                             (Amounts in thousands)
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                              For the Nine Months Ended
                                                                                    September 30,
                                                                         ---------------------------------
                                                                              1999              1998
                                                                         ---------------------------------
<S>                                                                      <C>                 <C>
Cash flows used in operating activities                                     $  (264)           $   (11)
                                                                           --------            -------
Cash flows from investing activities:
  Proceeds from sales and maturities of marketable securities                 5,165              8,400
  Purchase of marketable securities                                          (2,000)            (5,201)
  Purchase of convertible note                                                   --             (1,500)
  Proceeds from note receivable                                                 500                 --
  Capital expenditures and leasehold improvements                              (670)            (3,390)
  Capitalization of software development costs                               (1,348)            (1,220)
  Acquisition costs, net of cash acquired                                        --                (58)
                                                                           --------            -------
    Net cash provided (used in) by investing activities                       1,647             (2,969)
                                                                           --------            -------
Cash flows from financing activities:
  Revolving credit facility, net                                                (69)               487
  Increase in notes payable                                                     102                269
  Payments on notes payable                                                    (158)              (157)
  Capital lease obligations                                                     (41)               (29)
  Income tax benefit related to stock options                                     9                634
  Proceeds from sale of common stock under stock programs                       122                861
  Purchase of common stock                                                     (487)              (501)
                                                                           --------            -------
    Net cash provided by (used in) financing activities                        (522)             1,564
                                                                           --------            -------
Effect of exchange rate changes on cash and cash equivalents                   (165)               (77)
                                                                           --------            -------
Net increase (decrease) in cash and cash equivalents                            696             (1,493)
Cash and cash equivalents, beginning of period                              $ 1,831            $ 3,425
                                                                           ========            =======
Cash and cash equivalents, end of period                                    $ 2,527            $ 1,932
                                                                           ========            =======
</TABLE>

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

                                       5
<PAGE>

                    Template Software, Inc. and Subsidiaries
                       Notes to the Financial Statements


Note A -- Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated
financial statements of Template Software, Inc. and subsidiaries (the "Company")
                                                                       -------
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of September
30, 1999 and the results of operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.  It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-K.  The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the operating results to be expected for
the full year.


Note B -- Merger with Level 8 Systems, Inc.

     On October 20, 1999, the Company announced that it had entered into an
Agreement and Plan of Merger dated as of October 19, 1999 (the "Merger
                                                                ------
Agreement") with Level 8 Systems, Inc., a Delaware corporation ("Level 8") and
---------                                                        -------
Level 8's wholly-owned subsidiary, TSAC, Inc., a Delaware corporation (the

"Subsidiary").  The Merger Agreement provides for Level 8's acquisition of the
-----------
Company by the Company's merger with and into the Subsidiary (the "Merger").
                                                                   ------

     Under the Merger Agreement, each share of the Company's common stock will
be exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock, subject
to adjustment.  The actual number of shares of Level 8 common stock to be
exchanged for each Company share will be based on the average trading price of
Level 8 stock for the 10 trading days prior to the third trading day before
Level 8's shareholder approval, but will not be less than 0.2838 Level 8 shares
per Company share (if Level 8's average trading price exceeds $13.74) or more
than 0.3672 Level 8 shares per Company share (if Level 8's average trading price
is less than $10.62).  The Merger is intended to qualify as a tax-free
reorganization, which means that Company shareholders would generally be
permitted to defer taxes on the Level 8 stock portion of the merger
consideration.

     In connection with the Merger, on October 17, 1999 the Company's Board of
Directors approved an amendment to the Rights Agreement by and between the
Company and First Union National Bank dated as of July 3, 1998 (the "Rights
                                                                     ------
Agreement").  The amendment provides that neither Level 8 nor the Subsidiary
---------
will be considered an "Acquiring Person" (as that term is defined in the Rights
Agreement), and that the execution, delivery and consummation of the Merger
Agreement will not cause the occurrence of a "Distribution Date" or a "Stock
Acquisition Date" (as these terms are defined in the Rights Agreement).  The
amendment thus ensures that the Merger will not trigger the distribution of
rights to the Company's shareholders under the Rights Agreement.  In addition,
in connection with the Merger Agreement, the Company has agreed not to further
amend the Rights Agreement without the consent of Level 8.

     The Merger is subject to certain conditions to closing, including
shareholder approval, regulatory approval, and necessary consents and filings.

