LEVEL 8 SYSTEMS, S-1/A, 1996-12-17

LEVEL 8 SYSTEMS
S-1/A, 1996-12-17
COMPUTER PROGRAMMING SERVICES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1996

REGISTRATION NO. 333-15455
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------

PRE-EFFECTIVE AMENDMENT
NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

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

<TABLE>
<S> <C> <C>
NEW YORK 7372 AND 8742 11-2920559
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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

ONE PENN PLAZA
SUITE 3401
NEW YORK, NEW YORK 10119-0002
(212) 244-1234
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------------

ROBERT R. MACDONALD
CHAIRMAN OF THE BOARD
ONE PENN PLAZA
SUITE 3401
NEW YORK, NEW YORK 10119-0002
(212) 244-1234
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
EDWARD W. KERSON, ESQ. ROBERT S. BROWN, ESQ.
Proskauer Rose Goetz & Mendelsohn LLP Brock Fensterstock Silverstein McAuliffe & Wade LLC
1585 Broadway One Citicorp Center
New York, New York 10036-8299 56th Floor
(212) 969-3000 New York, New York 10022-4611
(212) 371-2000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

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

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1)
<S> <C> <C> <C>
Common Stock, par value $.01 per share........................ 1,150,000(2) $11.38(3) $13,081,250.00
Additional Shares of Common Stock............................. 115,000(5) $12.07(6) $1,388,050.00
Representative's Warrants..................................... 100,000 $0.001 $100.00
Shares of Common Stock Underlying Representative's Warrants
(7)......................................................... 100,000 $15.36 $1,536,300.00
Additional Representative's Warrants.......................... 10,000 $0.001 $10.00
Shares of Common Stock Underlying Additional Representative's
Warrants.................................................... 10,000 $14.85 $148,500.00
Total Registration Fee........................................ - - -

TITLE OF EACH CLASS OF SECURITIES AMOUNT OF
TO BE REGISTERED REGISTRATION FEE(1)
<S> <C>
Common Stock, par value $.01 per share........................ $3,964.02(4)
Additional Shares of Common Stock............................. $420.62
Representative's Warrants..................................... $0.03(4)
Shares of Common Stock Underlying Representative's Warrants
(7)......................................................... $465.35(4)
Additional Representative's Warrants.......................... $0.01
Shares of Common Stock Underlying Additional Representative's
Warrants.................................................... $45.00
Total Registration Fee........................................ $4,895.03(8)
</TABLE>

(1) The price stated is estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457 under the Securities Act of 1933.

(2) Includes 150,000 shares that the Representative has the option to purchase
to cover over-allotments, if any.

(3) Based on the average high and low prices reported for the Common Stock on
the Nasdaq National Market on October 30, 1996.

(4) Filing fee previously paid.

(5) Includes 15,000 shares that the Representative has the option to purchase to
cover over-allotment, if any.

(6) Based on the average high and low prices reported for the Common Stock on
the Nasdaq National Market on December 13, 1996.

(7) Pursuant to Rule 416, this Registration Statement also registers such
indeterminate number of shares as may become issuable pursuant to the
antidilution provisions of the Representative's Warrants.

(8) Of such filing fee, $4,429.40 was previously paid. Accordingly, a filing fee
of $465.63 is included herewith.

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PROSPECTUS

1,100,000 SHARES

[LOGO]
COMMON STOCK
------------------

Of the 1,100,000 shares (the "Shares") of common stock, par value $.01 per
share (the "Common Stock"), offered hereby, 660,000 Shares are being issued and
sold by Level 8 Systems, Inc. (the "Company") and 440,000 Shares are being sold
by certain Selling Shareholders (as hereinafter defined) of the Company. The
Company will not receive any of the proceeds from the sale of Shares by the
Selling Shareholders. The Common Stock is quoted on the Nasdaq National Market
under the symbol "LVEL." On December 16, 1996, the last reported sale price of
the Common Stock was $11.25 per share. After completion of this offering, Liraz
Systems Ltd. and its wholly-owned subsidiaries will continue to own
approximately 54% (53% if the Representative's over-allotment option is
exercised in full) of the outstanding Common Stock.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share........................... $11.00 $.77 $10.23 $10.23
Total(3)............................ $12,100,000 $847,000 $6,751,800 $4,501,200
</TABLE>

(1) Does not include additional consideration to Hampshire Securities
Corporation, as the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of (a) a 3% non-accountable
expense allowance and (b) warrants entitling the Representative to purchase
up to 110,000 shares of Common Stock. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."

(2) Before deducting estimated expenses of this offering payable by the Company
of $787,800, including the Representative's non-accountable expense
allowance.

(3) The Company, on the one hand, and certain individual shareholders of the
Company and a corporate selling shareholder (collectively, the "Selling
Shareholders"), on the other, have granted the Representative an option,
exercisable within 45 days after the date of this Prospectus, to purchase on
a pro rata basis up to an additional 45,000 and 120,000 shares of Common
Stock, respectively, on the same terms as set forth above, solely to cover
over-allotments, if any. If the Representative exercises such option in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholders will be
$13,915,000, $974,050, $7,212,150 and $5,728,800, respectively. See
"Principal and Selling Shareholders" and "Underwriting."

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

The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to, and accepted by, them and subject to their
right to reject orders in whole or in part and certain other conditions. It is
expected that delivery of certificates will be made against payment therefor at
the offices of Hampshire Securities Corporation on or about December 20, 1996.

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

HAMPSHIRE SECURITIES CORPORATION
---------------

THE DATE OF THIS PROSPECTUS IS DECEMBER 17, 1996

<PAGE>
[flow diagram of three-tier software architecture which is color coded to show
Level 8 products and services]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE
ACT. SEE "UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF (A)
THE UNDERWRITER'S OVER-ALLOTMENT OPTION, (B) THE REPRESENTATIVE'S WARRANTS, (C)
UP TO 900,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF
OPTIONS THAT MAY BE GRANTED UNDER THE COMPANY'S 1995 STOCK INCENTIVE PLAN (THE
"PLAN"), UNDER WHICH OPTIONS TO ACQUIRE 792,822 SHARES HAVE BEEN GRANTED AND ARE
CURRENTLY OUTSTANDING AND (D) 146,188 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OTHER WARRANTS CURRENTLY OUTSTANDING. AS USED IN THIS PROSPECTUS AND
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO THE COMPANY AND
ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. CERTAIN CAPITALIZED TERMS
ARE DEFINED IN THE GLOSSARY ON PAGE 45.

THE COMPANY

Level 8 Systems, Inc. (the "Company") believes that it has established
itself as a technology leader in the rapidly growing middleware marketplace. The
Company's middleware products and services, some of which have been developed
pursuant to contracts with International Business Machines Corporation ("IBM")
and Microsoft Corporation ("Microsoft"), utilize messaging and object technology
to solve enterprise-wide integration problems associated with linking legacy
environments, the desktop and the internet. The Company recently entered into
agreements with Candle Corporation ("Candle"), pursuant to which Candle
purchased 246,800 shares of Common Stock for $11 per share and acquired certain
rights to technology developed by the Company and will acquire certain
non-exclusive distribution rights to the Company's products, including Falcon
External Gateways (which is referred to below). In addition, the Company,
through its wholly-owned subsidiary, ProfitKey International, Inc.
("ProfitKey"), offers MRP II and shop-floor scheduling packages and related
services.

The Company has experienced substantial growth on a quarter-to-quarter basis
in its middleware products and services operations since last year, as the
Company's focus and operating strategy have evolved from that of an industry
specific ("vertical") software developer to a provider of middleware products
and services. Industry sources have estimated that the messaging middleware
market exceeded $100 million in 1995 and that such market is expected to grow to
approximately $1.7 billion by the year 2000.

The Company, through its wholly-owned subsidiary, Level 8 Technologies, Inc.
("Level 8"), has been designated as an IBM Premier Partner for IBM MQSeries.
Pursuant to contracts with IBM, Level 8 has ported version 2 of MQSeries to the
DEC VMS platform and will be entitled to royalties, if any, from sales of the
ported product and has ported IBM's distributed object product, DSOM. In
addition, the Company provides installation, education, integration and
help-desk services in support of IBM and Level 8 sales of IBM MQSeries licenses.
Samuel Somech, a co-founder of Level 8, was the original designer of the
transactional messaging product that became version 1 of MQSeries.

Microsoft has selected the Company to develop messaging gateways (currently
called "Falcon External Gateways") to facilitate communications between
computers running Microsoft's messaging product (currently called "Falcon") and
various non-Microsoft environments. Microsoft developed Falcon as a
transactional messaging system for use within Microsoft Windows NT and Windows
95. Level 8's Falcon External Gateways are being developed and are owned by
Level 8 and facilitate communications of Falcon with IBM MQSeries, mainframes
and UNIX-based systems. Microsoft's Falcon and Level 8's Falcon External
Gateways are currently being Beta tested and are expected to be available for
shipment in mid-1997. Microsoft has indicated an intent to promote Level 8's
Falcon External Gateways.

3
<PAGE>
legacy system as a collection of objects. Consulting services associated with
DOT/XM technology have generated approximately $700,000 of revenue during the
nine months ended September 30, 1996. The first large commercial installation of
DOT/XM is currently taking place at ABN/AMRO Bank.

The Company's expansion plan is to grow primarily on the basis of Level 8
middleware products, such as messaging gateways, DOT/XM and other software tools
that permit access to legacy information from any computing environment. Other
products under development by the Company, and with respect to which the Company
currently is offering consulting services, are (a) a publish/subscribe product
which sends designated data ("publish") to interested users ("subscribers")
using transactional messaging as the delivery mechanism, and (b) an
internet-application integration product which uses portions of the DOT/ XM
framework to integrate commercial transactions on the internet with the legacy
systems of the selling corporation.

Through ProfitKey, the Company offers MRP II and shop-floor scheduling
software packages, as well as related installation, training and support
services. Historically, ProfitKey has directed its software packages to job
shops and custom manufacturers, which use ProfitKey's software package to
facilitate "just-in-time" deliveries and efficient scheduling of expensive
shop-floor equipment.

The Company began operations in 1988 as a wholly-owned subsidiary of Liraz
Systems Ltd. (together with its wholly-owned subsidiaries, "Liraz"), an Israeli
public company that is a systems integrator. Since 1988, the Company, through
its ASU consulting division ("ASU"), has provided systems integration consulting
services primarily to manufacturing businesses in the State of California. In
October 1994, the Company acquired ProfitKey and Bizware Computer Systems
(Canada) Inc. ("Bizware") and, in April 1995, the Company acquired Level 8. The
Company had its initial public offering in July 1995, selling 1,430,000 shares
of Common Stock at an initial public offering price of $5.50 per share. In July
1996, the Company decided to focus on the middleware activities of Level 8, and,
in that connection, on September 9, 1996, sold substantially all the assets of
Bizware for $230,000 and subsequently changed the Company's name from Across
Data Systems, Inc. to Level 8 Systems, Inc.

The Company was incorporated in the State of New York in 1988. Its executive
offices are located at One Penn Plaza, Suite 3401, New York, New York
10119-0002, and its telephone number at that address is (212) 244-1234.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Outstanding Prior to
this Offering................... 6,248,575 shares
Common Stock offered hereby:
Offered by the Company.......... 660,000 shares
Offered by the Selling
Shareholders.................. 440,000 shares
Total....................... 1,100,000 shares
Common Stock Outstanding After
this Offering................... 6,908,575 shares
Use of Proceeds................... For general corporate and working capital purposes,
which may include increased software development and
marketing activities and the acquisition of software
companies and software licenses for the middleware
market. See "Use of Proceeds."
Risk Factors...................... A purchase of the Shares offered hereby involves a high
degree of risk and immediate and substantial dilution.
Prospective investors should review carefully and
consider the information set forth under "Risk
Factors."
Nasdaq National Market Trading
Symbol.......................... LVEL
</TABLE>

4
<PAGE>
SUMMARY FINANCIAL INFORMATION

The following selected unaudited pro forma consolidated operations and
balance sheet data represent a consolidation, adjusted as described in "Pro
Forma Selected Consolidated Statements of Operations," of the historical
statements of operations and balance sheets of the Company. The Company's
historical financial statements reflect the activities of Level 8 for the
periods beginning April 1, 1995, the date of its acquisition by the Company, the
activities of ProfitKey for the periods beginning October 3, 1994, the date of
its acquisition by the Company, and the activities of Bizware for the periods
from October 28, 1994 through September 9, 1996, the respective dates of its
acquisition and disposition by the Company. The pro forma financial data do not
purport to be indicative of the results that would have been achieved if the
acquisition of Level 8 had been consummated on January 1, 1995 and the sale of
Bizware had been consummated as of December 31, 1994, or of the results that may
be achieved in the future. The following selected unaudited supplemental data of
Level 8 (the Company's wholly-owned subsidiary) represents unaudited historical
data for the three months ended September 30, 1995 and 1996. These data should
be read in conjunction with "Pro Forma Selected Consolidated Statements of
Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and the Notes
thereto of the Company appearing elsewhere in this Prospectus.

UNAUDITED PRO FORMA CONSOLIDATED OPERATIONS DATA:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
----------------- --------- ---------
<S> <C> <C> <C>
Revenue................................................................ $10,674,112 $8,393,562 $9,434,786
Cost of revenue........................................................ 5,651,389 4,391,249 5,399,356
----------------- --------- ---------
Gross margin........................................................... 5,022,723 4,002,313 4,035,430
Operating expense...................................................... 4,543,537 3,232,893 4,800,391
----------------- --------- ---------
Operating income (loss)................................................ 479,186 769,420 (764,961)
Other income (expense)................................................. 62,856 3,604 96,164
----------------- --------- ---------
Income (Loss) before income taxes...................................... 542,042 773,024 (668,797)
Income taxes........................................................... 334,700 448,600 160,700
----------------- --------- ---------
Net income (loss)...................................................... $ 207,342 $ 324,424 $(829,497)
----------------- --------- ---------
----------------- --------- ---------
Net income (loss) per common share(1).................................. $ .04 $ .07 $ (.14)
----------------- --------- ---------
----------------- --------- ---------
Weighted average common and common equivalent shares(1)................ 4,897,113 4,555,368 5,985,265
----------------- --------- ---------
----------------- --------- ---------
</TABLE>

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

(1) See Note 1 to the Consolidated Financial Statements of the Company.

UNAUDITED SUPPLEMENTAL DATA OF THE LEVEL 8 TECHNOLOGIES, INC. SUBSIDIARY:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenue.................................................................................... $ 335,755 $2,389,373
Operating income (loss) before amortization of goodwill.................................... (147,779) 61,430
Operating (loss)........................................................................... (253,977) (44,063)
</TABLE>

UNAUDITED CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
AS ADJUSTED
ACTUAL (1)
---------- --------------
<S> <C> <C>
Working capital (deficiency)......................................................... $4,616,165 $ 10,580,165
Total assets......................................................................... 16,020,923 21,984,923
Long-term liabilities................................................................ 394,994 394,994
Shareholders' equity (deficit)....................................................... 11,676,321 17,640,321
</TABLE>

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

(1) Adjusted to reflect the issuance of 660,000 Shares in this offering at a
public offering price of $11.00 per Share, less Underwriter's discounts and
commissions of $508,200 and estimated offering fees and expenses of
$787,800.

5
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER MATTERS REFERRED TO HEREIN,
INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. THIS SECTION
CONTAINS FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS."

LOSSES FROM RECENT OPERATIONS. The Company has incurred net losses for each
of the three months ended September 30, 1995, December 31, 1995, March 31, 1996,
June 30, 1996 and September 30, 1996 of $42,064, $89,413, $266,971, $557,985 and
$187,626 (which does not include the $1,484,061 loss attributable to the sale of
Bizware in the three months ended September 30, 1996), respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, the Company's future plans are subject to known and
unknown risks and uncertainties that may cause the Company's actual results in
future periods to be materially different from any future performance implied
herein. There can be no assurance that the Company's operations will be
profitable.

RISKS ASSOCIATED WITH GROWTH. The Company intends to expand primarily by
increasing sales personnel and marketing activities and by increasing software
development activities. The Company expects that the expenses related to the
planned expansion generally will precede the Company's realization of the
benefits, if any, of any such expansion. Accordingly, the Company expects that
the incurrence of these expenses will adversely affect the Company's earnings
and working capital in the periods prior to the Company's realization of the
benefits, if any, of such expansion.

Additionally, the Company's results of operations may be affected by any
acquisition consummated by the Company or a reorganization or disposition by the
Company of its existing assets. The Company has considered a reorganization or
sale or disposition of businesses that are not essential to its operations in
the middleware market. In that connection, the Company discussed with certain
unaffiliated third parties the sale of ProfitKey. Such talks have been
terminated, and the Company presently has no arrangement, commitment or
understanding to sell ProfitKey. If the Company were to expand in the future by
acquisitions of software companies and licenses, there can be no assurance that
it would be successful in locating or acquiring suitable companies and licenses
on acceptable terms, or that any acquired companies could be effectively
integrated into, and profitably managed by, the Company.

DEPENDENCE ON DEVELOPING MARKET FOR MIDDLEWARE. The market for middleware
in software applications is continuing to develop. The Company's major products
are transactional messaging and distributed object middleware. There can be no
assurance that the Company's transactional messaging and distributed object
middleware will achieve broad market acceptance or that the market for
middleware will continue to grow. Even if transactional messaging and
distributed object middleware achieve broad market acceptance and the market
grows, there can be no assurance that the Company will ever have a significant
share of that market. See "--Consequences of Rapid Technological Change" and
"Business."

CONSEQUENCES OF RAPID TECHNOLOGICAL CHANGE. The software industry is
characterized by rapid technological change, frequent introductions of new
products and systems, changes in customer demands and evolving industry
standards. The introduction of products embodying new technology or adapting
products to the computing market and the emergence of new industry standards
often render existing products obsolete and unmarketable. The Company's success
will depend upon its ability to enhance its existing products and to develop,
introduce or otherwise acquire on a timely basis new products that keep pace
with technological developments and emerging industry standards in order to meet
the changing needs of the Company's customers. There can be no assurance that
the Company will be successful in developing and marketing product enhancements
or new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction or sale of these products or
that the Company's new products and product enhancements (if any) will
adequately meet the requirements of the marketplace and achieve

6
<PAGE>
market acceptance. In addition, there can be no assurance that technological
changes or evolving industry standards will not render the Company's products
and technologies obsolete. See "Business."

COMPETITION. The Company competes in the application software and systems
integration services markets, as well as in the developing market for
transactional messaging and distributed object middleware. Such markets are
highly competitive, and the Company believes competition will intensify in such
markets. The Company competes with developers of middleware, such as Digital
Equipment Corporation, IBM, Candle and Microsoft; with providers of systems
integration services, such as Anderson Consulting, Logica PLC and numerous local
and regional providers; and with providers of software packages for particular
markets, such as Fourth Shift Corporation and Symix Systems, Inc. The Company's
competitors generally have substantially larger operations, have broader product
lines with greater name recognition and market acceptance and have significantly
greater financial, marketing, personnel and operating resources than the
Company. There can be no assurance the Company will successfully compete in any
market in which it conducts, or may conduct, its operations. See "Business."

POSSIBLE NEED FOR ADDITIONAL FINANCING. Based on the Company's operating
plan, the Company believes that the net proceeds of this offering, together with
anticipated funds from operations, will be sufficient to satisfy its capital
requirements and planned software development activities through June 1998,
although there can be no assurance that additional capital will not be required
before such time. In that connection, the Company is developing four new
products for introduction in 1997, which will require additional investments in
development and marketing. In addition, as yet unplanned acquisition and
development opportunities and other contingencies may arise, which also could
require the Company to obtain additional capital. The Company anticipates that
it could require additional capital in order to finance its current plans for
expansion and its development activities. Sources of funds may include the
issuance of common or preferred stock sold in a public offering or in private
placements, debt securities or bank financing. There can be no assurance that
the Company would be able to obtain capital on a timely basis, on favorable
terms, or at all. If the Company is unable to obtain such financing, or generate
funds from operations sufficient to meet its needs, the Company may be unable to
implement its current plans for expansion and software development. See "Use of
Proceeds."

ALLOCATION OF NET PROCEEDS TO GENERAL CORPORATE AND WORKING CAPITAL
PURPOSES. The Company expects to allocate the net proceeds of this offering to
general corporate and working capital purposes, which may include increased
software development and marketing activities and the acquisition of software
companies and software licenses for the middleware market. As a result,
investors will not know in advance how the Company will utilize such net
proceeds. See "Use of Proceeds."

ABSENCE OF PATENT PROTECTION. The Company does not have any patents and has
not filed any patent applications. The Company relies on a combination of trade
secret laws, nondisclosure and other contractual agreements with its employees
and consultants and technical measures to protect its rights in its know-how and
proprietary products. The foregoing may not afford the Company sufficient
protection for its know-how and products, and other parties may develop similar
know-how and products, duplicate the Company's know-how and products or be
granted patents that would materially and adversely affect the Company's
business.

The Company believes that its products and services do not infringe the
rights of third parties; however, while the Company has not received notice of
any infringement claims, third parties may assert such claims against the
Company, and such claims could require the Company to enter into licensing
agreements for the technology in question or royalty arrangements or result in
litigation, which could materially and adversely affect the Company's business.
There can be no assurance that the Company could acquire any such license on
terms acceptable to the Company or at all. Any failure of the Company to acquire
such licenses could materially and adversely affect the Company's business and
prospects. See "Business."

7
<PAGE>
DEPENDENCE UPON KEY PERSONNEL. The Company depends upon the continued
efforts and abilities of its senior management personnel, including Arie Kilman,
the Company's Chief Executive Officer, and Samuel Somech, the President of the
Company. Mr. Kilman and Mr. Somech have entered into employment agreements with
the Company. These agreements terminate in the second quarter and fourth
quarter, respectively, of 1998. The loss or unavailability of the services of
either of these individuals for any significant period could have a material
adverse effect on the Company's business and prospects. The Company is the sole
beneficiary of key-man life insurance in the amount of $1,000,000 on the life of
Mr. Somech. There can be no assurance that such insurance will continue to be
available on reasonable terms, or at all. See "Business" and
"Management--Employment Agreements."

DEPENDENCE ON MAJOR CUSTOMERS; FLUCTUATIONS OF OPERATING RESULTS. A
significant portion of the Company's business is attributable to a limited
number of changing customers. For the nine months ended September 30, 1996, the
Company's five largest customers accounted for an aggregate of approximately 30%
of the Company's revenue. Such customers and the approximate percentage of such
revenue accounted for by each such customer are TransQuest, Inc. (a wholly-owned
subsidiary of Delta Airlines) (13%), Nelcor Incorporated (5%), Ascend
Communications, Inc. (4%), IBM (4%) and American Express Corporation (4%). The
loss of any such customer and the failure to attract new customers could have a
material adverse effect upon the Company. As a result of the Company's reliance
on a limited number of changing customers, the Company's results of operations
have fluctuated, and will continue to fluctuate, materially from period to
period. Accordingly, the results of operations in any one period may not be
indicative of the results of operations for any succeeding period.

CERTAIN NON-CASH CHARGES TO EARNINGS. The acquisitions of ProfitKey and
Level 8 have been accounted for as purchases. Accordingly, in late 1994, the
Company recorded, in connection with the ProfitKey acquisition, approximately
$2,702,600 for service contracts acquired; and in April 1995, the Company
recorded, in connection with the Level 8 acquisition, approximately $2,960,400,
representing the excess of cost over net assets acquired. As a consequence of
the amortization of these intangible assets, the Company will record
amortization expense of approximately $526,400 each year through 2001, and a
reduced amount each year for 13 years thereafter. In September 1996, the Company
recorded a loss of approximately $1,484,000 in connection with the sale of
Bizware. See "Capitalization," "Pro Forma Selected Consolidated Statements of
Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and Notes
thereto.

FLUCTUATIONS IN PERSONNEL NEEDS; DEPENDENCE UPON CONSULTANTS. Although the
Company has a small number of employees, the Company believes its existing staff
is sufficient in number and expertise to meet its existing requirements.
However, the Company's required staffing levels are likely to change materially
from period to period, depending upon customer requirements. The Company's
ability successfully to service significant projects depends, in large part, on
the Company's ability to attract and retain highly qualified technical and
managerial personnel during specific periods. There can be no assurance that the
Company will be able to continue to attract and retain such personnel when
needed, on terms acceptable to the Company, or at all; the failure to do so
would materially and adversely affect the Company.

The Company depends upon the continued services of approximately 14
non-employee consultants involved in a variety of tasks, including developing
software, training and on-site programming. The computer industry is
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. There can be no assurance that the consultants the Company
currently engages will continue to render services to the Company, or that the
Company will continue to be able to attract and retain consultants when needed,
on reasonable terms, or at all.

CONTROL BY LIRAZ; POTENTIAL CONFLICTS OF INTEREST. At the completion of
this offering, Liraz will own approximately 54% (53% if the Representative's
over-allotment option is exercised in full) of the outstanding shares of Common
Stock. Therefore, Liraz will have the ability to control the election of
directors of the Company and the outcome of all issues (except with respect to
certain extraordinary

8
<PAGE>
matters requiring the affirmative vote of holders of two-thirds of the
outstanding shares) submitted to a vote of shareholders of the Company. Such
control could adversely affect the market price of the Common Stock or delay or
prevent a change in control of the Company. See "Principal and Selling
Shareholders" and "Description of Securities."

The Company has entered into various agreements with Liraz, which the
Company believes are on terms no less favorable than those between unaffiliated
parties. See "Certain Relationships and Related Transactions."

