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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark one)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005.

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to  


Commission File Number 0-26392


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


Delaware
11-2920559
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification Number)


1433 State Highway 34, Building C; Farmingdale, New Jersey
07727
 (Address of principal executive offices)
 (Zip Code) 

(732) 919-3150
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES _ NO X

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

43,441,917 common shares, $.001 par value, were outstanding as of May 6, 2005.


Level 8 Systems, Inc.
Index
 
PART I. Financial Information
Page
Number
   
Item 1. Financial Statements
  
   
Consolidated balance sheets as of March 31, 2005 (unaudited) and December 31, 2004
3
   
Consolidated statements of operations for the three months ended March 31, 2005 and 2004 (unaudited)
4
   
Consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 (unaudited)
5
   
Consolidated statements of comprehensive loss for the three months ended March 31, 2005 and 2004 (unaudited)
6
   
Notes to consolidated financial statements (unaudited)
7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
21
   
Item 4. Controls and Procedures
21
   
PART II. Other Information
21
   
   
SIGNATURES
25
   
 

Part I. Financial Information
Item 1. Financial Statements
 
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

 
  
March 31,
2005
  
December 31,
2004
  
ASSETS
              
Current assets:
              
Cash and cash equivalents
  
$
62
  
$
107
  
Assets of operations to be abandoned
    
141
    
148
  
Trade accounts receivable, net
    
126
    
152
  
Prepaid expenses and other current assets
    
49
    
108
  
Total current assets
    
378
    
515
  
Property and equipment, net
    
12
    
15
  
Total assets
  
$
390
  
$
530
  
LIABILITIES AND STOCKHOLDERS' DEFICIT
              
Current liabilities:
              
Senior reorganization debt
  
$
2,405
  
$
1,548
  
Short-term debt
    
3,422
    
3,646
  
Accounts payable
    
2,437
    
2,351
  
Accrued expenses:
              
Salaries, wages, and related items
    
1,009
    
879
  
Other 
    
1,818
    
1,725
  
Liabilities of operations to be abandoned
    
518
    
536
  
Deferred revenue
    
76
    
85
  
Total current liabilities
    
11,685
    
10,770
  
Long-term debt
    
217
    
250
  
Senior convertible redeemable preferred stock
   
1,367
    
1,367
  
Total liabilities
    
13,269
    
12,387
  
Stockholders' (deficit):
              
Preferred stock
    
--
    
--
  
Common stock
    
43
    
43
  
Additional paid-in-capital
    
210,150
    
210,142
 
Accumulated other comprehensive loss
    
(7
)
  
(8
)
Accumulated deficit
    
(223,065
)
  
(222,034
)
Total stockholders' (deficit)
    
(12,879
)
  
(11,857
)
Total liabilities and stockholders' (deficit)
  
$
390
  
$
530
  

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

3




LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
  
Three Months Ended
March 31, 
  
   
2005  
  
2004
  
Revenue:
              
Software
  
$
89
  
$
10
  
Maintenance
    
33
    
73
  
Services 
    
31
    
--
  
Total operating revenue
    
153
    
83
  
               
Cost of revenue
              
Software
    
4
    
719
  
Maintenance
    
100
    
104
  
Services 
    
228
    
280
  
Total cost of revenue.
    
332
    
1,103
  
               
Gross margin (loss)
    
(179
)
  
(1,020
)
               
Operating expenses:
              
Sales and marketing
    
224
    
335
  
Research and product development
    
264
    
312
  
General and administrative
    
248
    
471
  
Impairment of intangible assets
    
--
    
587
  
Total operating expenses
    
736
    
1,705
  
Loss from operations
    
(915
)
  
(2,725
)
               
Other income (expense):
              
Interest income
    
--
    
1
  
Interest expense
    
(124
)
  
(39
)
Change in fair value of warrant liability
    
--
    
19
  
Other income
    
8
    
117
  
Loss before provision for income taxes
    
(1,031
)
  
(2,627
)
Income tax provision
    
--
    
--
  
               
Loss from continuing operations
    
(1,031
)
  
(2,627
)
Loss from discontinued operations
    
--
    
(9
)
Net loss
 
$
(1,031
)
$
(2,636
)