                                       6
<PAGE>

Note C - Recent Accounting Pronouncements

     In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 (SOP 98-9), "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions."  The
provisions of this SOP that extend the deferral of the application of certain
passages of SOP 97-2 are effective December 15, 1998.  All other provisions of
this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999.  Earlier adoption is permitted as of the beginning of
fiscal years or interim periods for which financial statements or information
have not been issued.  Retroactive application of the provisions of this SOP are
prohibited.  The adoption of SOP 98-9 is not expected to have a material impact
on the Company's operating results, financial position or cash flows.


Note D - Income Taxes

     The Income Tax Benefit was $0.8 million for the quarter ended September 30,
1999 compared to an Income Tax Provision of $0.2 million for the quarter ended
September 30, 1998.  The Income Tax Benefit for the nine months ended September
30, 1999 was $2.0 million compared to an Income Tax Provision of $0.6 million
for the nine month period ended September 30, 1998.  The Company's effective tax
rate was 25% for the quarter ended September 30, 1999 compared to 87% for the
quarter ended September 30, 1998.  The Company's effective tax rate was 25% for
the nine month period ended September 30, 1999 compared to 46% for the nine
month period ended September 30, 1998. These tax rates reflect the differences
in effective tax rates relative to the Company having pre-tax losses in 1999 and
pre-tax profits in 1998 along with lower tax rates applicable to losses in
foreign jurisdictions, the effect of the permanent differences relative to the
Company's profit/loss and the establishment in 1999 of valuation allowances for
deferred tax assets attributable to net operating losses in France in the amount
of approximately $482,000.


Note E - Earnings Per Share

     Earnings per share is presented in accordance with SFAS No. 128, Earnings
per Share.  Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the period.  Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average of
common shares outstanding after giving effect to all dilutive potential common
shares that were outstanding during the period.


     The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.

<TABLE>
<CAPTION>
                                                     Three Months Ended    Nine Months Ended
                                                    --------------------  --------------------
                                                        September 30,         September 30,
                                                    --------------------  --------------------
                                                       1999       1998       1999       1998
                                                    ---------  ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>        <C>
Weighted average shares outstanding - basic         4,901,909  5,120,860  4,951,050  5,021,608
Potential common shares related to stock options           --    548,637         --    781,970
                                                    ---------  ---------  ---------  ---------
Weighted average shares outstanding - diluted       4,901,909  5,669,497  4,951,050  5,803,578
                                                    =========  =========  =========  =========
</TABLE>

     The Company did not have any dilutive common shares during the three and
nine month periods ended September 30, 1999.  Net income (loss) reported was not
adjusted for the computation of basic or diluted earnings per share.  In 1999,
443,857 and 395,815 shares primarily related to the inclusion of the effect of
potential stock options exercises were not included in the computation of
diluted earnings per share for the three and nine month periods ended September
30, 1999, respectively, because to do so would have been antidilutive for those
periods.

                                       7
<PAGE>

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations.

Results of Operations

     Revenue.  Total Revenue was $9.1 million for the quarter ended September
30, 1999 compared to $9.9 million for the quarter ended September 30, 1998, a
decrease of $0.8 million or 7.8%.  This decrease was primarily attributable to a
decrease in product revenue.  Total Revenue for the nine month period ended
September 30, 1999 was $31.4 million compared to $28.7 million for the nine
month period ended September 30, 1998, an increase of $2.7 million or 9.4%.
This growth resulted principally from volume increases in sales of software-
related services for customers such as the National Imagery and Mapping Agency
("NIMA") in the United States and Commerzbank, Mannesmann and Delvag in Germany.