SUBSTANTIAL OPTIONS AND WARRANTS RESERVED. The Company has reserved 900,000
shares of Common Stock for issuance pursuant to the Plan and expects to reserve
additional shares of Common Stock upon adoption of a new plan within the next
year. To date, options to purchase an aggregate of 873,196 shares of Common
Stock have been granted pursuant to the Plan and warrants to purchase an
additional 146,188 shares of Common Stock are outstanding. The Company also will
sell to the Representative in connection with this offering, for nominal
consideration, the Representative's Warrants to purchase an aggregate of 100,000
shares of Common Stock at a price per share equal to 135% of the public offering
price per share, subject to adjustment. The exercise of such options and
warrants and subsequent sale of the underlying Common Stock in the public market
could adversely affect the market price of the Company's securities. The
existence of the Representative's Warrants, the outstanding options issued under
the Plan and such other warrants may prove to be a hinderance to future
financings, since the holders of such warrants and options may be expected to
exercise them at a time when the Company will otherwise be able to obtain
additional equity capital on terms more favorable to the Company. See
"--Possible Need for Additional Financing" and "Underwriting--Representative's
Warrants."

SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial numbers of
shares of Common Stock (including shares issued upon the exercise of stock
options and warrants) after this offering by the Company, Liraz, the
Representative or the executive officers or other affiliates of the Company, or
the perception that such sales could occur, could adversely affect the market
price for the Common Stock. In that regard, holders of approximately 56% of the
6,908,575 shares of Common Stock outstanding after the offering, including the
officers and directors of the Company, have agreed not to sell publicly or
otherwise dispose of any shares of Common Stock for the period of six months
after the date of this Prospectus (the "Lock-Up Period"), without the prior
written consent of the Representative. Beginning immediately or shortly after
the Lock-Up Period, all the shares of Common Stock currently owned by the
Company's affiliates will be eligible for resale in the public market pursuant
to Rule 144 under the Securities Act. In addition, the Company has granted
certain parties, including Candle (which owns 246,800 shares of Common Stock)
and Liraz, registration rights with respect to an aggregate of 4,120,802 shares
of Common Stock (or approximately 59.6% of the Company's outstanding shares
after this offering), which rights may be exercised after March 1, 1999 and six
months after the date of this Prospectus, respectively. See "Shares Eligible for
Future Sale--Registration Rights."

DILUTION. The offering price per share of Common Stock is substantially
higher than the net tangible book value per share of the Common Stock at
September 30, 1996. Purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution of $9.39 in the pro forma net
tangible book value per share of Common Stock at an offering price of $11.00 per
Share. To the extent outstanding options and warrants to purchase shares of
Common Stock are exercised, there will be further dilution.

DIVIDEND POLICY. The Company has never declared or paid cash dividends on
the Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. See "Market Price of Common Stock and Dividend Policy."

9
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NEW YORK LAW AND THE RESTATED
CERTIFICATE OF INCORPORATION. Certain provisions of section 912 of the New York
Business Corporation Law (the "BCL"), which prohibit certain persons from
engaging in business combinations with the Company, may be considered to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder may consider to be in the shareholder's best interests. These
provisions of the BCL also may adversely affect the market price for the Common
Stock. The Company's certificate of incorporation authorizes the issuance,
without shareholder approval, of preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Such designations, rights and preferences established by the Board
may adversely affect the relative voting power or other rights of, and may have
a dilutive effect on, holders of the Common Stock. In the event of issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Although the Company has no present intention to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
See "Description of Securities."

10
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from this offering (after payment of the
estimated offering expenses and underwriting discounts and commissions) are
expected to be approximately $5,964,000 ($6,409,500, if the Representative's
over-allotment option is exercised in full) at an offering price of $11.00 per
share. The Company expects to allocate the net proceeds of this offering to
general corporate and working capital purposes, which may include increased
software development and marketing activities and the acquisition of software
companies and software licenses for the middleware market.

The Company believes its ability to increase software development and
marketing activities and to take advantage of acquisition opportunities will be
enhanced by the additional capital from this offering. As part of an ongoing
policy of examining software business acquisition opportunities, the Company has
actively considered various acquisitions. The Company currently does not have
any arrangement, commitment or understanding as to any acquisition.

Pending such use of the net proceeds of this offering, the Company will
invest the net proceeds in short-term, interest-bearing securities. The Company
will not receive any proceeds from the sale of Shares by the Selling
Shareholders.

MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY

Since July 27, 1995, the date of the initial public offering of the Common
Stock, the Common Stock has been quoted on the Nasdaq National Market.
Initially, the Common Stock traded under the symbol "ACRS"; as of October 4,
1996, the Common Stock has traded under the symbol "LVEL". The quarterly high
and low reported sales prices for the Common Stock as quoted on the Nasdaq
National Market for the periods indicated are as follows.

<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
1995
Third Quarter (from July 27)..................................................... $ 103/8 $ 61/2
Fourth Quarter................................................................... 8 51/2
1996
First Quarter.................................................................... 81/8 51/2
Second Quarter................................................................... 151/2 7
Third Quarter.................................................................... 121/2 81/8
Fourth Quarter (through December 16)............................................. 121/8 91/4
</TABLE>

The reported last sale price per share of the Common Stock as quoted on the
Nasdaq National Market on December 16, 1996 was $11.25 per share. As of such
date, the Company had 6,248,575 shares of Common Stock outstanding. Based on
information available from the Company's registrar and transfer agent, the
Company estimates there were approximately 104 shareholders of record as of
December 16, 1996.

The Company has never declared or paid any cash dividends on the Common
Stock. The Company intends for the foreseeable future to reinvest earnings, if
any, to fund the development and expansion of its business. The declaration of
dividends in the future will be at the discretion of the Board of Directors and
will depend upon the earnings, capital requirements and financial position of
the Company, general economic conditions and other pertinent factors.

11
<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at September 30, 1996, (a) as reflected in the Company's unaudited
consolidated financial statements and (b) as adjusted to reflect the receipt by
the Company of estimated net proceeds of $5,964,000 from the sale of the Shares
at the public offering price of $11.00 per Share. See "Pro Forma Selected
Consolidated Statements of Operations."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt and loan from related party.................. $ 130,593 $ 130,593
Long-term debt...................................................................... 26,009 26,009
Loans from related companies........................................................ 360,685 360,685
------------- -------------
Total liabilities............................................................. 517,287 517,287
Shareholders' equity:
Preferred stock................................................................... -- --
Common stock...................................................................... 62,303 68,903
Additional paid-in capital........................................................ 13,020,141 18,977,541
Retained (deficit)................................................................ (1,400,421) (1,400,421)
Unearned compensation............................................................. (5,702) (5,702)
------------- -------------
Total shareholders' equity.................................................... 11,676,321 17,640,321
------------- -------------
Total capitalization................................................................ $ 12,193,608 $ 18,157,608
------------- -------------
------------- -------------
</TABLE>

12
<PAGE>
PRO FORMA SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS

The following unaudited pro forma selected consolidated statements of
operations for the year ended December 31, 1995 and the nine months ended
September 30, 1995 represent a consolidation, adjusted as described in the
accompanying notes, of the audited consolidated statement of operations of the
Company for the year ended December 31, 1995 and unaudited consolidated
statement of operations for the nine months ended September 30, 1995, adjusted
to eliminate the unaudited statement of operations of Bizware for the period
from January 1, 1995 to December 31, 1995 and for the nine months ended
September 30, 1995, respectively (Bizware was sold by the Company on September
9, 1996), and to include Level 8 for the period from January 1, 1995 to April 1,
1995 (Level 8 was acquired by the Company as of April 1, 1995 and, accordingly,
its results of operations are included in the consolidated statement of
operations of the Company from that date). Level 8's acquisition was treated as
a purchase for accounting purposes.

The following selected unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1996 represents a
consolidation, adjusted as described in the accompanying notes, of the unaudited
consolidated statement of operations of the Company to eliminate the unaudited
statements of operations of Bizware for the nine months ended September 30,
1996.

The following pro forma consolidated statements of operations do not purport
to be indicative of the results that would have been achieved if the sale of
Bizware had been consummated prior to January 1, 1996 or 1995, as the case may
be, or if the acquisition of Level 8 had been consummated as of January 1, 1995,
or of the results that may be achieved in the future. The pro forma consolidated
statements of operations should be read in conjunction with, and are qualified
in their entirety by reference to, the Consolidated Financial Statements and
Notes thereto of the Company appearing elsewhere in this Prospectus.

13
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------
LEVEL 8
SYSTEMS, BIZWARE
INC. COMPUTER LEVEL 8
AND SYSTEMS TECHNOLOGIES, PRO FORMA PRO FORMA
SUBSIDIARIES (CANADA) INC. INC. ADJUSTMENTS AS ADJUSTED
------------ ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue................................. $ 10,139,024 $ 1,405,856 $1,940,944 $ -- $ 10,674,112
Cost of revenue......................... 4,514,207 109,617 1,246,799 -- 5,651,389
------------ ------------- ------------ -------------- ------------
Gross margin............................ 5,624,817 1,296,239 694,145 -- 5,022,723
Operating expense....................... 4,781,038 720,964 370,863 112,600(1) 4,543,537
------------ ------------- ------------ -------------- ------------
Operating income........................ 843,779 575,275 323,282 (112,600) 479,186
Other income (expense) and
minority interest..................... 52,970 (22,486) -- (12,600 (2) 62,856
------------ ------------- ------------ -------------- ------------
Income before income taxes.............. 896,749 552,789 323,282 (125,200) 542,042
Income taxes............................ 278,700 64,100 28,000 92,100(3) 334,700
------------ ------------- ------------ -------------- ------------
Net income.............................. $ 618,049 $ 488,689 $ 295,282 $ (217,300) $ 207,342
------------ ------------- ------------ -------------- ------------
------------ ------------- ------------ -------------- ------------
</TABLE>

UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS:

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
LEVEL 8 BIZWARE
SYSTEMS, COMPUTER
INC. SYSTEMS LEVEL 8
AND (CANADA) TECHNOLOGIES, PRO FORMA PRO FORMA
SUBSIDIARIES INC. INC. ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $7,645,505 $1,192,887 $1,940,944 $ -- $8,393,562
Cost of revenue.......................... 3,237,573 93,123 1,246,799 -- 4,391,249
----------- ----------- ----------- ----------- -----------
Gross margin............................. 4,407,932 1,099,764 694,145 -- 4,002,313
Operating expense........................ 3,333,057 583,627 370,863 112,600(1) 3,232,893
----------- ----------- ----------- ----------- -----------
Operating income......................... 1,074,875 516,137 323,282 (112,600) 769,420
Other income (expense) and
minority interest...................... (7,413) (23,617) -- (12,600)(2) 3,604
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 1,067,462 492,520 323,282 (125,200) 773,024
Income taxes............................. 360,000 31,500 28,000 92,100(3) 448,600
----------- ----------- ----------- ----------- -----------
Net income............................... $ 707,462 $ 461,020 $ 295,282 $(217,300) $ 324,424
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>

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

(1) Additional amortization cost related to the acquisition of Level 8, as if
the acquisition occurred on January 1, 1995, was $105,500, plus compensation
cost related to stock options granted in March 1995 to certain Level 8
employees, as if the options were granted on January 1, 1995, and less
certain Bizware options.

(2) Additional interest charged at 4% on a loan in the principal amount of
$628,172 from a related company. The loan did not bear interest until July
1, 1995.

(3) Reflects federal taxes on the S-corporation earnings of Level 8 of $100,000,
offset by the related tax reduction for the expenses recorded in connection
with the compensation cost related to certain stock options and the interest
charged on the loan from a related company.

14
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED PRO FORMA CONSOLIDATED

STATEMENT OF OPERATIONS:

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996
----------------------------------
LEVEL 8 BIZWARE
SYSTEMS, COMPUTER
INC. SYSTEMS PRO FORMA
AND (CANADA) AS
SUBSIDIARIES INC. ADJUSTED
---------- ----------- ---------
Revenue................................................. $9,785,718 $ 350,932 $9,434,786
<S> <C> <C> <C>
Cost of revenue......................................... 5,562,898 163,542 5,399,356
---------- ----------- ---------
Gross margin............................................ 4,222,820 187,390 4,035,430
Operating expense....................................... 6,833,528 2,033,137 4,800,391
---------- ----------- ---------
Operating loss.......................................... (2,610,708) (1,845,747) (764,961)
Other income (expense).................................. 88,965 (7,199) 96,164
---------- ----------- ---------
Loss before income taxes................................ (2,521,743) (1,852,946) (668,797)
Income taxes (benefit).................................. (25,100) (185,800) 160,700
---------- ----------- ---------
Net loss................................................ $(2,496,643) ($1,667,146) $(829,497)
---------- ----------- ---------
---------- ----------- ---------
</TABLE>

15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statement of operations and balance sheet data as of and
for each of the five years in the period ended December 31, 1995 have been
derived from the Company's audited Consolidated Financial Statements and Notes
thereto. The consolidated statement of operations and balance sheet data as of
and for each of the nine months ended September 30, 1996 and 1995 have been
derived from the Company's unaudited consolidated financial statements. In the
opinion of management, such data for each interim period presented below include
all adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the financial position and results of operations of the Company
as of the dates and for the periods indicated on a basis consistent with the
audited Consolidated Financial Statements. The results for any interim period
are not necessarily indicative of results for a full year. The following table
reflects the activities of ProfitKey only for the periods beginning October 3,
1994, the date of its acquisition by the Company, for Bizware from October 28,
1994 to September 9, 1996, the respective dates of its acquisition and
disposition by the Company, and for Level 8 only for the periods beginning April
1, 1995, the date of its acquisition by the Company. The following table is
qualified in its entirety by reference to the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $ 861,875 $ 948,505 $ 1,312,935 $ 3,596,602 $ 10,139,024 $ 7,645,505 $ 9,785,718
Cost of revenue.................. 612,117 600,059 809,286 1,702,417 4,514,207 3,237,573 5,562,898
--------- --------- ----------- ----------- ------------ ----------- -----------
Gross margin..................... 249,758 348,446 503,649 1,894,185 5,624,817 4,407,932 4,222,820
Operating expense................ 250,750 397,465 532,305 1,227,795 4,781,038 3,333,057 5,349,467
--------- --------- ----------- ----------- ------------ ----------- -----------
Operating income (loss) before
loss on sale of subsidiary..... (992) (49,019) (28,656) 666,390 843,779 1,074,875 (1,126,647)
Loss on sale of subsidiary....... -- -- -- -- -- -- 1,484,061
--------- --------- ----------- ----------- ------------ ----------- -----------
Operating income (loss).......... (992) (49,019) (28,656) 666,390 843,779 1,074,875 (2,610,708)

Other income (expense)........... 2,463 (13,324) (4,056) 50,287 68,261 7,878 88,965
--------- --------- ----------- ----------- ------------ ----------- -----------
Income (loss) before income taxes
and minority interest.......... 1,471 (62,343) (32,712) 716,677 912,040 1,082,753 (2,521,743)
Income tax expense (benefit)..... (1,400) (2,900) -- 133,200 278,700 360,000 (25,100)
--------- --------- ----------- ----------- ------------ ----------- -----------
Income (loss) before minority
interest....................... 2,871 (59,443) (32,712) 583,477 633,340 722,753 (2,496,643)
Minority interest in income of
consolidated subsidiary........ -- -- -- 19,887 15,291 15,291 --
--------- --------- ----------- ----------- ------------ ----------- -----------
Net income (loss)................ $ 2,871 $ (59,443) $ (32,712) $ 563,590 $ 618,049 $ 707,462 $(2,496,643)
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
Net income (loss) per common
share.......................... $ -- $ (.02) $ (.01) $ .15 $ .13 $ .16 $ (.42)
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
Weighted average common and
common equivalent shares....... 3,839,166 3,839,166 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
</TABLE>

CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency)...... $ 108,920 $ 181,812 $ 290,991 $(1,679,294) $ 4,103,621 $ 4,617,552 $ 4,616,165
Total assets...................... 153,163 338,213 438,340 5,848,838 15,059,198 15,551,035 16,020,923
Long-term liabilities............. 105,518 290,153 425,671 2,054,105 497,822 507,261 394,994
Shareholders' equity (deficit).... 6,748 (52,695) (85,407) 489,729 11,498,535 11,630,074 11,676,321
</TABLE>

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

As described in "Business--General," the Company's only operations prior to
the acquisition of ProfitKey in late 1994 were certain limited consulting
services through its ASU consulting division. The following discussion reflects
the activities of ProfitKey and Level 8 only for the periods beginning October
3, 1994 and April 1, 1995, the respective dates of acquisition of those
companies.

Prior to the acquisition of ProfitKey in October 1994, the Company did not
have any substantial non-cash charges to earnings. Upon the acquisition of
ProfitKey and the subsequent acquisition of Level 8, the Company began to incur
substantial non-cash charges to earnings due to amortization of goodwill
associated with the acquisition of Level 8 and amortization of service contracts
acquired with the ProfitKey acquisition. As a consequence of the amortization of
these intangible assets, the Company will record amortization expense of
approximately $526,400 each year through 2001, and a reduced amount each year
for 13 years thereafter. See "Risk Factors--Certain Non-Cash Charges to
Earnings" and "Capitalization."

In July 1996, the Company decided to focus on the middleware activities of
Level 8. As part of that strategy, on September 9, 1996, the Company sold
substantially all the assets of Bizware, its wholly-owned subsidiary, for
$230,000, and, in that connection, the Company recognized a loss of $1,484,061.
The results of operations of the Company without Bizware are reflected in the
pro forma information provided elsewhere in this Prospectus. See "Pro Forma
Selected Consolidated Statements of Operations." The Company also considered a
reorganization or sale or disposition of businesses that were not essential to
its operations in the middleware market. In that connection, the Company has
discussed with certain unaffiliated third parties the sale of ProfitKey. Such
talks have terminated, and the Company presently has no arrangement, commitment
or understanting to sell ProfitKey.

The Company's results have fluctuated materially from period to period and
will continue to fluctuate materially in the future because a small number of
the Company's customers, projects and software license sales account for a
significant portion of the Company's revenue, and because such customers and
projects are likely to change from period to period. Accordingly, the results of
operations in any one period may not be indicative of the results of operations
for any succeeding period. See "Risk Factors--Dependence on Major Customers;
Fluctuations of Operating Results."

This Section contains forward-looking statements. See "Special Note
Regarding Foward-Looking Statements."

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995

REVENUE for the nine-month period ended September 30, 1996 increased by
approximately $2.1 million (28%) over the nine months ended September 30, 1995.
The increase was attributable primarily to an approximately $3.0 million (294%)
increase in the revenue of Level 8. Approximately $618,000 of the increase in
revenue of Level 8 was attributable to inclusion of the revenue of Level 8 for
the entire 1996 period compared to only the six months of 1995 following the
acquisition of Level 8 on April 1, 1995, and approximately $2.4 million (233%)
was attributable to an increase in revenue of Level 8 during the comparable
six-month period. The increase in revenue of Level 8 was offset, in part, by a
decrease in revenue of Bizware of approximately $842,000.

COST OF REVENUE for the nine-month period ended September 30, 1996 increased
by approximately $2.3 million (72%) over the nine months ended September 30,
1995. The increase was attributable primarily to an approximately $2.0 million
(263%) increase in the cost of revenue of Level 8. Approximately $379,000 of the
increase in cost of revenue of Level 8 was attributable to the inclusion of cost
of revenue of Level 8

17
<PAGE>
for the entire 1996 period compared to only the six months of 1995 following the
acquisition of Level 8 on April 1, 1995, and approximately $1,576,000 (212%) was
attributable to an increase in cost of revenue of Level 8 during the comparable
six-month period. As a percentage of revenue, cost of revenue increased from 42%
for the nine-month period in 1995 to 57% for the comparable 1996 period. This
increase was attributable primarily to an 86% cost of revenue for sales in 1996
of $1.1 million of third-party software licenses.

OPERATING EXPENSE for the nine-month period ended September 30, 1996
increased by approximately $2.0 million (60%) over operating expense for the
nine months ended September 30, 1995. The increase was attributable primarily to
Level 8 opening a new office and related staffing expenses and an additional
three months of operations in 1996 for Level 8 totaling approximately $1.2
million. The balance of the increase was due to increased sales and marketing
expenses at ProfitKey and increased general corporate overhead. As a percentage
of revenue, operating expense increased from 44% for the nine months ended
September 30, 1995 to 55% for the nine months ended September 30, 1996
(excluding the loss associated with the sale of Bizware).

OTHER INCOME (EXPENSE) for the nine-month period ended September 30, 1996
increased to approximately $89,000 from approximately $8,000 during the
comparable nine-month period in 1995 primarily due to interest earned from
investment of cash remaining from the Company's initial public offering.

INCOME TAX EXPENSE (BENEFIT) was 1% and 33% of income before taxes and
minority interest for the nine months ended September 30, 1996 and September 30,
1995, respectively. The effective tax rate differed from the federal statutory
tax rate (i.e., 34%) in 1996 primarily due to the nondeductibility of the loss
on the sale of a Bizware and the change in the deferred tax valuation allowance.

MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY was eliminated
starting April 3, 1995, when the Company acquired the minority interest in
ProfitKey.

1995 COMPARED TO 1994

REVENUE for the year 1995 increased by approximately $6.5 million (182%)
over the prior year. The increase was attributable primarily to the acquisitions
of ProfitKey on October 3, 1994, Bizware on October 28, 1994 and Level 8 on
April 1, 1995.

COST OF REVENUE for the year 1995 increased by approximately $2.8 million
(165%) over the prior year. The increase was attributable primarily to the
acquisitions of ProfitKey, Bizware and Level 8. As a percentage of revenue, cost
of revenue decreased from 47% in 1994 to 45% in 1995. This decrease was
attributable primarily to lower cost of revenue for Bizware, which resulted from
a high margin contract that concluded during the second quarter of 1995.

OPERATING EXPENSE for 1995 increased by approximately $3.6 million (289%)
over the prior year. The increase was attributable primarily to the acquisitions
of ProfitKey, Bizware and Level 8. As a percentage of revenue, operating expense
increased from 34% during 1994 to 47% during 1995. This increase was
attributable to an increase in amortization of goodwill and service contracts
from approximately $55,000 during 1994 to approximately $575,000 during 1995,
higher operating expenses at Bizware and Level 8, which only had an impact after
their dates of acquisition, and the addition of corporate overhead starting in
October 1994.

OTHER INCOME (EXPENSE) had no significant change during 1995.

INCOME TAX EXPENSE was 31% and 19% of income before taxes and minority
interest for 1995 and 1994, respectively. The effective tax rate for 1994
differs from the federal statuatory tax rate (i.e., 34%) primarily due to the
effect of foreign tax rates and credits and the utilization of net operating
loss carry forwards.

MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY had no significant
change for 1995.

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1994 COMPARED TO 1993

REVENUE for 1994 increased by approximately $2.3 million (174%) over the
prior year. The increase was attributable to the acquisitions of ProfitKey and
Bizware.

COST OF REVENUE for 1994 increased by approximately $893,000 (110%) over the
prior year. The increase was attributable primarily to the acquisitions of
ProfitKey and Bizware. As a percentage of revenue, cost of revenue decreased
from 62% in 1993 to 47% in 1994. This decrease was attributable primarily to the
acquisitions in 1994 of ProfitKey and Bizware which each had a lower cost of
revenue as a percentage of revenue.

OPERATING EXPENSE for 1994 increased by approximately $695,000 (131%) over
the prior year. The increase was attributable primarily to the acquisitions of
ProfitKey and Bizware. As a percentage of revenue, operating expense decreased
from 41% in 1993 to 34% in 1994. This decrease was attributable primarily to the
acquisition in 1994 of Bizware, which had lower operating expense as a
percentage of revenue.

OTHER INCOME (EXPENSE) for 1994 increased to approximately $50,000 from
approximately $(4,000) for the prior year. The increase was attributable
primarily to the settlement of ProfitKey accounts payable at amounts lower than
previously recorded.

INCOME TAX EXPENSE was 19% and 0% of income (loss) before income taxes and
minority interest for 1994 and 1993, respectively. During 1993, the Company had
a small loss and did not have a tax benefit.

MINORITY INTEREST INCOME OF CONSOLIDATED SUBSIDIARY began on October 3,
1994, when the Company acquired approximately 92% of the outstanding stock of
ProfitKey.

LIQUIDITY AND CAPITAL RESOURCES

In 1996, the Company funded its operations with cash remaining from its
initial public offering. During the nine months ended September 30, 1996, the
Company used net cash of approximately $640,000 for operations, expended
approximately $1.5 million for capitalized software development and expended
approximately $600,000 on equipment. In July 1996, Candle acquired 246,800
shares of Common Stock at a price of $11.00 per share. The proceeds (i.e., $2.7
million before costs of issuance) have been invested primarily in short-term,
interest-bearing securities. At September 30, 1996, the Company had working
capital of approximately $4.6 million and a current ratio of 2.17.

In 1995, the Company funded its operations with cash from operations and
from the net proceeds of its initial public offering. Operating and financing
activities during 1995 generated net cash of approximately $8.3 million. The
Company expended approximately $837,000 for capitalized software development,
approximately $381,000 on equipment and approximately $2.2 million for the
acquisition of Level 8. At December 31, 1995, the Company had working capital of
approximately $4.1 million and a current ratio of 2.34. In 1994, the Company
funded its operations with cash from operations and funded its acquisitions of
ProfitKey and Bizware with loans from related companies.