     Product Revenue was $0.5 million for the quarter ended September 30, 1999
compared to $1.2 million for the quarter ended September 30, 1998, a decrease of
$0.7 million or 59.6%.  This decrease is primarily attributable to significant
product transactions in the three month period ended September 30, 1998 with
Eagle Eye Technologies, Inc. and Motorola Center Computersysteme with no
transaction of comparable size in the three months ended September 30, 1999.
For the nine month period ended September 30, 1999, Product Revenue was $3.9
million compared to $5.1 million for the nine month period ended September 30,
1998, a decrease of $1.2 million or 23.9%.  This decrease was primarily
attributable to the decrease in product revenue in Europe.  The Company believes
that penetration into the German enterprise integration market has not occurred
primarily because German companies are spending their information technology
budgets on Year 2000 remediations and SAP implementations.  In the three month
period ended June 30, 1999, the Company realigned its sales strategy in Germany
to penetrate the market with lighter products (i.e., products that have less
functionality and complexities) that are more relative to the enterprise
application integration market.  The Company is now focussing on reselling
Vision Jade and Visual Edge, both lighter enterprise integration products, in an
effort to penetrate our German customer base.  Services Revenue was $8.6 million
for the quarter ended September 30, 1999 and September 30, 1998.  Services
Revenue was $27.5 million for the nine month period ended September 30, 1999,
compared to $23.6 million for the nine month period ended September 30, 1998, an
increase of $3.9 million or 16.7%. This growth resulted principally from volume
increases in sales of software-related services for customers such as the
National Imagery and Mapping Agency ("NIMA") in the United States and
Commerzbank, Mannesmann and Delvag in Germany.

     Cost of Revenue.  Total Cost of Revenue is comprised of salaries and
related benefits for personnel, amortization of capitalized software development
costs and an allocated portion of rent, building services and computer equipment
services and expenses.  Total Cost of Revenue was $6.9 million for the quarter
ended September 30, 1999 compared to $5.8 million for the quarter ended
September 30, 1998, an increase of $1.1 million or 19.5%.  Total cost of revenue
was $22.6 million for the nine month period ended September 30, 1999 compared to
$15.8 million for the nine month period ended September 30, 1998, an increase of
$6.8 million or 43.0%.    Total Cost of Revenue was 76.2% of total revenue for
the quarter ended September 30, 1999 compared to 58.8% of total revenue for the
quarter ended September 30, 1998.  For the nine month period ended September 30,
1999, total cost of revenue was 72.2% of total revenue for the nine months ended
September 30, 1999 compared to 55.2% for the comparable period during 1998.  The
increase in the cost of revenue and the related percentage relative to revenue
was attributable to (i) higher technical staff salaries, (ii) utilization of
third party subcontractors in conjunction with the Company's implementation of
the NIMA service engagement (iii)the purchase and integration of a third party
software product with the Company's software products

                                       8
<PAGE>

and (iv) lower margins on service contracts. Also, certain contracts in Germany
achieved very low margins and technical personnel trained in the Company's
technology in France and Germany were under-utilized. As a result of these
issues, in the three month period ended June 30, 1999, the Company implemented a
reduction in force in Europe, primarily Germany in order to more closely align
the Company's European cost structure with its related revenue.


     Cost of Product Revenue was $0.5 million for the quarter ended September
30, 1999 compared to $0.3 million for the quarter ended September 30, 1998, an
increase of $0.2 million or 43.6%.  Cost of Product Revenue was $1.6 million for
the nine months ended September 30, 1999 compared to $1.1 million for the nine
months ended September 30, 1998, an increase of $0.5 million or 43.7%.  The Cost
of Product Revenue increased in the three month and nine month periods ended
September 30, 1999 primarily due to an increase in software amortization
associated with the general availability release of the Company's Enterprise
Integration Template(TM) ("EIT").


     Cost of Services Revenue was $6.4 million for the quarter ended September
30, 1999 compared to $5.4 million for the quarter ended September 30, 1998, an
increase of $1.0 million or 17.9%.  Cost of Services Revenue was $21.0 million
for the nine month period ended September 30, 1999, compared to $14.7 million
for the nine month period ended September 30, 1998, an increase of $6.3 million
or 43.0%.  This increase resulted primarily from the cost associated with
staffing the growth in services contracts.  The Company believes that Service
Revenue gross margins have decreased due to the use of third party
subcontractors, the provision and integration of a third party software product
on the NIMA contract and the low service margins and under-utilization of the
technical staff in Germany.  If any of the Company's engagements were to be
terminated on short notice, the Company would be unable to reduce Cost of
Services Revenue commensurate with the associated decrease in Services Revenue.
Any such termination would have a material adverse effect on the Company's
business, operating results and financial condition.


     Selling and Marketing.  Selling and Marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations.  Selling and Marketing expenses were
$2.9 million for the quarter ended September 30, 1999 compared to $2.3 million
for the quarter ended September 30, 1998, an increase of $0.6 million or 25.6%.
Selling and marketing expenses were $8.0 million for the nine month period ended
September 30, 1999, compared to $7.2 million for the nine month period ended
September 30, 1998, an increase of $0.8 million or 12.2%. These increases
resulted primarily from additional expenditures targeted towards increasing
market awareness including public relations activities, tradeshows and expenses
associated with evaluating and generating proposals.  The Company has hired and
intends to continue to hire additional sales personnel primarily in the United
States and Germany and is utilizing additional technical staff in sales
activities.  The Company anticipates its selling and marketing expenses will
continue to increase.