The Company intends to accelerate its software development, expand its sales
force and increase its marketing activities, and the Company may acquire
software businesses and software licenses. To the extent that funds from
operations are not sufficient for these purposes, the Company will fund those
activities from the net proceeds of this offering.

The Company believes that its existing working capital, anticipated funds
generated from operations and the net proceeds of this offering will be
sufficient to fund its working capital and capital expenditure requirements
through June 1998.

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RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The Company adopted FASB
121 as of January 1, 1996.

In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which encourages, but does not require, a fair
value-based method of accounting for employee stock options. As permitted under
the new standard, the Company will continue to account for employee stock
options under APB No. 25, "Accounting for Stock Issued to Employees." The pro
forma disclosures required by this standard were adopted by the Company as of
January 1, 1996.

INFLATION AND CHANGES IN PRICES

Inflation has not had a material effect on the Company's operating results
to date.

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BUSINESS

GENERAL

The Company believes that it has established itself as a technology leader
in the rapidly growing middleware marketplace. The Company's middleware products
and services, some of which have been developed pursuant to contracts with IBM
and Microsoft, utilize messaging and object technology to solve enterprise-wide
integration problems associated with linking legacy environments, the desktop
and the internet. The Company recently entered into agreements with Candle,
pursuant to which Candle purchased 246,800 shares of Common Stock for $11 per
share and acquired certain rights to technology developed by the Company and
will acquire certain non-exclusive distribution rights to the Company's
products, including Falcon External Gateways. In addition, the Company, through
its wholly-owned subsidiary, ProfitKey, offers MRP II and shop-floor scheduling
packages and related services.

The Company, through its wholly-owned subsidiary Level 8, has been
designated an IBM Premier Partner for IBM MQSeries. Pursuant to contracts with
IBM, Level 8 has ported version 2 of MQSeries to the DEC VMS platform and will
be entitled to royalties, if any, from sales of the ported product and has
ported IBM's distributed object product, DSOM. In addition, the Company provides
installation, education, integration and help-desk services in support of IBM
and Level 8 sales of IBM MQSeries licenses. Samuel Somech, a co-founder of Level
8, was the original designer of the transactional messaging product that became
version 1 of MQSeries.

The Company is developing DOT/XM, a product that uses third-party
transactional messaging and distributed object products in a Level 8 designed
tool that facilitates integration of legacy systems into modern, open system
architectures, by representing the legacy system as a collection of objects.
Consulting services associated with DOT/XM technology have generated
approximately $700,000 of revenue during the nine months ended September 30,
1996. The first large commercial installation of DOT/XM is currently taking
place at ABN/AMRO Bank.

The Company's expansion plan is to grow primarily on the basis of Level 8
middleware products, such as messaging gateways, DOT/XM and other software tools
that permit access to legacy information from any computing environment. Other
products under development by the Company, and with respect to which the Company
currently is offering consulting services, are (a) a publish/subscribe product,
which sends designated data ("publish") to interested users ("subscribers")
using transactional messaging as the delivery mechanism and (b) an
internet-application integration product, which uses portions of the DOT/ XM
framework to integrate commercial transactions on the internet with the legacy
systems of the selling corporation.

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Through ProfitKey, the Company offers MRP II and shop-floor scheduling
software packages, as well as related installation, training and support
services. Historically, ProfitKey has directed its software packages to job
shops and custom manufacturers, which use ProfitKey's software package to
facilitate "just-in-time" deliveries and efficient scheduling of expensive
shop-floor equipment.

The Company began operations in 1988 as a wholly-owned subsidiary of Liraz.
Since 1988, the Company, through ASU, has provided systems integration and
consulting services primarily to manufacturing businesses in the State of
California. In October 1994, the Company acquired ProfitKey and Bizware and, in
April 1995, the Company acquired Level 8. The Company had its initial public
offering in July 1995, selling 1,430,000 shares of Common Stock at an initial
public offering price of $5.50 per share. In July 1996, the Company decided to
focus on the middleware activities of Level 8, and, in that connection, on
September 9, 1996, sold substantially all the assets of Bizware for $230,000 and
subsequently changed the Company's name from Across Data Systems, Inc. to Level
8 Systems, Inc.

The table below shows the Company's percentage of net revenues by category
for the years indicated. The revenue for 1996 includes ASU, ProfitKey and Level
8 for the nine-month period ended September 30, 1996, and Bizware through
September 9, 1996, the date of its sale by the Company. The revenue for 1995
includes the results of ASU, ProfitKey and Bizware for the full year, and Level
8 from its acquisition on April 1, 1995. The revenue for 1994 includes ASU for
the full year, ProfitKey from its acquisition on October 3, 1994 and Bizware
from its acquisition on October 28, 1994. The revenue for 1993 includes only the
results of the Company's ASU consulting division.

PERCENTAGE OF THE COMPANY'S NET REVENUE BY CATEGORY

<TABLE>
<CAPTION>
CONSULTING
AND SERVICES SOFTWARE OTHER TOTAL
--------------- ------------- ----------- -----
<S> <C> <C> <C> <C>
1993...................................................................... 100% 0% 0% 100%
1994...................................................................... 72 25 3 100
1995...................................................................... 70 22 8 100
1996 (through September 30)............................................... 71 23 6 100
</TABLE>

This section contains forward-looking statements. See "Special Note
Regarding Forward-Looking Statements."

LEVEL 8 PRODUCTS AND SERVICES

LEVEL 8 PRODUCTS. The Company's expansion plan is to grow primarily on the
basis of middleware products developed by Level 8, such as messaging gateways
and software tools that permit access to legacy information from any computing
environment. Each of the products offers the opportunity to deliver services
with the products and, to the extent that the sale is made directly by the
Company, Level 8 plans to offer the services. The products also will be sold
through other distribution channels, such as Candle, IBM or Microsoft Business
Partners, and those third-party sellers will be encouraged and trained to
provide services. The products are at various stages of development, as
described below. However, there can be no assurance that the development process
will not encounter delays and unforeseen problems, which could materially delay
the commercial introduction of the product or jeopardize the entire product.

FALCON EXTERNAL GATEWAYS. Microsoft has developed a transactional messaging
product, Microsoft's Falcon, for use with the Microsoft Windows NT and Windows
95 operating systems. Level 8 was selected by Microsoft to develop components of
software that allow messages to be passed from Falcon to IBM MQSeries and
directly to other systems, such as mainframes and those running the UNIX
operating system (collectively, the "Falcon External Gateways"). Microsoft has
agreed to recommend exclusively Level 8's Falcon External Gateways for the first
year after commercial release of the gateways. IBM has licensed to Level 8
portions of its API from IBM MQSeries for use with the Falcon External Gateways
to

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<PAGE>
facilitate connections between Microsoft's Falcon and IBM MQSeries. Microsoft's
Falcon and Level 8's Falcon External Gateways are in Beta site testing, and
Microsoft's Falcon and Level 8's Falcon External Gateways are expected to be
available for sale in mid-1997. Level 8's Falcon External Gateways are expected
to sell for $500 to $10,000, depending on the platform. A gateway will be
purchased for each of the two systems being connected.

Level 8's Falcon External Gateway family of products is designed primarily
for customers using Windows NT LANs co-existing with other hardware platforms.
By the year 2000, the installed base for Windows NT has been projected by
industry sources to grow to 7 to 10 million servers. The Company estimates that
each of 35,000 IBM mainframes and 1.2 million UNIX systems will be connected via
messaging to multiple Windows NT servers. The Company believes that Falcon
Gateways will permit interfaces between such systems.

The Falcon Gateway product family is designed to provide efficient and
reliable access to IBM mainframes, numerous UNIX platforms, such as Sun Solaris,
AIX, HP-UX and AT&T GIS, as well as AS/400, OS/2, Sun OS and VMS. Communication
is accomplished through a reliable message queuing technology offering assured
message delivery, time independent messaging and a consistent API across all
platforms.

The Falcon Gateway family of products will support three major functional
releases:

FALCON API CLIENT--The Falcon API Client release provides client support
using Remote Procedure Call ("RPC") technology on UNIX and CICS in the MVS
environment. The API Client architecture provides a library of Falcon API
that resides on each client platform, allowing applications to send and
receive Falcon messages and access queues within the Falcon network. The
Falcon External Gateway is fully integrated with the native NT service
management, event management and performance management infrastructure of
the Microsoft Windows NT Server.

FALCON QUEUE TO QUEUE GATEWAY FOR MQSERIES--The Falcon Queue to Queue
Gateway for MQSeries product is the most comprehensive of the Falcon Gateway
releases, with a complete interface to all IBM MQSeries (Version 2) server
platforms and IBM MQSeries for CICS under MVS. Use of this product with any
supported MQSeries server gives Falcon applications access to all 19 IBM
MQSeries platforms and their applications. This product will provide the
multitude of existing and new MQSeries applications easy access to Microsoft
Falcon-based networks using IBMs native MQSeries APIs. This feature also
allows Falcon enabled Windows applications access to IBM MQSeries enabled
applications for complete enterprise information access solutions.

FALCON TRANSIENT DATA QUEUE TO QUEUE--This product will provide queue to
queue support where the remote messaging queues reside on a non-Microsoft
platform. This feature will allow native Falcon networks to access CICS
Transient Data Queue applications and vice versa. Queues are CICS Transient
Data Queues wrapped by Falcon APIs. The CICS user can therefore have both
RPC and store and forward capabilities with the same Falcon APIs.

DISTRIBUTED OBJECT TRANSACTIONS. DOT/XM is a Level 8 developed tool that
facilitates the integration of legacy systems into modern open system
architectures by representing legacy systems as a collection of objects. It
includes a software framework for the server that is the middle-tier in a
three-tier computing architecture. The server responds to requests for
information from a front-end client by reformatting the request for
communication directly to legacy machines in their standard communication format
or via a transactional messaging product, such as IBM MQSeries. This "wrapping"
of the legacy machine is accomplished on the server, so that few, if any,
changes to code are necessary on the legacy machine. The server utilizes IBM
MQSeries as the transactional messaging vehicle within the server framework and
optionally to the legacy machine. The server framework also utilizes a
distributed ORB that complies with the CORBA standard, such as DSOM or ORBIX.
The server has a core framework of objects that perform the same functions for
all installations of the server. The framework includes functions such as
systems

23
<PAGE>
management, communications and security. The server also has a class library of
business objects from which objects will be selected to perform similar
functions for different operating environments, and it will have custom business
objects designed for the particular customer. An example of a business object is
"GET CHECKING BALANCE" for a "banking-at-home" application accessing an MVS
mainframe. DOT/XM has been the basis for a number of consulting projects
totaling approximately $700,000 of revenue during the nine months ended
September 30, 1996. The first large commercial installation of DOT/XM is taking
place at ABN/AMRO Bank. Testing in the cash management application is to begin
in November 1996 and live implementation is planned for March 1997. DOT/XM is
priced at approximately $150,000 for a single service application, with site
licenses expected to be priced in the $500,000 to $1,000,000 range.
Installations include extensive use of services to customize DOT/XM business
objects to particular applications. As Level 8 compiles a library of business
objects, Level 8 will attempt to sell the objects and, in that circumstance,
consulting services will decline.

PUBLISH/SUBSCRIBE. The publish/subscribe product uses transactional
messaging products, such as MQSeries or Microsoft Falcon, as the delivery
mechanism to send designated data ("publish") to interested users
("subscribers"). The alternate technique is for interested users to query the
database on a regular basis to determine if information of interest has been
added to the database. The publish/subscribe product was developed from a
$200,000 consulting project for a major transportation company. It is being
offered currently to new customers as a service using the Company's prior
experience and is planned to be developed into a deliverable product by
mid-1997.

INTERNET-APPLICATION INTEGRATION. Level 8 is developing an
internet-application integration product that uses portions of the DOT/XM
framework to integrate commercial transactions on the internet with applications
running on the legacy systems of the selling corporation. A prototype was
demonstrated at the Object Expo/Java Expo show in New York City during August
1996. The prototype was a home banking application that used JAVA applets to
provide the GUI screen for a client that could be located in the home and used
the internet as the communications link to a server at the bank. The server
accessed information on the customer from an MVS mainframe using IBM MQSeries
and portions of the DOT/XM distributed object framework. Level 8 believes its
technology will be important for companies that desire to conduct commerce on
the internet and need to integrate that commerce with the legacy computers that
are being used in their existing businesses. Level 8 has proposed projects to
several large institutions and, although there can be no assurance of success,
Level 8 expects to enter into contracts during the fourth quarter of 1996 with a
select number of these institutions.

LEVEL 8 SERVICES. Level 8 provides system integration services drawing on
its expertise in transactional messaging and distributed objects and offers a
family of services designed to meet the needs of companies installing
third-party transactional messaging products. These services have been provided
to over 40 major companies, including: financial institutions, such as ABN/AMRO
Bank N.A., American Express, Chase Manhattan Bank, Franklin Tempelton Group,
John Hancock Mutual Life Insurance Company, NationsBank Corp., New York
Mercantile Exchange, Trigon Blue Cross/Blue Shield and Travelers Life Insurance;
transportation companies, such as CSX Technology and Transquest (Delta
Airlines); manufacturing companies, such as Motorola Inc., NSK Corp. and Stanley
Tool; retailers, such as K-Mart Corp., The Dillon Company, Inc. and The May
Company; and government agencies, such as Fannie Mae. The following packaged
transactional messaging services are being offered for IBM MQSeries and are
likely to be offered for Microsoft's Falcon:

MQ/QUICK START. A fixed price service designed to get the customer
started using transactional messaging. Software is installed, configured and
tested for a particular application. Hands-on training is provided to
customer personnel.

MQ/EDUCATIONAL SERVICES. Classroom training in messaging is provided at
the customer's site or at Level 8's Boca Raton, Florida training facility.
Theory is taught in addition to practical applications, including an actual
application workshop.

24
<PAGE>
MQ/FAST TRACK FUNCTIONAL SLICE. Level 8 demonstrates the value of
messaging and its business advantage by automating a chosen application
based on an on-site requirements analysis. If appropriate, Level 8 will
design graphical user interface screens created for the application and
integrate messaging and an application into the client-server architecture.

MQ/ENTERPRISE ROLLOUT. Level 8 staff assist customers with application
of transactional messaging for multiple applications and provide skills
transfer required to deliver production strength systems.

MQ/HELP CENTER. Level 8 offers continuous help desk support, which can
be accessed by telephone or facsimile or through the internet.

PROFITKEY PRODUCTS AND SERVICES

ProfitKey offers MRP II and shop-floor scheduling software packages, and
related installation, training and support services, for use by manufacturing
businesses. ProfitKey also offers its customers hardware, which ProfitKey, as a
"reseller," purchases from leading hardware manufacturers.

ProfitKey's principal product, the Rapid Response Manufacturing software
package, addresses the needs of make-to-order job shops and custom
manufacturers. The customers of these make-to-order manufacturers, such as large
automobile companies, frequently impose on their make-to-order suppliers
especially stringent delivery deadlines, which, in turn, result in unusually
complex equipment scheduling and other scheduling requirements for the
make-to-order manufacturer. Rapid Response Manufacturing's particular strength
is its shop-floor scheduler, which is especially useful for manufacturers
attempting to meet the "just-in-time" delivery requirements of their customers.
ProfitKey also offers a fully integrated MRP II software package for
make-to-stock manufacturers.

The Rapid Response Manufacturing software package is comprised of a core
module, plus 20 optional modules to fit the needs of the particular
manufacturer. The software offers a wide range of easy-to-use tools, including:
a workbench-style framework with extensive on-screen inquiry displays, flexible
browse features, pop-up windows and graphs; a variety of loading and scheduling
options; management query tools for custom reports and Windows-based export of
data; bar code entry of labor and job tracking data; and numerous on-screen and
printed reports. The package enables manufacturers to prepare estimates, enter
orders, manage capacity (labor, materials, machines and work centers), schedule
and track jobs, manage inventory, prepare shipping documents and prepare
financial statements.

The software package is priced based on the number and types of modules
ordered, the hardware platform employed and the number of users. Typical
configurations on UNIX and Novell platforms sell for approximately $35,000 to
$40,000; on an AS/400 platform, the package typically sells for approximately
$70,000 to $80,000.

The purchase price of ProfitKey software includes a professional services
audit, which recommends an implementation plan supported by ProfitKey
consultants. A minimum 10-day implementation plan is required, but the typical
audit recommends a plan of 30 to 50 days of support services. The daily rate
charged is between $800 and $1,000, depending upon the length of the contract
and the skills required.

ProfitKey is currently rewriting its software in a fourth generation
language with graphical user interface. The existing version is written in
RM/COBOL and runs on UNIX, AS/400 and DOS platforms and Novell networks and with
ProfitKey's proprietary database or native AS/400 or Oracle databases. The new
product will use an object-oriented programming approach, employing GUPTA's SQL
Windows, and is being designed to run on multiple hardware platforms and
commercial databases. The Company believes the new software will be available in
mid-1997. However, there can be no assurance the development process will not
encounter delays and unforeseen problems, which could materially delay the
commercial introduction of the product or jeopardize the entire project.

25
<PAGE>
ProfitKey offers an 11-hour hotline to its service department for
troubleshooting at an hourly charge or as part of an annual maintenance
contract. ProfitKey's average response time is two hours. ProfitKey offers its
customers annual maintenance contracts at a cost ranging between 12% and 15% of
the base software license fee, which entitles the customer to telephone support
and new releases of the software.

MARKETS AND MARKETING

The Company sells its products and services primarily in the United States,
with additional sales in Canada and the United Kingdom.

The middleware marketplace is in the early stages of development. Industry
sources have estimated that the messaging middleware market exceeded $100
million in 1995 and that such market is expected to grow to in excess of $1.7
billion by the year 2000. The need for middleware products and services results
from the move to distributed processing and from the proliferation of computer
platforms. Businesses that have these disparate systems need a cost-effective
and reliable method to enable the disparate systems to communicate with each
other. Such need has grown as companies have spread geographically, have
acquired new operations and have offered new services, such as electronic
commerce on the internet, that require access to information located throughout
the enterprise. Companies such as IBM, Digital Equipment Corporation, Sun
Microsystems and Microsoft have introduced middleware products that work across
multiple platforms and that provide opportunities for add-on products and
services, such as those provided by Level 8.

Level 8 markets and sells its products and services by calling directly on
large financial service companies and through referrals to other companies from
its association with hardware and software providers. In July 1996, the Company
entered into a letter of intent with Candle, pursuant to which, among other
things, the Company agreed to grant to Candle certain distribution rights and
technology licenses for Falcon External Gateways and a technology license
agreement for DOT/XM. Definitive agreements are expected to be entered into
during the fourth quarter of 1996. In August 1996, the Company sold to Candle
all the Company's rights to MQ Secure, a security product that the Company
developed for IBM MQSeries. In February 1996, Level 8 entered into a licensing
agreement with IBM for portions of IBM MQSeries technology, which gives IBM
certain rights to distribute Level 8's Falcon External Gateways.

ProfitKey sells into a mature market that has developed specialty products
for particular manufacturing segments. ProfitKey's expertise is in shop floor
scheduling systems, which are most important to make-to-order manufacturers.
These are manufacturers who generally start to manufacture a product only after
an order is received. These manufacturers tend to be small to medium in size.
ProfitKey has targeted facilities with 50 to 200 employees and sells to them
with a direct sales force augmented in some territories by regional agents.

CUSTOMERS

No customer accounted for more than 10% of the Company's revenue in 1995.
For the nine months ended September 30, 1996, one customer accounted for
approximately $1.3 million of the Company's revenue, which represented 13% of
the Company's revenue for that period. See "Risk Factors -- Dependence on Major
Customers; Fluctuations of Operating Results."

COMPETITION

The Company competes in the application software and systems integration
services markets, as well as in the developing market for transactional
messaging and distributed object middleware. Such markets are highly
competitive, and the Company believes competition will intensify in such markets
in the future. The Company competes with developers of middleware, such as
Digital Equipment Corporation, IBM, Candle and Microsoft; with providers of
systems integration services, such as Anderson Consulting and Logica PLC and
numerous local and regional providers of consulting and integration services;
and with

26
<PAGE>
providers of software packages for particular markets, such as Fourth Shift
Corporation and Symix Systems, Inc. The Company's competitors generally have
substantially larger operations, have broader product lines with greater name
recognition and market acceptance and have significantly greater financial,
marketing, personnel and operating resources than the Company.

INTELLECTUAL PROPERTY

The Company does not have any patents and has not filed any patent
applications. The Company relies on a combination of trade secret laws,
nondisclosure and other contractual agreements and technical measures to protect
its rights in its know-how and its proprietary products. The foregoing may not
afford the Company sufficient protection for its know-how and products, and
other parties may develop similar know-how and products, duplicate the Company's
know-how and products or be granted patents that would materially and adversely
affect the Company's business.

The Company believes that its products and services do not infringe the
rights of third parties; however, while the Company has not received notice of
any infringement claims, third parties may assert such claims against the
Company, and such claims could require the Company to enter into licenses with
respect to the technology in question or enter into royalty arrangements or
could result in litigation, which could materially and adversely affect the
Company's business. There can be no assurance that the Company will acquire any
license with terms acceptable to the Company or, at all. Any failure of the
Company to acquire such licenses could materially and adversely affect the
Company's business and prospects.

EMPLOYEES

The Company believes that its employee relations are satisfactory. The
employees are not represented by a labor union, and the Company has never
experienced any labor problems resulting in a work stoppage. As of September 30,
1996, the Company had 111 employees, 19 of whom were engaged in product
development, 57 in consulting and services and 35 in marketing and
administrative functions.

PROPERTY

The Company leases offices in New York, New York (5,125 square feet at an
annual cost of $123,648 with its lease expiring during November 2000), Salem,
New Hampshire (15,600 square feet at an annual cost of $159,900 with its lease
expiring during October 1999), Boca Raton, Florida (39,500 square feet at an
annual cost of $51,348 with its lease expiring during July 1999 and 1,740 square
feet at an annual cost of $22,620 with its lease expiring during December 1996),
Santa Clara, California (1,700 square feet at an annual cost of $30,400 with its
lease expiring during May 1997) and Framingham, Massachusetts (700 square feet
at an annual cost of $15,000 terminable by either party with 30 days' notice).
The Company believes its existing facilities are adequate for its current needs
and that additional space should be available as required.

LEGAL PROCEEDINGS

The Company is subject to certain legal actions that arise out of the normal
course of business. It is management's belief that the outcome of these actions
will not have a material effect on the Company's consolidated financial position
or results of operations.

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to each
executive officer and director of the Company as of December 1, 1996.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Robert R. MacDonald............................. 52 Chairman of the Board of Directors
Arie Kilman(1)(2)............................... 43 Chief Executive Officer and Director
Samuel Somech................................... 44 President and Director
Joseph J. Di Zazzo.............................. 38 Controller, Chief Accounting Officer, Treasurer
and Secretary
Theodore Fine................................... 59 Director
Frank J. Klein(1)(2)............................ 54 Director
Lenny Recanati(1)(2)............................ 43 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Each director holds office until the Company's next annual meeting of
shareholders and until his successor is elected and qualified. Officers are
elected annually by the Board of Directors and hold office at the discretion of
the Board. The Company's directors receive no additional compensation for
serving on the Board of Directors, other than reimbursement of reasonable
expenses incurred in attending meetings. There are no family relationships among
the Company's directors and executive officers. The Company has agreed that
Candle may select a nominee for the Board of Directors in 1997, and the Company
will use its best efforts to have such nominee elected.

ROBERT R. MACDONALD has served as Chairman of the Board of Directors of the
Company since July 1996 and as a director of the Company since December 1994.
Mr. MacDonald served as President and Chief Executive Officer of the Company
from October 1994 to July 1996. Mr. MacDonald had been employed as President and
Chief Executive Officer of ProfitKey from May 1994 until it was acquired by the
Company in October 1994. Mr. MacDonald has served as Chairman of the Board of
Directors of Land & Sea, Inc., a private manufacturer of marine accessories and
computerized dynamometers, since March 1990, and served as its Chief Executive
Officer from March 1990 to December 1994. Mr. MacDonald received a B.S. in
engineering physics and an M.E. in electrical engineering from Cornell
University, and an M.B.A. from Harvard Business School.

ARIE KILMAN has served as Chief Executive Officer of the Company since July
1996. Prior to that, Mr. Kilman served as President of the Company from July
1996 to October 1996 and as Chairman of the Board of Directors of the Company
from December 1994 until July 1996. Mr. Kilman has served as Chairman and Chief
Executive Officer of Level 8 from July 1996. Since 1983, Mr. Kilman has served
as Chairman of the Board of Directors and President of Liraz, a software
consulting and systems integration company, which he founded. Liraz is an
Israeli public company, the shares of which are traded on the Tel Aviv Stock
Exchange. Mr. Kilman received a B.A. in economics and computer science from Bar
Ilan University in Israel. See "Principal and Selling Shareholders--Ownership of
Liraz and Certain of its Affiliates."

SAMUEL SOMECH has served as President of the Company since October 1996 and
has been a director of the Company since April 1995. From April 1995 to October
1996, Mr. Somech served as Vice President of the Company. Mr. Somech co-founded
Level 8 in February 1994 and has served as its President since April 1995. He
founded Data Voice Systems, Inc. in January 1987 and served as its President
until September 1990, when the company was acquired by System's Strategy, Inc.,
a division of NYNEX. From September 1990 until December 1993, Mr. Somech served
as the Technical Director of the Messaging Group for NYNEX. In January 1994,
Apertus Technologies, Inc. purchased the division from NYNEX,

28
<PAGE>
and Mr. Somech remained at his position until March 1994. Mr. Somech received a
B.S. in electrical engineering from Technion University, Israel, an M.S. in
computer science from Columbia University and an M.B.A. from Baruch College.