     Product Development.  Product Development expenses were $0.6 million for
the quarter ended September 30, 1999, compared to $0.4 million for the quarter
ended September 30, 1998, an increase of $0.2 million or 65.5%.  Product
development expenses were $1.5 million for the nine month period ended September
30, 1999, compared to $1.0 million for the nine month period ended September 30,
1998, an increase of $0.5 million or 46.6%.  This increase resulted primarily
from the development of enhancements to the EIT and the writedown of peripheral
product development efforts that were not strategic to the Company's enterprise
application integration focus amounting to approximately $124,000 and $ 40,000
recorded in the three month periods ended June 30, 1999 and September 30, 1999,
respectively.

     General and Administrative.  General and Administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff and goodwill
amortization.  General and Administrative expenses were $1.7 million for the
quarter ended September 30, 1999 compared to $1.3 million for the quarter ended
September 30,

                                       9
<PAGE>

1998 an increase of $0.4 million or 31.0%. This increase is primarily
attributable to increased personnel, recruiting costs and professional service
fees. General and administrative expenses were $7.3 million for the nine month
period ended September 30, 1999, compared to $4.1 million for the nine month
period ended September 30, 1998, an increase of $3.2 million or 78.9%. This
increase is primarily attributable to costs associated with the reduction in
force in Europe in the three month period ended June 30, 1999, increases in
personnel due to the higher level of revenues during the nine month period ended
September 30, 1999 compared to the same period in 1998 and the recognition of an
impairment loss to the goodwill associated with the Company's French acquisition
of approximately $1.0 million. As the result of the Company's ongoing evaluation
of the carrying value of its long-lived assets, in the three month period ended
June 30, 1999, the Company determined that the sales pipeline in the French
operations did not improve as originally anticipated; therefore, the Company
recognized an impairment loss equal to the unamortized balance of the goodwill
associated with the acquisition of the French operation. Goodwill amortization,
exclusive of the $1.0 million goodwill impairment loss, was $169,946 and
$587,772 for the three month period ended September 30, 1999 and September 30,
1998 and $206,468 and $608,811 for the nine months ended September 30, 1999 and
September 30, 1998, respectively.

     Income Tax (Benefit) Provision.  The Income Tax Benefit was $0.8 million
for the quarter ended September 30, 1999 compared to an Income Tax Provision of
$0.2 million for the quarter ended September 30, 1998.  The Income Tax Benefit
for the nine months ended September 30, 1999 was $2.0 million compared to an
Income Tax Provision of $0.6 million for the nine month period ended September
30, 1998.  The Company's effective tax rate was 25% for the quarter ended
September 30, 1999 compared to 87% for the quarter ended September 30, 1998.
The Company's effective tax rate was 25% for the nine month period ended
September 30, 1999 compared to 46% for the nine month period ended September 30,
1998. These tax rates reflect the differences in effective tax rates relative to
the Company having pre-tax losses in 1999 and pre-tax profits in 1998 along with
lower tax rates applicable to losses in foreign jurisdictions, the effect of the
permanent differences relative to the Company's profit/loss and the
establishment in 1999 of valuation allowances for deferred tax assets
attributable to net operating losses in France in the amount of approximately
$482,000.


Liquidity and Capital Resources

     The Company's overall cash and cash equivalents were $2.5 million at
September 30, 1999, which is an increase of approximately $0.7 million from $1.8
million as of December 31, 1998.  The Company's operating activities used cash
of $0.3 million for the nine month period ended September 30, 1999.  During the
nine month period ended September 30, 1999, cash flow used in operating
activities reflected the net loss, the deferred tax provision and the decrease
in deferred income, partially offset by depreciation and amortization and the
decrease in accounts receivable.


     Cash provided by investing activities totaled $1.6 million during the nine
month period ended September 30, 1999.  During the nine months ended September
30, 1999 the Company invested $0.7 million in property and equipment and
capitalized $1.3 million in software development costs.  Additionally, the
Company sold $5.2 million and reinvested $2.0 million of marketable securities,
netting $3.2 million for working capital. Precise Connectivity Solutions, Ltd.
repaid its $0.5 million note to the Company in full.