JOSEPH J. DI ZAZZO has served as Chief Accounting Officer, Treasurer and
Secretary of the Company since April 1995 and as Controller from January 1995.
Mr. Di Zazzo has been Vice President, Finance of ProfitKey since January 1995,
and was Controller of ProfitKey from May 1992 until January 1995. From June 1991
until May 1992, Mr. Di Zazzo was self-employed in the video business. From April
1987 until June 1991, he was the Controller of Workstation Technologies, a
private computer workstation value-added reseller. Mr. Di Zazzo received a B.S.
in business administration from Salem State College.

THEODORE FINE has served as a director of the Company since April 1995. Mr.
Fine co-founded Level 8 with Mr. Somech in February 1994. Since January 1993,
Mr. Fine has been a management information systems consultant to the financial
community and until July 1996 served as a marketing and sales consultant to the
Company. He previously was Vice President of Technology for the retail
international operations of Citibank, N.A. from March 1974 until December 1992.
Mr. Fine received a B.S. in electrical engineering from the Cooper Union for the
Advancement of Science and Art and an M.S. in electrical engineering from the
University of Southern California.

FRANK J. KLEIN has served as a director of the Company since December 1994.
Since January 1, 1995, Mr. Klein has been the President of PEC Israel Economic
Corporation ("PEC"), a corporation that holds equity interests in companies that
are located in Israel or are Israel related. PEC owns approximately 9.3% of
Liraz. Prior to Mr. Klein's appointment as President of PEC, he served as
Executive Vice President of Israel Discount Bank of New York from 1985. Mr.
Klein served as Executive Vice President of PEC from November 1977 to November
1991 and as Treasurer of PEC from May 1980 to November 1991. He is a director of
PEC, as well as a number of companies affiliated with it, including Elron
Electronics Industries Ltd. and Scitex Corporation Ltd. Mr. Klein holds
bachelors degrees in both law and business from New York University. See
"Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates."

LENNY RECANATI has served as a director of the Company since December 1994.
During the last 12 years, Mr. Recanati has been a senior manager and director of
Discount Investment Corporation Ltd. ("DIC"), an Israeli company that owns
approximately 9.3% of Liraz. He is Chairman of the Board of Directors of
Ilanot-Discount's Mutual Fund Management Company and is a member of the boards
of directors of a number of Israeli industrial and other enterprises affiliated
with DIC, including: Liraz, Klil Industries Ltd., Caniel-Israel Can Company
Ltd., Elron Electronics Industries Ltd., Super-Sol Ltd., Bayside Land
Corporation Ltd., Tefron Ltd. and Tambour Ltd. Mr. Recanati received his
bachelors degree in economics from the Hebrew University of Jerusalem and holds
an M.B.A. from Columbia University. Mr. Recanati is the son of Jacob Recanati.
See "Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates."

BOARD COMMITTEES AND MEMBERSHIP

The Board of Directors held 12 meetings during 1995. During 1995, each
incumbent director attended more than 75% of the total number of meetings of the
Board of Directors during the period he was a director.

On February 21, 1996 the Board of Directors formalized the creation of a
Compensation Committee, which is comprised of Messrs. Kilman, Klein and
Recanati. The Compensation Committee has (i) full power and authority to
interpret the provisions of, and supervise the administration of, the Plan and
(ii) the authority to review all compensation matters relating to the Company.

On February 21, 1996, the Board also formalized the creation of an Audit
Committee, which is comprised of Messrs. Kilman, Klein and Recanati. The Audit
Committee held a formal meeting on May 2,

29
<PAGE>
1996 with the Company's auditors. The Audit Committee has the following duties:
reviewing with the independent auditors the plans and results of the audit
engagement; reviewing the adequacy, scope and results of the internal accounting
controls and procedures; reviewing the degree of independence of the auditors;
reviewing the auditors' fees; and recommending the engagement of auditors to the
full Board of Directors.

EXECUTIVE COMPENSATION

The following table sets forth all the cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
1995 to the Chairmain of the Board of the Company, the Chief Executive Officer
and one named executive officer whose salary and bonus exceeded $100,000 during
1995. Prior to 1995, the Company was not a public company.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS (#) COMPENSATION
- ------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Arie Kilman...................................... 1995 $ 0 $ 0 -- --
Chairman of the Board of Directors(1)
Robert R. MacDonald.............................. 1995 $ 117,500(2) $ 70,000 117,347(3) --
President and Chief Executive 1994 $ 48,886 $20,000 -- --
Officer(1)
H. Jeffrey Fencer................................ 1995 $ 83,756 $ 42,560 10,410(3) $ 6,768(4)
Vice President(1)
</TABLE>

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

(1) Mr. Kilman is currently the Chief Executive Officer of the Company and has
an annual base salary of $200,000 and is entitled to a performance bonus of
$150,000 upon completion of this offering. Mr. MacDonald is currently
Chairman of the Board of Directors of the Company and has an annual base
salary of $50,000 and is entitled to receive $1,200 for each day of service
over eight days each quarter. Mr. MacDonald also receives a performance
bonus which is established by the Board. Neither Mr. Kilman nor Mr.
MacDonald has received any other compensation during 1996. Mr. Fencer is no
longer employed by the Company.

(2) Mr. MacDonald commenced his employment with ProfitKey in May 1994 and served
as President and Chief Executive Officer of the Company from October 1994 to
July 1996. Accordingly, this amount reflects a partial year's salary.

(3) In February 1993 and October 1994, ProfitKey granted options to purchase
shares of Common Stock to Mr. Fencer and Mr. MacDonald, respectively,
pursuant to ProfitKey's then existing stock option plan. Upon the
acquisition of the minority interest of ProfitKey by the Company in April
1995, the Company converted the ProfitKey options granted to Mr. Fencer and
Mr. MacDonald into options under the Plan to purchase 5,460 and 58,237
shares of Common Stock, respectively, at the exercise price of $0.69 per
share.

(4) Includes a car allowance of $4,200 and a payment of $2,568 for insurance
premiums on behalf of Mr. Fencer.

30
<PAGE>
OPTIONS GRANTED IN 1995

The following table sets forth information about individual grants of stock
options made to the Chairman of the Board of the Company, the Chief Executive
Officer and one named executive officer during the year ended December 31, 1995.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------------- ----------- --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arie Kilman.......................... 0 -- -- -- -- --
Robert R. MacDonald.................. 58,237(3) 11.5% $ 0.69 10/25/04 $ 481,620 $ 790,858
59,110(4) 11.7% $ 6.60 07/27/05 $ 139,500 $ 453,374
H. Jeffrey Fencer.................... 5,460(3) 1.1% $ 0.69 02/04/03 $ 40,622 $ 60,606
4,950(4) $0.69 02/02/05 $ 40,937 $ 67,221
</TABLE>

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

(1) The exercisability of these options is dependent upon the optionee's
continued employment with the Company. Options were granted at the fair
market value of the Common Stock on the date of grant and expire 10 years
from the date of grant. The option exercise price may be paid (i) in shares
of Common Stock owned by the executive officer, (ii) by delivery of a
promissory note of the executive officer on terms determined by the
Compensation Committee, (iii) by delivery of an irrevocable undertaking by a
broker to deliver promptly to the Company sufficient funds to pay the
exercise price, (iv) by delivery of irrevocable instructions to a broker to
deliver promptly to the Company cash or a check to pay the exercise price,
(v) in cash or (vi) in any combination thereof.

(2) The potential realizable value represents the estimated future gain in the
value of the options over their exercise price immediately prior to the
scheduled expiration date of the options. The calculation assumes the
specified compounded rates of appreciation in the per share price of the
Common Stock starting on the date of grant and further assumes that the
options will be exercised on their expiration date. The actual value, if
any, that may be realized will depend upon the market price of the Common
Stock on the date the option is exercised. There is no assurance that the
actual value, if any, that may be realized will be at or near the values
estimated by the calculations in the table. The closing market price of the
Common Stock at December 31, 1995 was $6.00 per share.

(3) In February 1993 and October 1994, ProfitKey granted options to purchase
shares of its common stock to Mr. Fencer and Mr. MacDonald, respectively,
pursuant to ProfitKey's then existing stock option plan. Upon the
acquisition of ProfitKey by the Company in April 1995, the Company converted
the ProfitKey options granted to Mr. Fencer and Mr. MacDonald into options
under the Plan to purchase 5,460 and 58,237 shares of Common Stock,
respectively. In October 1996, Mr. MacDonald exercised his option to
purchase 58,237 shares of Common Stock; and, in November 1996, Mr. Fencer
exercised his options to purchase 10,410 shares of Common Stock.

(4) All these options are currently exercisable.

AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES

The following table sets forth information about unexercised stock options
by the Chairman of the Board of the Company, the Chief Executive Officer and one
named executive officer during 1995. No stock options were exercised by such
individuals during 1995.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Arie Kilman.................................................... 0/0 --
Robert R. MacDonald............................................ 70,059/47,288 $ 309,238/$0
H. Jeffrey Fencer.............................................. 5,460/4,950 $ 28,993/$26,285
</TABLE>

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

(1) The market price of the Common Stock on December 31, 1995 was $6.00 per
share.

31
<PAGE>
DIRECTOR COMPENSATION

The Company's directors receive no additional compensation for serving on
the Board of Directors, other than reimbursement of reasonable expenses incurred
in attending meetings.

EMPLOYMENT AGREEMENTS

Under the employment agreement between the Company and Mr. Kilman, Mr.
Kilman will serve as Chief Executive Officer of the Company until May 1, 1998,
subject to earlier termination under certain circumstances. The agreement also
provides that Mr. Kilman will devote substantially all of his business time to
the affairs of the Company. The Company pays Mr. Kilman an annual base salary of
$200,000, and a performance bonus of $150,000 upon completion of this offering.
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. MacDonald, Mr.
MacDonald will serve as Chairman of the Board of Directors of the Company until
May 1, 1998, subject to earlier termination under certain circumstances. The
Company pays Mr. MacDonald an annual base salary of $50,000 and will pay $1,200
for each day of service over eight days each quarter. Mr. MacDonald also
receives a performance bonus which is established by the Board. If Mr.
MacDonald's employment by the Company is terminated for any reason, Mr.
MacDonald has agreed that, for one year after such termination, 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 Joseph J. Di Zazzo,
Mr. Di Zazzo will serve as Controller and Chief Accounting Officer of the
Company until May 1, 1998, subject to earlier termination under certain
circumstances. The Company pays Mr. Di Zazzo an annual salary of $75,000, an
annual increase of $5,000 and a performance bonus to be established by the
Board. If Mr. Di Zazzo's employment is terminated for any reason, Mr. Di Zazzo
has agreed that, for one year after such termination, 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 Samuel Somech, Mr.
Somech will serve as President of the Company until November 8, 1999, subject to
earlier termination under certain circumstances. 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, in its discretion, (c) a performance bonus determined
by the Board and (d) a car and telephone allowance of $2,000 a month. In the
event that Mr. Somech is terminated prior to November 8, 1999, Level 8 will pay
Mr. Somech a termination fee equal to 50% of the salary Mr. Somech would have
received from the date of termination until November 8, 1999. 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's 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 or assist any business in attempting to do so, (iv) cause any business
to refrain from doing business with Level 8 or (v) solicit or hire any person
who was an employee of Level 8 during the term of his employment agreement or
assist any business in attempting to do so.

In addition to the indemnification provided under the Company's Restated
Certificate of Incorporation and Bylaws, the Company has agreed to indemnify
each of Messrs. Kilman, MacDonald and Di Zazzo for all reasonable expenses
incurred in connection with the defense or settlement of any action or suit
involving that individual in his capacity as a director and/or officer of the
Company, as long as he acted in a

32
<PAGE>
manner he reasonably believed to be in, or not opposed to, the best interests of
the Company. Such indemnification will not be available, however, if the
particular individual is judged to be liable for negligence or misconduct in
performing his duties for the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company did not have a Compensation Committee during 1995. Mr. MacDonald
and Mr. Somech, officers of the Company during 1995, participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation. 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.

COMPENSATION POLICIES

The Compensation Committee has not met and has not yet formulated
compensation policies for senior management and executive officers. However, it
is anticipated that the Compensation Committee will develop a company-wide
program covering all employees and that the goals of such program will be to
attract, maintain and motivate the Company's employees. It is further
anticipated that one of the aspects of the program will be to link an employee's
compensation to his or her performance, and that the grant of stock options or
other awards related to the price of the Common Stock will be used in order to
make an employee's compensation consistent with shareholders' gains. It is
expected that salaries will be set competitively relative to the computer
software industry and that individual experience and performance will be
considered in setting salaries.

CHIEF EXECUTIVE OFFICER COMPENSATION

During 1995, Mr. MacDonald, then Chief Executive Officer of the Company, was
compensated substantially in accordance with his employment agreement with the
Company. See "--Employment Agreements." Mr. MacDonald's bonus for 1995 was
granted for Mr. MacDonald's work in connection with the completion of the
purchase of Level 8 by the Company and the completion of the Company's initial
public offering. This bonus was granted in lieu of any additional performance
bonus provided for in Mr. MacDonald's employment agreement.

33
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ACQUISITION OF LEVEL 8

In April 1995, the Company acquired Level 8 from its shareholders, including
Samuel Somech and Theodore Fine, for an aggregate of $2,000,000 and 525,159
shares of Common Stock. In addition, the Company granted Mr. Somech and Mr. Fine
options to purchase 77,805 and 38,902 shares of Common Stock, respectively, at
$5.00 per share. In connection with the acquisition, Level 8 entered into an
employment agreement with Mr. Somech and a consulting agreement with Mr. Fine.

LIRAZ

SALES OF COMMON STOCK TO LIRAZ EMPLOYEES. In March 1995, the Company sold
an aggregate of 30,334 shares of Common Stock to eight employees of Liraz for
approximately $.82 per share.

BORROWINGS FROM LIRAZ SYSTEMS. Since its formation, Liraz has advanced to
the Company an aggregate of approximately $4,025,000. In March 1995, Liraz
contributed $500,000 of those advances to the capital of the Company in exchange
for 363,983 shares of Common Stock. On July 25, 1995, Liraz contributed the
balance of those advances to the capital of the Company in exchange for 471,264
shares of Common Stock and a promissory note in the principal amount of
$1,228,172. The Company used $600,000 of the net proceeds from its initial
public offering of the Common Stock in August 1995 to repay a portion of the
note. The promissory note for the remaining indebtedness of $628,172 bears
interest at the rate of 4% a year, with principal and interest payable quarterly
over five years.

AGREEMENT WITH PROFITKEY. In April 1995, ProfitKey and Liraz entered into
an agreement, under which Liraz provided development services in Israel to
accelerate the graphical user interface rewrite of ProfitKey's Rapid Response
Manufacturing software product. Liraz and ProfitKey collaborated on the
technical design and coding of the different software modules. Under the
agreement, ProfitKey retains all rights to the software and paid $338,000 to
Liraz for software development. The Company believes the terms of the agreement
were at arm's length. Work under the agreement was completed in the third
quarter of 1996.

AGREEMENT WITH LEVEL 8. In December 1995, Level 8 and Liraz entered into a
custom computer programming agreement under which Liraz agreed to provide
development services and to share up to 50% of the development costs related to
the development of certain Falcon External Gateways, which Level 8 is developing
pursuant to an agreement between Level 8 and Microsoft. In exchange, Liraz will
receive royalties from sales of the resulting products at the rate of 30% for
the first $2,000,000 of revenue, 20% for the next $1,000,000 of revenues, and 8%
for all revenues in excess of $3,000,000. In connection with this agreement,
Level 8 and Liraz applied for and received an Israel--U.S. Binational Industrial
Research and Development Foundation grant of $432,000 to offset up to 50% of the
project's development costs.

ONGOING RELATIONSHIP. The Company's President, Arie Kilman, also is
President and Chairman of the Board of Liraz. Liraz has agreed to reimburse the
Company at a rate of $1,200 a day for each day of service Mr. Kilman spends on
matters relating to Liraz. For information regarding Mr. Kilman's employment
agreement with the Company, see "Management--Employment Agreements."

Liraz and the Company may from time to time compete for the same business
opportunity or engage in transactions with each other. In that connection, Liraz
and the Company have agreed that, in the case of any business opportunity
primarily involving North America, the parties will use their best efforts to
make the opportunity available to the Company; in the case of any business
opportunity primarily involving the Middle East, the parties will use their best
efforts to make the opportunity available to Liraz; and, in each other case, the
parties will participate equally in the opportunity. This agreement will
terminate on the earlier of (a) May 1998, subject to renewal thereafter, unless
either party wishes to terminate the

34
<PAGE>
agreement, and (b) the date Liraz ceases to own at least 35% of the outstanding
shares of Common Stock. In addition, the Company and Liraz have agreed that all
other transactions between the two companies will be on terms no less favorable
than those between unaffiliated parties.

See "Principal and Selling Shareholders--Ownership of Liraz and Certain of
its Affiliates" for a description of the relationship between Liraz and Messrs.
Kilman, Klein and Recanati, directors of the Company.

CANDLE CORPORATION

SALE OF COMMON STOCK TO CANDLE. In July 1996, the Company sold 246,800
shares of Common Stock to Candle for $11 per share.

LETTER OF INTENT. In July 1996, the Company, Level 8 and Candle entered
into a letter of intent regarding certain products. Pursuant to the letter of
intent, Level 8 has agreed to enter into a non-exclusive distribution and
technology license agreement for its Falcon External Gateways and a
non-exclusive technology license agreement for its DOT/XM. The Company is
currently negotiating the terms of the definitive agreements and expects to
enter into such agreements during the first quarter of 1997.

PRODUCT PURCHASE AGREEMENT. In August 1996, Level 8 and Candle entered into
a product purchase agreement. Pursuant to the agreement, Candle acquired
MQSecure, a transactional messaging security product developed by Level 8, and,
in exchange, provided Level 8 with a non-refundable advance of $250,000 against
future royalties to Level 8 of 20% (up to an aggregate of $3.0 million) on sales
of that product.

SOFTWARE AGENCY AGREEMENT. Level 8 entered into a software agency agreement
with Candle in October 1996. Pursuant to the agreement, Level 8 acquired the
non-exclusive right to market within North America certain systems management
products owned by Candle. In exchange, Candle agreed to pay Level 8 a 15%
royalty on the net revenue from any sales of such products by Level 8.

35
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of November 8, 1996, and as
adjusted for the sale by the Company of the Shares in this offering, by (a) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (b) each of the Company's executive officers
and directors, (c) all executive officers and directors of the Company as a
group and (d) each Selling Shareholder.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
AMOUNT AND NATURE OF
OWNERSHIP OF COMMON STOCK BENEFICIAL OWNERSHIP AFTER
BEFORE THIS OFFERING(1) THIS OFFERING
-------------------------------- NUMBER OF ----------------------------
PERCENTAGE OF SHARES PERCENTAGE OF
NUMBER OF OUTSTANDING BEING NUMBER OF OUTSTANDING
NAME SHARES SHARES OFFERED(2) SHARES(2) SHARES(2)
- -------------------------- --------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Liraz Systems
Ltd.(3)(4).............. 2,911,863 43.5% 50,000 2,861,863 39.0%
Liraz Export (1990)
Ltd.(3)(4).............. 962,139 14.4% 120,000 842,139 11.5%
Arie Kilman(5)(6)......... -- (7) -- -- -- --
Robert R.
MacDonald(5)(6)......... 182,740(8) 2.7% 55,661 127,079(8) 1.7%
Samuel Somech(5)(6)....... 285,606(9) 4.3% 70,000 215,606(9) 2.9%
Theodore Fine(6).......... 136,014(10) 2.0% 41,000 95,014(10) 1.3%
Joseph J. Di Zazzo(5)..... 4,388(11) * -- 4,388(11) *
Frank J. Klein(6)......... -- (12) -- -- -- (12) --
Lenny Recanati(6)......... -- (13) -- -- -- (13) --
Milford W. MacDonald...... 27,898 * 15,000 12,898 *
Joel Leonoff.............. 19,801 * 19,801 -- --
Mitchell Wasserman........ 19,801 * 19,801 -- --
Richard N. Rakup.......... 14,923 * 14,923 -- --
Jacob Vind................ 10,192 * 4,192 6,000 *
Michael J. Clare.......... 7,280 * 7,280 -- --
Moti Gutman............... 5,339 * 5,339 -- --
Avishay Hermesh........... 5,339 * 5,339 -- --
Yossi Shemesh............. 3,640 * 3,640 -- --
Elisha Mazali............. 2,184 * 2,184 -- --
Shabtay Efraim............ 2,184 * 2,184 -- --
Marilyn McLean............ 1,460 * 1,460 -- --
Matti Rotter.............. 728 * 728 -- --
Jonathan Korpel........... 728 * 728 -- --
Roger Tedesco............. 480 * 480 -- --
Carol Ann Wingrove........ 260 * 260 -- --
All directors and
executive officers as a 608,748(7)- 442,087(7)-
group (7 individuals)... (13) 9.1% -- (13) 6.0%
</TABLE>

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

* Less than 1% of the outstanding Common Stock.

(1) The persons named in this table have sole voting and investment power with
respect to the number of shares indicated as beneficially owned by them.

(2) Assumes no exercise of the Underwriters' over-allotment option. In the event
such option is exercised in full, Liraz Export (1990) Ltd. will sell an
additional 50,000 shares and will beneficially own 792,139 shares, or 10.7%,
of the Common Stock after this offering; Samuel Somech will sell an
additional 30,000 shares and will beneficially own 185,606 shares, or 2.5%,
of the Common Stock after this offering; Robert R. MacDonald will sell an
additional 20,000 shares and will beneficially own 107,079 shares, or 1.5%,
of the Common Stock after this offering; Theodore Fine will sell an
additional 15,000 shares and will beneficially own 80,014 shares, or 1.1%,
of the Common Stock after this offering; and Milford W. MacDonald will sell
an additional 5,000 shares and will beneficially own 7,898 shares, or less
than 1%, of the Common Stock after this offering.

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<PAGE>
(3) Liraz Export (1990) Ltd. is a wholly-owned subsidiary of the Liraz Systems
Ltd. The shares of Liraz Systems Ltd. are owned approximately: 32.3% by Mr.
Kilman; 16.2% by PEC; 16.2% by DIC; and 36% by the public in Israel.

(4) The address of each of Liraz Systems Ltd. and Liraz Export (1990) Ltd. is 5
Hatzoref Street, Holon 58856, Israel.

(5) The referenced individual is an executive officer of the Company.

(6) The referenced individual is a director of the Company.

(7) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Kilman as a result of his position as President, Chief
Executive Officer and the owner of approximately 32.3% of Liraz. See
"Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates" below.

(8) Includes 59,110 shares subject to stock options exercisable within 60 days
and excludes 30,432 shares held by family members of Mr. MacDonald.

(9) Includes 138,902 shares subject to stock options exercisable within 60 days
and excludes 288,902 shares subject to stock options not exercisable within
60 days.

(10) Includes 44,451 shares subject to stock options exercisable within 60 days
and excludes 44,451 shares subject to stock options not exercisable within
60 days.

(11) Includes 4,297 shares subject to stock options exercisable within 60 days
and excludes 11,206 shares subject to stock options not exercisable within
60 days.

(12) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Klein as a result of his position as an executive officer of
PEC, which owns approximately 16.2% of Liraz. See "Principal and Selling
Shareholders--Ownership of Liraz and Certain of its Affiliates" below.

(13) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Recanati as a result of his position as an executive officer of
DIC, which owns approximately 16.2% of Liraz. See "Principal and Selling
Shareholders--Ownership of Liraz and Certain of its Affiliates" below.

OWNERSHIP OF LIRAZ AND CERTAIN OF ITS AFFILIATES

Mr. Kilman is party to a shareholders agreement (the "Shareholders
Agreement") with PEC and DIC, pursuant to which Mr. Kilman, PEC and DIC have
agreed to act together to elect directors of Liraz and for certain other
purposes. The Company has been advised that each of PEC and DIC beneficially
owned approximately 16.2% of the ordinary shares of Liraz as of November 4,
1996. By virtue of the Shareholders Agreement, each party to the Shareholders
Agreement may be deemed to own beneficially the ordinary shares of Liraz owned
by the other parties. Each party to the Shareholders Agreement disclaims
beneficial ownership of the ordinary shares of Liraz owned by the other parties
to the agreement.

IDB Holding Corporation Ltd. ("IDB Holding") owns approximately 71.48% of
the outstanding shares of IDB Development Corporation Ltd. ("IDB Development").
IDB Development, in turn, owns approximately 70% of the outstanding PEC common
stock and approximately 55% of the outstanding DIC common stock. By reason of
IDB Holding's ownership of IDB Development voting securities, IDB Holding may be
deemed the beneficial owner of the 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, Messrs. Raphael Recanati, of Tel Aviv, Israel, and
Jacob Recanati, of Haifa, Israel, who are brothers, and Leon Recanati, of Tel
Aviv, Israel, and Judith Yovel Recanati, of Herzliya, Israel, who are brother
and sister, may each be 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
Commission, therefore be deemed a beneficial owner of these shares. Leon
Recanati and Judith Yovel Recanati are the nephew and niece of Raphael and Jacob
Recanati. Companies the Recanati family controls hold approximately 52.4% of the
outstanding ordinary shares of IDB Holding.

Except as noted above, the Company believes the beneficial owners referred
to above have sole voting and investment power regarding the shares of Common
Stock shown as being beneficially owned by them.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 6,908,575 shares of
Common Stock outstanding and 900,000 shares of Common Stock reserved for
issuance upon the exercise of options that may be granted under the Plan, under
which options to acquire 792,822 shares have been granted and are currently
outstanding, and 146,188 shares of Common Stock issuable upon the exercise of
warrants currently outstanding. The 1,100,000 shares of Common Stock sold in
this offering will be freely tradeable without restriction under the Securities
Act, except for any shares purchased by an "affiliate" of the Company (as that
term is defined under the rules and regulations of the Securities Act), which
will be subject to the resale limitations of Rule 144 under the Securities Act.
Of the presently outstanding shares of Common Stock, 4,559,756 shares are, and
6,188 shares issuable upon the exercise of the warrants will be, "restricted
securities" for purposes of Rule 144 and may not be resold in a public
distribution, except in compliance with the registration requirements of the
Securities Act or pursuant to a valid exemption from registration, including
Rule 144.

In general, under Rule 144(e), as currently in effect, a shareholder (or
shareholders whose shares are aggregated), including an affiliate, who has
beneficially owned for at least two years shares of Common Stock that are
treated as "restricted securities," would be entitled to sell publicly, within
any three-month period, up to the greater of 1% of the then outstanding shares
of Common Stock (6,908,575 shares immediately after the completion of this
offering) or the average weekly reported trading volume in the Common Stock
during the four calendar weeks preceding the date on which notice of sale is
given, provided certain requirements are satisfied. In addition, affiliates of
the Company must comply with additional requirements of Rule 144 in order to
sell shares of Common Stock (including shares acquired by affiliates in this
offering). Under Rule 144, a shareholder deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale by him, and who has
beneficially owned for at least three years shares of Common Stock that are
treated as "restricted securities," would be entitled to sell those shares
without regard to the foregoing requirements.

The Company and certain shareholders of the Company, including all directors
and officers, who after this offering will own 3,899,329 shares of Common Stock
(3,784,329, if the Underwriters exercise the over-allotment option in full) are
subject to lock-up agreements (the "Lock-Up Agreements") with Hampshire
Securities Corporation, under which these shares may not be sold publicly during
the Lock-Up Period without the prior written consent of Hampshire Securities
Corporation. Then and soon thereafter, all those shares will become eligible for
sale under Rule 144, and may be resold in the public market only in compliance
with the registration requirements of the Securities Act, pursuant to a valid
exemption from registration or pursuant to Rule 144. In addition, Liraz has the
right, exercisable after the Lock-Up Period, to have its shares registered under
the Securities Act at various times. See "--Registration Rights" below.

REGISTRATION RIGHTS

The Company has agreed that after December 27, 1996, at the request of Liraz
(and on no more than two occasions), the Company will file a registration
statement under the Securities Act for an underwritten offering of the Common
Stock owned by Liraz. In addition, if the Company otherwise proposes to register
its Common Stock under the Securities Act, Liraz may request that the Company
register its shares of Common Stock as well (subject to various limitations).
All fees and expenses in excess of $50,000, but excluding accounting fees
incurred in connection with any registration requested by Liraz will be borne by
Liraz. All fees and expenses incurred in connection with any other registration
will be borne by the Company, except that Liraz will pay all fees and expenses
of its own counsel and all underwriting discounts and commissions relating to
its Common Stock.

In connection with this offering, the Company has agreed to sell to the
Representative, individually and not as representative of the several
Underwriters, for $100, warrants to purchase 100,000 shares of Common Stock. The
Company has agreed to file a registration statement with respect to the shares
of

38
<PAGE>
Common Stock to be acquired upon the exercise of the Representative's Warrants
(the "Warrant Shares"). See "Underwriting."

In connection with its initial public offering, the Company sold to the
Representative warrants (the "Outstanding Warrants") to purchase 140,000 shares
of Common Stock. The Company has agreed to file a registration statement under
the Securities Act for an offering of the Outstanding Warrants and shares of
Common Stock issued upon the exercise of the Outstanding Warrants. In the event
that such registration statement is not declared effective by March 17, 1997,
the exercise price per share will decrease by 5% on such date and every month
thereafter until the registration statement is declared effective.

In addition, the Company has agreed to give advance notice to holders of the
Outstanding Warrants and the underlying Common Stock of its intention to file a
registration statement, and in one such case, holders of the Outstanding
Warrants and the underlying Common Stock will have the right to require the
Company to include the underlying Common Stock in such registration statement at
the Company's expense.

The Company has agreed, at the request of Candle, to file a registration
statement under the Securities Act for an offering by Candle of its Common Stock
during the 12-month period beginning on March 1, 1999. In addition, if the
Company otherwise proposes to register its Common Stock under the Securities
Act, Candle may request that the Company register its shares of Common Stock as
well (subject to various limitations).

The Company has agreed to use its best efforts to cause each such
registration statement to be declared effective under the Securities Act.

39
<PAGE>
DESCRIPTION OF SECURITIES

The Company's Restated Certificate of Incorporation and Bylaws include
provisions which are intended by the Board of Directors to help assure fair and
equitable treatment of the Company's shareholders in the event that a person or
group should seek to gain control of the Company in the future. Such provisions,
which are discussed below, may make a takeover attempt or change in control more
difficult, whether by tender offer, proxy contest or otherwise. Accordingly,
such provisions may be viewed as disadvantageous to shareholders inasmuch as
they might diminish the likelihood that a potential acquirer would make an offer
for the Common Stock (perhaps at an attractive premium over the market price),
impede a transaction favorable to the interests of the shareholders, or increase
the difficulty of removing the incumbent Board of Directors and management, even
if in a particular case removal would be beneficial to the shareholders.

The authorized capital stock of the Company consists of 16,000,000 shares of
capital stock, 15,000,000 of which may be common stock, par value $0.01 per
share, and 1,000,000 of which may be preferred stock. On December 16, 1996,
there were 6,248,575 shares of Common Stock outstanding; no shares of preferred
stock currently are outstanding.

COMMON STOCK

Each share of Common Stock entitles the holder thereof to one vote on all
matters submitted to a vote of shareholders, including the election of
directors. There is no cumulative voting in the election of directors;
consequently, the holders of a majority of the outstanding shares of Common
Stock can elect all of the directors then standing for election.

Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. Holders of Common Stock have no conversion,
redemption or preemptive rights to subscribe to any securities of the Company.
All outstanding shares of Common Stock will be fully paid and nonassessable. In
the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after provision for payment of liabilities to creditors
and the preferences, if any, of holders of preferred stock. The rights,
preferences and privileges of holders of Common Stock are subject to the rights
of the holders of any shares of preferred stock which the Company may issue in
the future.

CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

PREFERRED STOCK. As described above, the Board of Directors is authorized
to provide for the issuance of shares of preferred stock, in one or more series,
and to fix by resolution and to the extent permitted by the BCL, the terms and
conditions of such series. The Company believes that the availability of the
preferred stock issuable in series will provide it with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs which might arise. Although the Board of Directors has no
present intention to do so, it could issue a series of preferred stock that
could, depending on its terms, either impede or facilitate the completion of a
merger, tender offer or other takeover attempt.

BUSINESS COMBINATIONS. Section 912 of the BCL regulates "business
combinations," a term covering a broad range of transactions between "resident
domestic corporations" (as defined, which term would include the Company) and an
interested shareholder, which is defined as any person beneficially owning 20%
or more of the outstanding voting stock of the resident domestic corporation or
any affiliate or associate of that owner. Under the statute, a resident domestic
corporation may not engage in any business combination with any interested
shareholder, unless (a) if the business combination is to occur within five
years of the date the shareholder acquired 20% or more ownership, either the
business combination or the stock acquisition was previously approved by the
Board of Directors, or (b) the business combination is

40
<PAGE>
approved by a majority of outstanding voting stock (not including shares owned
by the interested shareholder), which approval may not be effectively given
until approximately five years after the interested shareholder first attained
20% ownership (the "Stock Acquisition Date"), or (c) the business combination
occurs after five years after the interested shareholder's Stock Acquisition
Date and the consideration paid to the non-interested shareholders meets certain
stringent conditions imposed by section 912. The restrictions imposed by section
912 will not apply to a corporation that amends its by-laws by the affirmative
vote of a majority of its outstanding voting stock (not including shares owned
by the interested shareholder) to "opt out" of section 912; however, an
amendment will not be effective for 18 months after the vote and will not apply
to any business combination where the Stock Acquisition Date precedes the
amendment. At this time, the Company will not seek to "opt out" of section 912
and, therefore, the restrictions imposed by section 912 will apply to the
Company.

Section 912 of the BCL may discourage other persons from making a tender
offer for, or acquisitions of, a number of shares of the Common Stock. This
could have the incidental effect of inhibiting changes in management and also
may prevent temporary fluctuations in the market price of the Common Stock that
often result from actual or rumored takeover attempts. In addition, the limited
liability provisions in the Company's Certificate of Incorporation with respect
to directors and the indemnification provisions in the Company's by-laws may
discourage shareholders from bringing a lawsuit against directors for breach of
their fiduciary duty and also may have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefitted the Company and its
shareholders. Furthermore, a shareholder's investment in the Company may be
adversely affected to the extent the Company pays the costs of settlement and
damage awards against the Company's directors and officers pursuant to the
indemnification provisions in the Company's by-laws.

WARRANTS

OUTSTANDING WARRANTS. In connection with its initial public offering, the
Company sold to the Representative the Outstanding Warrants. The Outstanding
Warrants are exercisable for a four-year period beginning on July 27, 1996 at a
price per share equal to $7.425. The Outstanding Warrants contain antidilution
provisions providing for adjustment of the exercise upon the occurrence of
certain events, including stock dividends, stock splits, recapitalizations and
sales of Common Stock below the then current market price. The holders of the
Outstanding Warrants have no voting, dividend or other rights as shareholders of
the Company with respect to shares of Common Stock underlying the Outstanding
Warrants, except to the extent the Outstanding Warrants shall have been
exercised.

BANK WARRANTS. In connection with the renegotiation of ProfitKey's bank
loan in 1992, warrants were issued to the bank to purchase shares of ProfitKey's
common stock. On April 3, 1995, the warrants were converted into warrants to
purchase 6,188 shares of Common Stock at a price per share equal to $6.87. The
warrants expire on March 31, 1997.

DILUTIVE EFFECT. While any of the Company's warrants are exercisable, a
warrant holder will have the opportunity to profit from a rise in the market
price of the Common Stock, with a resulting dilution in the interest of other
shareholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.

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<PAGE>
UNDERWRITING

The Underwriters named below, for which Hampshire Securities Corporation is
acting as representative, have severally, and not jointly, agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase,
and the Company has agreed to sell, the Shares offered hereby in the amounts set
forth opposite their respective names below.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Hampshire Securities Corporation................................................. 910,000
Alex. Brown & Sons Incorporated.................................................. 20,000
Hambrecht & Quist LLC............................................................ 20,000
Lehman Brothers Inc. ............................................................ 20,000
Montgomery Securities............................................................ 20,000
Salomon Brothers Inc............................................................. 20,000
Unterberg Harris................................................................. 20,000
Gabelli & Company, Inc. ......................................................... 10,000
Jefferies & Company, Inc. ....................................................... 10,000
Mesirow Financial................................................................ 10,000
Needham & Company, Inc. ......................................................... 10,000
Pennsylvania Merchant Group Ltd. ................................................ 10,000
Van Kasper & Company............................................................. 10,000
H.C. Wainwright & Co., Inc. ..................................................... 10,000
----------
Total...................................................................... 1,100,000
----------
----------
</TABLE>

A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement, to which reference is hereby made. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions. The Underwriters shall be obligated to purchase all the
Shares, if any are purchased.

Through the Representative, the Underwriters have advised the Company that
they propose to offer the Shares to the public at the public offering price set
forth on the cover page of this Prospectus and that they may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD"), and to certain foreign dealers, concessions not in excess of $0.40 per
share, of which amount a sum not in excess of $0.14 per share may be reallowed
by such dealers to other dealers who are members of the NASD and to certain
foreign dealers. After the commencement of this offering, the concessions and
reallowances may be changed by the Representative.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect of those
liabilities.

The Company has agreed to pay the Representative an expense allowance, on a
non-accountable basis, equal to 3% of the gross proceeds derived from the sale
of 1,100,000 shares in this offering (and any shares sold upon the exercise of
the over-allotment option). The Company has paid $25,000 as an advance on that
allowance. The Company also has agreed to pay certain of the Representative's
expenses in connection with this offering, including expenses in connection with
qualifying the shares for sale under the laws of the states the Representative
may designate. See "--Representative's Warrants" below.

Holders of approximately 56% of the 6,908,575 shares of Common Stock
outstanding after the offering, including the officers and directors of the
Company, have agreed not to sell publicly the shares of Common Stock during the
Lock-Up Period without the prior written consent of the Representative.

The Underwriters do not intend to confirm sales of Common Stock offered by
this Prospectus to any accounts over which they exercise discretionary
authority.

In connection with the offering made hereby, certain Underwriters and
selling group members (if any) or their respective affiliates who are qualified
registered market makers on the Nasdaq National Market

42
<PAGE>
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act,
during the two business day period before commencement of offers or sales of the
Common Stock. The passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.

The Company and the Selling Shareholders have granted the Representative an
option, exercisable during the 45-day period commencing on the date of this
Prospectus, to purchase at the public offering price per share less the
Underwriters' discounts and commissions up to 45,000 and 120,000 shares of
Common Stock, respectively, for the sole purpose of covering over-allotments, if
any. After the commencement of this offering, the Representative may confirm
sales of shares of Common Stock subject to this over-allotment option. Purchases
of shares of Common Stock upon exercise of the over-allotment option will result
in the realization of additional compensation by the Representative.

In connection with this offering, the Company has agreed to sell to the
Representative, individually and not as representative of the several
Underwriters, for $110, warrants to purchase 110,000 shares of Common Stock. The
Representative's Warrants are exercisable for four years, commencing one year
from the date of this Prospectus, at a price per share (the "Exercise Price")
equal to 135% of the public offering price per share. The Representative's
Warrants may not be sold, transferred, assigned, pledged or hypothecated for 12
months from the date of this Prospectus, except to members of the selling group
and to officers and partners of the Representative or members of the selling
group. The Representative's Warrants contain antidilution provisions providing
for adjustment of the Exercise Price and the number of shares of Common Stock
issuable upon the exercise thereof upon the occurrence of certain events,
including stock dividends, stock splits, recapitalizations and sales of Common
Stock below the then current market price. The holders of the Representative's
Warrants have no voting, dividend, or other rights as shareholders of the
Company with respect to shares of Common Stock underlying the Representative's
Warrants, except to the extent the Representative's Warrants shall have been
exercised.

The Company has agreed that, at the request of the holders of a majority of
the Representative's Warrants and Warrant Shares (and on no more than one
occasion), the Company will file a registration statement under the Securities
Act for an offering of the Warrant Shares during the four-year period beginning
on the first anniversary of the date of this Prospectus; and the Company has
agreed to use its best efforts to cause each such registration statement to be
declared effective under the Securities Act. In addition, the Company has agreed
to give advance notice to holders of the Representative's Warrants and Warrant
Shares of its intention to file a registration statement, and in one such case,
holders of the Representative's Warrants and the Warrant Shares will have the
right to require the Company to include the Warrant Shares in such registration
statement at the Company's expense.

While the Representative's Warrants are exercisable, the Representative and
any transferee will have the opportunity to profit from a rise in the market
price of the Common Stock, with a resulting dilution in the interest of other
shareholders. In addition, during that period, the terms on which the Company
will be able to obtain additional capital may be adversely affected, since the
Representative is likely to exercise its warrants at a time when the Company
would, in all likelihood, be able to obtain capital by a new offering of
securities on terms more favorable than those provided in the Representative's
Warrants.

The Company has agreed that, until December 17, 1999, Hampshire Securities
Corporation may appoint an observer to attend all meetings of the Company's
Board of Directors. The observer has the right to receive notice of all meetings
of the Board of Directors and to attend such meetings. However, the Board of
Directors may exclude the observer from any meeting at which, in the opinion of
the Board, confidential or sensitive matters are to be discussed. The observer
will be entitled to reimbursement for up to $500 of out-of-pocket expenses for
attendance at those meetings. In addition, the observer will be entitled to
indemnification, to the same extent as the Company's directors. Hampshire
Securities Corporation has advised the Company that its initial designee is an
officer of Hampshire Securities Corporation.

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<PAGE>
LEGAL MATTERS

The validity of the Common Stock being offered by this Prospectus will be
passed upon for the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York,
New York. Certain legal matters will be passed upon for the Underwriters by
Brock Fensterstock Silverstein McAuliffe & Wade LLC, New York, New York.

EXPERTS

The audited financial statements in this Prospectus and elsewhere in the
registration statement of which this Prospectus is a part have been audited by
Lurie, Besikof, Lapidus & Co., LLP, independent public accountants, as indicated
in their reports with respect to those financial statements, and are included in
this Prospectus in reliance upon the authority of that firm as experts in giving
such reports.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in the Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following general economic and business conditions: the loss
of, or the failure to replace, any significant customers; changes in business
strategy or development plans; the timing and success of new product
introductions; the quality of management; the availability, terms and deployment
of capital; the business abilities and judgments of personnel; the availability
of qualified personnel; and other factors referenced in this Prospectus. These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Shares offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares offered hereby, reference
is made to the Registration Statement. Statements contained in this Prospectus
as to the contents of any contract or other document that has been filed as an
exhibit to the Registration Statement are qualified in their entirety by
reference to such exhibits for a complete statement of their terms and
conditions. The Company also files periodic reports and other information
required to be filed pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Registration Statement and such periodic reports and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington,
D.C. 20549 or at certain of the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed
by the Commission. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov) through which the Registration Statement and the Company's
periodic reports and other information can be retrieved.

The Common Stock is quoted on the Nasdaq National Market under the symbol
"LVEL." Reports and other information concerning the Company may be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.

44
<PAGE>
GLOSSARY

API

Application Program Interface. The software that creates the visual
presentation on a computer screen.

CICS

Specialized software sold by IBM that acts as a transaction monitor to
control access to data and to provide communications.

CORBA

Common Object Request Broker Architecture. A standard for distributed
objects established by the Object Management Group, an affiliation of software
suppliers and customers.

DISTRIBUTED OBJECTS

A group of objects that follow rules that are standard within the computer
programming industry, such that individual objects can be readily shared by
different applications or computers.

DEC VMS

A computer operating system sold by Digital Equipment Corporation for use on
its computers.

DOT/XM

Distributed Object Transactions. The current name for Level 8's product
which combines third-party transactional messaging and distributed object
products in a Level 8 designed tool that facilitates integration of legacy
systems into modern, open systems architectures, by representing the legacy
systems as a collection of objects.

ENTERPRISE MESSAGING

The use of transactional messaging software to allow messages to be sent to
all computer systems in a company.

FALCON

The current name used by Microsoft for Microsoft's product that provides
transactional messaging within the Microsoft environment.

FALCON EXTERNAL GATEWAYS

The current name used by Level 8 for the products developed by Level 8 to
provide gateways between Falcon running in the Microsoft environment and other
software running in the non-Microsoft environment.

FRONT-END CLIENT

Desktop software applications that are the visual interface to server
programs.

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<PAGE>
JAVA

A computer programming language developed by Sun Microsystems, Inc., and
typically used in an internet environment, that allows application programs to
be written which are portable across different hardware platforms.

LEGACY SYSTEM

A term used to describe the centralized computer systems that typically
exist in large companies, in comparison with the newer, and often distributed,
client-server systems. Typically they are mainframe computers that run most of
the programs and store most of the data used in the operations of a company.

MESSAGING GATEWAYS

Specialized software that translates from one messaging protocol to another.

MIDDLEWARE

Various types of software that facilitate communication among otherwise
incompatible hardware and software.

MRP II

Manufacturing Resource Planning. An integrated application software package
used by manufacturers to manage their manufacturing operations and to report
financial results.

MQSECURE

A transactional messaging security product.

MVS

A computer operating system sold by IBM for use on IBM mainframe computers.

OBJECT

A grouping of software code with associated data that is designed for a
particular purpose.

ORB

Object Request Broker. Specialized software that manages the availability of
software objects for use by various applications.

ORBIX

Iona Corporation's implementation of an ORB that meets the CORBA standard.

PORTED

The process of converting the software code of a product so that the product
operates on a new hardware platform.

THREE-TIER ARCHITECTURE

A computer system architecture that consists of personal computers (the
front-end clients) connected to servers (the middle tier) which communicate with
legacy systems (back-end systems).

TRANSACTIONAL MESSAGING

Specialized middleware that stores and sends discrete computer messages
reliably and securely between computers that utilize different hardware and
software.

46
<PAGE>
INDEX TO FINANCIAL STATEMENTS

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES:

Independent Auditor's Report............................................................................... F-2

Consolidated balance sheets as of December 31, 1995 and 1994 and September 30, 1996 (unaudited)............ F-3

Consolidated statements of operations for the years ended December 31, 1993, 1994, and 1995 and the nine
months ended September 30, 1995 and 1996 (unaudited)..................................................... F-4

Consolidated statements of changes in shareholders' equity for the years ended December 31, 1993, 1994, and
1995 and the nine months ended September 30, 1996 (unaudited)............................................ F-5

Consolidated statements of cash flows for the years ended December 31, 1993, 1994, and 1995 and the nine
months ended September 30, 1995 and 1996 (unaudited)..................................................... F-6

Notes to consolidated financial statements................................................................. F-8
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
Level 8 Systems, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of LEVEL 8
SYSTEMS, INC. (formerly Across Data Systems, Inc.) AND SUBSIDIARIES as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LEVEL 8
SYSTEMS, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

LURIE, BESIKOF, LAPIDUS & CO., LLP

Minneapolis, Minnesota
January 26, 1996 (except for Note 13,
as to which the date is September 9, 1996
and except for the last sentence of Note 13,
as to which the date is November 8, 1996)