     Cash used in financing activities totaled $0.5 million for the nine month
period ended September 30, 1999 primarily relating to the Company's re-purchase
of common stock in conjunction with its stock buy-back program.


     The Company has a line of credit under a Loan and Security Agreement (the

"Loan Agreement") with First Union National Bank , previously Signet Bank (the
---------------
"Bank"), in the aggregate principal amount of $3.0 million.  As of September 30,
-----
1999, there were no amounts outstanding under this line of credit.  The Company
has been in compliance with all financial and non-financial covenants of the
Loan

                                       10
<PAGE>

Agreement. The Loan Agreement bears interest at the LIBOR Market Index Rate (for
the United States Dollar quoted by the British Bankers Association) plus 1.85%.
The Company's French subsidiary maintains with Banque Hervet an unsecured line
of credit for 500,000FF plus an additional 500,000FF of credit collateralized by
70% of accounts receivable (approximately $180,000 in aggregate) at an interest
rate of 8.3%. The Company's Austrian subsidiary maintains a line of credit with
Raiffeisen Bank for 1,000,000ATS (approximately $85,000), collateralized by 100%
of accounts receivable at an interest rate of 5%. As of September 30, 1999,
515,384FF (approximately $84,000) was outstanding under the French line of
credit and no amounts were outstanding under the Austrian line of credit.


     The Company's Board of Directors, on September 18, 1998, authorized the
repurchase of up to 500,000 shares of the Company's Common Stock in open market
transactions effected in accordance with Rule 10b-18 of the Securities Exchange
Act of 1934, as amended.  During the three and nine month periods ended
September 30, 1999, the Company purchased 40,600 and 115,800 shares of its
Common Stock for $140,975 and $486,994, respectively.  As of September 30, 1999,
the Company had cumulatively repurchased 299,800 shares of its Common Stock in
such transactions for $1,298,219 at an average purchase price of $4.33 per
share.

     The Company believes its cash balances, cash generated from operations and
borrowings available under its line of credit, will satisfy the Company's
working capital and capital expenditure requirements for at least the next
twelve months.  In the longer term, the Company may require additional sources
of liquidity to fund future operating activities.  Such sources of liquidity may
include additional equity offerings or debt financings.  There can be no
assurances that such sources of financing will be available to the Company, and
if they are, that they will be sufficient to meet the Company's liquidity needs
at such time.


Impact of Year 2000 Issue

     The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year.  If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000.  This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.

     The majority of the Company's systems have been confirmed as Year 2000
compliant as the result of the Company's Year 2000 compliance program conducted
to identify and correct any non-compliant software or systems that would cause a
significant detrimental effect on the Company.  The Company's compliance program
identified its Year 2000 risk in four categories: internal administrative
software; internal operational software and embedded chip technology; external
noncompliance by customers and suppliers; and Company products.

     INTERNAL ADMINISTRATIVE SOFTWARE.  All of the Company's internal
administrative software is "off-the-shelf' commercially available software.  The
Company gathered data to assess the impact of the Year 2000 on its
administrative systems such as the accounting and human resources systems.  The
Company's main domestic accounting system has been determined to be non-
compliant and is being replaced with new compliant software.  The estimated cost
of such replacement is expected to approximate $300,000.  The Company expects to
be in full compliance with its internal administrative financial systems before
December 31, 1999.  However, if due to unforeseen circumstances, the
implementation is not completed on a timely basis, the Year 2000 could have a
material impact on the operations of the Company.  In the event the Company
determines that there is a risk that the non-compliant domestic accounting
system cannot be implemented before Year 2000, the Company will develop
contingency plans accordingly.

                                       11
<PAGE>

     INTERNAL OPERATIONS SOFTWARE AND EMBEDDED CHIP TECHNOLOGY.  The Company
gathered data to assess the impact of the Year 2000 on its operational systems
such as production systems and communication systems.  The Company believes its
material, critical systems are Year 2000 compliant resulting from responses
received from inquiries made to the applicable vendors.  Additionally, as a
contingency, the Company believes it can replace any failing system with an
alternative commercially available system in a short timeframe.

     EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is
continuing the process of reviewing the state of readiness of its critical
suppliers and service providers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issues. This exercise includes compliance inquiries and reviews
that will continue throughout 1999. To the extent that responses to Year 2000
readiness are unsatisfactory, the Company intends to change suppliers or service
providers to those who have demonstrated Year 2000 readiness but cannot be
assured that it will be successful in finding such alternative suppliers and
service providers.  The Company does not currently have any formal information
concerning the Year 2000 compliance status of its customers but has received
indications that most of its customers are working on Year 2000 compliance.  In
the event that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with new customers or alternate suppliers, the Company's
business or operations could be adversely affected.

     COMPANY PRODUCTS.  The Company provides its customers with licensed
software products that are manufactured and developed internally and licensed
software products that are obtained from third party software vendors and
resold.  The following compliance statement covers the Company's internally
produced software products and is provided to the general public on the
Company's website.

                         Year 2000 Compliance Statement

     The Company recognizes that most customers use Company software products in
business-critical applications and that customers want to know if the Company's
products are "Year 2000 Compliant."  The compliance statements below cover the
Company's software products: Foundation Template (including the SNAP Template,
Web Component, Geographic Mapping Component and Process Monitoring Component),
Workflow Template ("WFT"), System Management Template ("SMT") and the Enterprise
Integration Template ("EIT").

Definition:

     There is no single definition of the term "Year 2000 Compliant" that is
generally accepted in the industry.   The Company has created the definition
below which we believe meets the letter and the spirit of a notice of compliance
that meets our customer's requirements.

     A software product is "Year 2000 Compliant" when: (1) the software product
itself does not fail at or near January 1, 2000 and (2) the software product
provides documented time and date facilities that allow developers to build
software that does not fail at or near January 1, 2000.  The phrase at or near
January 1, 2000 specifically includes treating the Year 2000 as a leap year.

Compliance Statements:

     The Foundation Template (including the SNAP Template, Web Component,
Geographic Mapping Component and Process Monitoring Component) provided by the
Company is Year 2000 Compliant.

     The Workflow Template ("WFT") provided by the Company is Year 2000
Compliant.

                                       12
<PAGE>

     The Systems Management Template ("SMT") provided by the Company is Year
2000 Compliant.

     The Enterprise Integration Template ("EIT") provided by the Company is Year
2000 Compliant.

How Compliance is Achieved:

     The Foundation Template, WFT, SMT and EIT meet the first criterion because
they employ a single module to obtain or provide time and date information.
This module has been extensively tested in many product development cycles and
in many customer solutions.  It handles the Year 2000 as a leap year.

     The Foundation Template, WFT, SMT and EIT meet the second criterion because
they use a common data structure for time and date information.  All time
requests start by getting the operating system time, then developers use one
function to convert operating system time to a single portable SNAP environment
data structure.  Developers use this data structure in applications to obtain
time and date information.  All time and date information is supplied as integer
values.  To provide a portable data structure the conversion algorithm is
different for different operating system environments.  The integer value
returned for `year' is a number representing the number of years since 1900.
The year value can be very large (over 10,000).  The integer value will
increment continuously at the turn of the century and beyond.  The algorithm
used to determine the current year (1900 + year) remains constant before and
after the turn of the century.

     When using Company products that are Year 2000 Compliant it is still
possible for application developers to introduce code that will make the overall
application non-compliant.

                 End of Company Year 2000 Compliance Statement

     The Company has investigated each third party software vendor whose
software products the Company resells regarding Year 2000 compliance of those
products.  The Company has determined that all of the third party products it
currently resells are Year 2000 compliant based upon the representations of the
respective third party software vendor. In all cases the third party software
vendor's license agreement is passed on to the Customer and the Company is not a
party thereto.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks.  Though the Company faces and manages
other types of risks, such as credit and liquidity risks, the Company's market
risk arises primarily from risks inherent in currency rate movements and from
risk inherent in the Company's marketable securities.  The Company regularly
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures.