F-2
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30
1994 1995 1996
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents................................................... $ 691,305 $ 3,147,509 $2,600,756
Marketable securities....................................................... -- 2,044,962 2,497,493
Accounts receivable, less allowance for doubtful accounts of $56,000,
$75,000 and $159,000, respectively........................................ 533,802 1,423,603 2,351,592
Income taxes receivable..................................................... -- -- 597,473
Inventory................................................................... 63,687 125,334 166,471
Prepaid expenses and other assets........................................... 70,216 157,054 265,488
Deferred income taxes....................................................... 266,700 268,000 86,500
---------- ----------- ------------
TOTAL CURRENT ASSETS.................................................... 1,625,710 7,166,462 8,565,773
---------- ----------- ------------
PROPERTY AND EQUIPMENT........................................................ 287,260 586,881 969,933
---------- ----------- ------------
OTHER ASSETS
Excess of cost over net assets of businesses acquired, net.................. 841,743 3,717,393 2,320,839
Service contracts acquired, net............................................. 2,372,532 2,016,850 1,861,371
Software development costs, net............................................. 704,773 1,505,169 2,242,969
Deferred income taxes....................................................... -- 26,400 --
Deposits and deferred costs................................................. 16,820 40,043 60,038
---------- ----------- ------------
3,935,868 7,305,855 6,485,217
---------- ----------- ------------
$5,848,838 $15,059,198 $16,020,923
---------- ----------- ------------
---------- ----------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Current maturities of long-term debt........................................ $ 71,008 $ 36,131 $ 8,593
Current maturities of loan from related company............................. -- 117,000 122,000
Accounts payable............................................................ 538,905 514,249 1,452,720
Accrued expenses............................................................ 345,730 444,841 618,707
Due to former shareholders of acquired subsidiary........................... 211,107 -- --
Income taxes payable........................................................ 302,926 88,412 --
Customer deposits........................................................... 289,838 213,221 204,606
Deferred revenue............................................................ 1,545,490 1,648,987 1,542,982
---------- ----------- ------------
TOTAL CURRENT LIABILITIES............................................... 3,305,004 3,062,841 3,949,608
---------- ----------- ------------
OTHER LIABILITIES
Long-term debt, net of current maturities................................... 19,053 43,975 26,009
Loans from related companies, net of current maturities..................... 2,015,165 453,847 360,685
Deferred income taxes....................................................... -- -- 8,300
Minority interest........................................................... 19,887 -- --
---------- ----------- ------------
2,054,105 497,822 394,994
---------- ----------- ------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value (authorized--1,000,000 shares; no shares
issued and outstanding)................................................... -- -- --
Common stock, $.01 par value (authorized--15,000,000 shares; issued and
outstanding--3,009,119, 5,922,410 and 6,230,335, respectively)............ 16,710 59,224 62,303
Additional paid-in capital.................................................. -- 10,371,302 13,020,141
Retained earnings (deficit)................................................. 478,173 1,096,222 (1,400,421)
Unearned compensation....................................................... -- (33,323) (5,702)
Foreign currency translation adjustments.................................... (5,154) 5,110 --
---------- ----------- ------------
489,729 11,498,535 11,676,321
---------- ----------- ------------
$5,848,838 $15,059,198 $16,020,923
---------- ----------- ------------
---------- ----------- ------------
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Consulting and service..................... $ 1,312,935 $ 2,574,108 $ 7,060,590 $ 4,572,754 $ 6,981,241
Software................................... -- 896,268 2,257,286 1,700,999 2,243,431
Other...................................... -- 126,226 821,148 1,371,752 561,046
----------- ----------- ----------- ----------- ------------
1,312,935 3,596,602 10,139,024 7,645,505 9,785,718
----------- ----------- ----------- ----------- ------------
COST OF REVENUE
Consulting and service..................... 809,286 1,428,400 3,571,535 2,208,452 3,462,191
Software................................... -- 162,090 341,655 248,567 1,688,561
Other...................................... -- 111,927 601,017 780,554 412,146
----------- ----------- ----------- ----------- ------------
809,286 1,702,417 4,514,207 3,237,573 5,562,898
----------- ----------- ----------- ----------- ------------
GROSS MARGIN................................. 503,649 1,894,185 5,624,817 4,407,932 4,222,820
----------- ----------- ----------- ----------- ------------
OPERATING EXPENSE
Selling, general and administrative
expense.................................. 532,305 1,173,071 4,205,943 2,962,315 4,870,391
Amortization of goodwill and service
contracts acquired....................... -- 54,724 575,095 370,742 479,076
----------- ----------- ----------- ----------- ------------
532,305 1,227,795 4,781,038 3,333,057 5,349,467
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS) BEFORE LOSS ON SALE
OF SUBSIDIARY.............................. (28,656) 666,390 843,779 1,074,875 (1,126,647)
LOSS ON SALE OF SUBSIDIARY................... -- -- -- -- 1,484,061
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)...................... (28,656) 666,390 843,779 1,074,875 (2,610,708)
----------- ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest income............................ -- 677 122,994 53,602 117,014
Interest expense........................... (4,056) (8,720) (54,733) (45,724) (28,049)
Gain on settlement of accounts payable..... -- 58,330 -- -- --
----------- ----------- ----------- ----------- ------------
(4,056) 50,287 68,261 7,878 88,965
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST.......................... (32,712) 716,677 912,040 1,082,753 (2,521,743)
INCOME TAX EXPENSE (BENEFIT)................. -- 133,200 278,700 360,000 (25,100)
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE MINORITY INTEREST....... (32,712) 583,477 633,340 722,753 (2,496,643)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY................................. -- 19,887 15,291 15,291 --
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS)............................ $ (32,712) $ 563,590 $ 618,049 $ 707,462 $ (2,496,643)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE........... $ (.01) $ .15 $ .13 $ .16 $ (.42)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES..................................... 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL RETAINED CURRENCY
--------------------- PAID-IN EARNINGS UNEARNED TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION ADJUSTMENTS
---------- --------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992................ 2,911,863 $ 10 $ -- $ (52,705) $ -- $
Net loss.................................. -- -- -- (32,712) -- --
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1993................ 2,911,863 10 -- (85,417) -- --
Common stock issued....................... 97,256 16,700 -- -- -- --
Net income................................ -- -- -- 563,590 -- --
Foreign currency translation adjustment... -- -- -- -- -- (5,154)
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1994................ 3,009,119 16,710 -- 478,173 -- (5,154)
Common stock issued....................... 19,801 3,400 -- -- -- --
Recapitalization.......................... -- 10,179 (10,179) -- -- --
Common stock issued in connection with the
Level 8 Technologies acquisition........ 525,159 5,252 1,570,225 -- -- --
Conversion of minority common shares of
ProfitKey to Level 8 shares............. 91,344 913 273,119 -- -- --
Common stock issued....................... 394,315 3,943 521,057 -- -- --
Conversion of loans from related companies
to equity............................... 471,264 4,713 2,045,287 -- -- --
Common stock issued in connection with
initial public offering................. 1,430,000 14,300 5,913,063 -- -- --
Common stock repurchased.................. (19,801) (198) (3,202) -- -- --
Exercise of stock options................. 1,209 12 988 -- -- --
Net income................................ -- -- -- 618,049 -- --
Unearned compensation related to issuance
of stock options........................ -- -- 68,285 -- (68,285) --
Adjustment of unearned compensation....... -- -- (7,341) -- 34,962 --
Foreign currency translation adjustment... -- -- -- -- -- 10,264
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1995................ 5,922,410 59,224 10,371,302 1,096,222 (33,323) 5,110
Exercise of stock options (unaudited)..... 61,125 611 41,565 -- -- --
Net loss for the nine months ended
September 30, 1996 (unaudited).......... -- -- -- (2,496,643) -- --
Adjustment of unearned compensation
(unaudited)............................. -- -- -- -- 27,621 --
Common stock issued (unaudited)........... 246,800 2,468 2,607,274 -- -- --
Foreign currency translation adjustment
(unaudited)............................. -- -- -- -- -- (5,110)
---------- --------- ------------ ------------ ------------- ------
BALANCE AT SEPTEMBER 30, 1996 (unaudited)... 6,230,335 $ 62,303 $ 13,020,141 $ (1,400,421) $ (5,702) $ --
---------- --------- ------------ ------------ ------------- ------
---------- --------- ------------ ------------ ------------- ------

TOTAL
------------
<S> <C>
BALANCE AT DECEMBER 31, 1992................ $ (52,695)
Net loss.................................. (32,712)
------------
BALANCE AT DECEMBER 31, 1993................ (85,407)
Common stock issued....................... 16,700
Net income................................ 563,590
Foreign currency translation adjustment... (5,154)
------------
BALANCE AT DECEMBER 31, 1994................ 489,729
Common stock issued....................... 3,400
Recapitalization.......................... --
Common stock issued in connection with the
Level 8 Technologies acquisition........ 1,575,477
Conversion of minority common shares of
ProfitKey to Level 8 shares............. 274,032
Common stock issued....................... 525,000
Conversion of loans from related companies
to equity............................... 2,050,000
Common stock issued in connection with
initial public offering................. 5,927,363
Common stock repurchased.................. (3,400)
Exercise of stock options................. 1,000
Net income................................ 618,049
Unearned compensation related to issuance
of stock options........................ --
Adjustment of unearned compensation....... 27,621
Foreign currency translation adjustment... 10,264
------------
BALANCE AT DECEMBER 31, 1995................ 11,498,535
Exercise of stock options (unaudited)..... 42,176
Net loss for the nine months ended
September 30, 1996 (unaudited).......... (2,496,643)
Adjustment of unearned compensation
(unaudited)............................. 27,621
Common stock issued (unaudited)........... 2,609,742
Foreign currency translation adjustment
(unaudited)............................. (5,110)
------------
BALANCE AT SEPTEMBER 30, 1996 (unaudited)... $ 11,676,321
------------
------------
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (32,712) $ 563,590 $ 618,049 $ 707,462 $(2,496,643)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation................................. 19,653 35,475 135,942 84,861 138,241
Amortization................................. -- 68,918 640,646 418,602 798,269
Loss on sale of subsidiary................... -- -- -- -- 1,484,061
Tax effect of utilizing deferred tax assets
that were reserved at date of acquisition.. -- 289,700 448,700 355,500 49,600
Expenses paid by and included in loans from
related companies.......................... -- 13,486 -- -- --
Minority interest in income of consolidated
subsidiary................................. -- 19,887 15,291 15,291 --
Accrued interest income...................... -- -- (45,190) -- --
Gain on settlement of accounts payable....... -- (58,330) -- -- --
Deferred income taxes........................ -- (266,700) (529,700) (430,300) 166,600
Gain on sale of automobile................... -- (2,099) -- -- --
Changes in operating assets and liabilities,
exclusive of those arising from business
acquisitions and sale:
Accounts receivable...................... (73,943) (46,782) 941,612 712,808 (819,696)
Unbilled revenue and client costs--
work-in-process........................ (46,885) 156,136 -- -- --
Income taxes receivable.................. -- -- -- -- (596,299)
Inventory................................ -- (11,870) (61,647) (45,478) (41,137)
Prepaid expenses and other assets........ 6,885 15,835 (77,789) (92,994) (129,667)
Deposits and deferred costs.............. -- 21,193 (19,051) -- (24,820)
Accounts payable......................... 13,253 (226,528) (252,954) (270,691) 988,071
Accrued expenses......................... (16,359) (4,134) (282,237) (302,028) 73,507
Income taxes payable..................... -- 173,175 (218,307) (72,219) (115,417)
Customer deposits........................ -- (472,086) (77,185) 10,563 (8,615)
Deferred revenue......................... -- (853) 50,757 (6,946) (105,680)
--------- ---------- ---------- ---------- -----------
Net cash provided (used) by operating
activities........................... (130,108) 268,013 1,286,937 1,084,431 (639,625)
--------- ---------- ---------- ---------- -----------
INVESTING ACTIVITIES
Purchases of marketable securities............... -- -- (1,999,772) (1,999,772) (2,497,493)
Redemption of marketable securities.............. -- -- -- -- 2,044,962
Purchases of property and equipment.............. (4,614) (68,976) (380,686) (167,569) (600,170)
Software development costs....................... -- (16,073) (836,852) (384,870) (1,509,331)
Payments to former shareholders of acquired
subsidiary..................................... -- -- (445,056) (445,056) --
Advances to former shareholders of acquired
subsidiary..................................... -- -- (294,622) (294,622) --
Payments received on advances to former
shareholders of acquired subsidiary............ -- -- 236,708 225,940 --
Cost of acquisitions............................. -- (1,190,956) (2,151,302) (2,118,217) --
Cash acquired in acquisitions.................... -- 1,439,932 5,669 5,669 --
Proceeds from sale of subsidiary................. -- -- -- -- 120,000
Employee (advances) repayments................... (11,184) 6,401 (9,033) 1,747 21,225
--------- ---------- ---------- ---------- -----------
Net cash provided (used) by investing
activities................................... (15,798) 170,328 (5,874,946) (5,176,750) (2,420,807)
--------- ---------- ---------- ---------- -----------
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
--------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................... $ -- $ -- $ 72,095 $ 31,912 $ --
Payments on long-term debt................................. (17,721) (34,118) (82,307) (60,860) (45,504)
Loans from related companies............................... 145,000 195,000 1,513,007 1,513,007 --
Payments on loans from related companies................... -- -- (907,325) (878,519) (88,162)
Net proceeds from issuance of common stock................. -- 16,700 6,455,763 6,6,73,498 2,609,742
Proceeds from exercise of stock options.................... -- -- 1,000 889 42,176
Repurchase of common stock................................. -- -- (3,400) (3,400) --
--------- --------- ----------- ----------- -----------
Net cash provided by financing activities............ 127,279 177,582 7,048,833 7,276,527 2,518,252
--------- --------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- 17,826 (4,620) 16,843 (4,573)
--------- --------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (18,627) 633,749 2,456,204 3,201,051 (546,753)
CASH AND CASH EQUIVALENTS
Beginning of year.......................................... 76,183 57,556 691,305 691,305 3,147,509
--------- --------- ----------- ----------- -----------
End of year................................................ $ 57,556 $ 691,305 $ 3,147,509 $ 3,892,356 $ 2,600,756
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 4,056 $ 8,720 $ 54,733 $ 35,801 $ 28,448
Cash paid (received) for income taxes...................... -- (63,141) 375,916 493,894 182,660

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>

In 1993, the Company entered into capital lease obligations for the purchase
of computer equipment and furniture totaling $8,666.

The Company acquired companies as follows:

<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Cost of net assets acquired (Note 2).............................. $ 2,424,275 $ 3,575,477
Additional direct costs........................................... 154,669 151,302
Common stock issued............................................... -- (1,575,477)
Paid directly by parent company (noncash)......................... (1,387,988) --
------------ ------------
Cash cost of acquisitions......................................... $ 1,190,956 $ 2,151,302
------------ ------------
------------ ------------
</TABLE>

In 1995, the Company converted $2,050,000 of loans from related companies
into 471,264 shares of common stock.

In 1996, the Company sold all the businesss of a subsidiary resulting in a
loss of $1,484,061 (unaudited) (Note 13).

See notes to consolidated financial statements.

F-7
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Level 8 Systems, Inc. (Level 8) (formerly Across Data Systems, Inc.)
develops and sells proprietary vertical application software packages and
provides software consulting and support services to customers located primarily
in the United States and Canada. On October 3, 1994, Level 8 acquired 92% (100%-
owned at April 3, 1995) of ProfitKey International, Inc. (ProfitKey). ProfitKey
provides computer consulting services and sells turnkey manufacturing resource
planning (MRP II) and scheduling software packages to manufacturing companies.
On October 28, 1994, Level 8 also incorporated a 100%-owned Canadian subsidiary,
3077934 Canada, Inc., which in turn acquired 99% (100%-owned at June 30, 1995)
of Bizware Computer Systems (Canada) Inc. (Bizware). Bizware sells software
packages that provide cost information used by the petroleum and retail
industries to manage and control individual retail outlets and groups of
outlets. Effective April 1, 1995, Level 8 acquired 100% of Level 8 Technologies,
Inc. (Level 8 Technologies) (formerly Level 8 Systems, Inc.). Level 8
Technologies specializes in transactional messaging middleware and distributed
object technology. Level 8 Technologies provides consulting services to the
financial services industry and to computer hardware and software providers, and
has begun to package portions of its distributed objects for sale to the
financial services industry. Consulting services are also provided by the A.S.U.
consulting division.

On July 27, 1995, Across completed an initial public offering of 1,430,000
shares of common stock. Liraz System Ltd. owns approximately 65% of the
Company's common stock.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Level 8, its
U.S. subsidiaries, ProfitKey and Level 8 Technologies, and its Canadian
subsidiaries, 3077934 Canada, Inc. and Bizware. All financial information of
subsidiaries is included from the date of acquisition. All intercompany accounts
and transactions are eliminated in consolidation.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The consolidated financial statements at September 30, 1996, and for the
nine months ended September 30, 1995 and 1996 are unaudited. In the opinion of
management, all adjustments which are necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods covered
were made and are of a normal, recurring nature. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of the interim periods are not necessarily indicative of the results
for the full year.

Bizware was sold on September 9, 1996. The financial statements for the nine
months ended September 30, 1996, include Bizware through the date of sale.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to the
amortization period for intangible assets, the determination of the allowance
for doubtful accounts, and the valuation allowance for deferred tax assets.

F-8
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Canadian subsidiary (Bizware) are translated
at the exchange rates in effect at the balance sheet date. Revenue and expenses
are translated at the average exchange rates prevailing during the year.
Translation adjustments arising from the use of differing exchange rates are
included in the foreign currency translation adjustments account in
shareholders' equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments consisting of cash,
receivables, long-term debt, and accounts payable approximate their fair values.
It is not practicable to determine the fair value of the loans from related
companies due to the related party nature of the transactions.

REVENUE RECOGNITION

The Company recognizes revenue from the sale of software and hardware
systems at the time of the installation of the system, provided no significant
obligations remain and collection of the resulting receivable is deemed
probable. Revenue from add-on hardware sales is recognized when the hardware is
shipped to the customer. Revenue related to service contracts is recognized
ratably over the terms of the contracts. Consulting and specialized software
development revenue is recognized in accordance with the terms of the contract.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Investments with
original maturities in excess of three months are classified as marketable
securities based on the maturity date.

Marketable securities at December 31, 1995, consisting of U.S. treasury
bills, are considered by management to be "held to maturity," and therefore are
reported at amortized cost which approximates market value. Marketable
securities at September 30, 1996, consist of U.S. government securities, are
considered to be "available for sale," and are reported at cost which
approximates fair value.

CREDIT RISKS

The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company does not believe it is exposed to any significant
credit risk on cash.

INVENTORY

Inventory is valued at the lower of cost (first-in, first-out) or market and
consists of purchased computers, software and related equipment.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the assets, primarily five to seven years.

F-9
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EXCESS OF COST OVER NET ASSETS ACQUIRED

The excess of the purchase price and related costs over the fair value of
the net assets of businesses acquired (goodwill) is being amortized on a
straight-line basis over ten and seven years for the Bizware and Level 8
acquisitions, respectively. The Company periodically assesses the recoverability
of the excess of cost over the net assets acquired by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations. Accumulated
amortization of goodwill was $14,512, $445,306, and $632,958 (unaudited) at
December 31, 1994 and 1995, and September 30, 1996, respectively.

SERVICE CONTRACTS ACQUIRED

Service contracts acquired in connection with the acquisition of ProfitKey
are amortized over 20 years based on the past history of customer retention for
service contracts and the Company's commitment to continually update their
product. Upon the cancellation of any service contract acquired, a pro rata
portion of the cost is expensed. Accumulated amortization, including termination
of service contracts, was $40,212, $185,163, and $226,920 (unaudited) at
December 31, 1994 and 1995, and September 30, 1996, respectively.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes qualifying software development costs after having
established technological feasibility and ends capitalization when the product
is available for release to customers, consistent with Statement of Financial
Accounting Standards No. 86. The Company amortizes such costs over a three-year
period or the expected useful life of the product, whichever is shorter.
Development costs which are principally attributable to enhancements and
modifications of existing products, and which are expected to provide little or
no additional revenue in future periods, are charged to current period
operations. Accumulated amortization was $14,394, $-0-, and $264,379 (unaudited)
at December 31, 1994 and 1995, and September 30, 1996, respectively.
Amortization of in-process software development costs totaling $1,505,169 has
not begun as of December 31, 1995.

UNDISTRIBUTED EARNINGS OF FOREIGN SUBSIDIARIES

It is the intent of management to permanently reinvest the earnings of its
foreign subsidiaries. Therefore, no deferred taxes are provided for U.S. taxes
on these earnings.

NET INCOME (LOSS) PER COMMON SHARE

Primary earnings per share is determined by dividing the net income (loss)
by the weighted average number of shares of common stock outstanding and
dilutive common equivalent shares from stock options and warrants. Prior to the
initial public offering, in accordance with Securities and Exchange Commission
Regulations, common equivalent shares issued by the Company during the
twelve-month period immediately preceding the Company's initial public offering
were included in the calculation of shares used in computing net income (loss)
per share as if they were outstanding for all periods presented, using the
treasury stock method, even if the effect was anti-dilutive.

RECLASSIFICATIONS

Certain reclassifications were made to the prior period financial statements
to present them on a basis comparable with the current period. The
reclassifications had no effect on previously reported net income or
stockholders' equity.

F-10
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. ACQUISITIONS

Effective April 1, 1995, the Company purchased all of the stock of Level 8
Technologies Inc. (Level 8 Technologies) for cash of $2,000,000 and 525,159
shares of common stock valued at $1,575,477 ($3.00 per share). Employees and
shareholders of Level 8 Technologies also received options to purchase an
aggregate of 39,164 shares at $1.37 per share and an aggregate of 116,707 shares
at $5.00 per share, respectively. Additional direct costs of the acquisition
totaled $132,032. Level 8 Technologies was incorporated and commenced operations
on February 24, 1994. The acquisition was accounted for as a purchase and,
accordingly, the 1995 consolidated statement of operations includes the results
of Level 8 Technologies since the date of acquisition.

The cost was allocated as follows:

<TABLE>
<S> <C>
Cash............................................................ $ 5,669
Accounts receivable............................................. 1,826,602
Property and equipment.......................................... 53,626
Excess of cost over net assets acquired......................... 2,828,391
Accounts payable and accrued expenses........................... (586,811)
Other liabilities, primarily deferred income taxes.............. (552,000)
---------
Cost of net assets acquired..................................... $3,575,477
---------
---------
</TABLE>

On October 3, 1994, the Company purchased approximately 93% of the
outstanding Class A preferred stock of ProfitKey International, Inc. (ProfitKey)
and became its majority shareholder. Subsequent to this transaction, the Company
purchased additional common and preferred stock to increase its ownership to
approximately 92% of all outstanding stock. The total cash cost of the stock was
$1,313,075, plus direct costs of the acquisition of $110,900. Service contracts
acquired resulting from the acquisition totaled $2,702,654, including direct
costs. This amount was subsequently reduced by $448,700 and $289,700,
respectively, which represents the 1995 and 1994 effect of utilizing acquired
deferred tax assets for which a valuation allowance had been recognized at the
acquisition date. The amount was further reduced by $39,512 in 1995 which
represents the pro rata portion of the cancelled service contracts acquired. The
Company also entered into an exchange agreement with the remaining preferred
shareholders requiring that all outstanding preferred shares (including those
owned by the Company) be converted into common shares at specified exchange
rates. As of December 31, 1994, all preferred stock was converted into common
stock. On April 3, 1995, the minority common shares of ProfitKey were converted
into Level 8 shares resulting in 100% ownership by the Company.

On October 28, 1994, the Company purchased, through a wholly-owned Canadian
subsidiary incorporated in 1994, 99% of the stock of Bizware Computer Systems
(Canada) Inc. (Bizware) for cash of $1,111,200, plus direct costs of the
acquisition of $63,039, and agreed to pay up to an additional $740,800. The
additional consideration represented 50% of the gross proceeds Bizware could
have received from a customer during the period October 15, 1994 to June 30,
1995. During 1995 and 1994, additional contingent consideration in connection
with the Bizware acquisition totaled $311,649 and $211,017, respectively, and
increased goodwill. Goodwill resulting from this acquisition totaled $1,208,902
and $879,885 at December 31, 1995 and 1994, respectively, including the
additional consideration.

F-11
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. ACQUISITIONS (CONTINUED)
The ProfitKey and Bizware acquisitions were accounted for as purchases and,
accordingly, the 1994 consolidated statement of operations includes the results
of operations of these companies since their respective acquisition dates. The
purchase price was allocated to the net assets acquired based on their estimated
fair market values at the acquisition dates, and the excess to service contracts
acquired and to goodwill.

The assets and liabilities of ProfitKey and Bizware recorded as of the
acquisition dates are summarized as follows:

<TABLE>
<CAPTION>
PROFITKEY BIZWARE TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Cash.................................................................. $ 183,368 $ 1,256,564 $ 1,439,932
Other current assets.................................................. 392,394 58,770 451,164
Property and equipment................................................ 227,212 37,256 264,468
Software development costs............................................ 643,819 6,372 650,191
Excess of cost over net assets acquired............................... -- 625,009 625,009
Service contracts acquired............................................ 2,591,754 -- 2,591,754
Deposits.............................................................. 32,738 -- 32,738
Current liabilities................................................... (2,722,238) (872,771) (3,595,009)
Long-term debt........................................................ (35,972) -- (35,972)
------------- ------------ -------------
Cost of net assets acquired........................................... $ 1,313,075 $ 1,111,200 $ 2,424,275
------------- ------------ -------------
------------- ------------ -------------
</TABLE>

The following unaudited pro forma financial information shows the results of
operations of the Company as if the Level 8 Technologies, ProfitKey, and Bizware
acquisitions had all occurred on January 1, 1994. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred,
nor is it necessarily indicative of future results of operations of the
consolidated companies.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Revenue........................................................ $ 14,722,500 $ 12,080,000
Net income..................................................... $ 1,100,900 $ 798,200
Net income per common share.................................... $ .29 $ .17
Weighted average common and common equivalent shares........... 3,839,166 4,777,758
</TABLE>

F-12
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment........................................................ $ 328,474 $ 598,169 $ 878,582
Furniture................................................................. 33,477 88,921 189,095
Office equipment.......................................................... 37,467 111,910 164,954
Leasehold improvements.................................................... 2,141 48,236 50,909
---------- ---------- -------------
401,559 847,236 1,283,540
Less accumulated depreciation............................................. 114,299 260,355 313,607
---------- ---------- -------------
$ 287,260 $ 586,881 $ 969,933
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accrued compensation...................................................... $ 114,092 $ 287,418 $ 205,455
Accrued consulting and professional fees.................................. 105,592 10,994 119,269
Accrued costs of sold subsidiary.......................................... -- -- 203,000
Other accrued expenses.................................................... 126,046 146,429 90,983
---------- ---------- -------------
$ 345,730 $ 444,841 $ 618,707
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

5. LONG-TERM DEBT

Long-term debt consists of various bank and finance company loans, bearing
interest at 10.5% to 18.4%, and are collateralized by equipment. Future
maturities of long-term debt are as follows: 1996-- $36,131; 1997--$17,771;
1998--$11,399; 1999--$9,193; 2000--$5,612.

6. TRANSACTIONS WITH RELATED COMPANIES

Loans from Liraz Systems Ltd. (Liraz) and Liraz Export (1990) Ltd.
(significant shareholders) totaling $3,528,172 were noninterest bearing through
June 30, 1995. On July 1, 1995, the Company converted $2,050,000 of these loans
to equity by issuing 471,264 shares of common stock. The Company paid $250,000
on the loan in April 1995 and made an additional payment of $600,000 from the
initial public offering proceeds in July 1995.

The remaining balance owed to Liraz was converted to a note due in equal
quarterly installments of $34,810, including interest at 4%. Interest expense on
the loan was $12,319 for the year ended December 31, 1995, and $16,290
(unaudited) for the nine months ended September 30, 1996.

F-13
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. TRANSACTIONS WITH RELATED COMPANIES (CONTINUED)
Future maturities of the loan are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
------ ----------
<S> <C>
1996.......................................................... $ 117,000
1997.......................................................... 124,096
1998.......................................................... 127,964
1999.......................................................... 133,177
2000.......................................................... 68,610
----------
$ 570,847
----------
----------
</TABLE>

In December 1995, the Company and Liraz entered into a development agreement
for the joint development of certain software for a Microsoft contract obtained
in July 1995. Liraz and the Company will each pay 50% of the total project
development costs. In exchange for providing 50% of the project development
costs, Liraz will receive royalties of 30% of the first $2,000,000 in contract
revenue, 20% of the next $1,000,000, and 8% thereafter.