     A substantial portion of the Company's revenues are generated from
international operations.  Revenues from foreign subsidiaries and export sales
accounted for 49.0%, 51.9% and 48.7% of the Company's total revenues in fiscal
years 1997 and 1998 and the nine months ended September 30, 1999, respectively,
or $12.3 million, $21.2 million and $15.3 million, respectively.  As a result,
the Company is subject to numerous international market-based risks (as well as
risks related specifically to these international operations, which are
discussed elsewhere in this report).  These risks include unexpected changes in
regulatory requirements, export limitations on encryption technologies, tariffs
and other trade barriers, political and economic instability in foreign markets,
difficulty in the staffing, management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable

                                       13
<PAGE>

collection, currency fluctuations and potentially adverse tax consequences. The
uncertainty of the monetary exchange values has caused, and may in the future
cause, some foreign customers to delay new orders or delay payment for existing
orders. These factors may, in the future, contribute to fluctuations in the
Company's financial condition and results of operations. The Company believes
that the Company's currency exchange risk is mitigated somewhat by the fact that
the Company conducts operations from international as well as domestic
locations, allowing it to minimize the impact of any currency movements by, for
example, paying its German debtors in German deutsche marks. Although the
Company's results of operations have not been materially adversely affected to
date as a result of currency fluctuations, the long-term impact of currency
fluctuations, including any possible effect on the business outlook in other
developing countries, cannot be predicted.

     The fair value of the Company's investments in marketable securities at
September 30, 1999 was $4.3 million. The Company's marketable securities
portfolio is invested (i) in short-term securities with at least an investment
grade rating to minimize interest rate and credit risk as well as provide an
immediate source of funds with a market value of $1.0 million as of September
30, 1999 and (ii) long-term federally backed zero coupon bonds with a market
value of $3.3 million as of September 30, 1999.  In this regard, the Company has
gross unrealized losses of approximately $1.1 million from its longer-term
marketable securities as of September 30, 1999, and there can be no assurance
that the Company will be able to recoup these losses if realized.  The Company
has filed an arbitration claim with the National Association of Securities
Dealers against Merrill Lynch Pierce Fenner & Smith with respect to certain of
these issues.  See "Part II -- Item 1  Legal Proceedings."  As a general matter,
although changes in interest rates may affect the fair value of the marketable
securities portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments are liquidated.

                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

  The Company has entered into a settlement agreement with Automated Financial
Systems, Inc. ("AFS") regarding an action that the Company had filed that has
been pending since December 23, 1998.  A description of the basis of this action
is contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 0-21921).  As part of the settlement, AFS has paid
the Company $260,000 on August 27, 1999 and dismissed its counterclaims against
the Company.

     On June 30, 1999, the Company filed a claim with the National Association
of Securities Dealers for arbitration against Merrill Lynch Pierce Fenner &
Smith ("Merrill Lynch") seeking compensatory damages of $950,000 plus attorney's
fees and lost income resulting from advice rendered by Merrill Lynch to
purchase, and the failure of Merrill Lynch to divest at the Company's
instruction, the Company's portfolio of zero coupon long-term bonds.  Discovery
has commenced in the arbitration.  The Company expects that the arbitration will
be completed by the end of 1999.  The Company cannot predict the outcome of this
arbitration proceeding.  If the Company is not successful in this arbitration,
there could be a material adverse effect on the Company's business, results of
operations and financial condition.

     On July 15, 1999, the Company filed an action against Manugistics, Inc.
("Manugistics") in the United States District Court for the Eastern District of
Virginia, seeking compensatory damages of approximately $1,250,000 resulting
from breach of certain representations contained in a license agreement for
Manugistics-developed software that the Company had attempted to incorporate
into a project that the Company is committed to delivering to an agency of the
federal government.  Manugistics has filed a counterclaim against the Company,
asserting breach of contract, breach of alleged settlement, and wrongful hiring.
On October 19, 1999, the Company filed an amended complaint

                                       14
<PAGE>

to include two additional claims, fraud in the inducement and constructive
fraud, seeking additional damages of $2,000,000. Discovery has commenced in the
action. No trial date has been set for this action, and the Company cannot
currently predict the outcome of this litigation. If the Company is not
successful in pursuing these claims, there could be a material adverse effect on
the Company's business, results of operations and financial condition.

     In addition, the Company is and may from time to time be involved in
ordinary routine litigation incidental to its business.  Other than as described
above, the Company is not aware of any pending or threatened litigation that
could have a material adverse effect on the Company's business, results of
operations or financial condition

Item 5. Other Information.