In addition, the Company and Liraz were awarded an Israel - U.S. Binational
Industrial Research and Development Foundation ("BIRD") grant totaling $432,000.
The BIRD grant will reimburse up to 50% of the development costs of the above
project. Once the products are sold, BIRD will be paid a royalty of 2.5% of
related sales in the first year and 5% in subsequent years until BIRD has
recovered 110% to 150% (depending on the elapsed time) of its payments. The
Company estimates its 50% share of the total project development costs to be
$600,000 before reimbursement of the BIRD Funds of $216,000. The Company is
capitalizing the software development costs associated with the project and will
reduce the capitalized costs by any grant funds received from BIRD. No funds
were received as of December 31, 1995. As of September 30, 1996, the Company had
capitalized approximately $334,700 (unaudited) before reimbursement of BIRD
funds totaling approximately $48,300 (unaudited).

7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS

PREFERRED STOCK

On May 31, 1995, the Board of Directors and on June 16, 1995, the
shareholders authorized the Company to issue up to 1,000,000 shares of preferred
stock, $.01 par value. No shares are issued or outstanding.

COMMON STOCK

On March 10, 1995, the Board of Directors and shareholders voted to change
the no par value common stock to $.01 par value, to increase the authorized
common stock from 200 shares to 8,000,000 shares, and to declare a stock split
resulting in the issuance of 200,000 shares for each share outstanding at the
time. On May 12, 1995, the Board of Directors authorized a 1.45593157 to 1
common stock split. Accordingly, all share information was retroactively
adjusted to reflect the recapitalization and stock splits. On May 31, 1995, the
Board of Directors and on June 16, 1995, the shareholders approved an increase
in the authorized shares of common stock from 8,000,000 shares to 15,000,000
shares.

On April 3, 1995, minority common shares of ProfitKey totaling 1,254,725
were converted into 91,344 common shares of Level 8 at an exchange rate of 13.74
shares of ProfitKey stock for one share of Level 8

F-14
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS (CONTINUED)
stock. The effect of the conversion increased service contracts acquired by
$238,854, common stock by $913 and additional paid-in capital by $273,119, and
reduced minority interest by $35,178.

On July 27, 1995, the Company completed its public offering of 1,430,000
shares (including 30,000 shares sold pursuant to the underwriter's exercise of
its over-allotment option) at a price of $5.50 per share. The proceeds from the
initial public offering totaled $7,865,000 before expenses of $1,937,637.

In July 1996, the Company sold 246,800 shares of common stock to Candle
Corporation at $11.00 per share (before costs of sale of $.43 per share).

UNEARNED COMPENSATION

Unearned compensation relates to stock options issued to employees and
represents the difference between the fair market value of the stock at the
grant date and the price to be paid by the officer or employee. The original
amount of unearned compensation was $68,285. Compensation is recognized as an
expense over the period the employee performs related services. Compensation
expense was $27,621 for the year ended December 31, 1995, and $18,414
(unaudited) and $27,621 (unaudited) for the nine months ended September 30, 1995
and 1996.

STOCK OPTIONS

On February 2, 1995, the Company adopted the 1995 Stock Incentive Plan,
which permits the issuance of incentive and nonstatutory stock options, stock
appreciation rights, performance shares, and restricted and unrestricted stock
to employees, officers, directors, consultants and advisors. The Plan reserves
900,000 shares of common stock for grant and provides that the term of each
award be determined by the Board of Directors.

Under the terms of the Plan, the exercise price of the incentive stock
options may not be less than the fair market value of the stock on the date of
the award, and the options are exercisable for a period not to exceed five years
from date of grant. Stock appreciation rights entitle the recipients to receive
the excess of the fair market value of the Company's stock on the exercise date,
as determined by the Board of Directors, over the fair market value on the date
of grant. Performance shares entitle recipients to acquire Company stock upon
the attainment of specific performance goals set by the Board of Directors.
Restricted stock entitles recipients to acquire Company stock subject to the
right of the Company to repurchase the shares in the event conditions specified
by the Board are not satisfied prior to the end of the restriction period. The
Board may also grant unrestricted stock to participants at a cost not less than
85% of fair market value on the date of sale.

F-15
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS (CONTINUED)
Stock option activity during the year ended December 31, 1995, was as
follows:

<TABLE>
<CAPTION>
OPTION PRICE PER
OPTIONS SHARE
--------- ---------------------
<S> <C> <C>
Options outstanding at December 31, 1994.................... -- --
Granted..................................................... 432,459 $ .69--$6.60
ProfitKey options converted................................. 72,742 $.69
Exercised................................................... (1,209) $.69
Terminated.................................................. (14,314) $ .69--$1.37
---------
Options outstanding at December 31, 1995.................... 489,678 $ .69--$6.60
---------
---------
Options exercisable at December 31, 1995, totaled 119,759.
</TABLE>

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION, which encourages, but does not require, a fair value based method
of accounting for employee stock options. As permitted under the new standard,
the Company will continue to account for employee stock options under APB No.
25. The proforma disclosures required by this standard will be adopted for the
year ending December 31, 1996.

STOCK WARRANTS

In connection with the renegotiation of ProfitKey's bank loan in 1992,
warrants were issued to the bank to purchase 85,000 shares of ProfitKey's common
stock at a price of $.50 per share. On April 3, 1995, the warrants were
converted into 6,188 Level 8 stock warrants at an exchange rate of 13.74
ProfitKey stock warrants for one Level 8 stock warrant. The warrants are
exercisable at $6.87 per share and expire on March 31, 1997.

In connection with the initial public offering, the Company sold 140,000
warrants to the underwriter for $140. These warrants are exercisable for four
years, commencing one year from the effective date of the initial public
offering, at an exercise price of $7.425 per share.

F-16
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 320,600 $ 161,900 $ (119,400)
State................................................ -- 20,000 60,000 52,000 (21,100)
Foreign.............................................. -- 90,200 (20,900) 31,400 (100,800)
---------- ---------- ----------- ----------- -----------
-- 110,200 359,700 245,300 (241,300)
---------- ---------- ----------- ----------- -----------
Deferred:
Federal.............................................. -- 4,800 (141,100) 89,100 256,000
State................................................ -- 18,200 (24,900) 25,600 45,200
-- -- 85,000 -- (85,000)
---------- ---------- ----------- ----------- -----------
-- 23,000 (81,000) 114,700 216,200
---------- ---------- ----------- ----------- -----------
$ -- $ 133,200 $ 278,700 $ 360,000 $ (25,100)
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>

Income tax expense (benefit) computed at the statutory federal income tax
rate is as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at statutory federal rate--34%..................... $ (11,100) $ 243,600 $ 310,100 $ 368,100 $ (857,400)
State taxes............................................ -- (19,700) 17,900 45,300 23,000
Effect of foreign tax rates and credits................ -- (40,400) (126,100) (137,700) (61,800)
Change in deferred tax asset valuation allowance....... -- -- (129,000) (46,400) 177,200
Net operating loss carryforward not recognized
(utilized) for financial statement purposes.......... 11,100 (87,700) -- -- 42,200
Rate differences....................................... -- 19,600 38,800 -- --
Nondeductible goodwill amortization.................... -- 13,900 159,100 102,500 136,500
Nondeductible loss on sale of foreign subsidiary....... -- -- -- -- 487,100
Other.................................................. -- 3,900 7,900 28,200 28,100
---------- ---------- ----------- ----------- -----------
Income tax expense (benefit)........................... $ -- $ 133,200 $ 278,700 $ 360,000 $ (25,100)
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>

F-17
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)
Significant components of the net deferred tax asset (liability) are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1994 1995 SEPTEMBER 30, 1996
------------------------ ------------------------ ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts
receivable........................... $ 7,400 $ -- $ 22,600 $ -- $ 63,600 $ --
Accrued expenses not currently
deductible for tax purposes.......... 100,200 -- 63,300 -- 76,600 --
Deferred revenue....................... 497,500 -- 451,200 -- 445,700 --
Net operating loss carryforwards....... 115,600 405,400 35,200 370,200 35,200 334,800
Unearned compensation.................. -- -- -- 11,000 -- 22,000
Depreciation and amortization.......... 10,500 -- -- -- -- --
Amounts not currently deductible due to
filing cash basis tax return......... 43,400 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
774,600 405,400 572,300 381,200 621,100 356,800
----------- ----------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Depreciation and amortization.......... -- -- (39,200) (98,300) -- (356,900)
Change from cash to accrual basis...... -- -- (265,100) (12,900) (82,500) (8,200)
Amounts not currently taxable due to
filing cash basis tax return......... (69,200) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
(69,200) -- (304,300) (111,200) (82,500) (365,100)
----------- ----------- ----------- ----------- ----------- -----------
Deferred tax asset valuation allowance... (438,700) (405,400) -- (243,600) (452,100) --
----------- ----------- ----------- ----------- ----------- -----------
Net deferred tax asset (liability)....... $ 266,700 $ -- $ 268,000 $ 26,400 $ 86,500 $ (8,300)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>

No provision has been made for U.S. taxes on approximately $794,000 of
undistributed earnings of its foreign subsidiary as those earnings are
considered to be reinvested in the subsidiary's operations. It is not practical
to estimate the tax that might be payable on the eventual remittance of such
earnings.

At December 31, 1995, the Company has approximately $987,000 of net deferred
timing differences from the ProfitKey acquisition. If future tax benefits of
these deferred timing differences are realized, the tax benefit of approximately
$400,000 will be used to reduce the goodwill resulting from this acquisition.

At December 31, 1995, the Company has approximate net operating loss
carryforwards of $1,014,000 from the acquisition of ProfitKey, which may be
applied against future taxable income. Under Internal Revenue Code Section 382,
as a result of the change in controlling interest of ProfitKey, the Company's
ability to utilize these acquired net operating loss carryforwards is limited to
approximately $88,000 each year. The carryforwards are cumulative if not
utilized each year and expire primarily in the year 2008.

F-18
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. OPERATING LEASES

The Company leases its office facilities under four operating leases
expiring through November 2000. The leases provide for base monthly rents
totaling approximately $29,200 plus an adjustment based on the increase in
operating expenses or lessor's property taxes over the base amounts, as defined
in the leases. One lease contains a three-year renewal option at a rent to be
determined by the parties and another lease contains an option to renew for an
additional five years.

Rent expense was approximately $36,700, $80,100, $271,900, $231,100
(unaudited) and $337,300 (unaudited) for the years ended December 31, 1993,
1994, and 1995, and the nine months ended September 30, 1995 and 1996,
respectively.

Approximate future minimum lease payments are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1996.......................................................... $ 336,900
1997.......................................................... 136,300
1998.......................................................... 123,700
1999.......................................................... 123,700
2000.......................................................... 123,600
Thereafter.................................................... 20,600
----------
$ 864,800
----------
----------
</TABLE>

10. GAIN ON SETTLEMENT OF ACCOUNTS PAYABLE

In 1994, the Company agreed to settle various vendor claims totaling
$129,366 for $71,036. These settlements resulted in a gain on the settlement of
accounts payable of $58,330.

11. SIGNIFICANT CUSTOMERS

Information regarding revenue from significant customers is as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A............................... 60.1% 24.0% -- -- --
Customer B............................... -- 11.8% -- -- --
Customer C............................... -- -- -- 10.0% --
Customer D............................... -- -- -- -- 13.4%
</TABLE>

12. FOREIGN OPERATIONS

The Company's foreign operations consist of the operations of Bizware, a
Canadian subsidiary, acquired October 28, 1994. All Bizware sales were to
customers located in North America. Financial

F-19
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. FOREIGN OPERATIONS (CONTINUED)
information as of and for the years ended December 31, 1993, 1994, and 1995 and
as of and for the periods ended September 30, 1995 and 1996, is as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- ---------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ -- $ 565,400 $ 1,405,900 $ 1,192,900 $ 351,000
Operating income................................ -- 378,200 581,900 521,100 (357,000)
Identifiable assets............................. -- 309,000 706,600 661,800 --
</TABLE>

13. SUBSEQUENT EVENTS

SALE OF SUBSIDIARY--BIZWARE

On September 9, 1996, the Company sold Bizware for $230,000, resulting in a
loss on the sale of the subsidiary of $1,484,601. The sales price consisted of
$120,000 in cash and a $110,000 receivable due in six equal monthly installments
through March 1997. In connection with the sale, the Company wrote off goodwill
of $997,027, software development costs of $479,961, property and equipment of
$78,877, and other costs were accrued or expended in connection with the sale
totaling $158,196.

EMPLOYEE BENEFIT PLAN

The Company adopted a 401(k) retirement plan for qualified employees. The
Company has not made any contributions to the plan.

EMPLOYMENT AGREEMENTS

The Company signed employment agreements with four officers of the Company
for salaries totaling $475,000 annually through May 1998, plus performance
bonuses for three of the officers. Also, options for 250,000 shares of common
stock were issued to the President of the Company on November 8, 1996.

F-20
<PAGE>
INSIDE BACK PAGE

[DIAGRAM SHOWING LEVEL 8 SOFTWARE ENVIRONMENT AND
COLOR CODED TO SHOW AREAS IN WHICH LEVEL 8 IS OPERATING.]
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 6
Use of Proceeds.................................... 11
Market Price of Common Stock and Dividend Policy... 11
Capitalization..................................... 12
Pro Forma Selected Consolidated Statements of
Operations....................................... 13
Selected Consolidated Financial Data............... 16
Management's Discussion and Analysis of Financial
Condition and Results of
Operations....................................... 17
Business........................................... 21
Management......................................... 28
Certain Relationships and Related
Transactions..................................... 34
Principal and Selling Shareholders................. 36
Shares Eligible for Future Sale.................... 38
Description of Securities.......................... 40
Underwriting....................................... 42
Legal Matters...................................... 44
Experts............................................ 44
Special Note Regarding Forward-Looking
Statements....................................... 44
Available Information.............................. 44
Glossary........................................... 45
Index to Financial Statements...................... F-1
</TABLE>

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

1,100,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

HAMPSHIRE SECURITIES
CORPORATION
DECEMBER 17, 1996

- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses (other than Underwriters'
expenses and discounts and commissions) in connection with the sale and
distribution of the securities being registered in the offering described in
this Registration Statement, all of which are payable by the Company. All
amounts shown are estimates except the Securities and Exchange Commission
registration fee and the NASD registration fee:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 4,850
National Association of Securities Dealers, Inc. registration
fee.......................................................... 13,961
Legal fees and expenses........................................ 120,000
Blue Sky fees and expenses..................................... 6,000
Printing and engraving expenses................................ 70,000
Transfer agent and registrar fees.............................. 10,000
Marketing expenses............................................. 100,000
Consulting fees................................................ 50,000
Performance bonuses............................................ 150,000
Miscellaneous.................................................. 45,189
----------
Total...................................................... $ 570,000
----------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under the Underwriting Agreement filed as an exhibit to the Registration
Statement, the Underwriters are obligated under certain circumstances to
indemnify certain controlling persons of the Company against certain
liabilities, including liabilities under the Securities Act of 1933.

The Amended Certificate of Incorporation provides that a director of the
Company shall not be liable to the Company or its shareholders for damages for
any breach of duty in such capacity except for: (i) liability if a judgment or
other final adjudication adverse to a director establishes that his or her acts
or omissions were in bad faith or involved intentional misconduct or a knowing
violation of law or that the director personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled or that
the director's acts violated Section 719 of New York Business Corporation law,
or (ii) liability for any act or omission prior to the adoption of the
indemnification provision in the Certificate of Incorporation.

The Company's Bylaws further provide for indemnification of directors and
officers of the Company to the fullest extent permitted by New York law. Section
722 of the New York Business Corporation Law provides, in substance, that New
York corporations may indemnify their directors and officers in connection with
actions or proceedings (other than one by or in the right of the corporation to
procure a judgment in its favor) brought against such directors or officers,
including actions brought against such directors or officers by or in the right
of any other corporation, by reason of the fact that they are or were such
directors or officers, against judgments, fines, amounts paid in settlement and
reasonable expenses.

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

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information reflects sales by the Company of unregistered
securities within the past three years and reflects a 1.45593157 to 1 stock
split. The issuances by the Registrant of the securities sold in the
transactions referenced below were not registered under the 1933 Act in reliance
on the exemption in Section 4(2) of the 1933 Act.

1. On or about December 31, 1994, the Company sold to its president and
chief executive officer and to the three senior executives of one of the
Company's principal business units an aggregate of 117,058 shares of Common
Stock for approximately $.17 a share.

2. On March 29, 1995, the Company sold to eight senior executives of Liraz
Systems Ltd., the Company's parent, an aggregate of 30,331 shares of Common
Stock for approximately $.82 a share.

3. On March 30, 1995, the Company sold to Liraz Systems Ltd. 363,983 shares
of Common Stock for approximately $1.37 a share.

4. Effective April 1, 1995, the Company issued to the eight shareholders of
Level 8 Systems, Inc. (two of whom became senior executives and directors of the
Company, and the remainder of whom are otherwise sophisticated investors) an
aggregate of 525,159 shares of Common Stock as partial consideration for the
Company's acquisition of Level 8 Systems, Inc.

5. On April 3, 1995, the Company issued to the 41 former minority
shareholders of ProfitKey International, Inc. (substantially all of whom are
employees or former employees, or family members of employees or former
employees, of ProfitKey International, Inc.), one of the Company's principal
business units, an aggregate of 91,344 shares of Common Stock pursuant to the
merger of ProfitKey International, Inc. with a subsidiary of the Company.

6. On July 26, 1996, the Registrant sold to Candle Corporation 246,800
shares of Common Stock for $11.00 per share.

II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>

1.1 Form of Underwriting Agreement. (1)

2.1 Agreement of Sale of Asset, effective September 9, 1996, between Bizware and 3203174 Canada, Inc. (2)

3.1 Restated Certificate of Incorporation of Registrant, as amended. (1)

3.2 By-Laws of Registrant. (3)

5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP as to the legality of the securities being
registered.

10.1 1995 Stock Incentive Plan, as amended. (1)

10.2 Stock Purchase Warrant issued by ProfitKey to Fleet Bank-NH for 85,000 shares of common stock of
ProfitKey dated January 28, 1992. (3)

10.3 Letter of agreement, dated May 14, 1993, between Fleet Bank-NH and ProfitKey. (3)

10.4 Consulting Services Agreement, dated March 17, 1994, between Norwest Technical Services, Inc. and
Level 8. (3)

10.5 Letter of Engagement, dated August 16, 1994, between Norwest Mortgage, Inc. and Level 8. (3)

10.6 Stock Purchase Agreement, dated September 28, 1994 among Liraz, R.W. Allsop & Associates II, L.P.,
HLM Partners, L.P., Kitty Hawk Capital, Ltd. and the United States Small Business Administration.
(3)

10.7 Amendment to Stock Purchase Agreement, dated September 29, 1994 among Liraz, R.W. Allsop & Associates
II, L.P., HLM Partners, L.P., Kitty Hawk Capital, Ltd. and the United States Small Business
Administration. (3)

10.8 Letter Agreement, dated February 19, 1995, between Bizware and Joel Leonoff. (3)

10.9 Software Acquisition Agreement dated February 23, 1995 among SASI, Bizware and Registrant. (3)

10.10 Service Agreement, dated March 31, 1995, between Level 8 and Transaction Information Systems, Inc.
(3)

10.11 Form of Amended and Restated Contribution Agreement, effective April 1, 1995, among Registrant and
the shareholders of Level 8. (3)

10.12 Amended and Restated Employment Agreement, dated November 8, 1996, among the Company, Level 8 and
Samuel Somech.

10.13 Consulting Agreement, dated April 4, 1995, among Bizware and Daimin Investments Ltd. (3).

10.14 Employment Agreement, dated May 1, 1995, between Registrant and Arie Kilman (3).

10.14A Amendment to Employment Agreement, dated as of September 18, 1996, between Registrant and Arie
Kilman. (1)
</TABLE>

II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.14B Amendment No. 2 to Employment Agreement, dated as of December 16, 1996, between Registrant and Arie
Kilman.

10.15 Employment Agreement, dated May 1, 1995, between Registrant and Robert R. MacDonald (3).

10.15A Amendment to Employment Agreement, dated February 21, 1996, between Registrant and Robert R.
MacDonald. (1)

10.15B Amendment to Employment Agreement, dated as of July 30, 1996, by and between Registrant and Robert R.
MacDonald. (1)

10.16 Employment Agreement, dated May 1, 1995, between Registrant and
Joseph J. Di Zazzo (2).

10.16A Amendment to Employment Agreement, dated as of October 23, 1996, between Registrant and Joseph J. Di
Zazzo. (1)

10.17 Agreement between AD/Ventures and Liraz Export Systems Ltd. (3).

10.18 Standard Program Product License Agreement of ProfitKey (3).

10.19 Standard Computer Hardware Purchase Agreement of ProfitKey (3).

10.20 Standard Software License Agreement of Bizware and Standard Escrow Agreement (3).

10.21 Agreement, dated June 13, 1995, between Registrant and Liraz (3).

10.22 Registration Rights Agreement, dated June 13, 1995 between Registrant and Liraz (3).

10.23 Agreement of Purchase and Sale, dated October 28, 1994, among Joel Leonoff, Russell Rothstein,
Mitchell Wasserman, Daimin Investments Ltd., 2993031 Canada Inc., 2962594 Canada Inc., 3077934
Canada Inc., and Bizware Computer Systems (Canada) Inc. (3).

10.24 Addendum, dated February 14, 1995, among Joel Leonoff, Russell Rothstein, Mitchell Wasserman, Daimin
Investments Ltd., 2993031 Canada Inc., 2962594 Canada Inc., 3077934 Canada Inc., and Bizware
Computer Systems (Canada) Inc. (3).

10.25 Form of Warrant Agreement between the Registrant and Hampshire Securities Corporation for 135,000
shares of common stock (3).

10.26 Form of Loan Agreement, dated June , 1995, between Registrant and Liraz regarding Registrant's
agreement to repay the principal amount of $1,228,172 (3).

10.27 Form of Loan Agreement, dated , 1995, between Registrant and Liraz regarding Registrant's
agreement to repay the principal amount of $628,172 (3).

10.28 Form of exchange agreement dated , 1995, between Registrant and Liraz (3).

10.29 Consulting Agreement, dated May 15, 1995, between Registrant and Nellcor Incorporated (3).
</TABLE>

II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.30 Stock Purchase Agreement, dated September 9, 1994, by and among Liraz Systems, Ltd., Richard T. Lilly
and the other individuals whose names appear on the signature page thereto (3).

10.31 Exchange Agreement, dated September , 1994, between Liraz and the individuals whose names appear
on the signature page thereto (3).

10.32 Stock Purchase Agreement, dated October 17, 1994, by and among Liraz and Gary E. Frashier (3).

10.33 Stock Purchase Agreement, dated October , 1994, by and among Liraz and William Dockins (3).

10.34 Stock Purchase Agreement, dated October 24, 1994, by and among Liraz and Alfred L. Whiting (3).

10.35 Certificate of Ownership and Merger of PK Holdings Inc., into ProfitKey International Inc., dated
March 30, 1995 (3).

10.36 Development Agreement, dated July 17, 1995, between Microsoft Corporation and
Level 8 (3).

10.37 Letter Agreement, dated June 1, 1995, from Visa International Service Association to
Level 8 (3).

10.38 Development Agreement, dated December 19, 1995, between Liraz and Level 8. (4)

10.39 Development Agreement, dated October 23, 1995, between Liraz and ProfitKey. (4)

10.40 Product Purchase Agreement, dated August 30, 1996, between Candle Corporation and Level 8. (1)

10.41 Investment Agreement, dated July 26, 1996, among Registrant, Liraz and Candle Corporation. (1)

10.42 Candle Corporation Software Agency Agreement, dated October 7, 1996, between Candle Corporation and
Level 8. (1)

10.43 IBM Licensing Agreement: NT Client Bridge, dated February 28, 1996, by and between International
Business Machines and Level 8. (1)

10.44 Letter of Intent, dated July 25, 1996, among Candle Corporation, Registrant and Level 8. (1)
</TABLE>

II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.45 Form of Warrant Agreement between the Registrant and Hampshire Securities Corporation for 100,000
shares of common stock. (1)

10.46 Letter Agreement, dated December 16, 1996, between the Company and Hampshire Securities Corporation,
relating to the Outstanding Warrants.

11.1 Statement re: computation of per share income (loss). (1)

21.1 List of Subsidiaries of the Company. (1)

23.1 Consent of Lurie, Besikof, Lapidus & Co., LLP.

24.1 Powers of Attorney. (1)
</TABLE>

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

(1) Previously filed.

(2) Previously filed and incorporated herein by reference from the Registrant's
Form 8-K dated September 9, 1996 (File No. 0-26392).

(3) Previously filed and incorporated herein by reference from the Registrant's
Registration Statement on Form S-1 (File No. 33-92230) as declared effective
on July 27, 1995.

(4) Previously filed and incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-26392).

(b) Financial Statement Schedules:

The following schedules are filed as part of this Registration Statement,
but not included in the Prospectus:

Schedule II Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS

A. UNDERTAKING IN RESPECT OF RULE 415 OFFERING.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;

(i) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;

(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no

II-6
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
more than a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective Registration
Statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

II-7
<PAGE>
SCHEDULE II

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
COLUMN C
------------------------
ADDITIONS
COLUMN B ------------------------ COLUMN E
----------- CHARGED TO COLUMN D ----------
COLUMN A BALANCE AT CHARGED TO OTHER ----------- BALANCE
- ---------------------------------------------------------- BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DESCRIBE(2) PERIOD
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ -- $ 39,319 $ 102,286 $ (85,605) $ 56,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ 56,000 $ 96,613 $ -- $ (77,613) $ 75,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Nine months ended September 30, 1996
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ 75,000 $ 112,937 $ -- $ (28,937) $ 159,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>

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

(1) Allowance for doubtful accounts acquired in connection with ProfitKey
International, Inc. and Bizware Computer Systems (Canada) Inc.