     On October 20, 1999, the Company announced that it had entered into an
Agreement and Plan of Merger dated as of October 19, 1999 (the "Merger
                                                                ------
Agreement") with Level 8 Systems, Inc., a Delaware corporation ("Level 8") and
---------                                                        -------
Level 8's wholly-owned subsidiary, TSAC, Inc., a Delaware corporation (the

"Subsidiary").  The Merger Agreement provides for Level 8's acquisition of the
-----------
Company by the Company's merger with and into the Subsidiary (the "Merger").
                                                                   ------

     Under the Merger Agreement, each share of the Company's common stock will
be exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock, subject
to adjustment.  The actual number of shares of Level 8 common stock to be
exchanged for each Company share will be based on the average trading price of
Level 8 stock for the 10 trading days prior to the third trading day before
Level 8's shareholder approval, but will not be less than 0.2838 Level 8 shares
per Company share (if Level 8's average trading price exceeds $13.74) or more
than 0.3672 Level 8 shares per Company share (if Level 8's average trading price
is less than $10.62).  The Merger is intended to qualify as a tax-free
reorganization, which means that Company shareholders would generally be
permitted to defer taxes on the Level 8 stock portion of the merger
consideration.

     In connection with the Merger, on October 17, 1999 the Company's Board of
Directors approved an amendment to the Rights Agreement by and between the
Company and First Union National Bank dated as of July 3, 1998 (the "Rights
                                                                     ------
Agreement").  The amendment provides that neither Level 8 nor the Subsidiary
---------
will be considered an "Acquiring Person" (as that term is defined in the Rights
Agreement), and that the execution, delivery and consummation of the Merger
Agreement will not cause the occurrence of a "Distribution Date" or a "Stock
Acquisition Date" (as these terms are defined in the Rights Agreement).  The
amendment thus ensures that the Merger will not trigger the distribution of
rights to the Company's shareholders under the Rights Agreement.  In addition,
in connection with the Merger Agreement, the Company has agreed not to further
amend the Rights Agreement without the consent of Level 8.

     The Merger is subject to certain conditions to closing, including
shareholder approval, regulatory approval, and necessary consents and filings.

Item 6.      Exhibits and Reports on Form 8-K.

  (a) The following exhibits are filed herewith:

     Exhibit

     Number  Exhibit Title
     ------  -------------
      2.1    Agreement and Plan of Merger, dated as of October 19, 1999, by and
             among Level 8 Systems, Inc., TSAC, Inc., and Template Software,
             Inc. (exhibits and schedules

                                       15
<PAGE>

            omitted but will be furnished supplementally to the Securities and
            Exchange Commission upon request)./1/

     10.1   Stockholders Agreement by and among Level 8 Systems, Inc., Template
            Software, Inc., and various stockholders of Level 8 and Template
            (schedules omitted but will be furnished supplementally to the
            Securities and Exchange Commission upon request)./1/

     10.2   Rights Agreement, dated as of July 3, 1998, by and between Template
            Software, Inc. and First Union National Bank, as Rights Agent./2/

     10.3   Amendment to Rights Agreement, dated as of October 19, 1999, by and
            between Template Software, Inc. and First Union National Bank, as
            Rights Agent./1/

     10.4   Service Agreement, dated as of September 24, 1999, between Template
            Software, Inc. and Richard Hugh Collard (schedules omitted but will
            be furnished supplementally to the Securities and Exchange
            Commission upon request).

     10.5   Employment Agreement, dated as of September 24, 1999, between
            Template Software, Inc. and Benjamin J. Martindale (schedules
            omitted but will be furnished supplementally to the Securities and
            Exchange Commission upon request).

     10.6   Employment Agreement, dated as of October 1, 1999, between Template
            Software, Inc. and David L. Kiker (schedules omitted but will be
            furnished supplementally to the Securities and Exchange Commission
            upon request).

     27.1   Financial Data Schedule for the nine month period ended September
            30, 1999.

     27.2   Restated Financial Data Schedule for the nine month period ended
            September 30, 1998.


--------------
1   Incorporated by reference to the Company's Report on Form 8-K, dated October
17, 1999 and filed November 2, 1999 (File No. 0-21921).

2   Incorporated by reference to the Company's Report on Form 8-K, dated
September 30, 1998 and filed October 15, 1998 (File No. 0-21921).

______________
  (b)  Reports on Form 8-K

     During the fiscal quarter ended September 30, 1999, the Company did not
file any reports on Form 8-K.

                                       16
<PAGE>

SIGNATURE
---------


     Pursuant to the requirements 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.


Dated:  November 8, 1999                TEMPLATE SOFTWARE, INC.

                                        By:  /s/ Peter Russo

                                             Peter Russo
                                             Executive Vice President and
                                             Chief Financial Officer

                                       17