(2) Uncollectible accounts written off, net of recoveries.

S-1
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGES
- ----------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>

5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP as to the legality of the securities being
registered.

10.12 Amended and Restated Employment Agreement, dated November 8, 1996, among the Company, Level 8
and Samuel Somech.

10.14B Amendment No. 2 to Employment Agreement, dated as of December 16, 1996, between Registrant and
Arie Kilman.

10.46 Letter Agreement, dated December 16, 1996, between the Company and Hampshire Securities
Corporation, relating to the Outstanding Warrants.

23.1 Consent of Lurie, Besikof, Lapidus & Co., LLP.
</TABLE>

<PAGE>

EXHIBIT 5.1

Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036-8299
(212) 969-3000
December 17, 1996

Level 8 Systems, Inc.
One Penn Plaza, Suite 3401
New York, New York 10119

Ladies and Gentlemen:

We have acted as special counsel to Level 8 Systems, Inc. (the
"Company"), a New York corporation, in connection with the preparation and
filing of the Company's Registration Statement on Form S-1 (Registration No.
333-15455) (the "Registration Statement") under the Securities Act of 1933,
as amended, relating to the proposed offering by the Company of 660,000 shares
of its common stock (plus up to 45,000 additional shares of its common stock to
cover over-allotments), the proposed offering by certain selling shareholders of
up to 440,000 shares of the Company's common stock (plus up to 120,000 to cover
over-allotments) and the proposed sale of warrants (the "Warrants") to purchase
110,000 shares of the Company's common stock.

We have made such investigation and examined such documents and
records (including certificates of certain public officials and certificates
furnished by officers of the Company) as we have deemed necessary, and on that
basis we are of the following opinion:

1. The shares of the Company's common stock to be offered by the
Company to the public pursuant to the Registration Statement (including the
additional shares issuable to cover over-allotments) have been duly authorized
and, when issued and paid for in the manner described in the Registration
Statement, will be validly issued and fully paid and nonassessable (subject to
Section 630 of the New York Business Corporation Law).

2. The shares of the Company's common stock to be offered by certain
selling shareholders to the public

<PAGE>

Level 8 Systems, Inc.
November 1, 1996
Page 2

pursuant to the Registration Statement have been duly authorized and are
validly issued and fully paid and nonassessable (subject to Section 630 of the
New York Business Corporation Law).

3. The Warrants to be sold by the Company pursuant to the
Registration Statement have been duly authorized and, after due execution and
delivery by the parties to the Warrants, will constitute legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms, except as may be limited by bankruptcy, insolvency, or other
similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).

4. The shares of the Company's common stock issuable upon exercise of the
Warrants have been duly authorized and when issued and paid for in accordance
with their terms of the Warrant, will be validly issued and fully paid and
nonassessable (subject to Section 630 of the New York Business Corporation
Law).

We consent to the use of our name under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement and to the use
of this opinion for filing as exhibit 5.1 to the Registration Statement. In
giving this consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
or the rules and regulations of the Securities and Exchange Commission
thereunder.

Very truly yours,

PROSKAUER ROSE GOETZ & MENDELSOHN LLP

<PAGE>
EXHIBIT 10.12

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

AGREEMENT, dated as of November 8, 1996 by and between Level 8 Systems, Inc.,
a New York corporation, with its principal office at One Penn Plaza, Suite
3401, New York, NY 10119 (the "Company") and Samuel Somech, residing at 9
Cloudy Lane, New Hyde Park, New York 11040 (the "Employee" ).

INTRODUCTION

The Employee and the Company's subsidiary are parties to an employment
agreement dated March 31, 1995, as amended on April 6, 1995, May 25, 1995
and September 18,1996; the parties desire to provide for the employment of
the Employee with the Company pursuant to certain new terms. In order to
accomplish such purposes and in consideration of the terms, covenants and
conditions hereinafter set forth, the parties hereby enter into this
Agreement.

ARTICLE I

CERTAIN DEFINITIONS

1.1 "Board" means the Board of Directors of the Company.

1.2 "Date of Termination" means the date of receipt of the Notice of
Termination in accordance with Section 5.4 hereof, or any later date
specified therein, or the date of death of the Employee, as applicable.

1.3 "Disability" means a disability which, at least ninety (90) days after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee's legal representative (such agreement as to acceptability not to be
withheld unreasonably); and as used herein, the term "Disabled" has a
correlative meaning.

1.4 "Good Reason" means (a) an adverse alteration in Employee's reporting
responsibilities; (b) a reduction in Employee's Annual Salary; (c) any
material failure of the Company to comply with the provisions of this
Agreement which failure shall not cease promptly, and in no event in more
than ten days, after the Company's receipt of written notice from the
Employee objecting to such conduct; (d) any purported termination by the
Company of the Employee's employment other than as expressly permitted by
this Agreement and (e) any failure by the Company to comply with and satisfy
Section 7.2 hereof. For purposes of this Agreement, any good faith
determination of "Good Reason" made by the Employee shall be conclusive.

<PAGE>

1.5 "Termination With Cause" has the meaning set forth in Section 5. 1
hereof, and "Cause" when used alone, has a correlative meaning.

ARTICLE II EMPLOYMENT; TERM; DUTIES

2.1 Employment. Upon the terms and subject to the conditions hereinafter set
forth, the Company hereby employs the Employee, and the Employee hereby
accepts employment, as President of the Company.

2.2 Term. The term of this Agreement (the "Term") shall be three (3) years,
commencing on the date hereof and terminating on the third anniversary of the
date hereof. The Term shall be automatically extended on a month-to month
basis after the expiration of such three (3) year period, unless either party
provides notice to the other party of its intention not to extend the Term,
at least fifteen (15) days prior to the end of the current Term.

2.3 Duties. During the Term, the Employee shall perform such duties for the
Company and for its subsidiaries and affiliates, consistent with his position
and title hereunder, and as may be assigned to him, consistent with his
position hereunder, from time to time by the Board. The Employee shall devote
his best efforts and his entire business time, attention and energies to the
performance of his duties hereunder.

2.4 Exclusive Agreement. The Employee represents and warrants to the Company
that there are no agreements or arrangements, whether written or oral, in
effect which would prevent the Employee from rendering service to the Company
during the Term as provided herein.

ARTICLE III COMPENSATION AND RELATED MATTERS

3.1 Compensation. As compensation for the services rendered by the Employee
hereunder, the Company shall pay to Employee an annual salary (the "Annual
Salary" ), subject to adjustment as hereinafter provided, of One Hundred and
Fifty Thousand Dollars ($150,000.00) per annum, payable in not more than
monthly installments. The Annual Salary shall be increased on each
anniversary of the date of this Agreement by an amount to be determined by
the Board in its discretion.

3.2 Performance Bonus. Employee shall receive a performance bonus, payable in
cash within 90 days after the end of each fiscal year of the Company, in such
amount as the Board shall determine in its discretion.

<PAGE>

3.3 Deductions. The Company shall deduct from the compensation described in
Section 3.1 hereof, any Federal, state or city withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any Federal, state or city
laws, rules or regulations.

3.4 Disability Adjustments. Any compensation otherwise payable to the
Employee pursuant to Section 3.1 in respect of any period during which the
Employee is disabled (as contemplated in Section 5.3 hereof) shall be reduced
by any amounts payable to the Employee for loss of earnings or the like under
any insurance plan or policy the premiums for which are paid for in their
entirety by the Company.

ARTICLE IV BENEFITS; EXPENSES

4.1 Benefits; Perquisites. During the Term, the Employee shall be entitled to
such benefits and perquisites, including paid vacation and participation in
incentive, savings, retirement, group life, health, accident, disability and
hospitalization insurance plans, as the Company may from time to time
generally make available to its employees.

4.2 Expenses. The Company agrees to reimburse the Employee' upon presentation
of a reasonably itemized report, for out-of-pocket expenses in excess of the
allowance provided pursuant to Section 4.3 below which were reasonably
incurred by the Employee in connection with the performance of his duties
hereunder.

4.3 Automobile and Telephone Allowance. During the Term, the Company shall
furnish the Employee with a monthly allowance of up to Two Thousand Dollars
($2,000.00) before taxes for automobile, telephone and other expenses
incurred in connection with the performance of his duties hereunder.

4.4 Stock Options. The Company shall grant to the Employee incentive stock
options, in addition to any options previously granted to him, to purchase
250,000 shares of the common stock of the Company for a purchase price of Ten
Dollars and Twenty Five Cents ($10.25) per share, of which options to acquire
50,000 shares shall be immediately vested, with one-third of the balance
vesting at the end of each annual anniversary of the date of this Agreement.

ARTICLE V TERMINATION; DEATH; DISABILITY

5 1 Termination of Employment With Cause; Resignation without Good Reason. If
the

<PAGE>

Employee (a) breaches any material provision of this Agreement and such
breach is not remedied within thirty (30) days after written notice thereof
from the Company; or (b) has committed an act of gross misconduct within the
meaning of Securities and Exchange Commission's regulations in connection
with the performance of his duties hereunder; or (c) demonstrates habitual
negligence (as determined in good faith by the Board) and fails to cure such
negligent behavior within thirty (30) days after written notice from the
Company; or (d) has been convicted of committing a felony, or (e) has
committed any act of fraud, misappropriation of funds or embezzlement in
connection with his employment hereunder; or (f) resigns without Good
Reason, then, in addition to any other remedies available to it at law, in
equity or as set forth in this Agreement, the Company shall have the right to
terminate Employee's employment (a "Termination With Cause"), without any
further liability or obligation to him hereunder or otherwise in respect of
his employment, other than its obligation to pay accrued but unpaid Annual
Salary and vacation time as of the Date of Termination.

5.2 Termination Other Than With Cause or Disability: Resignation for Good
Reason. (a) Notwithstanding any provision in this Agreement to the contrary,
if during the Term, the Company terminates the Employee's employment and
such termination is not a Termination With Cause, or for Disability, or as a
result of Employee's death, or the Employee terminates his employment for
Good Reason, the Company shall pay the Employee, as a termination fee, an
amount equal to 50% of the salary which would have otherwise been payable to
him with respect to the period from the termination date through the end of
the Term.

(b) The Employee acknowledges that the payments referred to in this Section
5.2 constitute the only payments which the Employee shall be entitled to
receive from the Company hereunder in the event of any termination of his
employment for any of the reasons referred to in this Section 5.2, and that
except for such payments the Company shall have no further liability or
obligation to him hereunder or otherwise in respect of his employment.

5.3 Resignation for Other Than Good Reason. Employee may resign from his
employment hereunder at any time upon ninety (90) days' prior written notice;
provided. however that at any time after the giving of such notice the
Company may elect to terminate Employee on an earlier date, in which event
the Company shall have no obligation to make any payments hereunder other
than its obligation to pay accrued but unpaid Annual Salary and vacation time
as of the Date of Termination.

5.4 Death; Disability. The Employee's employment hereunder shall terminate
(x) upon his death or (y) if the Employee becomes Disabled, at the election
of the Company by written notice to the Employee. In the event of a
termination of the Employee's employment by reason of death or Disability,
the Company shall pay the Employee (or his legal representatives, as the case
may be) as follows:

(a) any accrued but unpaid compensation for Annual Salary as of the Date of
Termination;

<PAGE>

(b) the Employee's Annual Salary in effect on the Date of Termination, in
monthly installments for the balance of the Term, but in no event shall such
payments be made for more than six (6) months;

(c) a cash payment payable within ten (10) days after the Date of Termination
equal to the Employee's Annual Salary on a daily basis (computed on a 260-day
year), multiplied by the number of accrued and unused vacation days at the
date of such termination; and

(d) in the event the Employee is Disabled, the Company will continue to
provide the benefits provided under Section 4.1 hereof for the Employee (and
the Employee's family members, if applicable), to the extent such benefits
continue to remain available without any significant increase in cost, for
the balance of the Term, until and unless the Employee obtains other
employment with comparable benefits within such Term.

(e) The Employee acknowledges that the payments referred to in this Section
5.3 constitute the only payments to which the Employee (or his legal
representatives, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death
or Disability, and that except for such payments the Company shall have no
further liability or obligation to him (or his legal representatives, as the
case may be) hereunder or otherwise in respect of his employment.

5.5 Notice of Termination. Any Termination With Cause or for Disability or
resignation by the Employee for Good Reason shall be communicated by a Notice
of Termination to the other party given in accordance with Section 8.2
hereof. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon and (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated. The failure by the Employee to
set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason hereunder shall not be deemed a
waiver of any right of the Employee hereunder and shall not preclude the
Employee from asserting such fact or circumstance in enforcing his rights
hereunder.

ARTICLE VI INVENTIONS; NON-DISCLOSURE; NON-COMPETITION

6.1 Inventions. All processes, technologies and inventions (collectively,
"inventions"), including new contributions, improvements, ideas,
discoveries, trademarks and trade names, conceived, developed, invented,
made or found by the Employee, alone or with others, during his employment
by the Company, whether or not patentable and whether or not conceived,
developed, invented, made or found on the Company's time or with the use of
the Company's facilities or materials, shall be the property of the Company
and shall be promptly and fully disclosed by the Employee to the Company.
The Employee shall perform all necessary acts

<PAGE>

(including, without limitation, executing and delivering any confirmatory
assignments, documents or instruments requested by the Company) to vest
title to each such Invention in the Company and to enable the Company, at its
expense, to secure and maintain domestic and/or foreign patents or any other
rights for such Inventions.

6.2 Non-Disclosure. The Employee shall not, at any time during the Term or
thereafter, directly or indirectly disclose or furnish to any other person,
firm or corporation, except in the course of the proper performance of his
duties hereunder (a) any information relating to any process, technique or
procedure used by the Company which is not, specifically, a matter of public
knowledge; or (b) any information of a confidential nature obtained as a
result of his present or future relationship with the Company, which
information is not specifically a matter of public knowledge; or (c) the
name, address or other information relating to any customer or supplier of
the Company; or (d) any other trade secrets of the Company. Promptly upon the
expiration or termination of the Employee's employment hereunder for any
reason, the Employee shall surrender to the Company all documents, drawings,
work papers, lists, memoranda, records and other data (including all copies)
constituting or pertaining in any way to any of the foregoing information.

6.3 Non-Competition. (a) The Employee agrees that during the Term and for a
period of one (1) year following the termination of the Employee's
employment with the Company (other than a termination pursuant to Section
5.2 hereof), regardless of the cause of such termination, whether voluntary
or involuntary, he will not, directly or indirectly, (i) compete with the
Company in the provision of consulting services within the United States with
respect to middleware, messaging, or fault-tolerant transaction processing;
or (ii) be interested in, employed by, engaged in or participate in the
ownership, management, operation or control of, or act in any advisory or
other capacity for, any firm or corporation which engages in the business of
providing consulting services within the United States with respect to
middleware, messaging, or fault-tolerant transaction processing; provided,
however, that notwithstanding the foregoing, the Employee may make solely
passive investments in any corporation the common stock of which is "publicly
held" and of which the Employee shall not own or control securities which
constitute more than one (1%) percent of the voting rights or equity
ownership of such corporation; or (iii) solicit or divert business from the
Company or assist any person, firm or corporation in doing so or attempting
to do so; or (iv) cause or seek to cause any person, firm or corporation to
refrain from dealing or doing business with the Company or assist any person,
firm or corporation in doing so or attempting to do so; or (v) directly or
indirectly, solicit or hire any person who was an employee of the Company at
any time during the Term, or assist any person, firm or corporation in doing
so or attempting to do so.

(b) In the event the Employee is employed by or engaged by any person, firm,
or corporation in contravention of Section 6. 3 (a) hereof, the Company's
obligation to make payments to the Employee under either Section 5.2 or 5.3
hereof shall terminate immediately and the Company shall have no further
liability or obligation to the Employee hereunder or otherwise in respect of
his employment.

<PAGE>

6.4 Breach of Provisions. In the event that the Employee shall breach any of
the provisions of this Article VI, or in the event that any such breach is
threatened by the Employee, in addition to and without limiting or waiving
any other remedies available to the Company at law or in equity, the Company
shall be entitled to immediate injunctive relief in any court, domestic or
foreign' having the capacity to grant such relief, to restrain any such
breach or threatened breach and to enforce the provisions of this Article VI.
The Employee acknowledges and agrees that there is no adequate remedy at law
for any such breach or threatened breach and, in the event that any action or
proceeding is brought seeking injunctive relief, the Employee shall not
assert as a defense thereto that there is an adequate remedy at law.

6.5 Reasonable Restrictions; Severability. The Employee acknowledges and
agrees that the restrictive covenants set forth in Section 6.3(a) hereof (the
"Restrictive Covenants") are reasonable and valid in geographic and temporal
scope and in all other respects, and are necessary for the protection of the
Company and its business. If any court of competent jurisdiction determines
that any of the Restrictive Covenants, or any part thereof, is invalid or
unenforceable, (i) the remainder of the Restrictive Covenants shall not be
affected thereby and shall remain in full force and effect without regard to
such invalidity or unenforceability, and (ii) such court shall have the power
to modify such Restrictive Covenant, and as so modified, such Restrictive
Covenant shall then be valid and enforceable.

6.6 Definition. For purposes of this Article VI, the term "Company" shall be
deemed to include any subsidiary or affiliate of, or predecessor to, the
Company.

ARTICLE VII
SUCCESSORS AND ASSIGNS

7.1 Not Assignable by Employee. This Agreement is personal to the Employee
and without the prior written consent of the Company shall not be assignable
by the Employee other than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's representatives.

7.2 Company's Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the Company and its successors and assigns.

(b) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
As used in this Section 7.2, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid.

<PAGE>

ARTICLE VIII
MISCELLANEOUS

8.1 Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Employee or
others. In no event shall the Employee be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Employee under any of the provisions of this Agreement.

8.2 Notices. Any notice provided for herein shall be in writing and shall be
deemed given or made (a) when personally delivered; or (b) when sent by
telecopier and confirmed within forty eight (48) hours by letter mailed or
delivered to the party to be notified at its or his address set forth herein;
or (c) upon receipt if mailed by first class registered or certified mail,
return receipt requested, to the address of the other party set forth or such
other address as may be specified by notice given in accordance with this
Section 8.2:

If to the Company:

Level 8 Systems, Inc.
One Penn Plaza, Suite 3401
New York, New York 10019
Attention: Arik Kilman

If to the Employee:

Samuel Somech
9 Cloudy Lane
New Hyde Park, New York 11040

In each case, with a copy to:

Bruno Dov Lerer, Esq.
767 Third Avenue, 24th Floor
New York, New York 10017

8.3 Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement shall be determined and settled by arbitration
in the County of New York, State of New York conducted by the American
Arbitration Association (the "AAA") in accordance with the then existing
rules, regulations, practices and procedures of the AAA. Notice preliminary
to,

<PAGE>

in conjunction with, or incident to such arbitration proceedings shall be
made pursuant to Section 8.2 hereof. Any decision in such arbitration,
including the award of legal fees by such Arbitrator(s) to the prevailing
party, shall be final, conclusive and binding upon the parties to the
arbitration and may be enforced by the judgment and order of the Supreme
Court of the State of New York for Suffolk County and the parties hereto
hereby waive any objection to such jurisdiction or venue in any such
proceeding commenced in such court.

8.4 Severability. if any provision of this Agreement, or portion thereof, shall
be held invalid or unenforceable by a court of competent jurisdiction, such
invalidity or unenforceability shall attach only to such provision or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein. In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.

8.5 Waiver. No waiver by a party hereto of a breach or default hereunder by
the other party shall be considered valid, unless in writing signed by such
first party, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or any other nature.

8.6 Entire Agreement. This Agreement sets forth the entire agreement between
the parties with respect to the subject matter hereof, and supersedes any and
all prior agreements between the Company and the Employee, whether written or
oral, relating to any or all matters covered by and contained or otherwise
dealt with in this Agreement. This Agreement does not constitute a commitment
of the Company with regard to the Employee's employment, express or implied,
other than to the extent expressly provided for herein.

8.7 Amendment. No modification, change or amendment of this Agreement or any
of its provisions shall be valid, unless in writing and signed by the party
against whom such claimed modification, change or amendment is sought to be
enforced.

8.8 Authority. The parties each represent and warrant that they have the
power, authority and right to enter into this Agreement and to carry out and
perform the terms, covenants and conditions hereof.

8.9 Titles. The titles of the Articles and Sections of this Agreement are
inserted merely for convenience and ease of reference and shall not affect or
modify the meaning of any of the terms, covenants or conditions of this
Agreement.

8.10 Applicable Law. This Agreement, and all of the rights and obligations of
the parties in connection with the employment relationship established
hereby, shall be governed by and construed in accordance with the substantive
laws of the State of New York without giving effect to principles relating to
conflicts of law.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

LEVEL 8 SYSTEMS, INC.

By: _____________
Name: Arik Kilman
Title: Chief Executive Officer

________________
Samuel Somech

<PAGE>
Exhibit 10.14B

AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT

The EMPLOYMENT AGREEMENT, dated May 1, 1995, as heretofore amended (the
"Employment Agreement"), by and between Level 8 Systems, Inc., a New York
corporation (formerly, Across Data Systems, Inc.) (the "Company"), and Arie
Kilman ("Executive"), is hereby amended by replacing paragraph 3.2 with the
following:

(3.2) Performance Bonus. The Board of Directors will establish a performance
bonus for the Executive each fiscal year after 1996 based on the then
current scope of responsibilities of the Executive and on the projected
budget of the Company. The 1996 performance bonus will be $150,000 if
the Company completes a public offering of at least $5 million during
1996. Notwithstanding the foregoing, in the event such bonus or any
portion thereof shall at any time be determined to reduce the net income
or increase the net loss of the Company for any period, Executive agrees
to waive such bonus or such portion thereof and the Company shall have no
liability therefor. In any event, such bonus shall not be paid prior to
January 1, 1997, and shall be paid only following (i) a determination by
the auditors of the Company and the Audit Committee of the Board of
Directors of the Company that such bonus shall not so affect net income
or net loss and (ii) consultation with Hampshire Securities Corporation
with such auditors and such Audit Committee.

WITNESS THE EXECUTION AND DELIVERY HEREOF as of December 1, 1996.

LEVEL 8 SYSTEMS, INC.

By: __________________________________
Robert R. MacDonald
Chairman of the Board of Directors

EXECUTIVE

______________________________________
Arie Kilman

<PAGE>

Exhibit 10.46

LEVEL 8 SYSTEMS, INC.
ONE PENN PLAZA, SUITE 3401
NEW YORK, NEW YORK 10119-0002

December 16, 1996

Hampshire Securities Corporation
640 Fifth Avenue
New York, New York 10019

Ladies and Gentlemen:

Reference is hereby made to the warrants, dated August 1, 1995 (the
"Representative's Warrants"), for the purchase of 140,000 shares of the common
stock, par value $.01 per share (the "Common Stock"), of Level 8 Systems, Inc.,
a New York corporation (formerly Across Data Systems, Inc. (the "Company")),
issued to you by the Company in connection with its Initial Public Offering of
the Common Stock. As a result of the currently contemplated public offering of
the Common Stock, you are entitled to exercise, under Section 9 of the
Representative's Warrants, certain "piggy-back" registration rights. In lieu of
such "piggy-back" registration, the Company hereby agrees to register the
Common Stock underlying the Representative's Warrants with the Securities and
Exchange Commission on a Form S-3 within three months after the closing date of
the impending public offering (file no. 333-15455). This letter shall in no way
limit the exercise of your rights in connection with the Representative's
Warrants relating to future "piggy-back" and "demand" registrations.

In the event that, at the expiration of such three-month period, such
registration is not then effective under the Securities Act of 1933, as
amended, the parties hereto agree that, as liquidated damages therefor, the
exercise price of the Representative's Warrants shall be reduced by 5% on
March 17, 1997 and by 5% on the 17th day of each month thereafter until
such registration statement is declared effective by The Securities and
Exchange Commission.

LEVEL 8 SYSTEMS, INC.

By: /s/ Robert R. MacDonald
-----------------------
Name: Robert R. MacDonald
Title: Chairman of The Board

Agreed and Accepted, this
16th day of December, 1996:

HAMPSHIRE SECURITIES CORPORATION

By: /s/ Leo T. Abbe
--------------------------
Name: Leo T. Abbe
Title: Managing Director

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULE

Board of Directors and Shareholders
Level 8 Systems, Inc.

We consent to the use in this Registration Statement relating to 1,100,000
shares of Common Stock of LEVEL 8 SYSTEMS, INC. on pre-effective amendment no. 2
to form S-1 of our report dated January 26, 1996 (except for Note 13, as to
which the date is September 9, 1996 and except for the last sentence of Note 13,
as to which the date is November 8, 1996) appearing in the Prospectus, which is
a part of this Registration Statement (File No. 333-15455), and to the reference
to us under the heading "Experts" in such Prospectus.

Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of LEVEL 8 SYSTEMS, INC. listed
in Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

LURIE, BESIKOF, LAPIDUS & CO., LLP

Minneapolis, Minnesota
December 17, 1996